Friday, January 03, 2014

There is a reason money is also called currency

All of us are familiar with electricity. We use it every day. Our bodies cannot function without it. When electrons flow in a wire, we have electricity. The name for that flow is "current". When electrons move, you have power.

By the same token, when a dollar sits in your wallet, it has very little power. But when you present it in exchange for something else, like food, gas or shelter, you generate economic demand. In this example, money is moving and generating force, a demand for goods and services. Most of the transactions we're familiar with involve the exchange of a dollar for something else.

The demand generated by a moving dollar is something that we're familiar with. Economists think of moving dollars as "circulation", and when money moves, it's taxed. Whenever we buy something, there is a sales tax for it. Of course, there are a few exceptions. In California, there is no sales tax on food. In Utah, there is a sales tax on food. When money moves, it tends to generate tax revenue.

When we think of a dollar, we usually think of paper money, a dollar bill with the familiar portrait of George Washington on the face and the word "ONE" on the back. When this money moves, we call it circulation, or demand. When electrons move, we call it current. The paper money has another name for it, a fancy name, and we call it "currency". I believe that the term "currency" came to represent paper money for the power that is created when paper money is circulated.

Nowadays, most people do not handle money in the original sense. We write checks. We use a debit card. We use PayPal. I know for myself that days and weeks may pass before I see a dollar bill of any denomination again. I used to study money when I was a kid. I was fascinated with the art of the older currency from the 19th and 20th century and used to gape in awe at pictures of the $100,000 bill with Woodrow Wilson on the face.

Most economists estimate the US economy to be worth approximately $16 trillion a year and they call this figure, the Gross Domestic Product. It's a huge, mind-boggling number, isn't it? $16 trillion is the value we come up with when we add up every transaction by everyone every day for one year. Every house, every car, TV, washer and dryer, every computer, cell phone, iPad, what have you, the GDP includes all of that. All of it generates tax revenue, with a few minor exceptions as mentioned earlier. Even online sales are coming into the fold.

But there is one area of our economy curiously missing from our tax revenue net: securities. When most of us think of securities, we think of stocks and bonds, we think of Wall Street. Some of us have invested in stocks and fewer still have invested in bonds. There is a lot of money flowing through Wall Street, every second of every day. The money never sleeps.

So how much money changes hands in a year on Wall Street? Estimates put that figure at $5 quadrillion. To put this in perspective, 1% of $5 quads is $50 trillion. Our economy is estimated to be a mere $16 trillion. A tax on all this speculation might actually help the economy. A small 1% tax on those high frequency traders might slow them down long enough to consider a meaningful trade, you know, a trade that actually creates jobs. A 1% tax will hardly be missed by super wealthy traders who are just pushing paper around and producing almost nothing for anyone else.

Strangely, this sort of tax, a financial transactions tax, has been largely absent from any discussion about fixing the debt. You know, the $16 trillion government debt that you, me and all of our grandchildren will have to pay for someday? Yeah, that debt. The one we owe to China.

Fortunately, somebody has noticed this gaping hole in the debate. But trust me, you'll never hear it from our esteemed colleagues on the right. They simply have too much skin in the game to talk about it.
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