Actual:
12/3/2008 1.025
12/17/2008 0.951
12/31/2008 0.944
1/14/2009 0.915
1/28/2009 0.885

Projected:
2/11/2009 0.856
2/25/2009 0.826
3/11/2009 0.797
3/25/2009 0.767
4/8/2009 0.738
4/22/2009 0.708
5/6/2009 0.679
5/20/2009 0.649
6/3/2009 0.620
6/17/2009 0.590
7/1/2009 0.561
7/15/2009 0.531
7/29/2009 0.502
8/12/2009 0.472
8/26/2009 0.443
9/9/2009 0.413
9/23/2009 0.384
10/7/2009 0.354
10/21/2009 0.325
11/4/2009 0.295
11/18/2009 0.266
12/2/2009 0.236
12/16/2009 0.207
12/30/2009 0.177
1/13/2010 0.148
1/27/2010 0.118
2/10/2010 0.089
2/24/2010 0.059
3/10/2010 0.030
3/24/2010 0.000
4/7/2010 -0.029

LK,

The banks do have much more massive losses. They are hidden in the conduits off balance sheet...tens of trillions each or more. The banks that had their deposits yanked and couldn't function short term were force-saled to other banks, and their conduits were transferred into the custody of the takeover bank.

When the Fed takes $30 billion and tells JPM they suffer the first $1 billion in losses and the Fed guarantees the other $29 billion, ok. But that doesn't address the tens of trillions they are hiding elsewhere.

delete.

"That's great, it starts with an earthquake, birds and snakes and aeroplanes, Lenny Bruce is not afraid...".

And neither is Chuck Norris. In fact, if you have $5 and Chuck has $5, he has more money than you

Yeah, it retarded, but I couldn't help it. Seriously though *I* am scared

I think it was demand deposits were yanked as soon as M1 went below 1.

Also, perhaps Bernanke is going to contract the balance sheet even more now?

Thank you to Leraconteur and Lkruvant. Very, very informative.

So what happens in the real world when we hit zero?
Does that mean that our $ becomes worthless or more valuable?
What about when we go negative?

I understand that that means for every USD put in the system does nothing at that point, but will we notice?

EDIT- Has this ever happened before?

Guys,

This is a red herring. I didn't know what it meant when I posted it, I do now... sort of.

It has absolutely nothing to do with the effect of new monetary base money. It doesn't mean that for every dollar added to the base the amount of money in the system shrinks.

It simply means that M1 is declining.

M1 is declining because demand deposits are declining. You can help figure that bit out if you're so inclined.

This is unrelated to the monetary base (unless somebody has a convincing argument otherwise).

Shouldn't the high powered money reverse the decline in demand deposits? Normally, it would. EVEN in the Depression, the M1 MULT did NOT go below 1.0 I still believe this is highly significant. Almost like the movie of credit creation is being shown in reverse. It should not be below 1.0. but the system has become unstable. The debt is still around, when normally, it would be defaulted upon, and the banks would be closed. An unnatural situation has been created by a codependent government.

From the way I understand it
Lera is correct in that the Velocity of money is going to Zero
You, Jason are correct in that the money is being pulled from the system

For every dollar the fed puts in, he is getting .88 out because everyone is pulling their money and putting it in their mattress or paying off debts

Where am I wrong?

Quote:

For every dollar the fed puts in, he is getting .88 out because everyone is pulling their money and putting it in their mattress or paying off debts

Where am I wrong?

I do not think there is a relation between a dollar "put in" by the Fed and the amount of money being taken out of demand deposits.

There may not be "causation" there, but it IS descriptive of what is happenning.

The more those ****ers put in, the more I pull out

Read my signature and start ACTING.

Vegas, you are right. For the Fed's money to work, it has to CIRCULATE. It has to be a part of the economy.

If the Fed prints a dollar and sends it out into the banking system, given the multiplier it should give back 1.6 or 3 dollars or whatever bang for the buck.

However, people and institutions are hoarding the money. They are NOT circulating it in the economy. Thus, while some dollars do make the rounds and promote a higher multiplier, others are hoarded and would lower the multiplier.

The net effect is a multiplier less than 1. This means money is more expensive, a deflationary effect. If the Fed wants to inject $500 billion of play money, it has to support it with $600 billion in REAL deposits.

Normally, it would be the reverse. If the multiplier were 10, the Fed could use $100 billion in real deposits and turn it into $1 trillion in demand deposits. That's when inflationary forces reign, and money is cheap.

Now, what happens when MULT gets close to zero? Money becomes VERY expensive and the Fed has to hoard VAST amounts of real wealth to create small amounts of M1..no economy can sustain that.

Karl (I believe) agreed with both these theories

so you just think that the .88 represent money pulled from demand deposits?

In that case, when we hit zero, does that mean that people no longer have money in the bank or the bank no longer has money to give to the people?

nah vegas - i just think that means that there is a BIG crisis in confidence

people would be taking cash out of the banks as fast as bernanke can pump it in

Thank you The_venerable!

I was starting to question what I learned

You're welcome, this is a very confusing topic and can be interpreted differently depending on how you look at the situation.

Jason, you are also looking at it now in the way traditional economists look at this but I think you were more correct the first time. I think this phenomenon is a more applicable interpretation of "liquidity trap" than the one that phrase is actually used for.

1000,
you REALLY think j6pk is going to know or is it going to be 'this **** is getting so scary, I think I need to make another bank run" thing?

I was just saying that that is what it would indicate, not how/why it happened

j6p will not get*****ed until we have 1933 conditions imo
they will be focusing on amurican Idull

Problem is, the assets of the banks are getting CRAMMED DOWN as we speak, and it's compounding every day!

Mtgspy had a good post on this somewhere...

Basically, if the banks don't hoard reserves, they're insolvent. If they don't lend, they***** off the Fed. Hence, they WILL lend as insolvent banks!

Wrap your head around THAT one... now go do a DCF and P/E analysis and see what you get: ah, yes, JPM and WFC are in ****sville.

Ahh....here is what is happening everyone.
Let's put this in small perspective.

Normally ACME Bank would have $500 cash in its vaults, and its customers would have a total of $2,000 in their accounts.

But given the liquidity trap I described above, ACME's customers bring in a total $2,500 to the bank, but still only get $2,000 total in their accounts.

Essentially, the bank is stealing from them.

So one has to ask, are the banks stealing from the Fed? Is the public stealing from the Fed? In a way, but no...everyone is hoarding money to pay off their debts. And guess what? They can't pay off their debt fast enough...that's why the MULT continues toward zero.

Debt is choking the system.

The problem for the Fed is they have to continue to have more and more real assets to back up smaller and smaller wealth creation.

This is a major problem for them.

So what is the likely real-world end result? Sovereign default? Followed by massive inflation?

The question here comes down to causality.

Specifically, if people and banks were to suddenly stop hoarding cash, the multiplier would go back up. But they can't, because of all the debt. The demand for money goes way up, making it more expensive and lowering the multiplier.

It is the effect of people wanting more money than there is. And the Fed can't just print the money to satisfy that demand, they have to have real assets to back up what they print.

And as the feedback loop runs around itself, the Fed has to have more and more assets to back up smaller and smaller return.