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Velocity of Money

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In my question on the Fed’s balance sheet “MachineGhost” brought up the issue of money velocity. I was wondering if anyone has any thoughts on why the velocity of M2 has dropped almost continuously since the second half of the 1990s? Why has it never recovered?

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Posted by (Questions: 9, Responses: 16)
Posted on 07/17/2017 6:36 AM
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Velocity is just a ratio. If you double M (which is usually defined incorrectly in the first place) and GDP doesn’t double then V has to get cut in half. It’s just math. But the point is that this doesn’t tell us anything about anything. Doubling the money supply doesn’t necessarily lead to growth. Especially when you define money as reserves. But even if you define money as deposits then the same thing is true. After all, what if I borrow a million dollars and put it in a hole? Or what if I borrow it to buy a business that immediately fails? That’s actually deflationary!

So, the point is that velocity is a silly measure. It doesn’t really tell us the cause since it’s just an ex-post measure of the effects from other things that are happening in the economy.

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Cullen Roche Posted by (Questions: 10, Responses: 1772)
Answered on 07/17/2017 1:05 PM
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Richard Werner covers this topic extensively in his book “New Paradigm of Macroeconomics” and various papers of his.

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Posted by (Questions: 40, Responses: 53)
Answered on 07/18/2017 3:03 AM
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Posted by (Questions: 40, Responses: 53)
Answered on 07/18/2017 3:04 AM
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Cullen said, “the point is that velocity is a silly measure.” Isn’t the difference between a slow economy and a healthy economy the rate at which money circulates through the economy? If so, how do you measure that?

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Posted by (Questions: 5, Responses: 102)
Answered on 07/21/2017 7:43 PM
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That would not be the circulation rate of a particular quantity of money, it would be the number of transactions in a year, that’s GDP.

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Posted by (Questions: 22, Responses: 333)
Answered on 07/22/2017 4:52 AM
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So which transactions count? For example, if corporations are hoarding money as their balance sheets suggest they are, and not at least raising entry level wages to a living wage. Then employees are not spending that money they do not have and the velocity of money, or the number of transactions is reduced. Nick Hanauer’s analysis seems apt.

I believe that we in the American political and economic elite face an extraordinarily inconvenient but undeniable truth: Our country will not get better until our fellow citizens feel better; and they will not feel better until they actually do better. And this is the hard part for many of you: The American people will not do better until they are actually paid more.

And they won’t be paid more until we change the way we manage our economy. This is the stark, simple fact at the heart of our ailing political system. Nothing is going to get better until we enact laws and standards that persuade or oblige every business to pay every worker a fair, dignified and livable wage. Everything else, from Trump on down, is a distraction or a lie…. the 43.7 percent of Americans earning less than $15 an hour, mostly white and rural,… routinely subject to poverty wages, unpaid overtime, wage theft, dehumanizing scheduling practices … Over the last 40 years, corporate profits as a percentage of GDP have increased from about six percent to about 11 percent, while wages as a percentage of GDP have fallen by about the same amount. That represents about a trillion dollars a year that used to go to wages, but now goes to shareholders and executives.

… [Due to raising the minimum wage], of the 10 largest counties in the nation, King County, Washington had the largest year over year job growth in 2016 (3.8 percent), and was the only one of the 10 counties to see over-the-year growth in wages (3.5 percent).

How can this be? Because that is how capitalism works. Because when workers earn more money, businesses have more customers and hire more workers. Because a thriving middle class is the source and cause of growth in capitalist economies. Because when restaurants pay restaurant workers enough so that even they can afford to eat in restaurants, it’s great for restaurants!

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Posted by (Questions: 5, Responses: 102)
Answered on 07/22/2017 11:21 AM
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> How can this be? Because that is how capitalism works. Because when workers earn more money,
> businesses have more customers and hire more workers. Because a thriving middle class is the source
> and cause of growth in capitalist economies. Because when restaurants pay restaurant workers enough
> so that even they can afford to eat in restaurants, it’s great for restaurants!

