Explain money to me (1 Viewer)

I miss the good old days when money was simple...

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uh oh.. There's a girl on my salt. how dare them?
 
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 )


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 )

Good stuff efil! I minored in Economics, but that was over 30 years ago. You're sparking my grey matter with concepts, terms, and theories that I haven't heard in years! Agree with everything you said up there ^, as well as the reasons.

With that agreement stated, I never really understood supply-side economics. It works (to an extent), but is it the most efficient model? I don't think so. While everyone knows we are a capitalistic society here in America, most would agree we are a consumer-driven economy. While increasing money supply has the potential for negative outcomes (inflation), increasing velocity has very few negative outcomes; while inflation could also result from increased velocity (increased demand), this is less of a concern than increased supply, which will LIKELY cause inflation. Our entire banking system revolves around "borrowing more money" in order to facilitate more consumption (on the production AND the consumption side). So why wouldn't stimulus be directed at consumers, as the engines who drive the economy?

If you accept the argument you illustrated regarding velocity, it intuitively stands to reason that the inverse is also true. In fact, I believe we see this in an empirical fashion every time someone gets a raise. In theory, you continue to live on the same (prior) salary with the same expenses, and increase savings/investment. In reality, we spend that money. Folks have a very strong tendency to live life according to their means. They buy that nicer car, or the bigger home, or the cooler toy, or take that more exotic vacation.

Businesses are acutely aware of slowing velocity, and react accordingly, compounding the downward spiral you describe. Seems to me that a viable strategy to offset would be to increase consumers' earning capability, in the form of higher wages (paid by businesses) or stimulus payments (paid by governments). By holding the line on wages/salaries, businesses continue to choke velocity at the very moment they should be stimulating it.

We can look back on that recessionary era circa 2008 and (mostly) agree that the bailouts of the financial sector and the auto industry worked. But I can't help wondering if that bailout money wouldn't have worked better, and quicker, without as many artificial side effects, if that money had been put directly in the hands of consumers. If we are, indeed, a consumer-driven society, why wouldn't you direct that money to your economic driver(s) FIRST. JMO...
 
Good stuff efil! I minored in Economics, but that was over 30 years ago. You're sparking my grey matter with concepts, terms, and theories that I haven't heard in years! Agree with everything you said up there ^, as well as the reasons.

With that agreement stated, I never really understood supply-side economics. It works (to an extent), but is it the most efficient model? I don't think so. While everyone knows we are a capitalistic society here in America, most would agree we are a consumer-driven economy. While increasing money supply has the potential for negative outcomes (inflation), increasing velocity has very few negative outcomes; while inflation could also result from increased velocity (increased demand), this is less of a concern than increased supply, which will LIKELY cause inflation. Our entire banking system revolves around "borrowing more money" in order to facilitate more consumption (on the production AND the consumption side). So why wouldn't stimulus be directed at consumers, as the engines who drive the economy?

If you accept the argument you illustrated regarding velocity, it intuitively stands to reason that the inverse is also true. In fact, I believe we see this in an empirical fashion every time someone gets a raise. In theory, you continue to live on the same (prior) salary with the same expenses, and increase savings/investment. In reality, we spend that money. Folks have a very strong tendency to live life according to their means. They buy that nicer car, or the bigger home, or the cooler toy, or take that more exotic vacation.

Businesses are acutely aware of slowing velocity, and react accordingly, compounding the downward spiral you describe. Seems to me that a viable strategy to offset would be to increase consumers' earning capability, in the form of higher wages (paid by businesses) or stimulus payments (paid by governments). By holding the line on wages/salaries, businesses continue to choke velocity at the very moment they should be stimulating it.

We can look back on that recessionary era circa 2008 and (mostly) agree that the bailouts of the financial sector and the auto industry worked. But I can't help wondering if that bailout money wouldn't have worked better, and quicker, without as many artificial side effects, if that money had been put directly in the hands of consumers. If we are, indeed, a consumer-driven society, why wouldn't you direct that money to your economic driver(s) FIRST. JMO...

Precisely regarding bailouts. I understand the need to keep large corporations afloat- but the bulk of stimulus should go to the hands of the consumer.

and yes...30 years for me. So when i found that site and M1, M2, future value terms i was like ohhhhhyeaaaaah this stuff ...lol.

Total agreement with everything you posted. Musta had same economics professors. lol.
 
Savings. BAYOU posted on the investment thread last month that the savings rate for households has increased 33pct over the last 2 months.

Speak for yourselves. The money I haven't been spending on gas, Uber, mani/pedi's, going out...I've been spending on booze and online shopping.
 
Speak for yourselves. The money I haven't been spending on gas, Uber, mani/pedi's, going out...I've been spending on booze and online shopping.
This....it's being pooled in the booze companies bank accounts. That and evidently Lowe's because they've been packed since the first covid case.
 
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?

The money is pooling in savings but that is temporary due to people being on lockdown and the government payments are coming to an end so it'll likely be a reversal, first with pent up demand then due to lack of money coming in from high unemployment.

This is just in theory though because the money isn't real, we're just creating it.

I have a feeling it's about to start pooling into banks. The banks have taken on huge risk for high yield loans to risky businesses that were overextended, particularly in the brick and mortar retail, energy and airline sectors. This should be bad for the banks but the FED is buying high yield debt which takes the risk away from the banks. Even companies like JC Penny and Hertz, who have filed bankruptcy, have had debt purchased by the FED. So the taxpayer is paying for the interest rates due on the loans for these companies that the banks are collecting.

In other words, it doesn't matter because the money is fake. If it runs out we'll just make more.
 
This is the most succinct version I've come across - hope it helps:



(the entire video is HIGHLY recommended)
 

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