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In the United States, the velocity of both the M1 and M2 money supplies has been declining for over a decade.

The decline in the velocity of M1 could be explained by the shift away from cash to cards and online payments.

What are the causes and implications of the decline in the velocity of M2?

Does it signify that the money supply is growing faster than GDP? If so, is real GDP declining? Does it indicate some sort of lack of liquidity? How does this relate to interest rates?

Thanks!

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  • $\begingroup$ It indicates extreme inequality or a lack of shared prosperity. $\endgroup$ – Renaldi Hirawady Jul 20 '17 at 7:22
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http://www.forbes.com/sites/traceygreenstein/2011/09/20/the-feds-16-trillion-bailouts-under-reported/#5a1dec1d6877

The decline in money velocity is due to enormous monetary injections, which mostly sat in recipient bank accounts and had no effect on the real economy. Under the Keynesian and monetarist theories that central banks operate upon, an increase in money supply should ease liquidity constraints and allow the economy to resume growth. In reality not much further growth was possible, likely because of the stagnation in conventional oil production.

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To answer your questions:

  1. Yes
  2. Not yet
  3. No, it indicates a lack of viable uses for the cash
  4. Interest rates fell because of the relatively small decrease in banks balance sheets coinciding with a sharply declining return on capital, and thus diminishing incentive for investors to leverage, causing increasing supply relative to demand for credit
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  • $\begingroup$ Thanks for your answer! Will wait a little longer to see if there are any more responses. Wouldn't the banks seek to invest the cash however they could? I know that the fed pays them to hold some cash but unless they are paid more than a treasury yield, even that would be a better investment. With regards to oil production - can you explain why you specify specifically conventional oil production? Why wouldn't a rise in non-conventional oil production also result in growth? It seems to me that as commodities everywhere seem to be oversupplied, the issue is not production but demand. $\endgroup$ – Comptonburger Feb 25 '16 at 23:05
  • $\begingroup$ Non-conventional oil production is barely useful as a fuel and takes large amounts of energy to extract forbes.com/sites/jamesgruber/2014/01/26/shale-oil-charlatans $\endgroup$ – D J Sims Feb 25 '16 at 23:07
  • $\begingroup$ The banks invest their excess cash in very marginal or speculative investment because fixed capital such as oil rigs produce such a low return. These do not count as goods and servicss, thus, there is little velocity of money. "Demand" has nothing to do with economic growth, the problem is that it is physically impossible to grow the economy without key resources such as energy. $\endgroup$ – D J Sims Feb 25 '16 at 23:10
  • $\begingroup$ Energy commodities (oil, natgas) have been in huge oversupply for the past year and a half though. This hasn't spurred any amazing economic growth. $\endgroup$ – Comptonburger Feb 26 '16 at 4:57
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    $\begingroup$ No, by oversupply I mean just that, oversupply. The supply is greater than the demand. Inventories are building. Your statement that the economy can't be grown without resources such as energy isn't pertinent when such resources are in abundance. $\endgroup$ – Comptonburger Feb 26 '16 at 18:18

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