The Velocity Of Money Is At Its Lowest Level Since The Great Depression
The velocity of money sits near all-time lows and is slowing, a result of ballooning money supply and the waning of the stimulus effects on the economy.
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 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 economy. The influence of the current low velocity of money will colour the post-pandemic recovery as well as the investment risks and opportunities presented to investors.
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