Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Fed Fumble: Lots of Cash, No One to Spend It


Velocity of money has slowed to a crawl.

With the Federal Reserve seemingly hell-bent on inflating its way out of this recession -- pumping an additional $1 trillion into the market -- the specter of hyperinflation necessarily looms large.

But not so fast: While the Fed's announcement might seem alarming, Chairman Ben Bernanke is fighting a forest fire with a water weenie.

Back in reality, the ongoing debt destruction and shift back toward savings is having a far greater effect on the American economy than a paltry few hundred billion dollars of "liquidity." The Wall Street Journal reports that, although M2 money supply has increased 10% in the past year, the cash isn't really going anywhere.

The more significant number -- what's known as the "velocity of money" -- fell to its lowest level since 1991. The velocity of money simply means how quickly money is spent: It measures the amount of gross domestic product, or GDP, generated for each dollar of cash sloshing around the system.

When confidence is high, credit is loose, and spenders are running rampant, money flows quickly through the system, boosting GDP. When social mood turns, however, and savers hoard their cash, the velocity of money slows down - and GDP grinds to a halt.

So even though the Fed is injecting more money into the system, consumers are socking it all away in savings accounts or paying down debt. Banks, for their part, aren't doing anything with the money, either. Big banks like Citigroup (C), Bank of America (BAC) and JPMorgan Chase (JPM), still reeling from mounting losses on bad debt, are hording what little cash they have.

Until the bad debt can be destroyed -- and until savers can receive attractive returns -- higher prices will remain merely hypothetical.

Inflation, like other economic entities, is controlled by supply and demand. The velocity of money is one way to represent the demand for "stuff" - when it goes up, prices tend to follow.

Fears about inflation are based partly on the assumption that, as consumer demand picks back up, empty store shelves and warehouses will create shortages that could lead to rampaging inflation.

Maybe - all in due time.

As the Journal points out, consumers jumping back into the spending game en masse depends on people not only having actual money to spend, but on having the desire to spend it. And while consumption certainly won't stop altogether, this slowdown may be something more than a run-of-the-mill recession: It may be a structural shift away from the consumerist leanings of the past 30 years.

Maybe, instead of stockpiling oil and gold, we should focus on stockpiling cash.
< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opin= =3D =3D3D ion about the performance of securities and financial markets by = the wr=3D iter=3D3D s whose articles appear on the site. The views expresse= d by the wri=3D ters are=3D3D not necessarily the views of Minyanville Medi= a, Inc. or members=3D of its man=3D3D agement. Nothing contained on the web= site is intended to con=3D stitute a recom=3D3D mendation or advice address= ed to an individual investor =3D or category of inve=3D3D stors to purchase= , sell or hold any security, or to =3D take any action with re=3D3D spect t= o the prospective movement of the securit=3D ies markets or to solicit t=3D= 3D he purchase or sale of any security. Any inv=3D estment decisions must b= e made =3D3D by the reader either individually or in =3D consultation with = his or her invest=3D3D ment professional. Minyanville write=3D rs and staff= may trade or hold position=3D3D s in securities that are discuss=3D ed in = articles appearing on the website. Wr=3D3D iters of articles are requir=3D = ed to disclose whether they have a position in =3D3D any stock or fund disc= us=3D sed in an article, but are not permitted to disclos=3D3D e the size o= r direct=3D ion of the position. Nothing on this website is intende=3D3D d = to solicit bus=3D iness of any kind for a writer's business or fund. Mi= ny=3D3D anville mana=3D gement and staff as well as contributing writers wi= ll not respo=3D3D nd to em=3D ails or other communications requesting inves= tment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos