How fast is your money?

February 21, 2014 04:35 AM

The wall of fiat money created over the last five years is staggering, offset only by the stasis that pervades its exchange. Money velocity is the key variable that will signal the character of confidence and the next wave of inflation.

Money Mechanism for Money Velocity

One common denominator for all documented hyperinflations, including those of so-called reserve currencies, has been an increase in the velocity of money.

Velocity of money is the speed with which money changes hands in the economy; or more specifically for modern times, the financial system.

Government spending, in the form of basic services, will provide the fuel to bid price.

Economically speaking

Organic growth is abysmal, especially when one considers the gross national product, or the production that occurs within geographic borders. The difference is magnified by the great explosion of fiat in the worldwide race to debase currencies, where foreign exchange distorts the true productive capacity of the underlying economy.

Job growth, of course, remains abysmal. Wages are stagnant and the labor participation rate continues at multi-decade lows.

The currency being created by the latest experimental bond buying program continues to pile up as excess reserves in the Fed's account.

The banks are not lending money into the economy at nearly the same rate that it is being created by the Fed.

The Un-Rideable Storm

To the extent possible, we've avoided dropping ocean analogies into these letters. However, the lessons learned from studying the ocean and directly experiencing its energy can be appropriate on occasion.

The train of ocean energy that every surfer dreams about is called a ground swell. A large storm forms thousands of miles away, with hundreds of miles of sustained high wind for days. It is the equivalent of dropping a large bolder into a calm lake. As the energy radiates outward, the waves organize into groups of traveling trains. The groups are often separated by long periods or lulls that induce a false sense of complacency.

When the energy is expended where local conditions are calm, we experience an organized form of chaos, accessible for those who choose to take part in the energy.

But when the local conditions are unstable, or if the swell comes in with a storm, the last place anyone should be is in the zone of exploding wave energy. This is because the local wind causes the organized train to accelerate geometrically.

There are two lessons applicable to the current state of monetary dynamics.

The first is that the storms have formed all over the world. Staggering amounts of money have been dropped like a thousand boulders into the ocean of existing liquidity.

The second is that like all storm energy, information (like current position and size) are readily available. The unknown variable is the timing of its arrival and its velocity.

As Money Velocity Accelerates

Acceleration is added when the local conditions are stormy; creating the veritable "Victory at Sea" that threatens everyone in its vicinity.

No one entity or body has the ability to understand a non-linear system like the U.S. or world economy. Some argue that if it is able to go on everyday like it has, that is a sign of its robustness or sustainability.

Again, there is no way that the planners have a total grasp of what they are doing. Complex systems can be tweaked, but the effects are impossible to predict - except that they unravel in a geometric sense. There is no way to alter the weather, much less a storm of this magnitude.

About the Author

In addition to running a busy medical practice, Dr. Jeffrey Lewis is the editor and publisher of, where he provides practical guidance for precious metals investors.