August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

[jk]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

CPI with corrections(black) looks to have broken upwards disproportionately, starting at 1995. I wonder if this is:
- a: Too many corrections applied. --or--
- b: A change in the relationship between the supply of money and inflation that we should discuss/investigate.

it is tautological to say this means a shift in velocity, but maybe that's where we need to look. the system has been swishing the money around faster.

on another matter:

The second argument that Ka-Poom Theory makes is that, eventually, without a specific time frame, the U.S. is on track to experience the same difficulties of any country with a large net external debt that cannot finance the monthly payments on that debt with either tax revenue or money borrowed from domestic or foreign sources. The U.S. is vulnerable to a balance of payments crisis.

because the discussion was mostly about inflation/deflation at the time fred put up his big post re-explaining kapoom theory, i think the above quote wasn't discussed. just a reminder to those learning about the current model here, the balance of payments crisis is associated with a mobilization of what i call "frozen" dollar assets CURRENTLY in the accounts of foreign holders. NO NEW MONEY IS REQUIRED. if enough foreign holders get antsy enough about the dollar, that's the game, it's over.

[bart]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

not alone. neg rates + falling dollar moves gold up... 2001 - 2008

The shorter term or daily chart show an example or two of how it can be a trading aid, in both directions, but its far from 100% workable alone... as are most tools.

[bart]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

as rdrees has decided to ignore your response, i'll jump in with a question...

It appears that he's not a weekend forum person.

what the hell is going on here? i see unit labor costs fall like a rock after the dot com cash... can't forget that! but they go up in this recession? why?

It can't possibly be a leading sign of inflation? ;)

[bart]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

ah... so inflation 'is not always and ever a monetary phenomenon'.

now the usa is truly 3rd world...

wage inflation is political.

we are all learning.

Take a few rimshots from stock, you deserve them...



But do recall that artificial control and suppression of the yuan value is also a monetary phenomena... ;)


And all hail edookashun...

[MarkL]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

it is tautological to say this means a shift in velocity, but maybe that's where we need to look. the system has been swishing the money around faster.

I must confess that I don't get it. As you say, M2/M3 are partially measures of the speed of money, but more importantly, with all the banks not lending and the "credit crisit" upon us, most would say money is swishing around slower! I still don't get why the black line goes up disproportionately.

...the balance of payments crisis is associated with a mobilization of what i call "frozen" dollar assets CURRENTLY in the accounts of foreign holders. NO NEW MONEY IS REQUIRED. if enough foreign holders get antsy enough about the dollar, that's the game, it's over.

I agree with the overall theme... "if enough foreign holders get antsy..." but remember that they have to get antsy in comparison to other currencies. This is why the DXY touched 90 during Q1Q2.

In the China thread, somebody said something like "Good luck getting your money out if everything goes to hell." Because China is an autocracy I don't the Yuan being a replacement currency to the dollar. The Euro govs are in similar state to the USA... many worse. What becomes the medium of exchange that people switch to to start the dollar collapse?

Again, the proposed future I'm discussing here is not the final-collapse phase, but the period leading up to it where people move out of the dollar... to something! What do they move to? Stocks? Lots of fear there. Treasuries? Bonds? A fair amount of $$ is moving to bonds... but that seems a difficult medium to do transactions in.

People aren't moving in droves to Gold yet, although I personally believe that will come... but there's not enough of that to supplant the dollar on a worldwide basis. Perhaps 10% can move to commodities and gold, which would result in a wild increase in those prices with gold hitting 10k/oz. But still 90% of the dollars in the world would move where? (Or even another 10%!).

Also, as mentioned (with a graph) in a previous post, the balance of payments of many other countries, is worse than ours. We're like... 24th if memory serves. So if the balance of payments issue were to trigger inflation or a dollar collapse, wouldn't we see evidence in these other European countries where the situation is much worse first and where they don't have the huge benefit of being the reserve currency of the world? As discussed in the other post... Iceland and England might be canaries in the coal mine... but there are many other countries with worse situations than ourselves.

[MarkL]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

I too want to thank all of you. I have been here since last fall, but this has been an extremely enlightening discussion for me also. jim

Count me in on this appreciation... I'm no newbie. Been doing some posting for over a year and been re-watching ever since iTulip came back to life. A couple of years ago I traded a few emails directly with Eric on some issues. I owe him for not losing a big chunk of my change.

