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The VELOCITY of Money: Mattress Hoarding in a Reeling Economy

Definition of Velocity

The rate at which money circulates, changes hands, or turns over in an economy in a given period. Higher velocity means the same quantity of money is used for a greater number of transactions and is related to the demand for money. It is also called the velocity of circulation.

Simply put, velocity is the movement of money in the economic system. It is ESSENTIAL to the health and vitality of our system that the money moves. The faster the better. A healthy economy is one in which there is a lot of activity, with its citizens buying and selling goods and services. There are plenty of fancy equations and wordy theories for this, but it all comes down to "activity."

If, for example, in a very small economy, a farmer and a mechanic, with just $50 between them, buy goods and services from each other in just three transactions over the course of a year:

Mechanic buys $40 of corn from farmer.

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October 31, 2008 Posted by Jack Wilkinson, G.R.I. | Untagged | Comment (0)

THE GREATER FOOL JUST LEFT TOWN: Evolution of A Cash Crisis

The Greater Fool Theory:

“Observation that any price (no matter how unrealistic) can be justified if a buyer believes that there is another buyer who will pay an even-higher price for the same item.” ~ businessdictionary.com

What does all the noise about a "financial crisis" really mean? Well, it's hard to understand sometimes, but the nub of the whole situation is this: you cannot lend money to people who cannot pay it back. Period. End of story.

Here is how the system works, simplified for brevity. Money is a tool that works by earning interest. A saver puts money in a bank or S&L and earns interest. The bank or S&L loans the money to someone who pays a higher rate. Both parties make money. If the loan is a real estate loan and the bank or S&L keeps the loan, known as a portfolio lender, the circulation of the money is small; from the depositor to the lender to the borrower.

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October 2, 2008 Posted by Jack Wilkinson, G.R.I. | Untagged | Comment (0)

Leverage and Liquidity: A Simple Comparison in the Post-Bubble Real Estate Market

Leverage, as used in real estate, refers to one's ability to control a large amount of asset value (money) with a small amount of asset (money). To simplify, consider that you can purchase a home for $100,000 using $20,000 of your own dollars. (The dollar amounts are a bit dated, but the idea is easier to follow using these numbers.) The other 80% is OPM, otherwise known as "Other Peoples Money."

Liquidity is the probability that an asset can be converted into an expected amount of value within an expected amount of time. If you know that you can sell your wristwatch for $100 within an hour, you could claim that your wristwatch is a liquid asset. If you are uncertain how much your watch is worth, or how long it might take to sell, where and to whom, then it is rather "illiquid."

Why is this important?

Because in today's market, questions abound. Where is the real estate market going? Is now a good t

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August 7, 2008 Posted by Jack Wilkinson, G.R.I. | Untagged | Comment (0)