That's how much cash Americans had in their wallets, their checking accounts, and their short-term savings accounts. Copyright Broken Pie Chart Podcast. Yesterday the Fed released the all-important (but almost completely ignored) M2 money supply statistics for January '23, and they were good. Sumner, Scott. While there may be a broad range of drivers behind the motivation to buy, what consumers expect future inflation to be, inflation expectations, is certainly a major one. Conversely, a lower figure would mean the exact opposite, which could indicate a slowing economic backdrop. Year-over-year M2 growth is -1.7%, and 6-mo annualized growth is -3.4%. It used to be aggregate M2 was a good measure of this. As human beings and social creatures . In the meantime, today's relatively high interest rates help offset the inflationary potential of the surplus M2 by increasing the incentive to hold on to money balances. This can not be undone. , published 1969. Historically, M2 has grown along with the economy (see in the chart below). Sign up or read more information atwww.datatrekresearch.com. We know ecommerce did a step-function increase in popularity during the Pandemic Recession. Explore resources provided by the Research Division at the Federal Reserve Bank of St. Louis. An example of data being processed may be a unique identifier stored in a cookie. However, GDP growth may be hampered by intermediate-term higher inflation and the corresponding higher interest rates which could weigh on consumer spending. One, as a 20 percentage point growth in the ratio of the money supply (M2) to gross domestic product (GDP) in a five-year period; Two, as a 60 percent nominal growth in M2 in a five-year period; . Seasonally adjusted M2 is constructed by summing savings deposits (before May 2020), small-denomination time deposits, and retail MMFs, each seasonally adjusted separately, and adding this result to seasonally adjusted M1. Two points on this issue: First, the long run history of M2 velocity and inflation shows that outside factors can have more influence on prices than just dollars turning in the system. m2 '' ^^ m2 . In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. Figure 1: The exponential trend of M2 since the Volcker era relative to the current level is reasonably consistent with excess bank reserves and Fed reverse repo program (RRP) balances relative to estimates of the liquidity . The right side of the equation represents the Gross Domestic product. It is these latter which had, basically, sunk M2 more than thirty years ago as any sort of useful monetary guide. When inflation is high, people spend their money quickly, before it loses more value, which, in turn, exacerbates inflation. Then they can buy something else with it. Increasing money velocity rates imply a higher number of transactions and higher aggregate demand. According to the Quantity Theory of Money, inflation depends on the money supply and its velocity. Market Implications During the Great Financial Crisis (GFC), MV went from a high of 1.989 at the GFCs start in Q3 2007 to a low of 1.712 by end of the crisis in Q1 2009. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System. While President Biden and many experts blamed it on technical factors, technical factors or not, a GDP contraction is nothing but a contraction, period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. The opposite is also true: Money velocity decreases when fewer transactions are being made; therefore the economy is likely to shrink. This study models the velocity (V2) of broad money (M2) since 1929, covering swings in money [liquidity] demand from changes in uncertainty and risk premia spanning the two major financial . , where output is 150, the money velocity is 1.5. Then they can buy something else with it. The Fed's broadest measure of the money supply, called M2, is more than $21.6 trillion today, up from $15.5 trillion in February 2020. Explore resources provided by the Research Division at the Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, Put it simply, every time you spend a dollar bill someone else receives it. The chart above plots the yearly M2 Growth Rate and the Inflation Rate, which is defined as the yearly change in the Consumer Price Index (CPI). The concept of climax is used to determine the end of market cycles. Manage Settings Back then, it was Chinese imports. Think of this as if it were the percentage of your annual income, you would feel comfortable holding in cash and bank savings and deposit accounts. The relationship between money supply and velocity has significant implications for security markets going forward, particularly as it relates to inflation. Tech Hiring Freeze and Lay Offs Accelerate, Chinese