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« Apple, Event Risk, and Market Timing | Main | Torturing the Data: Investors take heed! »

August 27, 2011



Indeed, that velocity series is old. I was more interested in displaying the trend. In other words, even if velocity were to turn around, it still has a daunting amount of ground to make up.

I take it from your multiple references to M2 that this was indeed the measure around which your original point was centered. Do you at least concede that broader credit is what truly reflects heightened economic activity, not just M2?

Additionally, I would like to apologize to readers and correct the M2 velocity changes I provided in my original comment. I just went back to double-check my calculations (I am calculating the year-over-year change in M2 velocity), and this is what I am getting now:

2009-01-01 -11.4%
2009-04-01 -11.8%
2009-07-01 -10.4%
2009-10-01 -4.8%
2010-01-01 1.0%
2010-04-01 2.8%
2010-07-01 2.4%
2010-10-01 1.6%
2011-01-01 -0.4%
2011-04-01 -1.8%

Thus, the change in velocity has not been as abysmal as it would have looked originally. It actually went positive briefly for 2010.

Nevertheless, my overall contention remains: regardless of what M2 does, the true indicator of economic expansion/contraction is the level of credit outstanding, not just M2. I.e. is that money supply being cycled productively into the economy?


wsm -- As I'm sure you noted, this is a quarterly series and therefore a bit old. The M2 weekly surge has occurred largely outside of this time frame.

More importantly, if M2 is rising and velocity is constant, nominal GDP moves higher. Since we have no way to measure velocity independently, we won't have the current numbers until we know Q3 GDP.

To summarize, pointing to velocity adds nothing to the discussion. See here for a better explanation:

If we eventually discover that the M2 surge did not correspond to higher nominal GDP (either real increases or inflation), then the velocity series will move lower.

Interesting question. There are not a lot of good economic signs, but I think this one is for real.



"The Good - The money supply rebound continues. This is a major forward-looking indicator that is widely ignored. It is a leading indicator, giving it extra significance. I have been writing about this for several weeks. It is ignored in the trading community. If you understand this point you will realize that the QE II effects are just starting. This interview featuring Bob McTeer, one of our favorite sources, explains the point in a way that anyone can understand."

There are some loose ends that must be tied up in order to make this argument. 1)When you refer to money supply, what measure are you referring to? 2)Perhaps most importantly, the value of this is a leading indicator only matters if the narrower measures of money supply (to which I assume you and McTier are referring, but neither one of you is specific on this) are cycled into the economy to create broader credit. In other words, the VELOCITY is important, not necessarily the money supply itself.

To that end, I would like to provide readers with the last 6 quarters of M2 velocity, available from the St. Louis Fed: (link at

2010-01-01 -13.0%
2010-04-01 -12.4%
2010-07-01 -12.0%
2010-10-01 -12.0%
2011-01-01 -10.8%
2011-04-01 -10.9%

(the dashes preceding each of these readings indicate negative velocity - i.e. shrinkage)

Readers can now decide objectively whether "the QE II effects are just starting."

Incidentally, if anyone has a link to a good data series tracking total credit outstanding in the economy (not just money supply, and not just consumer), I think it would be enlightening. But I could not find one.


"US investors had better get used to this rumor-driven trading, since the European story is more than a year away from a resolution."

Thanks Jeff for the tantalizing tip on Europe. One year from earliest resolution. Yet, even the tip is helpful as it conditions for acceptance of what will surely be negative headlines concerning Europe. The situation, as a kind of regency effect reminder of the credit crisis systemic risk, is ripe for media scare stories.

I can handle those if I can get an understanding on what the real issues are and be able to interpret individual stories within the context of the bigger story. That's where I need a little, or rather a lot of help.

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