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Slow Money - Big Money
With the DOW blowing by milestones I went looking for other things that were at record levels. The first one that I looked at was M2. No surprise at all, M2 is bigger than ever. Charts of the long and short term trajectory of money supply:
The money supply is $3T higher than it was at the start of the 2008 recession. GDP is up $2T.
There is another component of M2. It has me baffled. It too is at a record. In this case it's a record low. I'm sure this important. I don't know why it's happening. I don't know what the consequences of this will be. This chart is screaming something:
My thoughts on the chart:
- It's fairly clear that sharp declines in the velocity of money is consistent with periods of recession. But..
- If recessions are the cause of the decline in velocity, what the heck is going on today? We are now three years out of recessions, and velocity keeps dropping.
- Behind each of the recessions is the Federal Reserve. To offset a slowdown in the economy, it drops interest rates. When interest rates fall, velocity declines.
- As interest rates have been forced to zero for years past the last recession, the velocity of money has continued to decline.
- There are no periods in history where sustained economic expansion has occurred while money velocity is declining.
If you buy into my (admittedly un-scholarly) assessment of money velocity, then you might conclude:
* The Fed's ZIRP policy has outlived its usefulness as a policy tool.
* The Fed's policy on Forward Guidance for short-term interest rates (another two years of ZIRP) is accelerating the decline in money velocity, and therefore counter productive.
Clearly, Bernanke and the other Fed Doves don't think there is a connection between record low money velocity and ZIRP. In fact, they must believe precisely the opposite. These folks are aware of the collapse in velocity, they know that this drop is a drag on the economy (particularly inflation), yet they have committed themselves to a policy that (IMHO) insures that money velocity stays historically low. Go figure.
One final thought on money velocity - it will return to a more normal level at some point. This may not happen until years into the future when monetary policy goes off "Fast Forward". But it will happen.
When it does, the high octane gas that is now M2 and not moving; will become the bloated M2 that is moving. Another dumb question comes to mind.:
The Fed has said that it will not back off until inflation gets to 3%. But when the Fed does back off, money velocity should accelerate very quickly - and this should give inflation another big boost. So when the Fed finally does respond to rising inflation, its actions will light a fuse on more inflation.
The Fed Doves are not thinking of that scenario. If they did, they would be not so confident in their ability to control the outcome. That, or they're bluffing.
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Bruce,
I don't think ZIRP is the primary cause of collapsing velocity ( it would have the opposite effect in a healthier economy), the true culprit is how QE has been implemented.
Quick side note, look at M3: http://www.shadowstats.com/charts/monetary-base-money-supply . The problem with having the world's reserve currency is that you have to maintain the world's healthiest and largest economy to support it. The eurodollar system had a heart attack in 2007 and the US doesn't have the domestic strength to do CPR. Ramping of MB, M1 and M2 can't pull it off. The Fed is screwed and much of its action is forced by exogenous factors.
The overarching problem is the Minsky moment that we experienced globally, caused by Ponzi borrowing. There's no paper fix for that but the Fed tries anyway, and it tries in the dumbest possible way with "inbred QE".
Realization of toxic assets consumed reserves. The Fed panicked and took the fast (and wrong) option by swapping crap onto its books directly, crediting member-bank's accounts with fresh reserves. This wasn't done in a controlled manner under a repurchase agreement, but the Fed must have known it should be. All the Fed could do is politely request that banks maintain surplus reserves to facilitate a future reversal. Banks lied about turning over a new leaf, took the money from mom and went straight back to the tables. Fucking around with markets doesn't boost velocity in the real economy, quite the opposite when the economy is already weak (here's where ZIRP can also play a minor role). In addition, not all the toxic assets turned out to be bad and the banks whined about the income being made by the Fed on "their" assets. That's the real reason behind IOER and another killer of velocity.
So there are several factors that move a shitload of fresh money purely within the closed financial system. It takes a long time to eventually see the real economy so the velocity measure dies. It's a double whammy. The denominator surges from QE, while the numerator is weighed down by "distance from source" inflation effects. The real economy, being further from source than the financial economy, gets relatively weaker and that shows up in GDP as people get poorer, get scared, and circulate less.
