Spare Change And Silly Putty

“Ok, Sy, you said Pascal explained the ‘water seeks its level‘ thing before Newton got a chance to. Newton was so smart, though — how’d Pascal beat him to it?”

“Pass me a strawberry scone, Al, and I’ll tell you why.”

“Anything for free food, eh, Sy? Alright, here.”

“Oferpitysake, Al, add it to my tab like always. Too much hassle putting on this face mask just to walk from my car to the scones. Pascal had a 20‑year head start — did his hydrostatics work when Newton wasn’t even in his teens. Unfortunately, Pascal died when Newton was only half-way through college. Whoa, if only Pascal had been alive and productive in France while Newton was in his science years in England and Liebniz was churning at everything in northern Germany. What advances might they have made arguing with each other? Where would our Math and Physics be today?”

“They didn’t like each other?”

“Newton didn’t like anybody. He and Liebniz feuded for decades over who invented calculus. Pascal and Liebniz probably would have gotten along fine — Liebniz could make nice with everyone except Newton. Come to think of it, Newton and Pascal had a lot in common. Newton was a preemie and Pascal was seriously ill for the first year of his life, never got much better. Newton wrote his first formal paper at 22; Pascal publicly proved that vacuums exist by creating some when he was 24. On the flip side, Pascal was 33 when he presented his studies of what we now call the Pascal Triangle but Newton waited until he was 44 to publish his Principia. And each of them spent much of the final quarter of his life on religious, even mystical matters.”

“So did Newton and Pascal both do much about money and water?”

“Not about the combination, though both had a lot to do about each one. Newton was Master of England’s Royal Mint and spent much of his time in office chasing down counterfeiters. Pascal wasn’t a gambler but Fermat was and the two of them teamed up to invent the probability theories that power today’s gaming, finance and insurance industries. So there’s that. Pascal and Newton both pioneered the science of fluids but from different perspectives. Pascal looked at static situations — comparing atmospheric pressure at two different altitudes, that sort of thing. Newton, as usual, studied change — in this case how fluids flow.”

“Pour water into a pipe and it pours out the other end. What’s to study?”

“Measuring how fast it pours and how that’s affected by the pressure and the pipe and what’s being poured. Newton explored the motion of fluids in exhausting detail in Book II of his Principia. As you’d expect, he found that the flow rate of water or any of the other fluids he investigated rises with the pressure and with the cross-sectional area of the pipe. Being Newton, though, he also also considered forces that resist flow. Think about it — the pipe itself doesn’t move and neither does the layer of fluid right next to the pipe’s walls. The flow rate ramps up from zero at the walls to full-on at the center of the pipe. The ramp-up rate depends on the fluid’s viscosity, another concept that Newton discovered or invented depending on how you look at it. Viscosity measures the drag force the slower layers exert on their faster neighbors. Fluids like molasses are viscous because their molecules are really good at grabbing onto molecules in the layers next door.”

“Where’s money fit into this picture?”

“I’m getting to that. Newton thought that each kind of fluid had its own viscosity, always the same. Not quite — temperature makes a difference and there’s non‑Newtonian materials like Silly Putty whose viscosity depends on how fast you yank on them. But the weirdest non‑Newtonian fluid is ultra‑low‑temperature liquid helium. It’s a superfluid and has zero viscosity. The helium atoms experience absolutely no drag from their neighbors and can sneak through the tiniest cracks. Money does the same, right? Each dime and dollar flows with no drag from its cousins.”

“Money’s a superfluid?”

“Yup. Think how it leaks out of your pocket.”

“Uh-huh. … Hey, Sy, about that tab…”

~~ Rich Olcott

A Turn to The Urn

Working under social distancing rules, Al’s selling coffee from a drive-up cart in front of his shop — urns, paper cups, everything at arms length. No cash register, credit or debit transactions only. “Give me my usual, Al. I miss the mugs; your brews just don’t taste the same in paper.”

