Thesis: Increasing Money Velocity is the Only Way to get out of recession without risking getting deeper in debt

17 posts / 0 new
Last post
kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Thesis: Increasing Money Velocity is the Only Way to get out of recession without risking getting deeper in debt

Debt is a function of a loss of liquidity. If an economy runs trade deficits, it looses money.

If there is a way to increase the GDP without increasing the money supply, it can throw away Keynesianism out of the water. Why? The reason is that Keynesians assume that you must print money to expand the economy. In a way that makes some pseudo-sense. But where exactly does most of the money in our fractional-reserve banking-dominated economy come to general population in the first place? Debt! So if Keynesians wanted to increase the GDP, their decision would be to increase the money supply, M, which increases the debt!

The equation of exchange:

M * V = P * T

There is a better alternative, and that is increasing V. If you believe this equation from economists is correct, the only other way to increase nominal GDP aside from M is to increase V.

The importance of V should not be underestimated:

http://en.wikipedia.org/wiki/Velocity_of_money
http://en.wikipedia.org/wiki/File:M2VelocityEMratioUS052009.png

"Economists use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions. M2 is a key economic indicator used to forecast inflation." - Money Supply, Wikipedia

If you can technologically increase V to an arbitrary degree you should not need to increase M to stimulate the economy any longer. In fact, you could make M drop without inducing recession, unlike in the 1930s Great Depression where it in fact, due to central banking policies of the Federal Reserve, it did. Also, because the generation of M creates debt, as is practiced in our fractional-reserving lending system, increasing V would be a way out of having to produce more debt to expand the nominal GDP.

Hypothesis: If one sets up a system which allows n-number of GDP-related transactions to be done with a dollar in a given year, where n is a number signficantly greater than the present M2 money velocity, then by computerizing such a system, an arbitrary increase in the money velocity associated with transactions having contributions to GDP can be obtained such that, without expansion of the money supply, and without arbitrary government measures such as "stimulus bills", any historically-demonstrated pace of economic growth can be accomodated.

My proposal here is just one of my attempts to conjure up a system where, hopefully, we can arrive at the conclusion that, yes, we should have a system that allows V to increase.

The specific idea I have presented thus far, which is not perfect, nor could be, is just one of many possible methods one could devise to achieve this effect. There can be many more credible arguments from more credible people than myself who could come up with alternative answers for the same goal - increasing V to any arbitrary degree.

So if I failed to be right this time, there still remains a hope that there is indeed some way to increase V that can actually succeed.

Increasing V is an alternative to increasing M. Increasing M is tantamount to surrendering to a central bank's policies, for they can control this directly. However, while it may be illegal for the common individual to change M by themselves, it is not at all illegal to change V. If indeed the economy is able to pay its debts, then by definition, V must lead M in growth, for if not, payment transactions (P*T) will never keep up with the debts and interest introduced by M, given that we have a fractional-reserve banking system. In fact, paying our debts to the central bank is impossible without negatively contributing to M, so for the sake of maintaining liquidity the logical thing do to would be default, which you claim is a healthy thing. The healthier thing to do is to systematically avoid debt in the first place rather than systematically generating it only to systematically destroy it.

I think that defaults do not do complete justice. We should limit debts in the first place. Thus, we must maintain the liquidity of the assets of exchange. This generally occurs when they are being used. When they are used, we have then greater potential to pay debts. And because much of our debt is coincident with the expansion of the money supply, it should behoove of us to think about what exactly is the debt being used to support in the first place. If this is in fact a mere symptom of the lack of liquidity in our system, we should think about how prevent that from being induced onto unwitting losers in the game of economic musical chairs.

I do not subscribe to the notion that whatever degree of economic collapse that occurs is somehow natural. To me, there is no such thing as a natural economic collapse in any economic system one can think of or devise. They are all completely artificial to me.

I also believe that economic success is not natural either. It is completely up to the will of each individual to either try or not to try.

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Please excuse typos. Thanks!

accomodated → accommodated*

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
This post was (somewhat) adapted from a prior thread.

"In fact, paying our debts to the central bank is impossible without negatively contributing to M, so for the sake of maintaining liquidity the logical thing do to would be default, which you claim is a healthy thing."

