FRED says our money velocity sucks – like a vortex heading down the proverbial drain. And FRED’s friends keep throwing more and more money on the heap.
FRED is shorthand for Federal Reserve Economic Data and in this case, we reference the St. Louis Fed report titled Velocity of M2 Money Stock (as an economics undgrad, I love this stuff) (https://fred.stlouisfed.org/series/M2V, July 14, 2016).
Take a look at that chart. Velocity has averaged 1.74 post-Depression. It peaked at 2.21 Q31997 and has dropped steadily since then. It is now around 1.4 and falling steadily. Most people alive today have never seen money moving so slowly. Capital is log-jammed in the financial system and not moving – money is simply not changing hands the way it used to. As an entrepreneur, you may have noticed that it is much harder than usual to secure capital for fun things like buying new equipment and hiring employees.
Now check out the supply of money, M2:
It has ballooned from $7.4 trillion to $12.7 trillion since the beginning of the most recent recession. We have never experienced economic conditions like this – EVER. Normally when the money supply expands rapidly, it pushes prices up – more money chasing the same quantity of goods. Ominously, this has not happened in the last nine years. In fact the opposite is happening – deflation. Deflation has been avoided only because of the unprecedented printing of money. But it is coming.
So we have nearly doubled the money supply (71% increase since December 2007) and all of that increase plus a big chunk of the money in circulation before that is now lodged firmly in the financial system and isn’t coming out any time soon. It will take a major event to dislodge it. What type of major event? How bad will it be? Well, seeing as to how the last one was pretty painful and we were at half the altitude we are now, the next one is probably going to be severely painful. Rioting in thestreets like Venezuela painful? (http://www.ibtimes.co.in/venezuela-food-riots-5-dead-protests-over-high-inflation-food-
shortage-683228). Don’t know. Please respond with your thoughts on what you think the outcome might be.
Many people have asked me “Well then, where is this money held exactly?” Ultimately, it is all owned by individuals – you and me. In fact, it is now estimated that the wealthiest 62 people on the planet have the same wealth as the bottom 50% of people on the planet. Credit Suisse puts the figure at the top 1% having the same wealth as the bottom 50% of the world’s population. (http://fortune.com/2015/10/14/1-percent-global-wealth-credit-suisse/)
So the answer is that the vast majority of wealth created is stored safely and securely at the top. (https://publications.credit-suisse.com/tasks/render/file/?fileID=F2425415-DCA7-80B8-EAD989AF9341D47E)
On the bright side, the number of newly-minted millionaires is on the rise again. The city with the most millionaires?