“I know, Sy, but what can you do? Say, I’ve been reading your stuff with the sort‑of overlaps between Physics and Economics. Beyond your usual orbital? <heh, heh>”

“Very funny, Al. Yeah, a little, but it’s giving me some new perspectives on old ground.”

“Oh, yeah? What’s next?”

“Fluid mechanics, for instance. Ever notice how many money terms relate to water? ‘Cash flow,’ of course, but there’s also ‘liquidity,’ ‘frozen assets,’ ‘drowning in debt,’ a long list, so I decided to chase that metaphor, see how well it holds up. There’s a lot of Physics on your coffee cart, for instance.”

“Well, it’s heavy, I’ll tell you that.”

“Sure, but how about that glass tube that tells you how full the urn is? The Egyptians were using the principle thousands of years ago but Pascal put it on a firm theoretical basis before Newton got a chance to.”

“There’s thery in that thing?”

“Sure. There’s a pipe from the urn to the little tube, right, so all the liquid is connected. Pascal proved that the pressure on every little packet of fluid anywhere in a connected system has to be the same, otherwise fluid would flow to wherever the pressure is least and even things out. Pressure at the bottom of any skinny vertical column comes from atmospheric pressure plus the pull of gravity on the liquid in that column. It takes 33 feet of water to balance normal atmospheric pressure. For columns the size of your urn gravity’s contribution is less than 3% of atmospheric so the atmosphere rules. Pressure on the tube is the same as pressure on the urn so the two have to be at the same height. When the urn’s low, the tube’s low because Physics.”

“Cool, though when you look at it that way it seems obvious.”

“The good explanations often are. It takes a Pascal or a Newton to make it obvious.”

“So what’s this got to do with Economics?”

“Pascal’s principle supplied a fundamental assumption about how market‑based systems are supposed to work. Not with water, but with money — and instead of pressure there’s profit potential. The idea is that just like water will flow everywhere in a connected system until the pressure is equalized, money will flow everywhere in an economy until no‑one thinks they can make more profit in one place than in another. It’s more complicated than your coffee urn, though.”

“I expect so — lots more opportunities.”

“Well, yes, but the force‑equivalent is more complicated, too. Gravity and atmospheric pressure both exert force in the same direction. When you’re considering an investment, what do you think about?”

“The net profit, of course — how much I could make against what it’ll cost me to get in.”

“How about risk?”

“Three guesses why I’m doing this no-cash. I know what you mean though — like what if this electric cord overheats and burns the place down. Not likely, I checked the wire gauge and the circuit box.”

“Good strategy — look at all the things that can go wrong and address what you can control. But there’s uncontrolables, right? From an Economics perspective, you need to put each risk in money terms. Take the likelihood that something bad will happen, multiply by the monetary loss if it does happen and you get monetary risk you’ve got to figure against that expected net profit. My point is that the Economics version of Pascal’s principle has to take account of forces that pull money towards an investment option AND forces that push money away.”

“Two-way stretch, huh?”

“Absolutely. Take a look at a stock or bond prospectus some day. You’ll see risk categories you’ve never even heard of. Bond analysts have a field day with that kind of stuff. Their job is to calculate likely growth and cash yield against likely risk and come up with a price.”

“Risky business.”

“Always the joker, Al.”

~~ Rich Olcott

Something of Interest

“OK, Sy, I get how money is sorta like Physics ‘energy‘ except you can’t create energy but you can create money. And I get how Economics ‘velocity of money‘ and Physics ‘velocity don’t have much to do with each other. Your ‘Money Physics‘ phrase doesn’t make much sense unless you’ve got something with more overlap than that.”

“You’re a tough man, Vinnie. How about the word ‘exponential‘?”

“Means something goes up really fast. What about it?”

“Well, first off that’s not really what it means and that’s one of my personal peeves, thank you very much. Yes, quantities can increase exponentially, but not necessarily rapidly, and they can also decrease exponentially, either fast or slow. It’s a math thing.”

“Alright, I got myself into this. You’re gonna tell me how that works and it probably involves equations.”

