The Fix to our economy is found in the V (Velocity of money) not in having a V (as in Vendetta)!

6 posts / 0 new
Last post
kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
The Fix to our economy is found in the V (Velocity of money) not in having a V (as in Vendetta)!

Most of us here know that today most of our money is originally created as a debt. Interest is charged on it. If one pays both interest and principal on that original debt, that money is (supposedly) removed from monetary circulation.

Our ability to pay is:
M * V = sumof( P * T )
M = Money Supply
V = Velocity of Money
P = Value of Payment
T = Number of recurring Transactions for such payment in the specified period (default: 12 months)

In the case of debt:
Sufficient payments of interest and/or principal (P) recurring a certain number of times in a year (T) can potentially exceed M. However, if it happens too slowly, then it will never exceed the interest, and the debt will continue rising.
Also, the sum of all P*T is fixed to M*V, and customarily, banks issue M as a commodity. V itself is not issued, but rather, it is a function of how quickly money is exchanged. So to increase the P*T to pay the interest usually requires an increase in M. To prevent hyperinflation, the size of M is controlled by various mechanisms, many of which create the original debt in the first place, while others, such as interest, cause that debt to grow.

Is it possible then to pay the original debts? The only way to do that is if the money which has been paid for the debt can be re-earned fast enough.
If the money that is used to pay the debt is recirculated with additional debt attached to it equal to the money itself, then there is no chance at all that the money can be re-earned quickly enough to pay down the original+additional debt and the interest they both generated.

If, for whatever reason, we cannot achieve a political means of abolishing central control of the monetary system, which is perhaps closer to the truth than what we might wish to believe, then perhaps instead of dancing around the issue known as inflation of the money supply (M), which most of us don't control anyway, we should look at the velocity of money (V), which almost all of us contribute to, as the potential place for a solution.

We must understand that money supply (M) is represented by many forms, especially as deposits of currency in the banking system. In other words, much of M represents savings. We also should know that the equation for Gross Domestic Product (GDP), as defined by the expenditure method, is GDP = C + G + I + (X - M). Given that symbol I in this equation stands for investment, and given that GDP is ultimately M*V, where V is the velocity of (M) money associated with GDP-contributing transactions, we should realize that some of M*V represents investment.

We should also understand that the velocity of money (V) is indeed a velocity of money. Almost always it refers to the number of times a unit of exchange is exchanged per year. Similarly, GDP is often reported while taking for granted that it is a periodic value - usually an annual (or per year) quantity.

Furthermore, many of what we regard as services usually do not terminate upon completion of a payment. Many services are in fact ongoing and require monthly payments. The interval for a monthly payment, i.e. a month, implies a money velocity of 12 (per year). Thus, if one considers such transactions alone, then the ratio of the GDP over the quantity of money being circulated for such goods and services is roughly 12, assuming that all the same money stays in that circulation.

Is it possible to increase the money velocity? If it can be 12, why not greater than 12? We could, though this requires a higher ratio of currency flow over currency deposited. In a macroeconomic sense, this requires the ratio of GDP over the money supply to increase. Can it be done? Should it be done?

It is my thesis that we can and should do it. Why?

  1. While the general population cannot control M as money masters do, any participant in the economy can contribute to V as they wish. To increase V for our economy as a whole, we just have to increase the rate turnover (or velocity) of our money.
  2. We now have the technology to increase the rate turnover (or velocity) of our money. Electronically, it is just as possible to make daily payments via an ACH (Automated Clearing House) as it is possible to make monthly payments via an ACH.
  3. We do not have to inject extra money into the economy to stimulate demand, as the demand is, in reality, stimulated by the rate of recirculation of currency in return for goods and services. Most importantly, if we increase the money velocity this way, we can cover most, or even all, of our public expenses, without adding a single dime to the money supply!

How can and how should we do this?
All we have to do is devote some of the money supply to a relatively rapid turnover of currency. The more there are services compared to number of goods, the relatively easier this should be. If in fact most goods could be repackaged as services, in the form of membership, then this allows for a large fraction of money exchanges to be repetitious and ongoing. Thus, such services can be rendered in exchange for daily payments via an ACH, increasing the money velocity.

