VELOCITY

      A critical element in the strength of our economy is velocity. Velocity is the speed that money or purchasing power moves through the economy. A drop in velocity can neutralize the fiscal and monetary stimulus that the government hopes will boost our economy back to recovery. Understanding velocity should temper one's optimism about the publicly promoted efforts to make us believe that all is well and the government is in control.

      If you receive a tax rebate and run out and spend it on a diamond at Tiffany & Co., presumably the sales person that sold you the diamond makes money and the shareholders of Tiffany make money. If these people then go and spend their new gains at Wal-Mart, the salespeople and shareholders of Wal-Mart will now have additional money to spend. If some of these people use their new money as a downpayment in combination with some financing to purchase something much more expensive, then the money or purchasing power in circulation expands and even more people benefit. The faster this process flows through the economy, the more people benefit.

      However, if you receive a tax rebate and place it in a cookie jar as savings for a rainy day, nobody else in the economy benefits. If you are offered very low interest rates so you can borrow to make a purchase, but you don't want to or can't afford to make the purchase, the low interest rates provide no boost to velocity and no monetary expansion. The classic image to describe this situation is: "You can't push on a string". Another way to state this is: "You can lead the consumer to the store, but you can't make him buy."

      We are hovering at an important point of confidence where the consumer has to decide whether it is in his best interest to purchase (and perhaps even finance a larger purchase) and contribute to velocity, or wait and save his money. If velocity continues to fall, the government can enact all the stimulus programs it can dream up and still not cause an improvement to the economy. In fact, the government is at risk of doing great damage by debasing the currency and causing structural dislocations in the economy in a vain attempt to encourage a recalcitrant consumer.

      The jury is still out. The decision could go either way. It is important to realize that government stimulus does not guarantee an economic recovery.