Chapter 55 - A Lesson on Velocity

Velocity is an economic term to measure the number of times that money changes hands in a year. A fruit seller restocks daily and this represents a velocity of three hundred and sixty-five. A wage earner is often penniless by the end of the week and this represents a velocity of fifty-two. Humans live by trading with each other. Tokens were invented for this purpose. Tokens move from person to person to effect trade. If they do not move, there is no trade. The tokens are only performing their designed duty when they are actively moving. Tokens are required to hold the value of the previous transaction until the next transaction. No one has ever specified how long a token should be held until it enables another transaction. I have deemed it to be one month. A token is classed as moving if it moves at least one time in one month. This enables me to calculate the volume of money that is actually circulating and the volume of money that is idle in bank accounts or under mattresses. In most countries, the velocity is below two and in many countries, the velocity is below one. This figure of one tells us that, on average, money is only changing hands once each year. Some money is changing hands fairly regularly whilst a high proportion of money sits idle in bank accounts for extended periods of time. We are not using these tokens in an efficient manner. We need excessive quantities of tokens to do a comparatively small amount of work.

A graph of Velocity for the United Kingdom

Here are a few more velocities. There is a downward trend as more money is taken out of circulation to sit idle in bank accounts. More and more money is idle:

A graph of Velocity for numerous countries

This is a diagram to show Circulating Money and Hoarded Money for a velocity of one. Money changes hands once each year on average. To calculate the relative volumes of Circulating Money and Hoarded Money, I choose a time cutoff of one month. Money that changes hands more frequently than one month is deemed to be Circulating Money. Money that is idle for more than one month is deemed to be Hoarded Money. In this first diagram, I show a velocity of one. At a velocity of one, there is a Circulating Money of 8% and Hoarded Money of 92%:

The Velocity of Money equals One. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

My next diagram shows the two components of the Money Supply for a velocity of two. At a velocity of two, money changes hands twice each year on average. This corresponds to 17% of the Money Supply as Circulating Money and 83% as Hoarded Money:

The Velocity of Money equals Two. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

I now give you this diagram to show the relationship between velocity, Circulating Money, and Hoarded Money. You can see that at low velocities, the proportion of money that actually circulates is extremely small. This low velocity creates some strange economic behavior:

A diagram of Velocity of Money and Circulating Money. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

Taxation

Let us look at influences on the Money Supply. Taxation is taken from Circulating Money. This occurs because almost no tax is taken from money that is sitting idle in bank accounts. Almost every dollar of tax is taken at the time of a transaction or from the result of a string of transactions. I am referring to Sales Tax, Income Tax, and Company Tax. Sales Tax is tax taken at the time of a transaction. Income Tax is a tax based on wage transactions. Company Tax is the result of a series of transactions. Tax is only taken when money is doing something useful in the real economy. Almost zero tax is taken from financial transactions.

Velocity and Taxation. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

The taxes in the following diagram are almost entirely taken from transactions or the result of transactions in the real economy. The bias is horrendous. Gold plated cufflinks and gold colored paint attract Sales Tax but bars of gold and shares in a goldmine are exempt. Money that sits idle escapes tax, but money that moves is hammered with tax. People that create goods and services by making money dance in the real economy are taxed heavily, but those who hide money and remove it from circulation pay no tax. There is also very little tax on money that is likely to become hoarded. Taxes put a permanent downward pressure on velocity. This diagram shows the revenue sources for the OECD countries. Only the property tax is independent of transactions. Land Tax is a tax on a free gift from nature. Only Property Tax has some chance of taking money from Hoarded Money:

A graph showing tax take for the OECD

Bank Fees

The next issue is bank-fees, interest, and loan repayments. Those with Hoarded Money do not need to borrow money because they have ‘more money than they can spend’. These hoarders actually receive interest which they add to their hoards putting a downward pressure on velocity. All interest and all repayments are paid using Circulating Money. Loan repayments put a strong downward pressure on velocity. [Strong is an understatement. In a nation with 93% of its money as Bank Credit, with three times as much debt as money and an interest rate of 5%, the repayments can absorb around 14% of the Money Supply each year. Because the repayments are paid from Circulating Money, in a nation with a velocity of one, the volume of Circulating Money is 8%. These repayments exceed the magnitude of the Circulating Money by a factor of 1.7.]

Velocity and Bank Interest. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

Let us (not lettuce). Let us have a look at what happens when we remove money from Circulating Money. I start with a Velocity of Two. I remove money from Circulating Money.

The Velocity of Money equals Two. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

I remove 8% of the Money Supply. As always, it is removed from Circulating Money. I have created a horrendous depression and the velocity is reduced to 1.1. Half of the Circulating Money has been removed. An 8% fall in the Money Supply has caused a 50% fall in the Circulating Money. A 50% fall in the GDP is expected.

