First quarter GDP numbers were, well, bad. The economy grew at 0.2 percent. I'll sum up the problem, their simply is not enough money. Money can have many meanings. M1 is the total amount of M0 (cash/coin) outside of the private banking system plus the amount of demand deposits, travelers checks and other checkable deposits. M1 velocity is how quickly this moves through the economy. It involves both how quickly people spend the money in their accounts and the amount of credit available. If a quarter gets passed around from buyer to seller every day, the transactions increase GDP more than a dollar that sits in your wallet all year. The smaller M1 velocity, the less money is being passed around.
The fed lists the recent trend as: 2015:Q1: 5.965 2014:Q4: 6.141 2014:Q3: 6.203 2014:Q2: 6.212 2014:Q1: 6.276 Here's the thing. The data series is scewed. You get the same economic result if you have a lot of money moving slowly or a smaller supply of money moving around the economy more quickly. Prior to the 1960s, velocity ranged from around 2 to 3. Friedman & Schwartz In the 1960s, LBJ pressured the Federal Reserve Board to keep rates low during the Vietnam War. Califarno Lower interest rates mean money is moving more quickly. In order to keep inflation in check, the board reduced the pace at which the created money, relative to population growth. Unfortunately, Federal Reserve governors sit for only 13 years. The war lasted so long that the institutional knowledge of why the fed was setting the money supply at a certain level was lost. Due to retirements, delays in appointment and moves into the private sect only one member of Federal Reserve Board in 1965 remained on the board when the war ended in 1975, and he had other political issues. List of Fed Governors Even more unfortunately, the modern fed data set starts in 1959. The choice between monetary base and velocity, made as a wartime measure, became baked in to many of the fundamental economic assumptions going forward.↧
