The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.
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Damn! We're really moving! Just look at that recovery!
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Source Data:
St. Louis Fed: Custom Chart
Hmm, I was going to make an observation that QE has messed up the ratio with trillions of idle reserves earning interest for the banks. However, QE didn't start until 2008 and the trend goes back to 1993. Must have been bad weather since 1993.
ReplyDeleteMr Slippery,
ReplyDeleteThe peak was 1982. I started in 1993 because things had settled into a groove (consistent declining channel) by then.
Perhaps Ross Perot's "giant sucking sound" added some much needed polar vortex stability, lol.
Oops. Should have said 1981. Close enough for government work though!
ReplyDeleteThe denominator getting goosed by the Fed definitely is part of the recent down trend. But it is all due to lowering the fed funds rate. What is needed here is a chart showing them both. Or the ten year interest rate with the fed funds rate. Interest and velocity start going down together about 1980 when it dawned on everyone that credit will spur growth.
ReplyDeleteThe less money people make on their savings the more they save to make up for the lower rate. Thus the less they spend. Thus lower velocity.
Joseph Constable,
ReplyDeleteInterest and velocity start going down together about 1980 when it dawned on everyone that credit will spur growth.
It certainly will be difficult to get the short-term rates to fall much from here, although the 10-year could continue to fall (as it did in Japan after their housing bust in the early 1990s).
The less money people make on their savings the more they save to make up for the lower rate. Thus the less they spend. Thus lower velocity.
That's certainly how I behave.
Decades back we lived in a small village; there was only one user of the rather new "mobility scooters". It was referred to locally as a "chariot".
ReplyDeletedearieme,
ReplyDeleteChariots of Retire? ;)