Executive Summary
The velocity of money measures the rate at which currency circulates through an economy. It is a critical indicator of economic health. This report analyzes its behavior and implications.
Our analysis finds that the velocity of the M2 money stock (M2V) remains a crucial barometer of economic psychology. However, modern changes in the financial system have complicated its predictive power. The 2020 redefinition of the M1 money supply is particularly notable. This change has rendered M1’s velocity metric unreliable for historical comparison, which elevates the importance of the more stable M2V series.¹
An examination of M2V since 1989 reveals a history of economic cycles. Velocity surged to an all-time high in 1997 during the dot-com bubble’s “irrational exuberance.”² It then plummeted to a record low in 2020 amid fear-driven cash hoarding during the pandemic.³ Our analysis shows that the rate of change in velocity, more than its absolute level, often signals major economic shifts.
For consumer-facing sectors, money velocity acts as a proxy for confidence. High-velocity environments boost discretionary retailers like Best Buy. In contrast, low-velocity conditions favor value-oriented giants such as Walmart and Costco. Their business models are counter-cyclical to economic anxiety. For capital-intensive industries like semiconductors and nuclear energy, short-term velocity fluctuations are less relevant. The underlying drivers of velocity—long-term interest rates and macroeconomic stability—are far more important.
Currently, the U.S. economy faces a unique and potentially precarious situation. The M2 money supply is contracting, liquidity drains continue via Quantitative Tightening (QT), and interest rates remain restrictive. All of this is happening while nominal GDP growth decelerates.
This creates a significant “rupture risk.” Under this scenario, a sharp, forced increase in velocity would not signal a healthy economy. Instead, it would indicate a financial system under severe stress.⁴ This redefines a velocity spike as a potential symptom of systemic fragility, where the only alternative is a sharp economic contraction.
Therefore, monitoring early warning indicators of systemic stress is paramount. Both corporate leaders and policymakers must implement proactive risk management strategies to navigate the challenging economic landscape ahead.
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