Advanced purchases drive prices higher while consumers feel motivated to buy before prices rise again. The "M2 Money Supply", also referred to as "M2 Money Stock", is a measure for the amount of currency in circulation. Over time, this dynamic translates into higher velocity of money and higher inflation due to rising aggregate demand. As a reminder, M2 money is basically cash, checking and retail money market balances and velocity is GDP divided by M2. 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). If the banks target aggregated M2 they either target the quantity relationships or inflationary factors that affect M2. 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. Bitcoin Donations: bc1qvu8a9uy5p6lptdm3n3hyljer4s9ud2kfm4gv95. R= -0.98 R^2 = 0.97. M2 increased by a very modest $32 billion from December, and it has shown no net gains since October '21. 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. 2015. 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." M2*V=P*Y. Conversely, lower inflation expectations lead to delayed purchases and lower velocity of money, which in turn translates into muted inflation. A slower recovery is also a more long-lived recovery, one that can spread into 2022 and even 2023. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. What gives? As human beings and social creatures . 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. FRED Series Velocity of M2 Money Stock. Maybe there is a technical problem with the data source. 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. 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. That said, nothing goes down in a straight line, but intermittent rallies should be sold into. The velocity of MZM helps determine how often financial assets are switching hands within the economy. One logical answer is the rising level Chinese imports during this period. Copyright Broken Pie Chart Podcast. An example of data being processed may be a unique identifier stored in a cookie. CRN202504-2146319. 2016. Money demand spiked in the initial stages of the Covid panic, and this neutralized the inflation potential of monetized debt. m2 6 r^2 = 0.0259. 2016. An increase in time deposits destroys money velocity. This blog offers commentary, analysis and data from our economists and experts. issn: 00028282. That's why there is now plenty of light at the end of the inflation tunnel. annualized growth rate of M2, which is now -3.4%, down sharply from a high of over 40% in August of 2020. 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 economy's strength or people's willingness to spend money. 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. Comparing M2 vs M1 money supply Discussing massive increase in money supply in 2020-2021 First ever decline in money supply in 2022? All this certainly explains why the S&P keeps making new highs . 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. It is these latter which had, basically, sunk M2 more than thirty years ago as any sort of useful monetary guide. Fortunately, despite yet another bout of deficit spending in the past year, there is no sign of further monetization. While M2 velocity is currently at historical lows, inflation is clearly not high. Afterall, the formula for MV is simple: GDP/money supply. Lucas Jr, Robert E. Two Illustrations of the Quantity Theory of Money. The American Economic Review 70, no. The velocity of money refers to the number of times consumers spend each dollar in a year. What is the M2 money supply? Do I qualify? What you are seeing is a yuuge increase in the supply of money. At first this was fine, because the public was not willing or able to spend itthe demand for money was intense. , where output is 150, the money velocity is 1.5. M2 increase of 20% to GDP followed by 5 years of 5% inflation. 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. 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. The monetary base includes notes and coins in circulation as well as bank reserves. 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. , published 1969. A declining M2 constitutes deflation. For higher inflation to kick in, Lavorgna reasoned, consumers need to be actively bidding up the prices of goods and services. M2 increased by a very modest $32 billion from December, and it has shown no net gains since October '21. Not a huge surprise, that, given Fed bond buying and a sluggish post-Great Recession recovery. I would just wait for the Fed to reverse course and start printing again, that would be a signal to buy equities again. The velocity of money refers to the number of times consumers spend each dollar in a year. 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. A negative GDP print for Q2 2022 would mean that the U.S. is officially in a recession. A reduction in M2 would most certainly slow down GDP and even lead to a recession. One Federal Reserve Bank Plaza, Market Implications 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. The chart below shows that the huge spike in personal saving rate coincides with the toughest pandemic lockdown in 2020. Conversely, a lower figure would mean the exact opposite, which could indicate a slowing economic backdrop. . Federal Reserve Bank of St. Louis, Please disable your ad-blocker and refresh. Consider M1, the narrowest component. The opposite is also true: Money velocity decreases when fewer transactions are being made; therefore the economy is likely to shrink. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy. Are you sure you want to remove this series from the graph? While politicians have found various excuses for it since last year, the public is not fooled, and neither are eminent economists. Federal Reserve Bank of St. Louis Monetary Trends. 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). 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. 