However, there are a number of questions that have been rolling around in my head for years. They aren't resolved yet, but they are starting to see some light of day here... Fred, GRG55, rdrees, jk have all had insightful and fact based commentary that I've appreciated, without being dismissive or using the "addressed it before" comment that gets old quick.

For the last 3 years, I've read 100% of EJ's writings, and close to 100% of the commentary on his articles. I haven't read all of the non-Eric posts, but I've read a lot of them.

Despite the claims of some, I haven't seen some specific issues addressed to my satisfaction. They haven't concerned me prior to now because "KA" was in place and the first part of the theory was happening. But now with iTulip indicating that "KA" is over, yet deflation turned down again this month and also on a 12 month cycle I think bringing them up and addressing them makes good sense.

And some still are not addressed, at least, IMHO. I think we should discuss the possibility that KA is not over... and that maybe the Fed hasn't yet spent enough to overcome the 60T-600T in CDR/CDSs that haven't fully hit the fan.

So I appreciate the efforts despite not being a newbie! -Mark

[jk]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

I must confess that I don't get it. As you say, M2/M3 are partially measures of the speed of money, but more importantly, with all the banks not lending and the "credit crisit" upon us, most would say money is swishing around slower! I still don't get why the black line goes up disproportionately.

m2/m3 do NOT partially measure the speed of money. they are QUANTITIES. when multiplied by the relevant velocity measures, the product is GDP.
m * v = p *q = gdp
m=money supply
v=velocity
p= price level
q=quantity of production

I agree with the overall theme... "if enough foreign holders get antsy..." but remember that they have to get antsy in comparison to other currencies. This is why the DXY touched 90 during Q1Q2.

In the China thread, somebody said something like "Good luck getting your money out if everything goes to hell." Because China is an autocracy I don't the Yuan being a replacement currency to the dollar. The Euro govs are in similar state to the USA... many worse. What becomes the medium of exchange that people switch to to start the dollar collapse?

Again, the proposed future I'm discussing here is not the final-collapse phase, but the period leading up to it where people move out of the dollar... to something! What do they move to? Stocks? Lots of fear there. Treasuries? Bonds? A fair amount of $$ is moving to bonds... but that seems a difficult medium to do transactions in.

People aren't moving in droves to Gold yet, although I personally believe that will come... but there's not enough of that to supplant the dollar on a worldwide basis. Perhaps 10% can move to commodities and gold, which would result in a wild increase in those prices with gold hitting 10k/oz. But still 90% of the dollars in the world would move where? (Or even another 10%!).

Also, as mentioned (with a graph) in a previous post, the balance of payments of many other countries, is worse than ours. We're like... 24th if memory serves. So if the balance of payments issue were to trigger inflation or a dollar collapse, wouldn't we see evidence in these other European countries where the situation is much worse first and where they don't have the huge benefit of being the reserve currency of the world? As discussed in the other post... Iceland and England might be canaries in the coal mine... but there are many other countries with worse situations than ourselves.

all paper currencies are first and foremost, always and everywhere, paper. in the gentle. bearable, not-too-violent scenario, they will all drop gently against real goods, with minor movements against one another. then there are other scenarios....

[MarkL]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

m2/m3 do NOT partially measure the speed of money. they are QUANTITIES. when multiplied by the relevant velocity measures, (what is a relevant velocity measure?) the product is GDP.
m * v = p *q = gdp
m=money supply
v=velocity
p= price level
q=quantity of production

My understanding is quite different.

M0=currency plus commercial and CB reserves. That's a quantity.

M1=currency, plus checking accounts & other demand deposits. M1 is typically 6X-9X each dollar of M0 due to the velocity of money as it is loaned and reloaned by banks. A current deflationary pressure (that the Fed is countering by printing) is that the banks aren't loaning money which puts downard presure on M1.

M2=M1+short term time deposits. M2 contains additional velocity factors because banks reloan against short term time deposits. Velocity here add to the velocity in M1, and is why M2 is bigger than M1 despite being based on the same amount of original currency+reserves(M0).

M3=M2+long term time deposits. M3 contains more velocity factors still because banks also can reloan against long term time deposits. Same as M2 but more so. I've simplified (removed) a bit of what's in the various M#s to clarify. But those things are just things banks loan against too!

To give an example of M1:

Let's say the Fed prints up $10,000 and gives it to Laura. This is M0.

