“The velocity of money is at a level lower than that during the Great Depression.”
6/15/17 – A friend, who works at one of the top tangible assets companies in the world, sent me a copy of this memo from Donald W. Doyle, Jr., Chairman and CEO of Blanchard & Company, Inc. This refers to a meeting this morning, 6/15/17. It is reprinted here with permission.
TO: All Portfolio Managers
FROM: Donald W. Doyle, Jr.
DATE: June 15, 2017
RE: Questions from Meeting of June 15, 2017
The following is in response to questions asked (and not answered) at the meeting this morning, which involve the velocity of money and inflation.
VELOCITY OF MONEY
The Velocity of Money is a measurement of how fast liquidity injected into the system by the Fed transacts, or the rate of turnover in the money supply – that is the number of times one dollar is used to purchase final goods and services included in GDP.
Today, the velocity of money is at a level lower than that during the Great Depression. That decline offsets the potentially positive impact of recent rapid money supply growth.
The necessary question is, “Where did all the money growth go?” The answer is that Quantitative Easing pours money into the banks and other financial institutions, who then use it as they see fit. Instead of spreading that money in the economy through loans, the banks have built up massive excess reserves and cash assets. Keeping that gargantuan amount of money on their balance sheets is the primary culprit – the reason why rapid monetary growth has failed to produce either inflation or economic growth.
Skeptical? Over the past five years, the U.S. has experienced the lowest loan creation out of a recession in history. In traditional economics, loans – money created by commercial banks – ultimately leads to GDP growth. As long as quantitative easing continues, and Fed injects tens of billions into the commercial bank balance sheets each month, the banks see to it that most of the Fed’s money makes it only into capital markets, resulting in asset inflation (stocks), but not into the general economy, where commercial banks usually create significant amounts of loans and the resulting money then leads to an increase in money velocity and ultimately to growth.
Still skeptical? Only the least risky buyers have access to mortgage credit, leaving millions of buyers unable to take advantage of Federal Reserve policies that have reduced financing costs. The result? A sluggish velocity of money, and equally sluggish economic recovery. This monumental decline in the velocity of money (See chart from the Fed on Page 2) is restraining inflation, as it logically would. If the velocity of money reverses to a more normal level, money supply growth will clearly have a far greater stimulative effect on the economy. If velocity increases rapidly, it will cause a sharp increase in inflation. If inflation rises sharply, it will bring about a rapid increase in velocity. Both of these make perfect sense: the faster prices are rising, the faster people spend their money, since they want to make their purchases before prices rise further. The faster people spend their money, the faster prices rise, therefore, inflation.
Inflation foes insist that an improved economy will cause a tightening in policy on the part of the Fed and other countries’ central banks. However, political issues practically ensure that, when rapid growth finally returns, bankers will have neither the will nor the tools necessary to contain inflation. When and if that happens, it would be bearish for the dollar, bullish for gold.
HISTORY OF INFLATION
Why is higher inflation coming? The U.S. expansion is maturing. Labor markets are tightening. Greater competition for workers means firms need to offer higher wages. Rising wages and home prices, along with more stable commodity prices, are pushing up inflation, as will the fiscal stimulus promised by Trump. Inflation pushes up precious metals and rare coin prices.
Finally, massive money printing by the Federal Reserve has increased the U.S. monetary base by more than 300% since 2009. Virtually all economists believe that you cannot increase the monetary base by such a staggering amount and not eventually create large-scale inflation. Perhaps we could avoid future inflation at this point if we were to stop all additional money printing and begin to take some of that newly printed money away in a process called Reverse Quantitative Easing. However, not only is the Fed not implementing such a strategy, they continue to print even more dollars at the rate of more than $40 billion per month. There is no exit strategy. Eventually, with the injection of all of this new liquidity into the system, we will have higher inflation and much higher gold and rare coin prices.
So what, exactly, is fueling the perpetual rise in stocks? The central bankers and global corporations themselves.
We continue to see unprecedented activity and movement in all sectors of the US and global economy. The Baltic Dry Index is still down.
There are two things just about every trustworthy economist agrees upon. One is that this cannot last forever. Two, is that when it goes it’s going to be a devastating adjustment. It is a question of when.
My personal suggestion is that everyone seriously pray about getting some tangible assets in their investment portfolio. Does that sound like it only applies to the rich? NO! For many decades it has been recommended that EVERY portfolio (i.e. savings, retirement account, nest egg, emergency fund) have at least some percentage in tangible assets. It’s no guarantee against hardship but it is just about the best insurance you can get your hands on. And, you may be surprised at the options even if you have a small amount to work with. Even if you can only scrape together two hundred dollars, I suggest that you get the information and pray about it.
We are surrounded on every side by danger: danger in the economy, danger due to terrorist attacks, danger from neighbors lost to the insanity of what is termed far left views who openly call for people to be tortured or murdered for having a view not in line with their own, danger as spiritual attack is off the charts and the Vatican still can’t train exorcists quickly enough to meet overwhelming demand.
How are believers to respond in this time of pervasive insecurity?
No man or earthly system is our source or provider, rather, almighty G_d who dwells in us and provides us with peace in the midst of the storm! We are called to be the shining light in the midst of increasing darkness, peace when others around us are overwhelmed with despair, and loving in spite of increasing hatred toward the “people of the book.” But we can’t do that if we aren’t firmly planted on the rock!
There is not much hope in the world in these dark days. But we can have this confidence only through Yeshua Jesus, the Messiah, who is returning for us. And it is joy provided by Him that is our strength in times of trial.
The LORD is my strength and my shield; My heart trusts in Him, and I am helped; Therefore my heart exults, And with my song I shall thank Him.
Do not grieve, for the joy of the LORD is your strength.
I feel substantial trepidation about the coming months; I’m certainly not the only one. Keep your eyes on Him and He will direct your path. And if you don’t yet know Yeshua Jesus as L_rd of your life, please visit the Who is Yeshua Jesus? page and learn more. He’s knocking on the door of your heart. Open to Him then you will never have to walk this journey alone or rely solely on the shifting sands of earthly wisdom!