Economy Part 4 - Money Velocity and Debt
Science has played an important part in my life. In college I studied chemistry and biology and came to find an interest in science as a whole. This last week LIGO, (Large Interferometer Gravitational Observatory) with one gravitational wave detector in Louisiana and another in Washington State, announced that they had detected gravitational waves. These waves were predicted by Albert Einstein in his theory of general relativity in 1916…yes, one hundred years ago. These waves were propagated by the collision of two black holes, which is the other half of the discovery, demonstrating Stephen Hawking’s work. Kip Thorne of Caltech, a co-founding member of LIGO described the cultural importance of this finding. "When we look back on the era of the Renaissance, and we ask ourselves, 'what did the humans of that era give to us that is important to us today?' I think we would all agree it’s great art, great architecture, and great music. "Similarly, when our descendants look back on this era, and they ask themselves, 'What great things came to us?' … I believe there will be an understanding of the fundamental laws of the universe and an understanding of what those laws do in the universe, and an exploration of the universe," Thorne added. "LIGO is a big part of that. The rest of astronomy is a big part of that. And I think that cultural gift to our future generations is really much bigger than any kind of technological spin-off, than the ultimate development of technology of any kind. I think we should be proud of what we give to our descendants culturally."
Money gives us the opportunity to trade labor for resources and the more money one has access to the more resources can be obtained. Money also gives us the ability to access resources to enrich the lives of the collective society such as art or, as the example points out, scientific research. For the past several hundred years it has been the case that each generation has raised their standard of living. This rise was slow at first, but since the early 1900’s has accelerated and this rise has occurred with a dramatic rise in throughput. At this point in time virtually every country has increased their money supply to either pay for the resources they have already used or to get the flow of resources going again (stimulate the economy).
What if we lowered our throughput all over the world and still kept an average standard of living for everyone? It sure would look different. As hard as we try to live an individual lifestyle we are contained by the invisible laws of our global cultural paradigm. If we are to make a major change we definitely have to reassess what success looks like. We all want to be successful at what we do in life; however, there is now an abundance of disillusioned and disenfranchised people worldwide. Many hold little hope for the future and the result is violence, drug use, or just dropping out of society. This growing segment of the population cannot afford the cost of the throughput needed to keep up with our societal norms. We are all different and some are driven and want to be rewarded for their success whereas others are not so driven but still want a meaningful life. The main question is, what would the success of the ones who work harder, or on the other hand, the ones who lead a simpler lifestyle look like? For a start their incomes may look very different. Some would earn more money than others unless everyone earned the same amount. In the case of everyone earning the same amount there would be no incentive to work harder at a time when many global problems exists and need us to work more, not less. If there are people who earn more, what could they do with their extra money? To answer this question it may be helpful to first take a look at money velocity.
Simply put, money velocity is the number of times one dollar is spent to buy goods and services per unit of time (Wikipedia). In our high throughput culture when money velocity is high the flow of resources are also high. At the time this article is being written (Feb. 10, 2016) money velocity has dropped to a critical low point at a time when the shipping of global resources (including raw materials and finished goods - BDI) has also dropped to very low levels. Let’s investigate two examples of how the flow of money can happen.
Science has played an important part in my life. In college I studied chemistry and biology and came to find an interest in science as a whole. This last week LIGO, (Large Interferometer Gravitational Observatory) with one gravitational wave detector in Louisiana and another in Washington State, announced that they had detected gravitational waves. These waves were predicted by Albert Einstein in his theory of general relativity in 1916…yes, one hundred years ago. These waves were propagated by the collision of two black holes, which is the other half of the discovery, demonstrating Stephen Hawking’s work. Kip Thorne of Caltech, a co-founding member of LIGO described the cultural importance of this finding. "When we look back on the era of the Renaissance, and we ask ourselves, 'what did the humans of that era give to us that is important to us today?' I think we would all agree it’s great art, great architecture, and great music. "Similarly, when our descendants look back on this era, and they ask themselves, 'What great things came to us?' … I believe there will be an understanding of the fundamental laws of the universe and an understanding of what those laws do in the universe, and an exploration of the universe," Thorne added. "LIGO is a big part of that. The rest of astronomy is a big part of that. And I think that cultural gift to our future generations is really much bigger than any kind of technological spin-off, than the ultimate development of technology of any kind. I think we should be proud of what we give to our descendants culturally."
