Money, Stop... June's Velocity of Money Circulation Hits Another All-Time Low

Even with Money Injection, It Doesn't Circulate
Accumulated Assets Ultimately Flow Only into Stocks and Real Estate

[Asia Economy Reporter Kim Eun-byeol] Money is circulating less and less in the market. To overcome the economic crisis caused by the novel coronavirus disease (COVID-19), the Bank of Korea is injecting an unprecedented amount of money, but households and companies are focusing on accumulating assets in preparation for potential risks. Money, unable to find suitable investment destinations at the lowest interest rates, is concentrating only in stocks and real estate.

According to the Bank of Korea on the 2nd, as of the end of June, the velocity of money circulation fell to 0.62. The velocity of money circulation is an indicator that shows how many times a unit of currency is used in transactions over a certain period. It is calculated by dividing nominal Gross Domestic Product (GDP) by the money supply (M2 - broad money). A decline in this velocity means that money is not flowing properly to the right places in the market.

The velocity of money circulation was close to 1 in 2002. However, during the financial crisis, it broke below the 0.90 level, then fell below 0.80 in 2012, and entered the 0.60 range last year. The money multiplier, calculated by dividing M2 by the monetary base, also hit a record low of 14.85 as of the end of June. The money multiplier indicates how much money has been created through banks' credit creation process, and it also reflects the speed of money activity.

The velocity of money in the United States plummeted by as much as 20% in the second quarter

Although liquidity in the market surged due to the COVID-19 crisis, the phenomenon of money not circulating is occurring worldwide, including in Korea. According to the Federal Reserve Economic Data (FRED) of the Federal Reserve Bank of St. Louis, the velocity of money in the United States plummeted from 1.381 in the first quarter to a record low of 1.102 in the second quarter. While the average decline in velocity of money from 2000 to 2020 over ten years was 1.2%, recently the velocity dropped by 20% in just one quarter.

Experts say that in crisis situations, economic agents such as companies and households tend to refrain from spending money, and with consumer sentiment shrinking due to the COVID-19 pandemic, the phenomenon of money not circulating is an unavoidable reality. However, they pointed out that the excessive concentration of money only in asset markets such as real estate and stocks is an issue that should be addressed through policy measures.

This content was produced with the assistance of AI translation services.