“You made the phone call, I’m just sitting here, but you’re good, no equations just arithmetic. Ten times ten’s a hundred, right, and you can write that either 10×10 or 10², OK? The little two is the exponent, tells you how many factors to multiply together.”

“And 10 with a little three makes a thousand and ten with a little … six makes a million. See, it goes up really fast.”

“Depends on what the base number is. I’ve sent a tabulation to your phone…”

Exp’t 10 2 99% 100% 101%
2 100 4 98.01% 100% 102.01%
3 1 000 8 97.03% 100% 103.03%
4 10 000 16 96.06% 100% 104.06%
5 100 000 32 95.10% 100% 105.10%
6 1 000 000 64 94.15% 100% 106.15%
7 10 000 000 128 93.21% 100% 107.21%

“What’s all that?”

“Well, the top-row headers are just numbers I multiplied by themselves according to some exponents, and the first column is the series of exponents I used. Like we said, 10² is a hundred and so on down the second column. Number 2 multiplied by itself according to the same exponents gave me the third column and you see the products don’t grow anywhere near as fast. Do you see how the growth rate depends on the number that’s being multiplied and re‑multiplied?”

“No problem. What about the other columns?”

“Start with the fifth column. What’s 100% of 100%?”

“All of it.”

“And 100% of 100% of 100%?”

“I get it — no change no matter the exponent.”

“Absolutely. Now compare that to the 99% and 101% columns that give you the effect of a 1% growth factor. As you’d expect, very little change in either one, but there’s a lesson in the 99% column. It’s exponential by definition, but the results go down, not up. By the way, both of those are such small factors that the results are practically linear. You need to get beyond 15% factors for visible curvature in the usual graphs.”

“OK, so exponential says some arithmetic factor gets applied again and again. What’s that got to do with Physics or Economics?”

“Ever since Newton, Physics has been the study of change, all different kinds. Gradually we’ve built up a catalog of change patterns. Newton pointed out the simplest one in his first Law of Motion — constant velocity, say in meters per second. Plot cumulative distance moved against time and you get a rising straight line. His Second Law implies another simple pattern, constant acceleration. That’s one where velocity’s line rises linearly but distance goes up as the square of the time traveled. But Newton never tackled another very simple, very common pattern.”

“I thought Newton did everything.”

“Not the case. He was an amazing geometer, but to handle this pattern you need algebraic tools like the ones Liebniz was developing. Newton would rather have dunked his arm in boiling rancid skunk oil than do that. It took another century or so until the Bernoulis and Euler beat that problem into the ground.”

“So what’s the simple pattern?”

“Suppose instead of a quantity increasing by some absolute number of thingies per second, it increases by some constant percentage. That’s uncommon in the kinds of mechanical phenomena that Newton studied but it does happen. Say you’re a baby planet in the middle of a dust cloud. Get 15% bigger, you’re 15% better at attracting even more dust. Biological things do that a lot — the more bugs or bacteria you’ve got, the faster they multiply and that’s usually at a constant percentage-per-time rate. Exponential growth in a nutshell.”

“Planets, bugs, what’s that got to do with Economics?”

“Ever hear of ‘compound interest‘?”

“Low rates on bank accounts, high rates on credit cards, compounded. Gotcha.”

“Inflation does compounding, too.”

~~ Rich Olcott

The Solid Gold Bath Towel

“C’mon, Sy, I heard weaseling there — ‘velocity‑based thinking‘ ain’t the same as velocity numbers.”

“Guilty as charged, Vinnie. The centuries-old ‘velocity of money‘ notion has been superceded for a half-century, but the theory’s still useful in the right circumstances. It’s like Newton’s Law of Gravity that way, except we’ve been drifting away from Newton for a full century.”

“What, gravity doesn’t work any more?”

“Sure it does, and most places the force is exactly what Newton said it should be — proportional to the mass divided by the distance. But it goes wrong when the mass‑to‑distance ratio gets huge, say close to a star or a black hole. That’s when we move up to Einstein’s theory. It includes Newton’s Law as a special case but it covers the high-ratio cases more exactly and accounts for more phenomena.”

