The ongoing collapse in the velocity of money is unprecedented, especially as banks’ and, so far, borrowers’ balance sheets have remained strong (Chart 1). Rather, the decline in money velocity reflects a spike in risk aversion and precautionary savings and a collapse in credit demand. The households saving rate spiked to 34% in April, and at 14% in August remains well above the pre-pandemic level of about 7.5%. Simultaneously, bank loans not guaranteed by the government have fallen by about $900bn as borrowers have been repaying their debts, corporates have substituted market financing to bank lending,and banks have been tightening credit standards.
The Fed financial accounts show that households and nonfinancial corporations account for more than 75% of the M2 increase (Table 1). A detailed look at these sectors’ balance sheets suggests the M2 spike is unlikely to translate into a surge in spending when the economy normalizes.
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