Velocity and the effect of a reduction of the Money Supply. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

This is a depression of 1930s style or 1890s. This will hammer the GDP and send unemployment skyward.

What is fascinating to an economist is that an 8% fall in the Money Supply has the potential to cause a 50% fall in the GDP. At low velocity, the economy becomes extremely sensitive to minor falls in the Money Supply.

At low velocity, the economy becomes extremely sensitive to minor falls in the Money Supply.

Canada

I show you the effect for Canada. Canada had a 1.6% fall in the M3 Money Supply around 2008:

A graph of the Money Supply in Canada. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

Canada had a 1.6% fall in the Money Supply. This caused an 8% fall in Circulating Money:

A graph of the Circulating Money in Canada. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

This is reflected in a fall in the velocity:

The Velocity of Money in Canada. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

At this stage, I am to believe that a hiccup in any one of M3, M2, or M1 and perhaps even M0 can cause the damaging effect on Circulating Money. Any downward disturbance of any of the components of the Money Supply appears capable of upsetting the real economy which operates with the Circulating Money. I have more research to do on this. In Canada, the flow on effects included a big drop in the GDP:

A graph of GDP for Canada. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

To keep the hoarders happy, tax regimes have been modified to avoid their hoards. Thus tax is inappropriately collected from transactions. A fall in economic activity hurts the tax collection significantly. If tax was collected from Hoarded Money, the problem would not exist. The Tax Revenue took a tumble as the economic activity (GDP) fell. Strangely, the fall in government revenue was similar in size to the fall in the Circulating Money. A smart person in government would have spent some extra money into circulation and reaped a windfall in Tax Revenue:

Canada Circulating Money and Tax Revenue by Andy Chalkley. Creative Commons Attribute by Andy Chalkley. Creative Commons Attribute. www.andychalkley.com.au

Let us now consider the mechanism. This diagram reexamines the situation where the Money Supply fell by 8%:

A graph of Hoarded Money. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

My next diagram shows a more realistic situation. We study a 1% fall in the Money Supply. In high-velocity countries, a one percent fall in the Money Supply causes a small fall in the Circulating Money. In low-velocity countries, a one-percent fall in the Money Supply causes a devastating effect on the Circulating Money.

. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

If you understood my diagram, you would see that at a velocity of one, a one percent fall in the Money Supply has the potential to cause a twelve percent fall in the Money Supply. This means that low-velocity countries are extremely sensitive to minor falls in the Money Supply.

At low velocity, the economy becomes extremely sensitive to minor falls in the Money Supply.

Hoarding

People that hoard money are skilled at keeping their hoard. They work out their total worth and act in a competitive manner to maximize and increase their hoard. They tend to be politically wise and manipulate the taxation to minimize taxes on their hoards and on any money that may potentially enter their hoard.

People operating in the real economy, on the other hand, run their business by passing money on quickly. Money is transient to business. The business model tends to bring money in and spend it back out in wages within the same week. This group of people earn their income and feed themselves by passing money from person to business to person to business and so on in a fairly rapid manner.

It is easy to siphon money off when it is being transferred from person to person. We worry little about a fee of a couple of percent on the price. It is much more difficult to get money off someone who hoards money. Try to get 2% from someone’s hoard.

People that hoard also receive interest income which comes from people that operate within the real economy. This tends to deplete Circulating Money.

As such, there is a constant pressure trying to move money from Circulating Money to Hoarded Money. I demonstrate this in the following diagram. It is easy to move money from Circulating Money to Hoarded Money. It is difficult to reduce Hoarded Money:

Hoarding can cause a recession. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

It is easy to reduce Circulating Money and increase Hoarded Money. Most nations have a downward trend for velocity. No nation that I have found has an upward trend for velocity. More and more money is becoming idle. Governments are desperately trying to generate more debt to create more money when the solution is to increase velocity. We are swamping ourselves in debt rather than lifting velocity. We are not using the money that exists efficiently. We allow people to hoard money. This causes the downward trend in velocity seen on this graph.

A graph of Velocity for numerous countries

A Fall in Circulating Money

Humans live by trading with each other. When the number of tokens available for that trade falls, humans live with a little less trade. This is a recession or a depression. Humans are reluctant to let prices drop to suit the new conditions. Less trade means that we eat a little less and businesses close because the level of trade will not cover the high premium on the use of land. The reduction of tokens is a fall in the Circulating Money. The fall in Circulating Money may be due to an increase in hoarding as in this diagram. Two percent of the Money Supply moves from circulation to become hoarded:

Hoarding can cause a recession. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

In the above diagram in a nation with a velocity of two, two percent of the Money Supply moves from circulation to become hoarded. This causes a twelve percent fall in the Circulating Money. The velocity falls to 1.8. One can expect a twelve percent fall in the GDP.