So why don’t they paying their workers enough so they can create a virtuous circle of higher profits as Ford did back in the day? Modern-day businesses don’t. So what’s the catch?

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Posted by (Questions: 35, Responses: 592)
Answered on 08/02/2017 6:30 PM
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P.S. It’s not an indictment of capitalism, but something else. Because if its great for restaurants, it would be great for capitalism.

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Posted by (Questions: 35, Responses: 592)
Answered on 08/02/2017 6:30 PM
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P.P.S. And it goes without saying that if corporate profits mean revert back to 6% because they’re forced to pay their employees more due to urational minimum wage laws as a fix for their inability or unwillingness to offer higher weages, it will be bad for shareholders and the stock market. What will have more societal impact, higher income or lower savings?

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Posted by (Questions: 35, Responses: 592)
Answered on 08/02/2017 6:34 PM
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Prioritizing shareholders over the the people whose labor provide the profits that shareholders hope to share in is part of the problem. The reason employers do not create the “virtuous cycle” is because of shortsightedness, including quarterly short-sightedness. Instead many of these employers would rather let the taxpayers pay their employees the missing wages. Even their full-time workers qualify for government benefits. The worst, but favorite GOP way to cut government benefits is by fiat. The best way is to implement policies that make it so these workers no longer qualify, not by changing the rules of benefits, but preventing displacement of wage responsibility from employers to taxpayers.

I do not care whether it is bad for shareholders or the stock market. People first, then money.How a particular policy affects the stock market should be the least concern. Governance is all about the effect on people, especially the weakest people. You are coming very close to advocating a policy of protecting the rich at the expense of the poor. One reason the wealth disparity gap is so huge right now is because of decades of policies since Reagan that redistribute wealth upwards where it is least needed.

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Posted by (Questions: 5, Responses: 102)
Answered on 08/03/2017 1:33 PM
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I’m just gonna leave this right here. 🙂

https://www.pragcap.com/lets-talk-about-maximizing-shareholder-value/

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Cullen Roche Posted by (Questions: 10, Responses: 1772)
Answered on 08/03/2017 1:37 PM
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Cullen–I had no idea you wrote that just yesterday. I clicked through using the link in my email. I have run a couple of small businesses. In one case, I had a row with the board when we hired a particular employee. We wrote a job description, decided on the salary and advertised the position. After deciding on one of the candidates, a board member said the candidate was struggling financially and “living on fumes.” the board member opined that the candidate would probably be happy to work for half the salary. (Obviously this conversation occurred before we actually offered the position). The board was all for cutting the salary by half. I vehemently objected saying that we had already decided what the job was worth. The desperation of the candidate is irrelevant, and to cut the salary because she is hurting is mean-spirited. I prevailed.

As far as dividends and buybacks go, theoretically you may be right. But practically speaking, I would rather realize the dividends in real time regardless of tax consequences. I have been burned a few times with buybacks or reinvested dividends. A drop in the price of the stock or delisting will evaporate all those “dividends.” GM is a good example. After zeroing the stock in 2009, GM issued new stock in 2010. https://www.1stock1.com/1stock1_421.htm
With dividends, you have a chance of recovering your principal along the way, rather than struggling with deciding whether to sell or hold. (leaving aside the issue of stock picking for the sake of discussion).

“…they are also an entrance strategy for households and other institutions. These markets provide high return savings vehicles to the general public that would not otherwise be available for households to own so easily. Said differently, the public market is a wealth inequality reducer.” Again theoretically, this may be true, but practically speaking, it has not worked out like this for the general public. You have only to observe the bloodbath in 401(k)s in 2008 especially for people who were just about to retire, ie the first group of baby boomers. Stocks have not worked out well for the general public as their average annualized return tends to be less than the rate of inflation. As you have pointed out many times, and which the public is waking up to in droves, the best vehicle is a broad index fund like VTI or some such. (BTW,will something continue to be a good idea when everyone is doing it?)

