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Here’s Why Everyone is Confused About Economism’s Most Useless Concept

The concept of Velocity (V) of money confuses people. It does so because “Velocity” is a misnomer. Velocity is the speed of an object in motion. Economists pretend that V represents the speed of transactions in the economy. It’s absolute horseshit. V of M has nothing to do with the speed of transactions. Nothing. Zero. Zilch. Nada.

It is simply the ratio of the measured quantity of total GDP at a given moment, divided by the measured quantity of money in the banking system at that moment. It’s a snapshot of GDP/M = V. It’s a fixed ratio at a point in time that is different at different points in time. It does not measure movement. It does not measure speed of transactions. Whoever came up with that concept was full of crap. And as usual with most crap in eConomics and finance, it became accepted as religious Truth.

Which confuses the issues. eConomists like it that way. When they confuse everybody with their nonsense, they feel powerful.

When the Fed prints a few trillion and pumps it into Primary Dealer accounts, M expands by a like amount. For example in the spring of last year the Fed pumped, and M grew by $3 trillion in the space of a few weeks.

Changes in GDP, on the other hand, are slow and usually don’t vary much. They tend to be at a fairly constant rate, other than when there’s a crisis. GDP typically rises by 100-200 billion quarterly.

So if the Fed pumps $3 trillion, and GDP grows by 200 billion, then V is reduced by a factor of 15. GDP/M, that is, V, will only ever increase if GDP rises more than M, and that won’t happen until the Fed stops printing money at a pace greater than GDP.

All this extra money that the Fed is injecting into the banking system is money that the economy can’t use, even if it is rebounding at a very rapid clip as it is now. It serves no economic purpose whatsoever.

eConomists and the Fed are lying to you about that. The US economy could never keep up with a $3 trillion increase in M in a few weeks. It will rebound at the rate it is rebounding for reasons other than massive increases in money supply.  

GDP has rebounded so fast from the pits of the pandemic panic, that it has actually caught up to the Fed in recent weeks. The Fed is naturally taking credit for that.

GDP growth now is approximately equal to the rate at which the Fed is printing money, so V is flattening here. The chart below shows that. But when the next crisis hits, the Fed will print another massive wad of money to bail out the Wall Street criminal gangs again, and V will shrink a great deal again. 

This chart illustrates. It shows M2, GDP, and V. M2 and GDP are indexed to the bottom of the 2008-09 recession in March 2009, when the Fed started QE1. These are on the left scale. Both lines start at 100 as of March 2009.

The chart shows their growth relative to one another in percentage terms over the past dozen years.

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The Fed started full QE 1 in March 2009. It bought Treasuries from Primary Dealers to inject cash directly into the banking system and directly grow bank deposits in M1, and thereby M2. For the first two years, the Fed kept QE about even with GDP growth. V, the ratio of GDP to M, stayed almost stable, with GDP at about 1.7 times M.

Then the Fed stepped on the gas with QE 3 in mid 2011. You can see the pop in M.\ there It looks tiny relative to today, but then it was huge. The ratio of GDP to M (V) therefore declined as a result of that increase in QE.

From 2011 to 2017, the Fed pumped QE continuously at a rate greater than GDP. The GDP/M ratio, aka V, declined steadily.

Then in 2017-2018 V rose. What happened? Mother Janet tried to do the right thing. She started shrinking the Fed’s balance sheet. She tightened money. M2 growth slowed, but GDP kept growing at the same pace it always does. So as M slowed relative to GDP, the GDP/M ratio, aka V, rose.

Along came Lord Jaysus, continuing that “normalization” policy until late 2018.

The bond market wasn’t having it, though. The US government was issuing the same massive amount of debt month after month, but the Fed was buying less and less of it. Bond prices fell continuously and the 10 year yield rose relentlessly to 3.25%.

Jaysus cracked at the end of 2018. He stopped shrinking the Fed’s balance sheet and the GDP/M ratio rolled over.

Then in September 2019, the shit hit the fan in the money market and the Fed started its giant program of NOT QE. Which was QE, but the Fed said it was NOT. We knew better. As the Fed pumped money into M at a high rate,  the GDP/M ratio, or V, rolled over.

Then came March 2020, and we all know what the Fed did. This time, the economy really was crashing. That and all that Fed money printing caused the GDP/M ratio (V) to drop sharply.

It will go much lower again later this year when the Fed is forced to massively ramp up QE even more.

The US economy is a huge rumbling giant of a thing that has massive inertia. It’s the biggest, baddest, goddam force on earth. Nitpicking it with monetary policy has absolutely no impact on it. That is, until shit breaks because of the greed and malfeasance of the Wall Street crime bosses, and the corrupt cop on the beat Fed, who protects the Street con game.

When the Wall Street shell game breaks down as it does every dozen years or so, the economy contracts in shock. Then it gathers itself; the general expansion motion resumes, because people run out of stuff and need to start buying again. The economy starts moving again.

Over the long term it just keeps expanding at about the same pace all the time, REGARDLESS of monetary policy. These massive bursts of monetary excess have absolutely no impact on the US economy over the long haul. Their only purpose is to bail out the Fed’s cronies when they break stuff while running the Wall Street crime syndicate skims and scams .  

These monetary supernovas sure as hell have an impact on the stock market. That’s because the stock market is one of its only two direct monetary policy conduits. The other is the bond market.

And all of it is transmitted via the Primary Dealers, who are the only gangsters permitted to trade directly with the Fed as it exercises its monetary operations.

Whatever happens in the economy is only relevant, and it is relevant, because policy makers THINK that their policies matter. So they react to shit that they don’t need to react to, outside of making sure their banker gangster cronies keep raking it in. The Fed’s support of these massive financial chicanery schemes just makes the system more fragile all the time.

So V is essentially meaningless. It doesn’t tell us anything we don’t already know. We already know that money is exploding, because that’s the only way the Fed can keep the games running. Meanwhile GDP  grows at a semi constant rate of 2-3%, with rare exceptions in response to crashes and recoveries.

V adds nothing to that knowledge.

Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish LiquidityTrader.com, and was lead analyst for Sure Money Investor, of blessed memory. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both sales, analytical, and trading capacities. Prior to starting the Wall Street Examiner I was a commercial real estate appraiser in Florida for 15 years. I was considered an expert in the analysis of failed properties that ended up in the hands of bank REO divisions, the FDIC, and the RTC. Remember those guys? I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. I'm not some Ivory Tower academic, Wall Street guy. My perspective comes from having my boots on the ground and in the trenches, as a real estate broker, mortgage broker, trader, account rep, and analyst. I've watched most of the games these Wall Street wiseguys play from right up close. I know the drill from my 55 years of paying attention. And I'm happy to share that experience with you, right here. 

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