Replies to post #24053 on The Rising Influence of Rising Affluence

[gfp927z]

>> concentration of wealth in fewer and fewer hands <<


Yes, that is likely part of it. The big drop in velocity has occurred since 2008, when it stood at 10.5. Velocity then fell steadily to reach 5.5 in 2019, and with Covid it plunged even further to 3.5. But even before Covid, velocity had been cut in half. Those are the figures for M1, and Rickards says the collapse in velocity started even earlier for M2, M3. With velocity so low, the Fed's task of ginning up some inflation is much harder.

One key factor in the collapse of velocity after the 2008 financial crisis was that banks became extremely reluctant to lend, and this reluctance went on for years. Much of what they received from the bailouts and QE was held as excess reserves and parked back with the Fed. So those trillions weren't actually reaching the economy, which is why the recovery during the Obama years was so anemic.

As the one-time audit of the Fed revealed in 2011, more than $16 trillion in bank bailout money went to unwind Wall Street's massive Derivatives bets. The total amount in Derivatives was estimated to be a mind boggling $1 Quadrillion. 6 of the $16 trillion went to European banks who had been co-parties in the Derivatives. The charter of the ECB/European Central Bank didn't allow for a bailout using Euros, so the US was forced to send 6 trillion in dollars to unwind the European side of the Derivative bets.

So a fine mess. Most types of Derivatives hadn't been made legal until after 1999, and the type that blew up in 2008 had only been legal for a few years. The sensible thing to do in the aftermath would have been to ban most types of Derivatives, but of course that never happened.

Getting back to inflation, as Rickards points out, the Fed can boost the money supply all they want, but to get inflation cranked up will require an increase in velocity/turnover, which means lending + spending. When the inflation psychology does take hold though, you can go from 2% inflation to 10% inflation quickly.


>> Thanks, Gary, long time no see <<


Btw, I'm not 'Gary', but it's nice to meet you :o)