TMC#13! Money is a complex concept in modern finance, and we like to simplify things using M2 + ignoring financial transactions: that's not the way to do it.
Also enjoyed watching your interview with Daniel L on RV recently. I noted his call out on 'official' inflation and 'real' inflation. Of course, if the market only reacts to official inflation, then it doesn't much matter what real inflation is for the time being.
But, that all depends on the magnitude of downward pressure on peoples purchasing power and over what time period. A tricky monetary, fiscal and political game that has the real potential to blow up globally in the form of nationalism and populism. The skinny end of the wedge is already in position.
The correct investment mix based on multiple extreme outcomes is critical.
As a econ phd student having done my macro courses where the financialisation of monetary policy is absent from curriculum and everything we get taught is basically what you here call the 1940s-1980's framework, I find this blog a wonderfull educational ressource. Thanks!
Great article as always! I suggest looking at some of the excellent work Jeff Snider has done on the "term premium" you refer to. Also, I would try to look at "velocity" as GDP + Financial basket divided by the Divisia M4 monetary aggregate professor Barnett has put together (he's over at the Center for Financial Stability). I agree that "broad measures of money" like M2 are obsolete and even Divisia M4 misses at great deal in terms of the eurodollar market and eurodollar market transactions but it is certainly an empirically superior monetary aggregate vis-a-vis M2
Hi Alfonso, while many people now know that money velocity in context of current M metrics is not that useful anymore, I wondered if you might delve deeper into collateral velocity and its importance today
thanks. certainly agree that financial markets capturing more of the money supply...marshallian K ratio in effect. the scale on your new money velocity chart is pretty misleading though...why 0-10 instead of 0-2?
Best description of term premium I’ve read. Didn’t realize it was practically the price of duration risk.
I disagree that low money velocity is an irrelevant side show, not relevant to a financialised economy. Keynes’ liquidity preference shows us that economic agents (households, pension funds etc.) prefer to hold cash at low nominal interest. He motivates this with the ‘speculative’ demand for money, the idea that agents prefer to hold cash out of fear of rates rising and because other forms of investment are less appealing. Keynes’ liquidity trap, the symptom of a financially repressed economy. Money velocity is akin to Lacy Hunts’ Marginal Revenue Product of Debt Capital - an important variable to understand since using debt to stimulate the economy is becoming less effective (due to cash hoarding) when the cost of rising debt is still lower future growth.
A private trading group I am a member of started following you and including you in their weekly relational analysis round-up 2 weeks ago. I told them I had been following you for a while now and that you are good value!
QE 1 is ok. QE 2 and 3 (buyng high risk assets with long duration) are good for economy but with side effects like assets inflation (real estate, stock market ect.) and finally inequality. Could it be a problem for politicians and financial authorities?
Another excellent article Alfonso. Thank you.
Also enjoyed watching your interview with Daniel L on RV recently. I noted his call out on 'official' inflation and 'real' inflation. Of course, if the market only reacts to official inflation, then it doesn't much matter what real inflation is for the time being.
But, that all depends on the magnitude of downward pressure on peoples purchasing power and over what time period. A tricky monetary, fiscal and political game that has the real potential to blow up globally in the form of nationalism and populism. The skinny end of the wedge is already in position.
The correct investment mix based on multiple extreme outcomes is critical.
As a econ phd student having done my macro courses where the financialisation of monetary policy is absent from curriculum and everything we get taught is basically what you here call the 1940s-1980's framework, I find this blog a wonderfull educational ressource. Thanks!
Great article as always! I suggest looking at some of the excellent work Jeff Snider has done on the "term premium" you refer to. Also, I would try to look at "velocity" as GDP + Financial basket divided by the Divisia M4 monetary aggregate professor Barnett has put together (he's over at the Center for Financial Stability). I agree that "broad measures of money" like M2 are obsolete and even Divisia M4 misses at great deal in terms of the eurodollar market and eurodollar market transactions but it is certainly an empirically superior monetary aggregate vis-a-vis M2
Hi Alfonso, while many people now know that money velocity in context of current M metrics is not that useful anymore, I wondered if you might delve deeper into collateral velocity and its importance today
Kind regards,
Misua
https://www.ecb.europa.eu/pub/conferences/shared/pdf/20201123_money_markets/Jank_Moench_Schneider_Paper.pdf
So basically M2 counts both active money as well as paralyzed money.
Loving these posts - Appreciate you taking the time to share your views! Look forward to your insights each week...!
Also, thank you for 'Future Trouble in Macro? Liquidity Traps and a Slowing Global Credit Impulse'
Thank you.
Thank you for providing this insight, how would you track growth & Inflation?
thanks. certainly agree that financial markets capturing more of the money supply...marshallian K ratio in effect. the scale on your new money velocity chart is pretty misleading though...why 0-10 instead of 0-2?
Best description of term premium I’ve read. Didn’t realize it was practically the price of duration risk.
I disagree that low money velocity is an irrelevant side show, not relevant to a financialised economy. Keynes’ liquidity preference shows us that economic agents (households, pension funds etc.) prefer to hold cash at low nominal interest. He motivates this with the ‘speculative’ demand for money, the idea that agents prefer to hold cash out of fear of rates rising and because other forms of investment are less appealing. Keynes’ liquidity trap, the symptom of a financially repressed economy. Money velocity is akin to Lacy Hunts’ Marginal Revenue Product of Debt Capital - an important variable to understand since using debt to stimulate the economy is becoming less effective (due to cash hoarding) when the cost of rising debt is still lower future growth.
A private trading group I am a member of started following you and including you in their weekly relational analysis round-up 2 weeks ago. I told them I had been following you for a while now and that you are good value!
QE 1 is ok. QE 2 and 3 (buyng high risk assets with long duration) are good for economy but with side effects like assets inflation (real estate, stock market ect.) and finally inequality. Could it be a problem for politicians and financial authorities?