Money Velocity: The Speed That Changes Everything

Velocity Explained Simply

Velocity (V) tells you how fast money moves through the economy.
If people spend quickly (high V), the same dollars support more transactions.
If they save (low V), fewer transactions happen.

Velocity = GDP / M2

• V = 2.0 means each dollar is spent twice per year
• V = 1.0 means each dollar is spent once per year

Why Velocity Matters in MV = PQ

In the equation MV = PQ:

• M = Money supply
• V = Velocity
• P = Prices
• Q = Quantity of goods/services

If M is flat but V rises → P or Q must rise (inflation or real growth).
If M rises but V falls → effects offset (why QE didn’t immediately cause inflation in 2020).

Real World Examples

2008 Financial Crisis

• Banks froze lending, consumers saved
• V collapsed from ~1.9 to ~1.5
• Fed printed money (M↑) to offset V↓
• Stocks recovered slowly; consumer inflation muted

COVID (2020-2022)

• V fell to all-time low (~1.1)
• Fed massively increased M (+40%)
• Initially no inflation (V↓ offset M↑)
• When V recovered in 2021 → Inflation surged

How To Track Velocity

• FRED Series: M2V 
• Update frequency: Quarterly (lagging)
• Use leading indicators for V direction:
  • Consumer confidence (Conference Board)
  • ISM Manufacturing/Services indices
  • Credit growth (bank loan growth)
  • Job openings (JOLTS)

Strategy Based on V

V Trend	Likely Macro Outcome	Asset Strategy
Falling	Recession risk, deflation pressure	Raise cash, buy bonds, reduce risk
Bottoming	Transition, policy support	Start accumulating quality assets
Rising	Recovery, inflation later	Go risk-on: stocks, real estate, Bitcoin
Overheating	Late-cycle inflation	Rotate to commodities, value stocks

Next Steps

• Understand MV=PQ →
• Track M2 (the other half) →
• See Cantillon Effect (distribution) →
• Prepare inflation hedges →