Fed Pushes On String As Velocity Of Money Dies

by: Philip Davis

As noted by many analysts, and even Fed Hawks recently, is the fact that, at this point, the Fed is essentially "pushing on a string" with QE - meaning the policy is getting less and less effective as the money supply grows and grows because we're not actually doing a thing to improve the velocity of money and, no matter what amount of money you multiply by zero - you still end up with zero.

Click to enlarge

This BAC chart indicates the decline of the "Money Multipliers" over the past 9 months (and longer term, of course) and you can see that QE3 gave us only the briefest of bumps before collapsing back to mid 2011 lows and yes, that was right before the S&P spectacularly collapsed from 1,350 in late July to 1,125 by the middle of August (16.66%). We made our call to get the hell out of the rally a bit early then too (June 30th), but it all worked out in the end. It's fun to review the old daily articles as we headed into that catastrophic failure and note how similar my commentary was at the time on very similar concerns to the ones we have now. Now the Financial Times shares my concern on the velocity of money (which we discussed in detail at our Atlantic City Conference in April), saying:

The channel through which money creation is expected to stimulate the economy is credit creation. However, not only has the money multiplier process broken down, but the linkages from money growth to credit growth are at best very limited, as Chart 2 reveals. Since the end of the Volcker disinflation, the correlation between year-on-year growth of M2 and credit (measured here as loans and leases by banks) is just 0.13%. Bank lending arguably is soft now relative to historical trends because both loan supply and demand are restrained - albeit gradually improving. High lending standards and regulatory uncertainty hold back supply, while slow growth, deleveraging and depressed collateral values keep demand low.

Click to enlargeThough it has tanked the markets before, expect Bernanke to plead with Congress to do something next week, because the ability of the Fed to stimulate the economy is waning because the lenders aren't lending and the job creators aren't creating jobs and those are the people the Fed is putting the American people in debt for as he continues to hand the top 1% $85Bn per month to play with.

You can print infinite amounts of money but the practice of then giving that money to Banksters and the top 1% who use it only to create more wealth for themselves and don't "trickle down" to the bottom 90% gives you infinity times zero and your economy still sucks. Only when money makes it to the bottom 80% through job growth (300,000 - 400,000 a month, not 175,000, which barely keeps up with population growth), building and wage inflation can you have an expanding economy. Finally, the FT gets it - let's hope some of our "leaders" begin to as well.

Disclosure: I am short DIA, IWM, SPY, TSLA, SODA, USO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Positions as indicated but subject to change (fairly bearish mix of long and short positions - see previous posts for other trade ideas). Positions mentioned here have been previously discussed at philstockworld.com - a Membership site teaching winning stock, options & futures trading, portfolio management skills and income-producing strategies to investors like you.