Politicians are not economists and that is the biggest problem.  If you have time to read one long and boring financial piece, I suggest you choose John Mauldin’s Velocity of Money note.  If you choose to have a life and not be bothered with it, let me summarize a significant point within it.  The velocity of money is one of two variables that goes into determining our GDP, or our level of economic activity. 

The formula is GDP = M * V, which is the amount of money in the system times the number of times it trades hands (that’s the velocity of money).  In the article, he has a graph that charts the velocity of money through time.  It has averaged 1.67x (meaning money trades hands 1.67 times in a year) since 1900.  In the last decade, it was in the 2x range.  Currently, it has dropped to 1.72x.  Why the move up and then move down?  The biggest swing factor is the amount of leverage placed on money (either by banks, corporations, governments, or individuals).  The 1990s and early 2000s were years of increasing amount of leverage (debt).  In the past 18 months, we have seen people and enterprises lower their debt levels, preparing for a bad economy.  This naturally lowers the velocity.

Now, why do I say that the government wants to slow us down?  It comes down to the fact that government money velocity is thought to be lower than private sector activity.  The current administration puts the number at 1.5x.  I have heard others says that that is a best case number.  Whatever the real number, when the government spends money, it has less of an impact on our economy that when the private sector does since our velocity factor is greater than 1.5x (again, that may be putting a positive spin on the actual government influence).  For the government to spend this money, they are needing to take it from some place, and that my friends, is the private sector.  So, when the government spends $1, it has the best case scenario of making $1.5 of economic activity.  When you and I spend a $1, we make $1.7 of economic activity.  It’s just basic math.