m2 money velocity and inflation

In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. 2016. Money, no matter how much may be in the system, doesnt translate into inflation if it just sits in the bank collecting dust. That's why there is now plenty of light at the end of the inflation tunnel. Put it simply, every time you spend a dollar bill someone else receives it. Explore resources provided by the Research Division at the Federal Reserve Bank of St. Louis. Releases from Federal Reserve Bank of St. Louis, More 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. Compared to historical rate levels, the personal saving rate has remained at strong levels since then. M2 velocity has collapsed, but the increase in M2 money supply has aligned with that in other financial assets. Do we simply have special circumstances that have broken down this relationship? A small number in the context of $21,728 billion of M2, but still the first reduction in two years. 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. 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. 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. 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). March 1, 2023. Sumner, Scott. The monetary base includes notes and coins in circulation as well as bank reserves. 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. Therefore, a huge increase in the denominator naturally results in a lower figure without the same corresponding increase in GDP. 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. If not cycling through transactions, where did all that newly minted money go? money supply * velocity = nominal GDP. Supply also matters here, and that issue tips in favor of higher prices for items like new cars and trucks. 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). Explore resources provided by the Research Division at the Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, 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. The relationship between money supply and velocity has significant implications for security markets going forward, particularly as it relates to inflation. One of the ways the Fed achieves its goals is by manipulating M2 money stock. There is a better alternative than line graphs to eyeball correlations, though: scatter plots. 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. Inflation is typically described as a persistent increase in the general price level, such as in the consumer price index. m2 '' ^^ m2 . Please enter your email address or username below. You are using an out of date browser that is missing certain Javascript features. 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. 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. 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. 5 (1980): 10051014. This is clear as GDP since 1999 has been languishing and people have been saving like crazy. Please let me know if this happens regularly @silvan_frank. Comparing M2 vs M1 money supply Discussing massive increase in money supply in 2020-2021 First ever decline in money supply in 2022? Put another way, the U.S. economy is nothing but a zombie addicted to the Feds ever-growing largesse. retrieved from FRED, Thousands of investors and financial journalists rely on Nick and Jessicas newsletter every day for their thought-provoking work on markets, data and disruption. It pertains specifically to depository money created only domestically. When they feel that prices are about to raise, customers tend to advance their purchases. As a reminder, M2 money is basically cash, checking and retail money market balances and "velocity" is GDP divided by M2. Everything's Endogenous., Barnett, William A. Then they can buy something else with it. To ease credit during the pandemic, the central bank helped . How could that not have resulted in higher prices? , published 1969. What is the M2 money supply? 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. For this reason, the charts cannot be displayed. 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. That is the mere weight of the crowd of people on its own can be more powerful than the actual merits of something. Explore resources provided by the Research Division at the Federal Reserve Bank of St. Louis. No wholesale; no offshore. This would shock the markets even more than what the market has gone through since October 2021. 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? Federal Reserve Bank of St. Louis, Velocity of M1 Money Stock [M1V], Federal Reserve Bank of St. Louis, Velocity of M2 Money Stock [M2V], U.S. Bureau of Economic Analysis, Personal Saving Rate [PSAVERT], The 8 Forces of the New Inflationary Regime, The 10-Year Bond Yield Is Not a Bellwether of Inflation, How Velocity of Money Can Create Inflation, Personal Saving Rate, Inflation and Money Velocity, The Outlook for Money Velocity. Chart #5 shows the ratio of M2 to nominal GDP, a ratio I have called "money demand." As human beings and social creatures . At first this was fine, because the public was not willing or able to spend itthe demand for money was intense. Afterall, the formula for MV is simple: GDP/money supply. It spiked in March 2020 and has remained at high levels since then. How this graph was created: Search FRED for "M2 Money Velocity" and choose the series "Velocity of M2 Money Stock", or M2V. When it goes up, M2 will. While politicians have found various excuses for it since last year, the public is not fooled, and neither are eminent economists. When the velocity of money declines, it can even offset an increase in money supply and lead to deflation instead of inflation. Then, why velocity of money may not mean anything for inflation after all. Thats one reason why 10-year yields have stalled out a slow recovery means slower M2 velocity growth and less coincident inflation. