Velocity of Money Is Collapsing

In this post, I noted that the U.S. money supply increased by more than 60% in 2020: The graph below from the Federal Reserve shows that the velocity of money (a measure of the flow of financial assets in the economy) hovered around 1.8 since the 1960, rose to as high as 2.2 in the late 1990s, and has since fallen:

Note the collapse in money velocity in 2020. As the Federal Reserve expanded its money printing this year, the number of times financial assets exchanged hands dropped from about 1.4 to 1.1, which is a 21% decline. Why isn’t the newly created money flowing in and through the economy? Where are those financial assets sitting?

Published by markskidmore

Mark Skidmore is Professor of Economics at Michigan State University where he holds the Morris Chair in State and Local Government Finance and Policy. His research focuses on topics in public finance, regional economics, and the economics of natural disasters. Mark created the Lighthouse Economics website and blog to share economic research and information relevant for navigating tumultuous times.

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