Category: Physics: Money

What Goes Around

On By rolcottIn Physics: Money, UncategorizedLeave a comment

<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’ 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

On By rolcottIn Physics: Money, UncategorizedLeave a comment

<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

The Buck Rolls On, We Hope

On By rolcottIn Physics: Money, UncategorizedLeave a comment

<knock, knock> “Door’s open. Come in but maintain social distance.”

“Hiya, Sy. Here’s your pizza, still hot and everything but no pineapple.”

“Thanks, Eddie. Just put it on the credenza. There’s a twenty there waiting for you. Put the balance on my tab.”

“Whoa, I recognize this bill. It’s the one that Vinnie won off me at the after‑hours dice game last month before all this started. See, I initialed it down here on the corner ’cause Vinnie usually don’t do that well. How’d you get it from him?”

“I didn’t get it from Vinnie, I got it from Al when I sold him a batch of old astronomy magazines. Vinnie must have finally paid off his tab at Al’s coffee shop.”

“Funny how that one bill just went in a circle. Financed some risky business, paid off a loan, bought stuff, and here I get it again so I can buy stuff to make more pizza. That’s a lotta work for one piece of paper.”

“Mm-hm. Everyone’s $20 better off now, all because the bill kept moving. Chalk it off to ‘the velocity of money.‘ If Vinnie didn’t spend that money the velocity’d be zero and none of the rest would have happened.”

“That sounds suspiciously like Physics, Sy.”

“Guilty as charged, Eddie. Just following along with what Isaac Newton started back when he was staying at his mother’s place, hiding out from the bubonic plague.”

Newton, after a day at the beach
while wearing an anti-viral mask

“What’s that got to do with money? Was Newton a banker?”

“Not quite, although the last 30 years of his life he headed up England’s Royal Mint. The core of his work during his Science years was all about change and rate of change. His Laws of Motion quantified what it takes to cause change. He developed his version of calculus to bridge between how fast change happens and how much change has happened.”

“Hey, that’s those graphs you showed me, with the wave on the top line and the slope underneath.”

“Bingo. Pandemics are a long way from the simple systems that Newton studied, but the important point is that to study his planets and pendulums he developed general strategies for tackling complex situations. He started with just a few basic concepts, like position and speed, and expanded on them.”

“Speed’s speed, what’s to expand?”

“Newton expanded the notion of speed to velocity, which also includes direction. From Newton’s point of view, the velocity of a planet in orbit is continuously changing even if its miles per hour is as steady as … a planet.”

“Who cares?”

“Newton did, because he wanted to know what makes the change happen. His starting point was if there’s any motion, it’s got to be at constant speed and in a straight line unless some force causes a velocity change. That’s where his notion of gravity came from — he invented the idea of ‘the force of gravity‘ to account for us not flying off the rotating Earth and the Earth not zooming away from the Sun. His methods set the model that physicists have followed ever since — if we see motion, we measure how fast it’s happening and then we look for the force or forces that can explain that.”

“Now I see where you’re going. That ‘velocity of money‘ thing is about how fast the paper changes hands, isn’t it? Wait, if Vinnie had put that twenty up on his wall as a trophy, then the chain would’ve been broken.”

“Right, or if Al had diverted it to buy, say, coffee beans. That’s why we say velocity of money and not speed, because the direction of flow counts.”

“Smelling more and more like Physics, Sy. Like, there’s astrophysics and biophysics and you’re coming up with econophysics.”

“Well, yeah, but I didn’t invent the term. It’s already out there, with textbooks and academic study groups and everything. It’s just interesting to use economics as a metaphor for physics and vice-versa. The fun is in seeing where the metaphors break down.”

“I see one already, Sy. Those forces — we all had different reasons to kick the bill along.”

“Good point. Now we figure out those forces.”

~~ Rich Olcott