Nouriel Roubini points out the remarkable slowing of the velocity of money at Project Syndicate:
The reason ultra-low inflation remains a problem is that the traditional causal link between the money supply and prices has been broken. One reason for this is that banks are hoarding the additional money supply in the form of excess reserves, rather than lending it (in economic terms, the velocity of money has collapsed). Moreover, unemployment rates remain high, giving workers little bargaining power. And a large amount of slack remains in many countries’ product markets, with large output gaps and low pricing power for firms (an excess-capacity problem exacerbated by Chinese overinvestment).
To give you some idea of what has actually happened, let’s look at some of the conventional measures of the money supply.
M1 is usually define as notes and coins in circulation along with travelers’ checks, demand deposits, and other checkable deposits and here’s a chart of its velocity:
M2 is M1 plus savings accounts and time deposits:
and MZM is M2 plus money market funds:
Pretty clearly if you want money to start moving around, you need to do something. You could raise interest rates, you could stop paying banks for reserves, or you could start taxing it, i.e. taxing wealth. I can’t help but wonder if there’s some relation between the money supply freezing up and the general slowing of growth as well as the decline in the rate of new business start-ups.
My intuition is that all have a common cause: a reduced appetite for risk. I’m open to explanations as to why that might be.