Why Politicians Keep Telling Us to Spend, Spend, Spend!!!

“You want answers? I think I am entitled. You want answers?! I want the truth! You can’t handle the truth!” – From the movie “A Few Good Men”

The truth is that 70% of spending done in the US is done through consumer spending. I imagine the percentage is similar in other countries as well. Politicians tell us to spend because it’s practically become the last hope of the economy. Problem is that we are near the end of our means…

…or over our means. We keep using the future to pay for the now. Thing is the future is now. Our day of reckoning has come and we have to deal with it.

There is a little known concept in economics that is often called the speed of money. Sometimes it is also called money velocity. Basically it is how fast money exchanges hands.

Most of our economy is based on that speed. To use an analogy, think of the air inside a hot air balloon. The hotter the air, the faster the particles move inside the balloon, and the higher it rises. As the air inside the balloon cools, those particles move slower, and cause the balloon to go down.

How does this apply to the economy?

Money for the past 15 or so years has been moving at an alarming rate. Money has moved into and out of stocks, real estate, commodities, overseas businesses, and back again faster than it ever has before. Money moves from business to bank account to credit to bank and back into business again in one big circle. The money supply is continuously recirculating. One of the main reasons our economy has done so well in recent years is that money has been circulating very quickly.

If the money is out there, why is it bad if it is moving slowly? Glad you asked.

Consider it this way. Hypothetically you could use money in your savings account to buy a car, and then the car dealership buys another car from the manufacturer. Let’s say this process happens over the course of a year. That means we have two purchases in a year’s time. This helps make the economy bigger.

Now let’s say because of the economic situation you hold off till next year to buy that car. So now the dealership misses a purchase and the manufacturer misses a purchase. That is a loss of revenue for both of them. When this happens with enough people those companies suffer, and have to start laying off people. They might possibly go bankrupt.

Meanwhile, had you kept your money moving along like everyone else we wouldn’t have layoffs and a recession to deal with. Thus, the politicians ask you to spend more faster…

Is it starting to make a little sense now?

Of course, this is all hypothetical, and you probably don’t have that money in savings do you? And we are talking about a car purchase. A rather infrequent purchase for most people.

Let’s do one more example with food. You buy food everyday, either at the grocery store, or through a restaurant. Think how fast that money is moving! Sure it is a smaller amount, but it adds up. What happens when you spend less on food? If everyone’s doing it, eventually those companies will downsize too. And the economy right with it.

So we spend less and the economy suffers?

Yep, that’s what I am saying.

So should we spend more?

Nope, I’m just helping you understand why politicians do what they do. They aren’t as dumb as you think they are. Or as dumb as the media makes them out to be.

As I have stated previously, the money is out there folks. There isn’t any less of it, and the government keeps creating more. What we are lacking is money velocity and my other favorite concept, value creation.

The good news?

If we increase the speed of money again, and/or create more value in our economy, then we will prosper.

The even better news?

You are in control. It’s up to you to spend more or create more value. That’s about as simple as it gets…

Conclusion Questions

What are your thoughts on the economy before reading this?

What are they after reading this?

Does this all make sense?

Do you think I am right or wrong? And why?

What different actions will you take after reading this?