The End of Money

[FRED]

Editor's Note: Dr. Chris Martenson sent us his article The End of Money, in which he explores the thesis that the US money supply, like a jar of bacterium, has since going off the gold standard grown exponentially, with a terminal growth and collapse stage inevitable. iTulip ordinarily does not publish the "Quality Assurance" process to which we subject such contributions, but Dr. Martenson and Eric Janszen concluded that the QA itself is a useful addition to the piece.

Janszen: Agents of our monetary system get to casually throw off comments in its defense, like the famous line from Dr. Irving Fisher, Ph.D. in economics, on Oct. 17, 1929: "Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months." Or Professor Lawrence, Princeton University, in September 1929: "[T]he consensus of judgment of millions whose valuations function on that admirable market... is that stocks are not at present over-valued. Where is that group of men with the all-embracing wisdom which will entitle them to veto the judgment of this intelligent multitude?" Or Fed Chairman Alan Greenspan in testimony before the Joint Economic Committee, U.S. Congress, June 1999: "But bubbles generally are perceptible only after the fact. To spot a bubble in advance requires a judgment that hundreds of thousands of informed investors have it all wrong."

On the other hand, critics of "The System," as Greenspan calls it (http://www.itulip.com/forums/showthread.php?t=360), can't get away with the kind of unsubstantiated, rhetorical arguments supporters get away with making. They need to be rigorous. Dr. Martenson agreed with me that our exchange on his article, which follows, strengthens his case.

The End of Money

by Dr. Chris Martenson - January 10, 2007
The greatest shortcoming of the human race is our inability to understand the exponential function.

- Dr. Albert Bartlett
While it was operating well, our monetary system was a great system, one that fostered incredible technological innovation and advances in standards of living. But every system has its pros and its cons and our monetary system has a doozy of a flaw.

It is run by humans.

Oh, wait, that’s a valid complaint but not the one I was looking for.

Here it is: Our monetary system must continually expand, forever.

Which means it has a math problem in the same way that a beached whale has a breathing problem. In each case we have a massive organism that was optimized for a very different set of conditions than those in which it currently finds itself.

Our monetary system was conceived at a time when the earth seemed limitless and so nobody gave it much thought when we designed it such that every single dollar in circulation would be loaned into existence by a bank, with interest. In fact most thought it a terribly modern concept and most probably still do.

Since some people might begin grumbling about whether the earth is limitless or not, for the moment let’s remove any debates about natural constraints and simply talk about the mathematical evidence that our monetary system is now entering a stage of explosive, exponential growth.

Consider these data:

1) Money supply growth has gone parabolic. It took us from 1620 until 1974 to create the first $1 trillion of US money stock. Every road, factory, bridge, school, factory, and house built, every unit of economic transaction that ever took place over those first 350 years required the creation of $1 trillion in money stock. But it only took 10 months to create the most recent $1 trillion and I don’t recall seeing an entire continent’s worth of factories, schools or bridges built during that time.

2) Household debt has doubled in only 6 years. Think about that for a minute.

3) Total credit market debt (that’s everything) was about $5 trillion in 1975, has increased by $5 trillion in just 2 years, and now stands at over $51 trillion.

4) The wealth gap between the super-wealthy and everybody else is widening at a furious pace.

What’s going on here? Could it be that the US economy is so robust that it requires monetary & credit growth to double every 6-7 years? Are US households expecting a huge surge in wages to be able to pay off all that debt? Are wealthy people really that much more productive than the rest of us? If not, then what’s going on?

The key to understanding this situation was snuck in a few paragraphs ago; every single dollar in circulation is loaned into existence by a bank, with interest.

That little statement contains the entire mystery. If all money in circulation is loaned into existence it means that if every loan were paid back, all our money would disappear. As improbable as that may sound to you, it is precisely correct although some of you are going to consider this proof that I could have saved a lot in tuition costs if I had simply drunk all that beer at home.

But with a little investigation you would readily discover that literally every single dollar in every single bank account can be traced back to a bank loan somewhere. For one person to have money in a bank account requires someone else to owe a similar sized debt to a bank somewhere else.

But if all money is loaned into existence, with interest, how does the interest get paid? Where does the money for that come from?

If you guessed “from additional loans” you are a winner! Said another way, for interest to be paid, the money supply must expand. Which means that next year there’s going to be more money in circulation requiring a larger set of loans to pay off a larger set of interest charges and so on, etc., etc., etc. With every passing year the money supply must expand by an amount at least equal to the interest charges due on all the past money that was borrowed (into existence) or else severe stress will show up within our banking system. In other words, our monetary system is a textbook example of a compounding (or exponential) function.

Yeast in a vat of sugar water, lemming populations, and algal blooms are natural examples of exponential functions. Plotted on graph paper they start out slowly, begin to rise more quickly and then, suddenly, the line on the paper goes almost straight up threatening to shoot off the paper and ruin your new desk surface. Fortunately, before this happens, the line always reverses somewhat violently back to the downside. Unfortunately this means that our monetary system has no natural analog upon which we can model a happy ending.

http://www.itulip.com/images/reindeer.jpg http://www.itulip.com/images/M3.jpg


When comparing the two graphs above you are probably immediately struck by the fact that one refers to a nearly mythical creation especially revered at Christmas time while the other is a graph of reindeer populations. You may have also noticed that our money supply looks suspiciously like any other exponential graph except it hasn’t yet transitioned into the sharply falling stage.

To get the best possible understanding of the issues involved in exponential growth, while spending only 10 minutes doing so, please read this supremely excellent transcript of a speech given by Dr. Albert Bartlett. If, like me, your lips move when you read, it may take 15 minutes but I’d still recommend it. In this snippet he explains all: Bacteria grow by doubling. One bacterium divides to become two, the two divide to become 4, become 8, 16 and so on. Suppose we had bacteria that doubled in number this way every minute. Suppose we put one of these bacterium into an empty bottle at eleven in the morning, and then observe that the bottle is full at twelve noon. There's our case of just ordinary steady growth, it has a doubling time of one minuet, and it's in the finite environment of one bottle. I want to ask you two questions.

Number one; at which time was the bottle half full? Well, would you believe 11:59, one minute before 12, because they double in number every minute?
Second Question; if you were an average bacterium in that bottle at what time would you first realize that you were running out of space? Well let's just look at the last minute in the bottle. At 12 noon its full, one minute before its half full, 2 minutes before its ¼ full, then 1/8th, then a 1/16th. Let me ask you, at 5 minutes before 12 when the bottle is only 3% full and is 97% open space just yearning for development, how many of you would realize there's a problem?
And that’s it in a nutshell right there. Exponential functions are sneaky buggers. One minute everything seems fine, the next minute your flask is full and there’s nowhere left to grow.

So, who cares, right? Perhaps you’re thinking that it’s possible, just this one time in the entire known universe of experience, for something to expand infinitely, forever. But what happens if that’s not the case? What happens if a monetary system that must expand can’t? Then what? How might that end come about? And when? For an excellent description of this process, please read this article by Steven Lachance. A debt-based monetary system has a lifespan-limiting Achilles heel: as debt is created through loan origination, an obligation above and beyond this sum is also created in the form of interest. As a result, there can never be enough money to repay principal and pay interest unless debt is continually expanded. Debt-based monetary systems do not work in reverse, nor can they stand still without a liquidity buffer in the form of savings or a current account surplus.

When interest charges exceed debt growth, debtors at the margin are unable to service their debt. They must begin liquidating.
Mr. Lachance reveals the mathematical limit as being the moment that new debt creation falls short of existing interest charges. When that day comes, a wave of defaults will sweep through the system. Which is why our fiscal and monetary authorities are doing everything they can to keep money/debt creation robust.

But it’s a losing game and they are only buying time. How do I know? Because nothing can expand infinitely forever. The evidence clearly points to exponentially rising levels of money and credit creation. As the bacterium example shows, once an exponential function gets rolling along, its self-reinforcing nature quickly takes over requiring larger and larger aggregate amounts even as the percentage remains seemingly tame.

Similarly, our supremely wealthy suffer only from an inability to spend what they ‘earn’ on their capital (interest & dividend income) which means their principal is compounding. But, because each dollar is loaned into existence, it means that when Bill Gates ‘earns’ $2 billion on his holdings a whole lot of people somewhere else had to borrow that $2 billion. Taken to its logical extreme, and without enforced redistribution, this system would ultimately conclude with one person owning all of the world’s wealth. Game over, time for a Jubilee, hit the reset button and start again.

When we started our monetary system, nobody ever thought that we would fill up our empty bacterium bottle. Nobody really thought through what it would mean to society once wealthy people earned more in interest & dividends than they could possibly spend. Nobody considered if it was wise to place 100% of our economic chips into a monolithic banking system that requires perpetual, endless growth in order to merely function.

So we must ask ourselves; does it seem possible that our money supply can continue to double every 6 years forever? How about another 100 years? How about another 6? What will it feel like when we are adding another $1 trillion every month, week, day, and then finally hour?

Just remember, money is supposed to be a store of value or, said another way, a store of human effort. Currently it seems to be failing at meeting that characteristic and therefore is failing at being money.

