Speed Trap - Bleeding Off US Money Velocity

Credit for this thread goes to market observer Gregory Mannarino, who has been sounding the alarm on the massive deceleration of US money velocity throughout the pandemic. Check out this video for his analysis of how the crash of US money velocity is tied into the pandemic and fits into the wider context of the corrosion of the US economy.

First off, the concept of money velocity is very simple: it's the rate at which currency in an economic model changes hands. Our economic model is, of course, the Dollar and the US economy.

There is a formal economic formula to derive the velocity of money in an economic system, and it is a ratio of GDP multiplied by the total of all transaction involving GDP commodity, divided by the overall volume of money in the model. To help explain this, a simple example on a micro scale (courtesy of Wikipedia) is maybe more informative than the math behind it:

If, for example, in a very small economy, a farmer and a mechanic, with just $50 between them, buy new goods and services from each other in just three transactions over the course of a year

A farmer spends $50 on tractor repair from a mechanic.
The mechanic buys $40 of corn from the farmer.
The mechanic spends $10 on barn cats from the farmer.

then $100 changed hands in the course of a year, even though there is only $50 in this little economy. That $100 level is possible because each dollar was spent on new goods and services an average of twice a year, which is to say that the velocity was 2 / year. Note that if the farmer bought a used tractor from the mechanic or made a gift to the mechanic, it would not go into the numerator of velocity because that transaction would not be part of this tiny economy's gross domestic product (GDP).

Hopefully the salient things to take away from this example are that a) recycling/respending the same units of money increases the money velocity and b) it is an indicator of economic "motion", in other words a way to measure how much commerce is actually occurring.

Now for the dramatic part. Here is a graph plotting the measured velocity of the US dollar, over the period of the past 60+ years. This graph, along with more measurables of the US economy, are available the web site of the St. Louis branch of the US Federal Reserve.



The general gist of what's going on in the graph should be evident without much commentary, but there were a few things I wanted to mention.

First off, notice the increasingly rapid decline of US money velocity, starting right around the mid-to-late 1990s. What's that all about? Well, remember Ross Perot? Remember the "giant sucking sound" that he alluded to as the massive outflux of US manufacturing circa the 1990s. That's it. That's the giant sucking sound, or in this case, the giant screeching sound of the breaks being applied to the US industrial and economic system. Remember, the key points of money velocity are transactions that involve *US* GDP output. Buying goods produced in Mexico or China or South Korea might trickle money back in the coffers of US shareholders and workers, but production of those goods rely on components, labor and logistics sourced from other countries.

Second, you can see the pronounced cliff in 2020, and you know what caused it. I think it's important to emphasize that the lockdowns in 2020 disproportionately impacted *small* US businesses. Remember that in many places, small restaurants, markets and shops were forced to close or to operate at diminished capacity. Walmart has the capital reserves to operate at %50 capacity for 6-8 months. For Joe the small business owner, who doesn't have money reserves to weather dry spells, and whose margins are very tiny, he can't afford much more than a few weeks likely to be closed, and can't survive long stretches operating at a fractional % of his normal trade flow.

Last thing I'll mention is that another contributing factor to the giant slow down in US money velocity, from the perspective of how its tabulated, is that the overall money supply, the actual amount of greenbacks in circulation (which is the denominator of the money velocity equation) has EXPLODED. You can really notice the pronounced drop between say 2005 and 2010. This is the result of the Fed's hyper-output of money into the US economy, i.e. quantitative easing, and it correlates to the last big bust cycle we encountered prior to the pandemic (2008 housing bubble).

The measure of money velocity is not the ultimate, most precise indicator of US economic health, but it is one of importance,in particular, as in our example, as a bellwether for the "little guys" in the US economy, the small businesses, and also the US middle class (i.e. the driving force of US consumerism.

Looking at the graph is an insightful way to comprehend the shift in global economic potency and influence that has occurred over the past half a century, is continuing today, and that will be continue into the foreseeable future.

a reply to: SleeperHasAwakened

I love these macroeconomic topics... commenting so I can further review the thread and all links later on. Thanks for putting this together OP! That FRED chart of velocity of money is pretty dramatic once 2020 hits (to say the least)

S & F

I just have to go to the grocery store to see how the market is in real time. Money is in short supply, high prices, 1 and 7 children in Japan live in poverty. That's the real market crash and its right in our face today, not tomorrow, but today.

(Disregard, had a question but was answered in the OP.)

originally posted by: musicismagic
I just have to go to the grocery store to see how the market is in real time. Money is in short supply, high prices, 1 and 7 children in Japan live in poverty. That's the real market crash and its right in our face today, not tomorrow, but today.

I don't know about in Japan, but the problem here in the US is not supply, it's actually the opposite. We have too much money in circulation (remember Q.E. has been ongoing for over a decade), and the money isn't moving around for goods and services in the US, at least relative to prior decades.

The original person who brought this to my attention, as mentioned in the OP, pointed out how the money velocity metric shows that the myth of the "booming US economy", "record stock market highs", and "steady growth" is all a sham.