A fall in the Circulating Money is more likely caused by a fall in the Money Supply. In this situation, the Money Supply falls slightly. The hoarders are skilled at retaining their money. The reduction is taken from the Circulating Money:

Hoarding can cause a recession. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

In the above diagram, the Money Supply falls by two percent. This causes the Circulating Money to fall by twelve percent. We have created a massive recession. In a nation with a velocity of one, the fall in the Circulating Money would be twenty-four percent. Nations with low velocity are very sensitive to very small changes in the Money Supply.

Taxation

The government taxes the citizens. The tax is spent back out into society. So the government collects from Circulating Money and spends back into Circulating Money. The government does not influence the volume of Circulating Money under a steady state situation. What it collects as tax it spends back into circulation. It collects almost no tax from Hoarded Money. If it favors the finance industry with grants, bailouts, or contracts, it may move Circulating Money into the hoards of those with ‘more money than they can spend’. In most cases, the government collects from circulation and spends back into circulation. However, the hoarders are very good at sniffing out fresh money. Government spending ma finish up in the hands of hoarders.

The government does not generally influence the magnitude of the Money Supply nor the volume of Circulating Money. There are some strange circumstances when the government can influence the volume of Circulating Money.

Government Borrowing

The government borrows by issuing bonds. In some countries, these are called gilts or securities. A bond is effectively an IOU. You contract to buy a bond of value one million dollars. You deposit one million dollars into a bank account in the name of the government. The government issues you with the one million dollar bond. This bond has an end date which is the date on which the government will repay the one million dollars. In the meantime, the government pays you interest installments on arranged dates as in the below bogus diagram of a bond. The tear off slips at the base are the coupons for the regular interest payments. I could not find a royalty free image of a bond, so I created one.

Treasury Bond. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

Bonds have some interesting effects that are difficult to understand and more difficult to explain. Your comprehension is essential to understand the intricacies of our money system. When the government borrows money by issuing bonds, it spends the money into circulation. It has thus raised the volume of Circulating Money. It is known that government borrowing and spending into society boosts the economy. The reason is not so well understood. When a government borrows money by issuing bonds, the bonds are invariably purchased by persons with money sitting around looking for a place to multiply. Thus the bonds tend to be purchased by people with Hoarded Money. The government then builds a bridge or two and causes a movement of money from Hoarded Money to Circulating Money. The government has borrowed money that was hoarded and spent it into circulation.

Treasury Bond issue and its effect on the Money Supply. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

The issue of the bond did not increase the Money Supply, but it altered its composition. It took money from those that were doing nothing with it and gave it to those that operate in the real economy. the money started to circulate. The government moved money from hibernation to circulation. It took on some debt to do so, but the debt to government is different to household debt.

This is quite a tricky concept to comprehend. A logical person is likely to decry the debt taken on by the government. In Australia, there is three times as much debt as there is money. In Europe, there is two and a half times as much debt as there is money. In the USA, there is three and a half times as much debt as money. Worldwide, there is two times as much debt as money. These debts can never be repaid for various reasons, but the simplest is that to do so would destroy the vital circulating medium. The debt can never be repaid as in this diagram:

U.S. government debt can never be repaid. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

Debt cannot be repaid since William of Orange signed on the dotted line. King Charles of England lost his sovereignty and then his head. William of Orange from Holland was offered the crown of England if he signed on the dotted line to a group of businessmen who had set up their own private bank under the name ‘Bank of England’. William of Orange agreed that he would not create the money of the nation himself as previous sovereigns had done. He agreed to borrow from this group of businessmen. He would borrow the money used in the nation from this freshly created bank owned by a group of businessmen. Henceforth, governments and nations have operated on borrowed money. This system actually works remarkably well providing the government never makes the mistake of repaying the money. Any attempt to repay the debts, destroys the circulating medium on which the human trade relies. Since the debt can never be repaid, no attempt should ever be made to repay it. Balancing the budget is illogical logic. Economies work best when there is a mild increase in the Money Supply and a mild increase in government spending (with no decrease in velocity). The increase in Money Supply is necessary. It is the magnitude of the increase in spending and debt that is to be debated. Too big an increase causes inflation. Too small an increase in spending and too small an increase in debt causes a recession. However, I shall show in a while that the same effect can be achieved by raising the velocity. Greece and Spain have difficulty borrowing money so they need to increase the velocity of the Money Supply.

