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An Important Economic Indicator – Money Velocity – Crashes Far Worse than During the Great Depression

George Washington's picture




 

We noted 3 years ago that the velocity of money – an important economic indicator – is lower than during the Great Depression.

Things have gotten even worse since since then …

By way of background, the velocity of money is the rate at which people spend money.

In other words, it’s the speed at which a dollar moves from one person to the next through the economy.

The Federal Reserve Bank of St. Louis explains:

The velocity of money can be calculated as the ratio of nominal gross domestic product (GDP) to the money supply … which can be used to gauge the economy’s strength or people’s willingness to spend money. When there are more transactions being made throughout the economy, velocity increases, and the economy is likely to expand. The opposite is also true: Money velocity decreases when fewer transactions are being made; therefore the economy is likely to shrink.

The St. Louis Fed labels the velocity of money as “Gross Domestic Product/St. Louis Adjusted Monetary Base” …  and provides the following data on the velocity of money between the start of the Great Depression and today (click any of the charts for larger version):

Money

Here’s the money velocity right before the Great Depression hit:

Money 1

Here’s the money velocity from the darkest point during the Great Depression:

Money 2

Here’s the money velocity before the 2007-2008 crash started:

Money 4

And here’s the money velocity from the most recent data from 2014:

Money 3

Bottom line: The velocity of money has fallen much farther – and to much lower ultimate levels – than during the Great Depression.

Ouch

 

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Fri, 06/05/2015 - 21:59 | 6168452 g speed
g speed's picture

reserve requirements give FED control of amount of money let lose by member banks---IMHO thats the whole exercise of pass/fail bank stress tests--The reserve is there in case of banks needing to cover a bet-

Fri, 06/05/2015 - 17:02 | 6167805 Reaper
Reaper's picture

That might be the perverted genius of Bernanke's QE. The greedy wealthy horde their enhanced riches, so the money printing doesn't act as it did in the Weimar Republic.

Fri, 06/05/2015 - 15:51 | 6167631 CHC
CHC's picture

YIKES!!!!!!!!!!!!

Fri, 06/05/2015 - 15:51 | 6167630 Oscar Mayer
Oscar Mayer's picture

That's because there is so little actual money within the economy.

Channel locked Bankster Credit is not money, it does not flow within and through an economy like actual money flows.

There are literally thousands of potential transactions that could be conducted that are stifled due to the lack of physical cash.

http://carl-random-thoughts.blogspot.com/

Fri, 06/05/2015 - 16:02 | 6167663 rex-lacrymarum
rex-lacrymarum's picture

Nonsense. Since 2000, the US money supply has more than tripled (up 270%) and since 2008 alone it has more than doubled. There is more money in the economy than ever before, and the money supply is still growing at around 8% annualized at last count. 

Sat, 06/06/2015 - 00:39 | 6168655 Oscar Mayer
Oscar Mayer's picture

Nonsense, the current money supply stands at 1.36-Trillion, that's an increase of only $549-Billion since 2008, that's up only about 59% over 7 years.

Over half of that $1.36-Trillion is held overseas, benefitting our economy Zero.

Our economy is starved for cash.

Fri, 06/05/2015 - 16:43 | 6167776 bilbert
bilbert's picture

Econ 101 - Velocity of money is much different metric than amount of money.

Fri, 06/05/2015 - 18:38 | 6167996 cherry picker
cherry picker's picture

We can test the theory. 

Take a $10 bill and stick in in a forty five and shoot it 100 feet at a convenience store for soda

Give $100 to a kid and tell him to go and get soda, keep $20 for the effort and bring back $80 worth of soda

The kid beat the velocity and amount theory as he brought back the soda.

The $10 went so fast it disintegrated and there was nothing to purchase the soda with and no one to pick the soda up.

The above really doesn't apply to anything, but velocity and amount can be interpreted in any number of ways.

Fri, 06/05/2015 - 21:42 | 6168419 Tall Tom
Tall Tom's picture

but velocity and amount can be interpreted in any number of ways.

 

First this is a FINANCIAL WEBSITE.

 

Next the terms Volume (which the Financial Illiterate wrote as amount) and Monetary Velocity have DISTINCT DEFINITIONS.

 

Finally if you do not realize this and are FINANCIALLY ILLITERATE then YOU ARE ON THE WRONG FORUM.

