Economic Good News from an Obscure Source: Slow Money Velocity

First, the bottom line: According to the Jan. 27-Feb. 2 print edition of BusinessWeek: “Money velocity is at an all-time low, which usually signals growth.”

Second: “We’re simply not going to get inflation,” declares a former chairman of the White House Council of Economic Advisers.

How does one predict the strength of a national economy? One trustworthy gauge is the velocity of money, which moved at a glacial speed through 2013 – a feat that threatens to set a record not bested since 1959. According to BusinessWeek, an incredible amount of money – something like $11 trillion – is now sitting in cash, checking accounts, savings accounts, CDs, retail money market accounts and the like.

In case no one’s noticed, people haven’t been buying much of anything over the last four or so years. So the actual turnover of dollars chasing goods — the velocity of money — is at a 21st century record low. The recent Great Recession, coupled with a dramatic expansion in the U.S. money supply, figure huge roles in decelerating money velocity to record slow levels.

So why is this a good thing? “Money tends to slow down in the early stages of an economic recovery as people reduce spending, pay down debt, and increase their savings rate, and it doesn’t pick up speed until about four years into a turnaround,” writes Matthew Philips of BusinessWeek.

A strong precedent for predictive economic growth, a slow velocity of money — like what we have today — historically signals good times: “After a deep recession in the 1980s,” Philips says, “the economy went through almost a decade of growth.”

So for 2014, real bedrock economic good news at last!

By Michael Snyder, Managing Principal, The MEK Group