Why is M2 money velocity at a multi-decade low?

[Sam Brazil]

Whatever is happening economically, at least so far as this metric can track, has never happened before to the PP...

Does that freak anyone else out? What's more, why is no one talking about this? A google search only brings up doom and gloom type sites...nothing in the mainstream about this...and yet this is straight from the Fed and this is unprecedented at least as of 1960!

Can someone with more understanding of econ explain the significance of this?

[dutchtraffic]

Because the economy is totally dead and broken, it's just the gov and media that keep saying "all is well"


"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. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy. 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."

[Sam Brazil]

Because the economy is totally dead and broken, it's just the gov and media that keep saying "all is well"

What does record low velocity mean? That people are hoarding money instead of spending it? So does that mean we're experiencing the worst deflation we've ever seen?

[barrett]

Bumping this up in the hope that moda or someone else with econ chops will comment.

My puny understanding is that people are deleveraging or paying down debt. They are not spending or borrowing much so a lot of the new money in the economy is stuck in banks. Or maybe with so much money sloshing around, it's to be expected that the velocity of each individual dollar goes down.

Just stumbling about in the wilderness here, hoping to say something profound or totally inane that will spark a conversation. Thanks for posting that, Sam B.

[flagator]

Bumping this up in the hope that moda or someone else with econ chops will comment.

My puny understanding is that people are deleveraging or paying down debt. They are not spending or borrowing much so a lot of the new money in the economy is stuck in banks. Or maybe with so much money sloshing around, it's to be expected that the velocity of each individual dollar goes down.

Just stumbling about in the wilderness here, hoping to say something profound or totally inane that will spark a conversation. Thanks for posting that, Sam B.

Another explanation is that many many people actually, do not have much money to spend anyway. They cannot save nor can they spend if they have no money. The economy is mainly growing jobs that are part time, and pay low wages,

Outsourcing of american jobs to 3 rd world countries, and NAFTA have decimated the American worker. Wait till the TPP passes. It will get worse.  Also increased automation and technology use can cause unemployment and layoffs. Not everyone who gets laid off due to robot use can retrain or learn new skills. Some people do not have the mental capacity to learn new skills. Many people are being left behind. Food stamp use last time I checked was around 45 million people. Last time people needed that much assistance with food percentage wise was in the depression of the 1930s. And then you wonder why the M2 velocity keeps dropping?

It's also called greed and concentration of wealth by the 1%

Outsource, automate, and shelter all your money overseas as much as possible to avoid taxes. Let them eat cake.

I am not an economist, just saying...

[barrett]

Yeah, the velocity of money for minimum wage workers would be really high because they immediately spend everything they make on necessities. The problem is that their spending only makes up a puny piece of the pie. That FRED graph that Sam posted is likely a pretty good mirror image of wealth concentration.

[moda0306]

I wonder if the use and holding of certain lines of credit affects M2 to the negative, as it is not included in M2.

Hmmm this is a curious happening...not sure but I'll try to find some time later to see if I can come up with. I really do think people are spending more than they used to be. Not sure why this would be slowing down.

[Sam Brazil]

It's also called greed and concentration of wealth by the 1%

Outsource, automate, and shelter all your money overseas as much as possible to avoid taxes. Let them eat cake.

I am not an economist, just saying...

Well this chart of total M2 money supply seems like it's supporting what you're saying, because the overall money supply is at record highs...the economy is flush with money, and yet velocity is at an all time low...so some cohort of people are the recipients of that money and they're parking it somewhere so that it can't circulate through the economy and increase velocity. Since the lower socioeconomic tiers tend to spend money quickly, I suppose that means that the wealthy have received much of the money and they're investing it in assets in ways that don't "trickle down" -- makes sense if you look at asset prices, with the stock market at record highs and record valuations, huge amounts of money sitting in corporate accounts, and the startup bubble seeing ventures receive ridiculous amounts of venture capital. The venture one arguably would circulate money, but then again, software startups don't push money onto the lower socioeconomic tiers to spend it.

