The flow of funds

A client asked me last week why we couldn't all just not pay our bills for a little while, what was the big deal if people didn't pay their mortgages, rent, etc. Who is hurt?

It is by no means a stupid question, and it is one I think we have all thought about in recent months as we have hunkered into our homes and cut down on activities and -- usually -- expenses as we try to get through this thing.

Since I have never had any formal training in economics -- I wasn't easily able to lay my finger on the right term of art, which is the "quantity theory of money," which has lots of descriptions on the interweb. Here's how Sal Khan describes it.

But it is easy to sense some of its essence, because, on the one hand, we know that having wealth stored up, money in our accounts, food in our cupboards, lots of things around us, conveys to us a feeling of security. But it also carries with it risks: money in accounts can be stolen, the real value of assets can decline due to market changes or inflation, physical objects can not only be stolen but are subject to entropy, things fall apart if not used, food rots if not preserved, pets and infants piss and shit on things when we're not looking. I would be remiss today -- as Minneapolis burns after the death of George Lloyd from the knee of a casually squatting policeman -- if I failed to mention the problem of violence. What happens to a dream deferred? So there is an equilibrium point at which holding lots of things becomes itself a liability.

At the same time, we can all sense that when money is flowing in the community, wealth is being produced. You go out to dinner or a show, buy a boat or some other gewgaw, buy an insurance policy, give money to a charity or a present to a loved one, you're transfering money to someone else who can then use it and also is relieved of the necessity of dipping into their own savings to make their next transaction. So we can sense that there is something inherently good in the flow of money.

Moreover, it supports a more finely grained division of labor. Every time I bring in a specialist to do something rather than do it myself, I increase the probability that it will be done well and last longer, and it allows me to focus on getting better at things in my domain. This is why cities are great. Their value chains are more finely articulated. Same with globalization. Specialization supports productivity, therefore velocity of money does too.

But.... I could go on, but we are now well into the work day. There are always trade offs.