Where Is the Economy Heading? Velocity of Money Provides Clues

Where Is the Economy Heading? Velocity of Money Provides Clues

I often get asked my thoughts on where the economy is heading, and sadly, I don’t have a crystal ball, but I do have several gauges that I use to help determine the direction that the economy might be heading in. One of those gauges is the velocity of money.

Velocity of money is the rate at which money is being spent in the economy. It is calculated by dividing GDP (gross domestic product) (opens in new tab) by the money supply (M1 & M2). Both M1 and M2 can be used for calculation purposes. Think of M1 as the more focused number. This includes cash and transaction deposits, whereas M2 is larger and encompasses savings, CDs and money markets. GDP is the value of all goods and services in the economy.


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