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Wednesday, July 29, 2009

The Velocity of Money and the Chatham Walmart Proposal

I have spoken on more than one occasion about the velocity of money. The velocity of money is essentially how many times a given dollar is spent during a fixed time period. During periods of economic contraction, like now, velocity of money is low. That's because people are scared and they hoard every dollar they can get their hands on. In my opinion, the key to any stimulation is to increase the velocity of money. Once velocity of money increases the economy will recover.

Right now, Walmart is sitting on tens of millions of dollars that the company has earmarked to build and operate a store in the Chatham neighborhood of Chicago. If that store is given the go ahead to get built, Walmart will immediately sign several project managers. That team will move forward with acquiring all appropriate permits. Once those are secured, Walmart will break ground on a 150,000 square foot superstore. Building this project will require hiring about 500 UNION contractors, construction workers, electricians, plumbers, etc. Those companies will have to buy equipment, parts, and material. The folks hired will have to get to work somehow. They will have to eat lunch in the area.

Then, once the store is built, there will be 400 people hired to operate it. It will sell everything under the sun and will attract thousands of shoppers daily. Now, let's think about this. The current scenario has Walmart's money sitting in a bank account. How quick is the velocity of money in that scenario? The second scenario has that money being spent on labor, parts, equipment, etc. It is a scenario in which those hired will themselves need to buy parts and equipment. It will mean that 400 people currently sitting at home will be going to a job everyday. They will either drive costing gas or take public transportation putting money into the coffers of the city. In either scenario, they will be spending more money than they are now as well as receiving a paycheck.

I haven't even begun to discuss the velocity of money created once the store is built. There will be electricity, gas, and water bills that will all be paid. There will be 500 new paychecks to receive. All those people will need to come to work. So, they will spend money on either gas or public transportation. (unless they walk which some will) With more money in their pockets, these employees will spend more money on things they need and want. I haven't even mentioned the enormous velocity of money created by Walmart increasing their orders of goods to stock the store and then having those goods get bought.

The velocity of money increase in building and operating this Walmart superstore is exponential. Tens of thousands of businesses and individuals will see business transactions in crease as a result of it being built and operated. Instead, right now, only two entities see any transactions, Walmart and the bank their money is at.

It sounds so simple. What the city, and country, need right now is to increase the velocity of money. We need people to spend and invest more. That's what this Walmart proposal would do, and it would do it in an enormous way. Unfortunately, a theoretical increase in the velocity of money does nothing. So, until the politicians in Chicago brush up on their economics, the velocity of money that this Chatham store would provide won't happen.


Anonymous said...

Right on! The less my revenue stream flows in, the less my dispursements flow out.
Government's job should be to "grease the skids", not build dams.

Anonymous said...

"They will have to eat lunch in the area."

Yeah, like someone who works at Walmart can afford to eat out.