Money gives us the opportunity to trade labor for resources and the more money one has access to the more resources can be obtained. Money also gives us the ability to access resources to enrich the lives of the collective society such as art or, as the example points out, scientific research. For the past several hundred years it has been the case that each generation has raised their standard of living. This rise was slow at first, but since the early 1900’s has accelerated and this rise has occurred with a dramatic rise in throughput. At this point in time virtually every country has increased their money supply to either pay for the resources they have already used or to get the flow of resources going again (stimulate the economy).
What if we lowered our throughput all over the world and still kept an average standard of living for everyone? It sure would look different. As hard as we try to live an individual lifestyle we are contained by the invisible laws of our global cultural paradigm. If we are to make a major change we definitely have to reassess what success looks like. We all want to be successful at what we do in life; however, there is now an abundance of disillusioned and disenfranchised people worldwide. Many hold little hope for the future and the result is violence, drug use, or just dropping out of society. This growing segment of the population cannot afford the cost of the throughput needed to keep up with our societal norms. We are all different and some are driven and want to be rewarded for their success whereas others are not so driven but still want a meaningful life. The main question is, what would the success of the ones who work harder, or on the other hand, the ones who lead a simpler lifestyle look like? For a start their incomes may look very different. Some would earn more money than others unless everyone earned the same amount. In the case of everyone earning the same amount there would be no incentive to work harder at a time when many global problems exists and need us to work more, not less. If there are people who earn more, what could they do with their extra money? To answer this question it may be helpful to first take a look at money velocity.
Simply put, money velocity is the number of times one dollar is spent to buy goods and services per unit of time (Wikipedia). In our high throughput culture when money velocity is high the flow of resources are also high. At the time this article is being written (Feb. 10, 2016) money velocity has dropped to a critical low point at a time when the shipping of global resources (including raw materials and finished goods - BDI) has also dropped to very low levels. Let’s investigate two examples of how the flow of money can happen.
Example 1
In example number 1, person A spends their money on a product with high throughput production costs. Much of the money is passed on to other countries and does not remain locally. How do these other countries utilize their dollars?
In example number 2, person B starts out with an equal amount of money as person A, however chooses a low throughput path to acquire the desired material goods, such as a house or car. The money saved in a low cost/ low impact lifestyle can be spent on hiring others to build such a lifestyle.
In example number 1, person A spends their money on a product with high throughput production costs. Much of the money is passed on to other countries and does not remain locally. How do these other countries utilize their dollars?
In example number 2, person B starts out with an equal amount of money as person A, however chooses a low throughput path to acquire the desired material goods, such as a house or car. The money saved in a low cost/ low impact lifestyle can be spent on hiring others to build such a lifestyle.
Example 2
In the second example the money velocity increases and the resources available helps more people. Person B can actually know person C and D (laborers that are paid directly by person B) and personally see how it financially helps them. If money velocity is coupled with a low throughput system then money velocity could rise independent of resource flow. If Person B is wealthy, it would be important he/she set the stage for the rest of the chain reaction. As Person B purchases the material goods she/he must consider the whole system. If this concept is new to person B then the first person hired is one with that knowledge and skills. I personally known several people struggling economically who can set up low throughput systems for households but there is little demand for systems that use less.