[Sam Brazil]

How about this for a meta-explanation, just for giggles?

It's automation kicking in...the more automation, the fewer employees are needed, and therefore money thrown into the economy to be used by businesses ends up enriching the investor/owner class instead of making its way down to employees like it might have done in the past, when 100 employees were required to do what only requires 25 today. As automation gets worse, you can keep pumping more and more money to business, but it will concentrate more and more into the owners of the machines.

This isn't exactly a conspiracy that requires imagination. I worked for a company that specializes in creating software to automate things that used to require many people to do manually, and know friends in completely unrelated fields who have lost jobs directly because software innovation required fewer employees to do the job. It's not just about robots completely replacing humans -- software innovation can gradually chip away at the amount of humans needed to do things, yet still require some humans.

Back in PP land, I suppose none of this matters, because those productivity gains would be captured in rising stock prices...which is what we're seeing. We're also seeing deflation because, while assets are flying high, that money isn't making it through the general economy, and so money is becoming more and more scarce to the average person.

[barrett]

Can't find anything online at the moment that is really concise but that M2 number does seem to be moving down roughly in synch with the percentage of adults in the workforce. And my guess is that the real numbers are lower still if only full-time jobs are counted.

[jason]

My understanding is that money velocity is just the ratio of the GDP to the money supply.  For example, if the GDP of an imaginary country is $150, and the money supply is $100, then the money velocity is 150/100 = 1.5.  So, any time a country prints an enormous amount of money, like the US did during the 2008 bailouts, the money velocity will immediately fall since the money supply has just increased.  One would expect that, over time, this new money would find it's way into the economy and bring the money velocity back up. So, the question is, if this newly printed money is not circulating in the economy, where did it go?  We know that huge amount of the bailout money went to the big banks.  So, what did they do with it?  It looks like they are holding huge "excess reserves".
https://research.stlouisfed.org/fred2/series/EXCSRESNS
Banks are required to have 10% in reserve, which means for every $9 they lend out, they must have $1 on reserve (in their possession).  But if a bank has higher reserves, like 15%, it's simply because they do not want to lend out the maximum amount they are allowed to lend, which could be due to a number of reasons, including the banks feeling there are not enough lending opportunities out there where the reward outweighs the risk, or the banks want to have excess cash on-hand (liquidity) to be able to use it in the future. 
Also, since 2008, banks have been receiving interest payments from the Fed on their excess reserves.
http://www.frbsf.org/education/publicat ... s-reserves
These interest payments create a disincentive to lend since the banks can get payments from the Fed with zero risk.
They may have done it this way internationally to prevent the newly printed money from entering the money supply, in order to prevent inflation. 

[moda0306]

jason,

I think you nailed it.

Good work.

You seem to have some "econ chops," and I love your point about IoR disincentivising low-rate lending

[iwealth]

Is a lot of this money also sitting on the fed's balance sheet in the form of open market purchased treasuries/mortgage-backed securities?

[flagator]

How about this for a meta-explanation, just for giggles?

It's automation kicking in...the more automation, the fewer employees are needed, and therefore money thrown into the economy to be used by businesses ends up enriching the investor/owner class instead of making its way down to employees like it might have done in the past, when 100 employees were required to do what only requires 25 today. As automation gets worse, you can keep pumping more and more money to business, but it will concentrate more and more into the owners of the machines.

This isn't exactly a conspiracy that requires imagination. I worked for a company that specializes in creating software to automate things that used to require many people to do manually, and know friends in completely unrelated fields who have lost jobs directly because software innovation required fewer employees to do the job. It's not just about robots completely replacing humans -- software innovation can gradually chip away at the amount of humans needed to do things, yet still require some humans.

Back in PP land, I suppose none of this matters, because those productivity gains would be captured in rising stock prices...which is what we're seeing. We're also seeing deflation because, while assets are flying high, that money isn't making it through the general economy, and so money is becoming more and more scarce to the average person.

