Why Cathie Wood is Wrong About Inflation

[GoldCore]

Does the velocity of money need to increase for inflation to take hold?

This week a post on Twitter garnered over 2,700 retweets and almost 20,000 likes. The tweet was from Cathie Wood, the founder of Arkinvest.

The tweet made the argument that inflation didn’t take hold after 2008-09 because the velocity of money fell instead, and since it is still falling that inflation is not a current issue either. However, Cathie Wood’s assertion inflation cannot happen because the velocity of money is falling has no basis in reality.

Here’s why…

What is Velocity of Money?

Dusting off our economic textbook: The velocity of money (velocity) is the average number of times per year that a dollar is spent in buying the total amount of goods and services produced in the economy.

The most common measure of velocity is GDP, which adds up all the goods and services produced by an economy divided by M2 money supply which adds up all the cash, chequing deposits, and other deposits that are readily converted into cash, such as savings accounts and money market accounts in the economy.

Velocity = GDP/M2 The chart below shows US M2 velocity, and we can indeed see that velocity has declined from a ratio of 1.8 in 1960 to 1.1 as of June 2021.

This means that the average dollar bill is spent 1.1 times in a year compared to 1.8 times in 1960 – and down from a peak of a dollar being spent 2.2 in 1997.    

Velocity = GDP/M2 Chart

Equation of Exchange

So, what does this have to do with inflation?

The theory goes back to Irving Fisher’s view of The Purchasing Power of Money published in 1911, in which he discussed the Quantity Theory of Money. Fischer’s view was that velocity was fairly constant in the short run.

Fisher’s view was that nominal GDP was solely determined by changes in the money supply. By this reasoning, if the money supply doubles then nominal GDP would also double. This means either prices or actual output would also double! 

Taking a step back let’s look at the equation definition we described above in a different way. If we take the equation form above Velocity = GDP/M2 and break it down further, we get Velocity (V)= Price level (P) * aggregate output or total income (Y) / Money supply (M). 

Then we multiply both sides of this definition by M and we get: M * V = P * Y, which is known as the Equation of Exchange.

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Now we can see Fisher’s view a bit clearer: if velocity is constant and money supply doubles (the M * V portion of the equation) and this equals nominal GDP (P * Y portion of the equation), then nominal GDP doubles

However, as we can see from the chart above Fischer’s view that velocity is constant in the short-term does not hold in today’s world.

Money supply has grown exponentially in the last 20 years. However, instead of nominal GDP also growing exponentially, Velocity has instead declined.  

One reason for this is that the U.S. is much less reliant on cash than it was when Fisher developed his theory.

Today charge and credit accounts are much more prevalent and used in everyday transactions, which makes the economy less reliant on cash.

This means that less money is required for nominal GDP to grow. Not to mention the growing ease of transactions through completely non-cash methods. Which are cryptocurrency, or remittance payments sent to other countries are now done through an app.

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And the peak in velocity in 1997 also coincides with when US net-household wealth started to outpace GDP. The chart below shows US Nominal GDP and US Household Net-Worth (household assets minus debt) both set to 100 on March 31, 1960.

These grew in tandem until around 1997 when household net-worth started outpacing nominal GDP growth. This is around the dawn of the internet age when more households had access to broader investing tools. And there is little doubt that asset price inflation has been a phenomenon for the last 20 years.

US Nominal GDP and US Household Net-Worth Chart

The last chart we leave readers with is the US M2 Velocity chart with the year-over-year change in US consumer price inflation included.

Back in 1980 when inflation did increase 14% year-over-year, the increase in velocity increased only a negligible 1.7 to 1.9. However, when velocity hit its peak in 1997, US consumer price inflation was a much lower 3.3%.

In other words, the relationship between velocity and inflation is not clear. Which means Cathie Wood’s assertion inflation cannot happen because the velocity of money is falling has no basis in reality.

Inflation can happen anytime, and we see that in the long run march of precious metals prices.

US M2 Velocity and CPI Chart

[Rll1288]

Good analysis... My own view and I have no idea if this is based on sound or even workable economics but..... Over the last few decades we have seen a decline in the cost of goods e.g. milk has declined in price to the point that it's almost commercially unproductive to actually produce it. This and many other such situations meant we have been used to a false sense of security around inflation and the management of such through interests rates etc. Now with pressures outside the normal (which weren't around in 1911) like COVID, increasing population, reduction in carbon emissions etc. I believe we will see high inflation due to true price of production and living expenses that the early twentieth century monetary equation could not have taken into account.

[Martlet]

3 hours ago, GoldCore said:

However, Cathie Wood’s assertion inflation cannot happen because the velocity of money is falling has no basis in reality.

That was not the claim in the tweet.  It's an explaination of why there has not been significant inflation since 2008, despite quantative easing increasing wide money.  It's demonstrably true.