Who ever thought that oil production would hit a limit? Who knew that every acre of arable land, and then some, would someday be put into production? How could we possibly fish the seas empty?

We have parabolic money on a spherical planet. The former demands perpetual growth while the latter has definitive boundaries. Which will win?

What will happen when a system that must grow can’t? How will an economic paradigm so steeped in the necessity of expansion that economists unflinchingly use the term ‘negative growth’, suddenly evolve into an entirely new system? If compound interest based monetary systems have a fatal math problem, what will banks do if they can’t charge interest? And what shall we replace them with?

Since I’ve never read a single word on the subject, I suspect there’s even less interest in exploring this subject by our ‘leaders’ than there is in being honest about our collective $53 trillion federal shortfall.

I am convinced that our monetary system’s encounter with natural and/or mathematical limits will be anything but smooth, possibly fatal, and I have placed my bets accordingly. It seems that our money system is thoroughly incompatible with natural laws and limits and therefore destined to fail.

Now you know why I have entitled my economic seminar series “The End of Money”.

But the end of something is always the beginning of something else. Where's our modern day Adam Smith? We need a new economic model.

Dr. Chris Martenson © 2007
___
Discussion between Dr. Chris Martenson and Eric Janszen

Dear Dr. Martenson,

Glad you have benefited from iTulip over the years. Thank you for the articles.

I read your piece with interest. My question is, I understand the exponential function for bacteria and reindeer: they breed. But what is the exponential function for monetary growth?

In the case of bacteria and reindeer, their population stops growing when they run out of food. The “container” never fills because they out-compete each other for available food; the population then collapses.

The function of money growth is different. If you look at Money at Zero Maturity (MZM), for example, you’ll notice the quantity mostly rises but sometimes declines. In fact, if not continuously supplied with “food”-demand for loans-the money supply falls. This is also the case with bacteria and reindeer: limit the food supply and you limit population growth. Only in the instance of unlimited food does population and money rise exponentially. But in the real world, this circumstance does not occur.

http://www.itulip.com/images/day-mzm.jpg


In Japan, where monetary “food”-demand for loans-was not sustained, the money supply declined, although not drastically as it did in the US in the 1930s.

http://www.itulip.com/images/mzmdouble.jpg


While money growth appears exponential, an inexorable exponential function is not apparent. MZM took roughly 200 years to reach $908 billion in 1980, 6 years to double again from 1980 to 1986, 12 years to double again from 1986 to 1998, and 8 years to double again from 1998 to 2006. So it appears that the MZM money supply sometimes takes more, sometime less, time to double. That’s not what I’d expect if the money supply were growing exponentially according to a constant function.

Hope this is helpful.

Regards,

Eric

---

Eric,

Thanks for your thoughtful reply.

I did not mean to imply that our money supply is a continuous function that could be described in closed-loop form. If it could, we'd either have Milton Friedman's notebook computer managing things or I'd have discovered the fountain of rich and be fabulously wealthy.

With sufficient resolution, you would also be able to spot that bacteria populations do not grow with perfect consistency either...some die along the way, temperature changes slow the growth, etc., as well the rate changes as food grows scarce.

But if we back out a bit, and look with a slightly wider view point, we'd see those imperfections smoothed out. Again, I do not mean to claim that we have a continuous function which would be characterized by either a consistent or shortening doubly time. But we do have what appears to be a continuously compounding function which is apparent on the graph below except for the 1994-1995 timeframe which I briefly discuss below.

Also, for a variety of reasons I prefer to use M3 over MZM, so I have not had a chance to apply much analysis to MZM. But I will note that when I apply an exponential fit to M3, well, as a past research scientist, I salivate over R^2 that are better than 0.80.

http://www.itulip.com/images/M3vsexponentialcurve.jpg

M3 Money Stock vs Exponential Curve on a linear scale
(data from economagic + missing data recreated to present by nowandfutures.com)

If it looks like, smells like, and quacks like an exponential function... we may need to consider it one.

Despite not having a continuous exponential function, I find the exponential description to the be most useful analogy to describe our money system because, to be "healthy," it must expand.

In my mind, the moment in history when we (and by "we" I mean Alan Greenspan) did the most wrong thing imaginable can be viewed on the graph above as the period of 1994 to 1995. M3 was flattening out, Alan was making his infamous irrational exuberance speech, and meanwhile was putting the finishing touches on the launch pad of our current blow-off by reducing reserve requirements effectively to zero (currently at 0.4%) by changing the regulations to allow sweeps. But I digress.

The point I was trying to make is that our money system works great in forwards but has a real nasty time of it in reverse or even neutral. There's only so much farther forwards we can go; a moment which I believe we will experience in the next 10-20 years.

Unless Iran blocks the Strait of Hormuz. Then we'll experience it a whole lot sooner.

Again, thanks for your reply and the chance to stress-test this thinking a bit more.

All the best,

Chris

--

Chris,

Points taken. Don’t know if you read Aaron Krowne. A researcher by training, he came across the reserve requirement change you refer to that explained a mystery I’d been writing about for years: why did all of the charts, such as money supply, foreign debt holdings, and stock indexes, inflect in 1995? Answer: changes in reserve requirements and sweeps in 1995.

What (Really) Happened in 1995? (http://www.itulip.com/forums/showthread.php?t=292)

Still, critics are open to ask, will the exponential money growth function–whatever it is–ever cause the money supply to begin to double in shorter and shorter periods of time to reach a terminus and collapse as you suggest: a few years, to a year, to a few months...

The process you are describing is hyperinflation. Perhaps my acquaintance Paul Tustain of BullionVault, a high tech company CEO and a fellow very well self-educated in finance and economics who founded BullionVault, has an answer for us in this piece he about the nature of hyperinflation. He borrows the concept of valence from chemistry to make his case:

Hyperinflation is about unattractive money (http://goldnews.bullionvault.com/houseview/electrostatics)

Glad to print your article. With your permission, I’d like to include the thread of our email discussion. Those of us who are critical of The System need to be more intellectually rigorous than its followers; using the main elements of this discussion helps make the case.

Best,

Eric

--

Eric,

I had not read that piece by Aaron. What a fantastic bit of detective work. I've sent him a congratulatory email.

I am now even more certain than before that our easy money, credit crack-up boom is going to require such a massive amount of bailing out that the S&L crisis will look like a kindergarten bake sale.

I'm going to re-read that piece more carefully later and then chase the links down. Thank you for bringing that to my attention. It should be updated and re-run?

Next, I am in full agreement with you about the level of rigor. Of course the buy-side cheerleaders can get away with any old sort of nonsense but those who dare to question the central premises need to be as scrupulous as possible. Indeed, I am always looking for strong challenges to my data and viewpoints; as a scientist by training I regularly develop, reject and accept hypotheses as the data changes and peer review is both a necessary and desired part of the process.

Accordingly, I think it would be an excellent idea to print the email exchange.

Lastly, I concur with Paul (good article by the way, thanks again) about the nature of hyperinflation; it would be a mistake to think that it could only result from fresh printing of new money by the government. We have several generations of excess printing already 'out there' and that is the primary reason I am a long term buy-and-holder of gold & silver. When (not if) those magic checks get cashed we'll essentially have two generations of excess spending to contend with... and the only way I can see for that to be resolved is to destroy future purchasing power. So yes, I am in complete agreement there.

Best,

Chris


___

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[akrowne]

Excellent and succint piece.

I would say for the benefit of readers who might be new to the distinction that the terminal, exponential explosion of the money system is only a property of fiat money. When money equates to a real asset, it is a proper proxy for wealth. In a financial system with such a basis, there is nothing ominous about credit: it is extended much more carefully and wisely, as the lender is forgoing real wealth for the loan period, and taking on the risk that they may lose this wealth permanently. In fact, this is how the US economy grew considerably over 1800-1900 while undergoing a net deflation--experiencing money reduction relative to the size of the economy. Anyone who says we need fiat currency to grow the economy is arguing that no progress was made over the course of US industrialization--quite a fantastic claim!

(As a sidebar, anyone who says at least we don't have bank failures and depressions since fiat money was introduced in 1913 is ignoring the fact that this nation's worst bank failures and depressions actually came after that point.)

Another subtlety is that even gold (or other commodity)-backed money does not itself imply a "real" money system: if banks are allowed to keep reserves on a fractional basis (e.g., holding only 10% of money for deposits), then the monetary system is polluted with "bank credit money", which is basically just fiat currency again. In a system without a central bank, individual banks can still misbehave like this (fractional-reserve banking was invented by Florentine bankers in the 1600s, I believe): but customers can always take their money to more solvent banks, which provides a natural counter-balance.

Regarding the change in the reserves requirements prior to 1995, actually, I later found out that Hussman discovered (http://http://www.hussmanfunds.com/html/fedirrel.htm) these same changes at least five years before I did. But I don't think the publicizing of these facts can be under-done (and to be fair, I wasn't even of legal drinking age for most of 2001 when Hussman published the above!)

Anyway, there is more to this picture than even Hussman has discussed. It all might not have been possible without the ascendency of Treasury Secretary Rubin in 1995 and his puzzling "strong dollar" policy (from a Goldman alum, imagine that!), simultaneous with the introduction of Japan's ZIRP.

