There is a huge disconnect between the velocity of money and Employment Population Ratio. This fact will have an impact on inflation, interest rates, and what you can consider as a hedge against inflation when it finally strikes.
I have read a very good, logical, and very short article written by Vuk Vukovic published in Seeking Alpha. I picked up a few excerpts from it and then added my own comment in italics at the very end. The article talks mainly about Bitcoin, but I do not believe that Bitcoin is a good hedge against anything due to volatility (but it can still turn out to be a good risky investment). But Vuk made in his article a perfect explanation of what is currently normal and why as far as inflation and interest rates. Bold Highlights are my creation. Vuk writes:
“Consider the following graph depicting two very accurate indicators of the real economy - the velocity of M2 money, and the Employment-population (EP) ratio. The velocity of money measures the circulation of money in the economy, i.e. how fast goods and services are bought and sold. It is calculated by dividing the M2 money supply with nominal GDP. It is usually a great indicator of economic activity. When it goes down it means that less money is circulating in the economy, less goods and services are being bought and sold, which implies a recession. If it is not recovering, it usually means that consumption is lower and hence the economic recovery will be slower. Source: St Louis Fed.
More people getting jobs increases spending, which should increase the circulation of money in the economy. Not since 2012.
Why? Remember, the velocity of money is defined as money stock over nominal GDP. The expansion of the money supply by the Fed has been consistently higher than nominal GDP growth throughout the past decade. This means that a lot of money has been created, but less and less of that money is circulating in the economy. It never got translated into the real economy. It is mostly hoarded in banks' balance sheets (see graph below). Hence no inflation.
Our societies are therefore converging towards a Japanese scenario where interest rates will have to continue to be low (don't expect 3-4% rates at any time over the next decade), monetary expansion will continue, the velocity of money will be low, and a large part of nominal GDP growth will be driven artificially. Banks and big companies will continue hoarding cash. This is now turning into pure psychology - as long as there is faith in such a system, growth will continue. This is the new normal.”
Here is my take on the interest rates and inflation:
a Long-lasting period of low interest will probably stay with us for a long time because governments do not want to pay high interest on their excessive debts. This is a very good entry point into residential real estate, which is considered the very best hedge against inflation. I believe that we will renew our mortgages in 5 years again in the low-interest-rate environment.
If you look at the history of prices of residential real estate, there were a few periods when real estate prices stagnated, even went in post crises of 2008 slightly down, but then always came a strong recovery. We are experiencing tick up as we speak - this time also brought by symptoms of COVID, but about it, next time.