There has been a lot of good economic news lately, at least compared to the very bad news of a few years ago. But that doesn’t mean that there aren’t bad things worth keeping a close eye on – especially those that predict future action by the Federal Reserve.
The velocity of the US Dollar – the number of times per year that money turns over through the economy – continues to drop without an end in sight. This is a worrying sign because it suggests that most of the economic growth we are seeing comes from money that is being more or less printed by the Fed. It also suggests that there will be another round of quantitative easing, or even more money printed. There has to be a better way – and this wouldn’t be Barataria if we didn’t take a stab at how.
The velocity of the US Dollar is shown below in a chart from the St Louis Fed that starts back at the last major inflection point in the late 1990s. From that time until now it’s been nearly straight down, save a little rise in the mid 2000s. Since we first talked about the velocity of money last year the trend has continued pretty much along the same regression line:
Money is turning over slower and slower through the economy, suggesting that people with money are simply not spending it as rapidly as they used to.
This is consistent with risk aversion and the psychological sense of “depression”. It’s hard to imagine a major turnaround until we see a reversal in this chart. More interestingly, if the slow economic growth we have isn’t coming from more money being spent or invested, it must be coming from the expansion of money itself – which is to say it’s defined by Fed policy and deficit spending.
What’s the solution? If the velocity of money continues to drop there is only one thing that the Fed can do and that’s to keep printing more. We’re caught in an endless loop of more and more stimulus and lower benefit from that stimulus with each round. Something different has to happen if any more rounds of quantitative easing can be expected to have different results.
Given that more QE appears quite likely in this environment, it only makes sense to do it in a way that guarantees it moves through the economy more efficiently than the money that was sent forth before it. That’s where the ancient idea of Jubilee comes into play – a wholesale cancelling of bad debt. And ideally this should be taken in concert with central banks around the world – the ECB, Bank of England, Bank of Japan, and anyone else who wants to participate.
How could a Jubilee work? Let’s say that we have $1 Trillion in new quantitative easing. The central banks doing this could announce a period of time, say 3 weeks, in which every member bank with debt they want to offload can register that debt as being for sale. The total amount offered would likely be much more than $1T – let’s say for the sake of argument that $2T is registered when the clock runs out. That means that all the debt will be bought by the Fed at $0.50 on the dollar. As the time period goes on banks that offered debt for sale can pull it as this “auction” continues if the net payoff is not good enough for them. When it’s over, the payoff begins – and debt is canceled.
If this was done around the world at the same time, you can bet that a lot of Greek and Italian debt would be canceled – and the banks that offered it for cancellation would take their share of the hit. Imagine if junk paper all around the world was taken from the necks of people who are never going to pay it off anyway.
How would a $2T or so cancellation of bad debt help our economy? Given that total private debt is over $40T, or about 2.8 times the total GDP, removing 5% of it might not do a ton of good. But it would help one Hell of a lot more than simply buying T-Bills or mortgaged backed securities. There would be more money available for purchases and investments – and might even turn the velocity around.
It’s hard to imagine how this depression can end without cancelling or somehow growing out of our debt. If we do see the need to print more, why not put it right to what we know is the bottom line? There’s no better way to push the reset button and move forward into whatever comes next.
Follow the links for more info on Jubilee and the Velocity of Money.
Barataria - The work of Erik Hare 
This is worth repeating, it’s an excellent idea and if anything they should have done it all along. Keep at it!
Thanks! I do think this is important, and I do think that more QE will be around the corner if this keeps up. I don’t see any way other than more and more stimulus – but it’s clearly not working the way they are doing it now.
Pardon me for swearing, by why THE FUCK is it all or nothing, and never the logical middle ground? Just stop the interest rate charges and penalties on existing debt for anybody who wants to PAY DOWN their debt.
It’s that FUCKING EASY and NOBODY ever advocates this position, except for me.