This is another indicator that, because of so much money in the system that is not being put to use, we should expect inflation to spike soon.

Interesting and informative.
Thanks for the post.
Good food for thought, the effects of the massive input by the Fed printing can not lead to any good in the long term for sure.

a reply to: SleeperHasAwakened

One of the best, most informative and well composed posts I've seen here. Thank you.

In response to your above reply: I think of money as just another fungible commodity and like any commodity, an over-abundance means a diminishing of its value.

If there are too many tomatoes or automobiles or widgets in the market, their value goes down because demand doesn't match supply and owners are more willing to part with them. The same happens with the money supply. The "quantitative easing" caused a glut in the supply of money and lessened its value.

a reply to: SleeperHasAwakened

Very good post S&F.

We've been in a liquidity crisis for some time.

The solution of sending more government funds into "too big to fail" industry is just accelerating the crisis. When the overall economy is showings signs of collapse the "too big to fail" industries always end up taking in tax money and we've been pumping money into them for ages now. The people on the top will extract this money shortly after they no longer get their corporate welfare payments, the system will collapse, and we get another cycle.

At this point it seems like we already have a corporate universal basic income, with select industries getting government safety nets while citizens are supposed to somehow reap benefits from these corporate sponsorships.

I think they're essentially incapable of fixing the disaster they helped fuel. We'll be dealing with ever more frantic, useless, and desperate measures to try to regain some semblance of control. The crash will be historic, they'll all point fingers, then we'll get right back to doing it all over again. Central bank digital dollars will help liquidity, but without fixing the system on top of it there will continue to be cycles of catastrophic failure and hoarding money at the top will continue to cause liquidity issues. We can't funnel the money supply into a handful of companies and expect otherwise.

originally posted by: incoserv
a reply to: SleeperHasAwakened

One of the best, most informative and well composed posts I've seen here. Thank you.

In response to your above reply: I think of money as just another fungible commodity and like any commodity, an over-abundance means a diminishing of its value.

If there are too many tomatoes or automobiles or widgets in the market, their value goes down because demand doesn't match supply and owners are more willing to part with them. The same happens with the money supply. The "quantitative easing" caused a glut in the supply of money and lessened its value.

Thanks friend. I'm merely passing along the message from Greg Mannarino's work; definitely recommend following and supporting his work.

There are a number of factors in play in the deceleration of our monetary flow, and for sure, Q.E. has played a big part in it. Seems paradoxical that injecting *more* currency into the system could yield this result, but we should bear in mind where the majority of the Fed "relief" money was concentrated, most especially prior to the pandemic, during the housing crash. That money was not making its way down to ordinary folks that would use it productively in our economy, rather, it was propping up lenders, underwriting toxic mortgage assets and ending up in the hands of corporations, who often used it towards things like stock buyback programs (fun fact: buying stocks does *not* qualify as a GDP-oriented transaction, hence does nothing for our money velocity).

At least with the COVID relief, a chunk of the funds did make it to American's wallets, but this only staunched some of the bleeding, and we see it had unintended consequences (people staying home to collect free money rather than return to work).

originally posted by: Ksihkehe
a reply to: SleeperHasAwakened

Very good post S&F.

We've been in a liquidity crisis for some time.

The solution of sending more government funds into "too big to fail" industry is just accelerating the crisis. When the overall economy is showings signs of collapse the "too big to fail" industries always end up taking in tax money and we've been pumping money into them for ages now. The people on the top will extract this money shortly after they no longer get their corporate welfare payments, the system will collapse, and we get another cycle.

At this point it seems like we already have a corporate universal basic income, with select industries getting government safety nets while citizens are supposed to somehow reap benefits from these corporate sponsorships.

I think they're essentially incapable of fixing the disaster they helped fuel. We'll be dealing with ever more frantic, useless, and desperate measures to try to regain some semblance of control. The crash will be historic, they'll all point fingers, then we'll get right back to doing it all over again. Central bank digital dollars will help liquidity, but without fixing the system on top of it there will continue to be cycles of catastrophic failure and hoarding money at the top will continue to cause liquidity issues. We can't funnel the money supply into a handful of companies and expect otherwise.

^^^ Very astute points on how "throwing money at a problem" can just exacerbate it.

I feel that "the too big to fail", government chaperoned industries that get outsized degrees of help from Uncle Same are (shocker!) the financial industry, the lending/housing industry, and energy. Of course, we'd be remiss if we didn't bring up the fact that even states are now getting bailed out.

I also agree that there is no painless way to deflate the hyper bubbles that have been created in our economy. The only way forward seems to be keep printing money and a continuation of easy money policies. I think the Fed and Treasury and those setting economic policy realize this too, and this IMO is why they are still keeping interest rates low (despite the specter of inflation looming) and this why they are still not tapering the asset purchase programs.

a reply to: KentCook

Basically, the mom and dad businesses are dying out leaving the big players.