Amateurs debating the economy is a fun exercise, but worthless!
Posted By RichC on December 17, 2023
My buddy Jeff and I enjoy debating and learning from each other while sharing what we are reading. We are far from experts on anything (I should speak for myself), but that doesn’t stop us from opining. HA!
Last week with the Federal Reserve “pausing” on interest rate hikes with inflation coming down and semi-telegraphed that in 2024 we may likely see the first of rate cuts (and possibly three — although dialed back that optimism a day later) … so the two of us dove head first into economics and the economy.
As someone skeptical the U.S. can continue on this debt spending path and that we are in for a collapse (I agree … at some point, but I’ve also thought that for years), he posed the question (and assumptions):
So, if M1 shot through the roof, in a time of inflation caused by supply chain issues, as they say, but velocity of M1 tanked, is that because the increased supply didn’t need to change hands as much? In other words, it’s not a constant measure of money, but as more hits, it turns over less?
I tend to be be a contrarian to whatever is said … or at least try to see things from different views … so I replied with longer range macro view (see Velocity M2 1960-2021 chart below):
My thought is that the world economy stalled during the “Great Recession” so stimulus measures were put in place (cheap money and A LOT of it).
The bigger longer term issue is that demographic changes has older people saving (slowing velocity of all that cheap money – your theory) and fewer younger continuing to spend (that would increase velocity). See the last 20+ year trend in this Velocity 1960-2021 M2 chart.
COVID19 triggered economic collapse and uncertainty “tanking” velocity and as you say as “M1 shot through the roof.” Now the Federal Reserve is quickly trying to tame inflation as we returned to normal due to “a variety” of factors including the cheap money, stimulus checks, supply chain issues, war on energy industry — less supply/higher prices and cost of everything.
I also think most of us often look for simple explanations or a formula (this caused that) …. but even the brightest economists struggle and debate all the inputs. The Fed (as much as I dislike central planners) has only a couple tools to prevent the highs and lows of an economy that grows (2% inflation and low-ish unemployment).
Unfortunately as the government bureaucracy grows even larger, politicians create even more problems for Federal Reserve and the bigger government grows, controls and spends … the more difficult it is for the Federal Reserve to steady the economy (a least that’s my theory).
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