/biz/ - Business & Finance

>>29945308
The velocity of M1 (how much each $ goes around the economy buying things) collapsed from 5.5 in Q4 2019 to 1.21 in Q42020. So despite the money supply increasing 4.5 times, the velocity falling cancels it. Velocity has never been this low (Stats go back to 1959). The lowest period prior was 1959 when velocity was 3.6. just before the GFC managed to get to nearly 11. QE since the GFC has subsequently massively expanded the money supply but cratered money velocity. The Q419 to Q420 increase in transactions was a measly 0.86% - compared to 4-6% in the past few years.

If velocity increases to even 1.5, inflation will be HUGE.

But there's a massive circular problem in play. People are not spending cash because economies have been closed. Because rates are 0% people are putting their money in riskier assets, which inflates growth asset prices. This creates a runaway bubble in asset prices, and the longer rates stay at 0% the bigger the bubble gets as people FOMO. As more people do this, the less they are spending their money, and the longer economies stayed closed, the longer they will keep their money in the market rather than actually using it. Ironically the better things get, the worse the stock market will do. HOWEVER, there is a "wealth effect" where people are more likely to spend money if they think they have a big balance sheet, But if music stops and markets crash, that creates a negative wealth effect and people won't spend their money. So central banks are stuck a rock and a hard place where people won't spend money while economies are closed and there is a massive asset bubble going on because they want to remain invested for big gains, but if economies re-open and they start spending there will be massive inflation because of the money supply, and if there's inflation yields will sky rocket and stocks will crash, but if stocks crash people will get scared because they see they're losing all their wealth and will refuse to spend.