"It's not that the money does not work, it's that existing money is being destroyed at a fantastic rate."

It's both. The money that Ben is creating is only getting .885 worth of work out of 1.000 of money. That means that Ben and Tim create a dollar, but it doesn't do its job. The money is doing less and less with each passing month.

Money issued out into the economy used to have 2 iterations. Now it has less than one, thus it doesn't even get its full value before it stops working.

Would it be a good assumption that economists were not taught that M! MULT could be below 1.0?

I think it would be a good assumption to assume that many of their models are like the HF black boxes that assumed growth into perpetuity and never considered entering a negative growth/price number into their model to see what would happen. Economists, and BB by extension, likely all believe(d) that FOMC Monetary Policy should/could/would 'prevent a bad Drecession'.

Thank you Lera. I believe what is happening is akin to Nothing's reference to the Depression and reset. The Depression was not a reset but was merely a ----- (I can't think of the word- ).

Credit is a supply and demand instrument. The prevailing market conditions reflect pervasive lack of demand for it. Certainly not the growing demand that is necessary to support a debt-based monetary system.

Debtmoney can only work so long as growth increases. At each point in the US where we had a material change in growth prospects, we've had a monetary crisis, first in GD1, later in 1971 with the collapse of BW1. Each point reflected an inflection in growth expectations.

The problem now is that the debt bubble was astoundingly larger than any before it. The quadrillions in derivatives were largely created with leverage, people buying swaps with borrowed money and selling swaps to pocket arb spreads. Slicing and dicing them and trying to magnify a few pennies here and there via leverage. If you could create an imaginary bond that needed no real plant, no equipment, no land, no house, and turn this into "profits," wouldn't you do this? And not just do it once but cycle the returns into ever-higher pyramids of instruments? That is exactly what they did. The notion of a triggering event on a CDS was irrelevant because all parties assumed they could pass that risk on to someone else or otherwise hedge it.

This type of crap is what is hiding in all the SIVs and conduits all over the world. This animal had its tentacles in every single sector of our economy...look at GE if you don't believe it.

Now, the Fed is creating credit that is NOT circulating into the economy with any effect. The economy has its own problems that are unrelated to the finance sector. Free money cannot revive a ponzi bubble; it just cannot. The monetary base has its own issue because most of the credit growth of the past decade was for synthetic instruments and ponzi finance. This has collapsed en masse, consequently, the Fed originates credit that extinguishes other debt, slowing velocity dramatically while still increasing the aggregate monetary base. They're showing a HUGE increase in their "credit base," but for reasons that escape them, it's not showing up out here in the real world.

I don't think they knew how big the synthetic finance market was, or maybe they just saw no evil and looked the other way. Nobody is "hoarding" cash. Car sales have collapsed only because people have chosen not to buy. There is no horde of people at the glut of dealerships wanting to buy but who cannot "get" credit. Demand for credit has decreased markedly and the Fed has destroyed nearly all of the credit markets at any rate.

Baldy wrote..

Nothing's reference to the Depression and reset. The Depression was not a reset but was merely a ----- (I can't think of the word- ).

I think the word she used for 1931 was 'contraction', whereas this is the real deal, full on reset.

Money Velocity can only hit zero if either money supply goes to infinity, or if GDP goes to zero. I could possibly see GDP going to zero, but it's pretty extreme. The central bankers get hives if GDP contracts by 10%. GDP going to zero would send them all to an early grave (perhaps not a bad thing then). You can see why they're in such a scramble to get this 'stimulus' money and push it out into the system.

GDP = Velocity x Money Supply

Quote:

The_venerable
I'm going to play tin-foil contrarian here...

As I mentioned, I believe what we are seeing with the MULT is that, like ACME Bank, the Fed has to accumulate $2,500 in cash in order to get $2,000 out into the economy.

But instead of that resulting from the effect of people hoarding money...perhaps they are doing it willingly?

Perhaps they are the ones hoarding whatever assets of real value they can get their hands on.

I'm not saying its true. Just trying to play tin-foil contrarian. One is causing the other...just makes you wonder which is the cause.

after thinking more on this — it does NOT sound Tin-foily
deflation helps the banks (banks get paid back with dollars worth more)

the snag would be that this time, the banks TOO are in debt from their CDSs

*I'm not smart enough to say they themselves are NOT doing this

I used to get these mixed up. They are showing different things. A decrease in either can be bad of course... M1=M1 MULT X ST Louis Adj Base; GDP=Velocity X M2 Thanks Perseid.