“Just for grins, how about when the ratio is tiny?”

“We don’t know. Some cosmologists have suggested that’s what dark energy is about. Maybe when galaxies get really far apart, they’re not attracted to each other quite as much as Newton’s Law says.”

“I suppose the money theories have problems at high and low velocities?”

“That’s one pair of problems. Money velocity is proportional to nominal traffic divided by money supply. Suppose an average currency unit changes hands thousands of times a day. That says people don’t have confidence that money will buy as much tomorrow as it could today. They’ve got hyperinflation.”

“Ah, and at the low end it’d be like me putting Eddie’s autographed $20 in a frame on my wall. No spend, no traffic, zero velocity.”

“Right, but for the economy it’d be everyone putting all their money under their mattresses. Money that’s frozen in place doesn’t do anything except maybe make someone feel good. It’s like water in a stream, it has to be flowing to be useful in generating power.”

“Wait, you used a word back there, ‘nominal.’ What’s that about?”

“Good ears. It points up another important distinction between Physics and Economics. Suppose you’re engineering a mill at that stream and you measure water flow in cubic meters per second. Kinetic energy is mass times velocity squared and power is energy per unit time. If you know water’s density in kilograms per cubic meter you can calculate the stream’s available water power. Density is key to finding mass from volume when volume’s easy to measure, or volume from easily‑measured mass.”

“OK, so what’s that got to do with ‘nominal‘?”

“In economic situations, money is easy to measure — it’s just the price paid — but value is a puzzle. In fact, people say that understanding the linkage between price and value is the central problem of Economics. There’s a huge number of theories out there, with good counter-examples for every one of them. For example, consider the solid gold bath towel.”

“What a stupid idea. Thing like that couldn’t dry you off in the desert.”

“True, but it’s made out of a rare material and some people think rarity makes value. In the right setting it’d be beautiful and there are certainly people who think beauty makes value. A lot of person‑time would be required to create it and some people think labor input is what makes value. The people who think utility makes value would give that towel very low marks. Of course, if you’ve already got plenty of bath towels you’re not about to buy another one so you don’t care.”

“So how do they decide what its price should be?”

“Depends on where you are. Many countries use a supply‑demand auction system that measures value by what people are willing to pay. Planned‑economy countries set prices by government edict. Other countries use a mixed system where the government sets prices for certain commodities like bread and fuel but everything else is subject to haggling. Whatever system’s in use, ‘nominal‘ traffic is the total of all transaction prices and that’s supposed to measure value.”

“Velocity’s supposed to be money supply divided into value flow but we can’t use value so we fake it with money flow?”

“You got it. Then the government tries to manage the money supply so velocity’s in a sweet spot.”

“Sounds rickety.”

“Yup.”

~~ Rich Olcott

The Flight of George’s Dollar

<chirp, chirp> “Moire here.”

“Hi, Sy, it’s Vinnie. Eddie just dropped off my pizza order —”

“What did you get?”

“My usual, large with extra pepperoni. Anyhow, Eddie said you guys were talking about Money Physics which has me curious. I don’t suppose it’s about how young George Washington couldn’t have thrown that silver dollar across the Potomac.”

“It couldn’t have been a US dollar because they didn’t exist yet and it couldn’t have been the Potomac because it’s a mile wide and probably nothing of the sort happened anyway. You’re right, though. What I’m calling Money Physics is about the parallels and differences between Economics and Newtonian Physics. Remember that $20 bill your dice‑playing won from Eddie a while ago and he signed it?”

“Yeah, that was fun. I was hot that night.”

“Well, the other day I used that very same bill to pay Eddie for pizza.”

“How’d you get it?”

“We figured you used the bill to pay down your tab at Al’s —”

“That’s right.”

“And he used it to buy some old astronomy magazines from me. I paid it to Eddie to complete the circle. ‘Whoa,’ I thought. ‘The velocity of money, like in Economics.”

“There’s a word I know from flight school. Velocity’s a vector, combines speed and direction. Speed would be how quick money changes hands, of course, but how do you attach a direction to that and what do you figure from the vectors?”

