This is how money really works. I'm going to answer the question in this episode "What
is the velocity of money?" What does that mean? You better put your seatbelt on
because I'm going to blow you away. When I do this in front of audiences, I get this
deer-in-the-headlight look because they never thought about this or been taught
about this. So, get ready.
So, my name is Doug Andrew and I've been a financial strategist for 47 years now.
And I'm going to share with you just some snippets on how money really works
and hopefully you'll understand what is meant by the velocity of money. So, I'm
going to start out with a little scenario here. And I normally would not
read these slides. But I want you to either read with me or close your eyes
and listen to my story. Okay? Here we go. A traveling salesman is
riding through a rural area and his car has a tire that goes flat just outside
of a small town. Got it? He then discovers that his son borrowed the jack and the
lug wrench and didn't return it. He's in trouble. A passerby gives him a lift into
town so that he can borrow a jack and a wrench to change the tire. Now, the town's
cash and crews repair shop is willing to loan him the tools with $100 cash
deposit. Until he returns with the borrowed tools. Got it? He gives the only
100-dollar bill that he has tucked in his wallet for such emergencies. And
thanks the shop owner for trusting him and says, that he'll be back in about an
hour to return the tools and retrieve his $100. So far, so good. Now,
in the mean time, the shop owner takes the 100-dollar bill to the part
store next door and pays for the parts he put on hold which he needs to fix a
car that a customer is coming in to pick up in one hour. Hmm, so he used that
100-dollar bill for that. Now, the parts store owner takes the $100
across the street to the grocery store and buys the meat for the company
barbecue that evening. What does the grocery store do with that 100 bucks?
They immediately pay $100 to the butcher for the meat he cut for
the store that day. I wonder what the butcher is going to do with the hundred
bucks. The butcher promptly
to the be French owners place a block away and pays for the beef that he
bought on credit that morning. The beef rancher heads off immediately to the
coop across the street to pay for the feed he needed for his cattle. The co-op
takes the $100 and runs out to pay its debt to the local truck
driver. The truck driver hurries over to his dentist on the corner to pay for the
emergency drill and fill that he had done the day before. The dentist then
hurries and gives the $100 to the local pharmacy next door for the
supplies he purchased on credit. The pharmacy owner then takes the $100
over to the local cash and crews. Oh, we've come full circle here. Repair
shop to pay the balance of the repair they were just finishing with the parts
they just purchased. It's the $100 that the repair
shop went over to pay for at the automobile shop, okay? Just as the
Traveling Salesman arrives back at the shop to return the borrowed tools and
retrieve his 100-dollar bill. You got it? Here's what's funny:
The salesman noticed the town was really booming. A mid a rather sluggish national
economy and wondered "What was the town's secret? What's their secret here? They
seem to be booming?" As he drove out of town, he thought to himself, "Wow, I
retained my 100-dollar bill. It's safely tucked back in my wallet." As he
drives out of town, he sighs and begins to wonder. When his own customers are
going to order more supplies, so he can pay the people he owes money to. He
didn't even understand what took place in one hour with his $100.
Do you know how many times that $100 was used? Over 10 times. That's the
velocity of money. So, what does all this mean? So, as you think about that little
story, there was only one one 100-dollar bill. But it ended up representing
over $1,000 of transactions. That is called the
velocity of money. The amount of money that is created and traded in the United
States is way more, 17 times more than the amount of money in print. Sometimes
even greater than that. In a recession, money may turn only 17 times, sometimes
only 12 times. Sometimes it will turn over 30 times. So, this is how money works.
Banks, if they want to bring in million dollars of deposits, we collectively go
deposit money there. We lend them our money and they're willing to pay us
let's say 1% because that was the average for about 15 years here. And so,
they pay $10,000 an interest a year to borrow our money.
O-P-M, other people's money. Now, they turn around and loan it back or put it into
institutions ranked 6 notches higher in safety than they are. The multi-trillion
dollar legal reserve insurance industries where they put 30 to 40
percent of their tier 1 assets for liquidity and safety. And they earn 5%
just on the general account portfolio. They don't even use my favorite strategy
indexing. How much more is 5 than 1? I hope you don't think 4. It's 500%.
Would you hire an employee for 10,000 that made you 50? Would you buy a widget
machine for 10 grand that made you 50? That's a 500% return
unemployment cost or equipment cost. So, when I talk about how money really works,
banks do this. But you can borrow at 3%, okay? And if banks borrow at one and
invested 3, they're making t300%. Well, I've been borrowing
money at 3%. If I borrowed money at 6%, I'm paying
60,000. Let's say on a home mortgage. But if it's tax-deductible, it doesn't
cost me. That it only cost me 4% because I get 20,000 back
in actual tax savings. So, borrowing 6% at a tax-deductible interest
rate is only really paying 4% or 40. In my universal life insurance
contracts, I've earned an average of 8.2% for over
47 years. Let's round it down to 8. How much more is 8 and 4? That's
100%. You can be making 100%. This is how you
become your own banker. So, lately, I've been able to borrow money at
4.5%. That's a net cost of 3. I've borrowed money sometimes at
3% and that cost of 2. I turn it around and make 9. How much more is
9 than 3. I can make 300% just like the banks do. I can
make 500% sometimes just like the banks do. You can't believe how
many people don't get this. So, let's connect all the dots here. I've been
showing you that banks borrow our money at 1 or 2 percent. And if they borrow
it at one and they turn around and put it into institutions rank higher and
safety than they are, insurance companies and they earn 5.
That's a 500% increase. They pay 10,000, they make 500,000.
But is it really that? Based on that story I told you, sometimes people say,
"Well, why in the world would a bank or a credit union loan you or me money for a
house at 5 or 6 percent interest when they can put it into an insurance
company which is far bigger and safer and earn the same 5%" Why would
they do that? Here's the secret: Because if I borrow
let's say a million dollars to go build a house, what am I going to do with that
money? I'm going to pay a general contractor. What's the general contractor going to do
with the money? Pay subcontractors and suppliers. What are all of them going to do
with the million when I pay them? They're going to loan it back to the bank. They're
going to put it in the banks at 1%. So, the bank's get the money back. The same money
back at 1% and they loan it out at 5. They get it back at 1, loan and out of
5. How many times a year? The average bank 17 times a year.
During the recession, maybe only 12 times a year, shucky darns. That's the velocity
of money. The banks are loaning out money and getting it back at 1 loaning it
out at 5. They're making 500% 17 times a year on the same money.
Just like the story of the Traveling Salesman. Folks, that's the velocity of
money. And that's what makes America tick. I want you to watch this episode to
understand how you can have this concept helped you so that you can be part of
the thrivers and the wealthy in America.