Congress has created a stimulus package, now it’s up to us to make it work.
While I was close to having enough credits to get an economics degree, I’m no economist. Please keep that in mind as I share some of what I learned that I believe can help us today.
In particular I want to discuss a concept called the velocity of money…something we need to understand to keep our economy as strong as possible during these challenging times.
Velocity of money
From 1980 to 1997, the velocity of money hovered around 7. Loosely translated that means each dollar introduced into the economic system produced $7 of revenue. I’ve chosen this period simply because it’s the time in which the velocity of money was least volatile.
Here’s an example to illustrate how the velocity of money works. You buy a can of vegetables which results in revenue for the:
- farmers who produced the vegetables
- canning company
- company that produced the metal cans
- mining companies that mined the ore to create the cans
- distribution companies along the supply chain
- grocery stores that carried the canned vegetables
- all of the employees involved in each stage of the process
The obvious question is “What does this have to do with our current state of affairs?” The answer lies in the need to overcome a natural tendency we all possess by virtue of our humanity…the desire to hoard.
In times of uncertainty, like what we’re experiencing now, our natural tendency is to hoard…as evidenced by the volume of empty store shelves. If we allow this natural tendency to hoard to extend to the cash stimulus payments we receive, we’ll reduce the velocity of money and, consequently, the ability for all of us to weather this economy.
To get the maximum benefits of the stimulus payments we need to spend as much of these payments as possible. If we hoard the cash, there will be more and more of our fellow citizens who’ll struggle to put food on the table or keep a roof over their heads. Conversely, the higher the velocity of money, the more we spend, the easier it will be for all of us to weather this crisis and the more quickly we’ll rebound into a healthy economy when the crisis ends.
Overcoming natural tendencies requires conscious effort. It’s natural to want to hoard during times of uncertainty, but that doesn’t make it a productive behavior. During any period of uncertainty, overcoming our natural tendencies typically works to our advantage.
I encourage each and everyone of you, when you feel the desire to hoard your stimulus payments, to make a conscious decision to spend what you can after you’ve covered your basic needs so that you don’t inadvertently add to others’ suffering. I know that you’d never do that intentionally. Hopefully the information I’m providing will help avoid doing so inadvertently.
For our kids
Take this opportunity to help your kids understand the consequences of hoarding in any form. As they learn to balance their needs with the needs of others, they’ll become even greater assets to society.
I love hearing your thoughts and experiences, please share your thoughts below.
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