Money Is ‘Disappearing’ So Where Did It Go? – Bank Crisis Spreads

The velocity or the speed at which money moves in the economy is decreasing, making financial conditions worse even as the Federal Reserve (the Fed) increases its money supply. When banks have problems, it affects the whole economy. In 2008, banks stopped lending money, causing the velocity of money movement to drop. Central banks tried to fix the problem by lowering interest rates and increasing their money supply, but it didn’t work until 2020. Now, there’s a new issue with inflation, and banks are struggling to adapt to rapid rate increases. Central banks are trying to prevent a severe recession by improving their money supply, but it doesn’t seem to be working yet. In the last two weeks, the Fed has increased its money supply significantly. However, as this has increased, the velocity of money movement is going down. Why is this happening? People are taking their money out of smaller banks and moving it to larger banks or higher-yielding money-market funds. This causes the speed of money movement to decrease even more. Money-market funds have grown by almost $250 billion in the last two weeks. These funds invest in low-risk, short-term loans and have a low impact on the velocity of money movement. The RRP, which effectively neutralizes money movement, has also grown to new all-time highs of $2.65 trillion. Banks are likely to face more challenges, as they have about $2 trillion in losses from long-term investments. The Fed’s current strategy is making it difficult to control both inflation and economic growth at the same time.
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