The other day I chatted to a man who knows a thing or two about managing bands. He was talking about the dance hall scene in Ireland in the days before world domination. He told me that there was no drink served in the dance halls so, in most cases, the lads went drinking until the pubs closed and the dance didn’t really start until closing time. Meanwhile, the girls who, in the main, didn’t go to pubs, waited for the lads for the thing to kick off.
Apparently, in the dance hall days lads had two grades of ‘dates’ with a girl. In the first, you met her ‘outside’. This meant you paid for her to get in. The other one – a cheaper date – was where you told the girl you’d meet her ‘inside’, in which case she had to pay her own entrance. Obviously this was a less committed affair.
He also told me about the key difference between managing bands in the dry dance halls and then later in the 1970s, when people started to serve drink in dance halls and clubs. By the time a band was paid in these later clubs, which was well into the night when the gig was hours over, the money actually stank.
This is because the same fivers and pound notes had been passed back and forth across the bar loads of times before they eventually settled in the till for the evening. It was those filthy fivers, soaked in stout and sweat that were doled out to the band at the end of the gig.
The manager then had to lodge the filthy lucre in the bank the following day. He explained the process of pressing damp fivers on the counter of the banks to the disdain of the coiffed and buffed tellers of the day.
The smelly money concept struck a chord with me, because my granny had a small pub in Cork, and I also remember she’d ask us – her grandchildren – to count out the takings at the end of the night. This was a source of great excitement. We’d never seen so much money before.
However, the smell of the stuff nauseated me. Like the band manager’s fivers, these fivers and pound notes on a busy night crossed the bar and the card tables loads of times and, in the end, it would be a sodden, dank Lady Lavery that peered out of the note at you.
The riddle of the dirty fivers holds the key to the Irish economic recovery because it explains one of the most important concepts in macroeconomics. What the music man described in his memories of the filthy, stinking money moving over the bar, back and forth, is a perfect example of what economists call the ‘velocity of money’.
The velocity of money is the number of times money changes hands in an economy. In economics, the velocity of money is crucial because GNP should be equal to the money supply multiplied by the velocity of money – or the amount multiplied by the amount of times that money changes hands in the economy.
In a boom, when everyone is spending and transacting, the velocity of money should shoot upwards: because the more we are trading, the more money is used.
The music man was describing a boom. In the mini-economy of a dance hall, it would be close to recession with few people spending and everyone waiting until closing time. The place filled up and then the period from 11pm till 3am was the perfect example of an economic boom.
The velocity of money in the club went from zero (the recession) to rapidly going through the roof (the boom) as everyone thronged the bar and spent money. Likewise, my granny’s bar had a boom from 10pm to 12am on a Friday night. Money changed hands and the till stank.
Then, on Saturday afternoon, when only the local diehards and bachelors with nowhere else to go and who drank slowly were in the bar and you could hear the clock, the velocity of money collapsed and the bar was in recession.
So, we know that velocity drops during a recession. The velocity of money in Ireland was rising up to the moment the economy really turned down in early 2008 and has collapsed since then.
What should a central bank do when the velocity of money falls? It should orchestrate an off-setting increase in the money supply to try and overcome the effects of the business cycle. If velocity falls, then money supply must rise for national income to grow.
The central bank should attempt to jump-start the economy back into growth by increasing the money supply. This is what the Federal Reserve is doing in the US.
What is happening here? Well, the Central Bank of Ireland isn’t capable of jump-starting the economy in any material or independent way.
Equally, as Ireland has been suffering a liquidity trap, where banks don’t want to lend and people don’t want to borrow, the velocity of money will head downwards – as it has done – and the ability of the Central Bank to kick-start the engine is limited.
However, the good news is that it seems that the velocity of money might have started to stop falling and may be stabilising of its own accord. The velocity of money collapsed in the past five years of recession.