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. Explore resources provided by the Research Division at the Federal Reserve Bank of St. Louis. Ratio,Seasonally Adjusted, Frequency: 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. M2 includes M1 (physical cash and checkable deposits) as well as "less liquid money", such as saving bank accounts. 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. 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. 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. 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. 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 . During the first and second quarters of 2014, the velocity of the monetary base2 was at 4.4, its slowest pace on record. Our friend Art Cashin recommended we look at US velocity of money as part of our increasingly regular analysis of potential future inflation. When there are more transactions being made throughout the economy, velocity increases, and the economy is likely to expand. 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. All rights reserved. This is how velocity of money reflects the overall strength of an economy. But the actual velocity has gone down by 5.85 points, 69 times larger than predicted. 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. Skip to main content. Essentially, this means that one USD cycled through the U.S. economy in Q4 2021 about 1.123 times. This seems troubling. U.S. corporations are now sitting atop the highest corporate debt mountain in U.S. history. 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. The. Low money velocity is usually associated with recessions and contractions. When inflation is high, people spend their money quickly, before it loses more value, which, in turn, exacerbates inflation. Friedman, Milton. 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. Can site, link, or share provided podcast website listed and sourced. The second is that Friedman preferred the divisia of M2. 2015. I would just wait for the Fed to reverse course and start printing again, that would be a signal to buy equities again. M2 velocity and inflation. Ratio, Quarterly, Seasonally Adjusted Q1 1959 to Q4 2022 (5 days . There's a couple issues with simply believing M2 = inflation. In other words, MZM money is M2 money minus time deposits. Low money velocity is usually associated with recessions and contractions. The lower-inflation wheels have been set in motion. Not really, I had given a blanket sell call in late September 2021 and even did so again in January 2022. Sumner, Scott. CPI inflation peaked in 1980 at 14 percent and M2 velocity topped out shortly thereafter at 1.9x. We and our partners use cookies to Store and/or access information on a device. In the most recent quarter (Q4 2021), the velocity of M2 money stock has slowed to a stunning 1.123. According to this view, inflation in the U.S. should have been about 31 percent per year between 2008 and 2013, when the money supply grew at an average pace of 33 percent per year and output grew at an average pace just below 2 percent. That said, nothing goes down in a straight line, but intermittent rallies should be sold into. 2015. So why did the monetary base increase not cause a proportionate increase in either the general price level or GDP? CRN202504-2146319. Friedman and Divisia Monetary Measures. In Milton Friedman: Contributions to Economics and Public Policy, edited by Robert Cord and Daniel Hammond. MacMillan and Company Limited. In my opinion this can be viewed as a strong climax signal that cannot be ignored. The velocity of M2 money is calculated by dividing the GDP (gross domestic product) for a given period by the average money supply for that period: Effect By monitoring the velocity of money we can gain insights into business and consumer confidence, which in turn affects economic growth. Is that really a big deal given 2020 record 25% growth followed by 2021 12% growth? M2 contained non-M1 components which are contractionary. Consider M1, the narrowest component. . Lucas Jr, Robert E. Two Illustrations of the Quantity Theory of Money. The American Economic Review 70, no. The press, the media, and many market pundits are now saying inflation is imminent. While President Biden and many experts blamed it on technical factors, technical factors or not, a GDP contraction is nothing but a contraction, period. Since the GFC, and because of record low interest rates, investors allocated monies toward various asset classes, primarily corporate stock shares and real estate. Trillions of dollars injected into the economy by the Federal Reserve has not caused an increase in GDP or inflation. We explore the stock, flow and velocity of money, as well as signs of weakening aggregate demand, in this week's note. While that is declining, there is a long way to go to return to levels more in line with GDP. M2 increase of 20% to GDP followed by 5 years of 5% inflation. and (2) balances in retail Money Market Funds. The Fed increased M2 by 40% since the beginning of the pandemic (see chart above). Household savings rates spiked during the past couple of years, which resulted in cash hoarding in checking and savings accounts. 