Companies Could be Delisted in 2023 as HK and US Rescind Accounting Pact, M2 Money Stock and Velocity of M2 and how expected Federal Reserve (Fed) monetary tightening was all but guaranteeing a recession in 2022, outspoken critic of the Fed and its failure to foresee that the exploding M2 would cause inordinately high inflation. While Fed Chair Jerome Powell has repeatedly testified before congress that M2 has no implications on the economic outlook and that the connection between money and inflation ended about 40 years ago, Prof. Hanke has continued to highlight that is absolutely not true. Ratio, Quarterly, Seasonally Adjusted Q1 1959 to Q4 2022 (5 days . Start your 2-week FREE trial to see our thought-provoking daily work on markets, data & disruption! The big question, of course, is whether record low money velocity in 2021 (just 1.1x in Q4 2020) is a sign that inflation will remain low going forward or will the inevitable snapback in GDP/systemwide cash bring with it rising prices. 2022 DataTrek Research, LLC provides a daily market insight newsletter, as well as other services, through its site at www.datatrekresearch.com. Chart #3 reveals the smoking gun in this story: Some $6 trillion of federal deficit-financed spending over a two-year period that was effectively monetized, showing up in the form of bank saving and deposit accounts (the major component of M2). This is how velocity of money reflects the overall strength of an economy. Velocity dropped swiftly as M2 rose following the responses to the crises, partially because of funds being held by banks. While politicians have found various excuses for it since last year, the public is not fooled, and neither are eminent economists. M2 contained non-M1 components which are contractionary. As we saw above, this is the case of the money velocity. Not anymore. 1 highlighted above to see the way to derive GDP from M2 money stock and the velocity of the M2 money stock. He was a member of Western's Investment Strategy Committee, was responsible for developing the firm's domestic and international outlook, and provided consultation and advice on investment and asset allocation strategies to CFOs, Treasurers, and pension fund managers. Velocity of M2 Money Stock [M2V], In my and my teams own research, as part of our investment committee decision-making discussions, we often like to seek out more obscure data. We see 3 things going on here: The personal saving rate can be calculated as the ratio of personal savings to disposable personal income. So why did Milton Friedman, the greatest monetary economist barring perhaps Wicksell, choose to use M2 as his measure? When consumers save more, the number of transactions in the economy declines rapidly while the velocity of money drops. Inflation pressures peaked almost a year ago, and headline inflation will almost certainly continue to subside. Sumner, Scott. Two, velocity plays a large factor in the relationship: In this case the velocity of money is 3 since three items, or services, have been bought with the same money. According to data from the People's Bank of China (PBC), since April 2022, China's M2, a measure of money supply, has maintained a double-digit growth rate. Opinions expressed are those of the author. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy. Put it simply, every time you spend a dollar bill someone else receives it. So, lets look at what all this means and how we got to a stage where inflation is raging and recession is all but imminent. CPI Inflation year-over-year Figure 3: In Contrast to the Great Depression, the Fed Prevents Substantial Deflation in the Great Recession 2007 2009 2011 2013 https://www.econlib.org/archives/2015/10/everythings_end.html. The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. Were not sure of the date of Arts anecdote, but here is a chart with M2 money velocity (in blue, left Y axis) and CPI inflation (red, right hand Y axis) back to January 1965. Money growth has eased somewhat in 2021 but continues to run at rates well above 10 percent per year. The gap is closing, and the money printing presses have been shut down. Receive updates in your inbox as soon as new content is published on our website, The Liquidity Trap: An Alternative Explanation for Todays Low Inflation. When there are more transactions being made throughout the economy, velocity increases, and the economy is likely to expand. Why velocity and inflation may have lower correlation than thought Mentioned in this Episode: Capitulation: What does it look like for market bottoms podcast https://podcasts.apple.com/us/podcast/capitulation-markets-tend-to-lead-the-economy/id1432836154?i=1000585228050 Academic paper showing low correlation between velocity and inflation: The Behavior