Laura deposits the money in her checking account, which enables the bank to lend out $9000 to Joe (keeping a 10% reserve). Joe spends all of his money, but the store he spends it at promptly deposits it, and THAT bank lends out $8100 dollars to a guy who deposits it, but hasn't gotten around to spending it yet.

At this moment M0=$10,000. But M1 is $27,100 (Laura's 10k+Joe's Store's $9.1k+the next guy's deposit at 8.1k)

This happens multiple times (typically 6X-9X) and the speed with which it happens is the first measure of the velocity of money. Consumer spenders like Joe make it happen faster. It can happen multiple times in a single day!! Savers like Laura make it happen more slowly. If it happens slowly, 6X might be an appropriate multiplier for M0. If it happens faster 9X might be an appropriate multiplier.

In the example I gave, if the velocity of money had been twice as fast and two more loans/purchases/deposits had been made in the same time frame, M1 might be closer to $40,000 as two new people would have gotten $7290 & $6500 to spend respectively.

M2 is the same thing as M1, but with the loans against short term time deposits (and the cycle of money/loans/velocity surrounding them) calculated in, it's another measure of the multiplier effect of the velocity of money. M3 is more still.

M1, M2, & M3 (and the ratio's between them) are our best direct indicators of the velocity of money.

Let's take one more Example of M1
The Fed pushes a button and gives Citibank 10k. (How it's typically done these days). M0=10,000
Citibank desperately needs this money for reserves and so doesn't loan it.
M1=10k.

This is what's happening right now. The normal velocity factors are not kicking in, so the Fed/Gov is trying to print more and trying end-runs around the banks like cash for clunkers. The result... eventually, should be inflation. The question is whether the CDS/CDR amounts on the books of the banks will cause them to not lend for a short period longer and inflation will start soon, or whether they can absorb all the Fed has printed and more... resulting in potentially another disinflationary leg first (Ka...a.... Poom).

[jk]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

My understanding is quite different.

M0=currency plus commercial and CB reserves. That's a quantity.

M1=currency, plus checking accounts & other demand deposits. M1 is typically 6X-9X each dollar of M0 due to the velocity of money as it is loaned and reloaned by banks. A current deflationary pressure (that the Fed is countering by printing) is that the banks aren't loaning money which puts downard presure on M1.

M2=M1+short term time deposits. M2 contains additional velocity factors because banks reloan against short term time deposits. Velocity here add to the velocity in M1, and is why M2 is bigger than M1 despite being based on the same amount of original currency+reserves(M0).

M3=M2+long term time deposits. M3 contains more velocity factors still because banks also can reloan against long term time deposits. Same as M2 but more so. I've simplified (removed) a bit of what's in the various M#s to clarify. But those things are just things banks loan against too!

To give an example of M1:

Let's say the Fed prints up $10,000 and gives it to Laura. This is M0.

Laura deposits the money in her checking account, which enables the bank to lend out $9000 to Joe (keeping a 10% reserve). Joe spends all of his money, but the store he spends it at promptly deposits it, and THAT bank lends out $8100 dollars to a guy who deposits it, but hasn't gotten around to spending it yet.

At this moment M0=$10,000. But M1 is $27,100 (Laura's 10k+Joe's Store's $9.1k+the next guy's deposit at 8.1k)

This happens multiple times (typically 6X-9X) and the speed with which it happens is the first measure of the velocity of money. Consumer spenders like Joe make it happen faster. It can happen multiple times in a single day!! Savers like Laura make it happen more slowly. If it happens slowly, 6X might be an appropriate multiplier for M0. If it happens faster 9X might be an appropriate multiplier.

In the example I gave, if the velocity of money had been twice as fast and two more loans/purchases/deposits had been made in the same time frame, M1 might be closer to $40,000 as two new people would have gotten $7290 & $6500 to spend respectively.

M2 is the same thing as M1, but with the loans against short term time deposits (and the cycle of money/loans/velocity surrounding them) calculated in, it's another measure of the multiplier effect of the velocity of money. M3 is more still.

M1, M2, & M3 (and the ratio's between them) are our best direct indicators of the velocity of money.

Let's take one more Example of M1
The Fed pushes a button and gives Citibank 10k. (How it's typically done these days). M0=10,000
Citibank desperately needs this money for reserves and so doesn't loan it.
M1=10k.

