Money Supply x Velocity = Total Money = GDP
This equation should be singed into the brain of every representative. Within it lies the power to understand our economic situation and derive meaningful solutions.
Money Supply: Our economic turnaround will not take place until we find balance in how we trade internationally. We are in an unsustainable cycle whereby, as consumers, we buy imports from countries that do not readily buy an equal amount of our exports. This imbalance sends money overseas and prevents us from churning through that money and increasing our overall purchasing power. As well, the banking sector needs to remain solvent, but we should not ignore the need to regulate the banking sector since it does indeed allow for the vital production of money supply.
Velocity: With $100, you can allow the purchase of $800 of goods and services if the velocity of money equals 8. Velocity is defined as the number of times money changes hands in a year. Money cannot change hands within this country if we continue to send it overseas as part of our larger effort to buy cheap imports and sink our own economy. Good job folks! You might want to check where stuff is made maybe. Nor can money change hands if it sits idle in the stock market or unproductive investment vehicles.
Total Money: Money supply and velocity work in tandem. The financial sector is having a rough time keeping money supply up. The government is trying to keep the financial sector solvent while boosting velocity. The Oregon Legislature wants a $175 million stimulus package to help create 3,000 jobs. There should be a Buy Oregon provision in that package in order to keep the money supply here in Oregon. No sense in spending money if we kill both the money supply and velocity by sending it overseas.
GDP: Having wealthy investors hold onto money is important since entrepreneurs can access that money to fund profitable ventures. At the peak of the economy, there was a definite lack of profitable business ventures. We call this oversupply of money an unproductive asset, and it manifested in high oil prices for example. Excess money was simply chasing a pyramid of price increases. Going forward, excess money is better taxed since it will reduce the overall systematic risk all investors face and it will prevent the manifestation of bubbles. The potential for future ventures to show profitability is also somewhat based off the risk free rate, which will rise if the U.S. government and municipalities overdose on debt.
Real Stimulus: As a society, we tend to favor letting wealthy individuals keep their money. But their money is created first by the banking sector and then grown through velocity. A long-term, mindful solution realizes that money vanishes if the banking sector fails or if velocity dwindles. Higher taxation of "idle money" will help to ensure velocity remains high and that money is available for the purchase of goods and services for all members of this society, including the wealthy. Taxation of productive money can decrease economic activity if it slows velocity, but we are not talking about that. Money acquired (not created!) by the government to use for economic stimulation is by definition idle money for which an investor has no other productive use. An investor will not loan money at 4% when productive ventures offering 15% exist. Those ventures simply don't exist at the present. In our current economic climate, there is definite idle money that should be taxed in order to boost velocity of that money. Instead of using this money on loan, taxation would be more appropriate since it is the government's use of that money that is ultimately trying to suspend GDP, reinvigorate productive ventures and ensure that wealthy individuals have access to money in future periods.
Is it better to lose $5 million in the stock market or provide the government with $3 million through taxation in an effort to suspend the remaining $2 million? A short sided person will not realize that the $2 million can only grow in future periods in a sound economic climate. We are short sided if we allow $5 million to fail because of an aversion to taxation. Let us tax idle money, put it to work here in Oregon, put Oregonians to work in the process and allow wealthy citizens to regrow any foregone wealth.
PS. I was the 2008 winner of the CFA Society of Oregon's forecast contest. I have a massive bottle of Apolloni Pinot Noir as proof as well as some other gifts. Our future looks incredibly bleak and unemployment will only worsen. Three thousand jobs are nothing and we are trying to create them using borrowed money! We need meaningful solutions as well as political will. We need to stomach higher taxes so long as those taxes move money along right here in Oregon.
To our future!