I have received a lot of requests to visit the velocity of money -the rate at which money changes hands. And I thought that it would be instructive to compare the US velocity to another non-QE G7 economy. And since I have a lot of Canadian readers, I chose Canada. The velocity has seriously slipped in both economies.
The chart above (or to the left, depending on your browser) illustrates the monthly MZM and M2 measures of velocity for the US. The quantity theory of money specifies that the velocity of money = nominal GDP/money supply, but I use personal income rather than nominal GDP, as the BEA reports this on a monthly basis. Given a level of money supply, the recent drop in economic activity, i.e., personal income falls, dragged the velocity of money down quickly. It has started to stabilize since March 2009.
Same in Canada: the money supply dropped sharply in Q1 2009 (velocity = nominal GDP/broad money).
Notice that the velocity in Canada has been on a downward trend spanning 1973-2009, however, the negative slope is falling. I am not too familiar with Canada’s velocity (perhaps some of my readers may be more so), but usually a declining velocity of money is associated with a drop in GDP or inflation. I would have to look into this further, but Canada did experience a term of disinflation from the early 80′s to mid 90′s.
Originally published at News N Economics and reproduced here with the author’s permission.
1802 Responseshttp%3A%2F%2Fwww.economonitor.com%2Frebeccawilder%2F2009%2F07%2F27%2Fus-vs-canada-in-charts-the-velocity-of-money%2FUS+vs.+Canada+in+Charts%3A+the+Velocity+of+Money2009-07-27+10%3A45%3A13Rebecca+Wilderhttp%3A%2F%2Fwww.economonitor.com%2Frebeccawilder%2F2009%2F07%2Fus-vs-canada-in-charts-the-velocity-of-money%2F to “US vs. Canada in Charts: the Velocity of Money”
Aaron Menenberg is Foreign Policy and Energy analyst, and a Future Leader with Foreign Policy Initiative. He also co-hosts Podlitical Risk (@podliticalrisk). He is a graduate student in international relations at The Maxwell School of Syracuse University. Previously he has worked at Praescient Analytics, The Hudson Institute, for the Israeli Ministry of Defense, and at the IBM Corporation. The views expressed are his own, and you can follow him on Twitter @AaronMenenberg. He welcomes questions and comments at firstname.lastname@example.org.
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