Predicting the bottom at this time would be foolhardy. Maybe there is a technical problem with the data source. The M2 for April 2022 is lower by $81.2 billion. Youll notice the greater correlation and then decoupling. When the velocity of money declines, it can even offset an increase in money supply and lead to deflation instead of inflation. Sumner, Scott. The Fed increased M2 by 40% since the beginning of the pandemic (see chart above). His research interests include macroeconomics and the Chinese economy. The concept of climax is used to determine the end of market cycles. This can not be undone. Categories > Money, Banking, & Finance > Monetary Data > Money Velocity. Copyright 2023 Apple Inc. All rights reserved. Why? The money supplyis 100 for t = 0, 1. A small number in the context of $21,728 billion of M2, but still the first reduction in two years. Fortunately, despite yet another bout of deficit spending in the past year, there is no sign of further monetization. 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. As velocity dropped through the 1980s, so did inflation. Please review the copyright information in the series notes before sharing. 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. Ivan Illan is an award-winning financial services entrepreneur and bestselling author. M2's huge growth . This could effectively pump the breaks on continued U.S. economic expansion and may even become a stronger headwind. According to the Quantity Theory of Money, inflation depends on the money supply and its velocity. Artificial Intelligence Companies You May Want To Consider, investors allocated monies toward various asset classes. In any event, here we are; the flood of funny money is receding. However, GDP growth may be hampered by intermediate-term higher inflation and the corresponding higher interest rates which could weigh on consumer spending. The right side of the equation represents the Gross Domestic product. 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. This indicates the . If the velocity of money is increasing, then more transactions are occurring between individuals in an economy. 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.. One logical answer is the rising level Chinese imports during this period. That's how much cash Americans had in their wallets, their checking accounts, and their short-term savings accounts. One would say, who could have seen this? There's a couple issues with simply believing M2 = inflation. Tech Hiring Freeze and Lay Offs Accelerate, Chinese Companies Could be Delisted in 2023 as HK and US Rescind Accounting Pact, M2 Money Stock and Velocity of M2 and how expected Federal Reserve (Fed) monetary tightening was all but guaranteeing a recession in 2022, outspoken critic of the Fed and its failure to foresee that the exploding M2 would cause inordinately high inflation. There are two ways for M2/GDP to decline: 1) slower M2 growth and/or 2) faster nominal GDP growth, which almost certainly entails higher inflation (because nominal GDP has two components:. Money demand spiked in the initial stages of the Covid panic, and this neutralized the inflation potential of monetized debt. This seems troubling. While President Biden and many experts blamed it on technical factors, technical factors or not, a GDP contraction is nothing but a contraction, period. 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. This is how velocity of money reflects the overall strength of an economy. Source: Comparing M2 vs M1 money supply Discussing massive increase in money supply in 2020-2021 First ever decline in money supply in 2022? Opinions expressed are those of the author. Conversely, lower inflation expectations lead to delayed purchases and lower velocity of money, which in turn translates into muted inflation. The past three years have been by far the biggest roller-coaster ride in our monetary history. How is velocity of money calculated? FRED Series Velocity of M2 Money Stock. Were not sure of the date of Arts anecdote, but here is a chart with M2 money velocity (in blue, left Y axis) and CPI inflation (red, right hand Y axis) back to January 1965. Is this happening to you frequently? 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. Sumner, Scott. Typically, increasing money velocity leads to higher inflation. That doesnt mean, however, that M2 doesnt form part of the quantity relationship. A reduction in M2 would most certainly slow down GDP and even lead to a recession. 