Velocity and M1

I'm going old school here with a chart of M1 (blue) and the velocity of M1 (orange). The fiscal and monetary responses last year pushed M1, a measure of the most liquid assets in the U.S., beyond $6.5 trillion. This was roughly 65% higher than December of 2019.

Velocity of M1, how often one dollar is spent to purchase goods and services, dropped from 5.9 in December 2019 to 3.9 in 3Q 2020. The calculation for velocity is GDP/M1. So, by definition as M1 increases, all else equal, then velocity drops.

Obviously, policy makers hope that higher M1 boosts GDP. With the lockdowns, economic activity plummeted early then rebounded. With newly passed stimulus measures and talk of very large additional spending plans, the trend looks to continue.

Some would say that the expanding money base also has found its way into the financial markets. Note the steeper line for M1 following the GFC and related peak in velocity. I'm no economist but thought this would be good in which to marinate.