Movement of Money
According to the Federal Reserve, the Velocity of Money can be measured in several ways, including 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. 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.
M1 is the money supply of currency in circulation (notes and coins, traveler’s checks [non-bank issuers], demand deposits, and checkable deposits). A decreasing velocity of M1 might indicate fewer short- term consumption transactions are taking place. We can think of shorter- term transactions as consumption we might make on an everyday basis.
The velocity of money has cratered, signaling a sharp decline in day-to-day consumption.
The question facing President Trump and the Republican Party - can they use debt to help grow the economy out of its rut, and eventually pay down on that same debt in the future? This is a new approach that is necessary, in part by a feckless Congress that will never make tough spending decisions despite demographic and economic realities that suggest problems are only going to get worse.
There are lots of variables, including the role of the Federal Reserve that complained bitterly about the lack of fiscal policy during its herculean efforts to bring the U.S. economy out of the ditch. Of course, all the money that had been printed to deal with the Great Recession is one of the reasons why the velocity of money has swooned.
M2 Federal Reserve
The broader M2 component includes M1 in addition to saving deposits, certificates of deposit (less than $100,000), and money market deposits for individuals. Comparing the velocities of M1 and M2 provides some insight into how quickly the economy is spending and how quickly it is saving.
The addition of trillions of more dollars skews an apples-to-apples comparison. Still, 4Q17 M2 money supply at 1.43 is not far from the record low read of 1.15 during the Great Depression.
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