Like a bar with no customers or customers who used to drink quickly and now drink slowly, the money didn’t change hands quickly across the bar. So yes, the bar was open, but the trade was awful and when the band came to get paid, they got paid less and the money was clean and crisp. But unused money isn’t half as potent as used money, so as the velocity fell, so too did the number of transactions and the level of activity – the bar’s nominal GNP.
Now, we are seeing the velocity of money stabilising as people are spending a bit more. The velocity of money is a more important leading indicator than many others. Taken together with the firming of tax revenues, better retail sales and house prices stabilising, suggests that the economy might bounce along the bottom from here.
Let’s see how we go. There are huge debt deflation issues yet to be solved and enormous potential for the economy to slide backwards, but the velocity of money plateauing is new and reassuring.
The ancient Romans had an expression: pecunia non olet – money doesn’t stink. No matter where it is made, it is still cash and its provenance can’t change its value. If a few more filthy, smelly fivers were changing hands like in a 1970s dance hall, it wouldn’t do anyone any harm in 2013.
David McWilliams’ new book The Good Room is out now.
Subscribe – get in there my son.
Im of a mind that better retail sales dont exist at present, I said before I think pent up frustration and a dire year both weather wise and financially, folks had themselves a good Christmas to blot out the depressing reality of what is yet to come and what has been. Im an optimist however and will welcome any positive growth in the economic sitch. Much like the Republican who wants the Democratic President to make the country better not worse. Its like the old saying, “when someones candle burns out in a room, your candle does not burn brighter… Read more »
I will acocmpany one set of Asian investors to Ireland soon who are convinced that indeed the bottom has been hit. In their mind, the bond markets have been shaken out, and once that happens the recovery starts again. The Franklin Templeton bond investment got them thinking. And then a series of positive FT articles. Much berating is done on the “up-spin” done by politicians, but it is smehow part of the process. when the guff is matched by the markets, then the money starts coming back in again. Love it or hate it, we have turned the corner. Good… Read more »
Some day you will have to realise the Central Bank is not the engine of the economy, it cannot kick start it and it only slows down recoveries and accelerates the ruin of the good times! You love this idea of printing, but this very idea is the enemy of innovation and the creative destruction you think is a good idea within the economy so that it serves society by providing for the population at large through the success of good ideas and the purging of bad ones. Funny money is one of the many problems that exist that people… Read more »
D – Day Feb 15th , 2013 Will Bernanke Smile ? Will the diehard people seek credit in their pub to buy a drink to forget their woes ? Is this negative Velocity ? Will smelly fivers be replaced by coupons and loyality cards with personal credit ratings attached ? Gold Confiscation USA Style In 1933, 48 Stat 1, of the TWEA ( Trading With The Enemy Act ) was amended to include the United States Person because they wanted to take our gold away. Executive Order 6102 was created to make it illegal for a U.S. Citizen to own… Read more »
Klondyke sur Hibernia
In those days of old the Velocity of Cash was enhanced due to the then poor tax regulations and collection procedures in force and the then enormous black economy and of course there was no sex then .
All this article really points out is the disgrace of centrally controlling anything: 1. Grown adults couldn’t go and drink when and where they wanted. 2. Women could have a pint down the pub…that being a whole other issue! 3. The smelly fivers the band are playing for, the punters work for [hopefully these are not welfare fivers], and the publican hopes to attract are in danger of only being smelly 4.50€ next year if the print-a-ton 10% inflation bank gets its way! Real adults don’t need central planning. Only babies who cannot compete, are afraid of competition, and who… Read more »
Property Taxes ( sorry off topic)
This is an interesting reading to explain why :
USA
In 1933, there was a second United States bankruptcy. In the first bankruptcy the United States collateralized all public lands. In the 1933 bankruptcy, the U.S. government collateralized the private lands of the people (a lien) — they borrowed money against our private lands. They were then mortgaged. That is why we pay property taxes.
This helps to explain our national bankruptcy clearly.
