Chapter 6 - The Velocity of Money in Greece

Let us hear some more about King Pin.

King Pin

The nation of King Pin was doing remarkably well. The people walked with smiles. Houses had been built for all. The roads were new. Schools had been built. There was no extra silver in the country. However, the silver was in the form of coins that moved from person to person. Silver was no longer stored in vaults by King Pin. The money was no longer hoarded and kept idle. The secret to the money system success was that money was plentiful and it moved from person to person. It is only when money moves that people feed themselves, houses get built, and people get entertained. Silver coins must exist and be moving. The ‘moving’ bit is as important as the ‘exist’ bit. Money is useless if it is not moving.

Some people in King Pin’s kingdom became wealthier than others. They started to hoard the coins. Some even turned the silver into jewelry for their wives to wear. Some people were proud to show their overflowing chests of silver coins. More and more coins disappeared from circulation. The coins existed, but they did not move. What was strange was that the less well off revered those that had hoarded the coins. Slowly, the poor got hungry and problems returned. The king’s treasurer went to the king and pleaded: “Please King Pin. Release some more coins. The people are going hungry and the poor are selling their daughters into slavery.” The king replied that he had already released his hoards of silver into circulation and had been declared the best king ever. He asked the treasurer “What is causing the problem?”

The Velocity of Money in Greece

Let us have a look at the velocity of money in Greece. The velocity of money is a calculation of the number of times that money changes hands in one year. Consider a fruit seller. A fruit seller sells his fruit and restocks each day. The fruit seller represents a velocity of three hundred and sixty-five. A typical employee has no money left at the end of the week. The employee represents a velocity of fifty-two. A shop might restock each week. The shop represents a velocity of fifty-two. Greece has a velocity of less than one. Most money in Greece spends lengthy periods of time doing nothing. This money is sitting idle in bank accounts. The money of Greece has three hundred and sixty-four days of idle holiday and does three seconds of work on one day each year. It partakes in one transaction in three hundred and sixty-five days. The money in Greece is not creating the transactions that enable a vibrant civilized society. If I go to Syntagma Square and give the accordion player a ten euro note. He might go to the kebab shop next to the bus stop and buy a kebab. The kebab shop owner might immediately pay his cook the ten euros in wages owed. The cook goes down the road and gets a haircut. The hairdresser goes and spends the ten euro on a spinach pie. The café owner buys some apples. The fruit stall pays his debt at the newspaper kiosk. The kiosk gives it to his son as wages. The son buys a new tyre for his trick bicycle as a replacement for the tyre he damaged bouncing off a café wall down near Monastiraki Metro Station. In a few hours, this ten euro note has enabled ten transactions in less than a day. This represents €100 in transactions which is equivalent to a €36 500 annual contribution to the GDP. This note represents a velocity of 3650. But this money in Greece only manages one €10 transaction in a complete year. Money is being worshiped as idle savings in bank accounts. The people with this idle money are those that have ‘more money than they can spend’. They are the well off. It is not the people of Greece that are idle, it is the money that is idle. There is a lack of money for the real economy because money in Greece is idle. It is not the poor that are idle. There are many looking for work that is not there to be found. It is the money that is idle in the bank accounts of those with ‘more money than they can spend’.

Here is the shocking graph of the velocity of money in Greece:

Greece velocity of money. Graph by Andy Chalkley. Creative Commons Attribute Data: Bank of Greece and OECDstat

The low velocity indicates that money is not being used for productive purposes. Numerous other countries also have horrendous values for the velocity of money. The difference is that other countries have constantly increasing debt which causes the Money Supply to increase. The only reason that low velocity is not shocking to economists is that most countries also have similarly shocking graphs:

The velocity of money in numerous countries. Graph by Andy Chalkley. Creative Commons Attribute. Data: World Bank

[The data is from the World Bank. The World Bank is not owned by the world. Its ownership is dubious but it is controlled by private interests.]

Hoarded Money and Circulating Money

To determine how much money is hoarded, I classified 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. 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 almost 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 Greece, 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 way the government removes tax makes the situation worse. When the government removes tax as Income Tax, Sales Tax, and Company Tax, it takes it from Circulating Money. The reason is that these taxes are taken from money as the result of transactions. These transactions are the movement of Circulating Money. Sales Tax takes a bite of money out of the Circulating Money at each transaction. It is a shocker of a tax. It is almost the worst tax that one could invent. It destroys the transactions that generate the tax. Payroll Tax is even worse. Almost no tax is taken from Hoarded Money. Hoarded Money remains hoarded. Hoarded Money is worshiped by those with fat bank accounts full of idle money. The issue here is not that the rich are rich but that they are impeding the movement of money. It is not the wealth of the wealthy that causes the problems, it is the hoarding of the circulating medium that slows the number of transactions occurring.

