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By HaleStewart November 29, 2013 8:33 am
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Record Low US Monetary Velocity Is Hindering Growth

MZM is "money of zero maturity."  Put in less formalistic terms, MZM is money that can be readily spent.  Velocity is the rate at which money moves through the economy; higher velocity means each dollar is being spent faster while lower velocity means each dollar is being spent at a slower pace.

The above chart tells us that liquid funds are now moving through the US economy at nearly the slowest pace on record.  That means that every dollar which a consumer acquires spends a longer time in that consumers wallet rather than being spent on acquiring goods and services.

Why does this matter?

1.) An expanding economy has momentum and a healthier economy has a faster momentum.  The low level of monetary velocity tells us that consumers are less willing to spend money, thereby slowing the pace of expansion.

2.) The low level of velocity at least partially explains why there is low inflation in the US despite the massive increase in the monetary base which is part of the Fed's QE program.

3.) This slow pace of velocity is to be expected when the economy is recovering from the deflation of an asset bubble fueled by easy credit.  As consumers alocate more of their funds to paying down a large amount of debt, they allocate fewer dollars to consumer purchases.  Hence, lower velocity.

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer

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