100 dollar

The term “velocity of money” (also “The velocity of circulation of money“) refers to how fast money passes from one holder to the next. It can refer to the income velocity of money, which is the frequency at which the average same unit of currency is used to purchase newly domestically-produced goods and services within a given time period. (Wikipedia).

Similarly, if you have $100,000 working capital in your business, you really want to cycle that money as often as possible throughout the year, simply because greater turnover of funds employed means more revenue. More turnover means more efficiency, less turnover means less efficiency.

In the economy, the velocity of money is usually measured as a ratio of Gross National Income (GNI) to a country’s total supply of money.

In 1976, Gross National Income was 1.7 times the amount of broad money supply. Reflecting the inefficiency of the ever-growing money supply (fuelled by borrowing), GNI is now .86 times money supply.

In the 2014 – 2015 period it took $4 dollars of money supply to produce $1 of GNI.

More recently that ratio has improved against the long-term downtrend. That has occurred because the increase in annual money supply has decreased from $147 Billion per year to $38 Billion for the year to June 2018. A dramatic reduction in annual increases in Money Supply (ie less borrowing) is synonymous with a slowing economy (1989 to 1993, 2001 to 2003).

In 2007, the trend flatlined but the then Labor Government provided massive stimulus to avoid the GFC.

The long term trend is that it takes more borrowings to produce an additional dollar of income.

The increasing focus on the prudential management of the Banking system is reducing the growth of lending, pointing to a falling growth in Gross National Income and, by definition, a recession if there is two consecutive quarters of negative growth.