MV = PQ
Diupdate
In this rough draft of an idea, I naively try to figure out the effect of the immense money printing, and the "true" value of inflation.
After BIS came out talking about the hidden debt, I began thinking about the "hidden" money. With such low money velocity, we cannot possibly feel the real effect of all that flood of money.
I am amazed from this chart. Mainly because I just realized that there is a ticker that measures money velocity besides the FRED:M2V. It has the impractical name of A14187USA163NNBR. And it provides us with very long historical data to analyze.
For us to have a remote hope of analyzing such extensive numbers, we simplify certain things. The title is the famous Milton Friedman equation (Quantity Theory of Money). Since I haven't studied finance, I just found out this equation. It was not famous for me. Yet, here I am, an unprofessional talking about finance.
The letters in the title's equation mean the following:
M stands for money.
V stands for the velocity of money (or the rate at which people spend money).
P stands for the general price level.
Q stands for the quantity of goods and services produced.
Info taken from Federal Reserve Bank of St. Lous
stlouisfed.org/on-the-economy/2014/september/what-does-money-velocity-tell-us-about-low-inflation-in-the-us
On the chart, there are two charts of the "fixed" SPX*Velocity. Because there are two separate tickers for velocity.
FRED has data on the US GDP only after 1947. So one of the differences between these charts could relate to it.
GDP in a period when QE didn't exist, was a meaningless statistic. Increase in productivity can't take you parabolically high like we see now.
The reason we use SPX*Velocity is the following: If you do some calculations on the MV=PQ equation and multiply by SPX we have:
SPX*Velocity (Chart) = SPX/M * GDP
In reality, this chart shows us the effect of the SPX bubble on GDP. Before 1947 there was horizontal movement.
If you think about it, until 1947 the fact that SPX*Velocity didn't grow, means that SPX is a good representation of GDP.
On the left handside of the equation is the chart, on the right is total product produced.
So now, the parabolic GDP is 100% due to the parabolic movement of SPX thanks to infinity-free-money-printing.
The money velocity tells us more. Because money was not fiat, people used to hoard it and not spend it. So we see a substantial drop from 4.8 to 2 in velocity, before the Great Depression. The same is now, but faster... for the last 20 years, money velocity has taken a skyfall. The slow drop in money velocity occured because money was precious and people kept it. Now it is not moving because there is a MASSIVE amount of it in circulation, but most importantly, because it is hidden, like the hidden debt BIS is looking for.
I know this idea is confusing. There is so much stuff that is hard to explain and visualize.
Let's think of a scenario. If/when the Dollar Milkshake commences, and someone goes bankrupt, the debt is deleted. Since the debt is deleted, let's say that the money is deleted as well. We realize that if the money supply goes incredibly low, it would be as if we "go back in time". The Dollar Milkshake, that will push it's value to incredible highs, is nothing more than turning back the clock in time. All these years everything lost their value, as well as dollar. The only debt that will remain and not go bankrupt, is gold. It is not debt, but it serves as one because it is technically currency.
This is an inverse-pyramid SPY_Master uploaded.
The fake money we have created costs a ridiculous amount compared to gold reserves. GDP has increased 100 times in the last 80 years. And SPX more than 3 times to GDP. This gives us an idea of just how much over-leveraged and overblown the stock market is.
Human values haven't increased 100 times. Hunger poverty and suffering hasn't gone down 100 times. And we are certainly not much wiser than ancient civilizations like the Greeks (perhaps much less wise).
This is a truly fixed SPX chart. And by fixed, I mean qualitatively. It looks like we are in a state like before the Great Depression. Very very bubbled. Who knows if more money printing will take place and take us off the chart.
To conclude, we can calculate inflation if we calculate the missing money velocity. SInce money doesn't circulate, there is low inflation. It is the product of money supply and velocity that matters. If velocity returns to normal levels (it certainly tries to), we look for an increase of 60% in velocity, which would push inflation much higher than now. Imagine the panic we will feel if inflation goes to 15% next year, let alone 60%.
I began writing this idea to calculate the inflation, but my mind went places... It's been fun writing.
Tread lightly, for this is hallowed ground.
-Father Grigori
After BIS came out talking about the hidden debt, I began thinking about the "hidden" money. With such low money velocity, we cannot possibly feel the real effect of all that flood of money.
I am amazed from this chart. Mainly because I just realized that there is a ticker that measures money velocity besides the FRED:M2V. It has the impractical name of A14187USA163NNBR. And it provides us with very long historical data to analyze.
For us to have a remote hope of analyzing such extensive numbers, we simplify certain things. The title is the famous Milton Friedman equation (Quantity Theory of Money). Since I haven't studied finance, I just found out this equation. It was not famous for me. Yet, here I am, an unprofessional talking about finance.
The letters in the title's equation mean the following:
M stands for money.
V stands for the velocity of money (or the rate at which people spend money).
