The Slowing Velocity of Money

October 17, 2012

In this week’s Chart of the Week we take a look at the velocity of the Money Zero Maturity (“MZM”) money supply over the last ten years. Velocity of money can be defined as the rate of turnover in the money supply; in other words, the number of times one dollar is used to purchase final goods and services included in GDP. The MZM money supply is one of the more popular measures of the liquid money available for immediate consumption in the economy. Assuming all other factors remain constant, an increase in the velocity of money coincides with an increase in GDP. In addition, higher velocity of money is often associated with rising inflation.

The velocity of money has been dropping since 2005 and this trend accelerated during the financial crisis of 2008. Once the economy began growing again and exited recession in 2009, the velocity of money resumed growth as would be expected but soon began trending downward again. This continued downward trend in the velocity of money shows that as the Federal Reserve continues to increase the money supply through successive rounds of quantitative easing, each additional dollar injected into the economy has a decreasing effect on GDP. Conversely, if the Fed begins to reign in the supply of money and the velocity does not increase, GDP would likely decrease in response to any tightening policy enacted by the Fed. Going forward, the velocity of money will be another economic indicator to follow as we attempt to gauge the economy’s recovery.

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Related Content

05.23.2024

A Falling Tide Lowers All Boats

The resilience of the American consumer has been an unanticipated phenomenon in the four years since the outbreak of the…

05.14.2024

The “Fix” Is In!

The strength of the U.S. economy over the last several quarters has surprised many investors, as consensus expectations from the…

05.09.2024

The Emergence of Argentinian Equities

Argentina has faced myriad economic headwinds in recent time, including hyperinflation, currency-related difficulties, and a series of defaults on its…

05.02.2024

Is Bitcoin Fairly Valued?

Despite mixed performance to start 2024, bitcoin finished the first quarter up roughly 68%. Buoyed by a broad weakening of…

04.26.2024

1Q 2024 Market Insights Video

This video is a recording of a live webinar held April 25 by Marquette’s research team analyzing the…

04.25.2024

Mind the Gap

Any ride on the London Tube reminds riders to mind the gap: Beware the space between train car and platform…

More articles

Subscribe to Research Email Alerts

Research Email Alert Subscription

Research alerts keep you updated on our latest research publications. Simply enter your contact information, choose the research alerts you would like to receive and click Subscribe. Alerts will be sent as research is published.

We respect your privacy. We will never share or sell your information.

Thank You

We appreciate your interest in Marquette Associates.

If you have questions or need further information, please contact us directly and we will respond to your inquiry within 24 hours.

Contact Us >