 

Or you can use this forum, take your knocks when deserved, and become Financially LITERATE.

 

Other than that YOUR OWN CREDIBILITY has taken quite a hit.

Fri, 06/05/2015 - 23:34 | 6168591 cherry picker
cherry picker's picture

Hey Tall Tom

I have been coming here for years.

I'll be the first to admit that sometimes a comment slips by without making a hell of a lot of sense.

After all I am a human.

If that hurts my credibility, so be it :)

Fri, 06/05/2015 - 15:42 | 6167602 kchrisc
kchrisc's picture

Then comes the "high-velocity" fiat currency hot potato game.

Long wheelbarrows.

Liberty is a demand. Tyranny is submission..

Fri, 06/05/2015 - 21:59 | 6168451 Al Gophilia
Al Gophilia's picture

Liberty = Independence,

Tyranny = Demand

Submission = Subservence,

Acceptance = Slavery,

,

Fri, 06/05/2015 - 15:41 | 6167598 mt paul
mt paul's picture

Starve the Beast...

Fri, 06/05/2015 - 15:41 | 6167597 El Vaquero
El Vaquero's picture

When spending doesn't increase, but the monetary base is expanded via QE, its velocity will drop.  Add to that a terminally ill economy, and it will drop even further.  That's where we are today.

Fri, 06/05/2015 - 22:02 | 6168455 Quinvarius
Quinvarius's picture

Yeah.  And M1 and M2 are both up about 5% since "the end of QE".  So velocity has to keep dropping.  That is the way the math works.  Velocity is useless without a stable money supply.

Fri, 06/05/2015 - 16:39 | 6167764 wiser
wiser's picture

helicopter money is the cure for money velocity problems

Fri, 06/05/2015 - 21:55 | 6168441 Bossman1967
Bossman1967's picture

The beast is being starved. I sat with a new client yesterday after an hour of graveling for her business really confused considering I saved her 600 $ a year on her insurance. I asked her why people were acting shut down she was an older lady 69 nice house nice vehicle living in Duncan Oklahoma, haliburton home office, she was nice to explain that people are scared, anxious broke and waiting on something really bad so why even bother.... What an eye opener and what that means for bussiness

Fri, 06/05/2015 - 22:04 | 6168459 shovelhead
shovelhead's picture

Next time try groveling.

Graveling can be hard on an old lady.

Fri, 06/05/2015 - 15:51 | 6167629 kchrisc
kchrisc's picture

"Spending" is actually a Keynesian term.

What is actually meant is that trade hasn't increased, and less so against the banksters' ever increasing ponzi scheme.

Trade can only come about when people have been able to produce and have something by which to trade. If much of what they produce is stolen, and/or production is hindered, then less and less trade can be rightfully expected.

Liberty is a demand. Tyranny is submission..

 

Say's Law: "An economic rule that says that production is the source of demand. According to Say's Law, when an individual produces a product or service, he or she gets paid for that work, and is then able to use that pay to demand other goods and services"

Fri, 06/05/2015 - 16:23 | 6167720 cherry picker
cherry picker's picture

When you think about the world's oldest profession, prostitution, it cannot be possible.  It may be second or third or further down the list, but the johns had to earn money first before spending on favors.

It is more than likely that a need, desire or 'demand' started trade, for without that motivation why trade at all?

Fri, 06/05/2015 - 22:01 | 6168454 shovelhead
shovelhead's picture

One can have a need or demand for an item, but until someone invests capital and labor to produce the item needed, that demand goes unmet, thereby contributing nothing.

Prostitution is different only in the fact that the needed item is extant but the rental price has to be negotiated.

It's a symbiotic relationship.

Lots of pussy out there that nobody wants at any price.

Fri, 06/05/2015 - 19:41 | 6168156 scatterbrains
scatterbrains's picture

Very well stated.  All you Keynesians out there need to think about CP's  sage words next time your about to slip yir dik up in some stank raw Kurger'ess ass.

 

 

Fri, 06/05/2015 - 15:33 | 6167571 11b40
11b40's picture

Who cares?  We got .gov to take care of us now.  They didn't have EBT in 1925.

/sarc

Fri, 06/05/2015 - 21:18 | 6168373 dreadnaught
dreadnaught's picture

They did have "Relief"- a sort of welfare

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