@Lk

That is a very important point. The social aspect has a profound effect on all of this. There has been a substantial shift, one that TPTB probably didn't think was even remotely possible, away from the desire for more credit. The social mood, as Kevin Depew at minyanville alludes too, is darkening and that is reducing the demand for credit, which is cratering the monetary system. That is why we need non-debt based money. It'll control gov spending, limit credit excess, and when SHTF at least your money isn't debt and it'll still retain value (although, dollars are extremely valuable right now, as has been pointed out).

Sundevilgrad wrote..

That is why we need non-debt based money. It'll control gov spending, limit credit excess, and when SHTF at least your money isn't debt and it'll still retain value

Go read this ticker: http://market-ticker.org/archives/712-Th....

And let's have no more mention of non-debt based money on this thread, please.

We just need regs to be enforced. Crooks need to be stopped. We need some morality in regulators and banking and Wall Street and Main Street. People are not ENTITLED to borrow what they can't pay, or lend what they know can't be paid back. We will still need credit in the future, as people always have. It got a BIT out of hand though.

Quote:

Money Velocity can only hit zero if either money supply goes to infinity, or if GDP goes to zero. I could possibly see GDP going to zero, but it's pretty extreme. The central bankers get hives if GDP contracts by 10%. GDP going to zero would send them all to an early grave (perhaps not a bad thing then). You can see why they're in such a scramble to get this 'stimulus' money and push it out into the system.

.

Look at Iceland. In 72 hours they had a MULT and V(x) crash completely. Currency dropped to 30% of prior day's value, Stock Market dropped to 22% of prior days value.

But the ramifications are still working through the Icelandic economy as everything unwinds. Unemployment is still dropping, jobs are still disappearing, protests are still occurring, government is collapsing, and this is months later.

They don't have to go to zero to get the desired effect of a crash/collapse.

LK is right, debt based economies are like viruses. They require constant growth in order to sustain themselves. Look at all the booms in U.S. economic history, they all followed geopolitical events.

Debt based economies sustain themselves from sucking the lives out of other economies. The U.S. economy was founded on the very idea, by stealing land from Indians and murdering them in order to move west.

EDIT- off topic SORRY

Tell that to the ones who were rounded up and forced to live in "model villages", and forced to westernize themselves at gunpoint.

Way off topic here guys.

@Alsace
I'm not arguing against debt (credit); the argument is that this is the end result of debt based monetary systems in which the money to pay the interest on the money that was borrowed into existence must again be borrowed with interest, i.e. continually rolling over the debt. At a certain point the service on that interest cripples the economy. Money that is borrowed into existence, at interest, will always be doomed to fail this way. Eventually, all money creation will go to service the compounding original interest that was never created. This is a different concept than interest in the private capital markets, that KD explained in the thread you linked.


I completely agree with KD; interest, in the private capital markets is a must in a capitalistic economy. Here, here. If you want to borrow a dollar from me, I want a piece of whatever action you're getting.



There is a reason that the Vm line has been in a linear decline forever. It has to. There is no other way with a debt based monetary system.

Sundevil, it doesn't "have to". You can "fix it" but doing so requires that you force the bad debt to default. This cleans the system out but generates massive bankruptcies in the process.

It is, however, an ESSENTIAL part of capitalist systems in which private property rights (which includes the right to accumulate capital and thus be able to lend it) are respected.

Sundevil, we tend to think that we, as a society, know more than cultures that have long since been forgotten.

Maybe now we see that we shouldn't be so full of ourselves. Perhaps there was a reason why many, many cultures spanning several millenia routinely had debt forgiveness and banned interest on loans.

I think passivesf has a point though-- history seems replete with examples where a "depression" (not a Depression ;) leads to an episode of outrageous inflation, if not outright political and currency failure. It only makes sense to me because at a certain point hoarded money will come out and buy. At a point, that buying will lead to higher velocity and higher prices and...

Baldy wrote..

Thank you Lera. I believe what is happening is akin to Nothing's reference to the Depression and reset. The Depression was not a reset but was merely a ----- (I can't think of the word- ).

