Velocity of Money and the Federal Reserve

INNO

A major reason there is little inflation has to do with the velocity of money. How often each dollar changes hands. Money has been ‘stuck for decades.

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To Calculate the Velocity of Money you simply divide Gross Domestic Product (GDP) which is the total of everything sold in the country by the Money Supply. Thus Velocity of Money= GDP ÷ Money Supply.

If there’s too much money supply relative to total transactions, each individual dollar isn’t being asked to do that much work. Dollars don’t move much. Velocity falls.

If there isn’t enough money supply relative to total transactions, each dollar has to move – & be involved in many transactions. It’s like the economy is calling each dollar to work harder. Velocity rises.

When I look at this chart, it confirms the feds have created FAR TOO MUCH money supply over the last 20 years, relative to how many total transactions there have been in the economy.

In other words, today’s economy asks its dollars to do a lot less work and spend more time being idle than it asked of its dollars in the year 2000.

And it could well be the money masters at the Fed want it this way so as to keep rates low.

Jeff, Guest blog

 

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