I think most people would agree that as technology gets more and more advanced fewer and fewer people will be able to earn a paycheck.

That is why the debate is now moving toward a universal guaranteed income. Under that light you will be guaranteed a minimum sustenance income of let's say about $1000 / month, in lieu of any other payments or benefits. Social security retirees would be exempt, as well as very young babies. That will give everyone a foundation for the basics. Then if you want to work above and beyond that is up to you. If you fall on hard times, cannot find work especially due to the relentless displacement of an increasing amount of workers from jobs, you'd have a basic safety net.

Switzerland is voting this fall for a basic universal income of about $1200 / mo for all.
I believe as technology marches on endlessly and more and more people are jobless this will become a "forefront issue".


St louis FED defines money velocity as :

https://research.stlouisfed.org/.../M2V/
Federal Reserve Bank of St. Louis
Jun 24, 2015 - 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. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time.

It does not say anything about GDP over units of currency etc. It is not obvious to me whether the trillions the FED created in the crisis of 2008 is part of M2 or not. If it is, that would explain the low velocity as all most of these funds are sitting in reserve with the FED earning 0-0.25 %, if it isn't, then the money is not being used for purchasing goods but it is being hoarded.

[LC475]

Why is M2 money velocity at a multi-decade low?

Because people are preferring to hold onto their money rather than spend it, more so than in the past several decades.  "People" in this case includes bankers -- the personal savings rate has risen, but the banks' savings rate ("excess reserves") has risen more.  Both factors contribute to the slowing of monetary velocity.

What does record low velocity mean? That people are hoarding money instead of spending it?

Precisely.

So does that mean we're experiencing the worst deflation we've ever seen?

No.

[Libertarian666]

Of course, the real answer is that there is no such thing as "velocity of money". Money is always in someone's cash balance; there is no time when it is "moving".

[Sam Brazil]

Of course, the real answer is that there is no such thing as "velocity of money". Money is always in someone's cash balance; there is no time when it is "moving".

What about when it changes hands?

[Libertarian666]

Of course, the real answer is that there is no such thing as "velocity of money". Money is always in someone's cash balance; there is no time when it is "moving".

What about when it changes hands?

For anything other than physical cash (e.g., checks), it stays in the original holder's cash balance until the new holder has it. For physical cash, I guess in the instant of handing it over it is in neither balance, but that is economically insignificant.

[LC475]

Of course, the real answer is that there is no such thing as "velocity of money". Money is always in someone's cash balance; there is no time when it is "moving".

Well, while you are right if you look at it a certain way, there is a measurement that does measure something real.  It is: how many different people's balances does a given lump of cash move through in a given period of time.  So, if in a month's time, a dollar has been in possession of 5 different people, it means the average time-between-jumps is 1/5th of a month.  If that is true of all dollars, on average, throughout a society, then you can say the average time-between-jumps of money is 1/5th of a month for all of society.  Or, if you want to put it in "velocity" terms, five spends per month.

So-called "money velocity" shows how much people are trading, how much money is moving around changing hands.  Velocity may not be the perfect term, since as you point out Libertarian666 most money is spent digitally, not by passing physical bills, and so physical motion is not present and even if it were, this term has nothing to do with measuring the literal speed of any such motion.

[Libertarian666]

Of course, the real answer is that there is no such thing as "velocity of money". Money is always in someone's cash balance; there is no time when it is "moving".

Well, while you are right if you look at it a certain way, there is a measurement that does measure something real.  It is: how many different people's balances does a given lump of cash move through in a given period of time.  So, if in a month's time, a dollar has been in possession of 5 different people, it means the average time-between-jumps is 1/5th of a month.  If that is true of all dollars, on average, throughout a society, then you can say the average time-between-jumps of money is 1/5th of a month for all of society.  Or, if you want to put it in "velocity" terms, five spends per month.