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.

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

A strange problem 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.

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

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 Greece. It shows the Hoarded Money in gray. The money that is actually moving is the Circulating Money which is shown in light blue:

A graph of Circulating Money and Hoarded Money for Greece. Graph by Andy Chalkley. Creative Commons Attribute Data: Bank of Greece

In Greece, the Money Supply has fallen. The damaging part was the fall in the Circulating Money (light blue). The Hoarded Money takes no part in the economy. It is the fall in Circulating Money that causes the damage to the economy. Here is the Circulating Money with the y-axis magnified:

A graph of Circulating Money for Greece. Graph by Andy Chalkley. Creative Commons Attribute Data: Bank of Greece

The next graph shows the Circulating Money with an expected annual expansion of five percent.

A graph of Circulating Money for Greece. Graph by Andy Chalkley. Creative Commons Attribute Data: Bank of Greece

In this following graph, you can see that every time there is a fall in Circulating Money, there is a corresponding but larger rise in unemployment. This is not a fuzzy scatter graph. This is a direct correlation. Unemployment is light blue. The change in Circuiting Money is dark blue.

A graph comparing the change in Circulating Money and Unemployment for Greece. Graph by Andy Chalkley. Creative Commons Attribute Data: Bank of Greece

This next graph will tax your understanding. In the following graph, a fall in bank lending causes a fall in the Money Supply which causes a fall in the Circulating Money which causes a fall in the Tax Revenue, whilst the government gets the blame for not balancing the budget. The government won’t be able to balance the budget because the businesses are not paying tax because they are going broke for lack of available credit to keep the Circulating Money topped up. The order is this:

A fall in bank lending causes a fall in the Money Supply which causes a fall in the Circulating Money which causes a fall in the Tax Revenue. Graph by Andy Chalkley. Creative Commons Attribute Data: Bank of Greece and OECDstat

Attempts to collect more tax have been futile. They have failed to increase tax revenue. [1] Besides the brain drain caused by the excessive tax rates, increased tax rates have not produced a greater tax revenue as expected by illogical economists. The logic is not difficult to follow. Increased tax rates damage the very transactions that produce the tax. The taxes drain the Circulating Money which destroys the real economy.

A fall in the level of loans issued whilst the banks continue to remove repayments will cause the volume of credit to fall. Hoarded Money remains hoarded because almost no tax is removed from Hoarded Money. The tax system is skewed in favor of those living in the suburbs where even the dog might be wearing a fur coat. In an affluent area of Athens, I found one shop displaying a bowtie dinner suit for a child and an underwear shop that sells items that would suit a stylish prostitute. A battered train brings people from areas with inadequate rental apartments to lavish areas where people pay remarkably little tax. Their wealth is not the problem. It is the hoarding of money that is the problem. The hoarders are remarkably efficient at maintaining and magnifying their hoards. The less well off aspire to become wealthy hoarders. It is not the ownership of these notes that makes a society wealthy.

Ten euro note by Andy Chalkley. Creative Commons Attribute. www.andychalkley.com.au

It is the movement of these notes that allows these things to be built. (Σταθμός Μαρουσίου):

Marousi Metro Station, Σταθμός Μαρουσίου Athens by Andy Chalkley. Creative Commons Attribute. www.andychalkley.com.au

A nation can print millions of ten euro notes, but it does not make the nation richer. A nation becomes wealthy not by ownership of ten-euro notes, but by the movement of ten-euro notes. The notes cost nothing to print. If they are printed and hoarded they remain worthless. Putting ten-euro notes under the mattress makes a nation poor. Rapid movement of ten-euro notes makes a society affluent. If the ten-euro notes move, skyscrapers are built. Rapidly moving ten-euro notes will build a powerful nation. The very same notes, when hoarded will starve a nation. The ten-euro note, above will starve or feed a nation depending on whether it is used. That is the magic of money. Money was a gift from one of our ancestors for us to circulate. The circulation of tokens gave us an affluent lifestyle. We were freed from chasing pigs through forests with spears whilst wearing animal skins. A ten-euro note that does not move is useless. A broken spear is useless to a hunter-gather. He cannot use a broken spear when he needs to hunt a pig. A broken spear does no work. A hoarded ten-euro note does no work.