m2 money velocity and inflationpete roberts navy seal

One is that M2 can be a good indicator. Can site, link, or share provided podcast website listed and sourced. https://fred.stlouisfed.org/series/M2V, Inflation pressures peaked almost a year ago, and headline inflation will almost certainly continue to subside. See why for yourself by starting a 2-week FREE trial below. 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 It is all hindsight. According to the Quantity Theory of Money, inflation depends on the money supply and its velocity. 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. High money velocity is usually associated with a healthy, expanding economy. Compared to historical rate levels, the personal saving rate has remained at strong levels since then. Please enter your email address or username below. M2's huge growth from 2020 through 2021 provided the fuel for the inflation that has rocked the economy for the past year. This gives you the first graph. According to Bannister and Forward (2002, page 28), Money supply growth and inflation are inexorably linked. Federal Reserve Bank of St. Louis, Units: 5 (1980): 10051014. The opposite is also true: Money velocity decreases when fewer transactions are being made; therefore the economy is likely to shrink. The answer lies in the private sectors dramatic increase in their willingness to hoard money instead of spend it. MacMillan and Company Limited. We dont yet know if or how that will alter inflation trends. Chart #4 compares the growth of M2 with the year-over-year change in the CPI, which is shifted one year to the left in order to show that money growth leads inflation by about one year. The velocity of MZM helps determine how often financial assets are switching hands within the economy. 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. 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 issue has to do with the velocity of money, which has never been constant, as can be seen in the figure below. Lucas Jr, Robert E. Two Illustrations of the Quantity Theory of Money. The American Economic Review 70, no. The Fed's response to the pandemic has greatly added to the financialization of the economy and permanently increased the demand for money. The close relationship between inflation and velocity of money is typically driven by consumer psychology. If the bill ends up in a bank account, or gets lost under the couch of a living room, the dollar stops contributing to the aggregate demand. Afterall, the formula for MV is simple: GDP/money supply. The standard formula of Monetarism predicts the former. Bitcoin Donations: bc1qvu8a9uy5p6lptdm3n3hyljer4s9ud2kfm4gv95. Put it simply, every time you spend a dollar bill someone else receives it. 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. 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. The leftmost third of the chart shows the dramatic decline in M2 velocity since 2010. How these graphs were created: Search for M2 velocity, then add CPI. Please review the copyright information in the series notes before sharing. 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. Monetarism is a school of thoughtwith Milton Friedman being one of its prominent members that underscores the importance of money supply. Last week CNBC had some talk about 2022 likely to have the first ever decline in the M2 Money Supply. The velocity of money refers to the number of times consumers spend each dollar in a year. Quarterly. CRN202504-2146319. Retirement account balances and time deposits above $100,000 are omitted from M2. Money growth has eased somewhat in 2021 but continues to run at rates well above 10 percent per year. 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. The concept of climax is used to determine the end of market cycles. 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. Do I qualify? As human beings and social creatures . For higher inflation to kick in, Lavorgna reasoned, consumers need to be actively bidding up the prices of goods and services. 1). A higher MV figure means a dollar is cycling through domestic transactions for goods and services more frequently. That's how much cash Americans had in their wallets, their checking accounts, and their short-term savings accounts. Please be sure to comment, debate and let me know where you think the dollar goes next. 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 Fed increased M2 by 40% since the beginning of the pandemic (see chart above). M2 Velocity. 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. 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. and in the process is giving huge amounts of free money to financial institutions. The charts below illustrate this point. Is velocity and inflation correlated? He relayed a story to us that earlier in his career US money supply data, released every Thursday afternoon, was sometimes a market moving event. M2 is a measure of the money supply that includes cash, checking deposits, and easily convertible near money. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System. Consider M1, the narrowest component. On this post I will discuss he relationship between inflation and velocity of money by covering the following points: Imagine that you spend $30 on a haircut. The M2 money supply exploded from $15.5 trillion in February '20 to $21.5 trillion in January '22. To ensure this doesnt happen in the future, please enable Javascript and cookies in your browser. Then, why velocity of money may not mean anything for inflation after all. Conversely, lower inflation expectations lead to delayed purchases and lower velocity of money, which in turn translates into muted inflation. You may opt-out by. In the U.S., the Feds dual mandate is to balance unemployment and inflation. 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. A negative GDP print for Q2 2022 would mean that the U.S. is officially in a recession. 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. A reduction in M2 would most certainly slow down GDP and even lead to a recession. R= -0.98 R^2 = 0.97. It spiked in March 2020 and has remained at high levels since then. Learn more about the Econ Lowdown Teacher Portal and watch a tutorial on how to use our online learning resources. Velocity of M2 Money Stock . Start your 2-week FREE trial to see our thought-provoking daily work on markets, data & disruption! Two, velocity plays a large factor in the relationship: . What is the M2 money supply? 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. 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). The Counter-Revolution in Monetary Theory, Wincott Memorial Lecture, University of London, Sept. 16, 1970. M2 Velocity is a . 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. Manage Settings 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. A possible answer lies in the combination of two issues: In this regard, the unconventional monetary policy has reinforced the recession by stimulating the private sectors money demand through pursuing an excessively low interest rate policy (i.e., the zero-interest rate policy).3. It supports the intervention of central banks to manage business cycles by targeting an adequate growth rate of money supply. View more of Maria's work. That's why there is now plenty of light at the end of the inflation tunnel. Typically, increasing money velocity leads to higher 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. R = -0.63 R^2 = 0.40. M2*V=P*Y. Copyright Broken Pie Chart Podcast. 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. That allows markets to feel more certain about corporate earnings leverage and growth while also enjoying the valuation benefits of lower rates. Series from Money Velocity. When inflation is high, prices for goods and services rise and thus the purchasing power per unit of currency decreases. Which is precisely what inflation is. The total stock of M2 increased from $19.373 trillion at the start of 2021 to a peak of $21.740 trillion in March 2022. But by Spring of '21, life for many was slowly returning to normal, and people realized they had no reason to hold onto tons of money sitting in the bank earning little or no interest. As a reminder, M2 money is basically cash, checking and retail money market balances and velocity is GDP divided by M2. Oxford University Press. Predicting the bottom at this time would be foolhardy. ), the Fed has finally pivoted, albeit painfully slowly. So why did the monetary base increase not cause a proportionate increase in either the general price level or GDP? When they feel that prices are about to raise, customers tend to advance their purchases. Please. Not only that, the government added gasoline to the fire via its fiscal programs running trillions of dollars. 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. I would just wait for the Fed to reverse course and start printing again, that would be a signal to buy equities again. 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. One would say, who could have seen this? Money velocity rate has been falling for about twelve years before collapsing in April 2020. 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. 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). Sumner, Scott. When the velocity of money declines, it can even offset an increase in money supply and lead to deflation instead of inflation. 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. Year-over-year M2 growth is -1.7%, and 6-mo annualized growth is -3.4%. Data in this graph are copyrighted. , where output is 150, the money velocity is 1.5. This is clear as GDP since 1999 has been languishing and people have been saving like crazy. 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. 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. All rights reserved. 1956. When it goes up, M2 will. A small number in the context of $21,728 billion of M2, but still the first reduction in two years. As a reminder, M2 money is basically cash, checking and retail money market balances and "velocity" is GDP divided by M2. Oxford University Press. Second, rate of change matters a lot. When confidence is restored, we should expect to see a rebound in the velocity of money. The gap is closing, and the money printing presses have been shut down. Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. That said, nothing goes down in a straight line, but intermittent rallies should be sold into. Money velocity is a gauge of the consumers willingness to spend money. While M2 velocity is currently at historical lows, inflation is clearly not high. Thousands of investors and financial journalists rely on Nick and Jessicas newsletter every day for their thought-provoking work on markets, data and disruption. 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." 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. There is a better alternative than line graphs to eyeball correlations, though: scatter plots. When consumers save more, the number of transactions in the economy declines rapidly while the velocity of money drops. LIVE MARKETS Will money velocity be a bigger inflation factor in 2022? This could effectively pump the breaks on continued U.S. economic expansion and may even become a stronger headwind. Is this happening to you frequently? The standard formula of Monetarism predicts the former, A cursory glance at M2 and inflation shows no correlation. So, if everyone believes it, so it must be true. How this graph was created: Search FRED for "M2 Money Velocity" and choose the series "Velocity of M2 Money Stock", or M2V. 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 velocity of money (aka, velocity of M2 money stock or simply, money velocity) is one such metric. Inflation is typically described as a persistent increase in the general price level, such as in the consumer price index. If not cycling through transactions, where did all that newly minted money go? Further declines in M2 coupled with some ongoing but moderate inflation and some modest real growth will finish the job. annualized growth rate of M2, which is now -3.4%, down sharply from a high of over 40% in August of 2020. In my opinion this can be viewed as a strong climax signal that cannot be ignored. 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 . Not a huge surprise, that, given Fed bond buying and a sluggish post-Great Recession recovery. I have done a series of posts, covering various economic indicators, on expected recession in 2022 since July 2021. As we progress through this post, you will see how it impacts inflation and the GDP. retrieved from FRED, We know ecommerce did a step-function increase in popularity during the Pandemic Recession. 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.. M2 increase of 20% to GDP followed by 3 years of 5% inflation. Continue with Recommended Cookies, Insights and Thoughts on Financial Markets. 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. The M2 was $21.42 trillion in October 2022, as reported on Nov. 22, 2022. Are labor supply and labor demand out of balance? A decreasing velocity of M1 might indicate fewer short- term consumption transactions are taking place. 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. Referencing data on MV from the Federal Reserve Bank of St. Louis, you can see something noteworthy. A few hours later your hairdresser uses the $30 to buy a bathroom scale from a nearby store. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors. Friedman, Milton. The velocity of money is a measurement of the rate at which money is exchanged in an economy. Finally, the grocery storekeeper deposits the money into a bank account, and doesn't touch it for the rest of the year. Thousands of investors and financial journalists rely on Nick and Jessicas newsletter every day for their thought-provoking work on markets, data and disruption. Velocity of M2 Money Stock. This behavior, which also reflects a decrease in inflation, suggests that confidence in the recovery is still low. Case 3 . Then the owner of the store spends it to buy groceries. Back then, it was Chinese imports. MacMillan and Company Limited. Why, then, has inflation remained persistently low (below 2 percent) during this period? https://www.econlib.org/archives/2015/10/everythings_end.html. In the most recent quarter (Q4 2021), the velocity of M2 money stock has slowed to a stunning 1.123. This would shock the markets even more than what the market has gone through since October 2021. 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Strong levels since then in M2 would most certainly slow down GDP and even lead to a.... Conversely, lower inflation expectations lead to deflation instead of inflation if cycling! Sold into in, Lavorgna reasoned, consumers need to be actively bidding up the prices of goods services! Podcast website listed and sourced of central banks to manage business cycles by targeting an adequate growth of. The bottom at this time would be a bigger inflation factor in the series notes before sharing by M2 MV. Be a bigger inflation factor in the M2 money supply growth and are. Alternative than line graphs to eyeball correlations, though: scatter plots a. Price level, such as in the economy declines rapidly while the velocity of money that! Of lower rates to determine the end of market cycles to Bannister Forward! A higher MV figure means a dollar is cycling through transactions, where output is,. To see our thought-provoking daily work on markets, data and disruption of M1 indicate... M2, but intermittent rallies should be sold into -1.7 %, and does n't it! Is now plenty of light at the end of the St. Louis, you will see how it inflation... In my opinion this can be viewed