So-called "money velocity" shows how much people are trading, how much money is moving around changing hands.  Velocity may not be the perfect term, since as you point out Libertarian666 most money is spent digitally, not by passing physical bills, and so physical motion is not present and even if it were, this term has nothing to do with measuring the literal speed of any such motion.

Yes, but so what? I don't see the utility of such a calculation.

[barrett]

* To my surprise, the velocity of M2 money is calculated *exactly* as GDP/M2.  In the plot below, the curves appear to be identical!



* Finally, I don't find the velocity of money to be a terribly useful quantity, as it doesn't really help explain anything.

Tenn,

I'll preface my comments with the usual caveat... that I don't know much about economics.

BUT if VM=GDP/M2, then VM X M2=GDP. So an increase in money velocity increases the GDP. That surely matters at least a little, no?

[Libertarian666]

* To my surprise, the velocity of M2 money is calculated *exactly* as GDP/M2.  In the plot below, the curves appear to be identical!



* Finally, I don't find the velocity of money to be a terribly useful quantity, as it doesn't really help explain anything.

Tenn,

I'll preface my comments with the usual caveat... that I don't know much about economics.

BUT if VM=GDP/M2, then VM X M2=GDP. So an increase in money velocity increases the GDP. That surely matters at least a little, no?

GDP is also a meaningless number.
The Austrian economists, including HB, had a lot to say about the use of mathematics in economics, mostly about how mathematics has very little use in economics.

[sixdollars]

* Finally, I don't find the velocity of money to be a terribly useful quantity, as it doesn't really help explain anything.

BUT if VM=GDP/M2, then VM X M2=GDP. So an increase in money velocity increases the GDP. That surely matters at least a little, no?

I don't see it as useful mainly because there isn't a separate "knob" to manipulate money velocity directly.

But in terms of just trying to understand a little more about the world we live in, do you find it to be useful?  Or is it of little relevance to us and the PP?

Why is M2 money velocity at a multi-decade low?

Because people are preferring to hold onto their money rather than spend it, more so than in the past several decades.  "People" in this case includes bankers -- the personal savings rate has risen, but the banks' savings rate ("excess reserves") has risen more.  Both factors contribute to the slowing of monetary velocity.

What does record low velocity mean? That people are hoarding money instead of spending it?

Precisely.

So does that mean we're experiencing the worst deflation we've ever seen?

No.

I'm pretty much an econ noobie, but this would seem to me to be deflationary as well.  Do you agree or are you simply saying no because we've had worse episodes?

[LC475]

Why is M2 money velocity at a multi-decade low?

Because people are preferring to hold onto their money rather than spend it, more so than in the past several decades.  "People" in this case includes bankers -- the personal savings rate has risen, but the banks' savings rate ("excess reserves") has risen more.  Both factors contribute to the slowing of monetary velocity.

What does record low velocity mean? That people are hoarding money instead of spending it?

Precisely.

So does that mean we're experiencing the worst deflation we've ever seen?

No.

I'm pretty much an econ noobie, but this would seem to me to be deflationary as well.  Do you agree or are you simply saying no because we've had worse episodes?

Thank you for the excellent question. Inflation/deflation as terms are slightly problematic due to two competing, or at least different, definitions. We might be speaking of monetary in/deflation or we might be speaking of price in/deflation, and unfortunately we generally do not specify of which one we are speaking.

If you mean price deflation, then yes: if people are preferring to hold money rather than spending it for other goods more than they did before, then money (which is itself a good) will become more expensive, due to the increased demand. It's simple supply and demand. And, saying the same thing a different way, this means that overall, goods in general will become less expensive in terms of the money. That means: price deflation!  (Prices going down in terms of money = price deflation.) This is all true, if all else is equal. But all else is not equal. Though demand for money has gone up, supply has also gone up, and so we have not seen a general fall, or deflation, in the price of goods.

If you mean monetary deflation... well, it depends on how you define the money supply whether money velocity is even relevant to it.

[MachineGhost]

Can someone with more understanding of econ explain the significance of this?

More supply than demand for money.  It's all being swapped in a yield chase for assets.