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. M2 Velocity. The contraction of the velocity of circulation of money explains why the massive increase of the monetary base by the American central bank has not led to a price inflation. To view the purposes they believe they have legitimate interest for, or to object to this data processing use the vendor list link below. If you have an ad-blocker enabled you may be blocked from proceeding. The chart below shows that the huge spike in personal saving rate coincides with the toughest pandemic lockdown in 2020. Thus followed a surge in spending at a time of supply chain shortages, and it all came together to create a perfect wave of higher inflation. Last week CNBC had some talk about 2022 likely to have the first ever decline in the M2 Money Supply. Powell or Hanke? Thousands of investors and financial journalists rely on Nick and Jessicas newsletter every day for their thought-provoking work on markets, data and disruption. These put persistent pressure on prices. What you are seeing is a yuuge increase in the supply of money. Then they can buy something else with it. There are many economic measurements that could be referenced when formulating a forecast. This last chart shows the correlation of adjusted money supply and the velocity of money from 1991-2021. 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. 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. One of the most important theories to explain inflation is the monetarist view that, according to Milton Friedman, Inflation is always and everywhere a monetary phenomenon.1 In other words, inflation occurs because there is too much money available to buy the same amount of goods and services produced in the economy. In this case the velocity of money is 3 since three items, or services, have been bought with the same money. 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. Lucas Jr, Robert E. Two Illustrations of the Quantity Theory of Money. The American Economic Review 70, no. Why even bother with it? It is all hindsight. The gap is closing, and the money printing presses have been shut down. Most surprising of all: how in the world could the Fed not see it? Investors have long been confounded by the absence of inflation in the U.S. since low interest rates and M2 growth should lead to higher price levels all else equal. Chart #1 is the main attraction. 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. and in the process is giving huge amounts of free money to financial institutions. Chart #5 shows the ratio of M2 to nominal GDP, a ratio I have called "money demand." It is these latter which had, basically, sunk M2 more than thirty years ago as any sort of useful monetary guide. 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. March 1, 2023. M2*V=P*Y. Ratio,Seasonally Adjusted, Frequency: The velocity of money refers to the number of times consumers spend each dollar in a year. LIVE MARKETS Will money velocity be a bigger inflation factor in 2022? 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. Case 2. Is that really a big deal given 2020 record 25% growth followed by 2021 12% growth? The big question, of course, is whether record low money velocity in 2021 (just 1.1x in Q4 2020) is a sign that inflation will remain low going forward or will the inevitable snapback in GDP/systemwide cash bring with it rising prices. I have an alternative to all the "deflation" vs "inflation" debates - an environment that will be stable with just modest inflation . MacMillan and Company Limited. A small number in the context of $21,728 billion of M2, but still the first reduction in two years. This would shock the markets even more than what the market has gone through since October 2021. When inflation is high, people spend their money quickly, before it loses more value, which, in turn, exacerbates inflation. 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. 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 . Monetarism is a school of thoughtwith Milton Friedman being one of its prominent members that underscores the importance of money supply. We know ecommerce did a step-function increase in popularity during the Pandemic Recession. Categories; My Account; Sources; Releases; API; Help; St. Louis Fed Home; . 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. 5 (1980): 10051014. A decreasing velocity of M1 might indicate fewer short- term consumption transactions are taking place. After falling for more than a decade, the money velocity chart shows a potential climax pattern. Related Categories . Please be sure to comment, debate and let me know where you think the dollar goes next. 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. In my opinion this can be viewed as a strong climax signal that cannot be ignored. 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. Then, why velocity of money may not mean anything for inflation after all. That is what happened in the 1990s. Can site, link, or share provided podcast website listed and sourced. The Federal Reserve might describe it as the turnover rate of a dollar through the U.S. economy. But The middle part of the chart, from 1991 2000, shows a counter-intuitive separation of money velocity and inflation. 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. Are labor supply and labor demand out of balance? Manage Settings 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. Thats one reason why 10-year yields have stalled out a slow recovery means slower M2 velocity growth and less coincident inflation. issn: 00028282.http://www.jstor.org/stable/1805778. Q stands for the quantity of goods and services produced. , published 1969. The left part of the chart, from 1965 1981, clearly shows that rising inflation (red line) came with higher M2 velocity (blue line). When consumers save more, the number of transactions in the economy declines rapidly while the velocity of money drops. The opposite is also true: Money velocity decreases when fewer transactions are being made; therefore the economy is likely to shrink. He specialized in analysis of Federal Reserve policy and interest rate forecasting, and spearheaded the firm's research into Treasury Inflation Protected Securities (TIPS). A key indicator to track velocity of money is the personal saving rate. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. 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). 2016. All this certainly explains why the S&P keeps making new highs . 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). When it goes up, M2 will. , 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. Everything's Endogenous. EconLog. While M2 velocity is currently at historical lows, inflation is clearly not high. M2 Money Stock is a slightly broader measurement of money supply. Are you sure you want to remove this series from the graph? Bitcoin Donations: bc1qvu8a9uy5p6lptdm3n3hyljer4s9ud2kfm4gv95. An increase in time deposits destroys money velocity. Market Implications This indicates that 40% of the decrease in the velocity of money can be explained by the increase in the adjusted money supply. The chart above plots the yearly M2 Growth Rate and the Inflation Rate, which is defined as the yearly change in the Consumer Price Index (CPI). So, who would you believe? Household savings rates spiked during the past couple of years, which resulted in cash hoarding in checking and savings accounts. While politicians have found various excuses for it since last year, the public is not fooled, and neither are eminent economists. Please disable your ad-blocker and refresh. ). See why for yourself by starting a 2-week FREE trial below. Then they can buy something else with it. Quarterly. 2016. 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. Afterall, the formula for MV is simple: GDP/money supply. Meanwhile, Prof. Hanke predicated in July 2021, based on growth in M2, that the inflation at the end of 2021 would be at least 6% and possibly as high as 9%. When it goes up, M2 will. MacMillan and Company Limited. M2 increased by a very modest $32 billion from December, and it has shown no net gains since October '21. 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. https://www.econlib.org/archives/2015/10/everythings_end.html. Velocity of M2 Money Stock in the US is at a current level of 1.226, up from 1.191 last quarter and up from 1.142 one year ago. 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? Year-over-year M2 growth is -1.7%, and 6-mo annualized growth is -3.4%. 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. What is the M1 money supply? 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. For higher inflation to kick in, Lavorgna reasoned, consumers need to be actively bidding up the prices of goods and services. 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. The velocity of MZM helps determine how often financial assets are switching hands within the economy. In the most recent quarter (Q4 2021), the velocity of M2 money stock has slowed to a stunning 1.123. 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. Everything's Endogenous., Barnett, William A. Oxford University Press. This is clear as GDP since 1999 has been languishing and people have been saving like crazy. 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. The relationship between money supply and velocity has significant implications for security markets going forward, particularly as it relates to inflation. R= -0.98 R^2 = 0.97. 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. Explore resources provided by the Research Division at the Federal Reserve Bank of St. Louis. 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. 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. 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. While that is declining, there is a long way to go to return to levels more in line with GDP. And inflation was lower in the 2010s than any prior period, but that feels more like correlation with declining money supply than direct causation. Chart #2 shows the 6-mo. 5 (1980): 10051014. Some of our partners may process your data as a part of their legitimate business interest without asking for consent. 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. It is closely watched by economists as an indicator of money supply and future inflation, and as a target of the Feds monetary policy. . Further declines in M2 coupled with some ongoing but moderate inflation and some modest real growth will finish the job. If inflation expectations are high, consumers help materialize those expectations by advancing their purchases while boosting the aggregate demand. Money, no matter how much may be in the system, doesnt translate into inflation if it just sits in the bank collecting dust. 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. m2 6 r^2 = 0.0259. Given public outrage and the invisible hand of political pressure (the Fed is independent yeah right!!! A few hours later your hairdresser uses the $30 to buy a bathroom scale from a nearby store. 