As I have learned more about the Yen carry trade and the domestic situation in Japan, I have realized just how potent of a combination of these factors were. It was like the US financial economy was kindle-wood with gasoline already poured on it (lax reserves and other aspects of absent financial regulation), and the ZIRP was a flamethrower, setting the whole thing ablaze in 1995.

Yet still, Big Important Economists and Money People still don't understand the dynamics of the global financial economy (which seems to include Greenspan to this day), and its interaction with the real economy (goods trade) and national economics. They remain ignorant, unfortunately, at the peril of those who have put their trust in them.

[qwerty]

Great article!

Just like to pick up on two points by Eric:

1. Doubling Faster

"Still, critics are open to ask, will the exponential money growth function–whatever it is–ever cause the money supply to begin to double in shorter and shorter periods of time to reach a terminus and collapse as you suggest: a few years, to a year, to a few months..."

But, what Dr Martenson actually wrote was:

"What will it feel like when we are adding another $1 trillion every month, week, day, and then finally hour?"

The time to double remains constant, but the trillions come faster and faster since they represent a smaller and smaller proportion of the total amount.

2. Why exponential?

"My question is, I understand the exponential function for bacteria and reindeer: they breed. But what is the exponential function for monetary growth?"

Dr Martenson responded with a regression analysis fit. QED. But it seems to me that there is an a priori argument for predicting exponential growth:

Let M(t) be the amount of money at time, t.
Then the interest required to service it is r(t).M(t) where r(t) is the interest rate at this time.

Now if we further agree that the interest has to come from new money creation, we have (a short time, dt afterwards)

M(t+dt) = M(t) + r(t).M(t).dt

which as a mathematical derivative is;

dM/dt = r(t).M(t)

That is, M grows at a rate equal to r times the current level of M.

Now just to make an approximation, let's use the long run average,R of r(t) and act as if it were constantly at that level. Then we have

dM/dt = RM(t)

The mathematical function which satisfies this equation is:

M = m.exp(Rt)

Where m is the value of M at t=0.

[akrowne]

Yup; as long as credit must be expanded to cover the increasing income streams needed, you get an exponential function.

The insight of the article I got a real kick out of was that nobody (well, the "system") doesn't realize this is a problem until it's too late.

It will never, ever stop before it breaks down. Even if a lot of people recognize what's going on, you have too many agents in society engaged in the credit pyramiding to stop -- and each of them thinking "well, it's worked great so far, so why should I stop?"

[Pervilis Spurius]

This is an interesting thread and fills me with more questions.

1. Referencing Mortenson's chart, the problem with charting exponentials (especially with higher values of qwerty's R) is that they....well....always look so exponential on a "normalized" linear scale. For example, if you look closely at Mortenson's M3 chart it appears to have doubling on the order of every 6-12 years for quite some time. Point is that similar alarm bells could have been raised say, back in 1974 when M3 first hit $1E12. After all, only 6-8 years before it had been $500E9 and had taken 342 years to reach that 500 billion.

So, the key here is to find the appropriate boundary conditions where this exponential solution to qwerty's diff eq holds. Qwerty gives us only one:

M(t=0) = m

But what bounds the right hand side of the chart?

Mortenson only suggests the next 10-20 years (why?) or perhaps sooner if there are political problems with Iran(why?, again)

I have to admit, I don't necessarily disagree with Mortenson here, but there's a strong emotional component to my agreement. After all, $53 trillion in total gov't liabilities sure seems really bad when I think about it.

2. Just a suggestion: maybe we should come up with yet another money stock catagory, call it M4. Why? because M3 only accounts for all "on Balance sheet" bank credits and the bulk of that $53 trillion is "off balance sheet". So M4 then would include all of the "off balance sheet" activity too.

"That's (M3) not an exponential, This (M4) is an exponential!"

Viewed from this perspective, federal funds rates have been held too low for ........ decades?

[akrowne]

I think you're right... the issue of measuring "how much money" there is is a slippery one which gives plenty of room for under-estimating the problem.

I've been thinking about this for a while and I actually use the following sort of hierarchy for "money and money-like (credit) instruments"

Mr: real assets (only useful in consumption and barter).. not really money or monetized.
Mc: cash-like non-money instruments, e.g. precious metals. can be used as a store of value, money in extreme cases.
M0: (fiat) cash in circulation
M1: checking money
M2: savings money (including instrments like CDs)
M3: loans (including large-scale ones, like repos), securities (including stocks, bonds, and mortgages)
M4: revolving credit
M5: derivatives and trading leverage

I believe each category here has a higher and higher nominal value (except Mr, which is only included for completeness and is better categorized as "wealth" than "money"). I believe this entire hierarchy should be analyzed when trying to measure "the amount of money" and "liquidity" in the financial system.

Let me try to put dollar values on this hierarchy purely from memory -- this is probably somewhat off (note: these aren't downward-inclusive):

Mc: $1-2 trillion
M0: $2-4 trillion
M1: $4-10 trillion
M2: $10-15 trillion
M3: $20-30 trillion
M4: $20-40 trillion
M5: $50-100 trillion

A sidebar: Mc is interesting. In times of high confidence and stability of fiat money, gold in particular behaves like Mr more than Mc -- it is only really consumed for its decorative value, and a tiny bit of industrial use. But in times of monetary instability, it also becomes a store of value, becoming Mc. We've transitioned into one of those eras.

[EJ]

Great article!

The mathematical function which satisfies this equation is:

M = m.exp(Rt)

Where m is the value of M at t=0.

Well done! You've moved this discussion forward a great deal by defining this function for the exponential growth of money. I'm going to run it by our most gear-head economics advisers for comments.

A couple of other comments.

The need for ever increasing debt was pointed out to me as the major weakness of the capitalist system by a socialist economics professor at University of Massachusetts, Amherst in the late 1970s. He identified it as a characterization of capitalism rather than fiat money.

Over the years, most of the criticism of our fiat money system has come from the hard money (Mises, etc.) group, what I like to call the No Free Lunch school of economics. Politically, they have tended toward the right, and in any case certainly capitalists, if not free-market Libertarian purists.

Regardless of political bent, everyone seems to be able to agree that such growth can end in one of two ways:

1) Failure pre extremis (deflation)
2) Failure post extremis (disinflation/hyperinflation/deflation) ala Ka-Poom

The money supply does not grow constantly year to year, but, like economic growth, fluctuates.

http://www.itulip.com/images/RealGDPChange1929_2005.gif


You would expect, however, for the money supply to grow at more or less the same rate as the economy, and it did until the U.S. went off the gold standard and the rest of the world followed in 1971. The chart only shows the data going back to 1958, but the ratio of 0.12 between MZM and Real GDP holds going back to at least 1900, except during times of war when the gold standard was suspended. Since then, not only has the ratio not maintained at 0.12, it has increased 600%, meaning six times as much money supply is required to support a percent of Real GDP growth in 2005 as in 1971.

http://www.itulip.com/images/mzmvsgdp.gif


Since 1990, the relationship betweem NZM and GDP has fluctuated, as the bubble economy has gone through a series of booms and busts according bubble cycle rules:

1) Monetary Reflation (injecting liquidity)
2) Asset inflation (stocks, housing, etc.)
3) Monetary Tightening (liquidity extraction)
4) Asset deflation (2000 stock market crash, 2005 to ? housing bubble collapse)
5) Goto 1

http://www.itulip.com/images/MZM_GDP1990-2006.gif


Ka-Poom Theory is the bet that the cycle goes on until it doesn't. The failure post-extremis case will be driven by geopolitical events, a repudiation of U.S. foreign policy expressed via the sale of dollar denominated assets and the repatriation of dollars to the U.S. A wider war in the Middle East might do it.

http://www.itulip.com/images/KaPoom2006Q.gif

[Jim Nickerson]

EJ,

Is the Ka-Poom Theory chart immediately above, a recently updated one?

I have a hard time finding (searching for) other other articles where you have put up the chart. Front page, iTulip, I found what might have been the first edition, but things have moved on since.

Why not a Category in the fora list that notes the evolution of Ka-Poom as it is occurring?

[qwerty]

In answer to P.S. above:

"Referencing Mortenson's chart, the problem with charting exponentials (especially with higher values of qwerty's R) is that they....well....always look so exponential on a "normalized" linear scale. For example, if you look closely at Mortenson's M3 chart "

The best way to chart an exponential is with a log scale on the y axis. This morphs the curve into a straight line:

log(M) = log(m) + Rt

Which is a straight line with two parameters:
m: the point where the line crosses the y axis
R: the slope of the line

2. "it appears to have doubling on the order of every 6-12 years for quite some time. Point is that similar alarm bells could have been raised say, back in 1974 when M3 first hit $1E12. After all, only 6-8 years before it had been $500E9 and had taken 342 years to reach that 500 billion."

Yes! If you look at any region of an exponential curve, it has the same shaoe as any other part, only with a different scale (witness the fact that on a log scale the slope is constant). Thus any bacterium in the jar, at any point in the history of the jar, could pull up a chart and show that the line is screaming off to the top right. Even after 10 mins, the curve showing the history to date would have the same shape as it does after 10 years.

