ALL RIGHT, I am ready.
Central claim by Lacy Hunt here is:
Money Supply Growth (M2) is connected to GDP growth.
Velocity is the measure of the effect on GDP of each new M2 dollar. (V = GDP/M2)
1/21
Central claim by Lacy Hunt here is:
Money Supply Growth (M2) is connected to GDP growth.
Velocity is the measure of the effect on GDP of each new M2 dollar. (V = GDP/M2)
1/21
https://twitter.com/VukasinPekovic/status/1475503837846941698
Lacy's claim that Velocity matters in analyzing the 1970s and inflation goes like this:
(shout out to @DiMartinoBooth)
M2 went up steadily in the 1970s. GDP followed that money growth.
2/21
(shout out to @DiMartinoBooth)
M2 went up steadily in the 1970s. GDP followed that money growth.
2/21
Inflation occurs, to Lacy Hunt's way of thinking, not simply because of M2 growth, but because of separate dollar devaluation policies, he mentions going off the Gold Standard as one such policy. He mentions international trade as another.
3/21
3/21
Two interesting questions pop up here:
1) does velocity actually matter?;
and
2) is the dollar being devalued in the 2020s?
4/21
1) does velocity actually matter?;
and
2) is the dollar being devalued in the 2020s?
4/21
My good friend (and great twitter follow) @VukasinPekovic asks a good question via the initial graph which (kicked off this thread) took Lacy's argument and graphed Velocity and GDP from the Fred Database.
Seems to have little or no correlation with each other.
5/21
Seems to have little or no correlation with each other.
5/21
To spice things up, really really smart people think that velocity isn't relevant anymore. Take a look at @FedGuy12, @JeffSnider_AIP, @NewmanJ_R who all have different beliefs as to why money velocity isn't all that meaningful.
6/21
6/21
Lacy would likely respond with a different graph and analysis than what @VukasinPekovic did with his Fed Graph.
Look at GDP growth PER CAPITA instead of GDP nominal growth.
hoisington.com/economic_overv…
7/21
Look at GDP growth PER CAPITA instead of GDP nominal growth.
hoisington.com/economic_overv…
7/21
I took the liberty to map GDP Per Capita annual % change ALONG WITH velocity % change.
fred.stlouisfed.org/series/A939RX0…
8/21
fred.stlouisfed.org/series/A939RX0…
8/21
Lacy would further highlight that the Loan/Deposit Ration FOLLOWS velocity.
Which allows one to infer that as velocity drops, PRODUCTIVE DEBT drops as well.
In other words, there are LOTS of zombie companies surviving off of bad loans in our economy.
9/21
Which allows one to infer that as velocity drops, PRODUCTIVE DEBT drops as well.
In other words, there are LOTS of zombie companies surviving off of bad loans in our economy.
9/21
MEANING that low velocity indicates low GDP growth. Dropping velocity means dropping GDP growth.
Important to note, there is still growth, but growth is weaker and weaker as velocity goes down.
M2 rises, but a) each new dollar has less effect on GDP; b) banks lend less.
10/21
Important to note, there is still growth, but growth is weaker and weaker as velocity goes down.
M2 rises, but a) each new dollar has less effect on GDP; b) banks lend less.
10/21
@EPBResearch had an excellent thread on the topic earlier in 2021:
11/21
https://twitter.com/EPBResearch/status/1364263822253416453
11/21
I see velocity of money (V = GDP/M2) as a proxy for the productive nature of M2 growth.
I thought about this back in August 2021:
12/21
I thought about this back in August 2021:
https://twitter.com/NathanDallon/status/1423012865326436363?s=20
12/21
The second question raised here is COULD M2 grow, GDP growth weaken, and the USD actually get STRONGER?
That one is a head scratcher. Lacy seems to insinuate that is the case. Irving Fisher certainly seemed to think that unproductive loans could cause dollar strength.
13/21
That one is a head scratcher. Lacy seems to insinuate that is the case. Irving Fisher certainly seemed to think that unproductive loans could cause dollar strength.
13/21
$DXY showed strength in 2021
15/21
15/21
Nominal Broad U.S. Dollar Index is up in 2021.
16/21
16/21
Nominal Advanced Foreign Economies U.S. Dollar Index is up in 2021
17/21
17/21
30 Year treasury had some ups and downs on its yield, but it couldn't maintain its yearly highs and is ending 2021 up near 30 basis points on the year.
18/21
18/21
30-Year 3-5/8% Treasury Inflation-Indexed Bond, Due 4/15/2028
Up a tiny bit.
19/21
Up a tiny bit.
19/21
HOWEVER, all of this has the background of the CPI apocalypse of 2021 and M2 growth over the last 2 years.
"Consumer Price Index for All Urban Consumers: All Items in U.S. City Average, Percent Change from 2020"
"M2"
20/21
"Consumer Price Index for All Urban Consumers: All Items in U.S. City Average, Percent Change from 2020"
"M2"
20/21
I don't know whats going on frankly. Velocity helps me understand when there is productive credit out in the system.
Right now, debt is unproductive.
The dollar is strengthening BUT consumer prices are high and going higher.
#GoodLuck
21/fin
Right now, debt is unproductive.
The dollar is strengthening BUT consumer prices are high and going higher.
#GoodLuck
21/fin
***ONE MORE GRAPH***
I should have included this earlier.
FED POLICY HAS STOLEN GROWTH from the middle class.
The Fed/Treasury stole $20,000 from middle class earners in 2021.
The Debt has a cost, it just isn't hyperinflation. Its this. Much more pernicious.
I should have included this earlier.
FED POLICY HAS STOLEN GROWTH from the middle class.
The Fed/Treasury stole $20,000 from middle class earners in 2021.
The Debt has a cost, it just isn't hyperinflation. Its this. Much more pernicious.
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