Tuesday, December 11, 2012

Velocity of Money: Why $3 Trillion Fed Dollars Are Not Moving the Economy

Velocity of Money: Why $3 Trillion Fed Dollars Are Not Moving the Economy

Velocity of money: If a single $100 bill that comes into town circulates from hand to hand and ends up paying off everyone's debts in the entire town, then the velocity of that $100 was very high. If the same $100 was stuffed under a mattress, its velocity would be zero. If money has no velocity, it is dead money.

There is plenty of money sloshing around in the coffers of financial institutions the world over, but either A) those who want to borrow it are not qualified to borrow it or 2) those who are qualified to borrow it have zero interest in borrowing it; they are desperately trying to pay down their existing debts, not acquire more debt.

Who has access to this liquidity? Not entrepreneurs, not small business, nor anybody who is in the business of growing the economy.

The Fed has created $3 Trillion of dollars via computer key-stroke (i. e., "printing" money), which has increased the money supply yet NOT caused inflation. Why? Because of the low velocity of money.

This will all change in about 10 years, when velocity of money, the economoy, and inflation, will all come roaring back. Then it will be tiger riding time for the Fed.

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