THUS THE APPEARANCE OF THE SCREAMING EXPONENTIAL BLOW-OFF IS NO INDICATION OF A TERMINAL PHASE -- THAT BLOW-OFF IS ALWAYS THERE WITH AN EXPONENTIAL, RIGHT FROM THE START.

[EJ]

In answer to P.S. above:

"Referencing Mortenson's chart, the problem with charting exponentials (especially with higher values of qwerty's R) is that they....well....always look so exponential on a "normalized" linear scale. For example, if you look closely at Mortenson's M3 chart "

The best way to chart an exponential is with a log scale on the y axis. This morphs the curve into a straight line:

log(M) = log(m) + Rt

Which is a straight line with two parameters:
m: the point where the line crosses the y axis
R: the slope of the line

2. "it appears to have doubling on the order of every 6-12 years for quite some time. Point is that similar alarm bells could have been raised say, back in 1974 when M3 first hit $1E12. After all, only 6-8 years before it had been $500E9 and had taken 342 years to reach that 500 billion."

Yes! If you look at any region of an exponential curve, it has the same shaoe as any other part, only with a different scale (witness the fact that on a log scale the slope is constant). Thus any bacterium in the jar, at any point in the history of the jar, could pull up a chart and show that the line is screaming off to the top right. Even after 10 mins, the curve showing the history to date would have the same shape as it does after 10 years.

THUS THE APPEARANCE OF THE SCREAMING EXPONENTIAL BLOW-OFF IS NO INDICATION OF A TERMINAL PHASE -- THAT BLOW-OFF IS ALWAYS THERE WITH AN EXPONENTIAL, RIGHT FROM THE START.

There may be an upper threshold indicated by historical comparables of the money supply/GDP ratio. Maybe as you approach 1:1 MZM:GDP, for example, or a ration of some larger money aggregate, like M5:GDP. Last I checked, M3/GDP was 4:1, meaning $4 of new M3 money was needed to generate $1 GDP growth, versus 1.5:1 in 1980.

[Pervilis Spurius]

Qwerty:

Exactly!



There may be an upper threshold indicated by historical comparables of the money supply/GDP ratio. Maybe as you approach 1:1 MZM:GDP, for example, or a ration of some larger money aggregate, like M5:GDP. Last I checked, M3/GDP was 4:1, meaning $4 of new M3 money was needed to generate $1 GDP growth, versus 1.5:1 in 1980.

EJ:

Perhaps. Based on some limited experience, I would suggest that the terminal phase might manifest itself in a sudden and more extreme nonlinear move on top of the existing nonliearity. Desperate injections of liquidity to keep the economic ship afloat.

[EJ]

Qwerty:

Exactly!





EJ:

Perhaps. Based on some limited experience, I would suggest that the terminal phase might manifest itself in a sudden and more extreme nonlinear move on top of the existing nonliearity. Desperate injections of liquidity to keep the economic ship afloat.

Not hard to project where MZM = Real GDP. MZM on average grows at 8% a year since 1971 while GDP has grown 3% since 1959, the first year for which MZM data are available.

Because of the differential in growth rates, the ratio of MZM to GDP increases steadily. It doubled from .15 to .3 in the 11 years between 1975 and 1987, and again to .6 after another 15 years. When GDP growth declines below 3%, the Fed increases the MZM money supply. When GDP growth declined to 1% between 2000 and 2001, MZM increased 17%. The result was a spike in the ratio, from .47 in 2000 to .57 in 2001. As GDP increases, MZM growth rates were brought back down to "normal" growth rates. Of course, MZM never goes backwards year to year; MZM growth is compound, whereas GDP growth is simple.

http://www.itulip.com/images/mzmvsrealGDPprojectioned.jpg


If the ratios since 1971 hold, MZM will equal Real GDP by 2015. What does it mean to have an economy in which the most liquid form of money, MZM, is equal to the year's GDP? How does this compare to other countries today? In the past? Further exploration is required.

[Pervilis Spurius]

If the ratios since 1971 hold, MZM will equal Real GDP by 2015. What does it mean to have an economy in which the most liquid form of money, MZM, is equal to the year's GDP? How does this compare to other countries today? In the past? Further exploration is required.


I'm not sure the comparison of money supply to GDP has signifcant meaning.

Let me illustrate this with the case of Switzerland. Switzerland is of course very different from the USA, and many a case can be made that the comparison is not a good one (current, capital account surpluses, etc.), however let me make the case nonetheless on 2 important (I think) similarities:

1. Both have a high "per capita" proportion of global corporations (companies domiciled in their respective countries but with global operations.

2. Both have high foreign holdings of their respective currencies.

Ok, so on this 2 legged stool, let's look at the example of Switzerland.

Wikipedia estimates the 2005 Swiss GDP to be $367.5 Billion. Let's use this for the sake of argument. We need to convert this to CHF which ranged from $.86 to $.76. Looking at the chart, I am going to say it averaged about $.80. Inverting this we get 1.25CHF/$. So Swiss GDP is ~ CHF459 Billion.

Looking at the Swiss Monetary Statistics, it looks like the Swiss M2 figure most closely resembles US MZM since it excludes time deposits. In 2005 Swiss M2 averaged ~ CHF492 Billion

http://www.snb.ch/e/publikationen/publi.html?file=/e/publikationen/monatsheft/aktuelle_publikation/html/e/inhaltsverzeichnis.html

The ratio is then 492/459 = 1.07.

I don't hear any noise about the CHF's doom.

[EJ]

I'm not sure the comparison of money supply to GDP has signifcant meaning.

Let me illustrate this with the case of Switzerland. Switzerland is of course very different from the USA, and many a case can be made that the comparison is not a good one (current, capital account surpluses, etc.), however let me make the case nonetheless on 2 important (I think) similarities:

1. Both have a high "per capita" proportion of global corporations (companies domiciled in their respective countries but with global operations.

2. Both have high foreign holdings of their respective currencies.

Ok, so on this 2 legged stool, let's look at the example of Switzerland.

Wikipedia estimates the 2005 Swiss GDP to be $367.5 Billion. Let's use this for the sake of argument. We need to convert this to CHF which ranged from $.86 to $.76. Looking at the chart, I am going to say it averaged about $.80. Inverting this we get 1.25CHF/$. So Swiss GDP is ~ CHF459 Billion.

Looking at the Swiss Monetary Statistics, it looks like the Swiss M2 figure most closely resembles US MZM since it excludes time deposits. In 2005 Swiss M2 averaged ~ CHF492 Billion

http://www.snb.ch/e/publikationen/publi.html?file=/e/publikationen/monatsheft/aktuelle_publikation/html/e/inhaltsverzeichnis.html

The ratio is then 492/459 = 1.07.

I don't hear any noise about the CHF's doom.

Thanks. This addresses the question, What is the upper bound? Does one exist? After all, an economy is not a jar. What rule says MZM must be a fraction of GDP versus GDP a fraction of MZM? Intuitively, it seems out of whack to have an economy producing only as much output as it is carrying in zero maturity money, but I cannot articulate what specifically is "wrong" with that. Need to think about it.

I sometimes wonder whether this obsession with fiat money is a uniquely American one. Every nation today uses fiat money, although the euro does have a fractional gold reserve as the dollar did until 1971. But the other major fiat currency, the yen, does not. Of course, the Bank of Japan's "problem" since their 1990 stock market crash and 2002 real estate bust has been so-called "deflation," not inflation. I say "so-called" because under a gold standard, deflations of a few percent as Japan has experienced used to be a normal part of the economic cycle, and during Japan's "lost decade" of "deflation" all they have been able to manage is to put the U.S.A.'s largest auto manufacurers on the ropes.

An analysis of the M1 and GDP data available via the BoJ, from 1980 to 1999, illustrate a similar pattern of growth, even under conditions of "deflation."

http://www.itulip.com/images/M1vsGDO1980-1999Japan.jpg


The most curious thing is that the ratio stays more or less flat around .25 during their bubble economy years, 1985 - 1990. The ratio makes a modest dip in 1998 - 1999 as the JoB tried to cool the bubbling Japanese equity and real estate markets by drawing down the money supply. The dip in the M1/GDP ratio is caused singly by a dip in M1; the bubble economy's GDP continued to grow. January 1990, the NIKKEI crashed hard.

I don't know how much this tells us about fiat growing toward extremis via some exponential function in yen versus dollars, but it contributes to our understanding of why the Fed is reluctant to allow MZM to dip much or for long to stop an asset bubble. Between the BoJ's experience in 1989-1990 and the Fed's experiment in 1994 (http://www.itulip.com/forums/showthread.php?t=360), the lesson is clear.

[EJ]

EJ,

Is the Ka-Poom Theory chart immediately above, a recently updated one?

I have a hard time finding (searching for) other other articles where you have put up the chart. Front page, iTulip, I found what might have been the first edition, but things have moved on since.

Why not a Category in the fora list that notes the evolution of Ka-Poom as it is occurring?

Stay tuned, Jim. Your wish is our command!