Another way to look at it is to consider what would have happened if the Fed was run by calmer, braver people and it had implemented broader, real economy QE as follows.
The size of the black hole is known. Instead of giving money to banks, give it to taxpayers. Regardless of whether they save or spend, the money ends up as someone's deposit, thereby boosting reserves the same as if it were given straight to banks. The money supply expands, but this way velocity does not collapse. Banks then have a strong incentive to compete for reserves (deposits) and have to lift their game to cover the fact that toxic shit has been left on their books. The weakest will collapse without it being a crisis because there is enough cash in the system.
In conjunction with this, raise interest rates sharply to push people to pay down debt and save. This dampens an inflationary effect of handing out money and it rewards the prudent while punishing those who gambled and ran up a lot of debt. Raise rates high enough and the rate of credit being extinguished can cancel the QE rate meaning that there is a qualitative shift (improving) rather than a quantitative one.
One way to distribute money widely is to push it by a fat pipe to Treasury and let a huge government system disperse it, as is being done now, to an extent. This sucks because governments are notoriously bad at allocation. Instead, to make the QE process fair, hand out money in proportion to the amount of tax paid by the taxpayer in the past. This rewards those with a proven track record of earnings and honesty and gives nothing to loafers and cheats. Again, the subsequent spending will produce a qualitative shift as honest earners are more likely to spend productively than cheating wasters.
Of course, this leaves a big hole in Fed/Treasury, but no bigger than the one that currently exists thanks to QE. The difference is that done this way, the real economy has some chance of actually recovering so that the hole can eventually be filled without foreign creditors shitting themselves.
Fairest way would be to require banks to pay 100% of profits (after expenses) into filling that hole until it's done. De-financialize by taxing the financial sector relatively harder than the real economy. If banks won't comply because they can't or won't then either liquidate or nationalize the zombies.
mediocritas for FED chair
Now THAT would be interesting....
The stress would probably push me to commit suicide though, by shooting myself in the back of the head...twice, with Jamie Dimon's gun.
Brilliant. Thanks for that. Of course, I'll need to read it three times to catch all the nuances.
I do wish you'd come around more often.
:D
Added to the reality that credit must expand continuously in the current global money/economic scheme (and consumers are tapped out), is the reality that in order to keep the implosion at bay, the Fed, Treasury and selected too big to fail corporations (not only banks) are consuming the required expansion of money in a three card monti. This has a negative impact on velocity as money is not generally going into the economy.
A couple of comments.
1. We do not have a closed system. In an import based consumer economy, a lot of money is leaving the system. (or, the system is larger than it is assumed to be from the measurements)
2. We are in a consolidation phase where money is used to consolidate assets through purchase and is used less to create assets, through value adding labor.
3. Financial assets have no intrinsic value and so sticking money in financial assets and leaving them there contributes nothing. Similarly inflating the price of something while it retains the same value sucks up money without increasing velocity.
4. My guess is that velocity increases as we convert more labor to value and decrease when we convert less labor to value. Maybe a closer look at the components of GDP need to examined, scrubbed of all foreign labor arbitrage and we need a more accurate (all encompassing) measure of inflation.
Based on observtions, the Fed knows all of the above and is lying about its intentions.
Uncle Beauford says it's like using a vacuum to clean up after a cat with diarrhea.
It's easiest thing to do for a while until you have to empty the bag.
The rug isn't clean but it looks that way at a glance. The smell gives the game away.
85 billion /mo. is a hell of a Hoover.
Uncle Beauford would shoot the damn cat.
What kind of indication is the velocity of money when we know for a fact that consumer credit is increasing, GDP has increased, government debt has exploded oh but the velocity of money is less WHO CARES, its a ruse used by Kensyians to get you to take your eye off the ball.
Velocity of money means nothing. It is simply a function of the total supply of money increasing by a huge amount. You add that much weight to anything and it might slow down its total speed but exactly like a train that has thousands of pounds behind it the speed might be slow relative to a fiat but the weight is what wil kills you. Even if the train operator sees you on the tracks he cannot stop the train. Unlike the fiat driver who can swerve or hit the breaks in enough time.