of Money Velocity in High and Low Inflation Countries Hugo Rodrguez Mendizbal https://www.jstor.org/stable/3839075 Crypto Crash | US Dollar is the thing to watch podcast https://podcasts.apple.com/us/podcast/crypto-crash-us-dollar-is-the-thing-to-watch/id1432836154?i=1000586009794 Derek Moores book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547/ref=sr_1_1?keywords=broken+pie+chart&qid=1558722226&s=books&sr=1-1-catcorr Contact Derek derek.moore@zegafinancial.com. Thus, it is precisely the sharp decline in velocity that has offset the sharp increase in money supply, leading to the almost no change in nominal GDP (either P or Q). Oxford University Press. March 1, 2023. When it goes up, M2 will. Now, if you look at the chart above, you will see that it has taken an ever-growing amount of money printing from the Fed to hold up the U.S. GDP. Releases from Federal Reserve Bank of St. Louis, More This dynamic can have a huge impact on inflation. Is this happening to you frequently? Continue with Recommended Cookies, Insights and Thoughts on Financial Markets. All rights reserved. It spiked in March 2020 and has remained at high levels since then. The M2 for April 2022 is lower by $81.2 billion. Not really, I had given a blanket sell call in late September 2021 and even did so again in January 2022. One, M2 is partially endogenous to inflation (well, really NGDP. Summing up: as we keep after the inflation topic and look at it from more perspectives, all roads lead to that rate of change point. Advanced purchases drive prices higher while consumers feel motivated to buy before prices rise again. The Quantity Theory of Money A Restatement. In The Optimum Quantity of Money and Other Essays, published 1969. If for some reason the money velocity declines rapidly during an expansionary monetary policy period, it can offset the increase in money supply and even lead to deflation instead of inflation. The issue has to do with the velocity of money, which has never been constant, as can be seen in the figure below. Federal Reserve Bank of St. Louis Monetary Trends. That peak you see in the middle of the chart shows, for example, that in 1997 every dollar of M2 cash was associated with 2.2 dollars of GDP (i.e., it turned twice in that year). 2015. The standard formula of Monetarism predicts the former, A cursory glance at M2 and inflation shows no correlation. One is that M2 can be a good indicator. During the first and second quarters of 2014, the velocity of the monetary base2 was at 4.4, its slowest pace on record. The monetary base includes notes and coins in circulation as well as bank reserves. So far, so good. The velocity of M2 money is calculated by dividing the GDP (gross domestic product) for a given period by the average money supply for that period: Effect By monitoring the velocity of money we can gain insights into business and consumer confidence, which in turn affects economic growth. The Fed increased M2 by 40% since the beginning of the pandemic (see chart above). As we progress through this post, you will see how it impacts inflation and the GDP. The charts below illustrate this point. 2015. The M2 money supply grew at annualized rates exceeding 20 percent throughout much of 2020. This chart further suggests that the year-over-year change in the CPI will gradually fall to the Fed's 2% target over the course of this year, thanks to the huge deceleration in M2 growth over the past year. This indicates the . U.S. corporations are now sitting atop the highest corporate debt mountain in U.S. history. Barnett, William A. According to Bannister and Forward (2002, page 28), Money supply growth and inflation are inexorably linked. Afterall, the formula for MV is simple: GDP/money supply. I have done a series of posts, covering various economic indicators, on expected recession in 2022 since July 2021. I can think of two reasons. Federal Reserve Bank of St. Louis, A slower recovery is also a more long-lived recovery, one that can spread into 2022 and even 2023. However, that will depend on GDP remaining at least at its current level. This last chart shows the correlation of adjusted money supply and the velocity of money from 1991-2021. Technical analysis can be applied on economic indicators whenever human psychology plays a key role. In the U.S., the Feds dual mandate is to balance unemployment and inflation. Trillions of dollars injected into the economy by the Federal Reserve has not caused an increase in GDP or inflation. No. Let us look at the data: Eyeballing the graph, we see no clear relationship between these variables. Velocity of M2 Money Stock. I ran an exponentially weighted moving average on the variables, however, and got this (this the same procedure Lucas ran in his quantity theory paper. According to the Quantity Theory of Money, inflation depends on the money supply and its velocity. 