Abstract
This paper introduces the Split Velocity model as a transformative approach to economic systems, addressing the inefficiencies inherent in the traditional Circular Flow of Income (CFI). By achieving 100% recovery of losses within the CFI, the Split Velocity model establishes a lossless economy characterized by a baseline 1:1 return on investment over a one-year period. This contrasts sharply with the current zero-growth economy, where baseline returns are effectively 1:0, leading to reliance on cost-plus pricing, creeping inflation, and heightened financial risk. Through theoretical analysis, the paper demonstrates how the Split Velocity model balances money supply with productivity, creates price stability via a “price plane,” reduces inflation, lowers investment risk, enhances returns, and accelerates economic growth. The model fosters a well-oiled economic machine where productivity booms are matched by sustained demand, making it superior to the inflation-prone, inefficient status quo.
Introduction
The concept of the time value of money (TVM) is fundamental to financial decision-making, encapsulating the idea that a dollar available today is worth more than the same dollar in the future due to its potential earning capacity. In practical terms, TVM prompts the question: If an investor has one dollar to allocate from day one over a 365-day period (one year), where should it be invested to maximize percentage gain? Traditional options range from low-risk assets like treasury bills or government bonds to higher-risk instruments such as stocks or cryptocurrencies like Bitcoin.
However, the current economic framework, built on a flawed Circular Flow of Income (CFI), often results in a zero-growth baseline where the expected return on that dollar is zero (1:0). Businesses counteract this through markups or cost-plus pricing, which induces minimal GDP growth but perpetuates inefficiencies, inflation, and risk. This paper proposes the Split Velocity model as a superior alternative. By fully recovering losses in the CFI, the model creates a lossless economy with a baseline return of 1:1, meaning a one-dollar investment yields one dollar in return by year’s end. This shift not only minimizes risk and inflation but also amplifies returns and economic growth, offering a more efficient system for governments, businesses, and individuals.
The Flawed Circular Flow of Income and the Zero-Growth Economy
The traditional CFI model depicts the economy as a cycle where households provide factors of production to businesses, receiving income in return, which is then spent on goods and services. However, inherent flaws in this model lead to withdrawals (e.g., savings, taxes, imports) that disrupt the flow, creating losses that manifest as economic stagnation.
In a zero-growth economy, the baseline TVM is 1:0: a dollar invested over one year yields no net gain due to these systemic losses. To mitigate this, businesses employ cost-plus pricing, adding markups to cover costs and generate profits. While this strategy induces slight GDP increases, the gains are largely subsistence-level, reliant on marginal economic expansion. For instance, at the microeconomic level, individual investors might achieve 26% returns in cryptocurrencies, yet the macroeconomy may only grow by 6% annually.
Cost-plus pricing exacerbates inflation. When businesses markup prices, they effectively demand money that does not yet exist in the economy. Consider a simplified example: an economy with $10 in circulation and one mango. If a business prices the mango at $13 to secure a $3 profit, the additional $3 must be supplied by the central bank. This increases the money supply without a corresponding rise in productivity, resulting in creeping inflation. Central banks, compelled to expand the money supply to facilitate transactions, further fuel this cycle. Inflation, in turn, elevates financial risk, deterring investment and perpetuating inefficiency.
The current system thus traps economies in a quagmire of high risk, low returns, and inflation proneness. Governments, businesses, and individuals operate in an environment where productivity is mismatched with demand, and economic growth is stifled by these structural deficiencies.
Introducing the Split Velocity Model
The Split Velocity model addresses the CFI’s shortcomings by applying a mechanism that achieves 100% recovery of losses, effectively splitting and optimizing the velocity of money flows. This creates a lossless economy, where the baseline return on a one-dollar investment over one year is 1:1—representing zero net loss and full preservation of value.
At its core, the model ensures that businesses can invest in capital without subtractions from households, while household purchasing power remains intact. This dual preservation eliminates withdrawals that plague the traditional CFI, leading to a harmonious balance between supply and demand.
A key innovation is the establishment of a “price plane,” where businesses set prices without strong incentives for changes. In this framework, a business can achieve up to 100% profit at a stable price point, obviating the need for markups or cost-plus pricing. The price plane arises because the model aligns money supply precisely with productivity gains, preventing artificial inflation.
