M4—the broadest measure of money supply—rose sharply in 2020, which drove increased concerns about inflation. However, Fisher Investments’ founder and Co-Chief Investment Officer Ken Fisher says it’s not just the quantity of money that matters for inflation but also how fast that money changes hands, otherwise known as money velocity. In 2020, money velocity plummeted, offsetting a lot of the growth in money supply. Therefore, Ken says M4’s 2020 spike may not be as inflationary as everyone fears.
Further, Ken argues that M4 may not be the best measurement of money when it comes to inflation, as it includes money-types that aren’t commonly used as a medium of exchange (aka “near money”). Ken says money that is used as a medium of exchange (aka “real money”—coins, bills, checking and savings accounts) didn’t actually increase that much last year, and it’s the velocity of real money that matters most for inflation. Ken notes we don’t have a great measurement of velocity for real money, but suspects it fell in 2020 and 2021 because much of the direct government payments to individuals were used to pay down debt and save. Ken says another important detractor from the quantity of real money is that bank lending has also been shrinking recently, since people often use the money from loans as a medium of exchange. Until real money supply and velocity take off, Ken says investors’ inflation fears are secretly bullish—as they help keep a lid on rising investor sentiment.
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Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice. Nothing herein is intended to be a recommendation. The opinions expressed are subject to change without notice….(read more)

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Ken Fisher Explains Inflation Impacts from Velocity of Money

Inflation is a critical economic concept that has a profound impact on our daily lives and the stability of the global economy. Understanding the causes and effects of inflation is of paramount importance for policymakers, investors, and everyday citizens alike. One factor that can greatly influence inflationary pressures is the velocity of money. Financial expert, Ken Fisher, sheds light on this often misunderstood topic and explains its significance in the context of inflation.

To comprehend the role of velocity of money, it is essential to grasp the basic principles of inflation. Inflation can be defined as a sustained increase in the general price level of goods and services over time. It erodes the purchasing power of money, as the same amount of currency buys fewer goods or services as prices rise. In essence, inflation reduces the value of money.

The velocity of money refers to the rate at which money circulates within an economy. It measures how quickly money changes hands as it is used for transactions. Simply put, it is the frequency with which a unit of currency is spent on final goods and services per unit of time. When money is spent frequently, it is said to have a high velocity; conversely, when money is held onto and spent less frequently, its velocity is low.

Ken Fisher highlights that the interaction between the velocity of money and inflation is crucial. To see why, let’s consider two scenarios. In the first scenario, the velocity of money is high, indicating that people are spending their money swiftly. This frequent circulation of money can drive up prices as demand for goods and services outpaces supply. This is known as demand-pull inflation. In such a situation, the central bank may choose to increase interest rates to reduce spending and cool the economy.

Conversely, in the second scenario, if the velocity of money is low, it suggests that people are holding onto their money and not spending it as frequently. This reduced circulation can lead to a decline in economic activity, as businesses experience decreased sales and revenues. In an attempt to stimulate spending and boost the economy, the central bank may opt to lower interest rates to incentivize borrowing and spending.

It is worth noting that the velocity of money is influenced by various factors, such as consumer confidence, economic conditions, and monetary policies. For instance, during times of uncertainty, individuals may choose to hold onto their money as a precautionary measure, causing the velocity of money to decrease. Similarly, when interest rates are high, borrowing becomes more expensive, leading to a drop in the velocity of money.

Ken Fisher also emphasizes that the impact of the velocity of money on inflation is not immediate or linear. Changes in the velocity of money take time to affect prices. As a result, it is a complex and dynamic relationship that requires careful analysis and understanding.

In conclusion, inflation and the velocity of money are intricately linked in the global economy. The velocity of money plays a significant role in shaping the price levels of goods and services. The frequency at which money circulates influences economic activity, prices, and ultimately, the purchasing power of individuals. By comprehending these dynamics, policymakers, investors, and individuals can make informed decisions and adapt to changing economic conditions.