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Posted on 24 August 2012 | 6,946 views

Velocity of Money is now Lower Than the Great Depression

The rate at which money is exchanged from one transaction to another, and how much a unit of currency is used in a given period of time. Velocity of money is usually measured as a ratio of GNP to a country’s total supply of money.

Velocity is important for measuring the rate at which money in circulation is used for purchasing goods and services. This helps investors gauge how robust the economy is, and is a key input in the determination of an economy’s inflation calculation. Economies that exhibit a higher velocity of money relative to others tend to be further along in the business cycle and should have a higher rate of inflation, all things held constant.

Strictly speaking all the velocity of money tells us is how long people actually hold onto their money.  But from that we can infer their motives and perceptions of their personal finances and on a broader scale the economy in general.

If people are fearful for their jobs they will want to hold more cash and thus the velocity of money will fall. If on the other hand, they feel “flush with cash” they will spend it faster. But there are other reasons people spend cash quickly. The primary one is that they fear inflation. So rather than feeling rich a high velocity may also indicate a fear of the value of their money depreciating quickly.

A perfect example of this would be during the Hyperinflation in Weimar Germany between 1921 and 1923. During this time inflation got so bad that people would pay for their meal before the meal because if they waited until the end it would cost more. This is the ultimate in money velocity where people rush out to spend the money because holding it for a few minutes longer might cause it to lose additional value.

It’s Even Worse Than The Great Depression

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