Our "Slow Money" Economy.

Well, if we can translate that speed and movement into our monetary system. We would see, that in an active, expanding economy the money itself moves from person to person. Little time is spent in some one's pocket. (metaphorically speaking) And this ability for money to move from person to person in the shortest time possible is an important component of our economy.

If you've ever worked in a restaurant, or know someone who's owned one, then you know the most important way to boost profits is to turn-over the tables as they say.

To me, one of the best at this has always been “Nate and Al's” in Beverly Hills. This eclectic deli almost always has a line out the door for their weekend brunches. And to watch their staff in action on those days is like watching a well-choreographed ballet.

When someone leaves, the busboy immediately starts to clean the table, at the same time the hostess reach for a menu and leads you to that now empty table. As you sit down, you're asked if you'd like some coffee or other breakfast drink, and your meal begins. Just minutes after the other diners left.

Well, if we can translate that speed and movement into our monetary system. We would see, that in an active, expanding economy the money itself moves from person to person. Little time is spent in someone's pocket. (metaphorically speaking).

This ability for money to move from person to person in the shortest time possible is an important component of our economy.

It also no accident. For over a half-century the banking and financial industry has developed the “Back Office” capabilities that have made this possible.

Back in the 1960s and '70s for instance, it would take days for funds to travel from the east coast to the west. Checks might take a week to “Clear”, which is to be credited to your account.

This was because the banking system did not have the instant communication that we take for granted today. The East Coast Bank, for instance, would need to send a Fed Wire to the West Coast Bank. Who in turn would wait for those funds to be credited to their account on the Fed System before they would credit their customer.

It was a manual, cumbersome way of doing business by today's standards. And the result was a slower-paced economy. One in which investors and consumers had sharply fewer options in terms of what they could invest in our purchase.

The questions that we ask today is: Are We Returning to Those Old Slow Money Times? Let me take you through the numbers, and show how this is the current trend.

Now each quarter the Federal Reserve Measures how fast our money moves. It's called Monetary Velocity. And it's very much like how fast your car is traveling. When driving the car we look at how fast we're going by measuring the miles per hour we're going.

In just the same way, the Fed uses a FACTOR to measure how fast money is flowing. Way back in the Second Quarter of 1962, 58 years ago, Money, was moving along at a factor of 3.89. From that point on for 45 straight years money accelerated. Moving faster and faster from person to person. And this was one of the critical components which helped the economy grow.

All was going by the book, until we hit the Great Financial Crisis of

  1. Then something changed. Money began to slow. And slow dramatically. In the intervening 13 years, we've hit the skids on Monetary Velocity.

Interestingly, we are now back exactly where our story began. Velocity is at the exact same level we were in 1962.

So, what's changed? The answer is that the Fed has flooded our financial system with an overwhelming amount of NEW Dollars. These have been the so-called stimulus programs. Quantitative easing, direct asset purchases et cetera.

Now we still have dollars flowing through the system, but they are all new dollars. Created by massive bond issuance.

So instead of an economy whose monetary base is growing from the natural growth in business and industry. We have a monetary base that is growing artificially. “Stimulated” by the greatest experiment in Neo-Keynesian Monetary Policy ever attempted.

Think of it as a great fire hose of money which  every day keeps adding to our money supply.

All of those daily new dollars, have kept price levels steady. And given the appearance of an economy that is growing.

But the reality is that once the fire hose is shut off, or even reduced, velocity will likely fall to a level not seen in half a century.

Something every investor needs to consider.

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Start listening to The Beginning Of Tight Money.
8:21
Start listening to The Beginning Of Tight Money.
8:21