www.freedomtofascism.com
2009-01-05 12:28:22 UTC
Uh Oh.... Monetary Flat Spin
http://market-ticker.denninger.net/archives/703-Uh-Oh.....-Monetary-Flat-Spin.html
M1 money multiplier
Loading Image...
That has gone "just below" 1.0.
What is this?
I could go through the derivation of how money supply works in a fractional
reserve monetary system (any), but won't, because most readers would have
their eyes glaze over.
The important part of this graph is what it denotes. Bernanke has lost
control of "N" (or velocity), which is the actual knob that he is trying to
diddle when borrowing rates are changed (and in fact its the market that
sets that, despite his protests.)
In fact the most useful tool in The Fed's box in terms of influencing
monetary policy is the soapbox, that is, jawboning (whether it be by
cajoling or threatening.)
The problem with an M1 multiplier below one is that the effect of printing
money is of course multiplied by the velocity. That is, if you print up $10
into the economy the impact it has on economic activity depends on how many
times that $10 circulates in a given amount of time. The more it circulates
the higher the impact and the more your efforts do for the economy.
The bad news is that when the multiplier is less than one the more money you
spew into the economy the worse the impact, as you get less for each
additional dollar.
If you remember the "GDP for each dollar of debt" graph....
Loading Image...
M1's multiplier going below 1 strongly implies (but does not yet prove) that
we have reached that "zero hour".
Why? Because all money is in fact debt; this is inherent in all modern
monetary systems.
When Bernanke "creates" money he is doing so against an asset - that is, he
is issuing debt. A Federal Reserve Note (whether electronic or paper) is in
fact effectively a bond of zero maturity and indefinite expiration against
the future tax collection capacity of The United States.
That is, it's a treasury bond (via a circuitous route)
The paradox that Bernanke is in danger of discovering (the hard way) is the
paradox of a pilot who finds himself in a flat spin. As the ground
approaches he wants to pull back on the stick but if he does so, the spin
simply tightens as the wings are not producing lift - the angle of attack is
too high, not too low. As such if he does what his brain screams at him to
do instinctively, he dies.
Or the scuba diver who sucks on the reg and gets nothing. Your instinct is
to hold your breath and kick for the surface. If you do it you die.
In both cases your only hope of survival is to do exactly the opposite of
your instinct. In the case of the pilot you must not only give
counter-rudder (to stop the rotation) but also push the stick forward. In
the case of the diver you must exhale that last breath you have in your
lungs, knowing there are no more in the tank while you kick to ascend.
If you succumb to instinct you are dead. Really dead, as in splat (or
exploded lungs.)
Bernanke is effectively in the same box. The foundation of his entire
thesis as a banker is that a central bank can always reverse a deflation by
printing money. Unfortunately as he has done so velocity has fallen and the
multiplier has now gone below 1. If this induces him to do even more of
what caused this decrease there is a very real risk that the actual market
reaction will be to tighten the monetary flat spin.
This is because the underlying problem in the economy isn't the lack of debt
(money) in the system. It is that there is too much debt of all sorts, and
since money is in fact a form of debt, you can't fix the problem by playing
helicopter drop!
As I have said for more than a year the only way out is to force the bad
debt out into the open and default it. Yes, this will produce bankruptcies
- lots of them, including some for "inconvenient" people like Paulson's
buddies on Wall Street.
But until and unless that happens adding more debt to the system depresses
the multiplier effect of that debt on circulation further, and harms, rather
than helps the situation.
I don't expect our government officials to understand the math on this, nor
would trying to go through it help 99% of the readers, but unfortunately,
mathematics is the only true science - and you can't twist it, no matter how
hard you try.
Bernanke knows this at an intellectual level, just as the diver - or pilot -
knows that if he holds his breath (or pulls the stick) he is going to die.
The question now becomes whether Bernanke can overcome not only instinct but
also political pressure to do the wrong thing and instead use his intellect
- and the math - to do the right thing.
What is the right thing? Paradoxially, it is to withdraw liquidity and by
doing so force the bad debt into the open where it does (and must) default.
How far can the above ratio contract before we cross an "event horizon" from
which there is no escape?
I don't know.
But I do know that there is a "too late" point, as there is for all such
things, and that we are approaching it, as I have been saying for months.
BTW, evidence that Bernanke's Monetary Flat Spin is already impacting the
economy in ways that may do critical (if not fatal) damage was found this
morning in the Case-Schiller numbers. Everyone, including Bernanke, was
expecting the rate of home price declines to start to slow in the second
half of the year. Instead, they accelerated.
We're in uncharted territory folks, and the forecast is for dark-and-stinky
storms.
Buckle up.
PS: Congress, and the rest of America, can't say they weren't warned. They
were - right here:
http://market-ticker.denninger.net/archives/618-Congress-What-Bernanke-and-Hank-Arent-Telling-You.html
This post originated from Supernews,
not newsrazor.net. The idiot posting
from newsrazor.net is forging the nym
www.freedomtofascism.com in hopes that
people reading Google will think we're
the same person.
http://market-ticker.denninger.net/archives/703-Uh-Oh.....-Monetary-Flat-Spin.html
M1 money multiplier
Loading Image...
