August 22, 2012

Velocity of Money

Velocity of money is the  frequency with which a unit of money is spent on new goods and services.   It is a far better indicator of economic activity than GDP, consumer prices, the stock market, or sales.  In a healthy economy, the same dollar is collected as payment and subsequently spent many times over.  In a depression, the velocity of money goes catatonic.  
Velocity of money is calculated by simply dividing GDP by a given money supply.  The following is the velocity of money since Great Depression, sometimes a picture is worth more than thousand words and the picture is quite clear here.
The situation here is worst than the Great Depression and World War II and deteriorating fast.


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