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The problem with the economy is the velocity of money or in our case the lack of velocity.
Velocity is speaking of the average frequency with which a unit of money is spent. To give you a very rough understanding, let’s assume a very small economy of just you and me, which has a money supply of $100. I have the $100 and spend it to buy $100 of flowers from you. You in turn spend $100 to buy books from me. We have created $200 of our "gross domestic product" from a money supply of just $100. If we do that transaction every month, we will have $2400 of annual "GDP" from our $100 monetary base
P=MV, where P is the nominal gross domestic product (not inflation-adjusted here), M is the money supply, and V is the velocity of money. You can solve for V by dividing P by M. By the way, this is known as an identity equation. It is true at all times and all places.
The Fed is trying a grand experiment that is not working. The tarp stimulus was supposed to put a lot of money into the economy thereby creating velocity. Two problems. The banks are holding on to the money. Corporations are holding on to the money and the very wealthy are holding on to the money. The tarp and stimulus money has not been put into circulation. It has not "trickled down". The second problem is that if it is put into circulation all at once it could lead to massive inflation.
Simple solution. Tax the rich use the money to pay for infrastructure repairs which will increase transactions thereby increaseing velocity. Reducing social programs actually decreases velocity as that money is usually spent very quickly thereby increasing velocity.
Interesting theory but it would still become stimulus. The problems we are having can't be "fixed", we have the largest generation ever entering their slow down in spending phase. Velocity was as it's peak as they were spending like mad on growing kids and keeping up with the Joneses, now that the youngest boomer is 51, those days are done.
The younger generations are shell shocked and they will never be the consumers the boomer's where.
The Fed is trying a grand experiment that is not working. The tarp stimulus was supposed to put a lot of money into the economy thereby creating velocity. Two problems. The banks are holding on to the money. Corporations are holding on to the money and the very wealthy are holding on to the money. The tarp and stimulus money has not been put into circulation. It has not "trickled down". The second problem is that if it is put into circulation all at once it could lead to massive inflation.
The flaw with your equation is that $300B of the stimulus was trickled down.. It started at the bottom.. It involved such things as increased food stamps..
The second part of your equation is that the reason why its not helping (as I said it wouldnt) is you have to REMOVE the money from circulation, i.e. selling US Bonds, in order to float it back out. So rather than those who would have invested and loaned money out in the private sector, thereby circulating it, it went to government..
Quote:
Originally Posted by hotair2
Simple solution. Tax the rich use the money to pay for infrastructure repairs which will increase transactions thereby increaseing velocity. Reducing social programs actually decreases velocity as that money is usually spent very quickly thereby increasing velocity.
Your simple solution IS the solution they are taking.. Hows that working out for us? You dont think its welfare recipiants buying a trillion dollars in Treasuries, do you?
The flaw with your equation is that $300B of the stimulus was trickled down.. It started at the bottom.. It involved such things as increased food stamps..
The second part of your equation is that the reason why its not helping (as I said it wouldnt) is you have to REMOVE the money from circulation, i.e. selling US Bonds, in order to float it back out. So rather than those who would have invested and loaned money out in the private sector, thereby circulating it, it went to government..
Your simple solution IS the solution they are taking.. Hows that working out for us? You dont think its welfare recipiants buying a trillion dollars in Treasuries, do you?
There is no flaw. The fact is that banks and businesses are hoarding cash. Go to any reputable economic publication and you will see that this is true. The amount of money banks are holding as it relates to their required reserves has increased tremendously.
The government is not a black hole for money. It goes in and certainly comes back out at at a very fast pace.
I am advocating creating a disincentive for those that have money to hoard. The best disincentive is taxes.
Increase taxes would force individuals and corps to reduce income by investing in the business, which increases transactions which increases velocity or pay higher taxes, which is then the govt. could put into circulation thereby creating transactions and velocity.
There is no flaw. The fact is that banks and businesses are hoarding cash. Go to any reputable economic publication and you will see that this is true. The amount of money banks are holding as it relates to their required reserves has increased tremendously.
The government is not a black hole for money. It goes in and certainly comes back out at at a very fast pace.
I am advocating creating a disincentive for those that have money to hoard. The best disincentive is taxes.
Increase taxes would force individuals and corps to reduce income by investing in the business, which increases transactions which increases velocity or pay higher taxes, which is then the govt. could put into circulation thereby creating transactions and velocity.
No they are not..the money is circulating above us.
Where do you think those billions each month that the Fed puts into circulation are going ? They are not going to "Main Street".
The multi-nationals are making double digit profits based on their foreign sales. And they are paying taxes to those governments.
What..you want that money too ? The profits are NOT generated in the US.
