Which came first, the chicken or the egg? Or to put the question in macroeconomic terms, which came first, the Federal Reserve’s feverish additions to the money supply, or the steady decline in monetary velocity? Here’s what monetary velocity has done over the course of my lifetime (i.e., the last fifty years):
It appears to be slowing down. Quite like my metabolism, it has reached its current nadir. Come to think of it, the curve of my metabolic activity probably looks a lot like the curve for monetary velocity. I had a big spike in energy during the nineties, too, what with two kids and a wife, and a law practice sputtering and wheezing into life.
All this comes as the money printing furiously continues; here’s the trajectory of M2, a measure of money supply that includes cash and bank deposits:
So, is it the Fed’s printing that is causing the money velocity to drop, or something else? Since the money velocity zoomed up in the nineties while the money supply was relatively flat, perhaps not (i.e., no inverse correlation). But since the Great Recession, money supply and money velocity have been inversely correlated quite tightly. Maybe something changed. Maybe things are now more closely linked. Maybe you can bring old horses like me to water, but you just can’t make ’em drink.
Whatever is the case, this sort of analysis is quite a bit more relevant to where economic performance might be headed than, say, analyzing the psychotic stock market, which has lately risen on bad news, presuming it would prompt a Fed rescue, and also on good news, like the end of the shutdown/debt ceiling imbroglio, figuring that it would mean good times ahead. If nothing else, the steadily declining money velocity does not look hopeful. It has always declined in contractions. Always. But perhaps, this time is different.