The Pandemic, the Velocity of Money and a Face in the Crowd

Does this equation, VM = PQ/M, have any meaning to you?  It does to me.  What is more, it has a face.  But, perhaps, a little back story is needed.

Saturday morning, I had no choice.  Despite careful planning and buying ahead, I had to go to the grocery store.  The fact is you can only buy so many bananas ahead of time.  Perishables need to be replenished.  So, early on a rainy morning I headed to the stores, armed with a positive attitude, patience and my hand sanitizer.

I was already heading for my second store, still looking for the milk and eggs that seem to go fast these days, when the rain set in in earnest.  Without an umbrella, I joined a line of orderly people being allowed in a large grocery store in manageable pulses.  Everyone was polite, showing both kindness and good humor.  Nowhere was this more evident than when the man behind me in the line moved his huge umbrella over me as we stood there.  Usually two people must huddle under one umbrella, but this one was so enormous neither of us had to take even a half-step closer to one another.  I thanked him and we chatted during the ten minutes or so that it took us to have our turn to enter the store. 

While I am a retiree, this gentleman was still working—that is until Thursday when his employers shut down for “the duration.”  He said he didn’t want to go on unemployment and was hoping to get handyman jobs until they reopened.  He was a good man, a proud man and a kind soul.  He had a resolute face. 

And that brings me to VM = PQ/M.  If you are an economist, you know that VM stands for the Velocity of Money, which means how fast it moves through a community.  When you spend $5 for a dozen eggs at a farmers’ market (which I eventually did) the $5 is not gone.  It moves to the farmer, who spends it on chicken feed.  The feed store spends it on electricity.  The electric company spends it on wages…and on it goes.  Money does not stand still.  PQ is nominal gross domestic product—the measure of goods and services a community produces.  M is the money supply (usually referred to as M1 or M2) which is easily available to people.  It does not include stocks or bonds, but the money that is liquid:  currency, checking accounts, savings accounts, travelers’ checks, Certificates of Deposit and money market reserves. 

The whole equation gives an accurate look of how much money flows through a body of people.  It can be used to “take the temperature” of an economy.  Velocity indicates the production of goods and services, people employed, risks being taken on innovation and loans made by the banks.  Unlike the temperature of a human body, you want the velocity of money to be high.  You can not spend money you do not have.  You can not move wages through an economy when those wages have been denied by economic shut down.

The current concern about COVID-19 is genuine.  This disease kills.  But there are lots of ways to die.  I am as worried about the economic ramifications of this disease as I am about the medical consequences.  We are hurting so many people who will never test positive for COVID-19 but will test positive for economic hardship.  They need care, too.

Most pandemics have a surge, a decline and an echo increase before they are done.  We must expect the same in our economy, but it will not last months, it will last years.  For me, that hardship has a face, a good man with a large umbrella.

Keep the faith.