[metalman]

readers should note that mzm is a measure of the money supply that does not include aggregates that count as money.

at the end of 2006...

MZM: $7,216 billion
M1: $1,361.1 billion
M2: $7,023 billion
M3: $10,336 billion (until march 2006 when they stopped telling us)

do we have an itulip chart that shows the various levels of the m's over the years?

[Jim Nickerson]

readers should note that mzm is a measure of the money supply that does not include aggregates that count as money.

at the end of 2006...

MZM: $7,216 billion
M1: $1,361.1 billion
M2: $7,023 billion
M3: $10,336 billion (until march 2006 when they stopped telling us)

do we have an itulip chart that shows the various levels of the m's over the years?

If "we" means "Bart" then with little doubt the answer is YES. It might already be here somewhere.

[bart]

If "we" means "Bart" then with little doubt the answer is YES. It might already be here somewhere.

You rang? (http://www.nowandfutures.com/grins/you_rang.wav)


http://www.nowandfutures.com/images/m1m2m3_base_credit.png


It's overly busy too, but here's one since 1980:
http://www.nowandfutures.com/images/m1m2m3_base_credit1980-current.png


And the there's my Central Bank watch (http://www.NowAndFutures.com/cb_watch.html) page which has similar data for many major central banks since 1980 or so. The BoJ data goes back to 1970.
There's also a both a Fed page with various arcane data, and also a set of six other pages that simply link to various charts directly from the Fed that show monetary and other stats. Anyone can also go direct to the search function of the Fed's FRED database and find more charts than any econ geek should ever want here (http://research.stlouisfed.org/fred2/search).
Here's a sample of the long term M1 chart from the Fed:
http://research.stlouisfed.org/fred2/data/WCURRNS_Max.png

M3 is running at about $11,407 trillion right now, for what its worth.

[flow5]

There will come a time ( unpredictable ) when it will be impossible for the government ( federal ) to collect enough in taxes to pay all of its expenses, including interest on the national debt. The Gov't can of course borrow an indefinite amount through the Fed. ( concealed greenbacking ) given a few changes in existing law. But that would lead to hyper inflation - i.e., a collapse in the credit of the Gov't. So the easy way, is the way the French did it in 1960. Simply say that beginning Jan 1 ( or any other date ), new dollars will be issued, and that each new dollar is worth 100 old dollars. Then follow that up with a largely state controlled economy.

In 1960, the French economist / mathmetician Jacques Rueff, during Charles de Gaulle's presidency, converted the old franc, to a nouveau franc, equal to 100 of the old franc. However, even with this substitution, inflation continued to erode the currency's value, though at lower rates of change, in comparison to other countries. And this new franc equaled 20 cents to a U.S. dollar. The old rate was 5.00 to a dollar.

In 1960, the French franc, which was one of the weakest currencies, overnight, became one of the strongest. Correcting policies included plans to 1) balance the budget, 2) stablize the currency, and 3) eliminate currency controls.

The gold content of the franc increased 100%, & 1) foreign exchange rates, and 2) <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-comhttp://www.itulip.com/forums/ /><st1:country-region w:st=France'</st1:country-region>s internal prices, reflected the conversion overnight. Internally, prices dropped about 90 per cent, and the foreign exchange value rose from about 0.238 cents per franc, to about 20.389 cents per franc.

Domestically, <st1:country-region w:st="on">France</st1:country-region> was on a managed paper standard; externally, on a modified gold bullion standard. With the new policies, <st1:country-region w:st="on">France</st1:country-region>'s economy strengthened, and the franc became fully convertible @ approximately its gold par, into gold for foreign exchange and into foreign currencies.

With the introduction of the euro, the franc in Jan. 1, 1999, was worth less than 1/8 of its Jan. 1, 1960 value


Why sugar coat it? We are headed for a "command" economy and a totalitarian mold. This is about our preditory society, greed and evil. It is about our "elastic" legislators, lobbyist, and their constituents.:mad:

[bart]

There are excessively high rates of change in M3 but there is also considerable double counting in its construction, by the FED or whom ever, because of the Keynesian dogma that doesn't recognize the difference between the supply of money & the supply of loan-funds, e.g., money market mutual funds (MMFs). MMFs are the customer's of the commercial banks. The utilization of loan-funds or the monetary savings by the financial intermediaries is captured by its velocity relationship (MMFs deposits never leave the CB system). MMF deposits are evidence that the funds have already been spent


The double counting does exist, but is minimal.

The key is the actual rate of growth, since the double counting has been consistent over the years and decades. The various measures of growth rates on credit, as well as the Austrian definition of money, must also be taken into account when looking at the big picture.

[bart]

So I'm at odds with your conclusion that the errors are minor. I believe that the errors are substantial.

Fair enough. I'd put double counting at no more than about $500 billion, or less than 4%.

Given that it's relatively consistent over time, I also believe that it can safely be ignored, especially in the big picture.

[bart]

Your reconstruction of M3 could be called perfect.

Thanks, but being that it's based on almost the same data that the Fed used before it discontinued M3 reporting last year, it's far from perfect.

I do honestly think that double counting does apply to it, and that its mostly inherited from M2.

[flow5]

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BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; HEIGHT: 12.75pt; BACKGROUND-COLOR: transparent" align=right height=17 x:num>2006.01</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="47095">47,095</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="272531">272,531</TD></TR><TR style="HEIGHT: 12.75pt" height=17><TD style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; HEIGHT: 12.75pt; BACKGROUND-COLOR: transparent" align=right height=17 x:num>2006.02</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="46659">46,659</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="265394">265,394</TD></TR><TR style="HEIGHT: 12.75pt" height=17><TD style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; HEIGHT: 12.75pt; BACKGROUND-COLOR: transparent" align=right height=17 x:num>2006.03</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="46923">46,923</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="212477">212,477</TD></TR><TR style="HEIGHT: 12.75pt" height=17><TD style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; HEIGHT: 12.75pt; BACKGROUND-COLOR: transparent" align=right height=17 x:num>2006.04</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="47947">47,947</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="130671">130,671</TD></TR><TR style="HEIGHT: 12.75pt" height=17><TD style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; HEIGHT: 12.75pt; BACKGROUND-COLOR: transparent" align=right height=17 x:num>2006.05</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="47380">47,380</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="82176">82,176</TD></TR><TR style="HEIGHT: 12.75pt" height=17><TD style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; HEIGHT: 12.75pt; BACKGROUND-COLOR: transparent" align=right height=17 x:num>2006.06</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="46893">46,893</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="74180">74,180</TD></TR><TR style="HEIGHT: 12.75pt" height=17><TD style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; HEIGHT: 12.75pt; BACKGROUND-COLOR: transparent" align=right height=17 x:num>2006.07</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="47062">47,062</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="56317">56,317</TD></TR><TR style="HEIGHT: 12.75pt" height=17><TD style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; HEIGHT: 12.75pt; BACKGROUND-COLOR: transparent" align=right height=17 x:num>2006.08</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="46656">46,656</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="53590">53,590</TD></TR><TR style="HEIGHT: 12.75pt" height=17><TD style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; HEIGHT: 12.75pt; BACKGROUND-COLOR: transparent" align=right height=17 x:num>2006.09</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="46709">46,709</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="55376">55,376</TD></TR><TR style="HEIGHT: 12.75pt" height=17><TD style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; HEIGHT: 12.75pt; BACKGROUND-COLOR: transparent" align=right height=17 x:num>2006.1</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="46496">46,496</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="51050">51,050</TD></TR><TR style="HEIGHT: 12.75pt" height=17><TD style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; HEIGHT: 12.75pt; BACKGROUND-COLOR: transparent" align=right height=17 x:num>2006.11</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="46594">46,594</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="51261">51,261</TD></TR><TR style="HEIGHT: 12.75pt" height=17><TD style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; HEIGHT: 12.75pt; BACKGROUND-COLOR: transparent" align=right height=17 x:num>2006.12</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="47042">47,042</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="51339">51,339</TD></TR><TR style="HEIGHT: 12.75pt" height=17><TD style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; HEIGHT: 12.75pt; BACKGROUND-COLOR: transparent" align=right height=17 x:num>2007.01</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="47125">47,125</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="50331">50,331</TD></TR><TR style="HEIGHT: 12.75pt" height=17><TD style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; HEIGHT: 12.75pt; BACKGROUND-COLOR: transparent" align=right height=17 x:num>2007.02</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="46752">46,752</TD><TD class=xl22 style="BORDER-RIGHT: #ece9d8; BORDER-TOP: #ece9d8; BORDER-LEFT: #ece9d8; BORDER-BOTTOM: #ece9d8; BACKGROUND-COLOR: transparent" align=right x:num="50833">50,833</TD></TR></TBODY></TABLE>

BOJ reserves 1. required & 2. total (Anyone know why the big drop off?)
http://www.boj.or.jp/en/type/stat/dlong/fin_stat/boj/cdab0140.csv

[Aurakill]

I would say for the benefit of readers who might be new to the distinction that the terminal, exponential explosion of the money system is only a property of fiat money. When money equates to a real asset, it is a proper proxy for wealth. In a financial system with such a basis, there is nothing ominous about credit: ....