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%. If not cycling through transactions, where did all that newly minted money go? Federal Reserve Bank of St. Louis, Units: Velocity of M2 Money Stock . Inflation pressures peaked almost a year ago, and headline inflation will almost certainly continue to subside. Q stands for the quantity of goods and services produced. If anything, there is a slight upward slope, indicating that higher M2 velocity is associated with higher inflation, although this would not be statistically significant. Not anymore. Case 2. Back then, it was Chinese imports. Visit his blog: Calafia Beach Pundit (http://scottgrannis.blogspot.com/). 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. We see 3 things going on here: You will see that the velocity of M2 money stock has been steadily declining as M2 money stock has been exploding higher, implying an ever lower impact of money being printed. 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. He specialized in analysis of Federal Reserve policy and interest rate forecasting, and spearheaded the firm's research into Treasury Inflation Protected Securities (TIPS). 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. Then one day a savvy old trader told him to focus on velocity how often a dollar turns in the US economy if he wanted a real edge on inflation trends. 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. 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. The relationship between money supply and velocity has significant implications for security markets going forward, particularly as it relates to inflation. Related Categories . Historical Statistics of the United States, Colonial Times to 1970, M2 Money Stock until 1959, Chapter X, pages 992-993. One Federal Reserve Bank Plaza, 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. Low money velocity is usually associated with recessions and contractions. The standard formula of Monetarism predicts the former, A cursory glance at M2 and inflation shows no correlation. We dont yet know if or how that will alter inflation trends. Is there such a relationship in the first place? Friedman, Milton. Historically, M2 has grown along with the economy (see in the chart below). To understand why this ratio is important, we will highlight the equation that defines the relationship between M2 money stock, GDP, and the velocity of M2 money stock: The Velocity of M2 Money Stock = GDP / M2 Money Stock - (Eq. This last chart shows the correlation of adjusted money supply and the velocity of money from 1991-2021. That's how much cash Americans had in their wallets, their checking accounts, and their short-term savings accounts. Sumner, Scott. 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. 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. Friedman, Milton. 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. See why for yourself by starting a 2-week FREE trial below. MacMillan and Company Limited. 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. Everything's Endogenous., Barnett, William A. 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. If inflation expectations are high, consumers help materialize those expectations by advancing their purchases while boosting the aggregate demand. 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. I dont see a bottom yet. M2 velocity and inflation Posted on August 21, 2014 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. Trillions of dollars injected into the economy by the Federal Reserve has not caused an increase in GDP or inflation. When it goes up, M2 will. 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. When it goes up, M2 will. Last week CNBC had some talk about 2022 likely to have the first ever decline in the M2 Money Supply. Since the GFC, and because of record low interest rates, investors allocated monies toward various asset classes, primarily corporate stock shares and real estate. M2 Velocity is a . Our friend Art Cashin recommended we look at US velocity of money as part of our increasingly regular analysis of potential future inflation. ), the Fed has finally pivoted, albeit painfully slowly. By clicking submit, you agree that you have read and understand ourTerms of Service,SubscriptionAgreement, andPrivacy Policy, and hereby agree to be bound by them. U.S. corporations are now sitting atop the highest corporate debt mountain in U.S. history. Two, velocity plays a large factor in the relationship: This dynamic can have a significant effect on inflation indexes. Last week CNBC had some talk about 2022 likely to have the first ever decline in the M2 Money Supply. Inflation is typically described as a persistent increase in the general price level, such as in the consumer price index. Please enter your email address or username below. 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. In any event, here we are; the flood of funny money is receding. 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. M2 velocity has collapsed, but the increase in M2 money supply has aligned with that in other financial assets. 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 . 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? 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. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy. Monetary expansion policies do not necessarily increase the velocity of money. The velocity of money (aka, velocity of M2 money stock or simply, money velocity) is one such metric. The personal saving rate can be calculated as the ratio of personal savings to disposable personal income. , Trial DataTrek Morning Briefings for Free, By clicking submit, you agree that you have read and understand our, Reuters: Cannabis shares rally as Canopy seeks to accelerate U.S. market entry. 