The novel coronavirus pandemic triggered a sharp decline in GDP and policymakers responded through aggressive monetary policy. However, its likely to be a gradual recovery for the economy.
One of the indicators of economic growth is money velocity.
In simple words, it’s the number of times a dollar changes hands during a given period. The higher the money velocity, the more robust is economic growth.
As the chart below shows, U.S. money velocity has plunged in the recent past. This is one indicator of weak economic activity.
However, does it imply that the economy is performing at its worst level since 1960?
The answer is no.
Reason – The amount of money printed in the recent past has also resulted in the sharp plunge in money velocity. In calculating the money velocity, the denominator has the total money in circulation on an average in the economy.
With expansionary monetary policies, the liquidity in the entire economic system has surged. This includes liquidity in the banking and financial system.
On a cautious note, once GDP growth gains traction and credit growth increases, the glut of money supply in the economy can result in high to very high inflation.
To protect the value of savings, investors need to be invested in hard assets like gold and silver.