Sunday, March 2, 2014

Acceleration of MZM Money Stock

My last post involved the velocity of MZM money stock.

Velocity of MZM Money Stock

The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.

Using a physics analogy, if we know velocity over time then we also know acceleration over time. Let's see what that looks like.

The following chart shows the 20 year moving average of the annual change in the velocity of MZM money stock. (I am using a 20 year moving average to smooth the data out so we can see the underlying trends more clearly.)

Click to enlarge.

The foot is firmly on the break pedal again. (Pun intended.)

Perhaps we should be bracing for extra deceleration again? In any event, I am not exactly bracing for a legendary growth spurt from here. Let's just put it that way.

As a side note, the chart above looks a lot like a long-term chart of long-term real yield death. I doubt very much that it is a coincidence.

August 15, 2013
The Long-Term Death of Real Yields

Click to enlarge.

Somebody alert the Fed Chairman! The "lifeblood" is coagulating again! Better start tapering the tapering! I admit that it's a bit like alerting the Wizard of Oz that the curtain's not shut tight though. I don't really expect the Fed to be able to save us from ourselves (even if the Fed could see it ahead of time, which they rarely can). In general, we want so much to believe.

This is not investment advice.

Source Data:
St. Louis Fed: Custom Chart


Troy said...

Tax Cuts

GOP won't give the Dems any good cheer this cycle, but they'll run on them in 2016.

To get there from here, we're in a similar situation to 2005-2008, dependent on monetary injection.

blue is Fed QE, red is bubble loan YOY take-on.

If the Fed gives us an injection of that scale (i.e. no taper), I think we'll get a much smaller budget deficit, giving cover for the politicians to cut taxes a bit.

Viola, increasing real incomes across the board!

We're entering into a new monetary reality now.

We pretended money was this commodity of limited supply, but that's 19th century thinking.

Stagflationary Mark said...


We pretended money was this commodity of limited supply, but that's 19th century thinking.

I'm certainly not pretending that.

I believed and continue to believe that it will be harder and harder to make money off of money. There's already so much of it trying to earn interest as it is.

I don't believe that the Fed can create inflation adjusted prosperity over the long-term. I don't believe the Fed can prevent the next recession.

And lastly, I don't believe that QE is the panacea that many seem to think it is. I'm not even convinced it has lowered interest rates. Seems to me that it simply enticed money that would have bought bonds into buying riskier assets instead. How much of that money helped the people working at this country's many shopping malls? How much of that money helped recent graduates straddled with student debt? How much of that money helped retired seniors on fixed income?

Time will tell.

Stagflationary Mark said...


1. Do you believe there was serious pent-up demand during the Great Recession?

2. If so, do you believe there could be serious pent-down demand now?

3. Do you believe that the Fed has permanently put a stop to the business cycle by simply refusing to exit ZIRP?

4. If our weakened economy is still subject to the business cycle, where do you think we are within it?

5. How would sliding into a recession while still in ZIRP affect your confidence in the Fed?

For what is worth, my answers are: Yes, yes, no, late in the cycle, and not much.

I say "not much" because I already have very little faith in the Fed. There have been 19 recessions since the Fed was founded. If they had seen even half of them coming *and* could have prevented them, then there would only half as many, lol. Sigh.

If central planning, complete control over the money supply, and unquestionable authority is all it would take to prevent recessions, then communist countries would have never had any.

Troy said...

I don't think the business cycle exists any more.

today's peak was 1970s recession!

I look at the economy in terms of hydrography, the distribution of water as money.

Money (in the hands of a spender, not saver) commands production of new goods and services.

But with top 5% taking 33% of the national income, we've reached a state (to switch metaphors) like a nuclear reactor with half the control rods inserted.

The $400B+ trade deficit -- still more control rods inserted.

$1.8T/yr corporate profits

more money being drained out of the paycheck economy.

Counteracting this we have $6T in gov't spending:

we keep the circulation going.

If so, do you believe there could be serious pent-down demand now?

No, other than for granite counters and steel appliances, we may have bought enough of those 2004-2007.

Cars last ~10 years so we're hitting the replacement cycle of the initial bubble-bought cars.

Everyone who defaulted on their loans in 2008-2010 is leaving 'credit jail' soon and can borrow again.

Gen Y is only now edging into their 30s and they will present immense new demand, should they find the credit and jobs.

The 1980s and 2000s saw immense leveragings occur:

I don't see why the system won't pump it up again.

Alternatives that restore sanity either result in politicians losing their cushy jobs -- and/or riots in the streets a la 1992 LA.

Like I said, after ZIRP is NIRP, like what Abe and Kuroda are doing in/to Japan.

Not saying this is right, but trillions of dollars to have a quality all their own.

And the Fed has an unlimited supply of trillions of dollars.

Don't know what institutional brakes it has now, how the 'hawk' "governors" can restrain the interventionists.

But I do know that if the GOP wins it all in 2016, the current hawks will magically become the biggest f-ing doves you'll ever see.

Troy said...

real per-capita (age 25-54) gov't spending

I don't even understand how this is possible.

