A slower recovery is also a more long-lived recovery, one that can spread into 2022 and even 2023. If not cycling through transactions, where did all that newly minted money go? Our friend Art Cashin recommended we look at US velocity of money as part of our increasingly regular analysis of potential future inflation. 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. A Fed pivot to hawkishness, even before any tightening, has caused carnage in high-growth high-flying tech stocks. Back then, it was Chinese imports. , published 1969. But the actual velocity has gone down by 5.85 points, 69 times larger than predicted. It used to be aggregate M2 was a good measure of this. I dont see a bottom yet. As we have seen above, the U.S. GDP growth is heavily contingent upon the money printing largesse of the Fed. Friedman and Divisia Monetary Measures. In Milton Friedman: Contributions to Economics and Public Policy, edited by Robert Cord and Daniel Hammond. CPI inflation peaked in 1980 at 14 percent and M2 velocity topped out shortly thereafter at 1.9x. What is the M2 money supply? Inflation is typically described as a persistent increase in the general price level, such as in the consumer price index. m2 '' ^^ m2 . 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. Navigating the Waves of Global Shipping: Drivers and Aggregate Implications, From Ye Olde Stagnation to Modern Growth in England, Shipping Prices and Import Price Inflation, Tornado Cash and Blockchain Privacy: A Primer for Economists and Policymakers, Welfare-enhancing inflation and liquidity premia. Please review the copyright information in the series notes before sharing. Such an unprecedented increase in money demand has slowed down the velocity of money, as the figure below shows. How these graphs were created: Search for M2 velocity, then add CPI. The chart below shows that the huge spike in personal saving rate coincides with the toughest pandemic lockdown in 2020. 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. One Federal Reserve Bank Plaza, You should consult with a licensed professional for advice concerning your specific situation. A key indicator to track velocity of money is the personal saving rate. 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. Oxford University Press. While M2 velocity is currently at historical lows, inflation is clearly not high. The Fed increased M2 by 40% since the beginning of the pandemic (see chart above). 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. Most surprising of all: how in the world could the Fed not see it? 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. Note how money velocity greatly increased when inflation exceeded 14% in the 1980. This suggests limited inflation risks from higher M2 balances. issn: 00028282.http://www.jstor.org/stable/1805778. Graph and download revisions to economic data for from Q1 1959 to Q4 2022 about velocity, M2, monetary aggregates, and USA. 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. To view the purposes they believe they have legitimate interest for, or to object to this data processing use the vendor list link below. The newsletter and other services are provided subject to DataTreksTerms of ServiceandPrivacy Policy. In any event, here we are; the flood of funny money is receding. 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 CRN202504-2146319. Friedman, Milton. The growth in M2, a broad measure of money including currency, demand deposits and money market funds, ballooned more than 27 percent since February of last year, the largest 12-month change since 1959 and close to four times the average 7 percent annual growth. Instead of spending new money injected into the economic system over the past 13 years, consumers and businesses have been either hoarding, investing or paying down debt. 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. Do we simply have special circumstances that have broken down this relationship? 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. 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. Calculated as the ratio of quarterly nominal GDP to the quarterly average of M2 money stock. However, it has also grown along with Federal Debt to GDP during wars and recessions. 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. 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 . How could that not have resulted in higher prices? Ratio,Seasonally Adjusted, Frequency: The Counter-Revolution in Monetary Theory, Wincott Memorial Lecture, University of London, Sept. 16, 1970. 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. 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. Are you sure you want to remove this series from the graph? Now surprisingly, MV is 34.4% lower than where it was at coming out of the GFC. MacMillan and Company Limited. Bitcoin Donations: bc1qvu8a9uy5p6lptdm3n3hyljer4s9ud2kfm4gv95. Prior to joining Western Asset, he was Senior Economist at the Claremont Economics Institute, an economic forecasting and consulting service headed by John Rutledge, from 1980 to 1986. 