Under our bizarre taxation arrangements, the only way for the government to reduce the hoarding and increase the circulation is by borrowing from citizens with too much money and giving it to those that circulate money. Some of this borrowing would be unnecessary if taxation was used to remove a small proportion of the idle Hoarded Money from the hoarders. The method involves adjustments to the taxation regime. In this graph, you can see that almost all tax comes from the result of the taxation of transactions. Almost none is taken from hoards:

Australian Taxation. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

To remove some money from Hoarded Money, it is necessary to tax appropriately. Suitable taxes include Demurrage Tax, Wealth Tax, Financial Transaction Tax, Death Tax, Inheritance Tax, and Land Tax. Any of these taxes will allow the government to remove a very small part of the Hoarded Money and put it back into circulation. One of the most direct is a Demurrage Tax.

Demurrage Tax

Demurrage Tax is a tax on Hoarded Money. It is a tax on the holding of money. A typical Demurrage Tax is a small tax of 1% charged monthly on money holdings. In bank accounts, this is removed from accounts monthly. With Cash Currency, the tax is imposed by affixing a stamp on the note. Notes without the stamp are either unusable or discounted by the appropriate tax amount. A Demurrage Tax is an excellent way of reducing Hoarded Money and returning the money to the government who then spend it into circulation. This tax is a strong incentive for individuals to spend money in a short time frame. It is a strong disincentive to the hoarding of money. If citizens wish to maintain a store of wealth, they do not store wealth as money because money loses value. They store their wealth in any other form that is not money. Planting trees in a forest sounds like a good policy. They will hold goods in preference to money. Demurrage tends to create a much higher velocity of money. Here is a graph of velocity for the Chiemgauer which is a Demurrage Money:

A graph of the velocity of the Chiemgauer demurrage money.

There are great success stories where demurrage currencies have reinvigorated ravaged communities by dramatically boosting the local economy with a fast moving but cheap local currency. Demurrage makes money into a medium of exchange and discourages its use as a store of value. Demurrage money systems tend to be suppressed by centralizing authorities who cannot match the economic benefits of rapid money with their centralized debt based money. Due to an increased velocity, less money needs to be issued. Demurrage currencies experience a relatively high velocity of money because it loses value or incurs holding costs. Citizens want to spend their money before it gets ‘taxed’ reducing its value. This allows money to achieve its primary goal of enabling transactions and reduces the tendency to hoard money. Demurrage encourages economic activity by encouraging people to spend.

Demurrage Money by Andy Chalkley. Creative Commons Attribute

Demurrage Tax works in two ways. Firstly, it allows the government to remove around one percent of Hoarded Money each month which it promptly spends back into society. In a nation with a velocity of one, this would mean that the Circulating Money would be boosted by about eleven percent monthly. Secondly, the Demurrage Tax discourages the hoarding of money, the velocity of money increases, and the proportion of Circulating Money in the Money Supply would increase. There would now be a constant downward pressure on Hoarded Money. Less money is needed in society and less debt would accompany the money. A velocity repair has been effected. The typical demurrage figure is given as 1%. My calculations are that this is excessive. A figure of 0.1% would be appropriate in a bank account system. This is one dollar in a thousand.

Other Taxes

Demurrage Tax, Wealth Tax, Financial Transaction Tax, Death Tax, Inheritance Tax, and Land Tax all tend to take money from Hoarded Money. The tax then gets spent by the government back into circulation to benefit the whole society including the hoarders.

Maintenance of the Circulating Money

The central bank is entrusted with the maintenance of the Money Supply. The parliament has been pushed out of the task with the ingenious sentence: “The central bank should be kept free from political interference.” Who then should interfere with the operation of the central bank? Might it be that the banks control the banks?

The Federal Reserve Bank of St Louis lists the Money Supply of the USA to $18000 billion. The Federal Reserve has only ever created $1480 billion in Cash Currency. Of the $1480 billion in Cash Currency, one-half is estimated to be held outside the USA which is completely outside the U.S. economy. Thus only 4% of the money in circulation in the USA originated from the Federal Reserve. The remainder of the Money Supply is held as virtual numbers in bank accounts. It has to be virtual because it never came from the Reserve Bank. $18000 billion cannot be converted to Cash Currency because this volume of Cash Currency does not exist and never did exist. We are running our nations on credit created by banks. This system works and works well provided we accept the associated debt. The US Debt Clock lists the US Total Debt as $66800 billion. [2016-11][6] It is an interesting study to work out how we finished up with ‘more debt than money’. When the banks lend money, they do not hand out wads of Federal Reserve Notes. They add a credit to an account. They add a negative amount to one account and an equal positive amount to another account. The result balances. At the moment of creating the loan, the volume of money in the nation ratchets up and the debt in the nation rises by the same amount. Thus, the Money Supply and Debt rise in unison. By the magic of compound interest, the debt magnifies to create the situation where debt exceeds money. This is evident in this graph of money and debt of for the USA:

Money and Debt for the USA by Andy Chalkley. Creative Commons Attribute

Although this looks scary, we have lived with this system for a long time. The system functions provided the green Money Supply continues to rise at a slow but steady rate. If the green Money Supply falls or even ceases to rise at a steady rate, the economy experiences a recession. Businesses close and people go hungry. We have to live with the debt. If the debt does not increase, we are in trouble. Unless someone is clever enough to effect a velocity repair.

