My Predictions on the Economy
America is the land of the riches— we’ll to rephrase that: the land of the richest. The Great Recession has left our economy in a precarious situation; our economic inequality is now just as worse as the 30’s; HH Median Income still hovering around ‘08 rates; and trillions of dollars pumped into the economy has yet to make an affect on inflation.
As part of the recession-responsive monetary policy set forth by the Feds, quantitative easing has helped the total dollars of M2 money almost double to $13.746 trillion. Since 2008, we’ve added $6.25 trillion into circulation. That means we’ve added 120% more liquid assets to our economy. So.. where’s the money?
Prices surely haven’t doubled since then. The CPI Index (inflation indicator) has only gone up 26 points over that same time period meaning prices have increased 26%. But money supply increased 120%, so why hasn’t inflation increased at the same pace?
The answer is because of velocity. If you don’t know that that means, velocity is the total amount of dollars exchanged in an economy, domestically. In short, it is an indication of the number of transaction in an economy.
Velocity affects inflation because it allows for inflation to be felt by consumers. However, don’t think velocity is bad because it isn’t. Velocity is very good and can show an economy’s spending strength.
If you look at the graph below you can see how velocity of M2 Stock as fared over the same time period. Moving from 1.98 to 1.43. This means there were .55 dollars being transacted domestically over the same time period.
This decrease in dollar demanding transactions was because of economic sentiment. The median house hold income just passed its’ 2008 levels a year ago and credit card debt is over $1 trillion again. When velocity increases (more transactions take place) we will start to feel the affects of inflation and consumers will command higher interest rates.