I want to say one important thing in addition on this issue. There appears some confusion in the web stratosphere on one key metric around this subject. The positive correlation between money velocity and interest rates. Some observers have pointed to the historic correlation between the two as being supportive to forecast imminent money velocity increases as world wide interest rates are rising again albeit from historic low levels.
I want to say that this correlation is inverse and not a correlation ie quite the reverse.
The correlation is between real interest rates and money velocity. Not interest rates and money velocity. The two can be quite different. The US at present sees positive interest rates of around 1% on her 10 year T-bills. This is a head wind to money velocity not a tail wind. In the last couple of years even though rates have been falling real interest rates have been rising as inflation has fallen faster than interest rates. This is a crucial issue to consider when attempting to forecast money velocity increases!
Recall that in 2011 US inflation rates were touching 4% or 250 basis points higher than today’s inflation rate.
Normally as you head into an economic expansion rate rises lag the rises in inflation. Money supply and velocity expands as real rates stay negative. In effect risk takers are rewarded to expand credit, consume and take on investment, consumption and risk. Quite the reverse is occuring at present. Interest rates are rising as inflation falls. Risk takers are being negatively rewarded so given the inverse correlation money velocity could contract further.
