I think to understand why we have financial times that are good and bad at certain points in our lives we have to understand the velocity of money. Money is very sensitive to the speed in which it travels, just like the oceans are to temperature, a single degree change in temperature changes the whole eco system.
Some animals flourish while others do not. The same is true with money. When times are good, money is flowing at a constant and steady flow from one hand to the next. People go to work, earn their pay and spend it on the goods and services they enjoy. As the good times continue, spending increases, borrowing increases and the speed of money gets faster and faster. People believe that it will last forever and start to spend more because they will make more. False values take hold.
At this point people are spending more and more and making the same. The flow of money is going out faster than it comes in. Credit is easy to obtain. No money down, same as cash, no credit history required. This extra speed that money has picked up will ultimately catch up to us and the piper must be paid. In order to correct this, we stop spending in order to pay for what we have done rather than just slow down and adopt a more responsible fiscal discipline. It takes years sometimes for money to hit terminal velocity and it takes time to slow it back down. Now money starts to flow slower, people are not spending and banks have more ridged guidelines in their lending practices. This starts to constrict the flow of money making it difficult to access credit and continue to spend. People lose their confidence they once had. This is the time that the financially savvy start to appear. These are the people that will get the economy back on track by stepping in and buying. They are buying luxury cars at a discount, they are buying vacations and most of all they are buying Real Estate.
They further understand that the bulk of the wealth of this country was built with Real Estate. But unlike most people that think money is made when they sell, these people understand that the profit lies in the BUY not the sell. They are the leaders, the ones that know if they buy on sale today they will reap big rewards. For example, that ocean front home that was $6,000,000 3 or 4 years ago, they can now buy it for under $4,000,000 today. They will win big once the market turns. They also know that the market will turn because they understand that their spending will cause this to happen. The flow of money will be restored to a nice steady flow and prices will rise and they will reap the rewards for helping the rest of the people through the tough times. Make no mistake about it people are losing money. For every dollar that is lost someone is making that same dollar. Dollars do not disappear in to thin air .They merely go from one hand to the next, from the person who is losing the dollar to the person that is making the dollar. Billions of dollars have been made in times like this through out history .But only to the ones that understand the Velocity of Money. Let me know what you think This e-mail address is being protected from spambots. You need JavaScript enabled to view it.
Jeff Hunt
