Personal Wealth Management / Expert Commentary

Ken Fisher Explains Inflation Impacts from Velocity of Money

M4—the broadest measure of money supply—rose sharply in 2020, which drove increased concerns about inflation. However, Fisher Investments’ founder and Co-Chief Investment Officer Ken Fisher says it’s not just the quantity of money that matters for inflation but also how fast that money changes hands, otherwise known as money velocity.

Transcript

0:03
i've been asked
0:04
why it is that velocity of money matters
0:09
and particularly why it matters now and
0:13
in this i need to take you on a little
0:15
bit of
0:17
back trip into some historical evolution
0:20
to
0:21
portray now correctly so
0:24
before i do that let me just say that
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the fear arises because
0:28
the broadest measure of money as defined
0:33
in recent times m4
0:36
which is very broad exploded
0:41
last year through u.s central bank
0:44
activities in america
0:46
and that legitimately causes concerns
0:48
about inflation
0:49
and then questions legitimately arise
0:52
about how do you see that correctly
0:54
and traditionally it's always been true
0:57
that
0:58
there is both the quantity of money and
1:00
how fast the money turns over
1:03
because if the money turns over faster
1:06
that actually speaks to more potential
1:09
for inflation if the money turns over
1:11
slower
1:12
less so traditionally going back
1:15
way way back before there was actually
1:18
calculations on the quantity of money
1:20
there was theory derived in the
1:24
late era of the classical economists of
1:27
the day
1:28
particularly by no relation namesake
1:32
irving fisher who was a
1:35
famous economist at the time who got
1:37
heavily debunked after the 1929-32
1:40
stock market crash that
1:44
there's this model m v equals p
1:47
q m meaning the quantity of money
1:50
v meaning how fast it turns over
1:54
equals p the price of all goods and
1:57
services produced
1:59
and q the quantity of them price
2:02
times quantity later being defined to be
2:06
gdp inclusive of inflation
2:10
so the mv equals pq model
2:13
was something that was and still is in
2:17
sort of intro economics taught as a
2:20
macro
2:20
simplistic framework and therefore
2:25
velocity factors in but the
2:28
early subsequent monetarists led
2:31
predominantly by
2:32
legendary milton friedman presumed that
2:35
velocity
2:36
a couldn't really be precisely predicted
2:39
and b
2:40
was probably pretty stable now in the
2:43
very beginning
2:44
money was gold coins
2:48
banknotes uh and bank reserves
2:53
and that was the first money that was
2:55
calculated
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and then we moved to progressively
2:59
bigger
3:00
and broader definitions of money so by
3:02
the time milton friedman was most
3:03
popular
3:04
in the 1960s you had m1 and m2
3:07
and then that included time deposits and
3:10
banks
3:11
m2 with m1 and then you moved on to
3:15
broader definitions in m3 and then
3:18
broader still definitions in m4 that
3:20
include things like
3:22
uh certificates of deposit
3:25
and u.s treasury securities with a
3:27
maturity less than one year
3:30
and and and much broader that
3:33
m4 the broadest measure and there was
3:35
always the view that the broadest
3:36
measure was the best
3:38
uh it exploded a growth of almost 30
3:41
percent
3:41
last year tied to covet uh expansions on
3:44
the part of the central bank
3:46
federal reserve and with that this
3:49
fear of inflation the reality of that
3:52
however
3:52
is that from the introduction of m4
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after in the decade
4:00
around 2005
4:04
after the 2007 89 crash and with it
4:08
velocity just kept falling the velocity
4:10
of m4 has been falling steadily ever
4:12
since and then plunged
4:14
in 2020 as m4 grew by 30 percent
4:18
offsetting the growth of the quantity of
4:20
money almost perfectly
4:22
almost perfectly so that if you were a
4:25
traditional monetarist that believed
4:27
that velocity
4:28
should be steady state which by then you
4:30
probably should have gotten over but a
4:31
lot of people hadn't
4:32
you'd believe that inflation should
4:34
explode immediately but inflation didn't
4:36
explode immediately
4:37
and therefore quandary and in that
4:39
quandary you come to what i consider to
4:41
be a very
4:42
important point we don't have a good
4:45
measure of velocity for what's
4:48
the real quantity of money what is the
4:50
real quantity of money because it's not
4:52
m4
4:52
and in fact i'm thinking and i've
4:54
actually uh written
4:56
in a piece that has run on real clear
4:59
markets
5:00
that i think pretty soon they'll come up
5:02
with m5 which might include crypto
5:06
and uh might include a longer term
5:09
treasury securities and
5:10
might include high quality stocks and
5:12
then after that to probably come up with
5:14
m6 it includes scrap
5:15
plastics and a you know basket of
5:19
used antiques and uh maybe some tesla
5:22
batteries i don't know
5:24
but you get my point that these things
5:26
aren't real money
5:28
money is what is used as a medium of
5:30
exchange
5:31
when you buy and sell things it's money
5:34
is something you use
5:35
to transact for the purchase of real
5:38
things
5:38
you don't use one-year treasuries
5:42
to buy things you sell one-year
5:44
treasuries to get money which you then
5:46
use to buy things
5:47
and that understanding leads you back to
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the core of what money really
5:52
is and what the velocity has to be
5:55
that would be important that but we have
5:56
no calculation for that today
5:58
and so what i believe has happened is
6:00
that the velocity of money has
6:02
fallen tied to savings
6:06
paying back debt most of the
6:09
money for example that the federal
6:12
government spent
6:13
last year on covid was not spent on
6:16
buying goods and services but was spent
6:18
paying back debt and saving which is
6:20
repaying loans
6:21
and in repaying loans you're actually
6:24
offsetting the increase in these other
6:26
monies
6:27
and these near monies aren't real monies
6:31
it's the velocity of real monies that
6:33
matter
6:34
and that may actually have been steady
6:36
state because that didn't really
6:37
increase very much it's the near monies
6:39
that increased so much
6:40
that's what the federal reserve impacted
6:42
hugely and in fact
6:44
uh now as i speak for the last nine
6:47
months
6:48
bank lending has been shrinking and as
6:50
bank lending shrinks
6:52
that's a negative impact on the quantity
6:54
of real money because
6:55
people borrow money to spend it on
6:58
things
6:59
so with that i would say that the
7:01
velocity is important it's
7:02
hard to get a handle on we don't really
7:05
have
7:05
the impact of real money having exploded
7:08
the way the appearance of real money
7:10
has exploded and the fact that people
7:12
are so concerned right now about
7:13
inflation
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is fundamentally an underlying bullish
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thing because it says
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while there's more optimism than there
7:20
used to be
7:21
people aren't over the top optimistic
7:23
they're still worried about things
7:24
there's still wall of worry to climb for
7:26
this bull market
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which oh by the way as i speak at a new
7:29
all-time high today
7:31
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7:33
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7:34
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7:35
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7:37
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7:48
[Music]
7:57
you

 

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