Velocity of US money supply at long last edging up
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November 20th, 2009 by Prieur du Plessis, Investment Postcards from Cape Town
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Despite ballooning Fed reserves to bail out banks, money supply as measured by the growth in money supply with a zero maturity (notes and coins, check accounts, savings deposits and money-market accounts collectively) continues to slow.
The slowing growth is contra to what normally happens when the Fed lowers the Federal funds rate.
In real terms the growth rate is also slowing.
The slowing in MZM growth is a consequence of US banks’ tight lending standards. The trend is likely to continue until the banks relax these standards.
Velocity of MZM is at long last picking up after it started falling in the first quarter of 2007 - six quarters before economic growth slumped. The increase in MZM velocity effectively points to increased economic activity. Further increases in this velocity are essential for sustained economic growth.
Bottoms in consumer sentiment and MZM growth coincide, emphasizing the importance of improved consumer sentiment to get the economy going.
Lastly, the US bond market is an excellent indicator insofar as MZM velocity is concerned. Currently the yield on the 10-year note is pointing to further improvements in money velocity. The US bond market therefore also suggests that consumer sentiment is likely to continue improving and that the current improvement in the economy is sustainable, albeit probably at a slow rate.
Note: The source for all graphs is Plexus Asset Management, based on data from I-Net Bridge.
Dr. Prieur du Plessis is an investment professional with 26 years' experience in investment research and portfolio management. More than 1,200 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns, including his blog, Investment Postcards from Cape Town. He has also published a book, Financial Basics: Investment. Prieur is Chairman and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and a number of foreign countries. He also serves as Honorary Consul of Slovenia for South Africa, actively developing economic, cultural and scientific relations between Slovenia and South Africa. Prieur is 54 years old and live with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town, South Africa. His leisure activities include long-distance running, traveling, reading, motor-cycling and scripophily. Read more from the author/contributor here.
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