Taps Coogan – December 19th, 2022

Somehow I missed the following discussion between Hugh Hendry and Dr. Lacy Hunt a few weeks back and, while I would normally not post a video from more than a week ago, I’m posting this one because I have two cents to share.

While the wide ranging discussion covers many subjects, the two very different personalities come to a head on the concept of money velocity and its utility in predicting inflation and credit cycles.

As I see it, Dr. Lacy Hunt is right about the mechanics of pretty much everything he says but here’s the problem: money velocity can not be measured. It is strictly an inferred figure. Nobody sits around counting the number of times every dollar (or dollar approximate) gets spent. We couldn’t if we tried.

To the contrary, velocity is calculated by dividing GDP or Gross National Product (GNP) by the money supply. That’s it. No surveys, no data gathering, no nothing. It is not a measurement. It is a ratio.

That is where Hugh Hendry’s intuition to keep raising the question of Euro-dollar money creation comes in. If money velocity is GNP divided by the money supply, but you can’t accurately measure offshore dollar creation, and offshore dollar creation is bigger than domestic dollar creation, then what use is the velocity number you get at the end? It tells you the ratio between an incomplete measure of the money supply and an incomplete measure of total transactions.

Indeed, neither GDP nor GNP are intended to be measures of total transactions within the global dollar system. Both are focused on productive output, not transactions, and exclude the buying and selling of used goods, buying assets like ‘used’ homes, financial transactions, businesses replacing existing equipment, etc…

Of course, Friedrich Hayek understood and explained this eons ago.