I wasn't supposed to leave that line in there in this thread. The prior thread which has a different focus, different question, different approach, etc. can be found here:
http://www.peakprosperity.com/forum/denomination-cash-flow-money-exchang...

royalmetals's picture
royalmetals
Status: Member (Offline)
Joined: Mar 23 2010
Posts: 7
Velocity

Velocity equals consumption. Consumption of goods we no longer produce for ourselves. The velocity would speed up capital outflows to foreign producers. We export dollars and import real goods. Velocity might work to get our economy moving again if we produced the goods and services we consume.. Jmo

royalmetals's picture
royalmetals
Status: Member (Offline)
Joined: Mar 23 2010
Posts: 7
Velocity

One more thing...that is the whole idea of QE to
get the banks to start loaning money again to kick start the economy. The Fed has to continue QE until the banks are forced to liquidate treasuries bills and notes to seek greater returns risking it on the loans they make. The banks are suffering from margin compression and will eventually have no other choice but to lend money no matter what then you will get velocity even after the M is shut off. There is no escaping a debt based money system. All debts must and will be liquidated. I really enjoyed Bill Still's Secret of Oz on YouTube... Sounds plausible but we will never have debt free money for the good of the people. Money is a cartel and will always be manipulated by the powers that be ALWAYS until the return of Christ. Again JMO

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

Oh no.

Not again

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
If you want to increase V...

If you want to increase V, then just bailout my inlaws. 

They would spend the money so fast that the inflation rate would triple overnight.  And of course, they wouldn't  spend a dime paying back all the debt that they owe, so the V-killing bank balance sheet wouldn't be a factor.

dshields's picture
dshields
Status: Platinum Member (Offline)
Joined: Oct 24 2009
Posts: 599
not going to happen...

In order to have an increase in V people would have to have that money to spend over and above their fixed costs and debt service.  That is not going to happen any time soon if ever.  We are broke and broken.  The only real way to free up enough money to have a meaningful increase in V would be a restructuring of debt - a partial or total default.  This is not going to be allowed.

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2391
The increase in V will come.....

It will be one of the leading indicators of the final loss of confidence in the dollar.  It will be hailed by some in the MSM/CNBC crowd as yet another rebound for the resilient US consumer... when it will be nothing of the sort.  Rather it will signal the onset of a painful inflation/hyperinflation.   

I'm sorry.. but I disagree with most of what you wrote Kmarinas.....  We don't need to increase V... we need to get back to a place where capital (savings) is respected and promoted, and given a reasonable yield.  ZIRP and endless printing does harm to the underpinnings of free market capitalism.  We need a Volcker, someone who realizes that we need to face more short term pain in order to avoid a total collapse longer term.  There is no "technological" fix to this.  Listen to Stockman... nobody explains the (monetary) problem better than he.     

 

dshields's picture
dshields
Status: Platinum Member (Offline)
Joined: Oct 24 2009
Posts: 599
Jim H
Jim H wrote:

It will be one of the leading indicators of the final loss of confidence in the dollar.  It will be hailed by some in the MSM/CNBC crowd as yet another rebound for the resilient US consumer... when it will be nothing of the sort.  Rather it will signal the onset of a painful inflation/hyperinflation.   

I'm sorry.. but I disagree with most of what you wrote Kmarinas.....  We don't need to increase V... we need to get back to a place where capital (savings) is respected and promoted, and given a reasonable yield.  ZIRP and endless printing does harm to the underpinnings of free market capitalism.  We need a Volcker, someone who realizes that we need to face more short term pain in order to avoid a total collapse longer term.  There is no "technological" fix to this.  Listen to Stockman... nobody explains the (monetary) problem better than he.     

Jim H - Yes and yes.  The Fed Res is holding down interest rates to allow the Fed Gov to borrow enomous amounts of money for basically free and as the existing debt rolls over it does so at very low rates.  This allows the out of control spending spree to continue.

The numbers are terrifying.  We are currently taking in about 2.4 trillion in revenue to the Fed Gov.  We are spending 1.6 trillion over that this year.  Next year it is even more.  Let us say the difference between the national output required to generate the current 2.4 trillion revenue stream and the national output required to generate a revenue stream of 4 trillion (2.4+1.6) is so large that it simply is not going to happen - the output gap is enormous.  OK, so let's raise taxes to cover the output gap.  The tax increase would have to be a full 50% more to cover it.  That puts you well over the Laffer Curve so that is simply not going to happen.  Plus, it would throw the country into a deep depression as nobody would have money to buy anything but the absolute essentials.  An analysis of "tax the rich" to solve this problem proves to be a joke.  The rich do not have even close to enough money.  Since the top 10% are buying 70 of products and services in the consumer economy right you are back to acme instant depression if you take all their money.  There are only 235,000 people in America with net worths over 1 million.  Most of them are down in the small numbers of millions.  If you took everything they have it would be about enough to cover this years output gap.  What are you going to do about next year ?  What are you going to do when the people doing the majority of the spending now (V) are wiped out ?  Can you spell depression ?

