Ming the Mechanic:
Money velocity

The NewsLog of Flemming Funch
 Money velocity2003-03-29 12:39
4 comments
picture by Flemming Funch

Britt speaks about money velocity and gift economies.
"Money velocity is a big deal, but only economists talk about it. I'm no economist, but I know what I like. Money velocity measures how many times the average dollar changes hands in a year. The GDP measures all the transactions we do in a year. When we get a dollar, we spend that dollar, which gets measured as a $2 addition to the GDP. If consumers and businesses feel confident, they spend money faster and the GDP goes up and we proclaim ourselves successful, If we hang on to our dollars a little longer, we're less successful. I don't know what the current figures are, but I recall money velocity being about 12-14 times a year when I took my single Econ course. (Obviously, you should look elsewhere for your economic insights.) The calculation is made by dividing the money supply (no simple calculation, that) into the GDP. If money's zinging around the economy at the rate of 1 move per month (12 per year) and it slows by just a day, the GDP drops by 3%, which is a big deal. It gives us an idea why the consumer confidence rating is so important. It's safe to assume that money velocity was higher in 1999 than it is now, and that difference may account for the relative weakness in the economy."
If everybody feels confident or abundant or generous, money is loose, flowing from hand to hand easily. That feels a bit like a gift economy. So, hm, what stops us from having that right now?

It seems sort of logical and obvious that if we just speed things up and pass the money around faster, it can buy all of us what we want along the way, as long as it is available. The same dollar, or the same million can be passed around hundreds of times in a year, or a month, or a day, and buy each temporary owner a million dollars worth of stuff, by passing the token on to somebody else, who then in turn can buy a million dollars of something else, etc. So what's wrong? Why is it moving so slowly? Why aren't we just passing large amounts around all the time and buying lots of fun things?

One reason I can think of is taxes. If you have to pay a sizable cut to a third party whenever you exchange value, that slows down the fun drastically. But that mostly applies to private people. A business doesn't directly pay tax from buying and selling stuff that is part of the business. So that shouldn't really stop businesses from moving money very rapidly.

Is there not enough money in existence for us to feel confident in being able to move it around loosely? There might be a bit of a problem there, but in principle, if we move it rapidly enough, it will seem to function as much more than it is. You can increase the money supply by just moving it very quickly.

But how about if you don't know who to trade with? If you don't know very well what is available out there, and particularly if you don't know how good it is. Then you'll spend a considerable amount of time and effort looking for what you want, and trying to ascertain whether it is of good quality, whether you can trust the people you'll get it from, and whether it will be worth it. And frequently you'll make a mistake, because of lacking information, and you'll get less than you paid for. All of that slows you down and makes you reluctant and slow at moving money. And since most everybody else is having the same problem, they'll be reluctant and slow at giving you any money.

Superior information accelerates money. Bad information slows it down.

Traditional corporations put a lot of resources into producing good looking bad information, and in suppressing the distribution of the good information.

A relatively small network of people providing excellent information about what they offer and what they need, and how good it is, and a fast and reliable way of carrying out transactions - such a network could conceivable compete favorably with huge corporations that run on slow moving deception.


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4 comments

16 Jan 2006 @ 22:32 by Bryan Williams @207.67.108.200 : Money Velocity, Real GDP, and Inflation
You're missing the most important point about money velocity. As this defines how fast the dollars are floating around, there is a transactional cost every time money changes hands. Bills and currency had a much higher transactional cost than digital currency, but there's still a cost. The more transactions of the same dollars, the more transational costs are being eaten up.

Also, money velocity leads to higher inflation. Keeping a balance between a steadily growing Real GDP, low inflation, and low unemployment can be very tricky!  



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