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Monday Monetary Meltdown – Velocity of Money Crosses a Dangerous Threshold

Posted on the 19 April 2021 by Phil's Stock World @philstockworld

Monday Monetary Meltdown – Velocity of Money Crosses a Dangerous ThresholdHow is this a good thing?

Clearly, it's not.  Money is simply not being spent in our Economy and that's not the sign of a healthy economy.  Of course, we've been heading this way for two decades now back from the 90s, where $1 earned would circulate through the economy and average of 2.2 times, generating 3.2 GDP Dollars.  Now the velocity of money is getting close to 1, meaning a Dollar earned only adds one more Dollar to the GDP, for 2 GDP Dollars.

What does that mean?  Well it means that you $10Tn in circulation to have a $20Tn GDP where you used to need $6.25 so 60% more Dollars are needed to create a Dollar in GDP these days.  That means the Fed's policies are 60% less effective and that the economy grows 60% slower – for now.  It also means that, if for some reason, the pace of borrowing and spending pick up, that we could easily send prices rising 100% from where they are now, as money speeds up again.  That would, of course, boost our GDP (so yay!) but it would do so in a hyperiflationary way.  

In the 1990s, to keep inflation under 3%, the Fed raised rates from 3% to 6.5% and in 1978-1980, the Inflation Rate in the US was 9%, 13.3% and 12.5% and the Fed Funds rate was 10%, 12% and yes – 18% in 1980.  That's what the Fed has to do to keep a lid on inflation but that tool is no longer available to the Fed since we are now $28Tn in debt and 18% of $28Tn is another $5Tn we simply do not have so this country would become Greece and suffer a massive meltdown if we tried to use the Fed Funds rate to control inflation.

Monday Monetary Meltdown – Velocity of Money Crosses a Dangerous ThresholdWell, that's a pretty serious problem because look at this other indicator:  The Loan to Deposit ratio has also collapsed, meaning banks are no longer making money lending it to people – which is kind of the whole purpose of banks.  Instead they make money gambling in stocks and derivatives – just like they were doing before the last banking crisis.  

One of the reasons for this is that…


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