Low velocity is characterised by a high level of Hoarded Money. The economy becomes more sensitive to variations in Money Supply. I give you this graph again to revise the relationship between velocity, Circulating Money, and Hoarded Money:

One can see from the next diagram that a one percentage fall in the Money Supply will have a bigger influence on the magnitude of the Circulating Money.

• At a velocity of 12,  a 1% fall in the Money Supply will cause a 1% fall in Circulating Money.
• At a velocity of 6,    a 1% fall in the Money Supply will cause a 2% fall in Circulating Money.
• At a velocity of 2,    a 1% fall in the Money Supply will cause a 6% fall in Circulating Money.
• At a velocity of 1,    a 1% fall in the Money Supply will cause a 12% fall in Circulating Money.
• At a velocity of 0.5, a 1% fall in the Money Supply will cause a 24% fall in Circulating Money.

With a low velocity, it becomes exceedingly difficult to maintain a Money Supply and in particular to maintain Circulating Money at a steady figure. A minor change in the rate at which banks lend money will have large effects on economic activity.

Here are some typical velocity graphs:

At low velocity, the proportion of money that is circulating is very small. I show this in these graphs for Canada:

The next observation concerning an economy with low velocity is that a small change in velocity causes an equal proportionate change in Circulating Money.

• At a velocity of 12,   a 10% fall in velocity will cause a 10% fall in Circulating Money.
• At a velocity of 6,     a 10% fall in velocity will cause a 10% fall in Circulating Money.
• At a velocity of 2,     a 10% fall in velocity will cause a 10% fall in Circulating Money.
• At a velocity of 1,     a 10% fall in velocity will cause a 10% fall in Circulating Money.
• At a velocity of 0.5, a 10% fall will in velocity cause a 10% fall in Circulating Money.

A bigger issue in an economy with low velocity is that an increase in Hoarded Money of 1% will cause a greater change in Circulating Money:

• At a velocity of 6,    a 1% increase in hoarding will cause a   1% fall in Circulating Money. [1]
• At a velocity of 2,    a 1% increase in hoarding will cause a   5% fall in Circulating Money. [1]
• At a velocity of 1,    a 1% increase in hoarding will cause an 11% fall in Circulating Money. [1]
• At a velocity of 0.5, a 1% increase in hoarding will cause a 23% fall in Circulating Money. [1]

The reverse is also true. With a low velocity, a small reduction in the size of the Hoarded Money section of the Money Supply will give a massive boost to the economy.

• At a velocity of 6,    a 1% decrease in hoarding will cause a   1% rise in Circulating Money.
• At a velocity of 2,    a 1% decrease in hoarding will cause a   5% rise in Circulating Money.
• At a velocity of 1,    a 1% decrease in hoarding will cause an 11% rise in Circulating Money.
• At a velocity of 0.5, a 1% decrease in hoarding will cause a 23% rise in Circulating Money.

At a velocity of 1, a 0.1% instant tax on all Hoarded Money would theoretically cause a rise in the GDP of 1.1%. This is a tax of $1 in $1000. Far less severe than the confiscation percentages mentioned in ‘bail-in’ documents. (GDP and circulating are directly related. [2])