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If, for example, in a very small economy, a farmer and a mechanic, with just $50 between them, buy new goods and services from each other in just three transactions over the course of a year
A farmer spends $50 on tractor repair from a mechanic.
The mechanic buys $40 of corn from the farmer.
The mechanic spends $10 on barn cats from the farmer.
then $100 changed hands in the course of a year, even though there is only $50 in this little economy. That $100 level is possible because each dollar was spent on new goods and services an average of twice a year, which is to say that the velocity was 2 / year. Note that if the farmer bought a used tractor from the mechanic or made a gift to the mechanic, it would not go into the numerator of velocity because that transaction would not be part of this tiny economy's gross domestic product (GDP).
originally posted by: musicismagic
I just have to go to the grocery store to see how the market is in real time. Money is in short supply, high prices, 1 and 7 children in Japan live in poverty. That's the real market crash and its right in our face today, not tomorrow, but today.
originally posted by: incoserv
a reply to: SleeperHasAwakened
One of the best, most informative and well composed posts I've seen here. Thank you.
In response to your above reply: I think of money as just another fungible commodity and like any commodity, an over-abundance means a diminishing of its value.
If there are too many tomatoes or automobiles or widgets in the market, their value goes down because demand doesn't match supply and owners are more willing to part with them. The same happens with the money supply. The "quantitative easing" caused a glut in the supply of money and lessened its value.
originally posted by: Ksihkehe
a reply to: SleeperHasAwakened
Very good post S&F.
We've been in a liquidity crisis for some time.
The solution of sending more government funds into "too big to fail" industry is just accelerating the crisis. When the overall economy is showings signs of collapse the "too big to fail" industries always end up taking in tax money and we've been pumping money into them for ages now. The people on the top will extract this money shortly after they no longer get their corporate welfare payments, the system will collapse, and we get another cycle.
At this point it seems like we already have a corporate universal basic income, with select industries getting government safety nets while citizens are supposed to somehow reap benefits from these corporate sponsorships.
I think they're essentially incapable of fixing the disaster they helped fuel. We'll be dealing with ever more frantic, useless, and desperate measures to try to regain some semblance of control. The crash will be historic, they'll all point fingers, then we'll get right back to doing it all over again. Central bank digital dollars will help liquidity, but without fixing the system on top of it there will continue to be cycles of catastrophic failure and hoarding money at the top will continue to cause liquidity issues. We can't funnel the money supply into a handful of companies and expect otherwise.