This is what's happening right now. The normal velocity factors are not kicking in, so the Fed/Gov is trying to print more and trying end-runs around the banks like cash for clunkers. The result... eventually, should be inflation. The question is whether the CDS/CDR amounts on the books of the banks will cause them to not lend for a short period longer and inflation will start soon, or whether they can absorb all the Fed has printed and more... resulting in potentially another disinflationary leg first (Ka...a.... Poom).

sorry, mark. the m's are quantities. the relationship between the m's may vary with velocity, if you wish to try to predict m[sub-n] from m[sub-x], but they are, nonetheless, quantities.
look up m*v = p*q =gdp. econ 101. as to your question "what is a 'relevant velocity measure'?", obviously if m*v= gdp, then if gdp is fixed, m0 will be associated with a v0, m1 with a v1, and so on, to make the multiplication work. that is, each measure m[sub n] will be associated with a corresponding measure of velocity, v[sub n]. otherwise the math doesn't work.

[ThePythonicCow]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

In my view, it is a tad unfortunate that the "velocity of money" term ever entered into our money equations in the first place.

A financially sound small business with a good bookkeeper doesn't have this problem. They can take inventory of the goods and service capabilities they have in stock and of their bank accounts and turn out a proper balance sheet.

But large dynamic economies have no practical means to turn out a proper balance sheet, so have to estimate it from the transaction flow.

Unfortunately, it is not easy, sitting in a government cubicle, to know whether a set of ten transactions represent the same one item being bought and sold ten times, or ten different items. We can only measure the quantity of goods and services available by measuring the monetary transaction flow. So to get our goods and services to balance with our money supply, we have to use a "money velocity" factor. If we could take a static snapshot of a large economy's goods and services available for sale, rather than be constrained to only detecting the transactions on them, then we could drop this troublesome velocity factor on the other side of the equation.

[MarkL]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

sorry, mark. the m's are quantities. the relationship between the m's may vary with velocity, if you wish to try to predict m[sub-n] from m[sub-x], but they are, nonetheless, quantities.
look up m*v = p*q =gdp. econ 101. as to your question "what is a 'relevant velocity measure'?", obviously if m*v= gdp, then if gdp is fixed, m0 will be associated with a v0, m1 with a v1, and so on, to make the multiplication work. that is, each measure m[sub n] will be associated with a corresponding measure of velocity, v[sub n]. otherwise the math doesn't work.

I'm not sure we disagree... and if we do it's not by much.

So, I did re-research the formula. It's been 25 years since Macroecon 101 and it was a good refresher. FYI these are the first 2 links that Google brought up... gosh knows if they're "best". I reviewed the first five links and also did a search on the equation you gave me plus M2 and M3.
http://www.ses.wsu.edu/People/facult...fs/week9_2.pdf
http://iws.ccccd.edu/jspina/_private...%20Ch%2013.pdf

Interestingly, none of the first 5 links mention M2 or M3. I agreed with all of the PPT/PDF/class materials... for a generic "M." Took me back to university Macro Econ... and a hypothetical "M" is great in theory. But perhaps less usable in complex society... which is why we have M2, M3, revised CPI, etc.

So back to real life.
First, I agree with you that M0-M3 are quantities.

However...
M0*V1=M1
M1*V2=M2
and so on.

M1 doesn't exist without velocity. It is a direct function of M0*velocity. For all practical purposes, it is no different from M0... until you multiply it times velocity. Thus, M1 is no different from M0, except for velocity. One could eeevvvveeen say then... that M1 is a measure of of the velocity of M0.

Sounds like I'm backtracking on you? Not really. I think the direct measurement of amounts in banks that results in M1 and M2 is a quantity. I agree with you. I just think that that measurement, properly interpreted and if accurate, is effectively the same as M0 except for the differential of velocity. Thus M1 is a measurement of quantity... that properly interpreted is the indicator of the velocity of M0.

Note the new word. I'm backing off of calling M1 a measure of velocity and agreeing it's a measure of the quantities of amounts in banks. I also believe M1 is an indicator (not a measure) of the velocity of M0

There is a fudge factor you could claim. I'm sure there is some "misreporting" of M1 that causes it to differ from M0*"true" velocity (like we could ever know that!). Nevertheless, it's the best indicator of velocity that we have... and it is a quantity.

The one missing elephant in the room regarding the above, is bank reserves and lending laws. All of the above is only true if reserves and lending laws are considered a constant. With the repeal of the Glass-Steagall act, they were not!! As reserves were allowed to shrink dramatically and lending laws and policies were loosened, velocity increased rapidly increasing M3 (and M3+CDRs+CDSs (not measured in M3)) to a degree never before seen by man.