I hope the reader understands the implications of this. This can change the debate forever about how economic stimulus is created, suggesting that, instead of injecting more fiat into the money supply, we would be better off:

  • Repackaging goods as services (with membership)
  • Paying for such services via daily, automated funds transfers

Each series of daily, automated funds transfers could be listed as one separate line of a financial statement as an item of cash / day, so that way, the daily transfers, which can go on for years, do not clutter up the statement. The information age now makes this a convenient possibility.
Also, if nearly all goods (and other cost sources) were repackaged as services with flat rate charges before being offered to customers, then the customers' bank statements would no longer have as many line entries, making auditing (and printing) bank statements a simpler, quicker task.
Someday it could be even possible to consolidate the bills a person owes, and the payments a person has earned, into a single statement, provided that flat rate payment become ubiquitous for all transactions (including both bills and earnings), allowing each series of flat rate payments to be reduced to a single line on the statement.
To a certain extent, it could be simplified far enough to where it might be acceptable to post information regarding service agreements and pricing for similar services, along with the banking statement, into one convenient document.

The most important reason why we should make a deliberate attempt to increase the money velocity tied to GDP-contributing transactions is that by doing this we can do far more economic activity with less currency. The implications of this reason are:

  • Independence from central banks when it comes to economic growth
  • Independence from foreign direct investment when attempting to stimulate struggling economies
  • Creating local stimulus without issuing new money, subsidies, and similar dependence-fostering mechanisms

In addition to the most important reason (independence) is the added bonus of stabilized pricing (predictability of markets) that can result from widespread repackaging of various goods (and other cost sources) as services:

  • The idea is similar to how diversifying an investment portfolio can reduce the volatility of that portfolio's value.
    • As volatility goes down, business risk decreases, which encourages the growth of new businesses and jobs, which increases circulation velocity of currency in the economy.
    • Furthermore, given the risk-reward profile for each individual investor and/or entrepreneur in a business, the minimum reward (e.g. dividends, capital gains, bond interest, mortgage interest, etc.) desired from each start-up is reduced (due to lower risk) and can thus allow more of the money to flow to those who are not in the investor and/or entrepreneur class (e.g. most laborers and public beneficiaries).
    • The stabilizing of prices can reduce both the frequency and amplitude of budget fluctuations, which can in turn improve the retention of paid labor. The need for this will become especially crucial during times of massive labor shifts, particularly when it comes to displacement of workers due to stiff labor competition or even automation of labor, where you might expect an unprecedented level of public beneficiaries looking to find new industries and jobs to create (if they can imagine them) however removed such may be from the acts of processing raw materials, manufacturing goods, marketing, and sale of final products.

Increased independence from centralized banking decisions can be realized if we can stimulate the economy without inflating the money supply. Increasing the ratio of the GDP over the money supply is the *ONLY* (likely) way it can be done. Emotional and political incentives to create jobs can only go so far as they encounter the unrelenting reality that for businesses to meet or exceed their bottom line there must be demand for their products, which in turn depends on the ease of turning over currency in exchange for goods and services; so again, it's about the money velocity!
The only other "options" are violence and intimidation towards banks, public employees, etc. which will never be sustainable actions as they only lead to a replacement with "more of the same" corrupted leadership which never fails to emerge in such situations. The new leadership is almost always not better, and even if it is better, it's not by itself a solid foundation for keeping the economy moving.

In short, the Fix to our economy is found in the V (Velocity of money) not in having a V (as in Vendetta)!

If successfully popularized, we could call this the "Occupy Velocity" movement.

maceves's picture
maceves
Status: Gold Member (Offline)
Joined: Aug 23 2010
Posts: 281
simplify

 Can you simplify this please?

The way I understand it--there is more V if I pay the kid down the street to cut my lawn than if I spend the same amount for a Chinese made gizmo at  Walmart.  He might make two different purchases with the same money, so it gets spent three times.

is that the idea?

Johnny Oxygen's picture
Johnny Oxygen
Status: Diamond Member (Offline)
Joined: Sep 9 2009
Posts: 1443
arghhhh

kmarinas

Not this again. Really? Are you writing a thesis?

