The Significance of the Velocity of Money

QUESTION: Greetings Marty,

I have followed you since the old Money Radio days!

Can you help me understand the disparity between the declining velocity of money, the growth of the economy and what the natural consequence may be?

Thank you for your willingness to share your knowledge!

Regards,

MRM

 

ANSWER: Oh yes. Buzz Schwartz was a fantastic guy. I enjoyed doing his show there in California. The economic growth has been declining for decades as has the velocity of money, As the velocity declines, it shows that people are either saving more or they do not have disposable income after taxes to spend.  Normally, the velocity will decline and that is a sign of a recession. This is the normal reaction when people save and do not spend. However, if you are not in an economic recession/depression there is no FEAR FACTOR of what the future will bring, then the velocity declines because people really do not have the money after taxes to spend. This is one reason I keep harping on – it’s the taxes stupid!

In the USA, the velocity bottomed during the 2nd quarter of 2017 and has started to turn up with Trump lowering taxes. This is the first uptick since the decline began from the 3rd quarter of 1997 when the capital flows began to shift creating the 1997 Asian Currency Crisis. When Obama raised the tax rate from 35% to 39.6% in 2013, that began the real sharp decline.

The decline in the velocity of money and the rising burden of taxation is very alarming. That has been the worst combination which has suppressed the Euro zone economy. We see this with central banks setting targets for 3% inflation and they cannot reach that level.

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