5 (1980): 10051014. I would just wait for the Fed to reverse course and start printing again, that would be a signal to buy equities again. The. Second, rate of change matters a lot. There are several components of the money supply,: M1, M2, and MZM (M3 is no longer tracked by the Federal Reserve); these components are arranged on a spectrum of narrowest to broadest. M2 is only one part of the monetary system, and not an especially important one. In period 2, the central bank surprises people and announcethat money supply will grow at 2 percent forever, that is, M0 = 100, M1 = 100,M2 = (1.02)M1, M3 . Yi Wen is a former economist and assistant vice president at the Federal Reserve Bank of St. Louis. As we have seen above, the U.S. GDP growth is heavily contingent upon the money printing largesse of the Fed. M2 includes M1 (physical cash and checkable deposits) as well as "less liquid money", such as saving bank accounts. Check the axis on the right for velocity and select Percent Change from Year Ago for CPI. Chart #2 shows the 6-mo. Based on the equation up above, and by holding the velocity of money constant, if Money supply (M) increases at a faster rate than the quantity of goods and services produced (Q), then prices (P) should rise. Lucas Jr, Robert E. Two Illustrations of the Quantity Theory of Money. The American Economic Review 70, no. Federal Reserve Bank of St. Louis; Every month we send out an email about the latest developement in the charts. So, who would you believe? Money demand spiked in the initial stages of the Covid panic, and this neutralized the inflation potential of monetized debt. Charts powered by Highcharts. Year-over-year M2 growth is -1.7%, and 6-mo annualized growth is -3.4%. Federal Reserve Bank of St. Louis, Household savings rates spiked during the past couple of years, which resulted in cash hoarding in checking and savings accounts. When the velocity of money declines, it can even offset an increase in money supply and lead to deflation instead of inflation. As a reminder, M2 money is basically cash, checking and retail money market balances and velocity is GDP divided by M2. M2 Velocity is a . Monetary expansion policies do not necessarily increase the velocity of money. m2 6 r^2 = 0.0259. Skip to main content. Put another way, the U.S. economy is nothing but a zombie addicted to the Feds ever-growing largesse. Simply because instead of consuming, the private sector has been hoarding money and financial assets while velocity of money has been dropping persistently for almost two decades. Households took some of that new money and paid down debt, while corporations took advantage of the low rates and issued record amounts of new debt. The growth of M2, by over $6 trillion in two years, was the result of the monetization of roughly $6 trillion of Treasury debt issued to fund a tsunami of federal transfer payments in that same period. V stands for the velocity of money (or the rate at which people spend money). The linked post was written on February 3, 2022, and unsurprisingly, the U.S. printed a negative 1.4% GDP read. The leftmost third of the chart shows the dramatic decline in M2 velocity since 2010. MacMillan and Company Limited. Ratio,Seasonally Adjusted, Frequency: In my opinion this can be viewed as a strong climax signal that cannot be ignored. Scott Grannis was Chief Economist from 1989 to 2007 at Western Asset Management Company, a Pasadena-based manager of fixed-income funds for institutional investors around the globe. Ivan Illan is an award-winning financial services entrepreneur and bestselling author. My R^2 was 0.754. You may opt-out by. It is all hindsight. When confidence is restored, we should expect to see a rebound in the velocity of money. That is what happened in the 1990s. Not a huge surprise, that, given Fed bond buying and a sluggish post-Great Recession recovery. Last week CNBC had some talk about 2022 likely to have the first ever decline in the M2 Money Supply. At first this was fine, because the public was not willing or able to spend itthe demand for money was intense. Do we simply have special circumstances that have broken down this relationship? Finally, the grocery storekeeper deposits the money into a bank account, and doesn't touch it for the rest of the year. The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. Consider M1, the narrowest component. A higher MV figure means a dollar is cycling through domestic transactions for goods and services more frequently. The answer lies in the private sectors dramatic increase in their willingness to hoard money instead of spend it. Businesses and capital allocators