A Look at the Economic Future

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I want to take a break from talking about re-inventing a business to focus on a trend I find worrisome.  One of my favorite economists, Joseph Barbuto has been talking about this.

This is a chart depicting the velocity of money, thanks to one of the best economists I knew on Wall Street –  Lacy Hunt at Hoisington Investment Management.

The velocity of money is important because it tells us where the money in the economy is going.

When money velocity is high, the money currently in the system is flowing freely throughout the economy.  Wages rise, banks make loans, businesses thrive.  Of course, when money velocity is too high it creates inflation.

When the velocity of money is low as depicted in the above chart, money in the system is not reaching Main Street.  This is important particularly now because the Federal Reserve has spent recent years pumping money into the system.  Where has all that money gone?  Well, banks [including the big brokerage firms that have shifted their legal identities to include that of banking institutions], and banks are lending to only the highest rungs of the credit ladder  — brokerage firms, big companies and institutional investors.

The velocity of money creates pools in specific asset classes  —  In the above chart, the velocity of money declined after 2000 and it pooled in the housing market.  After the housing bubble burst in 2005 the velocity of money increased until it became clear that a lot of this money was disappearing in loan defaults.  That’s when the Fed dropped interest rates and began pumping money into the system to try to get the economy back on track.

Note that this didn’t increase the velocity of money.

Money is pooling in institutional investment accounts where it created a bubble in the stock market, emerging economies, gold and may even be creating another bubble in institutional investment in housing.  Much of the improvement in the US housing market has been due to hedge funds and foreign investors buying blocks of houses/apartments to use as rental properties.  However, money has been conspicuously absent from job creation, wages, and consumer credit.

What a lot of top economists are wondering right now is when the investment asset bubble will burst.  This is something you should wonder, as well.

Another economic crisis will compound your struggles over the past years, so start conserving money and lowering your expenses now.

When money velocity is rising, it means the economy is expanding. Production capacity is increasing. Deposits from rising wages are being lent and invested effectively. Essentially, more money is moving around the economy, in the places it should. Late 1978 into 1997 was such a period.

When money velocity starts to fall (as we saw after 1918 or 1997), it means investment is increasingly speculative. Less money is spent on productivity enhancements or capacity improvements. Workers’ wages stagnate or fall, so they spend less. Basically, the money flow shifts.

Think of it like our circulation. When money velocity is rising, blood is flowing through all our veins and arteries smoothly, feeding our muscles and organs the necessary nutrients and oxygen we need to function optimally. When money velocity is falling, blockages form and the blood pools dangerously. Blood clots and strokes become a constant threat.

When money velocity drops below average levels, as the black line in the chart above shows, then those bubbles and the debt behind them are starting to deleverage, and that causes deflation and negative money velocity.

– See more at: http://survive-prosper.com/2013/08/28/why-quantitative-easing-has-not-created-inflation-and-why-it-wont/#sthash.kdoDLpyH.8FWgXJhU.dpuf

When money velocity is rising, it means the economy is expanding. Production capacity is increasing. Deposits from rising wages are being lent and invested effectively. Essentially, more money is moving around the economy, in the places it should. Late 1978 into 1997 was such a period.

When money velocity starts to fall (as we saw after 1918 or 1997), it means investment is increasingly speculative. Less money is spent on productivity enhancements or capacity improvements. Workers’ wages stagnate or fall, so they spend less. Basically, the money flow shifts.

Think of it like our circulation. When money velocity is rising, blood is flowing through all our veins and arteries smoothly, feeding our muscles and organs the necessary nutrients and oxygen we need to function optimally. When money velocity is falling, blockages form and the blood pools dangerously. Blood clots and strokes become a constant threat.

When money velocity drops below average levels, as the black line in the chart above shows, then those bubbles and the debt behind them are starting to deleverage, and that causes deflation and negative money velocity.

– See more at: http://survive-prosper.com/2013/08/28/why-quantitative-easing-has-not-created-inflation-and-why-it-wont/#sthash.kdoDLpyH.8FWgXJhU.dpuf

When money velocity is rising, it means the economy is expanding. Production capacity is increasing. Deposits from rising wages are being lent and invested effectively. Essentially, more money is moving around the economy, in the places it should. Late 1978 into 1997 was such a period.

When money velocity starts to fall (as we saw after 1918 or 1997), it means investment is increasingly speculative. Less money is spent on productivity enhancements or capacity improvements. Workers’ wages stagnate or fall, so they spend less. Basically, the money flow shifts.

Think of it like our circulation. When money velocity is rising, blood is flowing through all our veins and arteries smoothly, feeding our muscles and organs the necessary nutrients and oxygen we need to function optimally. When money velocity is falling, blockages form and the blood pools dangerously. Blood clots and strokes become a constant threat.

When money velocity drops below average levels, as the black line in the chart above shows, then those bubbles and the debt behind them are starting to deleverage, and that causes deflation and negative money velocity.

– See more at: http://survive-prosper.com/2013/08/28/why-quantitative-easing-has-not-created-inflation-and-why-it-wont/#sthash.kdoDLpyH.8FWgXJhU.dpuf

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