"Velocity is a ratio of nominal GDP to a measure of the money supply. It can be thought of as the rate of turnover in the money supply – that is, the number of times one dollar is used to purchase final goods and services included in GDP."
- ZIRP is promoted in 2008 against a systemic crisis, and is held firm to this day through thick and thin.
- QE policy is employed against a global deflationary backdrop even as the US economy outwardly appears relatively okay. In the absence of signs of inflation's effects (in precious metals and commodities), inflationary policy making continues and Goldilocks' porridge is just right.
- US T bond yields rise as part of a global bond rout as debt is repudiated. Various Fed jawbones then begin to chatter about a "taper" of QE policy and this paints them as buffoons, if the listener just takes a moment to actually look into the global macro and realize that rising yields are not by the Fed's decision.
- There is a strong likelihood that the financers of last decade's US consumer driven debt binge – China and Japan, each under economic stress – are negatively impacting the T bond market and there is nothing the Fed can do about it unless it wants to blow itself up trying to stem that tide.
- Enter the banking sector and a would-be interest rate spread play. Enter T2C, as we transition from what most players are currently still obsessed with, QE, to its inevitable withdrawal or transition; the afterburner stage if you will.
- Per the chart above, the banks could have a long way to go on the upside, at least relative to the S&P 500. It is going to come down to whether or not the inflation 'takes', as it did in the inflationary operation early last decade.
- But here the analysis hits a holding pattern because I am not a Swami and I do not make predictions. What we will do is watch the banks closely in nominal terms as well as in ratio to the S&P 500.
- If the operation is to succeed, the banks would one day be looked back upon as inflation's delivery mechanism if the velocity graph above takes one of its little interim upward hooks within its secular downtrend. This one graph is however, the ultimate picture of the case for deflationary resolution to the ongoing age of Inflation onDemand, which is inflation promoted against ongoing deflationary pressure.