We have a unique situation in the economy right now. We have the story that the politicians are selling and we have reality. Now, to be fair, that is how politics work. No politician is going to say how bad anything really is. There is only a positive spin. You have to look at the real data. So let’s look behind the scenes at an economic indicator that shows the reality of the economy.
The Velocity of Money
The velocity of money is the rate at which cash exchanges hands in the economy. Said another way, it is the rate at which cash flows through the economy in economic transactions. A real high velocity of money suggests the economy is booming and money is flowing through the economy at a high rate. A high velocity of money also is a good predictor of inflation.
A low velocity of money suggests that the economy has lower economy activity and is a good predictor of deflation. Today the velocity of money is at an all-time historic low of 1.09. It has been in freefall since last year.
In fact, studies of the Great Depression showed the velocity of money was in freefall as well. However, the latest reading of today’s velocity of money is lower than that of the velocity estimates of the Great Depression. At the same time, the government through fiscal and monetary policy is pumping in trillions of dollars of money into the economy with no real effect.
Make no mistake about it, the economy is on life support – just hope no one tells the stock market.