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Hot Chocolate sang โ€œIt started with a kiss, I never thought it would come to thisโ€ in their 1982 hit of the same name. Apropos of nothing I used to work with a guy who lived next door to their lead singer, Erroll Brown.

Anyway, in this case, it didn't start with a kiss but with a chart, and though they are not as popular (with most people) as kisses, they can impart more information to the recipient.

I shared a version of the chart above in the Macrodesiac discord at 8.33 am on Tuesday morning in response to a discussion about UBI or Universal Basic Income.

I don't propose to say much about UBI here as I have aired my views on the subject at some length two or three times within the Macrodesiac Discord.

What I will say however is that UBI is a form of fiscal stimulus or at least it could be. As David Belle pointed out (in response to this article on a pilot scheme in California) ๐Ÿ‘‡

โ€œThe thing with UBI is that all of these initiatives are not working alongside the first letter of the acronym ย โ€œuniversal' until everyone receives the same and the welfare system is abolished then it's not universal.โ€

Which is true enough.

But then I got to thinking about fiscal stimulus in its broadest sense.

If we ask Google to define fiscal it returns โ€œrelating to government revenue and spending, especially taxesโ€

That makes fiscal stimulus completely distinct from monetary stimulus which is undertaken by the central bank.

We are at a juncture in the economic cycle where monetary stimulus is scheduled to be reigned in within many major economies.

A point at which fiscal stimulus should ideally take over to boost the economy and help it to ride out the storm of pandemic, war, supply chain disruption, rising inflation and interest rates, and potentially lower investment returns.

These factors, (if mixed together in the correct quantities and shaken for the correct length of time) create that most unpalatable of all financial cocktails: stagflation.

Fiscal stimulus typically takes two forms:

  • Enhanced government spending, usually on infrastructure
  • Large projects and tax cutsโ€Œ

Both methods are designed with the same broad goals. To create disposable income, or make goods and services cheaper to consumers. They work via different channels. Government spending injects more money into the economy, while tax cuts leave more money in the economy (by withdrawing less as tax).

Tax cuts or incentives can also encourage investment. For example, VC and PE firms receive generous tax treatment on their long term investment or carry.

Whether that's ultimately beneficial to anyone other than the VC firms and their investors is debatable but we won't dwell on that here and now.

Government spending can create jobs, improve communications and boost services. And as we saw over the pandemic with the furlough scheme, it can create an economic buffer or lifeline in times of dire need.

To be truly effective in boosting an economy, fiscal stimulus relies on whatโ€™s known as a multiplier, a concept developed in 1931 by Richard Khan, a student of legendary economist John Maynard Keynes; the multiplier measures or quantifies the effectiveness of spending and fiscal stimulus on the economies GDP.

In his paper, Khan talked about MPC or the Marginal Propensity to Consume. โ€Œโ€ŒThe more consumption that fiscal stimulus encouraged the bigger the multiplier and therefore the more successful the stimulus program would be.


Put simply: Pump money into the economy to create wealth, disposable income and persuade people to spend it or consume, then rinse and repeat.

The effectiveness of the multiplier and its ultimate influence on GDP is measured by something called the velocity of money. That is the number of times that money circulates through or is spent in an economy.

The higher the velocity of money, the more times that money is being spent and the more economic benefit is derived from it.

However, there's a problem. In recent times the velocity (or recirculation) of money has been declining. ๐Ÿ‘‡

Even as the volume of money within the world's largest economy has been growing...

M2 shown in red above, is a classification that is used to measure broad money supply. It includes current account deposits and near-cash - that's savings accounts and other time deposits, and money market securities.

Quite why the velocity of money in the US continues to fall is something of a mystery...

We can see that household credit has risen dramatically since the 1980s. As we might expect, the growth in credit has been reflected in the growth of M2 money.โ€Œโ€Œ

And here we look at real GDP in the US versus the velocity of M2 money in the economy. Something changed in the year 2000 during a brief recession and it's been downhill ever since, even as the economy continued to grow.

I am tempted to suggest that credit and cash have different velocities when it comes to recirculation.

Could it be that credit and other forms of electronic payment are not recirculating in the same way that physical cash used to?

Right now that's just my intuition. I don't have evidence to support that idea but it's certainly something for proponents of helicopter money and CBDCs to consider.

Because if you're going to inject cash into the economy you want to get a big bang for your buck.

The Federal Government in the US is thought to have spent $3.60 trillion on Covid stimulus and relief packages to date. Yet there is almost no sign of that money being recirculated or multiplied in the economy.

What's more, it's been revealed that some 57% of US households paid no federal income taxes in 2021 up from 44% in 2020.

With less money coming in and what appears to be a diminishing return from fiscal stimulus in the modern economy, politicians could well find the next couple of years to be taxing indeed.

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