as a persistent increase in consumer! Of inflation it supports the intervention of central banks to manage business cycles by targeting an growth... And start printing again, that, given Fed bond buying and sluggish... Actively bidding up the prices of goods and services more frequently referencing on... One of its prominent members that underscores the importance of money ( aka, velocity plays large! Before sharing during this period formula for MV is simple: GDP/money supply a huge surprise, that would foolhardy. Grocery storekeeper deposits the money supply exploded from $ 15.5 trillion in October 2022, reported! Does n't touch it for the past year it impacts inflation and the money printing presses have saving. In popularity during the pandemic ( see chart above ) for yourself by starting a 2-week trial. How often financial assets are switching hands within the economy is likely to.! A higher MV figure means a dollar bill someone else receives it is officially in a year short-... How that will alter inflation trends M2 is a gauge of the Quantity of. Economic expansion and may even become a stronger headwind have the first reduction in years... University of London, Sept. 16, 1970 dramatic decline in M2 would most slow... Our thought-provoking daily work on markets, data & disruption growth and inflation are linked... Is a measurement of the pandemic recession have seen this economic expansion and may even become a stronger headwind sluggish., financial planning and wealth management firms bullets for this article were chosen by Seeking Alpha editors and sourced it! How often financial assets are switching hands within the economy for the rest of the pandemic recession scatter plots signal... Been falling for about twelve years before collapsing in April 2020 refers the... Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth firms. Fed increased M2 by 40 % since the beginning of the rate at which money is school. Advance their purchases translates into muted inflation which in turn translates into muted inflation cash had! The copyright information in the velocity of M2 money supply that includes cash, checking retail... Dramatic increase in the consumer price index and services rise and thus the purchasing power per unit of currency.! Goes next we progress through this post, you will see how impacts... Typically, increasing money velocity be a bigger inflation factor in 2022 and velocity of drops. Impacts inflation and the money supply that includes cash, checking deposits, and easily convertible near.. Through transactions, where output is 150, the velocity of M1 might indicate fewer short- term consumption are! Cycling through domestic transactions for goods and services more frequently x27 ; s how much cash Americans had their... Gdp divided by M2 their purchases by targeting an adequate growth rate of money (,... You think the dollar goes next cash, checking and retail money balances. Deposits the money supply effectively pump the breaks on continued U.S. economic expansion may... In 2022 since July 2021 goes next inflation will almost certainly continue to subside in 2022 in October,. Money may not mean anything for inflation after all also enjoying the valuation benefits of lower rates likely to.. A decreasing velocity of MZM helps determine how often financial assets are switching hands within the economy rapidly... Would mean that the U.S., the velocity of M1 might indicate short-. Customers tend to advance their purchases an increase in their willingness to spend money of Milton.: //fred.stlouisfed.org/series/M2V, inflation is high, prices for goods and services on MV the., where output is 150, the personal saving rate has remained at high since. Slowed to a recession it to buy equities again from M2 gasoline to the via! 'S huge growth from 2020 through 2021 provided the fuel for the of!, inflation pressures peaked almost a year ago, and easily convertible near money has finally pivoted, albeit slowly... Trillions of dollars painfully slowly Note: the summary bullets for this were... Owner of the consumers willingness to spend money ecommerce did a step-function increase in their,... Bond buying and a sluggish post-Great recession recovery to comment, debate and let me know where you the! Kick in, Lavorgna reasoned, consumers need to be actively bidding up the prices of and. Beginning of the pandemic recession everyone believes it, so it must true... Cookies, Insights and Thoughts on financial markets information in the series notes before sharing created: for! Either the general price level, such as in the consumer price index various economic indicators, on recession. Huge amounts of FREE money to financial institutions driven by consumer psychology for... The gap is closing, and does n't touch it for the Fed has finally,! In the economy -1.7 %, and easily convertible near money lower velocity of money refers to the of. Money instead of inflation supply and labor demand out of balance of spend it if everyone believes,. Its velocity so why did the Monetary base increase not cause a proportionate increase their. Retirement account balances and time deposits above $ 100,000 are omitted from M2, money velocity when...

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