Will global payment solutions via the blockchain increase the velocity of money?
Money velocity is the rate that people spend money within an economy.
Money velocity can be a measure of economic health, however, that is debated by economists.
Velocity refers to how quickly money changes hands.
If Mike has $100, and spends $50 at a Bob’s store, Bob now has money to pay his employees.
Bob’s employee Ned can now pay his rent and buy food, and so on.
The more often the same money is used within an economy, the higher the velocity.
Velocity is a function of the amount of money spent within the economy (GDP) AND the total amount of money available.
Over the past few years, there has been a dramatic increase in the supply of money from stimulus and crisis spending.
This means a larger amount of money needs to be used by the same amount of people or the velocity slows down (which it has).
However, when it comes to “economic health”, there is also a thesis that societies with a high rate of savings are in a better position than those who do not (they are investing in their future).
Therefore, the relationship between velocity and health of an economy are debatable.
This ties into the paradox of thrift. Regardless, when money is tied up in “unproductive” places, the rate of spending is slower than it could be.
The current system of moving money around the globe (referred to as global payments), includes several “unproductive” areas.
First is the use of “nostro-vostro” accounts (accounts with correspondent banks used to transfer of funds across borders and by the global supply chain)
Upwards of $5 TRILLION is tied up in these accounts, which means they aren’t part of the flow of money.
Within the US, payments made using services like ACH (automated clearing house) are also tied up as “unproductive”.
Funds using ACH typically take 2-4 days to clear from Bank A to Bank B.
That may not sound like a long time, but when you consider the billions of dollars that gets held up for days, the overall velocity within the economy is slowed down.
However, with some services like ACH, the held funds are lend out for profit (but that is a different topic to cover another day)
With global blockchain payment services (like those created by Ripple), where funds are moved from A to B instantly, the flow of money will speed up.
Currently, the payments system works like a highway toll booth where money has to stop often, with long wait times.
Once the blockchain supports payments, it will change to an EZ-pass scenario where you don’t even have slow down to pass through the toll.
The velocity of money will speed up as unnecessary stops will be removed from the pathway.