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):
Here’s the money velocity right before the Great Depression hit:
Here’s the money velocity from the darkest point during the Great Depression:
Here’s the money velocity before the 2007-2008 crash started:
And here’s the money velocity from the most recent data from 2014:
Bottom line: The velocity of money has fallen much farther – and to much lower ultimate levels – than during the Great Depression.