Thursday, May 5, 2016
Velocity affected most by the productivity of debt
“Functionally, many factors influence V, but the productivity of debt is the key,” Hoisington and Hunt propose. “Money and debt are created simultaneously. If the debt produces a sustaining income stream to repay principal and interest, then velocity will rise because GDP will eventually increase by more than the initial borrowing. If the debt is a mixture of unproductive or counterproductive debt, then V will fall.
Financing consumption does not generate new funds to meet servicing obligations. Thus, falling money growth and velocity are both symptomsof extreme over-indebtedness and nonproductive debt.”
From Jim Grant of the Interest Rate Observer
So besides there being the sin of low interest rates killing velocity, there is the sin of high and unproductive debt.