What then causes the green Money Supply to cease to increase? When the banks make loans, they create fresh credit in one account with a matching debt in another account. (-x)+(+x)=0 The two cancel in the process called double entry accounting. Interest is added directly to the debt which magnifies the debt according to the process commonly called compound interest. The banks collect repayments. The Money Supply increases when the banks create fresh credit. The Money Supply recedes when the banks collect repayments. To maintain a constant Money Supply, it is necessary for the banks to issue new loans at the same rate that it is collecting repayments. If A is bigger than B, the Money Supply increases. If B is bigger than A then the Money Supply shrinks. I try to demonstrate this in the following diagram:

The velocity of money equals two by Andy Chalkley. Creative Commons Attribute

I hope this is obvious so that I can move on with the explanation. The bank creates fresh credit which it lends out. Where that fresh credit gets spent greatly affects the economy.

Where Freshly Created Credit is Spent

The destination of fresh credit has a very significant effect on a society. If freshly created credit gets spent on existing assets, it inflates the value of those assets. If the assets are of inflexible supply, the price will be pushed up by the fresh credit. If the fresh credit is for new assets such as houses, the nation will gain new housing stock and workers will be busy earning money to spend on vegetables. The fresh credit spent on new assets has started a daisy chain of transactions that boost the economy by firing up the Circulating Money.

New money is essential to top up the Money Supply. How that money is first spent is very significant:

If new money is pushed into any area where the volume of assets is inflexible, the asset price rises. If the volume of assets is partially flexible, the volume of assets will rise as well as the price.

If the supply of fresh credit dries up, the assets all fall in value. Sometimes there is a flight out of the asset class as citizens hurriedly sell that class of asset.

Inflation is very badly studied. It is common to have regional differences and item differences in Money Supply, economic activity (turnover/GDP), and inflation.)

Cost of Money

This is tricky to explain. Humans live by the exchange of services and goods. The task is to determine how much it costs to put the circulating medium in place. In the USA, the Money Supply equals $18000 billion. The US Debt Clock lists the US Total Debt as $66800 billion. [2016-11][1] If you want money, you borrow it. More accurately, all new money originates as a loan with associated debt. The money moves around from person to person by a fabulous system of bank transfer. I just ordered a slice of reindeer pizza and a decaf black coffee at Tromsø airport in the north of Norway. The card transaction reduced the money in my account in Perth, Australia and increased the account of the kiosk at Tromsø. However, the money originated from somebody’s loan possibly in the mortgage belt in Perth. The householder is paying the debt over thirty odd years. The fresh money created in the mortgage loan process got spent on materials and builders wages. The workers spend the money and a daisy chain of transactions has occurred ever since as the money got transferred from person A to B to C to D to E and so on and then to me for providing a bus service. I spent the money on reindeer pizza. The point is, if the householder did not buy a house and saddle his family with a mortgage, the money would not exist. For each dollar in the Money Supply, there is an associated annual debt somewhere else that someone is struggling to pay off. The debt that they contracted attracted interest and magnified the debt. Thus, there is $66 of debt for each $18 of money in circulation. This is just over $3.50 of debt around someone’s neck for each dollar sitting in someone’s account. So for each $1000 in bank accounts someone is servicing a $3500 debt. At a guessed interest rate of 5% gives us an interest bill of $175. Thus each $1000 in the Money Supply is costing society $175. Now we consider the volume of money that is actually circulating. The money that is hoarded takes no part in the economy. Only Circulating Money provides any service to society. At a velocity of two, only 17% of money is circulating. This is $170 of our $1000. So for each $170 that is circulating, there is an associated interest fee of $175. Our money is incredibly expensive. The situation is even more terrible for low-velocity countries. A country with a velocity of one experiences an utterly horrendous interest drain on the small amount of money that actually circulates. For each $80 that is circulating, there is an annual interest cost of $175. It is absolutely imperative that we reduce the cost of money by reducing the hoarding of money. It is imperative to repair the velocity in low-velocity countries.

This is why I state elsewhere that the next messiah will deem:

New Messiah says: “The ‘making of money from money’ as one of the ultimate sins.”


