Monetary Velocity has plunged
http://research.stlouisfed.org/fred2/graph/?s[1][id]=M2V
Defining it like an Economist
Monetary velocity is how many times a dollar is used to purchase an equal value of GDP goods and services. For example Party A uses it to buy something worth a dollar from Party B, who then uses it to buy something from Party C. If this dollar is used three times in a year, then its 'monetary velocity' is 3x.
In a healthy economy with a robust, strong currency, that dollar is in high demand as a means of transacting business and is used many times. Put another way... when the economy is growing faster than the money supply, velocity of money rises since each dollar has to work harder to satisfy the demand for commerce. In a shrinking or lethargic economy, with no additional printing.. the velocity of money holds steady. If there is excessive printing that exceeds the rate of economic growth, then the velocity falls.
Defining it for the lay person
Point blank: if you eat more calories than your body will use in a day, you're going to get fat. If you eat less than you burn rate, you will lose weight. If you balance it out, you will maintain weight.
Getting way too fat causes all kinds of health problems for people. An economy that gets fat on fiat paper is going to have health problems too.
In currency terms, a crashing velocity means the supply of money is growing so fast, it can weigh down the system ... like a big fat ass sitting on a coiled spring. If it loses its balance and falls off then the spring will explode and voila... we have an inflationary bubble in one or more asset classes.
Last time it found roots in the housing market, as loose money spawned an even larger loose credit cycle.... which enabled an even larger credit derivatives and securitization bubble.
Fiat vs. Commodities
Velocity is plunging for two reasons. First the economy shrunk rapidly during the recession, while the money supply was inflated. This compressed the turn ratio for money.
Second, while the economy is now growing it is growing sluggishly. While some growth is better than none.. the inflation of the money supply is growing even faster. M2 kept rising from one consecutive bailout (easing cycle) after another.
When the rate of money supply growth exceeds that of economic growth then the velocity of money will fall.
Being awash in paper fiat currency is not usually a good thing, because it leads to inflation. The majority of people, pundits and politicians see this inflation first as a speculative phenomenon, not the symptoms of a weakening currency. Hedge funds are blamed, sometimes banks, sometimes Arab countries (or other oil producers), but these are misguided if the fiat currency is inflating.
Inflation-Protection Security: Commodity buffer
Real assets measured in fiat currencies offer some protection from this effect. An investment portfolio that does not contain physical precious metals (silver, gold, platinum, and palladium), farm land (with water rights/timber, etc), and so forth could be exposed to real erosion by inflation.
Trading some of your fiat money for these assets, however, is a way of preserving the a portion of your long-term wealth... especially since they keep easing with one program after another. These items are becoming more expensive to acquire because the paper money used to buy them is becoming more plentiful in the system (not necessarily your paycheck!) and the global demand to exit fiat for real stuff is rising.
Be smart, protect your portfolio. Not having any commodity component could mean you are overexposed to fiat-denominated investments, and therefore not diversified. Add the buffer.