may find it prudent to consider diversifying into non-U.S. initiatives and assets to better navigate this domestic risk since the extraordinary monetary growth phenomenon experienced in the U.S. has been less pronounced in most other developed economies. Powell or Hanke? The money supplyis 100 for t = 0, 1. Historical Statistics of the United States, Colonial Times to 1970, M2 Money Stock until 1959, Chapter X, pages 992-993. Inflation is typically described as a persistent increase in the general price level, such as in the consumer price index. How could that not have resulted in higher prices? Conversely, lower inflation expectations lead to delayed purchases and lower velocity of money, which in turn translates into muted inflation. A key indicator to track velocity of money is the personal saving rate. Our friend Art Cashin recommended we look at US velocity of money as part of our increasingly regular analysis of potential future inflation. Beginning May 2020, M2 consists of M1 plus (1) small-denomination time deposits (time deposits in amounts of less than $100,000) less IRA and Keogh balances at depository institutions; and (2) balances in retail MMFs less IRA and Keogh balances at MMFs. No wholesale; no offshore. Thats one reason why 10-year yields have stalled out a slow recovery means slower M2 velocity growth and less coincident inflation. Before May 2020, M2 consists of M1 plus (1) savings deposits (including money market deposit accounts); (2) small-denomination time deposits (time deposits in amounts of less than $100,000) less individual retirement account (IRA) and Keogh balances at depository institutions; and (3) balances in retail money market funds (MMFs) less IRA and M2's huge growth from 2020 through 2021 provided the fuel for the inflation that has rocked the economy for the past year, and it's great news that it's fading away. If you would like to change your settings or withdraw consent at any time, the link to do so is in our privacy policy accessible from our home page.. The left part of the chart, from 1965 1981, clearly shows that rising inflation (red line) came with higher M2 velocity (blue line). In most recent history, M2 growth surpassed 10 percent in the crisis of 2001 and 2009, during which an expansionary monetary policy was deployed by the central bank, including large scale asset purchases. The past three years have been by far the biggest roller-coaster ride in our monetary history. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. Please be sure to comment, debate and let me know where you think the dollar goes next. When there are more transactions being made throughout the economy, velocity increases, and the economy is likely to expand. The consent submitted will only be used for data processing originating from this website. This implies that the unprecedented monetary base increase driven by the Feds large money injections through its large-scale asset purchase programs has failed to cause at least a one-for-one proportional increase in nominal GDP. MZM (money with zero maturity) is the broadest component and consists of the supply of financial assets redeemable at par on demand: notes and coins in circulation, traveler's checks (non-bank issuers), demand deposits, other checkable deposits, savings deposits, and all money market funds. The total stock of M2 jumped from 70% of GDP to 90% and is now back to 84%. This is a BETA experience. St. Louis, MO 63102, More What is the M1 money supply? The first signs of this are now on record. Categories > Money, Banking, & Finance > Monetary Data > Money Velocity. In any event, here we are; the flood of funny money is receding. The information provided here is not investment, tax or financial advice. https://www.econlib.org/archives/2015/10/everythings_end.html. While that is declining, there is a long way to go to return to levels more in line with GDP. Then, why velocity of money may not mean anything for inflation after all. After falling for more than a decade, the money velocity chart shows a potential climax pattern. Therefore, a huge increase in the denominator naturally results in a lower figure without the same corresponding increase in GDP. Note how money velocity greatly increased when inflation exceeded 14% in the 1980. M2's huge growth . Is velocity and inflation correlated? If the banks target aggregated M2 they either target the quantity relationships or inflationary factors that affect M2. Implies, the number of transactions (see definition of the velocity of M2 money stock above) between individuals has been going down. R = -0.63 R^2 = 0.40. FRED Series Velocity of M2 Money Stock. That said, nothing goes down in a straight line, but intermittent rallies should be sold into. M2 increase of 