Ken Fisher Explains Inflation Impacts from Velocity of Money

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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