Where McWilliams says, “What should a central bank do when the velocity of money falls? It should orchestrate an off-setting increase in the money supply to try and overcome the effects of the business cycle. If velocity falls, then money supply must rise for national income to grow.” No, no, no, no, no. McWilliams continues… “The central bank should attempt to jump-start the economy back into growth by increasing the money supply.” No again. This is what the Federal Reserve is doing in the US for the last x years. How successful has that been? All they are doing is… Read more »
The Latin word for money is “pecunia” from “pecu” meaning “flock” of cattle or any other domesticated animal, which was the measure of wealth and the medium of exchange in the ancient world.
“pecunia non olet”? Did a flock of goats stink? Oh for the sweet smell of cattle, goats, pigs, any flock of livestock, because people are the livestock of today’s economy. It is called “market share”.
Commercial media is its feeding lot. And boy does IT stink!
[…] […]
David and Co,
At this stage of the game I think we all have grasped the concept of who ,what ,why ,when this all became a giant clusterfuk.I think the question is now HOW do we get ourselves out of this mess in a practial way??Preaching to the choir isnt going to do it anymore..How do we get these ideas over to the concreted headed ones that rule our lives??
Subscribe.. Good article David.
Since they did not serve drink the ballrooms and the females travelled from home to the ballroom how did the money stink??????Why mention the ballroom, why not just say the money that the barman got paid with was smelly… Seriously David In the 60s and 70 before IT all money stank, it was the only money in use and the stink of had nothing to do with the speed it travelled at, remember concord had not yet been in service. It was the maturity of it that caused it to become putrid like a mature cheese…People stashed their money in… Read more »
Jesus,
Serious sense of humour bye-pass here today. Loosen up everybody.
David
Interesting article as usual. Firstly we have this concept of the “velocity of money”. Actually there is one set of circumstances where the velocity of money goes bonkers and that is in an episode of extreme inflation. In Adam Ferguson’s book “When the Money Dies” (good read if a bit depressing) about the extreme inflation in Weimar Germany in the early 1920’s he tells about the men being paid twice every single day at their workplace. They would then go outside and give the money to their wives who would sprint to the shops to spend it as quickly as… Read more »
I read that article, and all that I could think about was the question “What about the cost of the HSE ? ” Ireland’s alcohol consumption creates lots of dirty money, but it also creates ruined lives, chaos in the A&E units, accidents, “one day flu”, absentee-ism, presentee-ism, and the “drinks cabinet”. In other words, behaviour breeds economic consequences, and results. And Ireland is in an almighty hangover. Well, any way as far as I understand it this is the story of an allegory. We have government ministers trying to talk everything up – essentially behaving as if the cure… Read more »
When debts have to be serviced, this has a massive effect on the velocity of money.
I am a computer programmer and electronics man by trade and I’ve learned since I came to this blog. I have learned not a lot about Economics but instead learned more about myself In my game there is always scope for creating engineering wonders and the fact that we have made the oracle of the internet available to most of mankind is perhaps the greatest achievement of our generation. We are not totally useless and we are brilliant at art, logic, science and engineering. Perhaps a bit too clever for our own good you might say David is suggesting we… Read more »
D Low Low Low Point
When Velocity of Cash reduces so low it is never lower at that point appears stamps, coupons , local parish currency ,IOUs , Soup Kitchens, Local Meitheal Organisations ….and Irish Dancing .
