Some of our partners may process your data as a part of their legitimate business interest without asking for consent. 1). 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. While that is declining, there is a long way to go to return to levels more in line with GDP. By the end of that year, M2 totaled . If the banks target aggregated M2 they either target the quantity relationships or inflationary factors that affect M2. During the first and second quarters of 2014, the velocity of the monetary base2 was at 4.4, its slowest pace on record. 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. 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). Thousands of investors and financial journalists rely on Nick and Jessicas newsletter every day for their thought-provoking work on markets, data and disruption. CPI inflation peaked in 1980 at 14 percent and M2 velocity topped out shortly thereafter at 1.9x. It is all hindsight. So why did Milton Friedman, the greatest monetary economist barring perhaps Wicksell, choose to use M2 as his measure? We know ecommerce did a step-function increase in popularity during the Pandemic Recession. Now surprisingly, MV is 34.4% lower than where it was at coming out of the GFC. First, lets rearrange the Eq. The problem is that velocity of money is never constant. Series from Money Velocity. 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. Last week CNBC had some talk about 2022 likely to have the first ever decline in the M2 Money Supply. Do I qualify? M2 Money Supply Shrinking vs Inflation | Money Velocity Irrelevant?. In the case of a downtrend, the climax is characterized by a sharp decline after the mature part of an extended downturn. This could effectively pump the breaks on continued U.S. economic expansion and may even become a stronger headwind. 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. Ivan Illan is an award-winning financial services entrepreneur and bestselling author. I dont see a bottom yet. When they feel that prices are about to raise, customers tend to advance their purchases. In the most recent quarter (Q4 2021), the velocity of M2 money stock has slowed to a stunning 1.123. This means that every dollar in the monetary base was spent only 4.4 times in the economy during the past year, down from 17.2 just prior to the recession. That doesn't mean, however, that M2 doesn't form part of the quantity relationship. The opposite is also true: Money velocity decreases when fewer transactions are being made; therefore the economy is likely to shrink. This seems troubling. The M2 for April 2022 is lower by $81.2 billion. It's a psychological, self-reinforcing process. So far, so good. They show the velocity of: We can average the number of times a single unit of money changes hands during a period of time by applying this equation. 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. R= -0.98 R^2 = 0.97. Friedman and Divisia Monetary Measures. In. 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. Friedman, Milton. 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. Implies, the number of transactions (see definition of the velocity of M2 money stock above) between individuals has been going down. 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. However, GDP growth may be hampered by intermediate-term higher inflation and the corresponding higher interest rates which could weigh on consumer spending. Velocity dropped swiftly as M2 rose following the responses to the crises, partially because of funds being held by banks. He specialized in analysis of Federal Reserve policy and interest rate forecasting, and spearheaded the firm's research into Treasury Inflation Protected Securities (TIPS). Since then, M2 growth has turned negative, and today M2 is only $3.4 trillion above where it might have been in the absence of the Fed's "helicopter drop." 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. The. 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; . This behavior, which also reflects a decrease in inflation, suggests that confidence in the recovery is still low. Reuters Summary Major U.S. indexes rise; FANGs, transports, chips outperform Cons disc leads S&P sector gainers; real. m2 6 r^2 = 0.0259. Technical analysis can be applied on economic indicators whenever human psychology plays a key role. Oxford University Press. Q stands for the quantity of goods and services produced. By clicking submit, you agree that you have read and understand ourTerms of Service,Subscription Agreement, andPrivacy Policy, and hereby agree to be bound by them. Friedman, Milton. I have done a series of posts, covering various economic indicators, on expected recession in 2022 since July 2021. Money velocity (MV) isnt a complicated concept. Household savings rates spiked during the past couple of years, which resulted in cash hoarding in checking and savings accounts. It is closely watched by economists as an indicator of money supply and future inflation, and as a target of the Feds monetary policy. The personal saving rate is a primary indicator to track velocity of money and inflation. Case 3 . V stands for the velocity of money (or the rate at which people spend money). 