The rich already pay most of the taxes. How about raising the taxes of the 47% who currently pay no income tax? This is a HUGE chunk of the population. If they all start contributing and paying their fair share of taxes it would bring in a lot of revenue and help with the deficit.
There is no flaw. The fact is that banks and businesses are hoarding cash. Go to any reputable economic publication and you will see that this is true. The amount of money banks are holding as it relates to their required reserves has increased tremendously.
The government is not a black hole for money. It goes in and certainly comes back out at at a very fast pace.
I am advocating creating a disincentive for those that have money to hoard. The best disincentive is taxes.
Increase taxes would force individuals and corps to reduce income by investing in the business, which increases transactions which increases velocity or pay higher taxes, which is then the govt. could put into circulation thereby creating transactions and velocity.
Supply-side does not work, you can't create demand just by creating supply. The corps know that the next wave down is coming soon so they are hording money, the banks are getting paid by the Fed for keeping reserves.
Any money that moves through the government moves slowly. The stimulus is an excellent example. It took ages for the $700B to move from Obama's mouth to the infrastructure projects (like roads). The friction of the process is outrageous.
If I were rich, I would spend my money on something worth spending money on. Taxing me more won't cause me to suddenly say "I should have less income - I'll spend it." If you make Larry Ellison pay more in taxes, he will work harder to find a way to avoid it.
There is no flaw. The fact is that banks and businesses are hoarding cash. Go to any reputable economic publication and you will see that this is true. The amount of money banks are holding as it relates to their required reserves has increased tremendously.
The fact that they are holding onto money, is because we have people like you suggesting we need to take it from them. They'd be foolish to run around spending their capital with suggestions like yours floating around..
In addition, the banks are holding money because thats what government wants them to do... Its how they are keeping the inflation down.. they pump capital into the banks, and tell them not to injest it into the economy..
Quote:
Originally Posted by hotair2
The government is not a black hole for money. It goes in and certainly comes back out at at a very fast pace.
True, but when government has to first take money out of the economy in order to send it back into the economy, this results in a net increase of cash into circulation of ZERO...Meaning not only did it not pump up the economy, it actually lowers future GDP increases.. All the Obama stimulus bill did was prolong an economic hardship and decrease any recovery in the future.. Even the CBO reports said this was true..
Quote:
Originally Posted by hotair2
There is no flaw. The fact is that banks and businesses are hoarding cash. Go to any reputable economic publication and you will see that this is true. The amount of money banks are holding as it relates to their required reserves has increased tremendously.
The fact that they are holding onto money, is because we have people like you suggesting we need to take it from them. They'd be foolish to run around spending their capital with suggestions like yours floating around..
In addition, the banks are holding money because thats what government wants them to do... Its how they are keeping the inflation down.. they pump capital into the banks, and tell them not to injest it into the economy..
Quote:
Originally Posted by hotair2
I am advocating creating a disincentive for those that have money to hoard. The best disincentive is taxes.
Why is it the left is always about STEALING other peoples money? Do you realize people who hoard money results in investment capital for companies to expand? Look at Wall Street, its a bunch of money being hoarded, but my hoarding of money results in jobs and company expansions.. You want these things to not take place?
Quote:
Originally Posted by hotair2
Increase taxes would force individuals and corps to reduce income by investing in the business, which increases transactions which increases velocity or pay higher taxes, which is then the govt. could put into circulation thereby creating transactions and velocity.
No it wouldnt because cash hoarding does not equate to taxes.. I can hoard all the cash I want but its only taxable if I reinvest it.. What you are asking people to do is to hoard more, and not invest, thereby decrease tax revenues..
The rich already pay most of the taxes. How about raising the taxes of the 47% who currently pay no income tax? This is a HUGE chunk of the population. If they all start contributing and paying their fair share of taxes it would bring in a lot of revenue and help with the deficit.
Easy mistake. You are confusing current economic conditions with long term economic conditions. Creating velocity has nothing to do with reducing the deficit, but I understand that is all people are programmed to talk about. No I am talking about creating jobs, which non of the politicians are talking about. You have two distinct problems...deficit and depression. There has to be a balance to deal with both. So far, the Fed has failed miserably at both and so has congress and the pres. To do what the TParty Republicans are recommending will decrease velocity to 1930's velocity rates which whill send us right to another great depression.
The lower 47% spend the vast majority of their discretionary spending. There is not a lot to be gained by taxing them more. The increase in fuel costs has pretty much decreased there discretionary spending. They are already creating velocity. It is the top 2 percent that have the most discretionary money to spend and who spend the least (transact the least) as a percentage. That is where it has to come from to increase velocity. It is simple economics. I know it may not jive with your political philosophy, but it is what it is.
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