You make the fundamental criticism here of Dr. Martenson's thesis. The question of the validity of the projection of exponential exponential growth of the money supply may have some application in an investigation of the dynamics of money supply management, and therefore of central bank intervention. However, that is quite a different realm from Martenson's thesis whose premise is "If all money in circulation is loaned into existence ... literally every single dollar in every single bank account can be traced back to a bank loan somewhere." As you so rightly allude to, the fundamental basis of credit money remains the time lag inherent in commodity circulation between purchase and sale; at its most important level, the foundation that this lag gives to what used to be called Bills of Exchange in the UK, and, I believe, Notes in the US. No matter what the developments in the technical arrangements that handle this process in an age of electronic settlements the underlying facts of the real economy still underpin it.

And it is certainly not correct for Martenson to say that "For one person to have money in a bank account requires someone else to owe a similar sized debt to a bank somewhere else." Even if we consider only the amount of money that is deposited in banks in payment of wages and salaries, this is founded on real wealth, that which has been produced during the period for which these amounts are payment. It matters not if they are supported by the "commercial paper" of the employer. All these outstanding debts along the chain of production are settled on a regular basis, on a basis in fact that is set by the various circulation periods of the different areas of production, ultimately determined by the point of sale of the finished product, whether this be destined for consumption by the wage and salary earners or for productive consumption in the replacement of raw materials and capital equipment.



Another subtlety is that even gold (or other commodity)-backed money does not itself imply a "real" money system: if banks are allowed to keep reserves on a fractional basis (e.g., holding only 10% of money for deposits), then the monetary system is polluted with "bank credit money", which is basically just fiat currency again.


It is not correct to say that the money system is per se "polluted" by this type of credit. So long as the fractional basis is founded on the real demands of the circulation this type of credit is sound. The historical origins lie in the saving on the costs of circulation associated with the wear and tear on the precious metals. It was found long since that only a certain portion of the money supply was required to be in 'hard' circulation; we all know about this since I have seen essayed here on occassion the question of what constitutes a money supply based on the 'real' economy. In the days when Bills becoming due were settled at the Exchange it was likewise well known before too long that the amount of cash required for the settelement was a fraction of the total Bills, i.e, that sum required after debits and credits were balanced 'on the book.'

Incidentally, I am surprised that a natural scientist was not immediately suspicious upon coming across any thesis that depended on 'runaway', i.e., exponential, development. I believe I read somewhere this idea was even put forward in the early days of nuclear physics when it was mistakenly thought by some that a nuclear reaction once started would consume the Earth, if not the Universe.

As to the economic variant, we have plenty of historical evidence as to the course of unchecked hyper-inflation, whether Weimar or Zimbabwe. Let us hope that in the US neither option is courted.

[flow5]

You have to define rates of change in monetary flows (MVt) relative to rates of change in real gdp. There's very little information given by the monetary aggregates standing alone.

That the money supply would accelerate relative to the growth in real gdp was suggested in the 50's but it's only become fashionable to talk about it in the last decade. It's supposed to be that way. That's the way it was conceived by professors, professional economists, and the Fed's technical staff. And these ideas were sanctioned by Congress and our State legislators. These events were totally predictable and preventable.

Explain to me why the housing market didn't lead the U.S. out of the recession/depression for the first time in the early 80's? Why do you think long-term interest rates inverted relative to nominal gdp at that time? You'll have to re-examine the basics.

[Spartacus]

It matters not if they are supported by the "commercial paper" of the employer. All these outstanding debts along the chain of production are settled on a regular basis, on a basis in fact that is set by the various circulation periods of the different areas of production, ultimately determined by the point of sale of the finished product

Even if this is true , this is a vanishingly small part of the economy.

All the productive "plant and equipment" in the US is worth less than NY real estate.

Read the Hudson series on this site.

I'm thinking it may not be true because as you note, at this time lots of wages of even the non-FIRE economy are being paid out of the receipts of bond sales. Where I differ from you is that IMHO because of the flood of PE money and other easy credit, a much larger fraction of salaries than ever before come out of credit.

[Spartacus]

IOW,

lim
n->inf

lol ; )

[flow5]

We have an “elastic” currency “aided and abetted” by “elastic” legislators. We have perennial Walter Wriston caricatures pressuring the House Committee on Financial Services & the U.S. Senate Committee on Banking, Housing, and Urban Affairs. We have a conspiratorial organization that goes by the name of the American Bankers Association - with its well funded lobbyists.

The Board of Governors is self-described as: “subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute” Even so, the Fed is “connected at the hip” with Congressional allies, a la Greenspan, who the New York Times called a “three-card maestro”.

<O:p</O:p
The Fed’s research is politically coordinated, targeted to justify its monetary policy objectives - those that appease the banking community. It’s as the university professor said: “innovate away from home”. Academic freedom has become the “barbarous relic”.

[Digger]

Hello all,

I’m new to itulip and this is my first post. Thank you to all who have contributed to this most interesting site.

The topic of sustainability of an ever expending fiat money system is something I’ve been also pondering a lot. In theory I can see some basic scenarios that evolve from one another:

(a) Steady yet exponential but balanced growth of money supply at a slow rate of 1-4% ad infinitum. The creation of new debt always matches long term real GDP growth and wages so that old and newly created debt can always be serviced. The depreciation of the currency happens slowly enough to be not recognized by the population as a bad thing since the standard of living rises over time as well.

(b) A situation where the rather ideal case-(a)-scenario gets out of hand, first slowly later rapidly. The disturbance is caused by policy makers who are biased towards growth and stimulation. The much enjoyed higher growth rate at the beginning is later accompanied by even higher debt creation which finally comes to a point at which it is hardly manageable / serviceable (increasing rate of inflation). Real economic expansion comes at an ever higher cost or is not possible at all anymore.
At this point policy makers (the central bank and the government) have two options:

(c) Let malinvestments fail and take draconian measures to get the money supply growth back on track. This comes with a severe decline in overall economic activity but the decline is accepted by the population as the price of restoring sound money. It is understood that going back to a low money supply growth rate like in scenario (a) is beneficial to the majority of the people. A broad consensus among government, central bank and population is a prerequisite for such actions. The Fed under Volcker, a government under Carter/Reagan not standing in the way and people determined to save their currency chose this option in the late 1970ies / early 80ies.

or

(d) Take no counter measures but rather try to stimulate new debt creation with ever more new instruments and means. Though the result of such actions will be increasingly disappointing the delay of the day of reckoning is preferred over the pain a real cure would cause. To go this path a consensus among government, central bank and people is just as necessary. The U.S. in their late 90ies / early 2000 is a good example. The extreme indebtedness of all parts of society from the private sector to government favored inflation over disinflation / deflation. The debtor always likes having his debt inflated away. Investment money shifted out of the dollar and treasuries into tangibles (first into stocks, than into real estate, later into commodities) – a sign of broad consensus over a failing currency and acceptance of increasing inflation. Today, after the burst of the housing bubble and amidst the credit crisis an accelerating rate of inflation is even more wished for by the majority of people, the banking system, Congress and the Fed.

Once you are at stage (d) the question rises: Does this automatically lead to the next stage (e), hyperinflation, or is there some barrier that keeps money expansion from going that final step. Debt defaults and the collapsing of debt creation on a massive systemic scale that we are witnessing now are certainly deflationary for the U.S. and were it not for the numerous new inventions of the Fed and the government starting some relief policies the system would have imploded already. But this will not be enough and policy makers will come to a point where their arsenal of conventional deflation fighting weapons will be exhausted. At this point sterilized lending operations won’t do it anymore and the Fed would be overstrained as the lender of last resort. It will take outright monetization of debt by the treasury. The money printing helicopter will need to fly. Of course, such an operation would debase the dollar mightily and since the source of new money will then be treasury it would need the okay from Congress. Approval from Congress for monetization of debt is the only barrier that stands in the way the US inflating their way out of the mess. It is also the only way to avoid a deflationary collapse. Without it servicing existing debt let alone much needed creation of new debt will not be possible.

Since it is not so much in the hands of the Fed as in the hands of Congress and ultimately the people, how will they decide? Let’s see what is in for the people in both scenarios:

In a deflation wealth is consolidated into fewer hands. Debtors slip deeper into the debt hole and become debt slaves without any hope. Many of them default and creditors take ownership of collateral. Revolts and social unrest among the hopeless are a likely outcome. Creditors win relatively through enhanced purchasing power of the currency and the accumulation of tangible wealth. For the US a deflationary collapse would not only mean a collapsing economy, an army of unemployed debt slaves and vastly higher taxation but also total enslavement to creditor nations like China, Russia, Japan and the OPEC countries. If the US government honors the dollar and accepts deflation a big chunk of every dollar earned will go to foreigners for many decades. Eventually debt restructuring and / or national bankruptcy would be opted for anyway.

In an inflation wealth is transferred from creditors to debtors. In a society where debtors outnumber creditors inflation is a wealth equalizer. Debtors pay their debt back in depreciating dollars, they win. Creditors receive depreciating currency, they lose. In a hyperinflation that renders a currency worthless, creditors lose all and debtors get rid of all their debt. Dollar debtors are the US government, a big part of the population and some of the very rich people. Dollar creditors are a small part of the population, some very rich people and - most important - foreigners.