This lower throughput system has already begun to take hold within the business sector in value added products. When I first moved to Vermont I went over to see Butterworks Farm owned by Jack and Anne Lazor. When I arrived it was getting late and Jack wanted to give me a tour of the barn. I’ll tell you, he was as excited about showing me the barn as one could get. In fact he was so excited that I don’t think he noticed that there were no lights on and I couldn’t see a thing. Occasionally he’d say, “Don’t walk over there, it drops off three stories”. After the tour we began to talk and I found out that he makes sure the soils on the farm are fertile (in the years to come I would learn an incredible amount about soil), the farm then grows much of its own feed and hay to feed the small herd of cows, they then milk the cows, collect the milk, produce yogurt from the milk, and then deliver the yogurt. During each stage in the yogurt production local labor is needed. I ended up working part time for Jack and Anne for a few years and learned so much from them. Years later, Jack and Anne remain good friends and I came to realize that back in the early years they were definitely more worried about the health of the soil and how a farming system operated than any liability concerns. I also became friends with Laini and Barry, who live near the Lazors. Their farm is much smaller than Butterworks, however they have a similar model of value added production, developing a herd of goats, making cheese from the goat’s milk and working to have a self-sustaining farm. Back then ,about 25 years ago, I don’t think that the “value added” term was in existence. It was just an idea percolating in the minds of a few who were making it manifest.
Debt is an issue that our culture pushes beyond the view of consciousness. To get a good picture of where we are presently go to usdebtclock.org (and I do mean presently, as this website gives a running clock of fiscal data). As of February of 2016 our national debt is over 19 trillion dollars and according to the Congressional Budget Office it could climb to over 27 trillion dollars in ten years. At present each US citizen, including children, owes over $58,000. These figures do not include state, local, and personal debt. Debt is another way of saying that we will work in the future for the resources and services we enjoy today. On top of this exploding debt is an even more seldom discussed issue: unfunded liabilities – the amount, at any given time, by which future payment obligations exceed the present value of funds to pay them (InvestorWords). In other words, on any plan made for the future, the amount of debt is not covered by the present day assets. This is an important distinction because if the value of the assets decreases in value then the true cost of unfunded liabilities will go up. Examples of unfunded liabilities are Social Security, Medicare, Medicaid, and Obamacare which collectively make up about 47% of our yearly national expenditures. Estimates of our unfunded liabilities, range from the astronomical 101 trillion dollars to the beyond astronomical 210 trillion dollars. If we use the low figure of 101 trillion dollars then each person would be responsible for over $845,000. The Republicans explain how to deal with the problem of the unfunded liabilities and national debt is to cut programs while the Democrats want to raise taxes to pay for the social programs imbedded in our rising debt. Two things are very unfortunate. First if we drastically cut programs and raise taxes under our present high throughput system, it will not be enough to pay for the unfunded liabilities. The second unfortunate reality is that every country in the world is running up its own debt. The older population has been benefiting under this system which brings me to one of my favorite quotes: “It is difficult to get a man to understand something when his salary depends upon his not understanding it”, (Upton Sinclair).
I started paying attention to a Serbian-America economist by the name of Branko Milanovic. Branko, who worked for the World Bank as a leading economist in the research department and who is currently a professor at the City of New York Graduate Center, has written several books on global inequality and the data is astonishing. Presently the people of the United States are starting to be upset at the inequality we have in this country but we tend to ignore the larger global perspective. If you were to think globally about your economic standing, or where people you know place in the global economic ladder, it is quite startling. Branko points out that 60% of your income is determined at birth, are you born into a wealthy country or a poor one? Another 20% depends on if your parents are wealthy or not. This factor leads to where you live, where you go to school and, if, and where, you go to college. These two factors are the major influences on how much a person earns. How much effort or how much one works has little effect on income. He also points out that the poorest people in the US, earning between 3 and 4 thousand in internationally adjusted dollars, are above the 60th percentile of people in the world regarding to wealth. Since the location is the major influence of income migration from a poor nation to a richer nation is the way to increase a person’s income. The Haves and the Have Nots – Branko Milanovic. According to the Global Rich List if you earn more than $32,400 per year you are in the top 1% of the richest people in the world. While we see economic progress in technology that we have come to depend on, we fail to take notice that according to Amnesty International there are many children, some as young as 7, making two dollars a day are in tunnels mining the cobalt used in our lithium ion batteries for our technology. Unicef estimates there are 40,000 children in the region of the Democratic Republic of Congo mining for cobalt Has our society not taken notice that some are greatly benefiting while others are withering?
These concepts have helped me with imagining a world in which we have time to laugh, especially at our failures, time to teach one another, time to explore the world, time to eat healthy and exercise, time to … I could go on. It seems that this time gets shorter as our debt rises. Great breakthroughs come about through imagination.