By Jonathan Baird – January 15, 2022
The velocity of money (the frequency at which money changes hands) sits near all-time lows and is again slowing, following a short-lived stimulus-induced boost in 2020.
The velocity of money reached a peak in the late 1990s before declining in response to the crash of the internet stock bubble. It then began to recover before dropping sharply because of the Financial Crisis of 2008. Most noteworthy, money velocity continued to decline. This is indicative of the fundamental weakness of the world economy, which has relied heavily on central bank intervention and tax cuts to fuel economic growth since 2008.
The current low level suggests that recovery from this recession will be more gradual than consensus expectations, as stimulus efforts will have difficulty gaining traction. The tiny increase in the velocity of money produced by the huge fiscal stimulus applied by the government, before quickly resuming its downtrend, attests to the fragile nature of the US economy and, indeed, the global economy.
One might have expected that the velocity of money would have risen in 2021 as persistent inflationary pressures would have discouraged deferring spending. That it has not suggests that consumer psychology has yet to embrace the expectation that inflationary pressures will be long-lived, as in the 1970s.
The influences represented by the low velocity of money will colour the economic path ahead as well as the investment risks and opportunities presented to investors.
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