The hoarders simply do not realize the problem that they create for society. I try to explain this in this diagram. The diagram is for Australia which has three times as much debt as money:

The velocity of money equals two by Andy Chalkley. Creative Commons Attribute

We haven’t finished yet. I am writing this in a budget restaurant in Warsaw where the food is weighed at the till. I have a very nice pork steak for twenty zloty. Next is hyperinflation. Hyperinflation is considered to be a very high rate of inflation. It is much more than this. This is yet another misleading economic term like ‘great’ depression. Hyperinflation involves velocity. It should perhaps be called hypervelocity. Humans live by exchange of goods and services using a token of an accepted exchange value. The value of a token is derived from the potential next exchange. The token is required to retain value between one transaction and the next. If the supply or availability of tokens changes, the value of the token changes. If the availability of goods to purchase changes, the exchange value of the token changes. In a steady state situation, the purchasing power of tokens changes very little. The velocity also changes very little. Velocity is not given a priority as a study area in economics because it does not change much in steady state situations. This is not the case in hyperinflation. In hyperinflation, velocity is all important.

In a state of financial turmoil, the exchange value of the token might change sufficiently to cause people to spend them as soon as possible. Under the steady state, large portions of the Money Supply sit idle in bank accounts. This idle money suddenly comes out to play when it loses value. So hyperinflation is not just an increase in prices, there is a ‘flight from money’. There is double trouble. The money that was circulating moves significantly faster and vast quantities of idle money join the maelstrom. We are witnessing a massive increase in velocity as Hoarded Money cascades into Circulating Money.

A graph of estimated velocity during the Weimar Hyperinflation showing the flight from money in November 1923. Origin unknown. Accuracy unknown. Original source unknown. Adapted from a graph on Now and Futures www.nowandfutures.com by Andy Chalkley

There is an avalanche effect. The hoarded money is like the snow on a mountainside. One bird dropping could cause the snow to avalanche down the hillside. As the snow builds up, the avalanche is more likely to occur but the onset of the snow collapse mechanism is unpredictable. The same occurs with Hoarded Money. As the velocity decreases and the volume of hoarded money increases, the hyperinflation becomes more possible but it is not possible to predict the exact timing of the onset of a hyperinflation. I represent this in the next diagram. I show Hoarded Money cascading into circulation:

Hoarded money and the onset of hyperinflation by Andy Chalkley. Creative Commons Attribute

Hoarded Money Has No Value

I deal with methods to stop or prevent hyperinflation in other chapters. You may be able to follow this reasoning. Hoarded Money has no value. The reasoning is that there are no goods or services available to be purchased as all currently available goods have Circulating Money waiting for them. Hoarded Money only has value if we convert an equal amount of Circulating Money into Hoarded Money at the same time or we remove an equal quantity of money from circulation.

Recessions

Our usual economic starting point is ‘humans live by trading with each other’. If they are prevented from trading with each other, a recession occurs. A shortage of available tokens causes the recession. It is not the magnitude of the money supply that causes the recession. It is the magnitude of the portion of the money supply that is actually circulating. A fall in velocity will also cause a recession. The issue I wish to discuss is how to recover from a recession. There is a simplistic assumption that it is merely a matter of forcing the money supply to increase. This may or may not work. When the Money Supply is forced to increase, the increase is often commandeered by the hoarders. The increase becomes hoarded. This happened during the recovery in the USA from 2008. To recover from a recession, it is necessary to increase the volume of Circulating Money. It is necessary to increase the circulating component of the circulating medium. This is not always easy. It is a matter of ensuring that money gets into the hands of those that run businesses in the real economy and spend in the real economy. The finance industry tends to operate in the Hoarded Money section of the economy with the pastime of ‘making money from money’ without adding food, shelter, or goods to the populous. The value of the money they trade in their virtual world depends on the ability of money to purchase real goods in the real economy. To recover from a recession, business needs to be boosted. If new money is forced into the money supply, it is liable to be appropriated by the hoarders in the finance section of the economy. They are extremely good at sniffing out fresh money to add to their hoards. For a recession recovery, money must start to spin in the real economy that grows food, feeds people, houses people, fixes people, entertains people, and provides the goods that enable civilized life. To that end, a business-friendly environment must be created both in regulation and taxation. Money has to be added such that is spins and dances and avoids the money prison. The alternative is to make existing money move faster by increasing the velocity.

When a recession occurs, there is always a fall in the volume of Circulating Money. Businesses have been harmed. Some have gone to the wall. People have lost their jobs. There is a disruption of productive effort. If money is made available to the business community, the businesses may be reluctant or unwilling to expand. Recovery is a slow process and those that suffered need to heal. If you were running a business making furniture from recycled pallet wood and people stopped buying because they had no money for furniture, you would lay off your staff, close your factory, and send the equipment auction. You might continue a small operation in your back shed. You would be very reluctant to upsize to a factory when business built up. Whilst running your business, you had to deal with irate landlords, upset staff, difficult tax officers, multiple layers of idiotic government officers, personal status issues and more. During downsizing the problems got worse. You were burnt. You got no help. The government was quick to put its hand out for a share of your profit, but was slow to help. You would not want to go through the pain again. So you operate as a sole operator. Why would you want to be treated as the enemy of society because you employ people? You were acting as an unpaid tax collector for the government and treated as a potential criminal by tax auditors. The regulatory authorities treated you as a nuisance for wanting to run a factory. The bank treated you as a problem borrower as you paid them interest on money that did not exist until you borrowed it. Workers would fail to turn up to work some days or turn up with hangovers or do side jobs for friends on paid time but you were treated as a criminal by the government employment monitoring agencies. You would have to be quite determined to go through that again.