Hyperinflation would immediately solve the problems of a big part of the maxed out population. It would rid the government off its current debt and future obligations. It would hurt some of the very rich people who weren’t “clever enough” to move their wealth into tangibles. The most hurt would be foreign central banks, foreign banks and private investors who hold US debt. Hyperinflation would still be a very bad scenario but it would give the US a fair chance to start again at ground zero with no future obligations. The result resembles a jubilee. The biggest danger looms from foreigners who may turn hostile over their huge losses, but that’s also a possibility with debt default in a deflation. A strong US military however makes sure hostility is contained.

Britain was very happy to deprive the holders of Consols who prospered in the 19th century of their compounding power with the Great War (Keynes, “Inflation and Deflation”, Essays in Persuasion). Likewise, Germany was all too happy to ruin the parasitic class of “Rentiers” with the her Weimar inflation (Holftreich, “Die deutsche Inflation 1914-1923).

Keynes describes it so:

“… the benefits of a depreciating currency are not restricted to the government. Farmers and debtors and all persons liable to pay fixed money dues share in the advantage. As now in the persons of business men, so also in former ages these classes constituted the active and constructive elements in the economic scheme… The tendency of money to depreciate has been in past times a weighty counterpoise against the cumulative results of compound interest and the inheritance of fortunes. … By this means each generation can disinherit in part its predecessors’ heirs; and the project of founding a perpetual fortune must be disappointed in this way, unless the community with conscious deliberation provides against it in some other way, more equitable and more expedient.”

The “Rentiers” of today’s America are the foreigners. I can already see how negative sentiment is forming against some of them like the oil exporting countries – “T. Boone Pickens says the nation's wealth is being plundered by oil exporters (http://2164th.blogspot.com/2008/02/t-boone-pickens-on-oil-imports.html)…”

Considering that the power to choose one of the two evils lies finally with Congress and the people and not with some elitists at the Fed I believe that after all is understood a decision for hyperinflation rather than for deflation will be made by Congress. Between saving face and saving the dollar occasional deflationary backlashes are likely, some even severe and prolonged. They will give the holders of monetary assets chances to swap for tangibles and as such they may very well be intended by “TPTB”. For us mortals they will be confusing and difficult to handle. Taking into consideration who profits from what scenario and who has the power to decide I think the US will finally go the path of hyperinflation.

-digger

[metalman]

Hello all,

I’m new to itulip and this is my first post. Thank you to all who have contributed to this most interesting site.

The topic of sustainability of an ever expending fiat money system is something I’ve been also pondering a lot. In theory I can see some basic scenarios that evolve from one another:

(a) Steady yet exponential but balanced growth of money supply at a slow rate of 1-4% ad infinitum. The creation of new debt always matches long term real GDP growth and wages so that old and newly created debt can always be serviced. The depreciation of the currency happens slowly enough to be not recognized by the population as a bad thing since the standard of living rises over time as well.

(b) A situation where the rather ideal case-(a)-scenario gets out of hand, first slowly later rapidly. The disturbance is caused by policy makers who are biased towards growth and stimulation. The much enjoyed higher growth rate at the beginning is later accompanied by even higher debt creation which finally comes to a point at which it is hardly manageable / serviceable (increasing rate of inflation). Real economic expansion comes at an ever higher cost or is not possible at all anymore.
At this point policy makers (the central bank and the government) have two options:

(c) Let malinvestments fail and take draconian measures to get the money supply growth back on track. This comes with a severe decline in overall economic activity but the decline is accepted by the population as the price of restoring sound money. It is understood that going back to a low money supply growth rate like in scenario (a) is beneficial to the majority of the people. A broad consensus among government, central bank and population is a prerequisite for such actions. The Fed under Volcker, a government under Carter/Reagan not standing in the way and people determined to save their currency chose this option in the late 1970ies / early 80ies.

or

(d) Take no counter measures but rather try to stimulate new debt creation with ever more new instruments and means. Though the result of such actions will be increasingly disappointing the delay of the day of reckoning is preferred over the pain a real cure would cause. To go this path a consensus among government, central bank and people is just as necessary. The U.S. in their late 90ies / early 2000 is a good example. The extreme indebtedness of all parts of society from the private sector to government favored inflation over disinflation / deflation. The debtor always likes having his debt inflated away. Investment money shifted out of the dollar and treasuries into tangibles (first into stocks, than into real estate, later into commodities) – a sign of broad consensus over a failing currency and acceptance of increasing inflation. Today, after the burst of the housing bubble and amidst the credit crisis an accelerating rate of inflation is even more wished for by the majority of people, the banking system, Congress and the Fed.

Once you are at stage (d) the question rises: Does this automatically lead to the next stage (e), hyperinflation, or is there some barrier that keeps money expansion from going that final step. Debt defaults and the collapsing of debt creation on a massive systemic scale that we are witnessing now are certainly deflationary for the U.S. and were it not for the numerous new inventions of the Fed and the government starting some relief policies the system would have imploded already. But this will not be enough and policy makers will come to a point where their arsenal of conventional deflation fighting weapons will be exhausted. At this point sterilized lending operations won’t do it anymore and the Fed would be overstrained as the lender of last resort. It will take outright monetization of debt by the treasury. The money printing helicopter will need to fly. Of course, such an operation would debase the dollar mightily and since the source of new money will then be treasury it would need the okay from Congress. Approval from Congress for monetization of debt is the only barrier that stands in the way the US inflating their way out of the mess. It is also the only way to avoid a deflationary collapse. Without it servicing existing debt let alone much needed creation of new debt will not be possible.

Since it is not so much in the hands of the Fed as in the hands of Congress and ultimately the people, how will they decide? Let’s see what is in for the people in both scenarios:

In a deflation wealth is consolidated into fewer hands. Debtors slip deeper into the debt hole and become debt slaves without any hope. Many of them default and creditors take ownership of collateral. Revolts and social unrest among the hopeless are a likely outcome. Creditors win relatively through enhanced purchasing power of the currency and the accumulation of tangible wealth. For the US a deflationary collapse would not only mean a collapsing economy, an army of unemployed debt slaves and vastly higher taxation but also total enslavement to creditor nations like China, Russia, Japan and the OPEC countries. If the US government honors the dollar and accepts deflation a big chunk of every dollar earned will go to foreigners for many decades. Eventually debt restructuring and / or national bankruptcy would be opted for anyway.

In an inflation wealth is transferred from creditors to debtors. In a society where debtors outnumber creditors inflation is a wealth equalizer. Debtors pay their debt back in depreciating dollars, they win. Creditors receive depreciating currency, they lose. In a hyperinflation that renders a currency worthless, creditors lose all and debtors get rid of all their debt. Dollar debtors are the US government, a big part of the population and some of the very rich people. Dollar creditors are a small part of the population, some very rich people and - most important - foreigners.

Hyperinflation would immediately solve the problems of a big part of the maxed out population. It would rid the government off its current debt and future obligations. It would hurt some of the very rich people who weren’t “clever enough” to move their wealth into tangibles. The most hurt would be foreign central banks, foreign banks and private investors who hold US debt. Hyperinflation would still be a very bad scenario but it would give the US a fair chance to start again at ground zero with no future obligations. The result resembles a jubilee. The biggest danger looms from foreigners who may turn hostile over their huge losses, but that’s also a possibility with debt default in a deflation. A strong US military however makes sure hostility is contained.

Britain was very happy to deprive the holders of Consols who prospered in the 19th century of their compounding power with the Great War (Keynes, “Inflation and Deflation”, Essays in Persuasion). Likewise, Germany was all too happy to ruin the parasitic class of “Rentiers” with the her Weimar inflation (Holftreich, “Die deutsche Inflation 1914-1923).

Keynes describes it so:

“… the benefits of a depreciating currency are not restricted to the government. Farmers and debtors and all persons liable to pay fixed money dues share in the advantage. As now in the persons of business men, so also in former ages these classes constituted the active and constructive elements in the economic scheme… The tendency of money to depreciate has been in past times a weighty counterpoise against the cumulative results of compound interest and the inheritance of fortunes. … By this means each generation can disinherit in part its predecessors’ heirs; and the project of founding a perpetual fortune must be disappointed in this way, unless the community with conscious deliberation provides against it in some other way, more equitable and more expedient.”

The “Rentiers” of today’s America are the foreigners. I can already see how negative sentiment is forming against some of them like the oil exporting countries – “T. Boone Pickens says the nation's wealth is being plundered by oil exporters (http://2164th.blogspot.com/2008/02/t-boone-pickens-on-oil-imports.html)…”

Considering that the power to choose one of the two evils lies finally with Congress and the people and not with some elitists at the Fed I believe that after all is understood a decision for hyperinflation rather than for deflation will be made by Congress. Between saving face and saving the dollar occasional deflationary backlashes are likely, some even severe and prolonged. They will give the holders of monetary assets chances to swap for tangibles and as such they may very well be intended by “TPTB”. For us mortals they will be confusing and difficult to handle. Taking into consideration who profits from what scenario and who has the power to decide I think the US will finally go the path of hyperinflation.

