President Harry Truman famously wished for a “one-armed economist.”   He was tired of economists who say “on one hand . . . and on the other hand.”  Unfortunately, that is the nature of discussing the myriad aspects of economics.  There are 130 economic data points released most every month.  Economic data always contains reasons to worry about something.

Currently, most economic data is looking good.  Consumer confidence is up, which leads to the growth in consumer credit, which enjoyed the biggest increase in over three years.  Business confidence is also up, with Small Business Optimism reaching a new high last month for this cycle.  Small business is even more optimistic than big business, which is bullish.

On the one hand, this is proof that economic growth is increasing.

On the other hand, you’ll recall the formula GDP = PT = MV, which is that the Gross Domestic Product is equal to the total number of transactions in the economy multiplied by the average price per transaction, which is also equal to the money supply multiplied by the velocity of money.  As a young economics student, I was taught that the velocity seldom changes.  It measures the number of times a dollar is spent each year or the willingness of consumers to spend.  During the last recession, it dropped from about six to two, which is HUGE.  The result is that the big increase in the money supply did not increase inflation, if you remember Algebra 101.

But, what would cause velocity to increase?  Answer – increases in consumer confidence, consumer credit, and business optimism.  The problem is that money supply has to decrease at the same rate as velocity increases.  If not, inflationary pressures build.  It is difficult and indeed painful to decrease the money supply, suggesting the Fed will be slow to do so.  Watch out for an increase in velocity!  I might buy some gold when that happens.

Thank God we don’t have three arms . . . or do we?