March 18, 2012

How Rapidly Money Is Changing Hands

Readers suggested a topic on the economy. “The velocity of money, as measured by M2, just touched on a level last seen when I was a wee lad. Here is the graph posted a day or so back. One thing I recall about the period from 1966 through 1982 is that it was not exactly a joy ride for those US investors whose portfolios were loaded down with either long-term bonds or stocks. Should we care, and how should American households factor this information in their financial decisions?”

A reply, “Go to cash. The velocity of money is a measure of how rapidly money is changing hands. If money isn’t changing hands very rapidly then that is a sign that people are hanging on to what money they have rather than spending it. A consumer-based economy depends on consumers spending money. If consumers are not doing so then such an economy is hosed.”

Another said, “Possible alternate explanation: consumers are spending about like they usually do (see retail sales data), but banks are sitting on an unprecedented amount of cash in the form of reserves (which the Fed pumped into them). Big corps are sitting on lots of cash too. It might not be the consumer at all this time.”

One had this, “A somewhat speculative but reasonable presumption is that debt service is driving the velocity into the ground and once the debt is retired, velocity will accelerate rapidly. Not a forecast.”

And another, “Here’s my suspicion on why this is: No long term stability. The government itself is picking and choosing winners. The Supercommittee tax and spending cuts - are they real or will they be whittled away? What’s the tax situation going to be? What is the long term housing situation? What will the elections bring?”

“So, if lack of an ability to plan longer term exists, it may well be what is causing people to sit back and keep their powder dry. Also - state of the economy is uncertain. Recession? Recovery? I’m guessing after the election, the longer term outlook should become clearer. But, I’m looking to hire a a haruspex in any case.”

And finally, “I suspect that not too many people are keeping their powder dry. The majority of people I know are running just a little short on powder. A lot of people were borrowing to keep up over the past decade and now that is getting more difficult. The government is trying to take up the slack (borrowing) but isn’t quite. I think the velocity of M is down because we have passed Peak Credit. it is not going to come back in our lifetimes, JMO. This is fine for me, I have not been able to compete well with borrowers.”

The Springfield News Sun. “Owning a home once was a sure bet, an investment that would never lose value, said Michael Ford, founding director of Xavier’s Center for the Study of the American Dream. Owning a home once signaled that you ‘made it.’ In recent years, however, property values and home prices have dropped. The mandated update of property values in 2011 in Butler County, for example, resulted in a 4.3 percent average drop in residential property values and a total devaluation of about $250 million, according to the auditor’s office.”

“‘To talk about it as the American dream, I think people still want to own homes, but are reluctant after such a decline,’ said Ben Dunham, an agent for Henderson Land Investment Company in Urbana.”

“The people most affected are the homeowners who had the dream of their house appreciating in value and then upgrading, he said. ‘They’re not able to sell and do the upgrade. They did have the idea of upgrading and that’s not just going to happen in the current environment,’ Dunham said.”

Bits Bucket for March 18, 2012

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