That has gone "just below" 1.0.
What is this?
I could go through the derivation of how money supply works in a fractional
reserve monetary system (any), but won't, because most readers would have
their eyes glaze over.
The important part of this graph is what it denotes. Bernanke has lost
control of "N" (or velocity), which is the actual knob that he is trying to
diddle when borrowing rates are changed (and in fact its the market that
sets that, despite his protests.)
In fact the most useful tool in The Fed's box in terms of influencing
monetary policy is the soapbox, that is, jawboning (whether it be by
cajoling or threatening.)
The problem with an M1 multiplier below one is that the effect of printing
money is of course multiplied by the velocity. That is, if you print up $10
into the economy the impact it has on economic activity depends on how many
times that $10 circulates in a given amount of time. The more it circulates
the higher the impact and the more your efforts do for the economy.
The bad news is that when the multiplier is less than one the more money you
spew into the economy the worse the impact, as you get less for each
additional dollar.
If you remember the "GDP for each dollar of debt" graph....
Loading Image...
M1's multiplier going below 1 strongly implies (but does not yet prove) that
we have reached that "zero hour".
Why? Because all money is in fact debt; this is inherent in all modern
monetary systems.
When Bernanke "creates" money he is doing so against an asset - that is, he
is issuing debt. A Federal Reserve Note (whether electronic or paper) is in
fact effectively a bond of zero maturity and indefinite expiration against
the future tax collection capacity of The United States.
That is, it's a treasury bond (via a circuitous route)
The paradox that Bernanke is in danger of discovering (the hard way) is the
paradox of a pilot who finds himself in a flat spin. As the ground
approaches he wants to pull back on the stick but if he does so, the spin
simply tightens as the wings are not producing lift - the angle of attack is
too high, not too low. As such if he does what his brain screams at him to
do instinctively, he dies.
Or the scuba diver who sucks on the reg and gets nothing. Your instinct is
to hold your breath and kick for the surface. If you do it you die.
In both cases your only hope of survival is to do exactly the opposite of
your instinct. In the case of the pilot you must not only give
counter-rudder (to stop the rotation) but also push the stick forward. In
the case of the diver you must exhale that last breath you have in your
lungs, knowing there are no more in the tank while you kick to ascend.
If you succumb to instinct you are dead. Really dead, as in splat (or
exploded lungs.)
Bernanke is effectively in the same box. The foundation of his entire
thesis as a banker is that a central bank can always reverse a deflation by
printing money. Unfortunately as he has done so velocity has fallen and the
multiplier has now gone below 1. If this induces him to do even more of
what caused this decrease there is a very real risk that the actual market
reaction will be to tighten the monetary flat spin.
This is because the underlying problem in the economy isn't the lack of debt
(money) in the system. It is that there is too much debt of all sorts, and
since money is in fact a form of debt, you can't fix the problem by playing
helicopter drop!
As I have said for more than a year the only way out is to force the bad
debt out into the open and default it. Yes, this will produce bankruptcies
- lots of them, including some for "inconvenient" people like Paulson's
buddies on Wall Street.
But until and unless that happens adding more debt to the system depresses
the multiplier effect of that debt on circulation further, and harms, rather
than helps the situation.
I don't expect our government officials to understand the math on this, nor
would trying to go through it help 99% of the readers, but unfortunately,
mathematics is the only true science - and you can't twist it, no matter how
hard you try.
Bernanke knows this at an intellectual level, just as the diver - or pilot -
knows that if he holds his breath (or pulls the stick) he is going to die.
The question now becomes whether Bernanke can overcome not only instinct but
also political pressure to do the wrong thing and instead use his intellect
- and the math - to do the right thing.
What is the right thing? Paradoxially, it is to withdraw liquidity and by
doing so force the bad debt into the open where it does (and must) default.
How far can the above ratio contract before we cross an "event horizon" from
which there is no escape?
I don't know.
But I do know that there is a "too late" point, as there is for all such
things, and that we are approaching it, as I have been saying for months.
BTW, evidence that Bernanke's Monetary Flat Spin is already impacting the
economy in ways that may do critical (if not fatal) damage was found this
morning in the Case-Schiller numbers. Everyone, including Bernanke, was
expecting the rate of home price declines to start to slow in the second
half of the year. Instead, they accelerated.
We're in uncharted territory folks, and the forecast is for dark-and-stinky
storms.
Buckle up.
PS: Congress, and the rest of America, can't say they weren't warned. They
were - right here:
http://market-ticker.denninger.net/archives/618-Congress-What-Bernanke-and-Hank-Arent-Telling-You.html
This post originated from Supernews,
not newsrazor.net. The idiot posting
from newsrazor.net is forging the nym
www.freedomtofascism.com in hopes that
people reading Google will think we're
the same person.