Wednesday, June 6, 2012

Money Velocity Has Been Falling Since 2010 (GDP/M2, GDP/MZM)

Nominal GDP/MZM and Nominal GDP/M2 (source: St. louis Fed)
The velocity of money (nominal GDP/M2 or nominal GDP/MZM) has been falling since 2010, which means the boost in M2 from 8.4 trillion in January 2010 to 9.8 trillion today hasn't translated into GDP growth. M2 = M1+ savings deposits, time deposits, and retail money market funds. MZM = M2 less small-denomination time deposits plus institutional money funds (St. Louis Fed).

In other words, via the St. Louis Fed:

"velocity is a ratio of nominal GDP to a measure of the money supply. 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."

Or, here's another take at econlib.org: What Is Money Velocity?. Usually the monetary base is supposed to create new money (or M2 via new credit) in the fractionalized reserve banking system to purchase new goods and services. M2/BASE has been stair steeping down since the market bottomed in 2009 (chart below). I guess you could say it would have been a lot worse without Fed stimulus after the financial crash, but M2 velocity keeps making new lows and MZM velocity is near the 2009 low. Actually, M2 velocity just made a new all time low on the chart below the 1960s bottom. It is also interesting that both M2 and MZM velocity have been falling for decades now.

When people freak out about the possibility of hyperinflation from the Fed printing money or injecting reserves into banks, they picture M2 velocity spiking, uncontrollable price inflation, and a loss of confidence in the Dollar (missing anything?). Of course, the Fed would then try to kill this trend by raising rates to 50%. That would be interesting to blog about in real time. Here are more charts.


Velocity of M2 Money Stock (source: St. Louis Fed)



Velocity of MZM Money Stock (source: St. Louis Fed)



M2 Multiplier (M2 / Monetary Base) (source: St. Louis Fed)

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