Stub 3.7: Velocity of Money

The Economics committee was in the first day of its three day session. The lead topic was managing money supply.

It was no surprise that Ideka Nuffin had an all-star cast lined up. It quickly became apparent that their game-plan was to peg the Sedelia Dollar to the Cali Callor. That was really not a surprise, either. Nuffin had openly stated that she supported reunification with Cali.

Raymond had problems with pegging the SD to the Callor. At an intellectual level he was hearing that the Callor was rapidly losing value due to inflation. The last thing Sedelia needed was to find their currency shackled to an anvil in deep water.

At an emotional level, Raymond could not see how that would serve the needs of the citizens of Sedelia. And that is how he challenged the experts pitching “pegging”.

Professor Kanye Eastman was Nuffin’s star expert. Raymond had Grace watching the live-stream but for the most part did not chime in on the BAHA (Bone Anchored Hearing Aid) device. She did not want him to be distracted or to make the fact that he was getting coached obvious.

“And please tell me in plain English, Professor Eastman, how pegging the Sedelia Dollar to the Callor will benefit a typical household in Sedelia.” Raymond repeated.

Professor Eastman had a distressing habit of constructing mammoth sentences by tinker-toying together strings of demand-side economic jargon. While that might seem erudite in the faculty lounge it made the speaker seem disconnected to reality in most other venues.

Raymond really did want to hear Professor Eastman’s arguments but he also came to realize that Eastman was defeating himself. His wooly arguments only succeeded if nobody called attention to the fact that nobody understood what he was trying to say.

Eastman smiled in a condescending manner. “Well, OK young man. I will try to use short, simple words but these are VERY complicated ideas.”

Raymond smiled a patentedly plastic smile. “That is exactly what I want. Short, simple words. Short, simple sentences.”

“We cannot jump-start the Sedelia economy from nothing.” Eastman said. “The Sedelia economy is almost flatline. By most metrics, our economy is only slightly more robust than the economy of Nigeria...which is in sub-Saharan Africa if you did not know.”

“The only way we can keep the citizens of Sedelia from starving is to give them Universal Basic Income, Universal Healthcare and Food-and-Rent subsides as well as certain other subsides.” Eastman continued.

“The Sedelia economy does not have a reputation that allows us to borrow money from the international community. The only way we can finance UBI, UH and FaRs is by either using Callors or by pegging the Sedelia Dollar to the Callor.” Eastman said.

For Eastman, not using jargon was like holding his breath. He was very proud of being able to do it for sixty seconds and was sure he had “nailed it.”

Grace, the economics mentor he had picked up in AA buzzed in on his BAHA.

“Two questions.” Raymond said. “ ’Why do you say we cannot ‘jump start’ our economy from its current state?’ and ‘Who would provide the healthcare and produce the food and housing space and other necessary goods and services if we pay residents to stay home and not be productive?’”

Eastman said “Well, you would have to understand economics for me to answer your first question.”

“I want you to try. You actually did a fine job just now and I want a little bit of clarification.” Raymond said.

Raymond did not realize that Eastman was extremely vain and vulnerable to flattery. Sometimes you get lucky.

Eastman rose to the challenge. “The economy, business activity if you prefer, is the amount of currency in circulation times its velocity. Increasing the amount of currency in circulation involves injecting money into the banking system via ‘debt’. The tricky thing is that too much debt is toxic if the economy is fragile.”

“That is why Sedelia cannot get back on its feet organically.” Eastman continued. “The native economy is too fragile to sustain enough debt injection to get it self-sustaining.”

“I think I understood that.” Raymond said.

“Why can’t you increase the velocity of money rather than simply injecting money into the system?” Raymond asked with his blandest, most innocent face.

Eastman dismissed the idea out-of-hand. “Every economist knows that the velocity of money is a constant. You cannot manage a constant.”

“And you are wrong.” Raymond said. “The velocity of money is a variable that we can, and will, manage.”

Eastman was having difficulty wrapping his mind around the fact that somebody had told him that ‘...you are wrong.” That had not happened in more than a decade and this uneducated barrio rat had said it in public...and it was live-streamed worldwide!

“Excuse me.” Eastman said. “Did you say ‘I was wrong.’?”

“Yup.” Raymond said. “Happens to all of us. You will survive.”

“Young man, I will not tolerate flippancy.” Eastman said.

“Old man, you are not at University where you can flunk students who challenge you or trash the reputation of those who disagree with you.” Raymond shot back. “Your arguments must stand on their merits, not on what you presume your reputation to be.”

Raymond said, “Explain why you think velocity of money is a constant.”

“Data.” Eastman spat back.

Incidentally, the ratings for the live-stream spiked during this interchange. Enough watchers flagged it as “hot” to have the major aggregators port it into their feeds. The feeds started the loop sixty seconds earlier to capture “context”.

“When and where was the data collected?” Raymond asked.

“All over the world. Europe. Japan. Cali. The US. Canada. And it is all recent data...all within the last ten years. Velocity of money. Does. Not. Change.” Eastman crowed.

“I thought you said our economy was...” Raymond looked at the real-time transcription...” ‘only slightly more robust than the economy of Nigeria...which is in sub-Saharan Africa if you did not know.’

Raymond could not resist twisting the knife by adding the patronizing ‘if you did not know.’

“Is it possible that the velocity of money is different in Nigeria than it is in the developed world? Take your time. This is an important question.” Raymond said.

“Well of course it is different.” Eastman conceded.

“Is it faster, meaning more economic activity for a given money supply or is it slower?” Raymond asked. It was like pulling teeth because Eastman was starting to see where this was going.

“I suppose it is faster.” Eastman had to admit.

“A little bit faster or a lot faster?” Raymond asked.

“Well, I suppose it is a lot faster.” Eastman said.

“And why is that?” Raymond pressed.

“Because most of the economy circulates through the lowest tiers of the economy. They spend money as soon as they get it.” Eastman said. “In contrast, most of the assets in the developed world are in less tangible vehicles. Investors tend to sit on those assets so the velocity slows down.”

“And why is that? You might as well explain or I will draw it out of you one sentence at a time.” Raymond said.

“The lower tiers spend money as soon as they get it because they need to buy food. They also spend it as soon as they get it because they are typically paid at the end of the work day. Banks are scarce and thieves are less likely to steal food and other basic goods than to steal money.” Eastman said. “Plus, it is a mathematical fact that if you are paid every week then the money has been in the employer’s hands for a week, essentially not moving...velocity zero.”

“So, if I understand you correctly, we can increase the velocity of money and stimulate the economy by encouraging employers to pay their employees at the end of each workday?” Raymond said.

“That is correct.” Eastman conceded.

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