1. A person struggling to make ends meet ends up with an extra $200 a month.
2. A person who makes enough to meet all of their needs and many of their wants ends up with $200 extra a month.
Which one is more likely to spend that $200?
I'm not rich but I am in group #2. If I got an extra $200 a month it would probably go into savings or debt payoff. That's good for me, but it doesn't help the economy.
People with 2 million in bank are not going to spend that. It's sitting there. After a point there's on so many investments that can be made.
contrast that with people who need cash to buy things right now.
The second stimulates the creation of work.
No, it's not. The bank loans it out. There's a reason the banks offer free checking - it's not because they're in the charity business, but because they loan out the deposits and make money off of that.
There's more to it, and you can go deeper, but for the context of a simplified comparison, loans and investment were excluded.
The full explanation is that investment focused money has to be supported by consumption. You cant keep investing without people consuming stuff. Otherwise there's really no economy.
So consumption in the middle of the pyramid and bottom of the pyramid, generally has more impact on the economy:
2 million distributed between a bunch of people who will spend all of it immediately in purchases (toilet paper, food, clothes) has an immediate and direct impact on the economy.
Vs.
2 million to 1 person, who spends only 50k on daily expense, buys 1 car, and invests the rest, (there's only so many houses/cars and big ticket purchases people are going to make with their money. You don't need 7 dryers for example.)
That's the reason. Investments aren't going into the economy directly. They need someone else to be creating demand, thus creating investment need.
Nobody gets a loan or sells their company in order to store the cash in their mattress. Nobody hoards cash. Nobody with any fiscal sensibility, that is.
Money in a mattress is not working, and wealthy people especially always put the money to work (otherwise they become not-wealthy). Putting the money to work means it gets spent.
If risk is ignored and the money is thrown down a pit through ineffectual business, it's pushing on a string, velocity-wise. The company added the same kind of temporary stimulus you'd get by hiring people to dig ditches or do a cash transfer, but in a less efficient way than either one of those. Sometimes you get a hit, but dealing with direct investments is high overhead and introduces more conflicts of interest.
Capital that prefers lower-risk bets, on the other hand, ends up pooling in financial instruments designed for a low nominal risk: indexes, bonds, treasuries, real estate, and more sophisticated cocktails like the repackaged subprime mortgages that contributed to the 2008 crisis. These tools act indirectly on businesses, and so the money only gets "spent" in the sense that someone in finance is getting paid to handle the trades, somewhere along the way. Hence you get the effect of "velocity at the top", because money is sloshing around in a musical chairs game disconnected from goods and services, going from one large institutional investor to another. Each trade raises the pressure to speculate, allowing the market to trend upwards without actually doing much of anything for consumers, gradually increasing the likelihood of a crash.
And that is why Apple can end up sitting on $246B at the same time that the economy runs at less than full employment. Their strategy is already executing at full funding. They're financed for anything they could ask for, so if they're not doing it, they didn't want to do it. So they have to make a decision as an investor instead, and one of those options is to sit out if they perceive the market to be too risky.
Hoarding cash has a negative ROI (inflation). They are still going to put it to work. Apple is not sitting on $246B in idle cash.
> Each trade raises the pressure to speculate, allowing the market to trend upwards without actually doing much of anything for consumers, gradually increasing the likelihood of a crash.
There's no evidence of that.
So its normal for funds to return their capital back to investors as they say "hey, we really cant find more targets".
You seem adamant on assuming that investment = money at work.
This is like saying that pressing on the pedal = accelarate, while magicking away all the work done by the engine, and various other moving parts. The transmission mechanism.
Investment, is not consumption.
It is investment, in order to take advantage of consumption.
Directly providing consumption, is a far better method of improving economic activity, than by investment, in the current market scenario.
Oh wait - maybe I have a bead on where you are coming from:
In the scenario where all infrastructure and all factories were working at max capacity, any further investment in Infra/capex, will lead to an improvement in demand.
In the current scenario though, that is not the case, and adding more factories will not result in an increase in economic output.
Simply put, building a factory, but having no customers is investment with 0 return.
That's one way to look at it. But obviously at an extreme it doesn't work. The best way to increase monentary velocity and consumption is hyperinflation, but nobody is advocating that.
If consumption were truly driving the economy, Venezuela and Zimbabewe would be monentary powerhouses.
http://positivemoney.org/how-money-works/advanced/how-money-...
Banks don't have a shortage of money if less people save. In theory yes, but in practice, banks can borrow money at basically a 0% interest rate from the government. If the government sees that there isn't enough money in circulation, they will just put more in circulation.