Our Dead Money Economy

Take a quick glance at these depictions of Dead Money: while the broad measure of the money supply in the U.S., M2, has gone up 12-fold since the start of 1981, the velocity of money--how many times it changes hands over a period of time--has collapsed.

What does this tell us about the U.S. economy and what lies ahead? The Federal Reserve's FRED database provides a definition of M2 that's a good starting place.

Note that the Fed refers to money stock, where the word stock refers to the sum total of money in the system, as in "the store is fully stocked with merchandise". They're not referring to the stock market, but to all the money that's in the "store" of our financial system: cash, money in checking accounts and money market funds, etc. Here's the definition of M2:

"Beginning May 2020, M2 consists of M1 plus (1) small-denomination time deposits (time deposits in amounts of less than $100,000) less IRA and Keogh balances at depository institutions; and (2) balances in retail MMFs (money market funds) less IRA and Keogh balances at MMFs."

Put somewhat more directly, M2 is all the money in the financial system which people can spend. It doesn't include the money in individual retirement accounts because that has been set aside for the long-term and is not available (except in cases of early withdrawal) to spend.

Here's the definition of the velocity of money:

"The velocity of money is the frequency at which one unit of currency is used to purchase domestically produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy. A decreasing velocity might indicate fewer consumption transactions are taking place."

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Disclosures: None.

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