Liquidity June 18, 2020

As of 6/18/20, Treasury reports tax revenue of 2.090 trillion versus 2019 revenue for the same date of 2.268t, a 178 billion short-fall.

The Treasury revenue serves as a fairly good proxy for liquidity in the market. The 178 billion short-fall suggests a liquidity deficit on the consumer side of the market. The COVID19 reliefs from the Fed went in two directions, to the consumer by way of the IRS and to the supply side by way of quantitative easing to banks and the supply side.

Three trillion went to tax-payers by way of the IRS. Personal  income for April 2020 reflects that distribution.

2020.                            Jan.            Feb.            Mar.            Apr
Personal Income.    19.018t.      19.122.        18.709.        20.675t. (Otherwise 17.675)
Fed COVID Response Program                                          3.0t
Discretionary PI.     16.730.        16.881.        16.532.       18.660
Savings.                                        1.391.                              6.149t     BEA.gov

Both of the above mechanisms of pandemic economic relief resulted in an increase in the money supply, M1. The M1 contributes just one multiple to the GDP, which is a product as its name implies. The other multiple, the more important one, is the velocity, sometimes called the turnover rate or just multiple. Economists don’t pay much attention to the velocity and that’s a mistake. GDP/M1=velocity, the rate of turnover or churn of dollars over time. The turnover better represents the energy in the economy. It’s the energy you feel on the street or in the stores. Velocity is the economy of the street.

Yr.         GDP.       M1.        Velocity
2020.    21.34t.     4.8173.    4.23
2019.    21.54.      3.92.        5.49
2018.     18.67.     3.73.        5.01

2007.     14.99.     1.37.       10.93


The Corona virus and our shut down severely arrested the velocity in our economy. It will be interesting to watch the recovery. The Fed struggles to protect our economy by various means. The Fed, however, can go only so far in reducing interest rates and adding to the M1. The interest rates help both the supply side of the market and the consumer side indirectly stimulating velocity. The addition to the M1 through quantitative easing, however, helps only the supply side. Redistribution of Capital through the IRS went to the consumer side. In that regard, the IRS reliefs checks were a very good thing but no substitute for jobs.

You can follow the liquidity numbers daily on: https://fsapps.fiscal.treasury.gov/dts/issues
Or the BEA at: https://www.bea.gov/news/schedule