Thursday, March 29, 2012

The velocity of money

I wasn't going to post anything tonite but I couldn't resist ...   :-)

As a follow up to last night's post here's a chart off of the St. Louis Federal Reserve's website:

(click for larger image)

Velocity is a ratio of nominal GDP to a measure of the money supply.  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. (definition from the St. Louis Federal Reserve website).

I've been following this chart since the 2008 crash.  To say that this chart is simply an inflation gauge would be inaccurate.  It's better used as a barometer of economic health and serves as an excellent indirect measure for credit creation in an economy.  But credit creation feeds inflationary pressures.  If inflationary pressures were building in the economy the velocity of M1 money supply would not be taking a nose dive. 

And those commodity charts I posted last night ALL look a lot uglier after today's close.  Something is going on. A reaction to the Chinese slowdown?  Maybe, but I'm not so sure that's the entire story.  In any case, word on "the street" is that China may announce another interest rate cut by Sunday.  Time to position yourself for another central bank induced sugar boost!