Velocity and Sterilization

Mike Maloney was on the Keiser report talking about why we have may have been seeing more deflation instead of inflation despite the US FED printing trillions of dollars and sending it to central banks all over the world via quantitative easing since the 2008 housing crisis. 

According to M.V=P.G (Money Supply x Velocity = Price x Growth), If a heap of money is created and the money supply expanded more than is needed, then inflation or higher prices should be expected.  The US saw inflation of college tuition as the US made borrowing for college much easier and cheaper. As cheap federal money became available, college tuition quickly jumped from $10,000/yr to $20,000/yr and even $50,000/yr. 

However, despite the expansion of the money supply in the economy, we haven't seen the same kind of price increases. This is because of decreasing velocity. Velocity is the rate at which money is exchanged within an economy.  When a $1 is created, it may exchange hands several times and effectively do the work of $3 or even $5.  So you have to consider both money supply and velocity when forecasting price and growth.

Mike Maloney thought that psychological factors where to blame for decreased velocity resulting in price deflation.  He is mostly wrong.  People are still buying houses, cars and going out to eat. In reality, the decreased velocity is a purposeful economic policy set by the US FED and other central banks called "sterilization".  Sterilization is the FED policy purposely decreasing velocity to prevent inflation due to their endless money printing. 

Big banks are being offered money from the US FED at a nearly 0% interest rate. However, this cheap interest rate is not passed on to the regular citizen.  Mortgages are still about in the 4% range as they have been.  If regular people had access to cheap money, we would see inflation in the housing market just like college tuition.  Usually mortgage interest rates were determined by the FED prime interest rate.  The base interest rate is likely being artificially set now. You will remember that there were investigations after 2008 and bankers went to jail for LIBOR fixing. Well, this kind of rate fixing has been happening all along and is still happening. 

Big banks are borrowing free money from the US FED and are then required by BIS Basel 3 Accords to purchase treasury bonds and credit default swaps which floats all our national deficits and debts. Bond yields are terrible and do not keep up with inflation.  So, the big banks then exchange bonds with each other on the REPO market for cash.  The banks then use that cash to buy stock and artificially prop up their own stock and the stock market as a whole.  Big Business, many of whom are also registered as banks, then print stock options and take profits off the top into the pockets of a select few.

Sterilization decreases velocity by keeping the cheap printed money at the bank and in the speculative economy.  This is how and why North America has generated a record number of billionaires in the last 10 years but wages haven't increased for regular workers.   Expanded money supply with decreased velocity has resulted in steady prices and no real growth except maybe in the speculative economy. Sterilization is an economic policy where trickle down economics is not permitted to trickle down.