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. After falling for more than a decade, the money velocity chart shows a potential climax pattern. ). Which is precisely what inflation is. The total stock of M2 jumped from 70% of GDP to 90% and is now back to 84%. Copyright Broken Pie Chart Podcast. This is a BETA experience. A key indicator to track velocity of money is the personal saving rate. Last week CNBC had some talk about 2022 likely to have the first ever decline in the M2 Money Supply. Velocity of M2 Money Stock in the US is at a current level of 1.226, up from 1.191 last quarter and up from 1.142 one year ago. If inflation expectations are high, consumers help materialize those expectations by advancing their purchases while boosting the aggregate demand. How could that not have resulted in higher prices? A decreasing velocity of M1 might indicate fewer short- term consumption transactions are taking place. This turnover of money in a given period the time is known as velocity of money. A higher MV figure means a dollar is cycling through domestic transactions for goods and services more frequently. Thousands of investors and financial journalists rely on Nick and Jessicas newsletter every day for their thought-provoking work on markets, data and disruption. As a result, M2 stands more than 36 percent higher today than it did at the end of 2019. Historically, M2 has grown along with the economy (see in the chart below). Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System. Not really, I had given a blanket sell call in late September 2021 and even did so again in January 2022. Federal Reserve Bank of St. Louis; 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. Therefore, a huge increase in the denominator naturally results in a lower figure without the same corresponding increase in GDP. According to Bannister and Forward (2002, page 28), Money supply growth and inflation are inexorably linked. While M2 velocity is currently at historical lows, inflation is clearly not high. Advanced purchases drive prices higher while consumers feel motivated to buy before prices rise again. But the actual velocity has gone down by 5.85 points, 69 times larger than predicted. 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. Since 10-year interest rates declined by about 0.5 percentage points between 2008 and 2013, the velocity of the monetary base should have decreased by about 0.085 points. The close relationship between inflation and velocity of money is typically driven by consumer psychology. It can be thought of as the rate of turnover in the money supply--that is, the number of times one dollar is used to purchase final goods and services included in GDP. Maybe there is a technical problem with the data source. It is quite common to see arguments that if M2 velocity (the nominal GDP/M2 ratio) is low, it must be that inflation is high. 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. Source: When it goes up, M2 will. Is this happening to you frequently? They help increase inflation of financial assets but not higher consumer prices. We and our partners use data for Personalised ads and content, ad and content measurement, audience insights and product development. Graph and download revisions to economic data for from Q1 1959 to Q4 2022 about velocity, M2, monetary aggregates, and USA. All this certainly explains why the S&P keeps making new highs . Such an unprecedented increase in money demand has slowed down the velocity of money, as the figure below shows. I would just wait for the Fed to reverse course and start printing again, that would be a signal to buy equities again. M2's huge growth . His research interests include macroeconomics and the Chinese economy. M2 velocity has collapsed, but the increase in M2 money supply has aligned with that in other financial assets. Further Information A Technical Approach. Case 2. This blog offers commentary, analysis and data from our economists and experts. According to the Quantity Theory of Money, inflation depends on the money supply and its velocity. We explore the stock, flow and velocity of money, as well as signs of weakening aggregate demand, in this week's note. This is a change of 2.94% from last quarter and 7.36% from one year ago. Is velocity and inflation correlated? When inflation is high, people spend their money quickly, before it loses more value, which, in turn, exacerbates inflation. The M2 money supply exploded from $15.5 trillion in February '20 to $21.5 trillion in January '22. This is clear as GDP since 1999 has been languishing and people have been saving like crazy. 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. Predicting the bottom at this time would be foolhardy. Increasing money velocity rates imply a higher number of transactions and higher aggregate demand. Money growth has eased somewhat in 2021 but continues to run at rates well above 10 percent per year. 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 personal saving rate can be calculated as the ratio of personal savings to disposable personal income. 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. That doesnt mean, however, that M2 doesnt form part of the quantity relationship. My R^2 was 0.754. The first signs of this are now on record. Retirement account balances and time deposits above $100,000 are omitted from M2. Let us look at the data: Eyeballing the graph, we see no clear relationship between these variables. And why then would people suddenly decide to hoard money instead of spend it? 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. Further, it is lower than any time since 1960. 