Darryl Schoon outlines why he believes the falling velocity of money means it’s likely deflation that we face for a while longer yet…
THE SKY IS FALLING
The velocity of money is like blood pressure. If it is too high or too low, it can be fatal. Too high indicates inflationary pressures are building and/or the presence of speculative bubbles. If too low, deflationary pressures are growing, presaging a dangerous collapse in demand.
The velocity of money reached its high during the 1990s dot.com bubble. After it collapsed in 2000, low interest rates (2002-2007) fuelled another bubble, the US property bubble, and when it collapsed in 2008, the velocity of money again plunged and never recovered.
Despite trillions spent by central banks after 2009, the velocity of money has continued to fall. Today, in 2020, the velocity of money reached an all-time low. In Q1, the average velocity was only 1.37. Q2 will be even lower.
To offset the historic plunge in demand caused by COVID-19, central banks resorted to money printing on an unprecedented scale. While the money printing will stave off starvation for the vast majority at the bottom of the economic food chain and ensure profits for the few still at the top; today’s money printing will turn fiat money into little more than food stamps and give the economic elites little incentive to do otherwise.
Despite central banks’ excessive money printing, hyperinflation may not occur, at least not immediately. In capitalist economies, because currencies are circulating coupons of credit and debt, when credit disappears, so, too, does “money”; and, today, money is disappearing into deflation’s waiting maw even faster than the Fed can print it.
The mandate of the Fed in 1913 was to create a system of debt-based fiat money that insured bankers profited, i.e. “made bank”, off all societal productivity, a never-before-seen form of economic parasitism.
Since that time, the Fed has done admirably with that mandate, given the problems they’ve had to deal with, e.g. a dangerously low gold/fiat ratio in the 1920s, the 1929 stock market crash, the 1930s collapse of world trade, the loss of gold reserves due to US overseas military spending, the serial collapse of bubbles beginning in 2000 triggering “the great recession of 2008, the amuse-bouche to what is now about to happen,
I made the following observation in May 2011 in my article, Gold and Silver Storm The Fed.
AMERICA THE FROG
The frog is frozen still
In water now so hot
The water’s almost boiling
But the frog knows it not
Quickly it must jump
To avoid a boiling death
The Fates themselves are watching
With collective bated breath
Will America survive?
Or will it now succumb
Its heritage abandoned
Its future now undone
By its own hand it’s threatened
Itself its great threat
The frog continues sitting still
In denial ignorant yet
The water’s getting hotter
The heat’s turned up to high
And it’s an even money bet
That the frog is gonna die
It’s June, 2020. The water’s boiling. The frog’s still in the pot.
These are interesting times.
Buy gold, buy silver, have faith.
Darryl Robert Schoon