U.S. ECONOMY GREW BUT MONEY VELOCITY FELL AGAIN. HOW LONG WILL THIS CONTINUE? (Originally from 2016)

(I think that the blog post below is from October 1, 2016.)

Earlier this week, CNBC and others announced the final estimate for U.S. real GDP growth (from the Bureau of Economic Analysis) for the second quarter of 2016.  The estimated growth rate for the second quarter was somewhat faster than reported earlier.  Because the velocity of money is calculated as real GDP times the price level divided by the money supply (or nominal GDP divided by the money supply), a change in the real GDP growth rate would likely cause a change in the estimate for the velocity of money.

Despite the fact that the U.S. economy continued growing in the second quarter, the velocity of money in the U.S. continued to fall.  Based on data available at www.economagic.com (and elsewhere), the velocity of the U.S. M1 money supply declined again in the second quarter of 2016, from roughly 5.87 times per year in the first quarter of 2016 to roughly 5.75 times per year in the second quarter.  (The velocity of the U.S. M2 money supply, a broader monetary aggregate, also posted a decline, and to the best of my memory, earlier estimates of M1 velocity for the second quarter before the final real GDP estimate also showed a decline.)  Although future revisions to the estimates for M1 velocity may be made, the decline in M1 velocity calculated with the most recent estimates in late September 2016 has been roughly 46 per cent (based on my calculations using data from www.economagic.com) from its sample period peak in the fourth quarter of 2007.

To provide a simple explanation for the plunge in money velocity, nominal GDP spending is increasing but failing to increase by a percentage nearly as large as the percentage increase in the M1 money supply most quarters after the fourth quarter of 2007.  But why are people holding so many more dollars in forms consistent with M1 if they are unlikely to spend the funds in the near future?

Further, is it surprising that stabilization policy in the U.S., probably starting in the year 2009, has relied mainly on expansionary monetary policies of relatively rapid money supply growth rates and low interest rates while perhaps almost forgetting about more expansionary fiscal policies such as further reducing taxes and further increasing government spending during a period when the velocity of money is falling so drastically?  Given that the M1 money supply has more than doubled after December 2007 (based on data that I found on www.economagic.com that was compiled by the Federal Reserve), the U.S. is suffering from relatively weak growth in aggregate demand as measured by nominal GDP growth which has been far outpaced by the growth rate of M1 most quarters after the fourth quarter of 2007.  Would combining expansionary fiscal policies with expansionary monetary policies help?

Now that the third quarter of 2016 has ended, will the announcement of U.S. money velocity for the third quarter show yet another decline?  Although I am not certain, my best guess at this point is that the velocity of M1 in the U.S. probably fell again in the third quarter of this year.  The decline in the velocity of money will continue if relatively rapid money supply growth fails to spark (or at least coincide with) nominal GDP spending growth by a percentage at least as large as the percentage growth rate in the money supply.