Summary
M(x) should be able to be thought of as (M(x-1) * velocity) as I do. In any given year and when Mx is compared to another Mx this makes excellent sense and many economists do think of it as our best (only!?) indicator of velocity. But when Mx is compared to itself over time, factors such as reserves and laws must be factored in. In that scenario (which is common) at it's core Mx is most accurately a measurement of amounts in banks as you state.

Whatchathink?

[a warren]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

Off on vacation for 10 days and just now catching up with this excellent thread. Long before reading iTulip I was a convert to the idea that deflation was impossible in a world where printing money was a choice and all other items of human need, family, food, land, energy, etc. were limited. Currency is the sea in which all our requirements float. It is a sea of unlimited bounds and in that sea needs rise.

That said, I still see disinflation, (iTulip term), everywhere. In my industry, it's still rampant. We don't expect a bottom for six months. This isn't deflation it's just a stuff gets cheaper story and it drives out the less well funded or less adept at inventory management. But that's just our quirky little industry so I thought it might just be us.

But we just returned from vacation in Hawaii and there is definitely no upturn there. Flight...cheap, under $400 per round trip and the employees of the airline could not have been nicer. Really, I'm not making this up and I've been a frequent flyer for 20 years. Hotel...let me say, I made the reservation three months ago with Hilton because my long time associates at Marriott had not gotten the message that there was a price war going on. By the time I made some last minute stop over reservations in LA, the full service Marriott had dropped from $229 to $87 a night. Their staff had still not gotten the message about being nice but it was cheap.

Rentals from surf boards to cars were very reasonable and again, everyone was very accomodating and nice. This is our forth trip to Hawaii and overall it was the best. Maybe we've slowed down and learned to enjoy our time there. But there is also a change in aloha-land. Maybe it's people wanting to earn your trust and your business. It's a special place and I was quite moved that we were able to arrive at a time of balance when outsiders were providing an equal value to insiders.

There were no crowds at the beaches, it was open and fantastic for the kids. Everyone working at the resorts were, well, working.

And back to work...we've been growing some and hiring a few of our friends so we have to move. There's a glut of commercial space locally and again everyone is nice. Prices are down 30% we're trying to match our requirements to a local space.

I'm sure EJ'd post is correct long term and inflation is coming but it's not here yet. I don't see it anywhere. Disinflation is rampant and nice is everywhere a new value. Let's enjoy the transition.

The disinflation you speak of relates to suppliers who have very high fixed costs but relatively low variable costs. Airlines and hotels and even surfboard hirers cost change very little irrespective of the number of customers they have. Even commercial property owners have similar circumstances. So the disinflation you are experiencing is only part of the story. You are part compensating your suppliers sunk costs. Its the new costs for replacement inventory that some of us are yet to experience.

[MarkL]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

I submit that to the understatement of the decade award.

And I'm not sure we're going to get there for a good long while. Studies have shown that as populations have increased the distance between a criminal and his victim effectively increases. Thus we are in for a continuation of crime waves, not a slowing of tehm.

I have no "real" idea what the creators of CDS/CDRs expected from their efforts, but there are several possibilities:

1: They bought into the "housing will always go up" philosophy as almost everybody else did and honestly believed their instruments as good as they claimed.
2: They felt their instruments might crash someday, but felt that crash would only hurt impersonal banks... plus many of those banks had insurance(!) ...and thus they couldn't conceive that it might crash the entire world.
3: They honestly knew they were creating a ponzi scheme that might set back capitalism and the world.

Of all of these options, I consider #3 the least likely. Thus, Bart, one vote from me for your Unconcious Conspiracy theory.

I'll bet you to this day, that few if any individuals consider themselves personally responsible for this crime against humanity.

[metalman]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

However, even branded chains have been quietly closing outlets, shedding staff and "re-engineering" meals with smaller portions or cheaper ingredients, according to the British Hospitality Association. Industry experts said the restaurant business was experiencing its toughest time since the 1980s.
http://www.independent.co.uk/life-st...e-1776485.html

from mooncliff...

[Casual Observer]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

I have a very well made and kept house that's selling for about 100k less than what is owed on it. Aside from that I have no debt and have two years worth of expenses in cash.

Should I buy whatever durable goods I think I'll need, invest to hedge against inflation, and then allow inflation to erase the mistake I made purchasing the house?