Chart of the week: Money velocity plunges to lowest level in more than 50 years

Since the financial crisis hit in 2008, the US Federal Reserve has created more than $2.2 trillion. However this huge amount of new money has not found its way into the economy, because, understandably, banks are reluctant to make new loans. Instead, they are just leaving the money on deposit at the Fed and collecting interest.

With so much money just sitting idle in the banking system, money velocity, which is the rate at which money changes hands, has fallen dramatically. In fact, as the chart below shows, it is now at the lowest level in more than 50 years.

Money Velocity: M2 Money Stock 1950 – 2013 (Click on the chart for a larger version)

Money Velocity: M2 Money Stock 1950 – 2013 (Click on the chart for a larger version)

Chart courtesy of the Federal Reserve Bank of St. Louis

Money velocity can be thought of as the rate at which money changes hands in the economy. I.e., the number of times one dollar is used to purchase the goods and services that make up GDP.

Money printing & inflation

It is not only the US Fed that has been printing huge amounts of money, in fact, since 2008 central banks around the world have collectively printed over $11 trillion. Typically this sort of mass money creation leads to inflation. However, it takes more than just newly created money to create inflation, it also requires an increase in money velocity.

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