To encourage business it is necessary to make a business friendly environment. Taxation needs to be softened particularly taxation that restricts expansion. The important impediments to expansion are the tax treatment of depreciation and the tax treatment of inventory. Depreciation delays tax deductibility for money that has already been spent on fixed assets. Taxation procedures do not allow deductions for money spent on inventory. Money spent on trading stock is an expense that obtains goods for sale. No income is made until the goods are sold. For Income Tax purposes, inventory should be treated as deductible. Taxation of inventory and fixed assets restricts the expansion of business. The accounting profession calculates the profit of the business and uses the calculated profit as the figure for the income of the business for tax purposes. This is an error. Profit and income are different. An expanding business has reduced income because it has expenses related to the expansion. The result is that businesses are restrained from expansion by taxation.

There are various ways that the government can introduce more money into the Circulating Money. The government can borrow and spend the money itself on projects such as highways, bridges, and better public facilities. This puts money straight into circulation. The debt is no great issue as it can never be repaid. To increase the money in circulation, either the money supply needs to increase or the velocity needs to increase. A rise in velocity is a situation where Hoarded Money becomes Circulating Money. Another way to increase the Circulating Money is to reduce taxation on transactions. Decreasing taxation on these economy destroying taxes is prone to increase tax revenue. The taxation of transactions as occurs with Sales Tax, Income Tax, and Company Tax is prone to be revenue negative. A rise in the tax rate is prone to decrease tax revenue because the increased tax rate damages the transactions that harvest the tax. The tax damages the ability of the tax to collect tax. As a simple example, if you double the tax on shoes, you may halve the number of shoes sold. You are better to tax the inputs that will not harm the production. This is mainly the land. Land prices always rise to the limit of affordability. Tax on land does not increase the cost of using land because prices will rise to the limit of affordability irrespective of what tax is applied. If land or property is worth one million in an interest climate of ten percent, then the effective cost of use of the land is $100 000 per annum. It is worth $100 000 because someone is prepared to pay that much. If a land tax is imposed at $20 000 per annum, the land price will fall to $800 000 with an annual interest payment of $80 000. The occupier is still paying $100 000 for the use of the land but $20 000 is now in the hands of the government to create facilities. If a land tax of $50 000 is instituted, the value of the land will fall to $500 000 with an interest payment of $50 000. The occupier is still paying $100 000. Whatever scenario is in place, no one is going to pay more than $100 000 to use the land as no business in the region will sustain the payments. If the government is collecting $50 000 in tax from the land, it can cut other damaging taxes. Payroll Tax can go. Sales Tax can disappear or be replaced with a 0.1% general Transaction Tax. Income Tax can be reduced.

Recovering from a recession by Andy Chalkley. Creative Commons Attribute

Circulating Money

Here is a graph that I have compiled for you showing the Circulating Money for a few countries. They all have a troubling downward trend.

A graph of Circulating Money for numerous countries. Data: calculated from World Bank data.

Cost of Money

This would be the cost of money if Hoarded Money was eliminated.

A diagram showing the cost of money if hoarding was eliminated

The cost would be about 5% of the total money which would all be circulating.

Cost of Money

In the USA, there is over three and a half times as much debt as there is money. The velocity is about one and a half. This equates to a Circulating Money of about 13%. 87% of money is Hoarded. Debt grew by about $1500 billion each year as money grew by about $750 billion averaged over five years. So debt is outpacing money by $750 billion each year. So interest rate appears to be about 4%. I think we can assume that to the customer it is about 5%. I’m sure there is a better way of working out the average interest rate, but I have yet to think of it. The hoarders are hoarding around 87% of the money supply and this is creating interest for someone else to the sum of 87% of $1500 billion. Each $1000 that someone has sitting idle in a bank account is costing someone else 3.5*5%*$1000 = $175 in interest.

We can go a little further. Let us consider the cost of having a circulating medium. Because only 13% of money is circulating, the cost of providing the circulating medium is $175. The circulating medium is 13% of $1000. Thus it costs $175 per year to provide a circulating medium of $130. Thus it costs $1346 to provide a circulating medium of $1000. Money is somewhat expensive in the USA. To bring this down it is necessary to raise the velocity.

In the USA it costs $1346 annually to provide a circulating medium of $1000.

