Year-over-year M2 growth is -1.7%, and 6-mo annualized growth is -3.4%. This indicates the . However, that will depend on GDP remaining at least at its current level. 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. Then, why velocity of money may not mean anything for inflation after all. Money demand spiked in the initial stages of the Covid panic, and this neutralized the inflation potential of monetized debt. So why did Milton Friedman, the greatest monetary economist barring perhaps Wicksell, choose to use M2 as his measure? A higher MV figure means a dollar is cycling through domestic transactions for goods and services more frequently. 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. The standard formula of Monetarism predicts the former, A cursory glance at M2 and inflation shows no correlation. The issue has to do with the velocity of money, which has never been constant, as can be seen in the figure below. Check the axis on the right for velocity and select Percent Change from Year Ago for CPI. The personal saving rate is a primary indicator to track velocity of money and inflation. 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. , where output is 150, the money velocity is 1.5. 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. It is all hindsight. The M2 for April 2022 is lower by $81.2 billion. 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. I would just wait for the Fed to reverse course and start printing again, that would be a signal to buy equities again. Is this happening to you frequently? This dynamic can have a significant effect on inflation indexes. It is still mind-boggling to me that the unprecedented growth of M2 has almost completely escaped the public's notice. Most surprising of all: how in the world could the Fed not see it? The Counter-Revolution in Monetary Theory, Wincott Memorial Lecture, University of London, Sept. 16, 1970. 1 highlighted above to see the way to derive GDP from M2 money stock and the velocity of the M2 money stock. What gives? The monetary base includes notes and coins in circulation as well as bank reserves. Technical analysis can be applied on economic indicators whenever human psychology plays a key role. Bitcoin Donations: bc1qvu8a9uy5p6lptdm3n3hyljer4s9ud2kfm4gv95. As a reminder, M2 money is basically cash, checking and retail money market balances and "velocity" is GDP divided by M2. According to the Quantity Theory of Money, inflation depends on the money supply and its velocity. One is that M2 can be a good indicator. The views expressed are those of individual authors and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, or the Board of Governors. Last week CNBC had some talk about 2022 likely to have the first ever decline in the M2 Money Supply. Charts powered by Highcharts. Back then, it was Chinese imports. 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. Sumner, Scott. 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. 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. M2 contained non-M1 components which are contractionary. While M2 velocity is currently at historical lows, inflation is clearly not high. All rights reserved. As human beings and social creatures . The gap is closing, and the money printing presses have been shut down. These put persistent pressure on prices. Ratio, Quarterly, Seasonally Adjusted Q1 1959 to Q4 2022 (5 days . My R^2 was 0.754. 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). This seems troubling. A small number in the context of $21,728 billion of M2, but still the first reduction in two years. When the velocity of money declines, it can even offset an increase in money supply and lead to deflation instead of inflation. High money velocity is usually associated with a healthy, expanding economy. Inflation pressures peaked almost a year ago, and headline inflation will almost certainly continue to subside. Trillions of dollars injected into the economy by the Federal Reserve has not caused an increase in GDP or inflation. One would say, who could have seen this? A decreasing velocity of M1 might indicate fewer short- term consumption transactions are taking place. According to Bannister and Forward (2002, page 28), Money supply growth and inflation are inexorably linked. As we progress through this post, you will see how it impacts inflation and the GDP. Please let me know if this happens regularly @silvan_frank. 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. March 1, 2023. 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. ), the Fed has finally pivoted, albeit painfully slowly. 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. When inflation is high, people spend their money quickly, before it loses more value, which, in turn, exacerbates inflation. Not anymore. The second is that Friedman preferred the divisia of M2. 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. After accounting for velocity [(M*V)/y=P], we see the relationship become unity. 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. A key indicator to track velocity of money is the personal saving rate. As a result, M2 stands more than 36 percent higher today than it did at the end of 2019. Thousands of investors and financial journalists rely on Nick and Jessicas newsletter every day for their thought-provoking work on markets, data and disruption. Supply also matters here, and that issue tips in favor of higher prices for items like new cars and trucks. 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. The opposite is also true: Money velocity decreases when fewer transactions are being made; therefore the economy is likely to shrink. 2016. Chart #2 shows the 6-mo. 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. 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." It is these latter which had, basically, sunk M2 more than thirty years ago as any sort of useful monetary guide. I ran an exponentially weighted moving average on the variables, however, and got this (this the same procedure Lucas ran in his quantity theory paper. When it goes up, M2 will. The velocity of MZM helps determine how often financial assets are switching hands within the economy. We and our partners use data for Personalised ads and content, ad and content measurement, audience insights and product development. Theres a couple issues with simply believing M2 = inflation. How could that not have resulted in higher prices? Velocity is a ratio of nominal GDP to a measure of the money supply (M1 or M2). Velocity of M2 Money Stock [M2V], As we have seen above, the U.S. GDP growth is heavily contingent upon the money printing largesse of the Fed. Explore resources provided by the Research Division at the Federal Reserve Bank of St. Louis. 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. 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 . 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. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System. Put another way, the U.S. economy is nothing but a zombie addicted to the Feds ever-growing largesse. 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. 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 economys strength or peoples willingness to spend money. And why then would people suddenly decide to hoard money instead of spend it? In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. 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:. Is that really a big deal given 2020 record 25% growth followed by 2021 12% growth? Thus, it is precisely the sharp decline in velocity that has offset the sharp increase in money supply, leading to the almost no change in nominal GDP (either P or Q). Inflation is typically described as a persistent increase in the general price level, such as in the consumer price index. Are labor supply and labor demand out of balance? In this case the velocity of money is 3 since three items, or services, have been bought with the same money. It pertains specifically to depository money created only domestically. When inflation is high, prices for goods and services rise and thus the purchasing power per unit of currency decreases. 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. A declining M2 constitutes deflation. 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). Supply also m2 money velocity and inflation here, and headline inflation will almost certainly continue to.... Suddenly decide to hoard money instead of spend it instead of spend it within the economy would. Includes notes and coins in circulation as well as bank reserves at historical lows, inflation high. Years ago as any m2 money velocity and inflation of useful monetary guide a persistent increase money. 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