Rethinking Velocity of Money: Unleashing Economic Energy

Velocity of money refers to how much monetary energy can be harnessed as money flows. It is often wrongly interpreted as simply how fast or how often money moves from one place to another, but the actual benefit of velocity of money is in the work it does on the way from one place to another. How many jobs can it perform and how many productive activities can it sustain along the way?

It is analogous to a mountain lake where a vast amount of water is contained but unproductive. By building a trench to move some of that water to a small garden “productivity” is increased, and the velocity of the water is increased. A water wheel or turbine could be placed in the stream to spin a mill or generate electricity, increasing the velocity of the water and maximizing its productive use. Other energy sources can be combined with the water to create additional forms of energy that can drive increasing innovation. Such as heat for steam power or the cool water can be run through a house for cooling and washing prior to is use as irrigation. Without these systems, the energy and usefulness of the waters “velocity” is simply wasted and never recovered. The possibilities are only limited by the tools used to harvest the potential energy, The distance over which the water travels and imagination. It is not the movement alone of the water that is desired but the effects of the movement that offer endless possibilities, the flow is a means.

Similar to how water nourishes the physical landscape and stores energy to generate work, money nourishes the economic landscape and stores energy to generate work. Money is a natural part of economic landscapes which arise anytime trade needs to be facilitated. The brilliant cult classic film “Idiocracy” serves as an interesting counter-analogy for this concept. In the film, a society has become convinced that using a colored high-sugar sports drink (Brawndo) on crops is “What plants crave”. However, the protagonist suggests trying water instead, and the society is saved.

The point of the Brawndo storyline seems to be a commentary on special interests, the sports drink manufacturers. Being able to seize control of the narrative and create artificial demand for their product in a context where it was actually harmful to the ecosystem. Isn’t the same true with fiat currency? It has no historical use, attributes of good money, or spontaneous emergence. It is simply decreed by those in power. “Fiat, it’s what economies crave.”

Many have become convinced that a proprietary patented, yellow #5, high fructose corn syrup money equivalent is what we need to grow our economies. The problem is that our ability to create monetary velocity is stifled by using a proprietary system because our use of it is limited by the owners of it. (“Sorry, Brawndo is not permitted to pass through a turbine. You need a license for that.”)

When the forms of money needed to expand our economies physical and digital have emerged spontaneously and without decree, we just need to figure out how to use them. We can do this by not simply building a stack but stacking functions. Creating the tools and systems that can allow us to capture the energy as the money moves. In the digital realm bitcoin has emerged as the base layer of money, the stored energy, the actual water. Channels (lightning) have now been constructed to efficiently move bitcoin in large volumes for lower cost between pools. We seem to be at the water wheel invention phase where ecash mints of various types will be able to tap into channels and generate new forms of economic energy.

A quite interesting case study of stacking monetary functions and attaining high monetary velocity is in various forms of traditional life insurance contracts. Each monetary unit that is placed in the contract performs the following functions simultaneously: preservation of life value/life insurance, savings/retirement funds and collateral assets. The funds locked into the contract grow but can also be borrowed against. Instead of canceling the contract and taking the cash and missing out on future growth (interrupting the compounding growth), the owner can borrow against the cash value for personal investment, business ventures, paying off high-interest debt, etc., for any reason really and all contractually guaranteed. These contracts predate the fiat monetary system and worked on gold and silver standards in the past.

The insurance companies that are the longest lived and most financially sound operate as Mutual companies meaning the policy/contract holders are the shareholders; there are no third parties that have ownership in the assets of the mutual insurance company. Some are nearly 200 years old, which rivals the oldest banks in the world. Even today these contracts are quite attractive in terms of control over funds and the yields aren’t bad in fiat terms.

The problem is that in order to keep up with inflation people have to take more risk and give up more financial sovereignty to chase yields. We can see that using this pre-fiat financial instrument, each monetary unit can accomplish 3 “jobs” at the same time: generate insurance, save for retirement, obtain a collateralized loan. This is only one example of using and harnessing monetary velocity. What we really need to do is break free from the fiat mindset that tells us there’s only one way to go about solving financial problems and start thinking creatively about how to move money to places where it is most needed and likely to generate a return.

In relation to Bitcoin, when I first heard about Fedimints, my mind went straight to the mutual insurance company structure. A group of known and vested guardians is entrusted to provide specific contractually guaranteed benefits. Who wouldn’t want a bitcoin service that would allow anyone to generate an uninterrupted compounding yield on bitcoin, allow borrowing against it at a competitive market rate, and pay out a large settlement to heirs in the event of death – all denominated in bitcoin. Without ever giving up full custody of the asset.

Underlying funds would all be on-chain, investments would be in lightning liquidity and infrastructure. Loans would be given to policy owners via ecash or lightning depending on the use case. Or something completely different. It’s almost impossible to see how something like this would actually work until it is tried and iterated. Innovation always comes with unforeseen problems and eucatastrophes. The possibilities that will be made available in the years to come are exciting but will require an immense investment of time and energy, the pay off is escaping from the Idiocracy.