For years pundits chastised Americans for not saving enough, but in the past few years savings rates have exploded from negative to positive 5%. An unintended consequence of that plus banks and companies building up their own cash on the balance sheets leads to the “velocity” of money to plummet.
Money needs to change hands in a vibrant society in the fair exchange of goods and services.
Unfortunately, a liquidity trap can occur and may be occurring now that does not bode well for the economy going forward.
Read more about this at the link before. I’ll keep you updated on this too in subsequent newsletters.
As I mention in my video above, Greece is a fascinating story unfolding. I wish it was only Greece, but we have a few other countries in Europe that will be following it in the headlines over the coming year.
This is a good article on a few dissimilaries between Greece and the United States.
Why do you care?
When you’re at a summer BBQ, some know-it-all guy is going to start getting all apocalyptic on the US. You need the ammo to refute that.
There is a significant amount of money being held by corporations at the moment.
$1.9 trillion. 7% of their cash. That’s the highest level since 1963.
This is rational (from their point of view) due to the uncertainty in the world, including mixed signals from Washington.
But as they reinvest in technology, efficiency, and new products, this bodes well for the longer term value of their firms, and ultimately our investment markets.
You’ll see me in the coming months talk about the bond markets, particularly as the Quantitative Easing (QE2) comes to a close this summer.
We have a huge federal deficit. We need people to buy Federal bonds to lend money to the government.
With the huge influx of money from the Fed in the past few months, foreign investors were squeezed out. Will they come back? The answer is not as simple as you’d think.
I’ll be writing more and more about this as the year goes by, particularly it’s impact on you.
