The End of Cash?

Thursday, April 30, 2015
By Paul Martin

By: David Chapman
Thursday, 30 April 2015

Money velocity in its simplest terms is a measurement of how fast money is moving through the economy. Another way of looking it is that money velocity is simply a comparison between GDP and money supply. If money velocity is falling then that tells us money supply is increasing at a faster rate than GDP.

M1 is notes and coins in circulation, plus traveler’s cheques, demand deposits and other chequable accounts. A rising velocity is a sign that the economy is relatively healthy whereas a falling velocity might be an indication of a slowing economy or an underperforming economy.

The velocity of M1 is back down at levels seen during the 1980’s and early 1990’s recessions. The reality is that it may even be worse. The chart below shows the velocity of money over the past century. This chart uses M2, which is M1 plus savings accounts, time deposits less than $100,000 and money market accounts for individuals. The picture it shows could be of concern as it shows that the velocity of money has fallen below the levels of the 1950’s and 1960’s and is trending into the territory of the Great Depression and War of the 1930’s and 1940’s. Note as well how the velocity of M2 was trending negatively during the roaring twenties. Could it have been a harbinger of things to come?

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