European, U.S. and Japan growth is excruciatingly low. This is a fundamental fact that drives the whole of the developed world’s economies. How to fix this situation is apparently a mystery to economists.
It is connected to the mystery of why inflation has gone away when countries like Japan and even the EU are trying to stimulate higher levels of inflation, which is considered will spice up their economies and get animal spirits running. They have bought trillions of dollars of assets to do this, but to little avail. The liquidity is there, its just not flowing.
To me it is not a mystery any longer.
As a 15 year old, they taught me economics. Economics 101 you’d call it in the U. It occurred to me then and it still does today that most economic theories are just that, unproven ideas about as far from laws as you can respectably get, but I did pass the high school exam.
I do remember even that far back, that the “velocity of money” was important. How fast money goes around from person to person in an economy was one of the key variables in the then-dreaded inflation crisis. Inflation in the U.S. and Europe was quickly going off the dial back in the 1970s. If money zipped around too quickly it could drive prices up as part of the vicious circle of currency debasement. The faster the velocity, the faster the debasement, the faster the velocity as people tried to spend their inflating cash before it lost its value.
They didn’t teach me then, but I found out later, that the whole “new deal” mantra of the 1930s against deflation and its call for a decent amount of U.S. inflation, was that inflation made the financial money-go-round speed up and therefore helped to drive activity out of recession. If you had the right velocity of money for the economy you would get the right level of activity and growth.
Hoarders of money have long been the bugbear of economics. If only those hoarders would spend, it was said, then there would be better growth. In recent years, it was growth in consumer spending on credit that was looked to, to drive the economies of the U.S. and Europe forward. Looking back, the sustainability of growth through a growth of debt, was and is a warning sign that growth itself was in trouble as consumers unlike governments can’t keep borrowing more and more forever.
I don’t wander around worrying about the velocity of money but I do wander around worrying about the value of stocks and that comes back soon enough to worrying about economic strength and growth. However, what I do often end up having to deal with and cursing is KYC and AML (know your customer anti-money laundering checks), which has become a never-ending round of proving who I and my businesses are to an ever-increasing group of enterprises who are mandated to “know who you are” and get comfortable you are not part of a criminal or terrorist funding conspiracy, as 99.999% of people aren’t.
It dawned on me that this could well be a big drag on the velocity of money. As an individual I often feel the friction of spending my money and often feel disincentivized to spend it because of that awkwardness of using it. I have also heard stories from others about the difficulties of using cash, opening bank accounts, sending money abroad, the disappearance of high value notes like the 500 euro, the need to get utility bills notarized to prove identity and credit cards blocked/unblocked with regularity. This is just a partial list of an ever-increasing trend of financial life becoming more difficult. These stories are from normal people, trying to do normal things, in an everyday life. What are all these new inefficiencies doing to the velocity of money?
Well let’s ask the Federal Reserve.
Now I might have to wait a few lifetimes for my Nobel Prize in economics, but there you have it from the Fed itself, a collapse in the velocity of money.
Now it might not be all these new hurdles for cash, credit and financial services but it can’t help and I am always highly persuaded by a conclusion I’ve worked backwards to reach.
Without doubt it has never been harder to apply your money because of AML and KYC and a general clamp down on financial services.
However you explain it, the velocity of money has dove and if my 15-year-old self was asked a question on the impact of this, I would say “deflation” and a “drag on economic activity.” I think I’d get a tick on my test for that.
So I would suggest, enough of the KYC and AML already, because you can be sure that we are going to get more and more and more of it, unless someone in power steps forwards and says, “we have enough checks for now” rather than an expected “more please.”
A few years ago, I was told by an economist that it was impossible to make people spend money, so trying to drive demand by economic ploys was futile. This may be true. It is also true you can make it hard or easy for people to spend money and if you make it hard they will spend less.
They have made it harder to spend money, a lot harder, and if governments want to get some of their growth back then they should start to look to make it easier again by taking as much of the grit out of the economic merry-go-round’s bearings, as they can, or at least, stop pouring more in.
The easiest way to sterilize a situation is to shut it down and that is always a government tendency, because it creates for them the least risk and work. Hopefully this is not an option although history demonstrates some governments’ ability to do just that, as we see in Venezuela right now.
If the governments of the West want their growth back, they are going to have to take a bit more risk and do a lot more work to help get the velocity of money going again. They need to get on the progressive path of making things easier not harder. Growth comes from efficiency, not never-ending, ever-changing regulation.
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Clem Chambers is the CEO of private investors Web site ADVFN.com and author of Be Rich, The Game in Wall Street and Trading Cryptocurrencies: A Beginner’s Guide.
In November 2018, Chambers won Journalist of the Year in the Business Market Commentary category in the State Street U.K. Institutional Press Awards.