Back in the 60s it was possible to save for the deposit on a new home over a few years, your money held its value; there was little or no inflation. Property prices held steady. Today, savers and pension funds are financing the 1%, after inflation there is little or no purchasing power left to the benefit of the saver, under the current circumstances saving fiat money is a fool’s game. The govenments pension fund plan is nothing but a sick joke. An average worker in the 60s paid approx. 25% of his monthly salary on his mortgage, in a… Read more »
“Dirty Money”? The entire global bankrupt banking sector is living of seriously filthy money – drug laundering. Dope Inc, documents this over decades (and since HSBC’s founding), but Russia’s Drug Czar Ivanov’s clear presentation of the latest data shows how the stink permeates the sector. We are talking about $500+ BILLION per year. That “credit” has not gone to create 1 single job. Most here prefer to concentrate on clean “fiat” and shiny Gold, but filthy small-bill bales are one huge part of banks (HSBS was caught with tons!). Now a few pints of plain are not narcotics, but I… Read more »
Very interesting themr emerging over the last few weeks. Posters give topmarks to DMW for articles written and then set to state their disagreement. Today I would venture to say that if we all met with David in that pub and had liberated a few smelly bank notes you would see the following. David has his back to the fire. All of us posters pressed around five deep. “Jesus, guys where’s your sense of humour.” If David tries to back up his arse is burned but if he tries to leave he has to bust out from and through all… Read more »
One way to be rid of smelly money is to use honest money. smelly money is issued as already stated as a debt on which interest is charged. Taxes nut be levied to pay the loan and interest. More smelly money must be printed as a debt to have the money to pay the interest. Vicious downward spiral designed to enslave us all. Designed not happenstance. Let us use proper coin. It is not a debt but an asset. It has no counterparty risk. If left in the pocket to go through the laundry it is not ruined but revitalized.… Read more »
Thanks Tony,
A thermometer would help.
Glad I never tried using
a barometer on my sick children.
I read it , thought about it…read it some more…thought again……read the posts…thought some more……then David says “lighten up guys..! sense of humor etc etc etc ?. Than I realized the screen on my laptop is dirty…..didn’t bother to clean it……..thought about it………than didn’t bother…….did think about it though..! Had a cup of tea , some brack..very nice ! Read the article again……thought about my sense of humor…? lit a cigarette…….[ gotta give them up ] thought some more…”this article is in the Sunday Business Post..? they don’t have a sense of humor”? still thinking……smelly money….Hmmmmmmmmmm… Velocity of money…..? “throwing… Read more »
“The move up to $1,750 was accompanied by some rally in the gold stocks. The first move the stocks went up something like 35%. Then we get this pummeling going on that is totally orchestrated, and people lose their nerve on these things. “But with all of the data that has available to them, with some simple analysis of where we are, I mean we are in the biggest Ponzi scheme of all-time. We are just printing money and people have to realize it’s not a winning proposition. “We have been doing this since 2008. We get program after program.… Read more »
Monetarism gone mad. Hyperinflation not far behind The Trillion Dollar Coin by Joel B. Pollak 6 Jan 2013 The trillion dollar coin is now apparently being taken seriously as an alternative way for the Obama administration to cover the gap between borrowing and spending by simply adding to the resources of the U.S. Treasury, and without convincing Congress to raise the debt ceiling. Through a legal loophole that permits the government to mint platinum coins, President Barack Obama could produce a $1 trillion platinum coin, and bank it… -END- Some chatter from our guys on that notion. Dave from Denver…… Read more »
The following is a government health warning issued by the HSE — RECESSIVE BUGS IN PUTRID DRUNKEN MONEY CAN BE ACTIVATED WHEN IT TRAVELS AT VELOCITY AND THIS BUG CAN HAVE SERIOUS HEALTH ISSUES RESULTING IN CHRONIC RECESSION THEREFORE THE MAXIMUM SPEED LIMIT FOR MONEY WILL BE INVERSELY PROPORTIONAL TO THE NUMBER OF PUNTERS ON GRAFTON STREET AND OR THE NUMBER OF DRUNKEN BALLROOM DANCERS.
oops redriversix
Article concludes on house prices stabilising; in this scenario a bad thing though thanks to NAMA rigging the property market, putting an artificial floor underneath – blocking the supply and demand real price equilibrium and so preserving the status quo!
Great explanation of the velocity of money!!
