I start with the conclusion because politicians don’t have time to read a lot of bumpf.
Velocity of money, is an Economics 101 factor which effects the energetics of an economy. Too much velocity and you get inflation, to little and you get stagnation. Velocity of money is the rate at which money goes around the economic circuit. Its like the financial voltage of the system.
Velocity of money has been falling for years in the west.
Here is the US Velocity of money.
This is one of the reasons QE doesn’t make inflation. A slowing velocity of money has bogged the new cash down so it doesn’t do much in the way of stimulating the economy.
Politicians are not often economists so their actual ability to get stuck in and come up with ideas to boost the economy are rather restricted. They can cut taxes and they can spend money, but that traditionally is about it. They say they are going to cut red tape to unleash business but they never do and if the cash stimulus they unleash falls into the boggy ground of the swamp of modern economies, it doesn’t boost growth. It is the conundrum of many first world countries. It is a problem for Japan and the whole of Europe and it’s a problem for the once supercharging US economy.
The good news is politicians can address the velocity of money. It is something that can be fixed with policy. They need to do is come up with tricks to make money go from hand to hand faster or come up with ways to dig out money sumpted in the system or blocked in its bowels.
For years the political has been doing a great job making money go around slower, now it has to reverse that trend.
How have they been making it go around slower you might ask? Getting anything done in financial services is a bureaucratic nightmare. Try opening up a bank account. What once took no time at all, now takes ages. You might find you or you business even gets refused. The treacle of AML and KYC has without doubt sludged the velocity of money down. You also can’t tell me the constant war of cash has speed up the velocity of money either. Certainly as an economy ages, so the velocity of money falls but that isn’t the whole picture, because money simply isn’t what it used to be because the system has changed and traps money in assets which then don’t move.
Change needs to come from introducing ideas that speed money up again, as such everything else can be left as it is. So what sort of things would speed up the velocity of money?
Here are some examples, (not necessarily good ones but you’ll see what I mean.)
Let old people give more away tax free to their kids and grandkids by Increasing the gift tax threshold by a few thousand. The pennywise old then give to the pound-foolish young and boom the money flows and goes from stagnant to circulating.
Pay your social security in advance not in arrears. It doesn’t cost more but its going to be spent earlier.
Print a £100 pound note. How about a £200, £500 and £1000.
The world does not need my ideas, as I’m sure an hour of brainstorming by the finest policy minds could come up with 100 ways to increase the speed and flow of money and that would make a big difference to the recovery of the recovery in the aftermath of the Coronavirus crisis.
It is amusing that the British government, via the Royal Mint, will sell you gold at a premium to buy your cash off you to lock it up in a small metal disk to be stuck in your draw forever. The result is the Velocity of money goes down. It is actually QT (quantitative tightening), in a trivial way, slowing the Velocity of money down by draining some cash out of the system into a less liquid asset.
So how about reversing that. How about the government offering to buy Gold from its citizens at a 10% premium to the spot price. In would go the illiquid asset of Gold to the UK gold reserve, out would go freshly printed and backed cash. It would be QE for everyone and the government would end up with tonnes of gold in its vault. The British could swoop around the world hoovering up Gold to sell for profit to the government. What joy! They would get piles of cash and the Government mountains of Gold. Paper Money would spin around and around and be mainly backed by Gold. Now that might be inflationary, a bit, but aren’t we hearing from so many quarters we are going to be getting nothing but deflation? This idea might be terrible, but see how it doesn’t take a genius to think up schemes to accelerate the velocity of money, while even Nobel Prize winners have trouble coming up ideas that will work to boost the economy by manipulation the quantity of money instead.
While my ideas for speeding up the velocity of money may be terrible, the slowing of the velocity of money is real and politicians should be able to apply their resource managements skills to speed it back up. If they can, they will speed up the whole economic recovery process and that is desperately needed.