 

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
kmarinas86 wrote:We now have
kmarinas86 wrote:

We now have the technology to increase the rate turnover (or velocity) of our money. Electronically, it is just as possible to make daily payments via an ACH (Automated Clearing House) as it is possible to make monthly payments via an ACH.

Let's try to understand this one thing first.

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
maceves wrote: Can you
maceves wrote:

 Can you simplify this please?

The way I understand it--there is more V if I pay the kid down the street to cut my lawn than if I spend the same amount for a Chinese made gizmo at  Walmart.  He might make two different purchases with the same money, so it gets spent three times.

is that the idea?

It's not.

Here is the basic gist of the above:
cash flow = cash exchanged / time
money velocity = cash flow / total cash available
the economy (in nominal value) = total cash available * money velocity
origin of >99% of cash available in our system = debt
therefore
>99% of money is created with debt.
Can we reduce this debt?
Yes by not creating so much more of it in the first place.
This means not creating money so quickly.
So we need an economy where cash flow is very high and can be increased to an arbitrary degree.
Johnny Oxygen doesn't (want to) see the point of that...
But I see a very important point in doing so.
You see, the justification we've had for interest on money created is to prevent hyperinflation.
The more our system is addicted to printing more money, the higher the cost there should be in doing so.
In the early 1980's, Paul Volcker was inspired to increase interest rates for such a reason.
Interest is but one way of increasing the cost of adding money into the economy.
Another would be restriction of currency, whether imposed by real or artificial scarcity, but that would require that the people own the central bank.
We cannot count on that happening.
If no restriction on the money supply were in place, our currency loses value VERY fast, like what happened in Zimbabwe.
At the same time, interest is VERY unsustainable, as understood by Chris Martenson himself, as well as many others.
The only solution to our debts is infact to increase the money velocity.
In fact, if we have a certain amount of interest and debt, there is a MINIMUM amount of cash flow is required to pay that off. Also given that money creation coincides with additional debt, there is also a MINIMUM MONEY VELOCITY in which such debt could paid off. In fact, it must increase on and on for it to be paid off. But unlike perpetual interest, increasing the money velocity is sustainable, so as long as it is created by means other than money creation.
Unfortunately, we are below that minimum.
Jump to 2:41


Jump to 2:41

Johnny Oxygen wrote:

http://www.peakprosperity.com/comment/118134#comment-118134

Re: kmarinas

The system aims to increase the money velocity of the real economy, not that of the virtual economy, so that an economy can survive and even grow when money is scarcest. It aims to do this within our current system by flowing money into to "permanently liquid asset flows" or "locked cash flow assets" which never stop moving money (as long as they remain established), by which allowances (like that a child receives from his or her parents) become the basic commodity for trade for ongoing services and supplies of goods.

oh

There is more to an economy than the velocity of money.
[..]

My response to his full post: http://www.peakprosperity.com/comment/118167#comment-118167

Johnny Oxygen wrote:

http://www.peakprosperity.com/comment/120192#comment-120192

Holy persistence

Oh no.

Not again

Johnny Oxygen wrote:

http://www.peakprosperity.com/comment/120477#comment-120477

Enough

kmarinas

Why do you keep posting your 'thesis'?

It's clear that others simply aren't buying it and have noted why. Do you just want us to agree with you?

Johnny Oxygen wrote:

http://www.peakprosperity.com/comment/120491#comment-120491

kmarinas Your ideas are

kmarinas

Your ideas are academic and naive.

They simply don't work in the real world.

Johnny Oxygen wrote:

http://www.peakprosperity.com/comment/135629#comment-135629

kmarinas

Not this again. Really? Are you writing a thesis?

Johnny Oxygen, in a way like no one else I've seen, just doesn't care or appreciate what the money velocity does for the economy.

goes211's picture
goes211
Status: Diamond Member (Offline)
Joined: Aug 18 2008
Posts: 1114
Are we dealing with a problem or a predicament?

kmarinas86,

I don't think it is Johnny Oxygen that doesn't care or appreciate something.   You talk about the current economic/monetary system like it is a PROBLEM that can be solved with faster monetary velocity.  I think most of the people around here believe that we are in a PREDICAMENT where there are vastly more claims upon wealth than real wealth to support those claims.  If you don't know the difference between problem and predicament in this context, I suggest you rewatch the crash course.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments