Posts Tagged ‘gdp’

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by @anarchyroll

China’s influence on the global economy is well documented. If you don’t know what it is; since the mid 1990s China has basically become the straw that stirs the drink that is the global economy. Why? After all Europe as a whole and the United States are technically bigger players with more liquidity in the markets.

The reasons are how much money has been moving into China because of their precedent busting annual economic growth rates, in addition to their purchasing of US government debt. All major international economic players have been investing in China two decades, and they basically own the United States the way a bank owns your mortgage or your credit card debt. China is the world economic HBIC whether people like to admit it or not, and they don’t.

They don’t like admitting it, but they’ll put their money there. Manufacturing, real estate, consumer goods purchases, GDP, and every economic indicator in China has been going one direction since the Clinton administration, up…until now.

To maintain their status of belles of the ball in addition to maintain what has appeared to be unmaintainable growth rates, China’s government has essentially been cooking the books to make their economy look stronger than it actually is. Ironically their downfall may be identical to the downfall of the US economy circa 2008, real estate.

Last season on VICE on HBO, the ghost cities of China were explored and showcased in crystal clear high-definition for the world to see. The Chicago Tribune recently did a feature on Chicago architecture firms building skyscraper after skyscraper in an architectural arms race in the new metropolises of China. The very well researched and written article showed the highlights and low lights of the urban migration of the Chinese population. Some of those low lights included more ghost buildings, ghost towns, unemployment, and environmental problems.

The economic numbers on paper aren’t matching up with the physical reality of the external world. Wow, I guess China is becoming more like the US every day. I kid, I kid, they are actually becoming more like Japan every day by taking steps very similar to that of the Lost Decade.

The other economic catastrophe shoe may be getting ready to drop. Although GDP growth grew, it is at its slowest pace in 15 years. Manufacturing and trade are both down, two cornerstones of China’s economic darling status. The only things that are sharply moving up are industrial bankruptcies and inflation.

If you’re still reading you’re probably wondering why you should give a shit. The answer to that is simple. If China goes into a recession or depression, so does the rest of the first world because anyone who invests has money tied up in China.  If a run on the bank occurs in China, what is to stop them from doing a margin call on the US debt they’ve been purchasing since the 90s? And if that happens, what exactly happens?

It may not be time to move all of your money into canned tomato soup and shotguns…yet. But it looks more and more like buying American may not just be for cars and furniture anymore. It might be time for anyone with a mutual fund to make sure their assets aren’t being remedied with any eastern medicine.

eanda logoby @anarchyroll

What is money velocity? It is the speed at which the M2 money supply moves from one transaction to another.  What is the M2 money supply? It is all the liquid cash assets in the country from cash, savings accounts, mutual funds, certificate of deposits (CDs), checking deposits, or basically any kind of money stored in any kind of account, or mattress if you’re old and senile.

How can money velocity be used to gauge economic strength? Because money velocity ends up being the ratio of the size of a country’s economy to the size of the money supply. So there shouldn’t be more cash than there is gross domestic product (GDP) or less than. If there is more/less, then inflation/deflation occurs as a market correction.

I may sound very smart with the above explanation, but a recent article in Bloomberg Businessweek did all the heavy lifting for me. The article is short, quick, to the point, and keeps everything in plain language, as I try to do with this blog.

The concept of money velocity fascinated me because; I had never even heard or come across the term before, was unaware it is a relatively accurate economic indicator, and was surprised that the slower money moves the safer we are from inflation or another recession. Why is that? Hasn’t the Fed been flooding the markets with freshly printed money for over three years? They have, but people and businesses aren’t spending it, they’re saving it. Which is good for now because inflation could stop the economic recovery in its tracks.

But the money will have to start flowing sooner than later. Especially as QE gets tapered off over the next 18 months. Fading out QE and fading in inflation wouldn’t do much damage to the economy. It would be like getting autumn before winter or spring before summer, our bodies acclimate to the changing weather because of a gradual transition. This could be the case with money velocity. It was refreshing to learn that the low money velocity we are seeing now is historically normal, and has in the 60s and 80s preceded boom periods.

But those booms were just bubbles. We all must keep one eye on Wall Street to make sure that our country isn’t held hostage by a bursting bubble again. That is why they teach consumer ed in high schools folks, it’s not just to give an elective teacher a pay bump.

So now you know what money velocity and M2 money supply are. It’s used as an economic indicator because of its ratio to GDP. Lower velocity means lower prices and deflation while higher velocity means higher prices and inflation. Drop those in conversation at the cocktail lounge but not the night club, depending on how fast you want to move the cash in your wallet to keep the other parties interested…