(really, you don’t have to swear)
Certainly, we can regulate away penalties and that would help a lot. Eliminating interest rate charges is much harder to do unless we develop a much broader usury law. The whole idea of the Fed’s zero interest policy was to lower interest rates, but that has rarely been passed on to the consumers as they should be. It’s possible to make your plan happen, sure. It would be pretty hard to craft it but I’ll give it some thought.
These new rules could be made to apply to declared debt that is put into a program of some kind, that would certainly be easier. People could apply for these protections as an alternative to bankruptcy. That would be much easier to implement.
There is a basic tenet in the banking industry that is killing the middle class. Debt Restructuring first requires a default. Fix this one simple rule by adding in exemptions, and the economy would heal on its own.
But my main point is that the Fed is clearly at least going to contemplate more quantitative easing – and if they do that they damned well better find a better way to make use of it than what they have been doing so far. New ideas on this topic are important.
whatever they do it will be by and for the banks not for the citizens of this nation – how effective it is only matter when it effects their pockets
That may be true – but make no mistake it’s affecting their wallets now. And when the revolution comes … well, we have to at least develop a credible threat there.
Larry, why do you feel it necessary to tell us about the other side and why they are invincible? Shouldn’t you be on the other side if you feel that way?
Velocity of money is something that I think few people understand really well but I think they can sort of get it. The way it is falling is a very bad sign I agree and a lot more should be said about this. Tying it to Federal reserve action so far is a good point because with all they have done it only keeps dropping? Some of that is that the money supply keeps increasing, but they are increasing it faster than there is economic growth. It seems like inflation is inevitable after this so why would there be another QE?
Thinking this through makes my head hurt, but it is an important topic. Glad to see you aren’t all positive for once. 🙂
Thanks, and I try to not be too positive. There’s always the Federal Government to bring me down.
Seriously, it makes my head hurt to understand just what this means – but none of it can be good. Inflation does seem inevitable, and that is another way out of this mess. It’s hard to imagine that being as well managed as this depression, however. At some point we’re Brasil (and, the way things are going they are us, koo-koo-kajoob?)
If 7 to 10 trillion dollars worth of equity has been lost since 2006/2007, then the remaining assets americans have in relation to their debt has been strained to the point where there is less money to velocitize.
Ironically, the velocity of money dictates tax revenue, the faster it velocitizes, the more tax revenue the government gets.
You are clearly thinking this through so I won’t ride you too hard but if there is a QE4 or 5 or 6 you totally left out the moral hazard. It’s real and at least as important as inflation.
A good point. It’s been a while since I discussed the moral hazard. Banks and the stock market have become dependent on free cash to keep things going. I think that the constantly declining velocity shows this pretty clearly.
Yes, that was a bad omission. I’ll do better. 🙂
OK, let me back up a bit …. I think we can break this down into two questions:
1) If the Fed does another QE (and I think they will, whether it’s a good idea or not, given the MZMV curve above) what should they do to get the cash out into the economy more effectively than they have? We’ve seen them try buying mortgage backed securities, and one friend of mine suggested the Milton Friedman “helicopter drop” of cash. What else?
2) What can be done to reduce the overall debt load and help push the reset button on the old economy that has already failed? This could be another long list if we had an old fashioned brainstorming session.
Bonus points if you can work the Moral Hazard into your responses. 🙂
Incentivize consumer debt reduction. Anyone who is lowering their overall consumer debt levels each month gets a huge reduction in their credit card interest rate.
Allow consumers to restructure their debts for legitimate “dire circumstances” such as identity theft, job loss, accident victim (not their fault), family medical emergency, Caregiving for a relative, etc.., without being placed in default first.
That is a very simple and practical regulation/law that I could get behind. Thanks, a very good addition! I’m not one to think about consumer regulation so this sort of thing goes right past me most of the time.
You given me insight as to the mindset many economy based blogs get into who are deft at number analyzing and number crunching, thank you.
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