Explain money to me (1 Viewer)

[guidomerkinsrules]

so essentially (theoretically) we have a money flow
people give money to businesses -> businesses give money to workers & suppliers -> they, in turn, give money to other entities, et al ->-> and then some of that gets peeled off for taxes that pay for running the country

normally, that's a fairly fluid process, yeah?
but now the flow has been stymied with people out of work and others not going into places of business bc stay at home

so if the flow is being choked off, wouldn't that indicate that money is pooling somewhere?
where is the money pooling?

 

[guidomerkinsrules]

caveats
if that's not an apt metaphor, please offer another that explains where the money that's normally in the system is not in the system

ALSO, not super interested in the libertarian/"conservative" anti-tax argument

ALSO ALSO not super interested in the progressive '.5% peeling off most of the wealth' argument (i mean, i am, just not here)

 

[James Spader]

so essentially (theoretically) we have a money flow
people give money to businesses -> businesses give money to workers & suppliers -> they, in turn, give money to other entities, et al ->-> and then some of that gets peeled off for taxes that pay for running the country

normally, that's a fairly fluid process, yeah?
but now the flow has been stymied with people out of work and others not going into places of business bc stay at home

so if the flow is being choked off, wouldn't that indicate that money is pooling somewhere?
where is the money pooling?

At banks or loaned out. So the Federal Reserve has created multiple facilities to loan money (typically through asset purchases). The loans go to entities or municipalities. I have access to a lot of info that I can share with you. The NY FED website has tons of information. Or you could read the book called The Creature from Jekyll Island (joke).

Nice little video to give an overview. Thought you might like it.

 

[efil4stnias]

Savings. BAYOU posted on the investment thread last month that the savings rate for households has increased 33pct over the last 2 months.

So to keep that flow going, enter the Fed and stimulus.

 

[brandon8283]

so essentially (theoretically) we have a money flow
people give money to businesses -> businesses give money to workers & suppliers -> they, in turn, give money to other entities, et al ->-> and then some of that gets peeled off for taxes that pay for running the country

normally, that's a fairly fluid process, yeah?
but now the flow has been stymied with people out of work and others not going into places of business bc stay at home

so if the flow is being choked off, wouldn't that indicate that money is pooling somewhere?
where is the money pooling?

Money can be "created" too, now that we're not on the gold standard.

People saving money is one location where it could be pooled.

On the supplier end, I would actually say that money is probably being pooled in capital assets that aren't sold. So if a product is sitting on the shelf, it is money until it is sold.

Kind of like potential energy vs. kinetic energy.

Maybe?

 

[UncleTrvlingJim]

 

[efil4stnias]

Money can be "created" too, now that we're not on the gold standard.

People saving money is one location where it could be pooled.

On the supplier end, I would actually say that money is probably being pooled in capital assets that aren't sold. So if a product is sitting on the shelf, it is money until it is sold.

Kind of like potential energy vs. kinetic energy.

Maybe?

or, as we have had in recent history, stock buy backs.

Businesses also forecast, so if the forecast is that folks are starting to save more, ( aka not spend ) they wont produce 1000 widgets a month to sit on shelves, because while it is an "asset" - its a depreciating asset due to lack of demand. Therefore, they will cut production. Reduce capital expenditures and contraction begins. Its a self-feeding cycle ( downward pressure )

 

[efil4stnias]

one last item....what you are also speaking about is the "velocity" of money. Velocity being the number of times $1 gets spent or turns over.

For instance, i pay you $1 for a bottle of water you are selling. How quickly do you spend that $1? Do you spend it later that day to buy more water to sell ? ( increased velocity ) or do you hold it? ( slowing velocity )

Ill see if i can find the video on this to explain better.

 

[superchuck500]

 

[guidomerkinsrules]

or, as we have had in recent history, stock buy backs.

Businesses also forecast, so if the forecast is that folks are starting to save more, ( aka not spend ) they wont produce 1000 widgets a month to sit on shelves, because while it is an "asset" - its a depreciating asset due to lack of demand. Therefore, they will cut production. Reduce capital expenditures and contraction begins. Its a self-feeding cycle ( downward pressure )

But that money they’re not using for widgets should still be in the system/flow, no?
Or they’re just sitting on it?

 

[efil4stnias]

But that money they’re not using for widgets should still be in the system/flow, no?
Or they’re just sitting on it?

But think about it...how is it in the system? If production of widgets drops from 1000 units per month to 500, that means layoffs. So if 5 employees lose their jobs, thats 5 less people putting money into the "flow" chart you posted. That also means the velocity is slowing because that $1 for widget isnt turning over to either a) payroll or b) buying more material to make more widgets.

so they sit on it til their forecasts show an uptick, they purchase stock back or use it for other items within the organization. But that means fear of slowing has set in.

The cycle has begun. The question for many is "where to inject stimulus to kick-start it again".

and its in the system ( M2 or overall money supply ) but its not flowing ( velocity )

Money Demand and Money Velocity

How the demand for money changes the velocity of money and how that affects the inflation rate.

thismatter.com

little lengthy but does pretty good job of explaining. But it will get convoluted because there are so many variables at play. Its not as simple as we all wish it to be. Interest rates, inflation ( deflation ), velocity, money supply, demand....all sorts of variables that play a role in the original flow chart.

To fully understand flow, you have to understand all the variables within that create or stymie that flow.


but for the basis of your question, where is it? savings. People and business are holding it.

Shoot, im doing it. My savings rate has increased since March. Since the general consensus is we will have another round of COVID in the fall, im preparing my household to weather that financial pinch now by saving more for that time.

IF it comes, im prepared. If it doesnt, now i have a lil nest egg to spend it ( which, if most do like i do, will jump start the velocity because we are all spending again )

 

[UncleTrvlingJim]

too late slick... look above... gotta get up pretty early to beat me to a Simpson's reference.

 

[UncleTrvlingJim]

But think about it...how is it in the system? If production of widgets drops from 1000 units per month to 500, that means layoffs. So if 5 employees lose their jobs, thats 5 less people putting money into the "flow" chart you posted. That also means the velocity is slowing because that $1 for widget isnt turning over to either a) payroll or b) buying more material to make more widgets.

so they sit on it til their forecasts show an uptick, they purchase stock back or use it for other items within the organization. But that means fear of slowing has set in.

The cycle has begun. The question for many is "where to inject stimulus to kick-start it again".

Demand side stimulus.

Which is what we should have been doing for years, if we wanted to spend deficit dollars to propel the economy b/c 2% GDP growth and 200k jobs created per month weren't enough for some reason.

 

[superchuck500]

too late slick... look above... gotta get up pretty early to beat me to a Simpson's reference.

Yeah I slept in a bit today.

 

[saintfan-n-alex]

i saved a bunch of money on my car insurance