You might be wondering, 'What is M2 Money Supply and what does velocity have to do with it?'. First of all, you're not alone. It took me a long time to truly understand what it is and it took me an even longer period to understand why the velocity of M2 money has collapsed in the last 25 years or so.
The light bulb turned on in my head after watching a few videos just in the last couple of days that included Alasdair Macleod of Gold Money, Andrew Maguire of Kinesis Money and George Gammon of Rebel Capitalist. They all had different but related topic points that led me to inquire about the velocity of money. The Federal Reserve's StLouisFred.org F.R.E.D. website and their 'Velocity of M2 Money Stock' graph quite clearly shows the collapsed velocity in M2 money (F.R.E.D. stands for Federal Reserve Economic Data).
First, a quick explanation of what M2 Money supply is. In the Fed's own words, 'The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy'.
Simply put, they keep track of how many times one dollar changes hands, hence the 'velocity' of money. There used to be M1, M2, M3 and MZM (MZM is longer tracked by the FED). M1 describes the money supply in circulation, coins, bills, traveler's checks, demand deposits and checking deposits. Beginning in May 2020, M1 and M2 were combined to include small denomination time deposits of less that $100,000, less IRA and Keogh balances at depository institutions.
I had a difficult time grasping how the velocity of money has been collapsing for 25 years while the money supply has doubled a number of times since the Dollar was decoupled from gold in 1971, aka the 'Nixon Shock'. That is, until I watched George Gammon's video. In it, he made some 'crazy' predictions about inflation, deflation, real and negative interest rates and central bank digital currencies, among other things.
He makes some great points about how the U.S.A. has been running on deficits for years (decades) now through debt monetization, another term that most people don't quite understand. When the government needs new money, they sell U.S. Treasuries and it was at this point when the light bulb came on in my head. Gammon explains that when a non-institutional investor buys treasuries, he calls this 'Green Money', which would be included in the M2 money supply.
If it's a banking institution that buys treasury notes, Gammon refers this as 'Red Money' and is not included in the M2 money supply. So what happens when non-institution investors don't buy treasuries? Well, the FED steps in, of course. On December 18, 2002 the FED's balance sheet was less that $720 Billion. Today, it stands at just over $8.5 Trillion. More or less, the U.S. government is running on fumes and I think even that is quickly running out.
This is how they've been able to turn debt into money by creating money (currency) out of thin air to finance out of control deficits by buying treasuries with it. This is the true definition of 'Debt Monetization'. Most sane people would immediately see this as a massive fraud!
So now, going back to the collapsing velocity of money, I was able to connect the dots by realizing that most of the 'money' is, in every essence of the word, is fake. This would explain why the velocity of money has dropped about 50% since peaking in the third quarter of 1997. What happened soon after? 9/11 and the Dotcom bursting, taking the Nasdaq Index down with it and of course, the wars in Iraq and Afghanistan. It's been downhill ever since.
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From 1959, where the FRED chart begins tracking velocity, we can see it remains fairly steady until 1990 with an average of 1.8. Then, when the early 1990s recession hit, the velocity of money ramped up to peak at 2.192 in 1997. From there though, the precipitous decline begins. By the second quarter of 2020, it fell to a record low of 1.112 (going back to 1959), roughly half its peak in 1997.
So, in conclusion, I see debt monetization as the cause for the drastic drop in the velocity of money. It's impacting everyone, not just the U.S.A.. All around the world, governments are in a similar situation. Japan and China are the biggest holders of U.S. treasuries and they have, as of late, become net sellers to prop up their falling currencies. If they're not buying anymore, then who is? You now know the answer!
Unfortunately for Americans, I see their dollar dropping in 2023 and it may be one for the history books. The best hedge against such a situation is to park some of your cash in precious metals. Gold and silver are back up to 7 month highs. It would also be a good idea to buy some Bitcoin. For most of us though, one Bitcoin is out of reach but Bitcoin Bits or Satoshis are well within reach.
Consider using the CryptoTab browser to mine free Satoshis. I'm days away from earning my first 5,000 Satoshis after just a few months. It's only worth about a dollar now but just wait until Bitcoin goes to $100,000 or $250,000 or even $1 Million. Even though I only have a few bits, I have a lot more than most of the populace.
I'm a big fan of silver as it is so underrated and under-valued. I think this has been done on purpose but that's another story in of itself. Did you know that when Germany collapsed in the early 1920s, a silver ounce went to over 400 Billion marks? One ounce of gold went to 87 Trillion by the time their hyper-inflation was over. The median price of a home back then was about 4,000 to 7,000 marks. Just one ounce of silver would have bought the entire neighborhood. It's extreme, I know but it actually happened.
More recently, it was Zimbabwe and their ridiculous $50 Trillion note.
It's happening again, folks. Which side do you want to be on when this is all over, the winning side or the losing side? As for me, I plan on being on the winning side. I hope and pray to see you there too! Check out OwnX by clicking the banner above or the link below to start investing in precious metals. I invest a whopping $50 per month. I can write with certainty that I'm one of the richest people in my neighborhood because of it. At least, I will be in due time.
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