In addition to positive GDP data, FRED (the Federal Reserve Bank of St. Louis) also reported the fourth consecutive increase in both M1 and M2 velocity, the rate at which US currency changes hands. (take a minute to read the “Background on economic Velocity” below). After FRED’s previous report on velocity in May 2018 (see my earlier blog post) I predicted the recovery begun by President Trump was sustainable based three previously consecutive quarterly increases in velocity.
See the FRED graphs below:
Note the sustained downward trend in M1 and M2 velocity during the eight years of the Obama administration and recovery after President Trump taking office.
Federal Reserve Bank of St. Louis
Velocity of M1 Money Stock - July 29, 2018
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Federal Reserve Bank of St. Louis
Velocity of M2 Money Stock - July 29, 2018
While the good news was eagerly reported by the Trump administration, the President’s detractors did their best to discredit the data citing residual recovery trends from the Obama administration (untrue as I will illustrate). Over the years I’ve found that velocity data reported by FRED provides the most telling indicator of the US economy as it mirrors the mood of the broader US population’s spending and savings habits. Because velocity data are reported quarterly (and their meaning/existence obscure to most) they are rarely discussed in financial news reporting. The media more actively observes the myopic daily DOW and NASDAQ market closings and ignores the long time constant required for more accurate quarterly data collection and reporting (such as M1, M2 velocity).
In celebrating President Trump’s recent economic success (confirmed by velocity data forecasting and current GDP reporting) it occurred to me the same velocity data provides a glaring illustration of the complete failure of Barack Obama’s economic policy. In the years preceding Barack Obama the excursions of M1 and M2 velocity tracked (and often anticipated) the rise and fall of the US economy. Note that during Obama’s presidency, both M1 and M2 velocities began a steep sustained decline (for eight consecutive years) until the election of President Trump. Upward movement in Obama era economic and stock market performance (along with its approximated < 1.9% GDP) is more attributable to the acumen of the major Wall Street investment firms, corporate America and their leadership. Wall Street firms utilizing programmed trading and investment in global markets outside the US played all segments of the market to optimize returns for their investors. Unfortunately the average consumer/homeowner didn’t share in this financial market success and experienced the larger downturn in the US economy. In my opinion, during his presidency Mr. Obama hijacked prevailing Wall Street successes and labeled them as his own.
In a separate observation Mr. Obama’s economic policies doubled our national debt during his presidency. An accurate illustration of this might be to assemble previous US Presidents 1 through 43 on one side of a number line with Obama positioned on the opposite side. During his eight year term of office Mr. Obama singularly doubled the national debt over the previous 43 presidents combined. Not an easy task.
President Trump’s critics claim his recent tax cuts and increased military spending have boosted the deficit further, but the current and projected increase in GDP (well above 4.1%) should soon offset this concern and ultimately lower our national debt. President Trump’s strategy for economic recovery and prosperity have been enormously successful. The continued support of his policies and allied candidates during the mid term elections will assure the continued recovery and future success of the US.
Background on Economic Velocity
As an important economic indicator, M1 and M2 velocity of the money supply requires your attention. I’ll again review the fundamentals of economic velocity for your reference and further study.
As defined by FRED (the Federal Reserve Bank of St. Louis):
“The velocity of money is the frequency at which one unit of currency is used to purchase domestically produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy. The frequency of currency exchange can be used to determine the velocity of a given component of the money supply, providing some insight into whether consumers and businesses are saving or spending their money. There are several components of the money supply,: M1, M2, and MZM (M3 is no longer tracked by the Federal Reserve); these components are arranged on a spectrum of narrowest to broadest. Consider M1, the narrowest component. M1 is the money supply of currency in circulation (notes and coins, traveler’s checks [non-bank issuers], demand deposits, and checkable deposits). A decreasing velocity of M1 might indicate fewer short term consumption transactions are taking place. We can think of shorter term transactions as consumption we might make on an everyday basis. The broader M2 component includes M1 in addition to saving deposits, certificates of deposit (less than $100,000), and money market deposits for individuals. Comparing the velocities of M1 and M2 provides some insight into how quickly the economy is spending and how quickly it is saving.”
Source: Federal Reserve Bank of St. Louis, Velocity of M2 Money Stock [M2V], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series
In addition President Trump has recently taken many additional steps to boost our economy further.
1. Tax cuts which increase individual income.
2. Eliminating the Obama health care penalty mandate.
3. Eliminated many Obama imposed regulations on businesses and new construction, encouraging new investment.
4. Eliminated many environmental regulations which inhibit business expansion (new oil pipeline construction).
5. Restored the coal industry inclusive of the clean coal initiative.
6. Challenging unfair excessive tariffs on US goods shipped overseas.
7. Repatriated US investments from overseas markets to the US. (Apple, Microsoft and others)
8. Protected strategic industries with tariffs to encourage domestic development (steel, agriculture, etc.)
9. Challenged unfair tariffs on US exports to China.
10. Signed an agreement with the European Union to establish free trade/no tariff markets.
11. Signed agreements encouraging Asian based manufacturers to invest in the US (Foxconn and others ).
12. Encouraging the Federal Reserve to temper interest rate increases to encourage investment and business expansion.
13. Eliminating regulations and encouraging investment in LNG distribution (Liquefied Natural Gas) making the US an energy exporter to Europe and the world.
14. Invoking penalties on IP (Intellectual Property) theft and unfair tariffs imposed on US companies.
15. President Trump has proposed a second round of tax cuts for consumers soon to be proposed to congress.
16. Larger scale defense funding now provides a more efficient economy of scale on volume purchases effectively reducing military costs as growth continues.
17. President Trump's insistence that NATO member nations meet their own commitment to 2% investment of their GDP will ultimately reduce US costs over time.
18. In addition to reducing prescription drug costs a new health care plan is being drafted to make better, less expensive health care available to all.
Given time President Trump believes these initiatives (and others) have real potential to boost our GDP above and beyond current 4.1% levels to 8 or 9%. Given the short term success in raising our GDP in record time it would seem President Trump's projected growth forecast for the economy is achievable.
Please join me in congratulating President Trump and his administration for this record economic achievement. Let's ensure this success story continues as the mid term elections approach.
Best regards,
Thomas D. Jay
Semiconductor Industry Consultant
Thomas.Dale.Jay@gmail.com
https://ThomasDaleJay.blogspot.com
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Thomas D. Jay is a member of the IEEE.
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References and acknowledgements:
[1] Federal Reserve Bank of St. Louis, Velocity of M2 Money Stock [M2V], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series
[2] whitehouse.gov