P stands for the general price level.
Q stands for the quantity of goods and services produced.
Info taken from Federal Reserve Bank of St. Lous
stlouisfed.org/on-the-economy/2014/september/what-does-money-velocity-tell-us-about-low-inflation-in-the-us
On the chart, there are two charts of the "fixed" SPX*Velocity. Because there are two separate tickers for velocity.
FRED has data on the US GDP only after 1947. So one of the differences between these charts could relate to it.
GDP in a period when QE didn't exist, was a meaningless statistic. Increase in productivity can't take you parabolically high like we see now.
The reason we use SPX*Velocity is the following: If you do some calculations on the MV=PQ equation and multiply by SPX we have:
SPX*Velocity (Chart) = SPX/M * GDP
In reality, this chart shows us the effect of the SPX bubble on GDP. Before 1947 there was horizontal movement.
If you think about it, until 1947 the fact that SPX*Velocity didn't grow, means that SPX is a good representation of GDP.
On the left handside of the equation is the chart, on the right is total product produced.
So now, the parabolic GDP is 100% due to the parabolic movement of SPX thanks to infinity-free-money-printing.
The money velocity tells us more. Because money was not fiat, people used to hoard it and not spend it. So we see a substantial drop from 4.8 to 2 in velocity, before the Great Depression. The same is now, but faster... for the last 20 years, money velocity has taken a skyfall. The slow drop in money velocity occured because money was precious and people kept it. Now it is not moving because there is a MASSIVE amount of it in circulation, but most importantly, because it is hidden, like the hidden debt BIS is looking for.
I know this idea is confusing. There is so much stuff that is hard to explain and visualize.
Let's think of a scenario. If/when the Dollar Milkshake commences, and someone goes bankrupt, the debt is deleted. Since the debt is deleted, let's say that the money is deleted as well. We realize that if the money supply goes incredibly low, it would be as if we "go back in time". The Dollar Milkshake, that will push it's value to incredible highs, is nothing more than turning back the clock in time. All these years everything lost their value, as well as dollar. The only debt that will remain and not go bankrupt, is gold. It is not debt, but it serves as one because it is technically currency.
This is an inverse-pyramid SPY_Master uploaded.
The fake money we have created costs a ridiculous amount compared to gold reserves. GDP has increased 100 times in the last 80 years. And SPX more than 3 times to GDP. This gives us an idea of just how much over-leveraged and overblown the stock market is.
Human values haven't increased 100 times. Hunger poverty and suffering hasn't gone down 100 times. And we are certainly not much wiser than ancient civilizations like the Greeks (perhaps much less wise).
This is a truly fixed SPX chart. And by fixed, I mean qualitatively. It looks like we are in a state like before the Great Depression. Very very bubbled. Who knows if more money printing will take place and take us off the chart.
To conclude, we can calculate inflation if we calculate the missing money velocity. SInce money doesn't circulate, there is low inflation. It is the product of money supply and velocity that matters. If velocity returns to normal levels (it certainly tries to), we look for an increase of 60% in velocity, which would push inflation much higher than now. Imagine the panic we will feel if inflation goes to 15% next year, let alone 60%.
I began writing this idea to calculate the inflation, but my mind went places... It's been fun writing.
Tread lightly, for this is hallowed ground.
-Father Grigori
Catatan
When we analyze SPX, we have to differentiate between the US 1.0 and US 2.0Trendlines for example shouldn't mix between the two.
We let this instrument automatically draw trendlines from Jan. 01, 1950 until now.
The outer one, has a deviation of phi^2 (or phi+1)
The inner one, has a deviation of phi^2/2 (or (phi+1)/2)
Price had some very important touches throughout the years.
We better get high above the ribbon soon. And price must do this decisively.
Or is it too late?
Maybe this happens instead...
For some background on why I use this pattern, look at the following idea.
But probably, this happens: Stagflation!
Catatan
Look at DOW, trendlines auto-drawn in the same period, with one difference. DOW has trendlines with 1 Deviation and 2 Deviations. Instead of 1.618, 2.618 for SPX.
1950 is an important year, like 2022. Until 1950, DJI overperformed SPX. Like we witness now.
There's more... Look at US10Y
Catatan
What if...Catatan
The ceiling we have reached is NOT random.We draw a log-based retracement, on the A14187USA163NNBR * SPX chart from the top of the great depression to the bottom. We have reached the 3.0 retracement, pinpointed at 5442.61. The new ticker of SPX * M2V has reached a top of 5493.23 on the first week of 2022.
Yellow chart: Old ticker
White chart: New ticker.
Catatan
The real issue is that we had enormous QE, and a small fraction of it resulted in "growth" relative to money printed. The stock market increased as if we printed half the money we did. We don't know where the other half of money printed is.We should be 45% lower than we are now. We are nowhere near a bottom...
Catatan
Look at USOIL/SPXMore info in this idea
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