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Technology Stocks : Intel Corporation (INTC)

INTC 48.26

-0.7%

Feb 5 3:59 PM EST

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To: Defrocked who wrote (34555)	10/9/1997 6:40:00 PM
From: Defrocked	of 186894

FWIW DEPT.Note on the Velocity of Money and Internet Purchases e.g. Dell at $3 million per day. I read a post recently that suggested increasing purchases on the Internet might increase the velocity of money, push economic expansion and create inflation. I would like to correct this logic by distinguishing between the transaction velocity of money and the income velocity of money through a simple example. The fact that people are buying more computers over the Internet and paying for them more quickly does not necessarily increase economic activity. Instead it just makes the purchasing more efficient since the transaction costs of search, delivery and other frictions are reduced. All that happens is the buyer pays Dell, for instance, direct without say CompUSA getting a cut. Payment through electronic credit card transfers may be a little quicker but does not result in inflation or economic expansion. When transfers of money are involved economists refer to that as transactions velocity. However, if the resulting electronic transfers between Dell and the customer are used by Dell's bank to expand their loan portfolio an increase in the income velocity of money may occur. But this increase in loan demand is independent of the Dell Internet purchase decision. Dell would have received the deposit eventually but from CompUSA rather than directly from the consumer. Thus the driving factor for loan expansion centers on the supply and demand for loanable funds by the bank and borrower respectively. The income velocity of money tends to increase after monetary expansion and decrease after money supply contractions. In other words, people want to borrow more when inflation increases and less when deflation occurs. Don't mean to be a bore. But with Dell selling directly through the Internet so successfully this topic will probably come up again. So now you can impress your friends with economics at your next cocktail party.<g>

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