Ivan Illan is Chief Investment Officer at AWAIM and bestselling author of Success as a Financial Advisor For Dummies.
We’ve entered one of the most peculiar chapters in modern economic history—one where trillions of dollars remain dormant across bank accounts and corporate balance sheets. While the Federal Reserve’s balance sheet expansion during the pandemic was historic, the real story lies in what didn’t happen: All that money never fully moved through the U.S. economy.
Money velocity—the rate at which money circulates through the economy—remains stuck near historic lows, about 20% below pre-pandemic levels, according to my firm’s recent research highlight, which dives more deeply into data analysis on this subject. This anomaly can help further explain why inflation has been so stubborn and why traditional portfolio strategies (like static 60% stock/40% bond portfolios) have misfired.
But here’s what most investors miss: Velocity isn’t some economic abstraction—it’s the connective tissue between monetary policy and real-world spending decisions.
The Great Stagnation
During normal economic cycles, velocity acts like a transmission mechanism—when the Fed pumps money into the system, it should theoretically spur spending and investment. But something broke in 2020. Despite M2 money supply growing at the fastest pace in 75 years, velocity collapsed to record lows.
Three years later, we’re living with the consequences. Businesses are sitting on more than $8 trillion in cash reserves—35% higher than pre-pandemic levels. This effectively amounts to corporate cash hoarding. Meanwhile, as inflation erodes purchasing power, consumers are maxing out their credit cards to historic levels, while also maintaining a somewhat elevated personal savings rate.
The Fed’s tightening campaign has slowed money supply growth but done little to kick-start velocity. Perhaps this might have something to do with the high interest the Fed pays to banks on their excess reserves.
Portfolio Implications
This environment creates unique challenges for asset allocation. Traditional 60/40 portfolios assume bonds will offset equity risk, but that relationship broke down when both assets fell simultaneously in 2022. This may not be a one-off anomaly, given both structural changes to labor markets and corporate financing.
Cash isn’t the drag it used to be either. With money market yields hovering around 4%, investors are getting paid a fair yield—something we haven’t seen in nearly two decades. But this comes with hidden risks. Those attractive yields exist precisely because velocity remains depressed, which is a symptom of an overall slower economy. You simply cannot have a robustly growing economy where the rate at which money circulates is trending lower and lower.
The Way Forward
Smart investors are adapting by shortening duration, favoring one-to-three-year Treasurys over long bonds to mitigate rate volatility. However, be on the lookout for opportunities to add credit and long-duration risk during specific phases of this economic cycle. Seek companies with fortress balance sheets that can weather extreme topline revenue shocks.
The bottom line? We’re in uncharted territory. Money velocity may never recover to its pre-pandemic levels (which we’re already depressed relative to two decades prior). The transition to permanent velocity compression won’t be smooth. Investors who understand these dynamics—rather than relying on outdated playbooks—will be best positioned for what comes next.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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