Monetary Velocity And Dollar Hoarding

by: Hale Stewart

Velocity is the speed at which money flows through the economy. Think of it this way: Suppose an economy has 10 people and only 10 $1 bills. Now let's suppose that in year X, each person buys 1 item from somebody else. Compare that to the situation where 1 person purchases 5 things from either the same person or a different combination of people. Either way, the second situation is far healthier (because more is going on).

Right now, all the velocity indicators of the various monetary measure are low and declining. That is a very bad situation as it indicates that -- despite the Fed flooding the economy with money -- people are hoarding dollars.