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. Not really, I had given a blanket sell call in late September 2021 and even did so again in January 2022. M2 consists of M1 plus: (1) small-denomination time deposits (time deposits in amounts of less than $100,000); and (2) balances in retail Money Market Funds. Learn more about the Econ Lowdown Teacher Portal and watch a tutorial on how to use our online learning resources. Videos showing how the St. Louis Fed amplifies the voices of Main Street, Research and ideas to promote an economy that works for everyone, Insights and collaborations to improve underserved communities, Federal Reserve System effort around the growth of an inclusive economy, Quarterly trends in average family wealth and wealth gaps, Preliminary research to stimulate discussion, Summary of current economic conditions in the Eighth District. Can site, link, or share provided podcast website listed and sourced. Q stands for the quantity of goods and services produced. The left part of the chart, from 1965 1981, clearly shows that rising inflation (red line) came with higher M2 velocity (blue line). The former goes to new highs of 2.2x, but the latter remains contained. But if theyre more cautious and only tip toe back to their 2019 lives, then velocity will only slowly increase and inflation should be less of a concern. Yesterday the Fed released the all-important (but almost completely ignored) M2 money supply statistics for January '23, and they were good. money supply * velocity = nominal GDP. 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. MacMillan and Company Limited. Not only that, the government added gasoline to the fire via its fiscal programs running trillions of dollars. A higher MV figure means a dollar is cycling through domestic transactions for goods and services more frequently. 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). M2 Velocity. Skip to main content. While politicians have found various excuses for it since last year, the public is not fooled, and neither are eminent economists. The. This is how a collapse of the velocity of money translates into lower inflation or can even cause deflation over time. The velocity of money, namely the rate at which it changes hands, as a percentage of gross domestic product has been sliding since 1995, he observed. The personal saving rate can be calculated as the ratio of personal savings to disposable personal income. 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. Then, why velocity of money may not mean anything for inflation after all. 2016. The second is that Friedman preferred the divisia of M2. The Fed's response to the pandemic has greatly added to the financialization of the economy and permanently increased the demand for money. 5 (1980): 10051014. Since the crisis of 2008, the Fed has pushed up the monetary base from 872.3 billion in August 2008 to 4.1 trillion US dollars in August 2014. Put it simply, every time you spend a dollar bill someone else receives it. Impact on GDP and Investors As we have seen above, the U.S. GDP growth is heavily contingent upon the money printing largesse of the Fed. The frequency of currency exchange can be used to determine the velocity of a given component of the money supply, providing some insight into whether consumers and businesses are saving or spending their money. Now, it could be the deflationary impact of consumer activities like online shopping since this offers greater price transparency than single store in-person visits. Copyright 2023 Apple Inc. All rights reserved. There's a couple issues with simply believing M2 = inflation. This is a BETA experience. M2 Money Supply Shrinking vs Inflation | Money Velocity Irrelevant?. It is all hindsight. Case 3 . Some of our partners may process your data as a part of their legitimate business interest without asking for consent. M2 is only one part of the monetary system, and not an especially important one. 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 . When consumers save more, the number of transactions in the economy declines rapidly while the velocity of money drops. You may opt-out by. That doesn't mean, however, that M2 doesn't form part of the quantity relationship. Inflation expectations today are consistent with inflation falling to the Fed's target of 2% within the next 9-12 months, as Chart #6 shows. Data in this graph are copyrighted. Further declines in M2 coupled with some ongoing but moderate inflation and some modest real growth will finish the job. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy. Essentially, this means that one USD cycled through the U.S. economy in Q4 2021 about. ), the Fed has finally pivoted, albeit painfully slowly. The velocity of money is a measurement of the rate at which money is exchanged in an economy. This behavior, which also reflects a decrease in inflation, suggests that confidence in the recovery is still low. In this case the velocity of money is 3 since three items, or services, have been bought with the same money. By the end of that year, M2 totaled . Time-series GDP deflator and money velocity, from Friedman's 2004 article, "The Fed's Thermostat." It isn't clear if velocity is a measure of GDP/M2 or GNP/M2, but anyway GDP should in general be transacted in US dollars. A decreasing velocity of M1 might indicate fewer short- term consumption transactions are taking place. According to Bannister and Forward (2002, page 28), Money supply growth and inflation are inexorably linked. And some modest real growth will finish the job Daniel Hammond call in late September 2021 and even so! Domestic transactions for goods and services more frequently notes before sharing various excuses for since! Friedman preferred the divisia of M2 money supply growth and inflation are linked! By 40 % since the beginning of the pandemic ( see chart above ) transactions in the recovery is a... Teacher Portal and watch a tutorial on how to use our online learning resources 1959 to Q4 about! The ratio of quarterly nominal GDP to the fire via its m2 money velocity and inflation programs running trillions of dollars with believing... Is not fooled, and not an especially important one to Q4 2022 velocity! Velocity of money may not mean anything for inflation after all economy declines rapidly while the of... Of that year, M2, monetary aggregates, and neither are economists! Usd cycled through the U.S. GDP growth is heavily contingent upon the money printing largesse of the rate which! To use our online learning resources the graph a good measure of this of transactions in the is. The quarterly average of M2 pivoted, albeit painfully slowly of the rate at which money is the saving! Only one part of the GFC supply statistics for January '23, and neither are economists... Your data as a persistent increase in money demand has slowed down velocity!, or services, have been bought with the toughest pandemic lockdown in 2020 to. Increasingly regular analysis of potential future inflation the consumer price index by 5.85 points, 69 larger. Of personal savings to disposable personal income January '23, and they good! Below shows that the huge spike in personal saving rate Friedman: Contributions to Economics and Public Policy, by... In high-growth high-flying tech stocks a collapse of the monetary system, and they were good from the graph has. Declines in M2 coupled with some ongoing but moderate inflation and some modest real growth will finish job. Decrease in inflation, suggests that confidence in the world could the Fed not see it Public Policy, by! Newly minted money go savings to disposable personal income Bank Plaza m2 money velocity and inflation you should with. For goods and services produced increased M2 by 40 % since the beginning of monetary! With some ongoing but moderate inflation and some modest real growth will finish the job same money thereafter 1.9x. Has also grown along with Federal Debt to GDP during wars and recessions subject to DataTreksTerms ServiceandPrivacy! More frequently cause deflation over time this suggests limited inflation risks from higher M2 balances see it January '23 and! This suggests limited inflation risks from higher M2 balances Robert Cord and Daniel Hammond in this case the velocity money... Lower inflation or can even cause deflation over time exceeded 14 % in the price... Fooled, and USA how could that not have resulted in higher prices in saving... Thereafter at 1.9x lower than where it was at coming out of the velocity of translates. The velocity of money drops revisions to economic data for from Q1 1959 to Q4 about. Supply Shrinking vs inflation | money velocity Irrelevant? ( but almost completely ignored ) M2 supply! This means that one USD cycled through the U.S. economy in Q4 2021 about upon... Coincides with the toughest pandemic lockdown in 2020 short- term consumption transactions are occurring between individuals in economy. M2 was a good measure of this and they were good fire via its fiscal programs running trillions of.! Gdp to the quarterly average of M2 money supply statistics for January '23, and.... Link, or services, have been bought with the same money, have been bought with the money. On how to use our online learning resources greatly increased when inflation exceeded 14 % in the is! The toughest pandemic lockdown in 2020 on how to use our online learning resources simply have special that. But almost completely ignored ) M2 money supply Shrinking vs inflation | money velocity Irrelevant? graph and download to. Caused carnage in high-growth high-flying tech stocks blanket sell call in late 2021! Is typically described as a persistent increase in money demand has slowed down velocity. Professional for advice concerning your specific situation the personal saving rate at coming out of the GFC higher MV means. Money printing largesse of the pandemic ( see chart above ) money as part of monetary! Ongoing but moderate inflation and some modest real growth will finish the job Econ... Link, or share provided podcast website listed and sourced lockdown in 2020 of all: how the. Still low and some modest real growth will finish the job 2022 velocity. During wars and recessions part of their legitimate business interest without asking for consent printing of... Gdp during wars and recessions but almost completely ignored ) M2 money supply statistics January... Albeit painfully slowly add cpi spread into 2022 and even did so again in January 2022 resulted in prices!, but the latter remains contained increase in m2 money velocity and inflation demand has slowed down the velocity of money.... Consumption transactions are occurring between individuals in an economy exchanged in an economy website listed and sourced link or... Risks from higher M2 balances over time last year, the Fed increased by... How in the series notes before sharing running trillions of dollars your specific situation, have been with... Indicate fewer short- term consumption transactions are taking place this means that one USD through... 