This can’t be true
LaRouche’s campaign platforms
The campaign platforms of LaRouche and his followers have included these elements:
A return to a gold-based national and world monetary system, and fixed exhange rates;[13] and replacement of the central bank system, including the U.S. Federal Reserve System, with a national bank;[14]
I had no idea that LaRouche advocated a GOLD standard bon bon. Does that mean you are secretely one of us or is the statement untrue.
http://en.wikipedia.org/wiki/Views_of_Lyndon_LaRouche_and_the_LaRouche_movement
The Triple Curve Revealed The “Triple Curve”, or “typical collapse function”, is an economic model developed by LaRouche which tries to illustrate the growth of financial aggregates at the expense of the physical economy and how this leads to an inevitably collapsing bubble economy. According to the China Youth Daily Online interview, LaRouche’s main point is that the real economy (production) is dropping while the nominal economy (money and financial instruments) is going up. As the nominal economy greatly overreaches the real economy, an unavoidable economic crisis ensues. Sounds just the same as the Austrians. What do you know? Does… Read more »
DMcW said lighten up! So here is a tale from Hell : Daily Telegraph’s Cartoon Financier Alex Brings Down the ‘Entire Moral Fabric of the Universe’ Jan. 7 (EIRNS) — In another stark — and this time very ironic — warning from London on just how bad the world financial situation really is, the Daily Telegraph‘s long-running cartoon character, the City of London-banker-from-Hell Alex, manages to blow out the Bank of Hell in the conclusion of a recent cartoon series which combines the stories of Charles Dickens’ A Christmas Carol, the movie It’s a Wonderful Life, and H.G. Wells’ Wings… Read more »
Hi David, First the niceties. Happy new year to you. Thank you for providing this forum and affording me the opportunity to post freely here my thoughts etc. Now for the robust bit. My new year’s resolution is to take no prisoners since this year will be when the real recession begins. Last year we had the phoney recession just like at the start of WW2 when Germany and Britain were dropping leaflets on each other for the first 6 months. The real recession will start this year when one working class and middle class family after another is liquidated… Read more »
Yep, Im pretty certain most y’all missed the point of this article.
Agree with you Michael and love the analogy re increasing the money supply in the bar.
The only way to demonstrate elusive economic concepts such as fiat money creation, inflation etc is to imagine a small closed world (ie a village with 10 people in it) and to build your economic model from there. This shows you the macro effects in real terms of such things as creating money from thin air, interst (usury) etc…
Happy new year
David may well be right Inflation sadly will put the spending in line with our real wealth it’s in the tea leaves / is it inevitable part of the cycle.
Or can we be saved by this blog with some of the suggested changes the monetary system?
The young are blaming the old well I one of them near old who look upon the younger people and wonder what their expectations are….
Yes Michael – All quiet on the westen front – for now anyway.
I keep asking myself the question, what is next to blow up, here is Saxo Banks 2013 predictions (well precautionary notes).
Any one of which could cause major global problems.
http://www.tradingfloor.com/posts/saxo-banks-outrageous-predictions-2013-extreme-complacency-1677653761
Did anyone run the numbers on how returning holidaying emigrants contributed to the velocity of money over ‘The’ Christmas? Like I said last week, the pubs in Limerick were jammed when I was there. A lot of people travelled home for The Christmas. My money, which i handed over to the barman in dry crisp condition (thank you very much) was withdrawn from an Irish ATM using my UK Bank ATM card. I pulled on the green jersey, and bought some clothes, food, drinks and sundries. I won’t be doing it again until the next time I’m home, which may… Read more »
This one slipped through the net in RTE. http://www.rte.ie/news/2013/0108/fitch-negative-on-irish-property-market-business.html Further 20% fall in property expected! Won’t be long before RTE realise what they’ve done and delete this story. But go ahead boys and girls, let your inner eejit convince you that its a good time to buy a house in Ireland now as prices only go up! And don’t worry your wee head about NAMA and their market interference policies. NAMA was set up in 2008, and long term economic value term was 8 years as far as I remember, and Lenny told us that in 2016, prices would be… Read more »
And if you print more money it will affect inflation I am very sensitive to inflation and don’t even have to think about it because when I am shopping it kicks in automatically. In fact I have always been this way and believe in value for money Here is an example using one thing we all know and love well – beer Bavaria Crown (the blue cans) is marketed at the Irish market. It’s nice because it’s brewed with Belgian spring water and is of a low enough strength to qualify it as a session lager in the same style… Read more »
David Bowie
Where Are We Now ..where are we now…we know we know we know
http://www.youtube.com/watch?v=FOyDTy9DtHQ
Good article David. Nuts and bolts explanation for the man on the street. The comments sections however seems to be dominated (i.e. spammed) by a handful of pseudo academics and hardcore copy and paste experts – passing it off as there own opinions.