“It is a criticism of government. If we are to stop capitalists from monopolizing too much of the means of production then that is the responsibility of government.” I completely agree,and that is basically my point. However, we see the GOP is on a tear to “eliminate regulations” that would impose the kind of discipline you are talking about. The GOP are still relying on the discredited “trickle-down” argument to persuade their base to support it, even though the GOP must know better. The failure of trickle-down is part of the economic angst that supposedly gave Trump the Electoral College. The GOP response seems to be, “Have faith it will work this time.”

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Posted by (Questions: 5, Responses: 102)
Answered on 08/03/2017 2:29 PM
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Technically, it’s not the responsibility of government, it’s all of us. But once social decay of mores gets unleashed by rentiers and cronyists, then “Big Daddy” government has to step in and take up the slack. In the old days of yonder it was more about fighting repugnant moral restrictions that got everyone’s panties all twisted into a bunch; now it seems to be more about greed, selfishness and glory-hounding like the Pharma Bro. Progress?

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Posted by (Questions: 35, Responses: 592)
Answered on 08/03/2017 7:40 PM
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As far as the GOP goes, I think its pretty evident that either they haven’t evolved from their Friedmanism or they just use the “trickle down” economics as a marketing shtick to hardwired conservatives. That they don’t ever walk the talk when in power is really confounding, but it’s probably because the on-the-ground situation is not exactly at the crisis level that 90% marginal income tax rates, double digit inflation and an oil embargo & hostage crisis represented. Losing real income over the past 30-years while technology has improved everyone’s living standards isn’t exactly a crisis rapidly coming to a head…. its a slow burn. I will even argue that it is a newly white male phenomenom, because the colored have already been in that slow cooker for much much longer.

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Posted by (Questions: 35, Responses: 592)
Answered on 08/03/2017 7:48 PM
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Hi Lucas,

You’re a good man and a good capitalist. Maybe I am naive, but I believe there are more of you in this system than there are people like Martin Skreli or whatever the hell his name is. I think a good CEO pays his employees a living wage and treats them well. That’s easy to say though and much harder to do. Most businesses fail and it is the owner who fails most when they do fail….

As for dividends vs buybacks – it just totally depends on the specifics. At the most basic level they are the same thing. But the most basic case is never true. I think people demonize buybacks because they don’t really understand them. They think companies are just boosting earnings or manipulating the stock, but what they’re really doing is giving shareholders more flexibility. Instead of incurring a tax like I do with a dividend the company is basically give me more future value via the shares. This allows me to decide when I will incur my tax. That’s a good thing.

401Ks leave much to be desired, but I don’t think it’s a good example of how public markets are failing. Especically considering this article published today which cites the fact that 401k balances are at record highs and more and more Americans are benefiting.

https://www.wday.com/business/4307202-americans-keep-crushing-it-their-401ks

Just imagine if public markets didn’t exist. The 1% in this country would be much much wealthier. Instead, they sell their wealth and essentially distribute 10% annualized gains to other people in the process….

As for your last comment – I think that is the key point here and we totally agree. Our govt has failed to constrain capitalists from creating inequality. Yes, it will always exist to some degree, but we have handed all the power to the capitalist class. And I am an ardent capitalist!!! I just recognize that people like myself wield too much power and curry too much favor….

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Cullen Roche Posted by (Questions: 10, Responses: 1772)
Answered on 08/03/2017 10:56 PM
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I don’t see how its in the government’s interest to constrain inequality the way those that hold the reigns of power are elites themselves. I think it would be more accurate to say our system of government has failed and needs to be replaced/reformed/abolished, not that the government failed per se. It’s almost like the late 1800’s all over again.

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Posted by (Questions: 35, Responses: 592)
Answered on 08/05/2017 3:24 PM