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August 9, 2012

'Escape Velocity': Money Velocity at 53 Year Low

While I understand escape velocity is a physics term that I am taking out of context, many may ask what the recession and impending economic uncertainty has done to our economy at large. Fortunately, the Federal Reserve tracks money velocity and a recent inquiry by Common Sense Capitalism found the following:

A dollar produced $1.95 in GDP before the credit crisis and today it produces $1.57, which is the lowest in the 53 year measurement of money velocity (M2).  Velocity began to rebound in late 2010, only to resume declining in mid-2011.  This is further proof that economic uncertainty (created by the fiscal cliff) is damaging our economy.

If the Federal Reserve is paying attention to this statistic (and keep in mind they track thousands so they may not take much stock in money velocity), we may expected further Central Bank intervention in the near future.  However, if further QE is the solution, why has the first two rounds resulted in such a velocity drop?

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