"You have [been] speaking of velocity of money lately and I agree with your assertion that we needn't worry about real inflation until we start seeing velocity measures pick up. However, I have read a number of recent pieces that define velocity of money differently and when I check the Chart Library, the Bloomberg measures you are using don't seem to be updated properly. Can you touch on velocity of money in one of your upcoming posts?
Specifically, how do you think we as traders/investors anticipate inflationary pressures using money velocity measures? Thank you!
David Fuller's view Thanks for your interesting questions.
Actually, I think we have never stopped seeing real inflationary pressures due to the debasement of currencies. Consequently, most of the things we pay for on a regular basis have increased considerably in price over the last few years, and our taxes have gone up as well. What we are not seeing yet is wage inflation and many collectibles have declined in price due to slower global GDP growth.
Re the Chart Library, items that plot quarterly data, such as money velocity, can be very fiddly and often have to be updated manually. These have now been updated.
My basic assumption is that all the QE will lead to broader inflationary pressures, including wages, once global GDP growth next expands. However, this 20-year chart of Bloomberg Velocity of Money US M1 shows no correlation with US 10Yr Bond Yields that I can discern, so I am making a behavioural assumption.
We know that many investors, from creditor nations to US pension funds and banks, and HNW individuals have continued to pile into T-Bonds due to a combination of fear, QE and the 30-year momentum move. Consequently, Fullermoney has referred to historically low government bond yields as the last great bubble. Therefore, and assuming that the US will not follow Japan's deflationary path which Mr Bernanke is determined to avoid, I am asking myself if a number of these investors will abandon T-Bonds, creating a self-feeding momentum move of rising yields, when confidence in economic growth increases and is reflected by increasing velocity of money? There is also a darker, minority scenario - in which bond yields rise because investors fear that the US economy is following the Southern European path. We simply do not know but the charts will eventually show us.