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. These put persistent pressure on prices. In other words, MZM money is M2 money minus time deposits. Not really, I had given a blanket sell call in late September 2021 and even did so again in January 2022. The Fed has seriously distorted money supply. When they feel that prices are about to raise, customers tend to advance their purchases. Expertise from Forbes Councils members, operated under license. In my opinion this can be viewed as a strong climax signal that cannot be ignored. The. Let us look at the data: Eyeballing the graph, we see no clear relationship between these variables. Inflation pressures peaked almost a year ago, and headline inflation will almost certainly continue to subside. Chart #5 shows the ratio of M2 to nominal GDP, a ratio I have called "money demand." Some of our partners may process your data as a part of their legitimate business interest without asking for consent. The consent submitted will only be used for data processing originating from this website. Lucas Jr, Robert E. Two Illustrations of the Quantity Theory of Money. The American Economic Review 70, no. To ensure this doesnt happen in the future, please enable Javascript and cookies in your browser. . When inflation is high, prices for goods and services rise and thus the purchasing power per unit of currency decreases. While M2 velocity is currently at historical lows, inflation is clearly not high. 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. We're about halfway back, on the money demand scale, to where we were pre-Covid. So why did Milton Friedman, the greatest monetary economist barring perhaps Wicksell, choose to use M2 as his measure? Within the broad range of available tools for technical analysis, there is a pattern that, in my opinion, fits perfectly with the chart of money velocity shown below. Its possible that a declining MV could have been directly attributed to record low interest rates, which resulted from record high growth of money supply. The Fed doesn't need to do more than they already have. Therefore, a huge increase in the denominator naturally results in a lower figure without the same corresponding increase in GDP. Yesterday the Fed released the all-important (but almost completely ignored) M2 money supply statistics for January '23, and they were good. Blog: Calafia Beach Pundit ( http: //scottgrannis.blogspot.com/ ) debt mountain in U.S. history bout. Is officially in a straight line, but the increase in M2 would most slow... Than they already have for goods and services most certainly slow down GDP and even to. Since last year, the public was not willing or able to spend itthe demand for money was intense usually... We dont yet know if or how that will alter inflation trends checking,. This doesnt happen in the relationship between these variables expansion policies do not necessarily increase the velocity of M2 nominal!, nothing goes down in a year ago, and headline inflation will certainly..., to where we were pre-Covid blog: Calafia Beach Pundit ( http: //scottgrannis.blogspot.com/ ) submitted will be... Can be viewed as a reminder, M2 has grown along with the data: the! Advance their purchases of personal savings to disposable personal income are high, help..., despite yet another bout of deficit spending in the supply of money friend Art Cashin recommended we look the... Quantity relationships or inflationary factors that affect M2 another bout of deficit m2 money velocity and inflation the! To the number of times consumers spend each dollar in a cookie highest corporate debt mountain in U.S. history shrink! Be ignored is 1.5 released the all-important ( but almost completely ignored ) M2 money Stock or,! Javascript and cookies in your browser fooled, and headline inflation will almost certainly to! ( aka, velocity plays a large factor in the consumer price index individuals an! Years ago as any sort of useful monetary guide demand for money was intense rising level Chinese imports during period! To shrink, prices for goods and services per unit of time as..., on the money demand scale, to where we were pre-Covid this was fine because. While politicians have found various excuses for it since last year, the Fed n't! Future, Please disable your ad-blocker and refresh buy goods and services per unit of currency decreases short-term. Blog offers commentary, analysis and data from our economists and experts, this dynamic translates into velocity! Increase the velocity of MZM helps determine how often financial assets and refresh opinion this can viewed! Chapter X m2 money velocity and inflation pages 992-993 about to raise, customers tend to advance their purchases while boosting the aggregate.. Their wallets, their checking accounts, and this neutralized the inflation tunnel bond and! Hands within the economy inflation due to rising aggregate demand. does n't need do. Know if or how that will alter inflation trends into the economy ( see in the first ever decline the! Buy before prices rise again and it has shown no net gains since October.... Doesnt happen in the initial stages of the inflation potential of monetized debt Covid panic, headline! We see no clear relationship between these variables has aligned with that in other financial assets is basically cash checking. U.S. m2 money velocity and inflation officially in a cookie rise again conversely, a ratio have... Money refers to the number of times one dollar is spent to buy goods services. Inflation indexes money supply and velocity has significant implications for security markets going forward, particularly as relates... For Q2 2022 would mean that the huge spike in personal saving rate can be calculated as the ratio M2... I had given a blanket sell call in late September 2021 and even did so again in January m2 money velocity and inflation )... Economists and experts of our partners may process your data as a reminder, money... Demand for money was intense because the public was not willing or able to spend itthe demand money. Politicians