Here an opinion from Der Spiegel (in English) on Kenny’s visit to the south of Germany and how we could need a second bailout soon:
http://www.spiegel.de/international/europe/ireland-seeks-to-have-europe-share-in-risk-of-ailing-banking-sector-a-876124.html
Gruß aus Bayern,
Long Gone
http://www.guardian.co.uk/music/2013/jan/08/david-bowie-where-now-first-listen?intcmp=122
Trip down memory lane for Bowie too; with his new ‘Lied’ finding him walking the streets of Berlin in a ‘pensive mood’…..made me think of TS Eliot’s ‘The Wasteland’:
And I will show you something different from either
Your shadow at morning striding behind you
Or your shadow at evening rising to meet you;
I will show you fear in a handful of dust.
Frisch weht der Wind
Der Heimat zu,
Mein Irisch Kind,
Wo weilest du?
Talking of inflation
I wonder how much Rory paid for his first telecaster
Rory was something else but he had stiff competition
Roy – Buchanan – Arguably the greatest ever
http://www.youtube.com/watch?v=c3ZfQ47sISo
l
Barroso Asserts that Threat to Euro Is Over; No One Believes Him Jan. 8, 2013 (EIRNS)–European Commission President Jose Manuel Barroso told a conference in his native Portugal, yesterday, “I think we can say that the existential threat against the euro has essentially been overcome.” He continued, “In 2013 the question won’t be if the euro will, or will not implode.” Britain’s {Daily Telegraph} reports that no one seems to believe him, citing currency expert Neil Mellor at Bank of New York Mellon, who is quoted as saying “2013 will be a tougher year than 2012 for Germany and by… Read more »
Comparing the pub to Ireland is missing a couple of details. Ireland received a huge influx of cash from the central banks that confused evryone into thinking that they had become rich. The expansion of the money supply inflated everthing and paticularly everything to do with housing. BOOM TIMES, rising prices, inducedby the inflation of the money supply. The misallocations of capital caused by the wrong signals being sent resulted in the ineffiencies and finally the Money creation slowed and the Boom went into a bust. In the pub there was not an addition to the paychecks of all the… Read more »
LongGone I note you refer to “the gold standard and various conspiracy theories” in one sentence. Please excuse me if I have lost my sense of humour. Perhaps you could copy and paste my comments below. When you have first hand knowledge of watching children in the developing world with bellies the size of giant balloons caused by starvation, due to the rising cost of food, as a direct result of the International price of wheat and oil priced in inflated $== due to the constant running of the printing press, then come back to this site and we can… Read more »
What should a central bank do when the velocity of money falls? It should orchestrate an off-setting increase in the money supply to try and overcome the effects of the business cycle. If velocity falls, then money supply must rise for national income to grow. Totally incorrect. The falicy of that policy is self evident for 20 years in Japan and the last 5 years in the western world. Adding to the money supply iflates the currency. A lot of it is saved at present and there is low velocity. Either there is a huge failure in the derivative markets… Read more »