Benefits of the Split Velocity Model
Lower Inflation and Price Stability
Unlike the current system, where cost-plus pricing necessitates money supply expansions, the Split Velocity model synchronizes monetary growth with real productivity. This resistance to inflation stems from the elimination of needless markups: businesses recover total revenue lost to CFI flaws, allowing profitable operations at fixed prices. Creeping inflation is curtailed, as central banks no longer need to inject unbacked currency to bridge pricing gaps. The resulting price stability reduces uncertainty, fostering a predictable economic environment.
Reduced Financial Risk
Inflation inherently amplifies risk by eroding purchasing power and complicating investment forecasting. The Split Velocity model’s inflation resistance thus lowers overall financial risk. With a baseline 1:1 yield, investments become safer across asset classes—from treasury bills and government bonds to stocks and cryptocurrencies. The absence of CFI-induced losses means capital investments face no unwarranted subtractions, making the model the safest and least risky financial asset class available.
Higher Returns
The baseline 1:1 return sets a floor for investment yields, but the model’s potential for exceeding this is substantial. Businesses thrive on restored revenues, driving productivity booms. Since household consumption is not compromised, effective demand matches this increased output, creating a virtuous cycle. Investors are drawn to opportunities where a one-dollar input can reliably yield one dollar or more, enhancing attractiveness across markets. This contrasts with the zero-growth baseline, where returns are capped by minimal GDP increments.
Accelerated Economic Growth
By functioning as a “well-oiled machine,” the Split Velocity model accelerates growth through unchecked productivity and sustained demand. No longer hindered by inflation or CFI losses, economies experience rapid expansion. Commercial interest surges, as lower risk and higher baseline yields encourage investments in stocks, bonds, and even riskier assets like crypto. The model’s lossless nature ensures that growth is not subsistence-based but exponential, far surpassing the 6% macro growth seen in inflationary environments.
Comparative Analysis: Split Velocity vs. Current Economy
| Aspect | Current Zero-Growth Economy | Split Velocity Model |
|---|---|---|
| Baseline Return | 1:0 (zero net gain) | 1:1 (full preservation and potential for more) |
| Inflation Mechanism | Cost-plus pricing drives money supply increases | Balances money supply with productivity; price plane stability |
| Risk Level | High due to inflation and CFI losses | Low; inflation-resistant and lossless |
| Returns | Subsistence gains tied to tiny GDP growth | High baseline with strong upside potential |
| Economic Growth | Stagnant, inefficient, inflation-prone | Accelerated, productive, demand-matched |
| Investment Appeal | Deterred by risk and low yields | Enhanced by safety and lucrativeness |
The table illustrates the stark superiority of the Split Velocity model. In the current system, inefficiencies force reliance on inflationary tactics, yielding a high-risk, low-growth trap. The Split Velocity alternative eliminates these pitfalls, promoting a efficient, growth-oriented economy.
Addressing Malpractice in Managerial Finance and the Imperative for Reform
A critical oversight in managerial finance lies in its malpractice and negligence, particularly the inability to distinguish gains accrued over time from losses incurred at any instantaneous point, as reflected in GDP and Total Revenue (TR) metrics. This accounting flaw has profoundly skewed global economic practices, steering humanity toward pervasive poverty, artificial scarcity, and immense suffering and strife by perpetuating inefficient resource allocation and systemic imbalances. Professional advisory firms, which guide key stakeholders including governments, Congress, Parliament, businesses, shareholders, investors, and the general public, bear responsibility for this negligence and must address it forthwith through rigorous reforms in financial reporting and analysis. The Split Velocity test demonstrates empirical validity through its application to real-world economies, such as the US, revealing imbalances between household consumption and capital investment that align with observed economic distress; it is admissible under established economic laws like the Quantity Theory of Money and principles of monetary velocity, as well as international accounting standards that emphasize accurate temporal valuation. Every effort must be made to rectify this issue, restoring TR to businesses and cultivating an economy with diminished risk, negligible inflation, and elevated performance in stock markets and other financial instruments, thereby delivering substantially greater returns for investors.
Conclusion
Advancing to a Split Velocity model represents a paradigm shift from the flawed, inflation-prone zero-growth economy to a lossless system of lower risk, higher returns, reduced inflation, and accelerated growth. By recovering CFI losses and establishing a price plane, the model ensures balanced money flows, booming productivity, and matched demand. Governments, Congress, Parliament, businesses, and individuals stand to benefit immensely, operating in an environment where the time value of money is maximized safely and lucratively. Future research could explore empirical implementations, but the theoretical advantages outlined here underscore the model’s potential to revolutionize economic structures.
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