Monday Monetary Meltdown – Velocity of Money Crosses a Dangerous Threshold

How 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.

Well, 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…

You must login to see all of Phil's posts. To read the rest of this article now, along with Phil's live intra-day comments, live trading ideas, Phil's market calls, additional member comments, and other members-only features - Subscribe to Phil's Stock World by clicking here.
To signup for a free trial membership, click here.

Do you know someone who would benefit from this information? We can send your friend a strictly confidential, one-time email telling them about this information. Your privacy and your friend's privacy is your business... no spam! Click here and tell a friend!