Velocty is not the cause of non expanding economies, drastic increases in money supply are the cause, people who do not know what in the world prices are become timid in the face of huge money supply increases. Velocity being a function of the money supply increase is only showing the increase it shows you nothing about what is happening with money.
For the Train the calculation is easy: F=MV2
For the economy the calculation becomes a social construct first and is then applied through goal seeking.
Fit the curve Bitchez !
velocity won't return this is a very different country then the one where johnson kicked off inflation there are less jobs at good wages every single day; we live in a plutocracy where the wealth is limited to a select few; & where the 6 dumbest words are; when the banks begin to loan
Back when I was in High School, my Grandfather told me that the government was incapable of management. Even in the case of war. Later,I read that the government, when intervening in the economy, will produce a result that is exactly the opposite of it's stated goal. We now have continuing "wars", whose time spans dwarf the Afghanistan military exercise:
War on Poverty;
War on Drugs;
War on Pollution (another name for Nixon's Clean Air Act);
War on Ignorance (guess the Department).
What are the results?
A nation on welfare and the theft of an entire generation's wealth.
Big Pharma and millionsdrugged up daily.
An International Market for waste and hormones in every ones water.
New Math and the most facile and incompetent generation ever.
Gramps was a sharp knife having completed the 11th grade, and I attribute his wisdom for my success. The copy of "Bureaucracy" by LVM and a stack of coin also were helpful.
The usual one is
MV=PT
Where M is money supply measure, V is money velocity in 1/year (turnaround rate in economy, by the way 1/V= average hoarding length) , P are prices and T are transactions, BUT, as prices here are only commodities and products and wages. Financial assets are not included, hence formula gives wrong picture about potential inflation:
P= MV/T - since T does not include financial asset transactions ( which in fact are 80% of all monetary transactions), P goes to sky-hyperinflation- which is just plain wrong.
A simplest assumption would be to conclude that real economy and financial overhead economy functions independently in monetary terms in first approximation. Then reasonable formula would be:
MV = P financial assets*T financial assets+ P real economy * T real economy
Then money supply would be divided between ( as it obviously is from QE) inflation of financial assets (stocks, bonds, real estate) which has been 20%year in stocks and bonds and roughly neutral in real estate since 2009 , and inflation in real economy prices which is roughly CPI plus fuel plus food.
The fact of separation in case of QE is true as printing has not lead to increase in debt in private sector, and printing can achieve consumption increase only via debt increase. As that is not happening, QE money is rotating in financial sphere, generating interest rent to the wealthy.
I use this to think about QE and it clears things a lot.
In full separation, formula would be falling apart in 2 formulas:
M in financial sphere*V financial sphere= P financial * T financial sphere
M in real economy *V in real economy = P real economy * T real economy
And M financial sphere+ M real economy = USUAL M, e.g M2 or Austrian True money etc.
I have never understood HOW and why the financial overhead has been integrated in normal economy as wealth creating by asset inflation. As it is all based on debt, and debt compound interest grows exponentially, such formula as MV=PT are correct only for a limited period where surplus from productive economy IS able to finance interest. But , due to exponential character of debt (surplus was growing exponentially only because of discovery of coal and oil ) , sooner or later debt rent will exceed surplus, especially if the asset prices are pushed up by Greenspanomics or Bernankenomics.
Hence, the formula that excludes financial asset price from it is correct only for a limited periods of time where real economy has as fast growth as compound interest. As soon as real economy falters, debts are not paid, asset prices go into ground, "wealth" disappears, and assets move to the creditors.
Real economy is economy that increase wealth by adding value via capital investments and labor creating products and services needed in the economy. Real estate asset prices actually should fall relative to income (wages) in such economy.
But, financial sector of economy thinks differently and has taken then control over from productive sectors. So here we are, with 2 formulas that lead to planning by financial sector and movement of real wealth from down to UP.
The velocity of money seems to be zero because it is in the TBTF bankers event horizon. (Got stuck in their black hole for a while)
110k a year before corp BK forced me out in 2010. 21k last year 2 part time jobs. Property taxes 5800. My 7 month old grandson's smile when he hears my voice PRICELESS. Life. Can we put a price on it? Enjoy things of value because there is an ill wind blowing.