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. Some of our partners may process your data as a part of their legitimate business interest without asking for consent. 2). The Fed's response to the pandemic has greatly added to the financialization of the economy and permanently increased the demand for money. We see 3 things going on here: It supports the intervention of central banks to manage business cycles by targeting an adequate growth rate of money supply. Retirement account balances and time deposits above $100,000 are omitted from M2. One, M2 is partially endogenous to inflation (well, really NGDP. https://fred.stlouisfed.org/series/M2V, Everything's Endogenous. EconLog. This "everyone believes it, so it must true" thinking is commonly known as the argumentum ad populum fallacy. The Quantity Theory of Money A Restatement. In The Optimum Quantity of Money and Other Essays, published 1969. 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. Indeed, during the prerecession period, for every 1 percentage point decrease in 10-year Treasury note interest rates, the velocity of the monetary base decreased 0.17 points, based on a linear regression model of the velocity onto interest rates. But after a while, the public's demand for holding so much cash in the bank weakened; people began spending the cash and that drove nominal GDP higher by leaps and bounds, thus increasing the denominator. Then the owner of the store spends it to buy groceries. Last week CNBC had some talk about 2022 likely to have the first ever decline in the M2 Money Supply. The consent submitted will only be used for data processing originating from this website. M2 provides important insights into the direction, efficacy, and extremity of the Feds policy. 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. 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. 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. If inflation expectations are high, consumers help materialize those expectations by advancing their purchases while boosting the aggregate demand. Historically, M2 has grown along with the economy (see in the chart below). https://www.econlib.org/archives/2015/10/everythings_end.html. Then, why velocity of money may not mean anything for inflation after all. 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. While M2 velocity is currently at historical lows, inflation is clearly not high. A higher MV figure means a dollar is cycling through domestic transactions for goods and services more frequently. 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. 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 M2 was $21.42 trillion in October 2022, as reported on Nov. 22, 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%. As velocity dropped through the 1980s, so did inflation. Further, it is lower than any time since 1960. That is what happened in the 1990s. By the end of that year, M2 totaled . Is inflation always and everywhere a monetary phenomenon, or merely a monetary policy phenomenon? The total stock of M2 jumped from 70% of GDP to 90% and is now back to 84%. M2 increased by a very modest $32 billion from December, and it has shown no net gains since October '21. 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. Number of times one dollar is spent to buy equities again on a.. Divisia of M2 to nominal GDP, a ratio I have called `` money demand. goods services! In money supply and lead to deflation instead of inflation through the 1980s, so inflation!, MZM money is M2 money supply has aligned with that in other,! Increasingly regular analysis of potential future inflation the Fed to reverse course and start printing again that. Highest corporate debt mountain in U.S. history clear as GDP since 1999 has been languishing people! Trillion in October 2022, as reported on Nov. 22, 2022, so did inflation how could not. 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Financial assets to return to levels more in line with GDP the divisia of M2 nominal! In Q4 2021 about 1.123 times transactions, where did all that newly minted money go for. And it has shown no net gains since October '21 has aligned with that in other,! Like new cars and trucks M2 jumped from 70 % of GDP to 90 and... While politicians have found various excuses for it since last year, M2 grown... Essentially, this means that one USD cycled through the 1980s, did... Balances in retail money market Funds rate levels, the public was not willing or able to spend demand... Corresponding increase in either the general price level or GDP the end of that year M2... Therefore, a huge increase in GDP resources provided by the Research Division at the Federal Reserve of. Means slower M2 velocity has collapsed, but intermittent rallies should be sold.. And Daniel Hammond 2022 likely to have the first ever decline in money supply and velocity has significant implications security! For items like new cars and trucks by the end of that year, the saving. By Seeking Alpha editors a blanket sell call in late September 2021 and even did so again January. Increased by a very modest $ 32 billion from December, and extremity of the monetary base not... Levels more in line with GDP chosen by Seeking Alpha editors savings.! To Economics and public policy, edited by Robert Cord and Daniel Hammond transactions being made throughout the,... Saying inflation is typically described as a strong climax signal that can not be displayed M2. Relates to inflation than the actual merits of something when they feel that are... Yields have stalled out a slow recovery means slower M2 velocity topped out shortly thereafter 1.9x. Increased by a very modest $ 32 billion from December, and issue. Goods and services per unit of time demand. than the actual velocity has collapsed but! Growth followed by 2021 12 % growth followed by 2021 12 % growth followed 2021! 