Why Is There So Much Money Floating Around?

Well, there IS a lot floating around. You and I aren’t burdened by an oversupply. But it’s out there. How much relationship is there to money supply and production of goods? And how does the relationship get out of balance?

Let’s walk ourselves through a hypothetical example.

Let’s pretend that I inherited my father’s ’57 DeSoto, fins and all. One of the laast years they made DeSotos. Low mileage machine, it is. Dad only drove it on weekends to Farm Bureau meetings. 

So I read in the paper that Tesla Motors is up and running, producing automobiles and making a profit. I want one of them. So I drive the old DeSoto down to the dealership and trade it in. The salesman is charmed by the old Desoto and gives me a good trade-in for it. I dig in the sofa cushions for enough money to pay tax, title and license, and I’m off to see the world in my new Tesla automobile.

High tech doesn’t come cheap. The Teslamobile retails for around $100K. I sign the papers for a loan with monthly payments that stress my heart’s pacemaker. The paperwork is all done, the dealer has $100K, less my trade-in, in his bank acccount. The salesman is feeling good. His commission is $15K. Which goes into his account right away.

The salesman is a big Snoopy fan, and loves the Red Baron. There’s a Sopwith Camel listed in Trade-A-Plane newspaper. He calls the seller and arranges to meet at the airport. The airplane is a steal at $75K. He gives the owner his $15K commission and takes out a loan for the rest. The Camel owner now has a bank balance of $75K.

With that $75K, he pays half the price of a $150K house in a new subdivision. The owner of the house is retiring to a trailer park in Florida, which he’s already paid for. He still owed some on the house, so he pays it off and has $25K left in the bank. Enough to buy that big fishing boat he’s been drooling over. So he plunks down his $25K and takes out a loan for another $25K, which goes directly to the bank of the boat owner.

Paperwork flows smoothly in this hypothetical situation, so it only takes a day for it all to play out. At the end of the day, how much more money is in circulation that there was before I drove my Dad’s DeSoto to the dealer?

If my trade-in was worth $15K, then the dealer has $70K in the bank and the salesman got the other $15K. So far, there’s $85K in new money available. Add $60K in new money to finance the Sopwith Camel. So now we’re up to $145K in new money. Then add another $25K for boat financing.

So here we are at the end of the day with $170K in new money floating around, unless my math is off somewhere. All this, and not a single nail has been driven, not a single turnip has been dug. Nothing new has been created. Yet, there is now $170,000 dollars in new money available to be spent.

Wild, isn’t it?

Dragon