-digger

brilliant! where on earth did you find that keynes quote?

[Digger]

Thanks, metalman. J. M. Keynes, "Essays in Persuation", Norton & Company, New York - London 1963. (still available at amazon or wwnorton.com).

[c1ue]

Digger,

nice post and welcome to iTulip.

My question for you:

Your expectation is that Congress will accede to the will of the people and go the inflation route.

But inflation not only transfers wealth from creditors to debtors, it also levels the monetary playing field: i.e. the more money you have, the more purchasing power you lose to inflation.

Why would Congress - a tool of the wealthy and constituted of largely wealthy individuals, shoot themselves in the foot this way?

Secondly - what will happen when the US as a currency account deficit nation - starts to hyperinflate? Would not all present creditors cease their ongoing lending?

And how does the sudden cessation of 60% of the present oil supply, for instance, affect overall American society? Or having all the Wal Marts remain empty of 80% of their existing merchandise? or both?

[Jim Nickerson]

Digger,

nice post and welcome to iTulip.

My question for you:

Your expectation is that Congress will accede to the will of the people and go the inflation route.

But inflation not only transfers wealth from creditors to debtors, it also levels the monetary playing field: i.e. the more money you have, the more purchasing power you lose to inflation.

Why would Congress - a tool of the wealthy and constituted of largely wealthy individuals, shoot themselves in the foot this way?

Secondly - what will happen when the US as a currency account deficit nation - starts to hyperinflate? Would not all present creditors cease their ongoing lending?

And how does the sudden cessation of 60% of the present oil supply, for instance, affect overall American society? Or having all the Wal Marts remain empty of 80% of their existing merchandise? or both?

Congress is an institution of the members, by the members, for the members and comes across as seemingly stupid with regard to all things financial except those things that benefit the individual Congress person's self-interest and likelihood of being re-elected.

[Rajiv]

Digger see also the video End of Money (http://itulip.com/forums/showthread.php?t=4750)

and The Crash Course (http://itulip.com/forums/showthread.php?t=4751)

Both by Dr. Chris Martenson

[Digger]

c1ue,


Why would Congress - a tool of the wealthy and constituted of largely wealthy individuals, shoot themselves in the foot this way?

In order to stay in power Congress men and women will have to act according to the will of the majority of the people. If the people ask for debt relief from inflation they will implement that will though it will never be that obvious. Paulson asking Congress for a blank check to bail out the GSEs and Congress approving was a step in that direction. Congress people themselves can protect their wealth with tangibles or gold like everybody else who still has money to invest. They have plenty of opportunities like the one right now.

Secondly - what will happen when the US as a currency account deficit nation - starts to hyperinflate? Would not all present creditors cease their ongoing lending?

Sure they would, but at that point it wouldn’t matter much. The inexhaustible pool of monetized debt would have already been tapped.

And how does the sudden cessation of 60% of the present oil supply, for instance, affect overall American society? Or having all the Wal Marts remain empty of 80% of their existing merchandise? or both?

Inflation turning into hyperinflation is a process. It doesn’t happen overnight though the final phase will only take only a few months. The impact would be dramatic and of the kind you just hinted to. However, the only alternative at that point is the US defaulting on their debt, an overnight event that has similar consequences. At least hyperinflation has the advantage of paying foreigners back in depreciated dollars. With hyperinflation the US still calls the shots, with a deflationary downward spiral it is the foreigners. What will the people, the government and the Fed vote for? No doubt, either outcome is bad but one is worse than the other from a US perspective.

[Digger]

Thanks, Rajiv. I like the exceptional clarity of the crash course.

[c1ue]

Quote:
<TABLE cellSpacing=0 cellPadding=6 width="100%" border=0><TBODY><TR><TD class=alt2 style="BORDER-RIGHT: 1px inset; BORDER-TOP: 1px inset; BORDER-LEFT: 1px inset; BORDER-BOTTOM: 1px inset">Originally Posted by c1ue http://www.itulip.com/forums/images/buttons/viewpost.gif (http://www.itulip.com/forums/showthread.php?p=43648#post43648)
Why would Congress - a tool of the wealthy and constituted of largely wealthy individuals, shoot themselves in the foot this way?
</TD></TR></TBODY></TABLE>
In order to stay in power Congress men and women will have to act according to the will of the majority of the people. If the people ask for debt relief from inflation they will implement that will though it will never be that obvious. Paulson asking Congress for a blank check to bail out the GSEs and Congress approving was a step in that direction. Congress people themselves can protect their wealth with tangibles or gold like everybody else who still has money to invest. They have plenty of opportunities like the one right now.

I guess you have a more idealistic view than I do.

I view Paulson's action as exacerbating inflation although theoretically providing debt relief.

Inflation does not provide increase debt, it decreases debt if wages rise also.

Therefore Paulson act was to outwardly appear to help with debt by enabling the broken mortgage market to continue via propping up the GSEs, but this act as the first step toward the government taking on a gigantic liability only serves to weaken the dollar more.

If the people get their way, we're going to get protectionism, short term subsidies in lieu of real policy changes, and all the other lovely things that have been implemented in various part of South America during their earlier troubles.


Quote:
<TABLE cellSpacing=0 cellPadding=6 width="100%" border=0><TBODY><TR><TD class=alt2 style="BORDER-RIGHT: 1px inset; BORDER-TOP: 1px inset; BORDER-LEFT: 1px inset; BORDER-BOTTOM: 1px inset">Originally Posted by c1ue http://www.itulip.com/forums/images/buttons/viewpost.gif (http://www.itulip.com/forums/showthread.php?p=43648#post43648)
Secondly - what will happen when the US as a currency account deficit nation - starts to hyperinflate? Would not all present creditors cease their ongoing lending?
</TD></TR></TBODY></TABLE>
Sure they would, but at that point it wouldn’t matter much. The inexhaustible pool of monetized debt would have already been tapped.

I'm unclear on how the pool of monetized debt and its tapping relate to new loans necessary to buy oil, imported goods, and whatnot.

The currency account deficit is not a recycling of loans, this gap represents how much more the US is spending vs. earning in relation to the rest of the world.

The existing pool of MBS' and what not represent already sold 'securities' to various domestic and foreign entities for investment purposes; these are literally bad notes for past spending indiscretion.

The CAD represents ongoing and future spending indiscretion.

[Digger]

He c1ue,

Our views don’t differ all that much. Just a few comments…<O:p</O:p

I guess you have a more idealistic view than I do.

Maybe not. Politicians will do whatever necessary to stay in power. This includes promising all sorts of things and making all the wrong short sighted moves. I can’t really see them returning to fiscal discipline in a situation like this.<O:p</O:p

I view Paulson's action as exacerbating inflation although theoretically providing debt relief.

Exactly. The Paulson Plan was also about honoring GSE debt held by foreigners. It came at the expense of treasury and will ultimately increase gov. debt, hence it was inflationary.<O:p</O:p

Inflation does not provide increase debt, it decreases debt if wages rise also.

I can’t follow you on this one. Isn’t the increase of debt the main engine of inflation? Or do you mean inflation provides relief for debtors if wages rise proportionally?<O:p</O:p

Therefore Paulson act was to outwardly appear to help with debt by enabling the broken mortgage market to continue via propping up the GSEs, but this act as the first step toward the government taking on a gigantic liability only serves to weaken the dollar more.

A breakdown of Fannie and Freddie would have caused the spreads on GSE debt to widen significantly. The mortgage market that already runs mainly on GSE backing would have come to an immediate halt. So what Paulson said was not totally wrong. And yes, I totally agree: the government took on a gigantic liability that has the potential to weaken the dollar. In turn, the depreciation of the value of the dollar will help with the mountain of existing debt.

I'm unclear on how the pool of monetized debt and its tapping relate to new loans necessary to buy oil, imported goods, and whatnot.

According to Bernanke’s “deflation – making sure…”-speech the government will have to be the spender of last resort. It literally means “printing” money to buy goods. We’re not there though. <O:p</O:p

The currency account deficit is not a recycling of loans, this gap represents how much more the US is spending vs. earning in relation to the rest of the world.

Compound interest on existing government debt held by foreigners increases the current account deficit unless the debt is bought back or stops being recycled for other reasons. It’s part of the equation. Not sure we have the same understanding of monetizing debt / assets. I understand it basically as the Fed’s outright buying of possibly everything from bad ABS to treasury bonds as opposed to sterilized operations.

Thanks for your input,

Digger

.<O:p</O:p

[dave_cohen]

http://www.itulip.com/images/KaPoom2006Q.gif



So, in Ka-Poom theory, crude oil is bought & sold in Euros? Yen? Yuan? the Malaysian Ringgit? during the "repatriation" phase?

[dave_cohen]

It is run by humans.

Oh, wait, that’s a valid complaint but not the one I was looking for.
Too bad you didn't go down this road, Chris. Perhaps I will explore this rich territory in the future... It's ironic to see a rational and convincing discussion of the irrationality of homo economicus with an exponential function staring him in the face...

best,

Dave