I was over $325K 4 years ago. Last year made $45K. Never been happier. Life goes on. I spend my time now, not my money. Uncle sugar used to get $100K a year from me, now he gets almost nothing. Haven't set an alarm clock in 2 years, walk about 3 miles a day and have lost 35 pounds. I resigned myself to the fact that we failed as a society but looking forward to a new generation to right the ship. That's my hope and change
Ouch. Hope things get better money-wise for you.
+1.
Ill blows the wind that profits nobody.
My very rough calculations from the charts suggests that all the QE money is about the amount needed to balance the decrease in velocity. This may be the real reason that the print forever policy started last year. I wondered at the time what Bernanke was seeing that would make him do something so radical. I wonder what the up to date numbers are now and if they keep him up at night. One can hope.
Don't know if anyone has mentioned this...sorry i have not read much of the above, it is late. But , if you look at the M2 graph note the date of the change in the angle of the slope @ 1994...then look at the velocity of money about the same year and note the drop from this peak. Some how these two are directly proportional to each other. Which leads ??? I will leave it to you economics wizards.
Bruce, you expressed some befuddlement:
"There is another component of M2. It has me baffled. It too is at a record. In this case it's a record low. I'm sure this important. I don't know why it's happening. I don't know what the consequences of this will be. This chart is screaming something..."
I'll tell you what it's screaming....it's screaming OH SHIT!
While the Fed shovels money into the system, it's not having the impact of preventing a deflationary spiral. And in the process it's destroying the dollar. I think it's actually the worst of both worlds; a whipsaw effect. Significant deflation followed in short order by significant inflation, possibly hyperinflation. Good luck hedging it.
Bruce, one man's experimental noise is another man's Nobel Prize.
"We are now three years out of recessions, and velocity keeps dropping."
Who says "out of recession?"
Just wonderin' that might be the key to your <<question>>
And, please keep up the good work.
- Ned
The money is not related to national but global. Don't know if M2 is national or not. They move a lot of tax dollars offshore to foreign banks and banksters. I mean if they are behind the DHS buildup then they are moving a lot of those dollars into long term storage offshore for after the collapse. That's why when you see just a small glimpse of what the FED is doing revealed in a cursory audit you see that they have globalized the US monetary system into a world financial control system. Who knows how much it takes to support the military side of it. So the FEDs are taking everyone's money and building a death star with it. Once M2 enters their black hole it disappears.
+1 M2 is global
My understanding is that velocity is simply the "solve" for GDP / Money Supply as GDP = MV (where M = Money Supply and V = Velocity)..As excess reserves continue to accrete at the Federal Reserve and the money supply grows FASTER than GDP, the math requires "V" to slow..ie- but that money is not IN the economy but the mathematical impact of it IS, so it distorts the V....Hussman would probably show his chart that interest rates at the zero bound will lower opportunity cost (to zero- ie- ur next best option- Treasuries pay nothing so you hold cash) and thus lead to hoarding and destory velocity...It will rise again but what is interesting to me is that velocity peaked in the 90's and has been steadily declining for 15 years (through the housing/consumer spending bubble) when one would have thought velocity would have spiked...
My problem is not with printing but with how they are putting it to use. Currently they are buying new origination MBS. If they really wanted to fix things they would throw away their moral hazard and buy existing loans instead, refinance them with the homeowners and you can bet your life that the money will start turning over much more quickly. Buying all the existing loans would theoretically create a bunch of capital on bank balance sheets as well. One and done, no more printing needed after the big national refinance.Everyone wins. Like Krugman says we need to print more, but we just need to spend it differently then Krugman would like.
It is also worth noting that the Fed is buying debt with those printed dollars. Thus this money will slowly come back to them with interest and won't be a permanent part of the money supply. I am not sure what the average length of a MBS portfolio is, as princiapl is part of the payment and people move and end up paying the loans back early, but I would imagine 80% of the money is paid back within 20 years and likely faster, if you count the interest.
Where did you get the 'NEW' MBS origination from ?
