The Velocity of Money
As a kid, I remember asking my father: Why does the government print money?
He explained that if the government printed no money, then the same amount of money would just be passed around.
I stewed in this for a while. It explains the idea of money well.
Imagine I have $5000 and a plot of land.
I pay $5000 to my friend Grant, to build me a house.
Grant creates the house and then uses the same $5000 to pay Einstein to tutor his son.
Einstein takes the $5000 and pays me to teach him to rock climb.
Etc.
Grant, Einstein, and I have now all produced things we otherwise would not have because we were incentivised by money.
This isn’t a perfect model. Building a house, rock climbing, and tutoring are all more complex: our economy isn’t built by just singularly passing $5k around. There are taxes, gym passes, material costs, labor permits, yadda yadda, so the money flows to more than one person, creating a complex web. This demonstrates an interesting idea, however: Finite money can produce infinite value.
You could go so far as to say money isn’t real. It’s an abstraction, an incentive for people to produce things.
Things like printing money and quantitative easing are the Federal government’s tools that control how money drips through our economy.
Inflation incentivizes people to spend money since printing money dilutes your buying power. $100k 30 years ago ≠ $100k today, because the total amount of money in circulation has increased, so you own a smaller portion of the economy.
Banks also have a lot of control over the flow of money. They are one of the few actors in our economy (at least, in the USA) who can move money with 10,000% leverage (banks only need to be 10% liquid at any given time) while a typical investor who wants to margin trade is allowed a measly maximum of ~50% (with the exception of crypto).
Banks (the same ones bailed out in ‘08) are trusted to lend out money responsibly. They are in charge of financing: a powerful tool for our economy that fuels economic development. Energy infrastructure, for instance, would be even more challenging to pull off, if companies needed billions in up-front liquid capital, to invest.
That said, these actors also make mistakes. Poor underwriting led to the crash in ‘07-’08. The Federal government's over-indexing on inflation has caused a present-day recession.
So what’s a meaningful takeaway from all this?
I think the purpose of money is to be spent on productive assets (goods, services, information).
We can define the velocity of money as the volume of transactions and the people it goes to.
The more that money is passed from person to person, in exchange for productive assets, the more that money is employed as an incentive, and the more it produces value for our economy.
If x amount of money sits in a reserve for 1 year, it doesn’t produce anything.
If x amount of money is exchanged between 4 people for something productive, over the course of a year, it produces 4x as much for the economy.
The more people spend money on productive assets (goods, services, and information), the more our economy produces.
For this reason, it is important for both governments and institutions to incentivize spending more money.
On an individual level, it is also advantageous to invest in assets that predictably match or outperform the rate of inflation, so you aren’t losing buying power.
This is part of why I think working on global trade is a worthy initiative.
The easier it is to access the global economy, the more opportunities exist for people to spend and receive money in productive assets, leading to a more productive world.
In addition, if the direction of money is funneled into developing economies, the economy begins to produce things that improve their quality of life, security, and prosperity.
1 billion people live on less than $1 a day. Imagine the potential of improving their access to the global economy.
Just thoughts out loud…
On Life Philosophy
One thought I had in the last week is that often times getting to base competence is just about avoiding what not to do.
For instance:
The basics of charisma don’t require a charming smile and psychological seduction. It’s a lot more simple:
Don’t talk too much about yourself
Don’t act uncomfortable, insecure, or otherwise overly negative
Don’t give or accept any disrespect
If you can get these three down, you’re well on your way to making a new friend.
Getting to a 1200 rating in chess (generally regarded as an intermediate player)? Just don’t make obviously bad moves (ex. blundering pieces, not defending against a clear checkmate, etc.)
Want to live a healthy life?
Don’t eat junk or highly processed foods
Don’t do hard drugs (heroin, cocaine, etc.)
Don’t create a permanent impression of your 🍑 on the couch
And you’re good.
Notice none of these require proactive effort. They just require resisting some kind of imposing threat.
Of course, this doesn’t apply to everything. Sometimes, however, it’s easier to focus on what not to do to get from 0—>1, as opposed to trying to become an expert.
New Media:
What I’ve been listening to:
What I’ve been reading:
Steve Jobs’s autobiography by Walter Iacsacson - tons of little tidbits of crazy stories here. What happens when you mix a dictator with psychedelics, eastern spirituality, an inability to take no for an answer, an obsession with design, brilliant engineers and, and an absurd level of self-belief- a tale almost too unbelievable? I’ll follow up in the next few weeks with more specific takeaways.
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See you next week 👋,
-Satvik