Friday, December 16, 2011

Five Dollar Insight...

Yesterday I had to deposit some cash at the bank. Nothing huge, but every dollar counts these days, right?

The only problem was, not all the bills were recognized, and it pretty much illustrates the problems we face right now, not just in our everyday business, but the overall economy as well.

Dropping in cash at the bank is a pretty straightforward process. Used to be you just popped everything into an envelope, and you it all got deposited in the morning. Today, with "improvements" to the technology, you just drop bills into the machine, it reads them, and lo, instantly credited.

In theory.

That is, if the machine can read the bills. That means, the bills that aren't crumpled. The ones that are new. Haven't been used a lot. The higher the denomination, the better. Ones, fives, even ten spots, they get used and wadded up more often, and those are the ones that aren't so easy for the machines to read.

The bank decided that one of the fivers that I included wasn't good enough for a deposit. The tech couldn't read it, so it was rejected, and it went right back into my wallet. Not a big deal, but it does illustrate part of the problem that we face in the larger economy.

There is a lot of to do about tax cuts and tax breaks right now. Who gets them. What gets taxed, what gets a break, what is more valuable to the economy as a whole.  There is the school of thought that prefers to give breaks and recognize only the larger transactions.  Corporations and large businesses are more valuable to the general economy, in much the same way, that bills that are not in general circulation for long are easier to deal with for our banks at the ATM.

The fight against a payroll tax break is much akin.  Banks don't like the idea so much, because they won't be getting an influx of large cash from corporate sources. Instead, there will be smaller amounts deposited. A lot of them.  And more, with a payroll tax break, there won't be huge numbers posted to these accounts, but incremental amounts that will piled into paychecks. These smaller amounts do add up, and more, these smaller amounts will tend to go to things like paying bills. Utilities, gas, insurance, servicing credit card interest, into home loans, groceries, and small purchases. It's not sexy like dropping a few million into a single account, but like the five dollar bill, these smaller payments will circulate a bit more.

Giving large breaks to corporate sources, will mean dropping sexy amounts of cash into accounts. Akin to dropping larger amounts into bank accounts. These corporate accounts tend to head overseas, or are maintained a bit out of the chain of commerce. Put into the stock market. Put into funds that do things at a macro-economic level. Far more dynamic where the narrative heads when we talk about indicators. Bigger. Easier to track.

The problem is, economics isn't just at that macro level.  What we have are issues at the local level. Demand and supply are skewed at the moment, and we see a lot of Americans carrying debt, and crushed under the weight of bills hanging, with interest building.  At one level, this makes banks and utilities salivate at the thought of piling on more charges.  In the long haul, it means more cash extracted from consumers. The problem being, that this strategy chokes a lot of business models by depressing purchasing, and slowing payment on debts, which slows growth, slows demand, and right now, our economy suffers from a lack of movement in cash.

The humble fiver is an illustration of this. Crumpled, not too pretty, harder to read, the bank doesn't like it so much. The thing is, that fiver goes to small purchases. It goes to the gas tank. It goes to smaller purchases. That keeps the chain of commerce going.  In a similar way, these pay roll tax relief plans keep smaller amounts of cash moving as well. It provides not huge amounts of cash, but it does keep the cash moving.  People pay their utilities, they buy groceries, they buy gas, they pay down credit cards, they keep the cash in circulation. They pay for small goods, which then increases demand, which spurs production. It's not as sexy as a huge government contract, it's not an order for a company wide purchase of new laptops or an agribusiness expanding their facilities, but without increased demand, without this liquidity, those larger purchases, those larger demands never show up--or if they do, they do at a cost to local investment.

We are seeing a contraction in purchasing power by the middle class. We are seeing a drop in demand for services, and in response, we have banks increasing fees to make up for that. To squeeze folks when they're down. This in turn, lowers the amount of cash that folks are able to then put into purchases, further lowering demand, and increasing the overall difficulty in getting out of the hole we've dug ourselves into.

At some point, we have to recognize the power of that ugly five dollars. We have to recognize that cash in circulation does us all more good, than just looking at the larger deposits. That we need to put cash into the hands of folks who actually buy the stuff that folks would like to sell. To use the services that folks would like to provide. That cannot happen if folks don't have that cash on hand to do so. That by looking at only the larger purchases, the larger players, that we depress demand, and only exacerbate the difficulties we find ourselves in.

That lonely, ugly fiver, it wants to go to purchases. It wants to be used.  At some point, we need to recognize that those ugly fivers, when they compound over time and across the board, they add up. Not in the sexy way that twenties roll in, and count easy, but in smaller purchases that add up over time, and add up in ways that increase the ball of demand and keep the wheels greased.  Not as pretty, not as easy to point to, but economics isn't pretty, and ultimately, we need those small purchases, we need the cash passed around a few times before it heads up the chain, as opposed to going straight to the large banks, straight out of circulation, and straight out of the general economy.

Crossposted to The Motley Moose

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