I think they are buying the old empty shell MBS from the Ponzi heydays.
A backdoor TBTF rescue,before the servicing payments kill the banks.
where has all the money gone? the biggest benefactors of the fed policy has been the 1%ers who have benefited in bigger paychecks, bigger dividends and bigger capital gains. so how much of their gains are responsible for the increase in m2? since velocity is a function of m2 it means that the money going into m2 is not being spent in the proportion needed to grow the economy. why isn't it being spent? it is clear the money in the bottom 90% of the economy is being spent at a rate close to 100% the moment it is received. the next 9% are spending a smaller percentage but the rate is still in the range of 90% at best. that means that the money made/owned by the 1% is being saved in cash or cash like instruments in large enough quantitties to skew the velocity number and it is not being spent or invested in non cash assets(or maybe there is so much of it that it can't be invested fast enough). this could simply be a condemnation of supply side trickle down economics exposing the skewed distribution of wealth it caused while making a pointed argument that money is best spent at the bottom for the general health of an economy over the long term.
i bet these are the same charts a banana republic has.
The money is going to fill the holes in the banks' balance sheet. The holes are un-reported, so it looks like M2 is going up. if the banks marked their balance sheets to market and realized losses, the deflation would be evident.
The V2 money velocity at all time lows tells you that banks and corporations are hoarding cash and not hiring or lending.
It tells you that the FED has simply enabled another bubble - they have facilitated a ramp up in equities and supposedly housing and consumer debt so they can crash the mother fucker all over again and Wall Street can get bailed out again on the backs of The People AGAIN.
It is as clear as day if you look at the labor participation rate, the markets at all time highs, the sector rotation and churning of the hedgies and algo HFT machines in low volume, the lack of consumer saving and declines in income, increases in debt, and the non-stop FED jizz fest throwing $85 BILLION per month at buying crap to benefit the banks.
It has no benefit to the populace beyond illusory "wealth" or "net worth" of money trapped in 401K's and IRA's that is illiquid and can be taxed or vaporized overnight by a government controlled by monied interests and Jon Corzine types who grease the palms of politicians all across Western Civilization to the point that the politicians need a pint of Dawn detergent to turn a door knob.
This is the greatest lie, the greatest Ponzi, the greatest scam in the history of Western Civilization. It will end with wailing and gnashing of teeth. It is in 3D and 20/20 vision with Sensurround and smell technology but the three monkeys are deaf, dumb, and blind to the baboons wrecking the nations of the West.
Good commentary, but I think that this will be the last bubble the Fed gets to inflate. All the while they've been wrecking the currency, which they think is OK so long as all the other western currencies get wrecked at more or less the same rate.
The problem is once you've wrecked any scintilla of trust that folks have in a fiat currency, they'll find other things to trade with. Gold and silver, to be certain. But also bottles of laundry detergent, ammunition, a pack of smokes, a pint of rotgut. Once PM's and other commodities become the de facto currencies, monetary policy doesn't matter worth a shit. No one in zimbabwe cares about zimbabwean monetary policy.
Trust has not been eroded YET. The majority still believe the propaganda comming out of the media. We are a long way from a breakdown in the current monetary system.
Not only are banks and corporations hoarding cash but so are people. WalMart tells us that. What happens when velocity goes to zero or is there a stall speed where incremental income is spent on metals, ammo or second-hand goods? Or will people return to holding huge debt to buy goods thereby adding velocity? It boggles my simple mind.
Not only are banks and corporations hoarding cash but so are people. WalMart tells us that. What happens when velocity goes to zero or is there a stall speed where incremental income is spent on metals, ammo or second-hand goods? Or will people return to holding huge debt to buy goods thereby adding velocity? It boggles my simple mind.
Bingo. The banks are being recpitalized by stuffing the taxpayer with 40-cent paper at 100 cents on the dollar...The higher RE prices decrease losses on bad and defaulted loans.... it also inflates banks balance sheets. In my area, the FED really has momo in the MFD market - prices/values are really strong... iInvestors from 201 will be able to refi most of thier hard cash out... Leverage caused this shit and leverage is the desired solution. .
Leverage is all they've got.
