I like charts, they are an easy way to see visually with your own eyes what is actually happening without having to listen to spin or opinion. The above 2 charts are about as basic as it gets, the first one is the growth rate of M2 money supply while the second one is “velocity” of the M2 money supply, I got these right from the St. Louis Fed’s website. Cut and dry, “How much money is out there and how quickly it is moving.” Please notice that these charts are quite long term with M2 going back to 1984 and velocity back to 1958.
If you look at the first chart you will see that M2 was steadily rising until 2008 when it exploded upward “to save the system.” M2 was about $200 billion in 1984 and tripled to about $800 billion in 2008 (24 years), it has since more than tripled again…but this time in less than 5 years! Dissecting this chart a little further you can clearly see that since 2008 there were 3 periods of time where the money supply growth stagnated and then had another big jump upward. If you guessed that each one of these “upward leaps” in money supply corresponded EXACTLY with QE 1, 2, and 3, pat yourself on the back because you would be correct. I will get back to M2 in a short while but please keep in mind that Ben Bernanke testified (PERJURED) himself by stating that “QE” was not printing money…it was only like a rate cut he contended.
Now on to the second graph which shows the “velocity” of money and truly THE reason that money supply HAD to be exploded. Otherwise the whole system would have already come down in a heap. Please note that in the past, each time that velocity peaked it would coincide nearly exactly with the onset of a recession. You can clearly see the velocity peak 8 times and each time recession followed…until now…supposedly. Now, velocity has actually crashed and is lower than it ever has been since 1958 …so has something changed? Is velocity turning down no longer a bad thing for the economy like it always has been? Or…are we again… or still…in a recession but just not being told because we can’t handle the truth?
OK, so you’ve seen each chart but to get the whole picture you have to look at them both at the same time. Did velocity turn down because the Fed was printing too much or was the Fed forced to print because of the lack of velocity? It is obvious that velocity peaked in or around the year 2000. THIS was the peak of prosperity and it has been downhill since then. The stock markets peaked in 2000; real estate then bubbled and peaked in 2006…only to crash and then the 2008 financial train wreck. These events of collapse are what forced the Fed’s hand to print, print, and print because they had to “hide the reality.”
What do I mean by the “reality?” The reality, that debt levels became too high and unsustainable. More debt in the past always meant more economic activity and more profit but we crossed a threshold where more debt has stopped working as an “additive” and now is “dragging” even sovereign governments (the issuers of currencies) down. The Fed expanded money supply so that “nominal” prices would not fall. The Dow Jones at 13-14,000 back in 2000 inflation adjusted for 13 years it would be way over 25-30,000 as opposed to the current 15,000 level. This is simply because a dollar today buys far less than it did 13 years ago. THIS is why the Fed has had to go into panic “QE” mode, they have had to cover the collapse in velocity or the “truth” would have been known 5 years ago. The “truth” being a total and systemic collapse of the financial system.
I am sure you have heard the terms “there’s no money on the street” or “money’s tight.” This simply speaks to velocity. When people “scrimp” or pull in their horns collectively then business slows because the “turnover” of money slows down this is where we are today. Just as the central banks have “reacted” to the crash in velocity, investors are reacting to the central banks flooding the system with money (debt) by purchasing gold.
These 2 charts taken together (1+1) truly equal a coming disaster. China knows it; they have said so and judging by their hording in the gold market are acting on it. Russia also knows it and just last week warned their citizens to pull deposits from Western banks. Taken separately these charts don’t tell you anything definitively but taken together they tell you EVERYTHING. The “money” (chart 1) has already been created and issued for a total debasement (hyperinflation) to occur, the money is not “turning” over (chart 2) so business conditions are bleak at best. The debate all along has been “will it be deflation or inflation?” I have said all along that it will be both…and at least felt that way. A hyperinflationary depression is what these two charts are suggesting. All that is needed is some sort of spark to ignite the fears in the holders of currencies and this fire will rage. The upcoming G-20 summit may very well be the catalyst where nations collectively isolate and abandon dollar settlement. A U-turn in velocity would not in this case signal “better times,” on the contrary, it would signal the start of panic selling of dollars because the world knows there are just too many of them to have much value left!