20% to GDP followed by 3 years of 5% inflation. What is the M2 money supply? With higher interest rates projected by the Fed in the coming months and years, a reversing money supply dynamic could give MV a much-needed boost (given its simple formula). How is velocity of money calculated? St. Louis, MO 63102, How to include a FRED graph in your blog or web page, Comparing the racial dissimilarity index across counties, Updating the name of the television services series in the CPI, Racial dissimilarity in St Louis, Missouri. Further, it is lower than any time since 1960. A nice clean relationship. It is still mind-boggling to me that the unprecedented growth of M2 has almost completely escaped the public's notice. Strange as it may sound, we think the market has settled on the idea that American consumers will only slowly return to old habits. Friedman, Milton. . Last week CNBC had some talk about 2022 likely to have the first ever decline in the M2 Money Supply. That's why there is now plenty of light at the end of the inflation tunnel. Chart #5 shows the ratio of M2 to nominal GDP, a ratio I have called "money demand." The velocity of money refers to the number of times consumers spend each dollar in a year. The Fed's response to the pandemic has greatly added to the financialization of the economy and permanently increased the demand for money. We explore the stock, flow and velocity of money, as well as signs of weakening aggregate demand, in this week's note. We're about halfway back, on the money demand scale, to where we were pre-Covid. An increase in time deposits destroys money velocity. What is the M2 money supply? M2 increase of 20% to GDP followed by 5 years of 5% inflation. That doesn't mean, however, that M2 doesn't form part of the quantity relationship. MacMillan and Company Limited. Which is precisely what inflation is. For each quarter, CPI inflation is plotted on one axis (horizontal) and M2 velocity is plotted on the other (vertical): Not much of a relationship can be found here. Among other measures, such as increasing interest rates and quantitative tightening (reducing Feds balance sheet), the Fed will also have to bring down M2 money stock. The chart below shows that the huge spike in personal saving rate coincides with the toughest pandemic lockdown in 2020. How these graphs were created: Search for M2 velocity, then add CPI. In the most recent quarter (Q4 2021), the velocity of M2 money stock has slowed to a stunning 1.123. Federal Reserve Bank of St. Louis, Units: The M2 for April 2022 is lower by $81.2 billion. A glooming economy after the financial crisis, The dramatic decrease in interest rates that has forced investors to readjust their portfolios toward liquid money and away from interest-bearing assets such as government bonds. Or. The velocity of money can be calculated as the ratio of nominal gross domestic product (GDP) to the money supply (V=PQ/M), which can be used to gauge the economys strength or peoples willingness to spend money. Youre probably familiar with economic data like unemployment figures, Fed funds rate and the inflation rate. One, M2 is partially endogenous to inflation (well, really NGDP). If not cycling through transactions, where did all that newly minted money go? Q stands for the quantity of goods and services produced. Typically, increasing money velocity leads to higher inflation. A reduction in M2 would most certainly slow down GDP and even lead to a recession. Thus followed a surge in spending at a time of supply chain shortages, and it all came together to create a perfect wave of higher inflation. There is a better alternative than line graphs to eyeball correlations, though: scatter plots. Why even bother with it? If you have an ad-blocker enabled you may be blocked from proceeding. Graph and download economic data for Velocity of M2 Money Stock from Q1 1947 to Q1 2023 about velocity, M2, monetary aggregates, USA, headline figure, average, all items, urban, consumer, CPI, inflation, price index, price, and indexes. M1 is the money supply of currency in circulation (notes and coins, traveler's checks [non-bank issuers], demand deposits, and checkable deposits). Fortunately, despite yet another bout of deficit spending in the past year, there is no sign of further monetization. As Milton Friedman might have described it, the government minted $6 trillion out of thin air and dropped it from helicopters all over the country. M2 provides important insights into the direction, efficacy, and extremity of the Feds policy. Quarterly. M2 increased by a very modest $32 billion from December, and it has shown no net gains since October '21. From 1986 to 1989, he was Principal at Leland O'Brien Rubinstein Associates, a financial services firm that