Since the early part of the recession in 2008, the Velocity of Money (M1) has dropped over 30%. Velocity measures how fast money changes hands within the economy. Having it slow significantly while the Fed boosts the M1 money supply suggests that added liquidity is not spurring economic activity or inflation...at least not yet.
Velocity is important for measuring the rate at which money in circulation is used for purchasing goods and services. Higher velocity means the same quantity of money is used for a greater number of transactions and is related to the demand for money. This data can help investors determine how healthy the economy is.
Imagine that you have $10. You buy lunch from Bill for $10. That $10 is used to purchase the ingredients, and the left over is spent on something else Bill needs, maybe a cup of coffee from Tom. That's velocity of money, if it gets printed and goes into deep storage, nothing gets stimulated, except Bill who had the coffee. We need to see the money that is flowing into the economy being used, and it's not, so far.