“Their equivalent to speed isn’t what you think it is and there’s no notion of direction. The ghost that’s left is the concept that ‘velocity of money‘ should describe how often a unit of currency is reused. The problems start popping up when you try to measure that. Economists grew up thinking about first‑purchase productivity so their metrics exclude a lot of what we’d consider economic activity. That traveling $20, for instance. How many transactions would you say it went through?”

“Eddie to me to Al to you to Eddie. Four.”

“Sorry, the productivity right answer is one. Eddie didn’t buy anything from you when he lost those bets. Your debt to Al was already outstanding. Al bought used goods from me. The only transaction that counts in the productivity calculation was my paying for what came fresh from Eddie’s pizza oven.”

“Dice games don’t count? How about bank fees or talking to my lawyer, stuff like that?”

“Oh, there’s lots of controversial questions, especially in view of our economy turning from mostly farm and manufacturing to mostly services and now we’re paying attention to environmental costs. ‘Reuse, repurpose, recycle‘ doesn’t enter into the productivity equation, and neither does installing a pollution control system except for the initial purchase price. Do you own stock, maybe in a pension plan?”

“Not as much as I’d like, especially recently.”

“I know the feeling. When you bought your shares, the brokerage fee counted as services but economists argue about the cost of the shares themselves. There are loads of what-abouts like that. Bottom line is that trying to track money movement at the transaction level just doesn’t work.”

“So what did they do?”

“Fell back to country-level aggregate numbers which are very rough by Physics standards. Add up the total economic traffic in dollars, divide by the size of the money supply, that’s the number of times an average dollar must have changed hands, OK?”

“Gimme a sec … that sounds right.”

“So how do you evaluate each part of the fraction? Some people measure economic activity indirectly by summing up transactions, maybe by looking at sales tax revenue data. That’s the spend side. Or you could look at the income side using payroll or income tax data and supposing that people spend everything they pull in. It’s not a hard think to find holes in both of those, but suppose you come up with a number somehow. That gets divided by the money supply, which we understand a little better but not much. Do the arithmetic and you have a dollars-to-dollars ratio, not somethings-per-time. No physicist would call that a velocity, but what can you do?”

“You got me, but who cares?”

“The Fed cares, because velocity‑based thinking helps drive their policy decisions.”

~~ Rich Olcott

Unless We’re All In This, Together

I wrote the italicized text for another forum, but I’m reposting it here because my head and heart and the times demand it…


We’ll soon be in the month of our national Independence Day so it’s appropriate to point out that we’re living in an Age of Heroes.  We’ve had heroes all along, of course — the Founding Fathers and Mothers, the military who defend the country we’ve built, the first responders who run toward danger to protect the rest of us. 

Less lauded but still crucial is another group of heroes – parents, teachers, caregivers and others who take on responsibility for nurturing and supporting people who for whatever reason can’t handle the challenge themselves.  These heroes may not risk bodily damage but the emotional toll can be devastating.  It says something positive for our society that we have so many in this group.

But in the past few months we’ve come to recognize yet another category of heroism.  From maintenance and transportation staff to the entire farm‑to‑table supply chain workforce, these people have quietly continued their tasks in the face of COVID‑19, with or without protective measures in place.  Without their brave efforts our cities and economy would have been weakened far more than they have been. 

Those three categories together comprise a significant fraction of our population.  In my opinion, there’s a lesson there that our country has been too slow to learn.  Humans got where we are because we’re a societal species.  The Western Frontier closed a century ago.  Even the legendarily reclusive “mountain men” had to come into town occasionally for medical care or supplies they just couldn’t produce on their own.  In the past few months, our distress with social distancing and our burgeoning activity on social media highlight just how much we want/need to interact with other people.

Like it or not, we are all part of society.  Moreover, the smooth functioning of our society depends on our collaboration.  I’m not arguing an absolutist position here – cooperation leaves plenty of room for competition and individual liberty (how best to organize the economy is a separate discussion).  But I do think we need official and explicit recognition of the fact that what I do affects you and what you do affects me.

