Credit: Shutterstock photoIt is hard to get worked up about velocity of money. Sometimes it is rising going into a recession, sometimes it is falling. One general truth is that it has been slowing since the early 1980s.
The velocity of money has become a metric with little predictability for other economic metrics. A relevant post from the St. Louis Fed stated in part:
Of course there are general correlations - such as its relationship to inflation.
Even considering inflation, the correlations are far from perfect. But it is interesting to me that the trillions of dollars of quantitative easing had little apparent affect on the rate of decline in the velocity of money.
Is it possible that the distribution of wealth and income affect velocity of money? Logic dictates that the upper strata of wealth spends a far less percent of their income. And thus the more the inequality of wealth and income presents, the slower the velocity of money. From The Economist:
Is it just a coincidence the velocity of money slows at the same time wealth inequality is growing? And, at the same time, income inequality began growing. From the Center on Budget and Policy Priorities:
[Above graphic source: http://gabriel-zucman.eu/files/SaezZucman2014.pdf]
Passive income does add to the inequality - and is one of the major drivers. In 2017 the highest USA tax rate for ordinary income is 39.6% whilst capital gains is taxed at 20%. This artificially causes the upper income sector of the economy to favor investments over income due to tax savings.
Should the USA change its tax laws to close this loophole (capital gains taxed at a lower level than employment income) which is adding to inequality? Is it not in the interest of the economy to reward investing? And if spending is so critical to economic growth - is it logical the USA taxes spending? There are complex factors involved when considering using taxation to reduce income and wealth inequality.
Other Economic News this Week:
The Econintersect Economic Index for April 2017 improvement trend continues although the value remains in the territory of weak growth. The index remains below the median levels seen since the end of the Great Recession. Six-month employment growth forecast indicates modest improvement in the rate of growth.
Bankruptcies this Week from bankruptcydata.com: Adeptus Health
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
