Chart of the Week

By: David Chapman | Thu, Sep 13, 2012
Print Email


Source: stlouisfed.org

In last week's COTW the report centered on the massive growth of the monetary base since the financial crisis broke in September 2008 with the collapse of Lehman Brothers. Since the end of August 2008 when the monetary base was reported at $877 billion it has grown 3 fold to $2,651 billion as of the report on September 5, 2012.

In percentage terms that doesn't seem like much when stacked against the growth from February 1984 that saw the monetary base grow from $184 billion to the aforementioned $877 billion in August 2008.

That was a growth of almost 5 times but it did take 24 years. That works out to only about 15% a year vs. the roughly 50 % annual growth of the past few years.

With all of this money sloshing around the financial system one would think it would actually do some good and help the economy grow again. Now they seem poised to start another round of QE that could once again send the monetary base up over the next year. If the 50% growth of the past few years holds true the monetary base could be almost $4 trillion by this time next year.

But if one looks at the money velocity chart above it is not doing much good. The money is simply not getting into the economy or in this case circulated. First what is MZM. MZM is a measure of the total amount of monetary assets available in the economy at any specific time. Generally this contains at least the money in circulation, demand deposits plus money market funds. One can think of it as supercharged M2. Money stock today sits at roughly $11.1 trillion vs. $8.8 trillion just before the financial crisis of 2008 broke. The velocity of money is a ratio of nominal GDP to a measure of the money supply (M1 or M2 or MZM).

It can be thought of as 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. The velocity of money has been falling for years. In fact, it peaked at about 3.5 all the way back in 1981. Today it is at 1.4 and still falling.

So what does that mean? In 1981 that meant for every $1 of GDP, $3.50 was spent on new goods and services in the economy. Today it is only $1.40. The falling velocity of money is a prime reason that the economy is so sluggish. Money is simply not turning over fast enough.

It is interesting to note that while the economy was said to be booming during the 1990's the velocity of money was actually falling giving a false impression that the economy was better than it really was. The rot as they say was already creeping in. Today the velocity of money is falling and despite 2 rounds of QE already the decline has barely received a bump.

While a further round of QE is expected its impact will only be felt in a further rush into financial assets. If the past holds true a further round of QE should have little or no lasting impact on the economy. Throughout the 1960's and the 1970's the velocity of money was growing reflecting the strength of the economy at the time. Moreover, the 1970's was known as a period of stagflation. Today the monetary base grows; MZM grows, but the velocity of money or the turnover of that money just keeps falling.

Not a good sign going forward.

 


 

David Chapman

Author: David Chapman

David Chapman
DavidChapman.com

David Chapman

Industrial Alliance Insurance and Financial Services Inc.
26 Wellington Street East, Suite 900, Toronto, Ontario, M5E 1S2
Phone (416) 604-0533 or (toll free) 1-866-269-7773, fax (416) 604-0557

david@davidchapman.com dchapman@mgisecurities.com

General Disclosures: The information and opinions contained in this report were prepared by MGI Securities. MGI Securities is owned by Jovian Capital Corporation ('Jovian') and its employees. Jovian is a TSX Exchange listed company and as such, MGI Securities is an affiliate of Jovian. The opinions, estimates and projections contained in this report are those of MGI Securities as of the date of this report and are subject to change without notice. MGI Securities endeavours to ensure that the contents have been compiled or derived from sources that we believe to be reliable and contain information and opinions that are accurate and complete. However, MGI Securities makes no representations or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. Information may be available to MGI Securities that is not reflected in this report. This report is not to be construed as an offer or solicitation to buy or sell any security. The reader should not rely solely on this report in evaluating whether or not to buy or sell securities of the subject company.

Definitions: "Technical Strategist" means any partner, director, officer, employee or agent of MGI Securities who is held out to the public as a strategist or whose responsibilities to MGI Securities include the preparation of any written technical market report for distribution to clients or prospective clients of MGI Securities which does not include a recommendation with respect to a security.

"Technical Market Report" means any written or electronic communication that MGI Securities has distributed or will distribute to its clients or the general public, which contains an strategist's comments concerning current market technical indicators.

Conflicts of Interest: The technical strategist and or associates who prepared this report are compensated based upon (among other factors) the overall profitability of MGI Securities, which may include the profitability of investment banking and related services. In the normal course of its business, MGI Securities may provide financial advisory services for issuers. MGI Securities will include any further issuer related disclosures as needed.

The Author of this report is an outside director of Bullion Management Group, the manager of the BMG Bullion Fund. Also, the author may from time to time, be long and or short positions in the companies named within this technical market report.

Technical Strategists Certification: Each MGI Securities technical strategist whose name appears on the front page of this technical market report hereby certifies that (i) the opinions expressed in the technical market report accurately reflect the technical strategist's personal views about the marketplace and are the subject of this report and all strategies mentioned in this report that are covered by such technical strategist and (ii) no part of the technical strategist's compensation was, is, or will be directly or indirectly, related to the specific views expressed by such technical strategies in this report.

Technical Strategists Trading: MGI Securities permits technical strategists to own and trade in the securities and or the derivatives of the sectors discussed herein.

Dissemination of Reports: MGI Securities uses its best efforts to disseminate its technical market reports to all clients who are entitled to receive the firm's technical market reports, contemporaneously on a timely and effective basis in electronic form, via fax or mail. Selected technical market reports may also be posted on the MGI Securities website and davidchapman.com.

For Canadian Residents: This report has been approved by MGI Securities which accepts responsibility for this report and its dissemination in Canada. Canadian clients wishing to effect transactions should do so through a qualified salesperson of MGI Securities in their particular jurisdiction where their IA is licensed.

For US Residents: This report is not intended for distribution in the United States.

Intellectual Property Notice: The materials contained herein are protected by copyright, trademark and other forms of proprietary rights and are owned or controlled by MGI Securities or the party credited as the provider of the information.

Regulatory: MGI SECURIITES is a member of the Canadian Investor Protection Fund ('CIPF') and the Investment Industry Regulatory Organization of Canada ('IIROC').

Copyright © 2010-2014 David Chapman

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com

SEARCH





TRUE MONEY SUPPLY

Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
austrian-money-supply/