Chapter 2 - The Economics of Velocity.

Hoarded Money

A low velocity indicates a high level of hoarding. It indicates that very little money is changing hands. To study the effects of Hoarded Money, I made an executive decision that any money sitting idle for more than one month was Hoarded Money. Any money that changes hands within one month is decreed to be Circulating Money. The time period is arbitrary but a figure of one month gives good graphs and makes the comprehension easy. The prime task of money is to hold the value of a current transaction until the next transaction. How long the money token should be held was never decided.

To determine how much money is hoarded, I classify money as Hoarded Money or Circulating Money. I classify money that changes hands within one month as Circulating Money. This is money that is passing from person to business to person creating the goods and services in the real economy. Humans live by trading with each other. It is the movement of money in the real economy that enables civilized life. It is the Circulating Money that is feeding us, putting us in homes, and entertaining us. Money that sits in bank accounts for more than one month is classified as Hoarded Money. This money does nothing for society except pad the accounts of those with ‘more money than they can spend’. The following diagram represents a velocity of one. At a velocity of one, eight percent of money is circulating within one month. Ninety-two percent of money sits idle in bank accounts for a time in excess of one month.

Velocity equals One by Andy Chalkley. Creative Commons Attribute. www.andychalkley.com.au

In a country with a velocity of one, 8% of the Money Supply is changing hands in less than one month. 92% is sitting idle in bank accounts for excessive lengths of time.

Velocity equals One by Andy Chalkley. Creative Commons Attribute. www.andychalkley.com.au

The Circulating Money is moving from person to business to person to business to person to business creating the food, products, and services that enable civilised life. Humans exist by trading with each other. Someone invented the money token which greatly improved our civilised trade. Without money tokens, trade becomes tedious. If the volume of circulating tokens falls, trade is inhibited. If the volume of tokens is affected by hoarding, trade is inhibited. Hoarding of money is one of the worst things that you can do with money. Hoarded money stifles trade. People that hoard tokens are those that have ‘more money than they can spend’. There is very little tax on hoarded money. Almost all tax is removed from Circulating Money. Sales Tax is taken from transactions directly. Income Tax is taken from the result of a string of transactions. Company Tax is taken from the result of a string of transactions.

Tax is taken from Circulating Money by Andy Chalkley. Creative Commons Attribute. www.andychalkley.com.au

Luckily, when the government spends tax, it tends to spend it back into the Circulating Money. (Except when some clown promotes austerity economics.)

When the bank takes interest repayments, it takes the money from Circulating Money. The reason is that people that hoard money do not need to borrow. Money is only borrowed by those with no money. All people that borrow live in the Circulating Money component. Effectively, all bank repayments come from Circulating Money.

Bank repayments are taken from Circulating Money by Andy Chalkley. Creative Commons Attribute. www.andychalkley.com.au

There is a constant downward pressure on Circulating Money. People that have Hoarded Money are very competitive in their hoarding. They monitor their hoards regularly. They put competitive effort into increasing their hoards. They tend to be politically adept. They arrange that their hoards avoid taxation. They arrange that any money likely to become hoarded avoids taxation. Payroll Tax, for example, taxes those that earn money from sweat and toil. Unearned Income avoids this hammering. Profits from the sale of assets such as property often get favourable treatment. Gold paint gets Sales Tax. Gold plated electrical contacts get Sales Tax. Gold bars avoid tax. Shares in a gold mine avoid Sales Tax. Thus, there is a constant tendency for velocity to decrease as the Hoarding is favoured and the taxes are paid from the real economy.

When a bank cuts back on lending for any reason, the money supply falls. The reduction is taken from the Circulating Money. Hoarded Money remains hoarded. The result is seen as a fall in velocity.

A one percent fall in the money supply can cause a twelve percent fall in the circulating money which can cause a twelve percent fall in the GDP by Andy Chalkley. Creative Commons Attribute. www.andychalkley.com.au

An interesting item occurs when the banks take more repayments than they lend. Hoarders do not borrow and nor do they pay repayments. It is the Circulating Money that falls. Bank lending and repayments dramatically affect the Circulating Money. During a fall in the Money Supply, Circulating Money falls which is reflected by a fall in the velocity. This is the primary reason for a fall in the velocity. The economists usually give inappropriate answers. They suggest that the people are hoarding. This is wrong because, in a downturn, the people have even less money than usual and tend to be penniless by the end of the week. The workers are maintaining a velocity of fifty-two. The workers are not hoarding money, they are spending every cent they earn. The hoarders are skilled at keeping their hoards. They are very competitive at keeping and magnifying their hoards. They have managed to manipulate the tax system to avoid taxing their hoards. They also manipulate the tax system to avoid taxing money that may become hoarded. Hoarded Money is notoriously difficult to remove from hoarders. Decrease in velocity is natural due to the manipulation by hoarders. Increase in velocity is hard to obtain because of the political resistance by those with hoards to lose.

When the Money Supply falls, Hoarded Money remains hoarded. The fall is taken from the circulating component of the Money Supply. The effect is a fall in the Circulating Money which is reflected as a fall in the velocity. This is why small falls in the Money Supply sometimes cause large falls in the GDP. This net diagram shows a fall in the Money Supply of one percent. This one percent is removed from Circulating Money. Hoarded money remains hoarded. The result is a twelve percent fall in Circulating Money. This results in a twelve percent fall in GDP.

Small falls in the Money Supply can cause large falls in the GDP.

At a velocity of one, a one percent fall in the Money Supply has the potential to cause a twelve percent fall in the GDP.

The building of hoards brings a cost to society as a whole. The cost is a lack of circulating medium. This graph shows the Money Supply for Canada. It shows the Hoarded Money in grey. The money that is actually moving is the Circulating Money which is shown in light blue. Cash Currency did not fall. The Money Supply M3 fell by 1.6%. The Circulating Money fell by 8%. The GDP fell by 8%. The is quite remarkable. A fall of 1.6% in the Money Supply caused an 8% fall in the GDP:

A graph showing Circulating Money and Hoarded Money for Canada by Andy Chalkley. Creative Commons Attribute. www.andychalkley.com.au

The situation in Greece was quite different. Banks ceased lending and the M3 Money Supply fell by 41%. Circulating Money fell by 27%.

A graph showing Circulating Money and Hoarded Money for Greece by Andy Chalkley. Creative Commons Attribute. www.occupyschoolofmoney.com

For our purposes, Hoarded Money approximates to the sum of all the minimum balances in banks. When the money supply decreases, most of the money is taken from Circulating Money. Affluent people retain their hoards. Small and medium business may allow their minimum monthly balance to fall. At this stage, I am thinking that a small fall in M1 or M2 or M3 can cause a much larger fall in Circulating Money. Most of the reduction in M1, M2 or M3 will come from Circulating Money whilst some will come from the minimum monthly balance of small and medium business. The rule still applies. A fall in the Money Supply has the potential to cause a large fall in the Circulating Money. This then causes a large fall in the GDP. The GDP in Greece fell by 27%. The large fall in the GDP causes a large fall in the tax revenue and a large rise in unemployment. Remedies are in a later chapter.

In practice, Hoarded Money equates to the ‘minimum monthly balance’ in a bank account. In a downturn in the economy, businesses are prone to reduce their ‘minimum monthly balance’. In practice, the effects that I talk about tend to be less than the theoretical fall in Hoarded Money.