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Velocity, there is None

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At one time, velocity, the speed at which the monetary base is spent (measured as GDP/M2), was a reasonably reliable indicator of America’s position in the business cycle. More often than not, if velocity was tanking, it was a good bet the country was in recession. Today though, after years of unconventional monetary policy, velocity is no longer a reliable business cycle indicator.

If you’re not an economist or don’t work in the world of finance, you may be asking, “so what?” There are a number of practical reasons you might pay attention to velocity. For one, when velocity ticks up it can signal inflation ahead. And with velocity falling so far for so long, it’s possible there could be a neck snapping reversal if the growth rate of GDP ever begins to outpace the growth rate of M2.

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So what happens when velocity increases? Businesses, and individuals spend money at a faster rate. In turn they may increase prices and demand higher wages. So far, GDP growth hasn’t taken off. And growth may slow further before it accelerates. But if and when it does, the chart of velocity below illustrates that inflationary tinder is piled high and the slightest spark could set it off.

m2 velocity

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West (RIP JB) and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.
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