There has been a lot of speculation in the American press why after months of quantitative easing (money creation by the Fed from nothing)that the economy has not picked up. In fact, it takes two elements for this to work:
One is the amount of money in circulation. As you see by the graph below, this has exploded in the last year.
But, the other elements is what is called money velocity - the rate at which people spend and turnover the money in their possession. Just like goods sitting on the shelf in a store, real money is made by how often the products turn-over. Just sitting there does no good - it is dead value. As you will see from the graph below, the money velocity has dropped to an extremely low rate as people hold onto cash and savings because of uncertainty. Likewise, very little borrowing is going on that would also increase potential for velocity.
Thus the two elements cancel each other out and the recession continues. The question is whether the Fed will keep pushing on this string and re-open the values with round #3?
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