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. Charts powered by Highcharts. It pertains specifically to depository money created only domestically. Second, rate of change matters a lot. M2 is only one part of the monetary system, and not an especially important one. Or. The Quantity Theory of Money A Restatement. In The Optimum Quantity of Money and Other Essays, published 1969. 1956. FRED Series Velocity of M2 Money Stock. Then they can buy something else with it. March 1, 2023. 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. 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. Please be sure to comment, debate and let me know where you think the dollar goes next. See why for yourself by starting a 2-week FREE trial below. In other words, MZM money is M2 money minus time deposits. An example of data being processed may be a unique identifier stored in a cookie. The former goes to new highs of 2.2x, but the latter remains contained. So, who would you believe? Bitcoin Donations: bc1qvu8a9uy5p6lptdm3n3hyljer4s9ud2kfm4gv95. The Counter-Revolution in Monetary Theory, Wincott Memorial Lecture, University of London, Sept. 16, 1970. Meanwhile, Prof. Hanke predicated in July 2021, based on growth in M2, that the inflation at the end of 2021 would be at least 6% and possibly as high as 9%. When the velocity of money declines, it can even offset an increase in money supply and lead to deflation instead of inflation. Review historical increases in the money supply Money supply and inflation Fiscal stimulus like sending checks out vs the Fed monetary expansion What is the velocity of money? Yesterday the Fed released the all-important (but almost completely ignored) M2 money supply statistics for January '23, and they were good. Theres a couple issues with simply believing M2 = inflation. Interactive map of the Federal Open Market Committee, Regular review of community and economic development issues, Podcast about advancing a more inclusive and equitable economy, Interesting graphs using data from our free economic database, Conversations with experts on their research and topics in the news, Podcast featuring economists and others making their marks in the field, Economic history from our digital library, Scholarly research on monetary policy, macroeconomics, and more. 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 . 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. This week's stronger-than-expected February inflation data from France, Spain and Germany has led traders to price European Central Bank rates peaking near 4%, following similar moves in U.S . 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. M2 Velocity is a . This dynamic can have a significant effect on inflation indexes. One is that M2 can be a good indicator. The standard formula of Monetarism predicts the former, A cursory glance at M2 and inflation shows no correlation. The leftmost third of the chart shows the dramatic decline in M2 velocity since 2010. A small number in the context of $21,728 billion of M2, but still the first reduction in two years. The money supplyis 100 for t = 0, 1. 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. https://www.econlib.org/archives/2015/10/everythings_end.html. A slower recovery is also a more long-lived recovery, one that can spread into 2022 and even 2023. 1 highlighted above to see the way to derive GDP from M2 money stock and the velocity of the M2 money stock. 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. 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. Federal Reserve Bank of St. Louis, Units: Oxford University Press. It has caused much public and political outrage. One Federal Reserve Bank Plaza, This site requires JavaScript to run correctly. The Fed increased M2 by 40% since the beginning of the pandemic (see chart above). Steve H. Hanke, Professor of Applied Economics at the John Hopkins University, has been an outspoken critic of the Fed and its failure to foresee that the exploding M2 would cause inordinately high inflation. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. 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. , published 1969. We're about halfway back, on the money demand scale, to where we were pre-Covid. What is the M2 money supply? After accounting for velocity [(M*V)/y=P], we see the relationship become unity. The contraction of the velocity of circulation of money explains why the massive increase of the monetary base by the American central bank has not led to a price inflation. Can site, link, or share provided podcast website listed and sourced. Please disable your ad-blocker and refresh. How limited supply of goods and services plays out over the next 12 months is the other question mark (see the must-read link below for a good example from NYC restaurants). That is what happened in the 1990s. Why even bother with it? Inflation is typically described as a persistent increase in the general price level, such as in the consumer price index. Is there such a relationship in the first place? M2 increase of 20% to GDP followed by 5 years of 5% inflation. Strange as it may sound, we think the market has settled on the idea that American consumers will only slowly return to old habits. Expertise from Forbes Councils members, operated under license. Everything's Endogenous. EconLog. 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