Dying Money Velocity Began In 1995 With Massive Mortgage Credit Expansion

This is a syndicated repost courtesy of Confounded Interest. To view original, click here. Reposted with permission.

M2 Money Velocity (GDP/M2 Money Stock) peaked back in Q3 of 1997. And it has mostly gone down hill from there.  As of Q2 2016, M2 Money Velocity is at the lowest point in history.



One explanation for the decline in velocity is the decline in labor force participation since early 2000 when labor force participation peaked.  Fewer people participating in the labor force (as a percentage of the population) makes it more and more difficult to maintain velocity since GDP is lower despite the expansion of money.

Why is labor force participation declining? First, our population is aging and more and more people are retiring. Second, more and more students decided to attend and/or stay in school given the lousy jobs market.  Third, some people have just given up trying to find a job and would prefer to rely on the state for food, housing, healthcare, etc.

A closer look reveals some bad AND good news. Labor force participation for ages 25-54 has been declining since 2007 (but showing some improvement in 2016). On the other hand, LFP for ages 65 and above (many of whom were pushed back into the labor force as a result of the financial crisis and housing bubble burst) has been growing steadily since 2008.


Actually, the economic world turned before labor force participation peaked in early 2000 and M2 Money Velocity peaked in 1997.  A key economic indicator, core personal consumption expenditures YoY,  was above 4% in the early 1990s only to fall to around 2% around 1995 prompting the Clinton Administration to enact policies leading to a dramatic increase in mortgage credit (creating a credit bubble) as a stimulative measure. This was the Clinton National Homeownership Strategy: Partners in the American “Dream.” nhsdream2 That turned into a nightmare for millions of American families.


1995 was the beginning of the incredible housing credit bubble that catastrophically exploded in 2008.


Core personal consumption expenditures (cPCE) YoY sagged after 1989 and hit 2% by mid 1990s and has struggled to reach 2% on a consistent basis ever since. As a result, GDP has been compromised and the massive expansion of mortgage credit helped created a massive house price bubble which burst … and things have never been the same since.


And with the fall of the House of Usher cards, mortgage equity withdrawal has fallen as well (putting a damper on personal consumption expenditures.


Remember, housing is a consumption good (to serve as shelter), not a productive asset like a factory. Trying to create economic growth through housing is a poor choice. So much so that The Federal Reserve is left blowing asset bubbles instead of stimulating actual economic growth.


Here is President Bill Clinton, father of the credit bubble, singing “I’m a Lumberjack and I’m OK.”



Wall Street Examiner Disclosure:Lee Adler, The Wall Street Examiner reposts third party content with the permission of the publisher. I am a contractor for Money Map Press, publisher of Money Morning, Sure Money, and other information products. I curate posts here on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. Some of the content includes the original publisher's promotional messages. In some cases I receive promotional consideration on a contingent basis, when paid subscriptions result. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler, unless authored by me, under my byline. No endorsement of third party content is either expressed or implied by posting the content. Do your own due diligence when considering the offerings of information providers.

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