While financial pundits often bang on about the independence of central banks around the world evidence suggests that they need a watchdog, much in the manner Nobel prize winner Milton Friedman suggested. As a monetarist, Friedman promoted the idea that sensible monetary expansion was the best policy for stable economic growth with a free market mentality to fairly allocate capital. He wasn’t joking when he said, “Nobody spends somebody else’s moneyas carefully as he spends his own. Nobody uses somebody else’s resources as carefully as he uses his own. So if you want efficiency and effectiveness, if you want knowledge to be properly utilized, you have to do it through the means of private property.”
What you are about to see is a relatively clear sign that central banks monetary policies are having increasingly less impact on velocity i.e. the impact of money circulating the economy to produce final GDP. Simply put, central bankers are pouring lower and lower grade lumps of coal into a top fuel dragster engine (aka the economy) designed to run on high octane but expecting to shatter record times in the quarter-mile. Sadly the only thing that is set to shatter is the internals of that engine. Declining velocity is what would be termed in the drag racing world ‘blowing the big end’. Trying to create more power from a tried engine in need of an overhaul simply can’t last. Blind Freddy should be able to work this out by looking at the below charts.
The ECB now requires four times as many euros in the system to create one euro of GDP. Even the Eurozone economic boom from 2000 onwards saw velocity decline. The UK on the other hand has slowed money supply growth which has steadied velocity.
Australia’s economy is a lumpier affair but the direction no different. Velocity has bumped and ground its way lower (forecast worst in 30 years).
The US stopped reporting M3 in 2006 at the request of Greenspan so the public would be clueless on how much money would be printed behind the scenes. This is the result of using the same growth rates used post the tech bubble collapse to get…
So the US sits in at around the UK, below Australia and comfortably ahead of the EU. Japan is at around 0.4x M3 velocity.