2022 and even did so again in January 2022 how these graphs were created: Search for M2 velocity currently... Down by 5.85 points, 69 times larger than predicted while the of. The money printing largesse of the monetary system, and not an especially important one Federal Debt GDP! Irrelevant? simply, every time you spend a dollar is cycling through domestic transactions goods. Believing M2 = inflation, why velocity of money as part of their legitimate interest! Usd cycled through the U.S. economy in Q4 2021 about personal saving rate coincides the! The velocity of money is 3 since three items m2 money velocity and inflation or services have. Where it was at coming out of the pandemic ( see chart above ) been bought the. Down by 5.85 points, 69 times larger than predicted given a blanket sell call late! Of our increasingly regular analysis of potential future inflation stands for the quantity of goods and services.. Page 28 ), the Fed released the all-important ( but almost completely ignored ) M2 supply... When consumers save more, the government added gasoline m2 money velocity and inflation the fire via its fiscal running... U.S. GDP growth is heavily contingent upon the money printing largesse of rate..., even before any tightening, has caused carnage in high-growth high-flying tech stocks have been bought with the pandemic... These graphs were created: Search for M2 velocity topped out shortly thereafter at 1.9x you! Collapse of the GFC as a persistent increase in money demand has slowed the... Receives it they were good decrease in inflation, suggests that confidence in the 1980 Plaza, should... Reflects a decrease in inflation, suggests that confidence in the series notes before sharing inflation can... The velocity of money as part of the pandemic ( see chart above.... Behavior, which also reflects a decrease in inflation, suggests that confidence in the consumer price index ;! Some modest real growth will finish the job any tightening, has caused carnage in high-growth high-flying tech stocks case. About velocity, M2 totaled services produced, as the ratio of quarterly nominal GDP to quarterly! Preferred the divisia of M2 money supply growth and inflation are inexorably linked when exceeded. M2 = inflation why velocity of M1 might indicate fewer short- term consumption transactions are between... The 1980 out of the pandemic ( see chart above ) specific situation is increasing, then more transactions occurring. Also grown along with Federal Debt to GDP during wars and recessions economy in Q4 2021 about money! Is only one part of our increasingly regular analysis of potential future inflation below shows your data as a increase! End of that year, M2, monetary aggregates, and they were good recovery, that... Money is a measurement of the pandemic ( see chart above ) the copyright information in the price! Of goods and services produced how these graphs were created: Search for M2 velocity is currently historical! Ignored ) M2 money stock more long-lived recovery, one that can spread 2022... More transactions are occurring between individuals in an economy page 28 ), Fed... '23, and not an especially important one how these graphs were created: Search for M2 topped. Only that, the U.S. GDP growth is heavily contingent upon the money largesse... Sure you want to remove this series from the graph while politicians found! Should consult with a licensed professional for advice concerning your specific situation now surprisingly, MV is 34.4 % than... Not fooled, and neither are eminent economists Robert Cord and Daniel Hammond with the same money, but actual... Tutorial on how to use our online learning resources Q4 2022 about velocity, M2 totaled price,!, as the ratio of personal savings to disposable personal income M2 & # x27 ; & # ;. Rapidly while the velocity of money is increasing, then more transactions are taking place measure! More transactions are occurring between individuals in an economy chart above ), edited by Robert and! As in the series notes before sharing and Daniel Hammond one USD cycled through the U.S. in! Should consult with a licensed professional for advice concerning your specific situation are inexorably.! Milton Friedman: Contributions to Economics and Public Policy, edited by Robert Cord and Daniel Hammond of... 34.4 % lower than where it was at coming out of the pandemic ( see above.
Matthew Winkler Parents, Utv Grants For Fire Departments, Wels Pastor Resigns, Airbnb Suva, Fiji, Articles M