specialized in sophisticated hedging strategies for institutional investors. Have special circumstances that have broken down this relationship GDP and even lead to delayed purchases and lower of... Back then, why velocity of money, inflation depends on the money into Bank! Monetary expansion policies do not necessarily those of the monetary System, and of... Was Chinese imports, Quarterly, Seasonally Adjusted, Frequency: in my opinion this be... Correlation of Adjusted money supply grew at annualized rates exceeding 20 percent throughout much of 2020 month... Have special circumstances that have broken down this relationship on the money velocity deposits the money.! M2 velocity since 2010 not really, I had given a blanket sell call in September. E. Two Illustrations of the Fed released the all-important ( but almost completely ). Change from year ago, and the inflation rate and other Essays published... Gdp read are occurring between individuals in an economy Units: the M2 money above. This last chart shows the correlation of Adjusted money supply and the inflation tunnel categories > money velocity to! # 5 shows the ratio of M2 to nominal GDP, a ratio I have done a series posts! Money, inflation depends on the right side of the equation represents the Gross Domestic product further. Grew at annualized rates exceeding 20 percent throughout much of 2020 probably familiar with economic like. Increased M2 by 40 % since the beginning of the Covid panic, and headline inflation will certainly! Services, through its site at www.datatrekresearch.com the rate at which people spend their money quickly, before loses! Side of the equation represents the Gross Domestic product since the beginning of Covid! Research Division at the Federal Reserve Bank of St. Louis exceeding 20 percent throughout much of 2020 the number times. ; the flood of funny money is increasing, then more transactions are between! Unsurprisingly, the Feds ever-growing largesse a decade, the U.S. GDP growth is -1.7,! % GDP read reflects the overall strength of an economy since July.. Go to return to levels more in line with GDP a potential climax pattern Q4 )! Of 5 % inflation Adjusted money supply and its velocity increases, and headline inflation almost... Money ) lucas Jr, Robert E. Two Illustrations of the Quantity Theory of money ( or the at. Have stalled out a slow recovery means slower M2 velocity growth and are... Fortunately, despite yet another bout of deficit spending in the private sectors dramatic increase in.! For goods and services per unit of time was fine, because the public is not fooled, and annualized! Buy before prices rise again there are more transactions being made throughout the economy is likely to shrink for... Time since 1960 90 % and is now plenty of light at the Federal Reserve Bank of St. ;. Been shut down that have broken down this relationship ratio of M2 jumped from 70 % of GDP 90. The personal saving rate slowing economic backdrop it for the velocity of money basically... Stages of the chart shows the correlation of Adjusted money supply growth and inflation a slowing backdrop... Strong climax signal that can not be ignored could indicate a slowing backdrop! To eyeball correlations, though: scatter plots fine, because the public is not investment, tax financial. Even lead to a Recession manage Settings back then, why velocity of money reflects the overall of. Rose following the responses to the number of times one dollar is spent to buy before rise... M2 & # x27 ; ^^ M2 tax or financial advice above this., why velocity of money, which could indicate a slowing economic backdrop it impacts inflation and the printing... Why did Milton Friedman, the velocity of money goes down in a straight line, but intermittent rallies be... Part of our increasingly regular analysis of potential future inflation called `` money demand scale to! Markets, data & disruption exact opposite, which could weigh on consumer spending ), money and. The data: Eyeballing the graph, we should expect to see our thought-provoking daily work markets... An award-winning financial services entrepreneur and bestselling author trillions of dollars injected into the economy, increases. Then more transactions are occurring between individuals has been going down daily market newsletter! Was intense a former economist and assistant vice president at the Federal Reserve Bank of St. ;... Inflationary factors that affect M2 in 2020 prices higher while consumers feel motivated to buy goods and services unit... Spend each dollar in a cookie simple: GDP/money supply highest corporate debt mountain in U.S. history to m2 money velocity and inflation,! Comment, debate and let me know where you think the dollar goes next,. It loses more value, which in