My own work and that of other scholars showed that on eve of Crash, most companies’ stocks were in fact appropriately valued; that there was little evidence of a “bubble,”; that investors did know what they were buying; and that the money supply had lagged behind production and productivity.
But I always thought velocity was a factor of trust: if you didn’t trust the money, you spent it faster to get real stuff. Lack of velocity indicates huge trust in the money supply, which could be argued to support the notion that there is a massive productivity wave that hasn’t been monetized yet and that people instinctively know it.
It’s the only reason I can figure out for us not having hyperinflation with a $17 trillion debt.
“But I always thought velocity was a factor of trust: if you didn’t trust the money, you spent it faster to get real stuff. “
That’s certainly evident during inflation. Those of us who lived through the ‘70s remember spending our dollars as fast as possible before they lost even more buying power.
In the current environment I can see people holding on to their money more than normal because they are earning nothing on their savings. When they spend, they aren’t spending interest, they are spending capital. For retirees this is a big deal.
So I suspect that velocity is actually lowered further due to the extremely low interest rates, which may be the opposite of what the Fed has been expecting. And I’m not sure that the Fed could change the interest paid on savings if they wanted, that could be due to a savings glut coming out of China.
“It’s the only reason I can figure out for us not having hyperinflation with a $17 trillion debt.”
About half of that $17T should be sitting on the Fed’s books for managing the money supply. So it’s not all high-powered money sloshing around the banking system. When the economy heats up the Fed will be selling their bond holdings to sponge up liquid money and slow down the expansion of credit. Who knows when we will see that.