Wow. Very nice, eb.
I would submit, though, that Corzine doesn't have to grease any palms, as he is a dyed-in-the-wool tool of the PTB.
All in the plan, baby. But I think they're finding out that the best laid plans of central banksters and elitist Illuminati have some kinks. Turns out, people aren't easily predictable robots.
They should have twisted the head off this Internet thing the day it was born.
Did anyone see Mario Draghi the other day? Looked as bad as Bernanke. Those guys are stressed out.
:D
They should have twisted the head off this internet thing the day it was born.
They did, you must have missed it, at the same they ran out of money and destroyed George Washingtons boyhood house. That lead to the give um hell routine we have evolved into today. Although it does promise to get better if you can stomach and afford the time change thingy.
it is pretty amazing that the vast (unwashed) masses don't protest that they can do a better job with their own money, rather than being impoverished bailing out banksters, drug addicts, government spongers and welfare fraudsters
pity there isn't a happiness iq for a government and its policies...and no ..i dont think the misery index quite gets it..the glass could be three quarters full with the good stuff (JD) in my case..if only the "system" didn't take out the JD and fill it with urine..
perhaps this parralel would help
numerator = output of goods and services in the real (non-government) "productive" sector
denominator = fed printed money.
its worse than this, of course, in an increasingly communist/socialist regime, since most of the so-called non-government "productive sector..is in fact largely dependnet on the government sector for bail-outs/pork/subsidies...
Deflation. After years, decades, of practically unrestrained credit issuance into the economy by the banks, the credit bubble is popping.
As one glaring example.... Of that big spike up in velocity during the 90's, I wonder how much of it was driven by consumers spending "bubble priced" faux home equity, or cash generated from HELOC loans?
All of that dried up since 2008.
the m2-graph at the top is obviously an exponential. and it's an exponential for a reason : the currency is dying. the nature is very clear on this.
Regulations build up over time, like a belly.
Its time for regulations to go on a no hold barred atkins diet and trim back the fat. Trim 70% of all regulations. Many were created to "respond" to a single event and now they do more harm than good.
Eliminate 70%, the necessary ones that are axed in mistake will find their way back, don't worry about that.
AND bring home all the military and put them to work building the new energy infrastructure so we don't have to be enslaved to Saudi Arabia.
And then also eliminate 80% of all government, and put them to work building out the energy infrastructure, and other infrastructure. Sorry...you don't get to suck the gov teats in a manner of your own choosing....you used to run a famous politicians museum....well, your new gig is surveying for that new road repair....
Sorry that's they way it is. We are sick and tired of you gov types throwing roadblocks in our way, instead, we want you building roads (or whatever you choose) in a real, productive line of work. And you know that big gov pension you were counting on? Well, we take the present value and we enter a credit memo into your social security account.
Now I think we all have something to look forward too, a brighter future making products that we need and want here in the States. I like it, VOTE FOR ME.
The only thing worse than a government of regulations is a government of production.
Perfect analogy re bellies and regulations. Gonna steal it. +priceless!
Funny thing, when Congress isnt passing any new laws, the MSM refers them to a "Do nothing Congress" with the implication being that passing new laws HAS to be a good thing. If they aint making new regulations on 'something' (its for the children!) theyre somehow lazy and good for nothing, and I bet almost everyone swallows this tripe.
If only all the new laws/regs were used to get rid of the old ones...
Bingo, my sentiment for years. They should be busy abolishing laws that are contrary to liberty,freedom and productivity. I know, dream on!
+1 the first republicans fought for written law, in ancient Rome - and so it was published, for all to know. now new heroes will, eventually, fight to keep the written law to be kept small enough to be still known to all
Unfortunately we can not even afford to maintain the infrustructure we currently have, more less consider building further. Had it been done correctly the first time around, we would not have spend so much today repairing it.
10-4, just look at Germany. Old there starts at 500 yrs. the autobahn is as it was built 50 yrs. ago. As juxtaposed to our "cracker box" houses in this country that need maintenance from the day they are "completed". Just more evidence the printing by BerSpankMe will continue till it blows up. No choice.
Steve-O for ruler of the Planet!
All in favour...