If you read ZeroHedge enough, you will eventually think dark thoughts all the time. His blog is predicated on fear. Sometimes there are some posts there that give a person pause. This post was one of them. Out of all the charts that he posted, two really jumped out at me.
The top chart is the velocity of money. This is a measure of how fast money is changing hands in the economy. It’s not a measure of wealth-it’s a measure of activity. To calculate the velocity of money you simply divide Gross Domestic Product (GDP) which is the total of everything sold in the country by the money supply. Thus Velocity of Money= GDP ÷ Money Supply(M2). The other stat that is worrisome is the amount of dependency that American people have on the federal government.
This chart proves that if you subsidize something you get more of it. We all know how the stock market has done, but it pays to see it in chart form sometimes.
The velocity of money is very concerning to me. It’s something I have watched since the federal stimulus in 2009. The stimulus failed miserably. It was a gigantic waste of resources. The velocity of money isn’t just an indicator of economic activity, it’s also a measure of fear. Lower velocity shows people and businesses are hanging onto cash. They aren’t investing in new projects or expansion. They are better off by doing nothing than by doing something. Velocity drops when it’s the government doing all the spending.
When velocity is low, it’s highly deflationary. Deflation is not a characteristic that spurs economic growth. The overall climate in the world is deflationary right now. I can’t help but think that this is correlated to the amount of government spending and increasing government meddling into the economy.
From my point of view, one side looks at the economy like a puppet. They are the puppet masters that can pull a string and make something happen. The puppet masters like command and control. They like centralization. They create systems that administer, oversee, and monitor everything.
The other side sees the economy as a big amoeba. They try to create the right economic incentives and leave it to individuals to decide. The way that sort of economy works is really messy. There is no control over what people do-the classical school trusts that the individual will make rational decisions. The other side puts their faith in structure and systems.
That leaves the burning question. Is the stock going to crash like 1929 and leave the world destitute with a decade long Great Depression? I don’t think so. But, any rational person that looks at the market today knows that the rally over the past several years hasn’t been built on a strong foundation. It probably pays to find a way to hedge your bets right now.
I was long some $SPY over the past few weeks and just sold them. I watched it bounce up and down like a ping pong ball and this week after Fed Chair Janet Yellen spoke I sold them out. It was a short term trade, not a long term position and with all the volatility in the market I feel lucky to have turned a profit.
What’s the long term answer? It’s really important for government to get out of the way and turn the power over to the individual. The American people are resourceful and capable. We are the greatest source of economic innovation the world has ever seen. That can’t happen until at least 2016. The people in charge right now see the American people as puppets that can be manipulated and controlled.