Reading List for April 30, 2021

From budding trends to mature industries, Novem Group works hard to stay abreast of developing news. Here’s what caught our eyes this week:

Velocity of Money (continued from the April 23rd Reading List)

• What Does Money Velocity Tell Us about Low Inflation in the U.S.?
• Continuing on with last week’s comments on the subject, we’re still working to better understand this phenomenon.
  • Velocity is the ratio of Nominal GDP to the Money Supply.
    • So velocity won’t increase if Nominal GDP rises in tandem with Money Supply.
    • Macro Economics 101…
      • Nominal GDP = C+I+G+(X-M) or GDP= Consumption + Business Investment + Government Spending + Net Exports
      • Under normal circumstances, a rise in government spending is offset by a drop somewhere else because taxes go up or the government borrows the money by issuing bonds (thereby lowering consumption).
      • But it’s not happening that way… Government spending is up but the Fed is financing this by growing the money supply… there isn’t a full offset in the above equation.
    • Low interest rates depress the velocity of money
      • “for every 1 percentage point decrease in 10-year Treasury note interest rates, the velocity of the monetary base decreased 0.17 points”
        • In the late 90’s the 10y was at about 5.5%. Today it’s at 1.6%. So all else equal velocity should be down by 0.68. Starting with the 2.2 of the late 90’s that suggests that velocity of about 1.5- basically where we were pre-COVID.
        • In a test-tube this little relationship lines up nicely but I don’t see much correlation between the 10y (below) and velocity. Despite great periods of volatility in the 10y, velocity seems tightly range-bound until quite recently.



• One narrative I’m hearing is that velocity will rise back up to its historic range of 1.6-1.8 and when this happens, it will be highly inflationary.
  • Is velocity mean-reverting or is there something structural behind this change?
  • Is it possible that we’re barking up the wrong tree? In the 1970s, inflation was very high but the chart of velocity is steady.

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