DOES FALLING MONEY VELOCITY OFFER GUIDANCE ABOUT ECONOMIC POLICIES TO FIGHT THE COVID-19 CORONAVIRUS RECESSION?

With an estimated decrease in real GDP by the U.S. Bureau of Economic Analysis (BEA) for the first quarter of 2020 announced earlier this week (with the percentage decrease available at www.bea.gov), it appears that the United States has likely entered a COVID-19 coronavirus recession.  This is especially true if real GDP for the second quarter of this year falls even further.  Compared to understandably much attention being paid to real GDP, is it surprising that relatively little attention has been given to U.S. money velocity?  

Based on estimates from the Federal Reserve Bank of St. Louis, the velocity of the M1 money supply has now fallen by more than 50 per cent from its peak in the fourth quarter of 2007.  In that quarter, M1 velocity was nearly 10.68 on a seasonally-adjusted, annualized basis.  But, in the first quarter of 2020, M1 velocity was only about 5.27.  (https://fred.stlouisfed.org/data/M1V.txt)  This means that each U.S. dollar on average traded less than half as many times in GDP transactions in the first quarter of 2020 as it did in the fourth quarter of 2007.  In my view, this underscores the need for expansionary fiscal policy to minimize the damage from this economic calamity.

At a fundamental level, from the definition of money velocity, M1 velocity has been decreasing most quarters starting with the first quarter of 2008 because the growth rate of the money supply has exceeded the growth in nominal GDP spending.  (Note that nominal GDP measures production at prices in the period in which GDP is measured.  Real GDP measures spending at prices in the base year or the base period.)  Does the velocity data offer a message at a deeper level?  

At times, stabilization policy to complete the recovery from the Great Recession relied mainly if not exclusively on monetary policy.  But if money velocity falls substantially, then how effective is the expansionary monetary policy?  Despite some disadvantages when compared to expansionary monetary policy, expansionary fiscal policy, particularly government purchases, can guarantee that U.S. dollars and other units of currency are traded in exchange for goods and services counted as part of GDP.  In my 2015 book, It’s Velocity, Stupid! (short title), I mentioned the cliché about leading a horse or horses to water.  Strategic expansionary fiscal policy, by providing income to households and businesses that are 'thirsty,' can ensure that the desired ‘water consumption’ occurs.

(Readers should be aware that subsequent data revisions could cause changes to the above analysis.)