When I speak of the velocity of money, to most people, it sounds like I’m speaking Klingon. People don’t understand how important this is when talking about capitalism and our economy. Will Rogers defined it best in an op-ed in 1932 when speaking to trickle-down economics,
“Mr. Hoover was an engineer. He knew that water trickles down. Put it uphill and let it go and it will reach the driest little spot. But he didn’t know that money trickled up. Give it to the people at the bottom and the people at the top will have it before night, anyhow. But it will at least have passed through the poor fellow’s hands.”
Question: So, why is it important for money to move through the system? Answer: Because the more hands that touch a dollar, the more that dollar is worth. An simple example of the velocity of money might better answer your question,
1. Farmer sells $100 of grain to the cattle rancher
2. The cattle rancher sells $100 of beef to the store
3. The store sells $100 of seeds and equipment to the farmer.
That $100 dollars was used to purchase $300 of goods as it goes through this scenario and let’s say it takes 3 months for this cycle.
So what happens if the cattle rancher decides to spend $50 in grain and banks the other $50? Now that $100 dollars in the economy is only worth $150. But, what about the argument that the bank will loan out the $50 they received from the rancher. True, but if their interest rate is 5%, it would take 10 years for it to double and twenty years for it to create the same value it would have in just 3 months.
Now the big question… So what?
In 2019, the ratio of CEO-to-typical-worker compensation was 320 to 1, up from 65 to 1 in 1969. The CEO can’t or want to spend all that excess money. He banks it or invests and the majority of that money moves much slower or becomes dormant for decades and the economy doesn’t benefit. When the government taxes the rich, it spends that money. It pays wages to government workers, buys military equipment, builds infrastructure, and most importantly, gives it to the poor. The poor then spend it and the velocity of money increases. And as Mr. Rogers said, by the end of the day, it will be back in the rich guy’s pocket, so he remains rich, but the money moves around the economy, making it more efficient like a wagon being pulled by more horses can move faster and further. To better prove my point, take a million dollars and give it to 1 CEO and another million divided among 300 poor and middle-class people (300 to 1 ratio). The 300 poor and middle-class people will buy more groceries, more TVs, more phones, more cars and spend more eating out. Way more! And, the economy grows faster and goes further.
Your next question is what happens if the current administration increases taxes? Good question. Let’s start with who is going to get a tax increase. Less than 2 out of every 100 Americans will get this tax increase (1.8%). That means that 98.2 will not see any tax increase. And what happens to the new tax revenue. Remember, the government spends the money it takes in. They pay their debt, pay wages, buy products, and most importantly, they create jobs with the money they spend. In the end, all of these expenditures benefit the same people that were taxed. And if people are making money, they spend that money. Once again, they spend it on food, on rent, on services, and on and on. And, where does that money wind up? In the pockets of the rich, corporations and their CEOs. So, why do they oppose increased taxes? Because a bird in the hand is worth two in the bush. They have the money, why should they have to work to get it back? The answer is, again, simple. Like everything in our universe, if something doesn’t move, it dies. Consider money as the blood in your body. If the blood accumulates in one part of the body, the rest of the body dies and if the money doesn’t flow through everyone’s hands, capitalism dies and what is left is a feudal system of financial monarchs and vassals.
Some people say that taxing and redistribution of that money is nothing more than a handout to those who didn’t work hard for it and truth be told, in many cases, that’s true. But, I consider it as an investment in the future. Like a corporation will invest in a new product. Some of those products work, but many don’t. That has never stopped them from investing. If companies don’t grow, they eventually go broke, A national economy is no different.
A Randumb Thawt:
So whether you are a working Joe, a business owner or a millionaire/billionaire, embrace taxation. You will all benefit from it. Remember the farmer, the rancher, and the store owner. Remember that $100 dollars and most importantly, remember what Will Rogers said.