Why money is changing hands much less frequently

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INFORMING A CUSTOMER “I’m sorry, I can’t give you your money” is the stuff of bankers’ nightmares. But in June the Federal Reserve had to tell commercial banks just that: it was running out of spare change. As parts of the economy shut down, the flow of coins from wallets to deposits gummed up, leading retailers and banks to demand more. The Fed was forced to ration the supplies of pennies, nickels, dimes and quarters based on banks’ previous orders.The speed with which money, both physical and digital, moves is an important indicator of economic activity. Money’s “velocity” is calculated by dividing a country’s quarterly GDP by its money stock that quarter. The Fed tracks velocity for several definitions of money. The measure that is most popular with economists is “money of zero maturity” (MZM), which includes assets redeemable on demand at face value—such as bank deposits and money-market funds. The bigger GDP is relative to the money supply, the higher the velocity. Velocity has plummeted this year (see chart). In the second quarter, the velocity of MZM dipped below one for the first time on record, meaning that the average dollar was exchanged …

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