Tuesday, August 28, 2012

it's the velocity not the mass

Let’s talk about boring old money and its travels through the economy. ‘Ol Remus at The Woodpile Report linked to the article here:
Now, Remus has been pretty busy here recently putting up canned possum, but luckily for us he is still finding time to put up a quality weekly publication.  Normally I hate those that merely find other peoples writing for you, but his is the exception.  His is added value all the way.  But back to the above article.  Here we are talking about the velocity of money, or how fast it moves through the economy.  A fast movement means that Uncle Obammy put a paycheck in a sailors pocket who went to a tattoo parlor and got a tat of a Mexican hooker being violated by a donkey.  The tattoo artist took the money and bought Wonder Bread and bologna from the corner store, whose owner paid the landlord who in turn bought a car to give to his mistress.  And on and on.  Slow velocity of money just means the Fed invented another buck, the banker took it and stashed it to pump up his deposits to cover his derivatives bet that was leveraged 200 to 1 and there is sits.  Now, normally I give little to zero thought on the velocity of money but the above articles author swears that this is the best economic indicator you can find.  And as such, we are now sucking some serious ass economically.
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In 2008, according to the very dandy and handy chart, velocity of money literally fell off the cliff and IS NOW BELOW THE ALL TIME LOW OF THE GREAT DEPRESSION!!!!!!  Now, before all you Pollyanna’s  start grabbing each others asses, grinning like fools and doing a dance about how this means we won’t experience inflation, stop and ponder this.  Not only does it mean we are ALREADY in a depression worse than the 1930’s, it also means there will be less cash available for you to buy those products that are increasing in cost due to scarcity ( like food and fuel ).  I don’t care if every dollar is hoarded by bankers and all houses now cost only ten thousand bucks.  If the cost of heating the house is beyond your budget, the house is worth far less.  Say, on par with a gutted, boarded up ghetto house in Detroit.  And if you can’t buy enough food to have the calories to work a job to pay the mortgage, the house is still beyond your ability to afford.  Houses are a consumer item, and its value is reflected.  In a county where the only manufacture just closed the factory, your house which cost twenty grand to build and which you owe the bank fifty is now selling for five.  Houses are a consumer item, NOT an investment.  The falling cost of housing doesn’t necessarily reflect what kind of economy we are in as far as deflation or inflation.  And even if we were in a deflation, food and fuel is still inflationary due to supply and demand.
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Okay, now let me paint you a picture.  It’s, say, 1935.  A fellow in a CCC project is paid and sends home some cash.  Wife buys some essentials she can’t grow on the farm.  The store owner buys some more inventory.  The factory owner saves the profits as a cushion.  And that’s it for the dollar velocity.  There wasn’t a lot of economic activity.  Flash forward to today.  A jack booted thug gets a paycheck after he stomps a few kittens and snipers a mother holding a baby.  His wife takes the money and pays the mortgage and the cable bill and the cell phone bill.  Those merchants buy food from the grocers, pay the bank the business loan, pay back their business school college loan, pay off some credit card bills, pay the auto loan.  All those owners take the money and give it to the kids for allowance who go to the mall and buy video games and clothing from China and eat at the food court and on and on it goes because nobody grows their own food anymore or makes anything themselves.  It is nothing but a consumer society.  And in a consumer society, a lot more financial transaction take place than in, say, an agrarian economy prior to the universal auto ownership.  And yet, the money velocity today is below said primitive farming economy.
Does this activate any alarm bells?  Because it should.  An economy that is nothing but consumption is no longer seeing much consumption at all.   Our service economy is selling far fewer services, and if the decline of five percent in Chinese rail and the whatever percent decline in port arrivals is any indicator, we are selling far less physical goods as well.  And you think all will be well?  You think green shoots are about to sprout out of Mitt ( I’m a robot in disguise ) Romney’s ass as soon as he is elected?  If so, I absolutely insist that you share some of those wonderful drugs you are using with me.  Sure, “Wired” magazine says that since the last forty years of doomer warnings were wrong, we’ll never ever ever again have anything bad happen to us.  I’d also offer to sell you the Brooklyn bridge, but due to infrastructure negligence it is in pretty sorry shape and I wouldn’t feel right about the transaction.  Hope springs eternal, but the Four Horsemen just trample the bitch as it is sprouting.  Assume the worse.  You can hope all you want, just don’t bet on the best.  Remember, you wouldn’t have been warned about a Soviet missile strike ( we can’t trample the sheep, now can we? ) and you won’t be warned about a fall off the financial cliff.  You have to read between the lines yourself.  Ignore at your peril.
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  1. Good point about how velocity of money should be higher today. We do very little for ourselves anymore. It does highlight the difference between the haves and the have nots. Now that we have so many new have nots. Welcome to America former members of the middle class. It might be in your best interest to quit voting for the same old idiots!
    Dakin for president! After all he has the hair.

  2. One suspects that deflationary spirals don't help the velocity of money either.

    After all, if your money becomes more valuable by simply holding onto it, why spend it? Particularly why spend it if there is nothing you feel safe investing in?

    So with a deflationary spiral that has been going on (and supposedly just stopped) in housing, most people's largest asset, you would not expect velocity to be exactly rocketing along.

  3. I think part of the lack of velocity is where the money is accruing: banks, investment firms, etc. Much of the money supply is coming from the government one way or another (see article you link to). Give some poor folks the money and they go out and spend it. Give it to a bank, they squirrel it away to "preserve their liquidity".