Here’s my modest proposal – let’s rename the Fourth of July as National Interdependence Day.


Part of being societal, of course, is the impulse to protect those about us. That’s why many of those on the Thin Blue Line got into the force and I’m grateful and more than a little awed. But as we’ve seen, some of them don’t live up to what’s expected of them.

“There’s some bad apples in every barrel,” has been said too often. The question is, why are they still there? The line officers know better than anyone else the characters of their peers. Can’t they get rid of the bad apples themselves?

The most common defense I’ve heard from my LEO friends has been along the lines of, “Out there we can only survive if we know we have each other’s backs. If I write up a complaint and if the higher-ups don’t desk or boot the guy, he’ll look the other way the next time something goes down when we’re on the street together.” That culture must change, for the sake of the good cops and the rest of us.

There are some indications that the no-snitch attitude may be changing as the unions and PD administrators and prosecutors realize that bad cops directly contribute to the deadly conditions the rest have to work under. I sure hope so.

In closing, I highly recommend this thought piece from Trevor Noah, who is far more than a comedian. Please do listen through to the end. Then think about it. Then do something.

~~ Rich Olcott

Flasks Of Money

<chirp, chirp> “Moire here.”

“Hiya, Sy, it’s me again.”

“Hi, Eddie. I thought you were done with your deliveries tonight. That was a good stromboli, by the way, just the right amount of zing and sauce.”

“Thanks. Yeah, I’m done for the day, but I was thinking while I drove home. We said that the Feds and the banks together can tinker with the money supply so there’s no Conservation of Money like we got Conservation of Energy. But then we said that it matters to keep money in local businesses instead of letting it drain away somewhere else. That says there’s only so much to go around like the amount doesn’t change. So which is it?”

“Good point. You’ve touched on another contrasting parallel between Physics and Economics. In Physics we mostly understand how atoms work and we’ve got a pretty good handle on the forces that control objects big enough to see. J Willard Gibbs, probably the foremost physicist of the late 1800s, devised Statistical Mechanics to bridge the gap between the two levels. The idea is to start with the atoms or molecules. They’re quantum objects, of course, so we can’t have much precise information at that level. What we can get, though, is averages and spreads on one object’s properties — speed, internal energy levels, things like that. Imagine we have an ensemble of those guys, mostly identical but each with their own personal set of properties. Gibbs showed us how to apply low-level averages and spreads across the whole ensemble to calculate upper-level properties like magnetic strength and heat capacity.”

“Ensemble. Fancy word.”

“Not my word, blame Gibbs. He invented the field so we go with his terminology. Atoms weren’t quite a respectable topic of conversation at the time so he kept things general and talked about ‘macroscopic properties‘ which we can measure directly and ‘microscopic properties‘ which were mysterious at the time. Think of three flasks holding samples of some kind of gas, OK?”

“No problem.”

“The first flask is stoppered, no gas can get in or out but energy can pass through the flask’s wall. Gibbs would call the confined collection of molecules a ‘canonical ensemble‘. Because the wall transmits energy we can use an external thermometer to measure the ensemble’s temperature. Other than that, all we know about the contents is the number of particles and the volume the particles can access.”

“Canonical?”

“In Gibbs’ usage it means that he’s pared things down to an abstract essence. It doesn’t matter whether what’s inside is atoms or fruitflies, his logic still holds. Now for flask number two. It’s heavily insulated so whatever energy it had inside originally, that’s what it’s got now. We can’t measure the temperature in this one. Gibbs would consider the particles in there to be a ‘microcanonical ensemble,’ with the ‘micro’ indicating the energy restriction.”

“Where there’s a microcanonical there’s gotta be a macrocanonical.”

“You’d think, but Gibbs used the term ‘grand canonical ensemble‘ instead. That’s flask number three, which has neither insulation nor stopper. Both energy and matter are free to enter or leave the ensemble. Gibbs’ notion of canonical ensembles and the math that grows out of them have been used in every kind of analysis from solid state physics to cybersecurity.”

