Legend Art Cashin warns this may shock investors and create panic.
Eric King: “Art, you put out a note yesterday stating that we needed to take a look at the velocity of money. What is that looking like at this point? Any changes?
Art Cashin: “Yes, M2 has moved up. But perversely and in a countervailing sense, the Bank of St. Louis released the monetary base. The monetary base is what the Fed can do directly. If you can grow the monetary base, then ordinarily it would indicate that you can get monetary velocity and some inflation.
So let’s separate the two. The reason that I wrote about the velocity of money is that (up to now) it has been completely absent for the last 7 years. Now, the fact that the money supply has begun to grow is important because it could be a hint that money is picking up some velocity. That, in a traditional sense, is one of the things that can lead to inflation.
The Big Risk For The Fed
So it’s beginning to gain velocity but it’s also a potential real risk for the Fed. So far with all of the reserves that they have pumped into the system we have had little if any inflation. But if suddenly the velocity of money began to pick up sharply, they run the risk of that smoldering, non-inflationary look suddenly bursting into a wild inflation.
For completely different reasons you had that back in the amazing inflation in the Weimar Rebpulic in the 1920s in Germany. But initially inflation didn’t appear instantly. It was quiet, quiet, quiet, and then suddenly it (inflation) exploded.
So given that historical precedent, even though the methodologies are different, that makes me wary enough to keep an eye on M2 and whether we have velocity of money in the banking system.”
Eric King: “Art, you’ve been doing this for over half a century, what is your biggest fear right now?”
My Biggest Fear
Art Cashin: “My biggest fear is that if you have that accidental slip — if suddenly and unexpectedly monetary velocity began to pick up, the Fed would not find itself one step behind but probably 12 steps behind. Because at this critical moment they have announced that they are willing to tolerate a bit more inflation than ordinary because they are so concerned about the rest of the economic picture.
So I am concerned. As I say, it happened in a different fashion in the 1920s in (Weimar) Germany, and you can miss the gate. Inflation could begin to pick up as the velocity does and the Fed could find itself well behind in the game. That would be very unfortunate and have very bitter consequences.” Art Cashin discusses the implications of this for the gold market in his extraordinary audio interview that has now been released and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
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