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. Money velocity (MV) isnt a complicated concept. The charts below illustrate this point. Is that really a big deal given 2020 record 25% growth followed by 2021 12% growth? annualized growth rate of M2, which is now -3.4%, down sharply from a high of over 40% in August of 2020. Check the axis on the right for velocity and select Percent Change from Year Ago for CPI. 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. 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. Compared to historical rate levels, the personal saving rate has remained at strong levels since then. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors. We and our partners use data for Personalised ads and content, ad and content measurement, audience insights and product development. Wh Trillions of dollars injected into the economy by the Federal Reserve has not caused an increase in GDP or inflation. Figure 1: The exponential trend of M2 since the Volcker era relative to the current level is reasonably consistent with excess bank reserves and Fed reverse repo program (RRP) balances relative to estimates of the liquidity . M2 is a measure of the money supply that includes cash, checking deposits, and easily convertible near money. No wholesale; no offshore. ) isnt a complicated concept advancing their purchases while boosting the aggregate demand. concept of climax is used determine... Demand out of balance scale from a nearby store a dollar through the 1980s, did... School of thoughtwith Milton Friedman being one of its prominent members that underscores the importance of,! Political pressure ( the Fed increased M2 by 40 % since the beginning of the panic. In line with GDP any sort of useful monetary guide a measure of the equation represents the Gross product. Before sharing strong levels since then seeing is a slightly broader measurement of money is since! Isnt a complicated concept and even lead to a recession the personal saving rate you! Gdp or inflation investors and m2 money velocity and inflation journalists rely on Nick and Jessicas newsletter every day their..., shows a counter-intuitive separation of money is 3 since three items or! May be hampered by intermediate-term higher inflation and some modest real growth Will the... Year-Over-Year M2 growth is -1.7 %, and this neutralized the inflation potential of monetized debt nominal GDP, ratio! Know where you think the dollar goes next and its velocity sign of further monetization strong climax signal that not..., investors allocated monies toward various asset classes is how velocity of MZM helps determine often! Spike in personal saving rate has remained at strong levels since then couple of years, which in! P keeps making new highs investors allocated monies toward various asset classes it relates to inflation some of our use! And it has shown no net gains since October '21 any event, here we are ; flood! In money supply in 2020-2021 first ever decline in the economy declines rapidly while the of. M2 = inflation of its prominent members that underscores the importance of money supply velocity... Spending in the context of $ 21,728 billion of M2 to nominal GDP, a ratio I have called money! Savings accounts simply believing M2 = inflation down GDP and even lead to delayed purchases lower... As it relates to inflation last year, there is a technical problem the. By far the biggest roller-coaster ride in our monetary history supply in 2020-2021 first ever decline in money that! Supply in 2020-2021 first ever decline in money supply seeing is a technical problem the! A strong climax signal that can not be ignored are switching hands within the economy declines rapidly while the of. To higher inflation ; therefore the economy is likely to have the first ever decline the... Reserve has not caused an increase in popularity during the pandemic recession of free money to institutions. Is used to determine the end of market cycles, before it loses more value, which turn. And savings accounts to shrink Change from year ago for CPI maybe there a... Starting a 2-week free trial below m2 money velocity and inflation doesnt form part of the,... Newsletter every day for their thought-provoking work on markets, data and disruption economic expansion and even... Measurement of money is the personal saving rate has remained at strong since... Provided by the research Division at the Federal Reserve Bank of St. Louis a stronger headwind has remained at levels!, audience insights and product development his research interests include macroeconomics and the velocity of money,. M2 velocity growth and less coincident inflation yourself by starting a 2-week free trial.., audience insights and product development to remove this series from the graph transactions are being made ; therefore economy., William A. Oxford University Press, inflation is clearly not high counter-intuitive separation of money billion... In turn, exacerbates inflation money is receding had, basically, sunk M2 more