Ok, so we can't tax our way out so maybe we cut spending.  Let's see now, to get to balance we have to cut social security, medicare, medicaid, stop all the wars and cut the military by 50%, SNAP (food stamps) has to be cut by 50%, half the employees of the fed gov have to be laid off, section 8 subsidized housing has to be cut by 50%, agg subsidies have to be cut by 50%, and so on.  Everything would have to be cut by 50%.  Acme instant depression is the result as 35 of the GDP is the fed gov.  If you cut 17% of GDP you will have the mother of all depressions.  Can't cut your way out.  How about meet in the middle and cut 25% and raise taxes 25%.  Can you spell instant depression ?  The truth is there is no way out.  I have not heard a single person ever propose a solution that does not lead to acme instant depression.  Nobody has proposed such a solution because there isn't one.  Stockman and Martenson do not propose one either.  What they both say is we are toast.  The fed res now holds more than half of all fed gov debt (noit China).  The percentage of US debt the fed holds is growing every month.  They are never going to get paid back.  The fed is going to do 44 billion in Oct under operation twist to push down long term rates so the fed gov can borrow another astounding amount of money at artificially low rates.  By keeping rates so low the fed res has destroyed the bond market as a price discovery mechanism and has created the bond bubble of all time.

The politicians are not going to cut diddly squat.  They have already proved that.  And it is easy to see why - basically any cuts that would have any meaning at all would result in violence in America and probably the rest of the world.  Riots, lawlessness, panic, the migration of millions of people out of cities, a true national disaster and they simply are not capable as an institution of causing such a crisis.  All the Tea Party hoopla is not going to make any difference at all but I am sympathetic with their cause.  The politicians simply can not cut enough out of the spending to make any meaningful difference in the outcome.

That only leaves one path the institutions can walk down - the fed res buys the surplus deficit to cover the output gap - printing.  So they are going to print and they are going to keep printing.  They will not default as that is also acme instant depression.  They will have all kinds of fancy names for the printing.  Plus, nobody knows what the fed is doing in secret.  They can not be audited and they do not have to tell what they do.  Look what came out of the Bloomberg freedom of information action - all kinds of really surprising stuff the fed had been up to.  I would never have guessed the size and nature of the bailouts, swaps, and loans.

But to me the scariest part of all is the way the American people are acting.  There are black swans all over the place.  Any one of them would have caused great national concern 20 years ago.  Now the people just accept what appear to be emergencies as normal - no big deal.  I actually have liberal friends who believe the fed gov should be spending a lot more money.  I know smart people who honestly believe the gov will work it all out and everything is going to be fine.  The TV everyday is full of lies and distorted information.  Most people in America still believe the Fed Res is part of the government.  When you try to explain to them they think you are mentally disturbed.  The people have lost their critical thinking skills.  I know people who are very excited about Obama's new jobs bill.  They think Reagan is the devil and Obama is so brilliant that he is one of the chosen - people that actually emit energy in a special frequency.  I could just go on and on.  It is the scariest part  - the people of America.  The vast majority really have no idea what is going on at all.

 

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Jim H wrote: It will be one
Jim H wrote:

It will be one of the leading indicators of the final loss of confidence in the dollar.  It will be hailed by some in the MSM/CNBC crowd as yet another rebound for the resilient US consumer... when it will be nothing of the sort.  Rather it will signal the onset of a painful inflation/hyperinflation.   

I'm sorry.. but I disagree with most of what you wrote Kmarinas.....  We don't need to increase V... we need to get back to a place where capital (savings) is respected and promoted, and given a reasonable yield.

Such a place can be called China (or India if you want an example closer to having an ideal "free" market).

There is a paradox of savings that I don't hear much about. If you have savers (those living below their financial means) there will always be debtors (those living beyond their financial means). The only reason why we could see the amount of "savings" for the economy as a whole grow over time is that new money is introduced at a rate faster than the rate at which it leaks out of circulation, which hides the financial zero-sum nature of this situation. What has been hidden from people so long is the total debt; not just the national debt, but the

total

debt.