“OK, I think I see where you’re going here. Money acts sorta like energy so you’re gonna lay out three kinds of economy restriction.”

“You’re way ahead of me and the economists, Eddie. They’ve only got two levels, though they do use reasonable names for them — microeconomics and macroeconomics. For them the micro level is about individuals, businesses, the markets they play in and how they spend their incomes. Supply-demand thinking gets used a lot.”

“That figures. What about macro?”

“Macro level is about regions and countries and the world. Supply‑demand plays here, too, except the macroeconomists worry about how demand for money itself affects its value compared to everything else.”

“They got bridges like Gibbs built?”

“Nope. Atoms are simple, people are complicated. The economists are still arguing about the basics. Anyway, the economists’ micro level assumes local money stays local and has a stable value.”

“Keeping my business stable is good.”

~~ Rich Olcott

What Goes Around

<shout from outside my office door> “Stromboli Express. Get ’em while they’re hot!”

“The door’s open, Eddie, and you’re right on schedule.”

“I aim to please, Sy. Which ain’t easy while I’m wearing this virus mask.”

“On you it looks good, Eddie. Just leave the order on the credenza. How’s my account?”

“Still good from that last twenty. I gotta say, I appreciate you keeping your tab on the plus side. You, Vinnie, all you singles, your orders are keeping me in business despite that corporate PizzaDoodle shop that opened up.”

“Doing my part to keep the money local, Eddie. Besides, you do good pizza.”

“What difference does keeping the money local make? Anything to do with money being energy?”

“Whoa, where did that come from?”

You told me, Sy. When prices get higher than a perfect supply‑demand market would set them, it’s from inefficiency like what happens to machine energy that gets turned into heat by friction.”

“Ah, you stretched my metaphor a little too far. Money behaves like energy in some ways but not in others. For one thing, Conservation of Energy applies universally, we think, but Conservation of Money not so much.”

“The dollars in my wallet don’t multiply, that’s for sure.”

“Individuals aren’t allowed to fiddle the money supply — that’s called counterfeiting. But the 1930s Great Depression taught us that purposefully creating and destroying money is part of the government’s job. Banks can vary the money supply, too, sort of.”

“Yeah, I’ve seen videos of the Mint’s printing presses and them grinding up ratty old used bills.”

“That’s the least of what they do these days. Depending on which way you define ‘money’, only about a fifth of the money supply is cash currency.”

“There’s definitions of money?”

“Mm-hm. That’s one of the keys to the part the banks play. One definition is just the currency, like you’d think. The economists pay attention to a broader definition. When you deposit tonight’s receipts in the bank, the cash doesn’t just sit in a vault. For that matter, your credit card and debit card take can’t sit in a vault. What does the bank do? It keeps a certain percentage of its deposited dollars as a reserve in case you want to pull dollars out to pay Joey for his sausage or something. The rest of those dollars can be loaned out. The loaned dollars generally get deposited for a while before they’re spent and a fraction of those deposits can be loaned out … you see where this is going.”

“Whoa, so I put on a hundred and that turns into maybe four, five hundred or more by when the dust settles. I see what you mean about banks creating money even if it’s not real money.”

“Oh, it’s real money — officially blessed marks in a ledger or more likely, bits in computers instead of paper and coins, but it counts. Anyhow, the second definition of ‘money’ is combines currency and deposits from all those loans.”

“So what’s to prevent the bank from loaning out all their money and riding this pony over and over again? That’s what I’d want to do, pull in interest on like, infinite loans.”

“That’s where the government steps in. Depositors need to be sure they can make withdrawals. The Feds don’t tell banks, ‘You can only loan out a certain number of dollars.‘ What they do say is, “Your reserves have to total up to at least x fraction of your deposits.’ The Feds are free to change the value of x up or down depending on whether they want to shrink or expand the money supply.”

“Closing down or opening up the spigot and Conservation of Money ain’t a thing, gotcha. But what does that have to do with you guys keeping money local?”

“Think back to that $20 bill that went from you to Vinnie to Al to me to you. What would have happened if Al had decided to invest in some weird coffee beans instead of buying those magazines from me?”

“The dollars would fly away from our local bank and they wouldn’t be there for an x fraction loan for my business. Gotcha.”

~~ Rich Olcott

Supply, Demand And Friction

<chirp, chirp> “Moire here. Open for business on a reduced schedule.”

“Hiya, Sy. It’s Eddie, taking orders for tonight’s pizza deliveries. My 6:15 wave is full-up, can I schedule you for 6:45? Whaddaya like tonight?”

“Yeah, a little later’s OK, Eddie. Mmmm, I think a stromboli this time. Rolled up like that, it ought to stay hot longer.”

“Good idea. Hey, I been thinking about that ‘velocity of money‘ thing and the forces that change where it goes. Isn’t that just another name for ‘supply and demand’? Bad weather messes up the wheat crop, I gotta pay more for pizza flour, that kinda thing.”

“That’s one of the oldest theories in economics, the idea that low supply increases prices and conversely. Economists often use two hyperbolas to describe the trade-off. Unfortunately, the idea’s only sorta true and only for certain markets. Oh, and it’s only sorta related to how fast money flows through the economy.”

“C’mon, Sy, you’re talking to a professional here. I watch my costs pretty close. Supply-demand tells my story — a bad tomato harvest drives my red sauce price through the roof.”

“No question it works for some products where there’s many independent buyers, many independent sellers, everyone has the same information, and a few other technical only-ifs. It’s what they call a perfect market. How many different companies do you buy flour from?”

“Three or four in town here. I switch around. Keeps ’em on their toes and holds their price down.”

“Competition’s a good thing, right? No buyer pays more than they absolutely must and no seller takes less than their competition does. Negative feedback all over the place. If one vendor figures out an advantage and can make money selling the same stuff for a lower price, everyone else copies them and the market price settles into a new lower equilibrium and there’s no advantage any more.”

“Yeah, that’s the way it works for flour.”

“And a few other commodities like grains and metals and West Texas crude. Economic theorists love the perfect-market model because it sets prices so nicely. Physicists love ideal cases, too — frictionless pulleys on infinitely sharp pivots, that kind of thing, where you can ignore the practical details. Most markets have lots of practical considerations that gum up the works.”

“Devil’s in the details, huh?”

“Sure. I seem to recall you’ve got a favorite sausage supplier.”

“Yeah, my brother-in-law Joey. OK, he’s family, but he does good work — fresh meat ground exactly the way I want it, got a good nose for spices, dependable delivery, what’s not to like?”

“Is he more expensive?””

“A little, a little, but it’s worth it.”

“So hereabouts there’s an imperfect market for sausage. The economists might tally Joey’s extra profit from that premium price to an accounting column labeled ‘Goodwill.’ A physicist would have another name for it.”

“Goodwill. Joey’d like that. So what would the physicist call it?”

“Real mechanical systems are never perfectly energy‑efficient. Energy is always lost to friction. In my money‑physics framework money’s lost to friction. It’s the reason you pay a premium above what would be perfect‑market price for sausage. Nothing wrong with that so long as you know you’re doing it and why. Most real markets are loaded with friction of various sorts. Think of market regulators as mechanics, running around with oil cans as they reduce inefficiency and friction.”

“What other frictions … lemme think. Monopoly, for sure — some big chain takes over my market, drives me the rest of the way out of business and then they can charge whatever they want. Umm … collusion, either direction. Advertising, maybe, but that’s mostly legal.”

“You got the idea. So, how is business?”

“Are you kidding? Way off. I had to lay off people, now it’s just me baking and delivering.”

“Would you buy flour these days at the usual price?”

“Nah. At the rate things are going what I got will last me for a l‑o‑o‑n‑g time. I got no place to put any more.”

“Your customers aren’t buying, you’re not buying, money’s not changing hands. The velocity of money’s so low that supply-demand isn’t capable of setting price. That’s deflation, not market friction.”

“Either way, it hurts.”

~~ Rich Olcott