But I do know that by 2020 SS + Medicare alone is going to rise from $10,000 per worker to $14,000.

medicare + ss per worker

and when it's my turn to collect in the 2030s this will be up to $30,000 per worker.

Things are going to get weird here. What we know / think we know isn't going to be applicable going forward.

As long as we can produce enough food to feed ourselves at the general standards we've become accustomed to, I don't see Soylent Green-like conditions.

(Japan has the right idea with the depopulation thing, bummer about their quadrillion yen national debt that they ran up for some crazy reason)

Troy said...

now that's what I'm talking about, LOL

My quasi-Georgism informs me that this free money will just inflate rents and home values if it's sustained (like the FICA tax cut got eaten by rent increases), but the system's gotta do something, and, like Japan, doing the right thing is off the table.

Stagflationary Mark said...


I don't think the business cycle exists any more.

I strongly disagree.

today's peak was 1970s recession!

The business cycle has nothing to do with long-term secular declines. It's about the short-term cyclical changes back and forth between pent-up demand and pent-down demand.

Troy said...

pent-up demand and pent-down demand

I think much of our demand is for consumables, not durable goods.

Trips to the salon, Outback, etc.

There's no supply-side shortage here, just a lack of middle-quintile spending power.

And Gen Y, median age 20, wasn't old enough to catch the previous good times anyway.

The beauty of the 2004-2007 period was that $100B/month was raining on the middle quintiles via the housing bubble.

On top of that gov't spending was ramping up, from $28,000 per -capita in 2000 to $40,000 in late 2007:

But note the flat-top in that graph. Repression!

And it's going to break, cuz we're not going to cut spending, and entitlements are a slow, swelling wave coming right at us.

"Holy S-balls" indeed

Stagflationary Mark said...


There's no supply-side shortage here, just a lack of middle-quintile spending power.

You are missing my point.

People spend less when they are pessimistic about the economy. They eat at Outback less.

People spend more when they are optimistic about the economy. They eat at Outback more.

You look at the data as if people are not toggling back and forth between pessimism and optimism.

In my opinion, the business cycle is only dead when robots do all the work and make all the purchasing decisions. Probably won't be a good looking economy then though. Sigh.

There was pent-up demand during the Great Recession. If pent-up demand exists, then so to pent-down demand.

I really think ZIRP adds to it. Some are out there right now trying to decide if it is better to save $1000 at pathetic short-term interest rates or buy a new piece of furniture. Some are going to choose poorly.

Anonymous said...

The only way to keep the debt-based economy going is to keep reducing the interest rate that consumers and businesses have to pay on that debt. The fed funds are technically in negative territory now , and that has helped reduced the interest rates paid across the economy.

However , there's limited room for further maneuvers. If 2% is your desired inflation target , minus-2% is the limit for how low your short-term policy rate can go. At that level , in theory , you can imagine rates across the economy dropping to around 1-2% over time. In fact , this is what has happened in Japan. That's it , though. After that , to continue the debt game , you have to be willing to accept a higher inflation rate to get the more and more negative real interest rates you need to keep the Ponzi operating.

The worst part of going down this road is not that you have to tolerate higher inflation , it's that you've accepted the fact that the economy is a Ponzi scheme. Malinvestment will be the norm , incentives will be degraded , and living standards will , at best , stagnate.

There's is an alternative , however , and we've done it in the past. Base your economy on incomes , not debt. That requires shared prosperity , and I understand that that's a no-go right now , but it's something to keep in mind as conditions continue to deteriorate.

Stagflationary Mark said...


I agree with everything you just wrote.

Troy said...

it's that you've accepted the fact that the economy is a Ponzi scheme

Mortgages, credit cards, and now student loans.

Booomers got free state educations but are sticking their kids with $30,000+ loans.

Like Japan, we need inflation to save us but of course we can't inflate away the unfunded liabilities we owe out on that infinite horizon.

Best best is to hunker down in the bunker. Chances increased to 100% today (got some disappointing news on the job front) that I will be moving to Tokyo next year.

Going forward, I think a nation with fewer mouths to feed (not more like us) is going to be a more prosperous nation. Hopefully they'll restart those infernal nukes, they really need that investment to contribute to their macro again, even though in the scheme of things those 16 plants didn't actually cost all that much, compared to the $500B+ a year we're shoveling into the furnace on DOD expenses.

Contrary to my arguments here, I'm pretty bearish on the US. I just think the system has a pretty big bag of tricks it can use to keep things together, once the GOP decides to play ball again.

After all, Reagan proved that deficits don't matter!

Stagflationary Mark said...


got some disappointing news on the job front

I'm really sorry to hear that. Would you believe that my girlfriend has STILL only worked 2 part-time hours in all of 2014? The company is practically apologizing all over themselves for it. They've had a lot of issues with trainers lately. My girlfriend needs training but they are sick, have kids who are sick, and so on. If I got a dollar for every time she was told she'd be working so far this year but hasn't, well, I'd have quite a few dollars, lol. Sigh.

Contrary to my arguments here, I'm pretty bearish on the US. I just think the system has a pretty big bag of tricks it can use to keep things together, once the GOP decides to play ball again.

I'd be right there with you if I didn't think QE was just a trick (used to entice investors into riskier assets).