Velocity of money

[Pigeon]

Velocity of money

The velocity of money is a measurement of the rate at which money is exchanged in an economy. It is the number of times that money moves from one entity to another. It also refers to how much a unit of currency is used in a given period of time. Simply put, it's the rate at which consumers and businesses in an economy collectively spend money. The velocity of money is usually measured as a ratio of gross domestic product (GDP) to a country's M1 or M2 money supply.

Link

[Royal]

Stimulus?

[Pigeon]

The velocity of money formula shows the rate at which one unit of money supply currency is being transacted for goods and services in an economy.

The velocity of money is typically higher in expanding economies and lower in contracting economies.

For example, from 1959 through the end of 2007, the velocity of M2 money stock averaged approximately 1.9x with a maximum of 2.198x in 1997 and a minimum of 1.653x in 1964. Since 2007, the velocity of money has fallen dramatically as the Federal Reserve greatly expanded its balance sheet in an effort to combat the global financial crisis and deflationary pressures. Money velocity appeared to have bottomed out at 1.432 in the second quarter of 2017, but has recently fallen below that level. As of the fourth quarter of 2019, the M2 velocity of money was 1.425 which is the lowest reading of M2 money velocity in history.

[Royal]

Hmm. So software and automation?

[Pigeon]

People having money to spend. Getting worse by the years.

[Pigeon]

Consider an economy consisting of two individuals, A and B, who have $100 each. A buys a car from B for $100. Then B purchases a home from A for $100. B has kids and enlists A's help in adding new construction to his home. For his efforts, B pays A $100. A also sells a car he owns to B for $100. Thus, both parties in the economy have made transactions worth $400, even though they only possessed $100 each. In this economy, the velocity of money would be two resulting from the $400 in transactions divided by the $200 in money supply. This multiplication in the value of goods and services exchanged is made possible through the velocity of money in an economy.

[Royal]

I see. So this could be a good indicator of the class wealth divide?

[Pigeon]

Yes, at least to some extent.

Money in circulation.

[Royal]

Also a sign of wealth leaving country. Eek.

[Pigeon]

As of the fourth quarter of 2019, the M2 velocity of money was 1.425 which is the lowest reading of M2 money velocity in history.