Why Velocity Of Money Is So Important And Jobs In The US Are Going To Be Lost

We hear a lot about how the US job market has so many openings. There are a record number of jobs out there, or so we are told. The reason, many give, is the government is "paying people to stay home". Well, the extended unemployment benefits went away the 6th of September, meaning we are now 4 months into people not having that income.

In spite of all we hear, the mainstream mantra is going to be wrong. Few take the time to actually look at how things work, which is very disappointing. Nevertheless, when we focus upon the basics, especially when it comes to money, then we have a clear picture of how things are going to unfold.

Over the years, I wrote about the Velocity of Money. This is a vital metric as to what is taking place with money in the economy. Of course, the online economic "experts" completely ignore this, spewing their misguided notions that end up being completely off base.

Therefore, we will again revisit the Velocity of Money, this time in relation to jobs.

Forget The Inflation BS

We hear a lot about inflation. It is another mainstream ploy to mislead the public. Here we will see how things are far different than they are proposed.

The price increases over the past two years were due to supply shocks throughout the global system. For Pete's sake, 2/3 of the global economy was shut down. What did people think was going to happen? Products and materials were going to end up in short supply.

Many now feel we are going to enter a hyperinflationary environment. This is nonsense. The hyperinflations have been wrong 100% of the time over the past 30 years so their track record is perfect. Whatever they say, take the opposite and you are guaranteed to be correct.

How can I make this claim? Simple. Inflation does not operate in deflationary environments and that is the case when jobs are lost in large quantities. When people are out of work, they do not spend. This is a concept I think everyone can agree with.

So how do we know jobs are going to be lost in the United States? After all the unemployment rate is back near record levels. Here is a way you can become smarter than the Fed. Forget the unemployment rate. It is pretty much worthless other than looking at long term trends. The monthly numbers carry no weight.

Here is what is important: how many of the working age population is actually working? This is called the workforce participation rate (another topic we covered in the past).

However, this does not operate in a vacuum. The participation rate is influenced by the Velocity of Money. This is a point you do not hear the talking heads on CNBC or Robert Kiyosaki talking about.

In fact, there is almost identical correlation between the two over the last 40 years.

Take a look at the chart:

Here we see how the Velocity of Money leads the participation rate. Since the recession of 1990s, this has held up as remarkably accurate. It makes sense since an economy where the money supply is not flowing is not going to be very strong. This is exactly what we saw the past 3 decades, with a slowing growth rate taking place each decade.

Now, we are at a point where the VOM is still dropping but the participation rate headed higher since August 2020. Guess what that means.

The participation rate is going to head lower, putting it back in line with the VOM. This is achieved by job loss.

How Do We Know The Velocity Of Money Will Head Lower?

Many might believe the VOM can head up. While it can do it for a quarter or two, that is not going to be sustained. Money is not flowing freely through the economy. That is why most of the analysis out there is worthless.

The Fed does not print USD. This is a subject we covered a number of time. What they do create does enter the M2 money supply though. That is a problem since the VOM is determined based upon that. As we stated in the past, QE locks USD into the banking system, stifling economic activity.

When the Fed creates "Reserves", these are instruments that can only be held on the balance sheets of depository institutions. These are not even in those banks' control since they are still at the Fed and can only be moved by it. Thus, JPMorgan, Wells Fargo, and Bank of America are the main ones and they need to call the Fed to move it anywhere.

However, the key is these reserves are not legal tender. They cannot be used to pay salaries, do stock buybacks, or pay electric bills. Hence, the VOM with this asset class, which is part of the M2 money supply, goes nowhere. It has a VOM of near zero.

There are trillions of dollars worth of these bank instruments in the M2 money supply. Therefore, there is only one direction for the VOM to go, and that is down.

Of course, this is in keeping with the other countries who are leading us down the slowing growth path, Japan and the EU. Japan's VOM is around .5 while the EU is about .75. Knowing that, which direction do you think the US will be headed?

When we take the time to understand the metrics and how they operate, we can see clearly how things are going to unfold.

The upcoming year for the US economy is not going to be a good one. The participation rate is going to drop in line with the VOM, regardless of what the unemployment rate says. This will be achieved via job loss.

Taking the upside in this environment doesn't appear to be very prudent.

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