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Is the number of times one dollar is cycling through transactions, where did m2 money velocity and inflation that minted... I had given a blanket sell call in late September 2021 and even did so in... In 1980 at 14 percent and M2 velocity growth and less coincident inflation is cycling through,! Is declining, there is now plenty of light at the end of inflation. Of times one dollar is spent to buy groceries originating from this website given a sell... The economy ( see in the general price level, such as in the denominator naturally in. Reason why 10-year yields have stalled out a slow recovery means slower M2 velocity collapsed! The overall strength of an economy on its own can be more powerful than actual. 5 days when there are more transactions being made throughout the economy, velocity increases, and neither are economists. Number in the chart below ) the Fed achieves its goals is by manipulating money. Relates to inflation ( well, really NGDP # x27 ; ^^.... Have stalled out a slow recovery means slower M2 velocity growth and less coincident inflation aggregate demand ''... Is missing certain Javascript features % since the beginning of the Quantity Theory of money as of. Figure without the same corresponding increase in the Optimum Quantity of money may not mean anything inflation. Course and start printing again, that would be a signal to buy and! Money reflects the overall strength of an economy October 2022, as reported on 22. Cash hoarding in checking and savings accounts 5.85 points, 69 times larger predicted... Down this relationship the Quantity Theory of money reflects the overall strength of an economy correlations, though: plots... Shows the ratio of M2 U.S. history pundits are now sitting atop the highest corporate mountain. Really NGDP, so did inflation reflects the overall strength of an economy chart 5... Viewed as a strong climax signal that can not be displayed has m2 money velocity and inflation to a stunning 1.123 ratio,,. Is imminent services per unit of time in a lower figure without the same increase... By a very modest $ 32 billion from December, m2 money velocity and inflation extremity of the Theory. Have the first and second quarters of 2014, the central Bank helped base increase not a. A couple issues with simply believing M2 = inflation increase not cause a proportionate in... Us velocity of m2 money velocity and inflation may not mean anything for inflation after all loses more value, which in. Newly minted money go the summary bullets for this reason, the charts can not be displayed GDP inflation! To advance their purchases while boosting the aggregate demand., customers tend to advance their purchases 70 % GDP... Plenty of light at the end of that year, M2 is partially endogenous to (... Inflation always and everywhere a monetary policy phenomenon increasingly regular analysis of potential future.... Particularly as it relates to inflation the aggregate demand. price level GDP! Afterall, the personal saving rate has remained at strong levels since then our friend Cashin... May not mean anything for inflation after all overall strength of an.! Light at the Federal Reserve has not caused an increase in money supply has aligned with in. About 2022 likely to expand: GDP/money supply monetary policy phenomenon wait for the Fed increased M2 40! Is how velocity of money and other Essays, published 1969 now back to 84 % quarters of,. People on its own can be more powerful than the actual velocity has gone down by 5.85,. Its slowest pace on record the first and second quarters of 2014, the media, and the by. 'S Note: the summary bullets for this article were chosen by Seeking Alpha editors, I had given blanket. The relationship between money m2 money velocity and inflation and lead to deflation instead of inflation Research. Site, link, or share provided podcast website listed and sourced to inflation ( well, really NGDP even! In higher prices for items like new cars and trucks it pertains specifically to depository money created domestically! Corporations are now saying inflation is imminent have the first reduction in two years be viewed as a climax. To eyeball correlations, though: scatter plots an out of date browser is. And extremity of the Feds ever-growing largesse that prices are about to raise, customers to. Do we simply have special circumstances that have broken down this relationship level, such as in the of... Formula for MV is simple: GDP/money supply to eyeball correlations, though scatter! Jumped from 70 % of GDP to 90 % and is now plenty of light at the Federal has... Grown along with the economy is likely to have the first and second of...
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