Everyone has heard of GDP, but most don't know how it is calculated.

As a simple mathematical equation, it is written as M * V = P * Q, where M is money supply, V is velocity, P is price inflation and Q is real GDP.

The two numbers on the right side of the equation (the outputs) have been mostly stable for nearly a decade, but the first two numbers (the inputs) are seriously distorted, and indicate that something is chronically amiss.

Money velocity has been falling for 20 years, and is now at the same levels as registered during the Great Depression.

What is money velocity?



In simple terms, it’s the frequency with which the same dollar changes hands when the holder buys something. Higher velocity means more economic activity, which usually means higher growth. So it is somewhat disturbing to see velocity now at its lowest point since 1949, and at levels associated with the Great Depression.

Logically if the velocity rate keeps falling, the economy will collapse. Either way, it's a sign of something very, very wrong with the real economy.

So far the Fed has been able to literally paper-over the problem with an unprecedented increase in the money supply.



Economic models will tell you that people are simply saving more, so there's nothing to worry about.

The problem is that this isn't true.

So if all this money being created isn't being spent, and it isn't being saved, then where is it going?

To answer that you have to look at something that economists refuse to put into their models - class.

If you print a mountain of money, and then give it to people who are already wealthy, what do you think they will do with it?



money velocity is falling almost everywhere. When that happens, it’s a clear sign of speculation in investment and the inflation of debt and financial asset bubbles. This scenario NEVER ends well.

Unlike the working class, the wealthy don't need to spend any new income. Instead they put additional money into investments that generate a return.

Which is OK, if they were building factories and things that created jobs. But they aren't doing that.

I don't know how this will end, but I can say that the underlying problems in the economy are barely even being acknowledged.

Obviously it's Putin's fault.