This gives you the first graph. 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. Money demand spiked in the initial stages of the Covid panic, and this neutralized the inflation potential of monetized debt. We dont yet know if or how that will alter inflation trends. Friedman, Milton. This is clear as GDP since 1999 has been languishing and people have been saving like crazy. Federal Reserve Bank of St. Louis, Units: 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. Can site, link, or share provided podcast website listed and sourced. However, GDP growth may be hampered by intermediate-term higher inflation and the corresponding higher interest rates which could weigh on consumer spending. Last week CNBC had some talk about 2022 likely to have the first ever decline in the M2 Money Supply. Such an unprecedented increase in money demand has slowed down the velocity of money, as the figure below shows. Essentially, this means that one USD cycled through the U.S. economy in Q4 2021 about. Please be sure to comment, debate and let me know where you think the dollar goes next. Or. 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. 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. Trillions of dollars injected into the economy by the Federal Reserve has not caused an increase in GDP or inflation. Not really, I had given a blanket sell call in late September 2021 and even did so again in January 2022. When it goes up, M2 will. 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. This is how a collapse of the velocity of money translates into lower inflation or can even cause deflation over time. M2 increased by a very modest $32 billion from December, and it has shown no net gains since October '21. When the frequency of transactions increases, the velocity of money rises. The former goes to new highs of 2.2x, but the latter remains contained. A reduction in M2 would most certainly slow down GDP and even lead to a recession. Historically, M2 has grown along with the economy (see in the chart below). Further Information Compared to historical rate levels, the personal saving rate has remained at strong levels since then. 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. Back then, it was Chinese imports. One, M2 is partially endogenous to inflation (well, really NGDP. While M2 velocity is currently at historical lows, inflation is clearly not high. Further declines in M2 coupled with some ongoing but moderate inflation and some modest real growth will finish the job. Household savings rates spiked during the past couple of years, which resulted in cash hoarding in checking and savings accounts. M2's huge growth from 2020 through 2021 provided the fuel for the inflation that has rocked the economy for the past year. 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. By the end of that year, M2 totaled . 2016. Youll notice the greater correlation and then decoupling. But The middle part of the chart, from 1991 2000, shows a counter-intuitive separation of money velocity and inflation. Artificial Intelligence Companies You May Want To Consider, investors allocated monies toward various asset classes. Everything's Endogenous., Barnett, William A. Money velocity (MV) isnt a complicated concept. 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%. While M2 velocity is currently at historical lows, inflation is clearly not high. Essentially, this means that one USD cycled through the U.S. economy in Q4 2021 about 1.123 times. retrieved from FRED, As a result, M2 stands more than 36 percent higher today than it did at the end of 2019. If Americans quickly turn their cash savings and money market fund balances into trips, shopping excursions and service-based experiences like dining out then M2 velocity will accelerate quickly and inflation should logically follow. Do we simply have special circumstances that have broken down this relationship? There is a better alternative than line graphs to eyeball correlations, though: scatter plots. Those are important but dont necessarily tell the whole story on the state of the economy, much less the direction to which things may be headed. Implies, the number of transactions (see definition of the velocity of M2 money stock above) between individuals has been going down. Why, then, has inflation remained persistently low (below 2 percent) during this period? Maybe there is a technical problem with the data source. Chart #2 shows the 6-mo. We and our partners use data for Personalised ads and content, ad and content measurement, audience insights and product development. Retirement account balances and time deposits above $100,000 are omitted from M2. These expectations are important because they affect consumer's behavior. 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? Do we simply have special circumstances that have broken down this relationship? Federal Reserve Bank of St. Louis, Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors. Manage Settings Not only that, the government added gasoline to the fire via its fiscal programs running trillions of dollars. Thats one reason why 10-year yields have stalled out a slow recovery means slower M2 velocity growth and less coincident inflation. M2 Money Supply Shrinking vs Inflation | Money Velocity Irrelevant?. Oxford University Press. money supply * velocity = nominal GDP. Ratio, Quarterly, Seasonally Adjusted Q1 1959 to Q4 2022 (5 days . annualized growth rate of M2, which is now -3.4%, down sharply from a high of over 40% in August of 2020. This view can also be represented by the so-called quantity theory of money, which relates the general price level, the total goods and services produced in a given period, the total money supply and the speed (velocity) at which money circulates in the economy in facilitating transactions in the following equation: Based on this equation, holding the money velocity constant, if the money supply (M) increases at a faster rate than real economic output (Q), the price level (P) must increase to make up the difference. There are many economic measurements that could be referenced when formulating a forecast. The Quantity Theory of Money A Restatement. In. Money velocity rate has been falling for about twelve years before collapsing in April 2020. So why did the monetary base increase not cause a proportionate increase in either the general price level or GDP? M2 velocity has collapsed, but the increase in M2 money supply has aligned with that in other financial assets. Historical Statistics of the United States, Colonial Times to 1970, M2 Money Stock until 1959, Chapter X, pages 992-993. 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. The gap is closing, and the money printing presses have been shut down. Since the GFC, and because of record low interest rates, investors allocated monies toward various asset classes, primarily corporate stock shares and real estate. 13 Finance Experts Recommend Tech Tools For Managing Business And Personal Finances, A Court Case With High Implications For The Tech Sector And Inflation Still Higher Than Expected - Forbes AI Newsletter February 25th, Why IPOs And ESPPs Are A Strong Combination, Expired TCJA Provisions Hurt Businesses Come Tax Time, Artificial Intelligence Applications In Investing, Dominos And Papa Johns Earning Reports Disappoint Investors. 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. 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. How these graphs were created: Search for M2 velocity, then add CPI. If you have an ad-blocker enabled you may be blocked from proceeding. The "M2 Money Supply", also referred to as "M2 Money Stock", is a measure for the amount of currency in circulation. M2*V=P*Y. Releases from Federal Reserve Bank of St. Louis, More Technical analysis can be applied on economic indicators whenever human psychology plays a key role. For more information on the H.6 release changes and the regulatory amendment that led to the creation of the other liquid deposits component and its inclusion in the M1 monetary aggregate, see the H.6 announcements and Technical Q&As posted on December 17, 2020. Year-over-year M2 growth is -1.7%, and 6-mo annualized growth is -3.4%. It supports the intervention of central banks to manage business cycles by targeting an adequate growth rate of money supply. Copyright 2023 Apple Inc. All rights reserved. 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. 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). LIVE MARKETS Will money velocity be a bigger inflation factor in 2022? Then they can buy something else with it. The M2 money supply grew at annualized rates exceeding 20 percent throughout much of 2020. Friedman and Divisia Monetary Measures. In. The Federal Reserve might describe it as the turnover rate of a dollar through the U.S. economy. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. Powell or Hanke? Yi Wen is a former economist and assistant vice president at the Federal Reserve Bank of St. Louis. It's a psychological, self-reinforcing process. So far, so good. Oct 25, 2020. 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