The same is true for profit. If you pay all debts and accounts receivables immediately, then, if we could count the beans without err, so to speak, then capital accumulation in any business, even if just it is one puny cent, would be mathematically impossible. The reason for that is very simple. If $100 of purchases in one day generates $90 of purchasing power for the next day, then just to sustain this rate of purchasing power for the following day requires $10 of spending which was not earned in the previous day. So that $10 of capital accumulation for the business cannot be maintained unless of $10 of money is spent not accounted for in pay and dividends, which ultimately means money must be introduced by some other means! In other words, the existence of any macroeconomic profit is impossible if you don't have an expanding money supply. It's as simple as that. Also, the very existence of any cent of profit (= commercial savings) in the first place entails the possibility of reinvesting it back into business for exponential "financial" growth, which is mostly just fictitious wealth generated during economic bubbles. A bubble is what you shall expect if the targets for the profit rate exceed the rate of physical accumulation of wealth. A 10% average profit in an economy that grows 5% a year = financially unsustainable.

The only sense in which everybody can live below their means is within "physical" means, that is to say, when physical production of wealth exceeds consumption. But in the sense of finances, for everybody to live below their financial means is fundamentally impossible. Also, for everybody to live below their physical means implies the generation of massive unused inventory; i.e. production for the sake of production!

I can imagine a system where everybody could live at their financial means, but I am sure a system where all financial transactions are distributed indefinitely over time at a constant rather than "packaged and sent" on an individual basis is not familiar to many, and such will be easily misunderstood, and the connection with the ability to budget activity to the penny/month will be rarely forseen as a solution.

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

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Johnny Oxygen
Johnny Oxygen wrote:

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?

I am just clarifying what I am explaining. I don't expect anyone to be familiar with it at this time.

kmarinas86 wrote:

I am sure a system where all financial transactions are distributed indefinitely over time at a constant rather than "packaged and sent" on an individual basis is not familiar to many, and such will be easily misunderstood, and the connection with the ability to budget activity to the penny/month will be rarely forseen as a solution.

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
royalmetals wrote:Velocity
royalmetals wrote:

Velocity equals consumption. Consumption of goods we no longer produce for ourselves. The velocity would speed up capital outflows to foreign producers. We export dollars and import real goods. Velocity might work to get our economy moving again if we produced the goods and services we consume.. Jmo

How do we produce the good and services we consume if we do not have the energy ourselves? We keep on importing the energy to accomplish that.

Velocity does "equal" consumption, that is, if you don't pay down debts (i.e. in a fractional-reserve banking system, if you don't reduce M).

If we increase our energy independence, then the number of GDP-contributing domestic transactions per unit currency per unit time must rise, or else any effort toward energy independence can make us more financially dependent on debt (i.e. in a fractional-reserve banking system, more dependent on M) than we are now.

So energy (and thus job) independence can be seen as necessary, but not sufficient, in taking care of the debt systematically. Defaults could get rid of the debt, if allowed that is, but even then it wouldn't last very long as debts would be recreated with further disputes as to "who owes who what".

If we cannot arbitrarily increase V while decreasing M, then it is safe to say that government is wasting their time trying to restore the American balance sheet, or any government balance sheet for that matter. This is because the institution of debt is logically invalid, creating economic, political, social, and environmental instabilities - and thus sickness, injury, and death. There is good indication that debt itself could end the human race and life on planet Earth. That's why I am against it.

Johnny Oxygen's picture
Johnny Oxygen
Status: Diamond Member (Offline)
Joined: Sep 9 2009
Posts: 1443
kmarinas Your ideas are

kmarinas

Your ideas are academic and naive.

They simply don't work in the real world.

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Johnny Oxygen
Johnny Oxygen wrote:

kmarinas

Your ideas are academic and naive.

They simply don't work in the real world.

Translation: "Your ideas have not been considered or implemented - let alone understood. Of course they remain "academic" and carry a naive-sounding quality, and that's probably because "it is". It doesn't work in the real world. Heck, it hasn't even been tried yet - so there. (ha ha)"

EndGamePlayer's picture
EndGamePlayer
Status: Platinum Member (Offline)
Joined: Sep 2 2008
Posts: 546
Fix Economy in 1 yr or less-

Hey Jag- I think we have the same relatives!

Here's my 2cents on fixing the economy:

It doesn’t take a genius to see what’s wrong with this economy and some clear and concise steps we can all take to improve the economy immediately. I don't think pumping more money in will help- lets us the money we have to shore up our own country's economy.

