I Believe Gold and Silver Are Just Getting Started

The U.S. Mint made an unusual request this week. In a press release dated July 23, the bureau literally begged Americans to start putting coins back into circulation by spending or depositing them.

As you may have noticed, people just aren’t making transactions with coinage like they used to. That’s especially the case now in the age of the coronavirus. With many people sheltering-in-place, billions of dollars in everyday purchases are being made online that in normal times would have happened at the cash register.

This is creating a national coin shortage.

“Until coin circulation patterns return to normal, it may be more difficult for retailers and small businesses to accept cash payments,” the Mint writes, adding that for millions of Americans, cash is the only form of payment. Without coins, retailers can’t break bills.

This crisis, if it can be called that, got me thinking about the velocity of money. In simple terms, money velocity measures the number of times a unit of currency changes hands in a given period of time. As an illustration, imagine you spend $10 on lunch at a restaurant in a strip mall. That same $10 is then used by the restaurant owner to pay the lease, the landlord then uses it to pay its own creditors, and so on.
When the velocity of money increases, it suggests greater economic activity. Money is being spent more freely and rapidly. And when it decreases, it suggests the opposite—that the economy is stagnating or deteriorating. People aren’t spending.

Below is the velocity of M2 money supply, which includes not just cash but also so-called “near money”: savings deposits, money market securities and the like. As you can see, it’s at its lowest level ever, using 60 years’ worth of data.

velocity of M2 money supply in the U.S.
click to enlarge

So what does this mean, and can we blame coin hoarders for this decline? Hardly. Instead, we should be directing the blame at the Federal Reserve, which has flooded the economy with easy money.