When we think of velocity in economics, we usually think of M2 money velocity.
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.
M2 velocity declined during “The Great Recession” as GDP declined. But M2V continued to decline after The Great Recession as Bernanke, Yellen and then Powell continued to flood the economy with liquidity. And then Covid struck leading the US into another recession.
But if we look at GDP/QE (Fed Velocity of Asset Purchases), the picture is even more stark. QE Velocity was over 4 prior to The Great Recession (due to little quantitative easing prior to 2008), but continued QE after 2008 led QEV (or QE velocity) to fall under by 2015 and then crashed below 1 in the Covid recession.
While QE has not generated GDP growth like before The Great Recession of 2008/2009, it has certainly help the top 1%!
And on the hope of more Federal stimulus (with the usual nonsense add-ons that a politically-motivated), the Dow rose over 300 points on the addition of more sugar. Yes, fiscal and monetary stimulus acts like an enormous block of sugar, that will be followed by an enormous sugar crash requiring even more blocks of sugar (fiscal + monetary).
Of course, Pelosi (D-CA) and Mnuchin / House Republicans will play games as people suffer.
But how low can The Fed go with interest rates? Well, real interest rates have fallen for 700 years, so I doubt if rising interest rates for the long-term are in the cards.
Recent US history shows that we are still in negative 10-year Treasury yield territory.
And the US is still in a house price bubble as home price growth continues to exceed earnings growth.
Now, the earnings was YoY in above chart. But MoM is -0.9%.
Will the US economy and financial markets ever return to normal without continue fiscal and monetary stimulus?
According to the US Census Bureau, sales of new homes fell 6.2% YoY in April.
No, it does not look like new home sales from the housing bubble burst of the ALT-A, private label MBS years.
Yes, near record low mortgage rates are helping to mitigate the horrid effects of the COVID-19 fiasco.
Home prices in March, according to the lagged Case-Shiller national home price index rose 4.4% YoY. COVID-19 epicenters Seattle and New York City both managed to see YoY gains in home prices in March. (Phoenix AZ is leading the nation in YoY home price growth at 8.2%, nearly twice the national average).
So far the COVID-19 epidemic does not look like the notorious housing bubble burst of the second half of the 2000-2010 decade of The Big Short frame. But the CMBX BBB- index of commercial mortgage-backed securities is getting crushed by retail, hotel and office losses.
Although this has nothing to do with real estate, this Bloomberg headline grabbed my attention: “Macron Pledges $9 Billion in Stimulus to Help French Carmakers.” Hey Macron, how about telling Renault, Citroën and Peugeot to make cars that buyers in US want to buy!
While the US Treasury 10-year has just hit modern history lows, the Freddie Mac 30-year survey rate is CLOSE to its all-time low rate!!
Meanwhile, former Minneapolis Fed President Narayana Kocherlakota is calling for The Fed to cut rates immediately!
The Fed’s rate-setting Federal Open Market Committee holds its next meeting on March 17-18. I don’t think that the FOMC should wait that long to deal with this clear and pressing danger. I would urge an immediate cut of at least 25 basis points and arguably 50 basis points. That’s a cheap insurance policy for the economy that the Fed shouldn’t pass up.