A reprieve, imho.

Perseid wrote..

Money Velocity can only hit zero if either money supply goes to infinity, or if GDP goes to zero. I could possibly see GDP going to zero, but it's pretty extreme. The central bankers get hives if GDP contracts by 10%. GDP going to zero would send them all to an early grave (perhaps not a bad thing then). You can see why they're in such a scramble to get this 'stimulus' money and push it out into the system.

GDP = Velocity x Money Supply

I don't quite understand your assertion in mathematical terms.

Money supply could stay positive non-zero and velocity goes to zero. Its called currency failure.

@Gen - Completely agree with the private property rights. However, dollars should not be considered the "private property" of the FED, they should not be allowed to charge interest on money they create out of thin air by kiting a check.

Granted, even in an asset backed monetary system the velocity of money could get very low (hoarding, etc...), but if the money is created without a debt component I don't think the problems would be as severe.


Can someone present a case in which this is not the end result of a debt based monetary system (velocity goes to zero as the created money must be used to service the interest on debt)?

Again Sundevil, if you default the debt overload then the borrower AND LENDER get ****ed but the system is cleared out.

It is not necessary for the system to implode. It only implodes if you attempt to PREVENT these destruction cycles beyond the event horizon - once that happens you're ****ed.

Up until that point is reached options exist. The key is recognizing when you're in danger of getting caught on the wrong side of that event horizon, and at that point REFUSING to prevent the liquidations and, in fact, forcing them.

Banning interest is not going to solve any problems, debt forgiveness may though.

Here is an article on Iceland showing the effects after their reset - trade/financial collapse.

http://www.telegraph.co.uk/news/worldnew....

highlights

Quote:

Iceland's humiliation begins at Heathrow. Try buying the currency, the krona, at Travelex and you will discover it is no longer held. "And whatever you do," says the woman at the counter, "don't bring any back." The words "failed state" bring to mind ungovernable Third World hell-holes, but Iceland is a new kind of failed state, a financially failed one.

"Many people who live in beautiful houses and drive beautiful cars are completely broke," says political commentator Egill Helgason. "None of it can be sold, they have lost their jobs. People look wealthy, but worry about the next meal."

When the government nationalised the banks, it was left with liabilities in excess of $60 billion (£40 billion), more than three times GDP. The krona nose-dived and borrowers like the taxi driver woke up one cloudy morning to discover that, in krona terms, their loans had doubled in size.

With the krona effectively dead, the country has been forced to seek the shelter of a bigger currency – probably the euro.

Inflation soared as import prices rose, hitting the many mortgages in Iceland that are index-linked.

Now, interest rates are 18 per cent and inflation 20 per cent; and each man, woman and child could owe as much as $250,000 to foreign creditors.

"There is a market for cod fishing quotas," adds Helgason. "A kilo of cod was sold for 4,000 krona in this market. If you went to a shop you could buy it for 1,200 krona. So the cod swimming in the sea was worth more than cod that had been caught – madness."

At this pace/trajectory I don't see how we're not going to be in the same boat as Iceland.

Quote:

When the government nationalised the banks, it was left with liabilities in excess of $60 billion (£40 billion), more than three times GDP.

3 x US GDP is $40T. If we nationalise the US Banks we could end up finding more and more liabilities as time goes on.

Some good assumptions can be made about Iceland from the article concerning GDP = V X M. The velocity of the Krona is zero, no one wants it, it is a failed currency, inflation picked up (import prices rising) and interest rates picked up (because of risk), they are looking for a new currency (to bring back currency velocity), GDP is cliff diving, unemployment is rocketing, there are strange price distortions in needed goods like Cod (maybe because Icelandic people would rather eat cheap grains rather than fish in order to save money and sell the fish off the ocean to the rest of the world in different currencies since the cod price in the rest of the world is stable).

The V of the krona only collapsed after massive debt (nationalization of the banks)and the interest payment of said debt crushed the velocity of the currency. So basically the US is on a similar path and if V = 0 then we will see the dollar collapse, we will see inflation rise (no more cheap Chinese goods), interest rates will pick up (risk), similar price distortions might occur for resources we produce, of course the big difference here is we are the worlds consumption engine and our dollar is the world's reserve currency if we go everyone goes, unlike Iceland.