Hoarded Money Has No Value

This is a tough one to understand. When money is removed from circulation, it becomes hoarded and no longer partakes in transactions. Other money effects all the transactions that feed and clothe the civilized. The totality of all business is conducted as if our hoarded money did not exist. New money came along to replace the money that had become hoarded. When hoarded money is brought out of retirement, it dilutes the pool of circulating medium. Any big movement of hoarded money to circulation significantly dilutes the pool of circulating medium lowering the purchasing power of all money. Hoarded Money only has value when converted to circulation if an equal amount of money becomes hoarded or an equal amount is removed from circulation. If vast quantities of hoarded money moves into circulation, as might happen in a hyperinflation situation, the money system may be destroyed.

Hoarded Money has no value.

Hoarded Money gets its value from the money that is transacting in the real economy. Hoarded Money obtains its value from a potential transaction that is not going to happen. Hoarded Money relies on the vibrancy of the real economy to provide value to the Hoarded Money even though the Hoarded Money does not partake in the real economy. At a velocity of one, 92% of money is hoarded, yet this 92 % gets its value from the transactions that are handled by the 8% that is transacting. If the 92% were to burst into the 8%, there would be a dam burst effect as the circulating medium suddenly magnified by eleven. I don’t like to contemplate this anywhere that I live. It is time to stop the hoarding. Even moderate hoarding has the potential to be devastating.

The Value of Money

Money has value if it can purchase things. Citizens do not care that it can be changed to gold as they need food not tooth fillings. If money cannot be exchanged for goods and services, money has no value. The backing for money is the goods and services that money can purchase. It is the GDP that underpins the value of money.

If someone pins an exchange value between money and silver, the silver gets its value from the money and the money gets its value from the goods it will purchase. The relationship is the opposite of what one might expect.

Inflation

Inflation matters less to those in the real economy. Money is transient to a business. If the inputs to a business rise in harmony with the income, there is no upsetting effect on the business other than changing price tags on a regular basis. Inflation matters more to those with Hoarded Money. In the real economy, money only needs to hold value until the next transaction. In the real economy, a mild inflation is of little issue. All prices rise in sympathy. Some prices such as wages may lag a little. Even to the employee, the wage packet rises in approximately in sympathy with the price of goods. Hoarded Money has a much bigger issue. It just sits there devaluing. Some of this is offset by a higher interest earned. Mild inflation may be essential to ensure that debt does not become entirely unpayable. A better substitute for inflation is to tax money that is not circulating. A demurrage tax would partially replicate inflation and ensure that the fall in the value of money landed in the hands of the government for projects for the betterment of society.

Repair of Velocity

It is not recognized that low velocity is becoming a serious threat to our money system. Low velocity causes these issues:

The repair of a low velocity economy is easy except for persuading those that are obsessed with the accumulation of hoards that hoarding is not wise. The whole economy and the tax system become skewed towards the hoarder. They have the time and money to influence the politicians.

The repair involves removing money from hoarded money and spending it into circulation in manner to ensure that it continues to circulate. The easiest is to tax the hoarded money at a fraction of a percent on a regular basis. Traditionally this has been one percent each month. But this is too high. It will produce too much tax and increase the circulating money too quickly. At a velocity of one, the ratio of Hoarded Money to circulating Money is just over 11.5 to 1. So for a 10% increase in Circulating Money, we need a Hoarded Money taxed at about 1% annually which is about 0.1% monthly. This is called a Demurrage Tax. The figure commonly discussed is a factor of about ten too high for a low velocity country and about five times too high for a country with a velocity of two.

Other taxes are advised and they include a general Transactions Tax, Inheritance Tax except on bona fide family business, Death Taxes, Land Tax, Property Tax, and Wealth Taxes. Transaction damaging taxes need to be reduced significantly.

A common problem in modern society is that it is becoming difficult to supply more money. More money means more debt. It is difficult to find new ways of generating debt. Debt is now hung on students and chronically sick citizens. We are looking at the maintenance of the money supply in the wrong way. We are making an assumption that we need to keep increasing the money supply to boost the economy. As I have demonstrated, we are only using around ten percent of money on a regular basis. We have money, but we are not using it. Money must be kept moving. Velocity must rise.

The Quran words it this way:

Quran 9.35: On that day, it (that hoarded wealth) will be heated in the fire of Hell and, therewith, their foreheads and their sides and their backs will be branded (and they will hear): “This is the treasure which you hoarded up for yourselves; taste now what you were busy hoarding!”

On that day, it (that hoarded wealth) will be heated in the fire of Hell and, therewith, their foreheads and their sides and their backs will be branded (and they will hear): This is the treasure which you hoarded up for yourselves; taste now what you were busy hoarding. Creative Commons Attribute

The hoarding of money has been condemned by Islam with threats of severe punishment.