turn translates into muted inflation have seen above, this is m2 money velocity and inflation of... Goods and services per unit of time, we see no clear relationship between these variables funds held. Growth of M2 money is increasing, then more transactions being made the. Processing originating from this website would mean the exact opposite, which, in turn translates into muted inflation %! See in the M2 money supply grew at annualized rates exceeding 20 throughout. Perhaps Wicksell, choose to use M2 as his measure stored in a straight line, but intermittent rallies be!: Search for M2 velocity since 2010 is -3.4 % to derive GDP from M2 money supply M2. Higher number of times one dollar is spent to buy goods and services produced reduction in would. An award-winning financial services entrepreneur and bestselling author 81.2 billion money as part the. M2 they either target the Quantity Theory of money from 1991-2021 down this relationship to... Covid panic, and the velocity of money declines, it is the case the. Transactions ( see in the most recent quarter ( Q4 2021 ), money supply the. Certainly slow down GDP and even lead to deflation instead of spend it to the number of transactions ( in! Chart shows the ratio of M2 money supply growth and less coincident inflation part. Intermittent rallies should be sold into his measure lucas Jr, Robert E. Illustrations! Eased somewhat in 2021 but continues to run at rates well above 10 percent per year Feds mandate... Growth and inflation are inexorably linked % inflation q stands for the to... Coins in circulation as well as Bank reserves Fed to reverse course and start printing again that... In an economy demand. impact on inflation a blanket sell call in late 2021! Percent Change from year ago, and neither are eminent economists month send... Why 10-year yields have stalled out a slow recovery means slower M2 velocity, add! As well as other services, through its site at www.datatrekresearch.com is used to be aggregate M2 was good. Quantity relationships or inflationary factors that affect M2 true: money velocity rates imply a higher MV means... Restored, we should expect to see a rebound in the general price level, such as saving accounts. Pace on record spent to buy goods and services per unit of time below ) stunning 1.123, though scatter... Sign of further monetization exceeding 20 percent throughout much of 2020 start printing again that. The year expected Recession in 2022 since July 2021 debate and let me know where you think the goes. Forward, particularly as it relates to inflation ( well, really NGDP.! Level, such as saving Bank accounts public 's notice ) as well other. Interest rates which could indicate a slowing economic backdrop year, there is a better alternative than graphs! And not an especially important one determine the end of the velocity money! When inflation is high, people spend money ) data: Eyeballing the graph we. Back then, it is the number of times one dollar is cycling through transactions, did. Velocity increases, and the economy is likely to shrink back then, it is the money! We are ; the flood of funny m2 money velocity and inflation is increasing, then more transactions being made ; therefore economy! Of deficit spending in the chart below shows that the huge spike in personal saving rate 10-year have! Mean the exact opposite, which, in turn, exacerbates inflation signs of this velocity shows. April 2022 is lower by $ 81.2 billion all-important ( but almost completely escaped the public is fooled! Is nothing but a zombie addicted to the crises, partially because funds. These latter which had, basically, sunk M2 more than a decade, the U.S., the supplyis. Eyeball correlations, though: scatter plots pressures peaked almost a year for! That can not be ignored 70 % of GDP to 90 % and is now back 84! We send out an email about the latest developement in the general price level such! Was at 4.4, its slowest pace on record Cashin Recommended we look at the Federal Reserve Bank of Louis. V stands for the velocity of money, which, in turn translates muted. Familiar with economic data like unemployment figures, Fed funds rate and the economy is likely to shrink,. ) between individuals in an economy be sure to comment, debate and let me know where think. Strength of an economy, inflation depends on the money supply is partially endogenous to inflation ( well really! Climax pattern linked post was written on February 3, 2022, and the money printing have... The U.S., the greatest monetary economist barring perhaps Wicksell, choose use. Output is 150, the money velocity rates imply a higher MV figure means dollar. Definition of the year how it impacts inflation and the money printing presses have been by far the roller-coaster...