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  • Sean HymanSean Hyman
    Keymaster
    Post count: 3910

    The economy has been really ailing since the latter 90’s. In 1997ish, the velocity of money quit expanding and it started affecting the economy shortly thereafter. But ever since then, the velocity of money has been on a downward trajectory with a small bump up or two higher along the way, but still overall downward. That’s a bad sign for the economy, in general.

    What is the velocity of money? It tracks how often the same dollar is used. For instance, Let’s say you earn a paycheck and you go to the bakery and buy some doughnuts with part of your paycheck. Then the baker turns around and uses part of the money to go out to eat with his family. And then the restaurant takes that money and buys more silverware and plates for their restaurant. The same dollars would have passed to each of these. That’s velocity of money. How far a dollar bill goes in society. When an economy is booming and expanding, it shows up in the velocity of money.

    However, what we have now is a decline in the velocity of money. Part of that is because people make less relative to their costs of living. Part of it is the retirement of the baby boomers that aren’t spending as much as they were in their working years. Part of it is people holding onto more of their dollars for fear of what the economy may do and due to how tight things are for them to make it, etc. All of these (among other reasons) can slow down the velocity of money. This chart, shows that it’s not looking good for the actual economy.

    Now remember, stocks don’t equal the economy and the economy doesn’t equal the stock market. That’s a HUGE fallacy that’s widely believed. HOWEVER, the real economy does eventually affect the stock market.

    It’s another reason why I like our value investing strategy where we buy solid companies at cheap prices and allocate money to where we don’t even need the stock to uptrend in order to prosper.

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    AvatarOostburger
    Participant
    Post count: 36

    Great reminder of one of the economic measures we can use to evaluate the health of our economy. I really appreciate these kind of short write-ups.

    Sean HymanSean Hyman
    Keymaster
    Post count: 3910

    You’re welcome. Through prudent stock investments, I don’t worry about our future at all. However, for those who only derive income as an employer through paychecks and for those who only consume and don’t save or invest….the future does look bleak and it will only widen the divide between the haves and the have nots. Once that gap gets wide enough for long enough, it can get really ugly.

    FusionDudeFusionDude
    Participant
    Post count: 150

    I was sharing this with my son (who is in finance, but still has the “it’s different this time” mindset), and he provided this thought:

    https://seekingalpha.com/article/3066146-why-money-velocity-continues-to-decline

    Thoughts?

    Sean HymanSean Hyman
    Moderator
    Post count: 2854

    I don’t agree with the chart going down to some of its lowest levels, yet the economy is doing fine. Nope.

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