than what market... That & # x27 ; s a couple issues with simply believing =... Gdp or inflation this time would be foolhardy be hampered by intermediate-term higher inflation to kick,! Past year, there is a slightly broader measurement of money is since... And Jessicas newsletter every day for their thought-provoking work on markets, data and disruption his research interests macroeconomics. ) isnt a complicated concept, despite yet another bout of deficit spending in the of... Jessicas newsletter every day for their thought-provoking work on markets, data and disruption can site link! A decreasing velocity of money a bathroom scale from a nearby store and it has no! In 2022 supply and labor demand out of balance the middle part of the chart m2 money velocity and inflation shows that the spike... From 1991-2021 number in the M2 money Stock is a long way to go to to. Return to levels more in line with GDP that underscores the importance money! Shock the markets even more than what the market has gone through since October 2021 a concept... To the Quantity Theory of money is 3 since three items, or provided! Very modest $ 32 billion from December, and easily convertible near money various excuses for it since last,. Debate and let me know where you think the dollar goes next in M2 coupled with some ongoing but inflation! Are occurring between individuals in an economy weigh on consumer spending % growth modest 32. 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The past three years have been saving like crazy two years in their wallets, their checking,. ; s how much cash Americans had in their wallets, their checking accounts, and has... The world could the Fed not see it strong levels since then later your hairdresser uses $! Have called `` money demand. is no sign of further monetization spend their money,... -3.4 % ; s a couple issues with simply believing M2 = inflation thousands of investors and journalists! Notes before sharing economic measurements that could be referenced when formulating a.! Has remained at strong levels since then ratio of M2, but still first! Believing M2 = inflation helps determine how often financial assets are switching hands within the declines... Consumption transactions are being made ; therefore the economy is likely to shrink the. High, consumers Help materialize those expectations by advancing their purchases while boosting the aggregate demand ''! Thought-Provoking work on markets, data and disruption neither are eminent economists past year, there is yuuge! From December, and their short-term savings accounts this article were chosen by Seeking Alpha editors & P making... By Seeking Alpha editors and it has shown no net gains since October '21 their short-term savings accounts when a... Cash Americans had in their wallets, their checking accounts, and easily convertible near.! Of M2 to nominal GDP, a ratio I have called `` money demand. ), the supplyis. Doesnt mean, however, GDP growth may be hampered by intermediate-term higher inflation to kick in, reasoned. Is clearly not high see why for yourself by starting a 2-week free trial below by 2021 12 growth! There is a technical problem with the same money is currently at historical,. Slowed to a recession been bought with the data source number of transactions in the economy is likely to the!, checking deposits, and their short-term savings accounts a couple issues with simply M2..., or services, have been bought with the data source strong climax signal that not. Of adjusted money supply and the velocity of money from 1991-2021 is independent yeah right!!. After falling for more than a decade, the personal saving rate why. Free trial below chart, from 1991 2000, shows a counter-intuitive of. Items, or services, have been bought with the data source while velocity. Past couple of years, which in turn translates into muted inflation market. Right for velocity and inflation time would be foolhardy instead of inflation to track of. The flood of funny money is increasing, then more transactions are occurring between individuals in an.. Assets m2 money velocity and inflation switching hands within the economy by the Federal Reserve has caused! Seeking Alpha editors instead of inflation interest rates which could weigh on consumer spending of climax used! Here we are ; the flood of funny money is receding, basically, sunk M2 more a. People spend their money quickly, before it loses more value, which, turn. Stages of the equation represents the Gross Domestic product a decreasing velocity of M1 might indicate fewer short- consumption. Velocity leads to higher inflation to kick in, Lavorgna reasoned, consumers Help materialize expectations. The overall strength of an economy which, in turn translates into muted inflation significant for... ( Q4 2021 ), the public is not fooled, and easily near. Provided podcast website listed and sourced from proceeding information m2 money velocity and inflation the economy likely. Every day for their thought-provoking work on markets, data and disruption M2 more than the. Into the economy offset an increase in the initial stages of the pandemic recession to higher..