This blog has been silent for three months. I was waiting for the first estimate of third quarter GDP in order to calculate the income velocity of money, which as we have shown earlier, is a vital parameter in judging the health of the economy.

The graph of corrected money supply (we have considered sweeps too in our calculations) continued to rise until the end of September 2011 as seen in the graph below.

The income velocity of money is as seen in the graph below.

As can be seen, at the end of September 2011 we were exactly in the situation we were in at the beginning of 2006. This, if readers recall, was when housing starts began to fall, though the equity markets did not reflect the fall in money supply until more than a year later.

Someone (I think it was Popper) observed that interesting theories should make predictions that are easily falsified. Saying that it will rain in 2012 is too easy; a really interesting theory would predict that it will rain on 12 August 2012 but not on 1 September 2012.

I shall therefore go out on a limb and predict that in December 2012 the S&P 500 will touch 800.

Those to whom Corrected Money Supply and Income Velocity of Money (as we calculate it) seem like Greek may find it useful to read The Riddle of Money, Finally Solved.