While reading Slow Money, (If you don't know about Slow Money, it means we all start spending money locally deliberately. It doesn't matter how much, 1% will help ensure that local food producers are able to make a living at producing food, which secures food production) -  the realization hit me – we are hemorrhaging money from this country with every drop of gas and oil we buy and burn. Some estimates are in the Billion$ a day! This money could be going to seeing to it your neighbor has a job, doesn’t loose their house at a devalued market and therefore devalue yours.  And you get good health and make new friends in the process.

How to start? It’s easy! The money you usually spend on gas every week can go for buying a bike, among other things. Maybe its only $10 a week that you can cut back on gas, maybe its $129 a week, but the important thing is- only you can stop the hemorrhaging of money out of this country.  If we all start making the effort to stop this blood bath – the lives we save may be our own.  It might sound idealist, but every president in office in the last 30 years has told us we must stop our addiction to gas. . .and we didn’t listen and not all of us are listening now.

We’re not listening to the sound of jobs leaving the country. We’re not listening to the tent cities popping up around the country and the homeless people living out of their cars or standing roadside begging. We’re not listening to the unemployed or under-employed. What we are listening to is the voice over the tubes telling us we deserve our freedom, we “deserve” our ability of each be independently mobile. This message is a strangle hold on our ideals when it conflicts with our common goals and ideals of real freedom – the ability to not work, not have affordable healthy food and reasonable priced energy.

But its not all bad- we get some nice benefits! Here’s a few ways we can rebuild our country that are easy –

  • Ø    Ride share to work with a neighbor;
  • Ø    Clean out the bike out of the garage and ride it once or twice a week;
  • Ø    Walk to shops, work and entertainment;
  • Ø    Work a day or two from home; or
  • Ø    Take low cost public transportation.
  • Ø    Some people are using “neighborhood vehicles” so they divide the cost of insurances, maintenance as well as gas.

Don’t know how to organize any of these? Print this out and share with someone who is complaining about the economy. Send them to this website - PeakProsperity.com. Here we are all working on the solutions and many of us find solutions and share them. Share the Slow Money concept with them - We can use the Slow Money concept to rebuild our cities and communities with the money we save.

How best to spent this money? Start buying local food and invest in local energy.  These are the 2 resources you will not want to be without. Doing this will build community and strengthen your ties to it. You will find resources you never knew you had and gain knowledge shared by others. Others will quickly join because frankly, no man is an island.

  1. Find your local farmers markets and local growers.
    1. Learn to grow some of your own food. And learn to put away some for rainy days. You can start by watching DIRT-the Movie. (also available on NetFlix.) Or if you are limited by space, check out "If you can feed Your Family with Aqua-ponics" here.
  2. Use your newly found money to build your own solar, wind or hydropower. Install back up wood heat and meet your local wood suppliers.
    1. Solar may still be high priced, but it comes in handy when other sources of power are not available. Check out more on solar here.
    2. Wind is also high priced, but again, any power is useful when no other power is available. However, many units can be home-made so the cost is greatly reduced.  Click here for more info on wind options
    3. Hydropower is still one of the best options as energy if you have any flowing water available. It is a fairly constant source of energy and batteries may not be required. Like wind energy, home-made units can be made. Click here for some hydropower options.
    4. Wood heat use is expected to increase in use by 600% over the next few years. Yet, we do not have enough wood to fill the needs of this type of demand. Without better burn technology, we risk de-foresting our lands. One of the ways we can conserve our wood is to burn it more efficiently. The Rocket Mass Heater  is one way to get more heat from less wood. Some estimates are 90% more heat (from the same amount of wood). The JetStove is another heavy metal pre-fab unit. Both units create a Taurus burn which burn off smoke and that creates more heat.  Both units can convert to heat water, cook, dry foods and more.
  3. Conserve. Conserve. Conserve.
    1. Conserve at Home Click for ideas on easy ways to save time and energy.
    2. Conserve with food  At Least think about turning the water guzzling high maintenance lawns into edible landscaping or at least plant a low maintenance, naturally short growing no mow grasses. Planting a landscape of edibles like fruit trees, strawberries or even zucchini can give you a lot of satisfaction and be a source of healthy food.
    3. Conserve in Transportation Energy!

Local Food and Energy – Make it the American Way. And do it soon – we need to make things better fast.

That's my rant of the day EGP

. . . and now I'm off to talk with those relatives about flying to Haiti for the week...

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