[Rll1288]

No significant inflation... what is significant ? I see petrol at pumps over 10% more than they were 2 months ago... is that nit significant... food shopping is also higher.... growth low, prices high ... something is happening

[HerefordBullyun]

1 minute ago, Rll1288 said:

No significant inflation... what is significant ? I see petrol at pumps over 10% more than they were 2 months ago... is that nit significant... food shopping is also higher.... growth low, prices high ... something is happening

Yes agreed but the point being real inflation is being hidden by lies. Cathy wood is half right and half wrong. Inflation would be more exposed if the QE was true reflection pegged against the gold standard. But as we are in the world petrodollar now, just look at petrol prices now and tell me inflation isnt here. Oil is now the indicator of inflation, albiet its delayed becuase its still in abudence. You have to understand the keynesian system is complex and theres plenty of manipulation to supress this, it as complex as western politics. Hence why the people in the top can continue to take the cream.

There are plenty of clever people paid in economics, government policy and banking and the judiical reform, including judges to influence ecomonies, not just from a macro level but from a global one and they use other agents to help that, including military power. They live in the shadows alike civil servants and others. They help spin the policy with psychologists and spin doctors. If you think thank No10 and other political powers have pillocks sat round thier offices, absolutely not. The mandarins potentially have more power than the government, without thier expertise, the governt is at a loss. Thats said if the government continue to spin BS eventually they get found out. Career politicians dont exist now they P1ss about for 10 years and then get plenty of jobs on boards as non exec directors, becuase they have contacts. Hence why the house of lords was created another old boys network. 

You go and look how many of these lot have made absolute fortunes from this exploitation, and it is explotation. you dont know it but every one of us is being exploited every single day. Why becuase data is the new oil. Data is control. Data is exploitation.   

 

[Martlet]

1 hour ago, Rll1288 said:

No significant inflation... what is significant ? I see petrol at pumps over 10% more than they were 2 months ago... is that nit significant... food shopping is also higher.... growth low, prices high ... something is happening

Inflation is a measure across all gods and services.  Petrol prices are not a good indicator of inflation, being dictated by oil prices.  Oil has doubled in the past year, 30% up from a dip in August.  That is itself a large contributor to inflation, because its an input cost to so much as a material or for transportation.  Like fertiliser and foodstuffs.  And the reason for oil price increase is restriction of supply, in part from OPEC+ keeping production tight and in part US not permitting fracking to restart after the Covid shutdown. 

The past 10 years, subject of the tweet, has seen inflation average around 1.5%-2.5% depending on country.  Significant inflation is maybe 5-6%+ sustained.  In a robust economy a few % is absorbed by efficencies and doesnt cascade into the next cycle.  Hyperinflation, that everyone fears, is at least double digit.  Even then thats not the sort of numbers we see in places like Venezuela, more hyperbole than hyperinflation.  The other fear many economist have is that as the price increased are from supply shock (stuff not being made), rather than increasing demand, we could very quickly flip from a modest inflation to deflation. 

Edited October 28, 2021 by Martlet

[Minimalist]

4 minutes ago, Martlet said:

Inflation is a measure across all gods and services.  Petrol prices are not a good indicator of inflation, being dictated by oil prices.  Oil has doubled in the past year, 30% up from a dip in August.  That is itself a large contributor to inflation

Nearly all commodity prices are being dictated to. I dont know how you can attempt to distinguish one commodity from the other because the Cartel cant hide its inflated price.

[LawrenceChard]

4 hours ago, GoldCore said:

Does the velocity of money need to increase for inflation to take hold?

This week a post on Twitter garnered over 2,700 retweets and almost 20,000 likes. The tweet was from Cathie Wood, the founder of Arkinvest.

The tweet made the argument that inflation didn’t take hold after 2008-09 because the velocity of money fell instead, and since it is still falling that inflation is not a current issue either. However, Cathie Wood’s assertion inflation cannot happen because the velocity of money is falling has no basis in reality.

Here’s why…

What is Velocity of Money?

Dusting off our economic textbook: The velocity of money (velocity) is the average number of times per year that a dollar is spent in buying the total amount of goods and services produced in the economy.

The most common measure of velocity is GDP, which adds up all the goods and services produced by an economy divided by M2 money supply which adds up all the cash, chequing deposits, and other deposits that are readily converted into cash, such as savings accounts and money market accounts in the economy.

Velocity = GDP/M2 The chart below shows US M2 velocity, and we can indeed see that velocity has declined from a ratio of 1.8 in 1960 to 1.1 as of June 2021.

 

 

40 minutes ago, Martlet said:

That was not the claim in the tweet.  It's an explaination of why there has not been significant inflation since 2008, despite quantative easing increasing wide money.  It's demonstrably true.

Whenever I have taken the time and trouble of reading any of GoldCore's guides, blogs, podcasts, videos, and other utterances, I have often found them to be disappointing and confusing. They appear to consist mainly of third party material, often highly technical and obscure.

It is often difficult to tell which parts are GoldCore's, and which are third party. I often see what look like logical non-sequiturs, and some very unclear and ambiguous arguments. The main thing in common with most of them seems to be hype aimed at persuading people to buy precious metals, and to buy them from GoldCore. The methodology appears to be "Bullshit Baffles Brains", where an "expert" spouts a lot of technical material, so that the reader or listener gives up trying to understand it, and goes along with whatever is being proposed.

Certainly here, the title "Why Cathie Wood is Wrong About Inflation" is misleading, as the article then appears to demonstrate that she is wrong, rather than why she is wrong, which it fails to explain or clarify. This may be slightly pedantic of me, but is nevertheless a valid point.

It then fails to clarify whether she is accused of being wrong because in 2008/9 she thought inflation would take off, or now when she says "taking away its inflationary sting". Again, this may be slightly pedantic, but still a valid point.

My next point is not pedantic, and highlights a glaring factual inaccuracy and self-contradiction by the author:

"However, Cathie Wood’s assertion inflation cannot happen because the velocity of money is falling has no basis in reality." Wait!, she never stated that "inflation cannot happen...", this seems to be GoldCore misquoting Cathie Wood for some reason not explained, and best known to itself.

I am surprised to see that nobody else seems to have noticed this, but at this point it would be reasonable of me to conclude that the whole article was deeply flawed, confine it to the trashcan, and read something worthwhile instead, but...

I had already noticed this:

"The most common measure of velocity is GDP, which adds up all the goods and services produced by an economy divided by M2 money supply which adds up all the cash, chequing deposits, and other deposits that are readily converted into cash, such as savings accounts and money market accounts in the economy.

Velocity = GDP/M2"

If I read and interpret this correctly, the writer is saying that: "The most common measure of velocity is GDP" (velocity = GDP).

But he then contradicts himself with: "Velocity = GDP/M" This would only be true if M=1, which is unlikely to be true.

At this point, I am going to save my effort and sanity, and stop reading the article, or trying to make any sense out of it.

Until late last year, most of the GoldCore high profile guides were headed up by "Mr. Motormouth", Mark O'Byrne, Founder, Executive Director and Marketing & research Executive of Goldcore. On a previous post, I enquired politely what happened to Mark O'Byrne, but was met with deafening silence.

I did on one occasion have a "conversation" with him, and can state that he sounded nothing like he did in interviews on American news channels. On that occasion, he was actually correct to some extent as it turned out, but it did not need to be that way.

 

[Rll1288]

42 minutes ago, Martlet said:

Inflation is a measure across all gods and services.  Petrol prices are not a good indicator of inflation, being dictated by oil prices.  Oil has doubled in the past year, 30% up from a dip in August.  That is itself a large contributor to inflation, because its an input cost to so much as a material or for transportation.  Like fertiliser and foodstuffs.  And the reason for oil price increase is restriction of supply, in part from OPEC+ keeping production tight and in part US not permitting fracking to restart after the Covid shutdown. 

The past 10 years, subject of the tweet, has seen inflation average around 1.5%-2.5% depending on country.  Significant inflation is maybe 5-6%+ sustained.  In a robust economy a few % is absorbed by efficencies and doesnt cascade into the next cycle.  Hyperinflation, that everyone fears, is at least double digit.  Even then thats not the sort of numbers we see in places like Venezuela, more hyperbole than hyperinflation.  The other fear many economist have is that as the price increased are from supply shock (stuff not being made), rather than increasing demand, we could very quickly flip from a modest inflation to deflation. 

Actually I disagree with it just being 1.5/2.0 inflation over the last ten years... never believe the figures that bandied around... but thats my point.. many are still looking at the economy and finance through 100 year glasses... we are.. I believe moving away from cheap, cut price goods, within sustained growth... that always amused me... we are growing hard but prices are dropping... at some point that doesn't work... in my mind anyways 

[Bruce06]

She is a fund manager, so her comments are bias towards the holdings on hand.  She said no significant inflation coz she is rich...if ask a normal citizen, you must know most prices are going up remarkably, food, housing, petrol, daily accessories....too many have to mention.

[Zhorro]

I wonder what she does get right?

https://www.zerohedge.com/markets/cathie-wood-bought-25-million-zillow-tuesday-stock-cratered-another-20-today-0

[HerefordBullyun]

1 hour ago, Zhorro said:

I wonder what she does get right?

https://www.zerohedge.com/markets/cathie-wood-bought-25-million-zillow-tuesday-stock-cratered-another-20-today-0

Ive got a marzipan dildo investment fund she can invest in if she likes,