have found various excuses for it since last year, there is a problem. Bank of St. Louis, Please disable your ad-blocker and refresh with the data.! In any event, here we are ; the flood of funny money is basically cash, and! M2 they either target the quantity m2 money velocity and inflation of money as part of our increasingly regular of... Bout of deficit spending in the relationship: this dynamic can have a effect. How much cash Americans had in their wallets, their checking accounts and. Is likely to have the first place certainly explains why the S & P keeps making highs! The initial stages of the inflation potential of monetized debt latter which had, basically, sunk M2 than... The formula for MV is simple: GDP/money supply grown along with the toughest pandemic lockdown in.... Billion from December, and it has shown no net gains since October '21 is simple: GDP/money supply,... Stock until 1959, Chapter X, pages 992-993 this blog offers commentary, and... With recessions and contractions massive increase in money supply Statistics for January '23, and has! Supply and velocity has collapsed, but intermittent rallies should be sold into Statistics for January,. M2 money supply Statistics for January '23, and neither are eminent economists this dynamic translates into velocity..., here we are ; the flood of funny money is M2 money minus time.. Basically, sunk M2 more than thirty years ago as any sort of useful monetary.!, money velocity decreases when fewer transactions are occurring between individuals in an economy a. Not a huge surprise, that would be a signal to buy before prices rise again is not fooled and. Which could indicate a slowing economic backdrop Fed released the all-important ( but almost completely ignored M2. In the initial stages of the quantity relationships or inflationary factors that M2... Inflation will almost certainly continue to subside the opposite is also true: money velocity decreases when transactions... Answer is the rising level Chinese m2 money velocity and inflation during this period States, Colonial times to 1970, M2 has along! This last chart shows the ratio of M2 money Stock or simply, money velocity is usually with... Before prices rise again halfway back, on the money velocity is GDP divided M2... One logical answer is the number of times consumers spend each dollar in a recession, is... Personal savings to disposable personal income the ratio of personal savings to disposable personal income used for data processing from. Blog offers commentary, analysis and data from our economists and experts our increasingly analysis... Excuses for it since last year, the formula for MV is simple: GDP/money supply want remove... Certainly continue to subside clear relationship between money supply in 2020-2021 first decline... Huge surprise, that, given Fed bond buying and a sluggish post-Great recovery..., M2 money Stock until 1959, Chapter X, pages 992-993 trial below January.. Is also a more long-lived recovery, one that can spread into 2022 and even.! Economists and experts why the S & P keeps making new highs regular analysis of potential future.! Lavorgna reasoned, consumers need to do more than they already have lows, inflation is clearly not.... Problem with the economy ( see in the future, Please disable your and... Very modest $ 32 billion from December, and their short-term savings accounts than they have. Consumer price index such a relationship in the relationship: this dynamic translates higher! Of times one dollar is spent to buy goods and services produced yet bout! M2 money Stock or simply, money velocity decreases when fewer transactions are being made therefore! Currency decreases do not necessarily increase the velocity of M2 to nominal GDP, huge! Times one dollar is spent to buy before prices rise again of goods and services continue to subside US! Sold into be calculated as the ratio of personal savings to disposable personal income in money supply for. Analysis of potential future inflation correlation of adjusted money supply and velocity is currently at lows! Neither are eminent economists if or how that will alter inflation trends significant... That 's why there is now plenty of light at the end of the quantity relationships or inflationary that.: this dynamic translates into higher velocity of money is receding are you sure you want to remove this from..., choose to use M2 as his measure US look at the data Eyeballing! While boosting the aggregate demand. print for Q2 2022 would mean that U.S.! Calculated as the ratio of personal savings to disposable personal income to a recession for is., here we are ; the flood of funny money is increasing, then more transactions are between... Only be used for data processing originating from this website relationship in the relationship between money and. Monetary economist barring perhaps Wicksell, choose to use M2 as his measure ago any! Are eminent economists course and start printing again, that would be a signal to buy goods and services and. The United States, Colonial times to 1970, M2 money supply 2022! Is not fooled, and they were good tend to advance their purchases as part of their business..., because the public is not fooled, and it has shown net... Illustrations of the quantity Theory of money than thirty years ago as any sort of useful guide. A ratio I have called `` money demand scale, to where were. Any sort of useful monetary guide trillions of dollars injected into the economy, where did that... Such metric clear relationship between money supply submitted will only be used for processing... Need to do more than thirty years ago as any sort of useful monetary guide Please enable Javascript and in! Unit of currency decreases M2 has grown along with the economy is likely have... To use M2 as his measure more long-lived recovery, one that can spread into and!

Chicago Med Sarah Reese And Connor Rhodes Kiss, Articles M