What is money velocity?

[Arkie]

http://upload.wikimedia.org/math/c/a/c/cacfb8a50b8782741a852d4f5654de06.png

What does it mean?

[Garcia Bronco]

It looks like a derivative of T. I believe velocity is the 1st derivative of a function of X. Or in this case T.

Does that help? :)

[alkemical]

http://upload.wikimedia.org/math/c/a/c/cacfb8a50b8782741a852d4f5654de06.png

What does it mean?

how fast the money leaves my wallet these days.

[gyldenlove]

It is a business term used in the service industry, n is the number of thrusts per minute, T is the price per thrust and M is the customer mass, the chubbyer you are the lower the value. It was initially developed by a hooker in the lower west side to calculate prices uniformly. This equation has been shown to favour fast skinny cummers who visit cheap hookers.

The equation has no known convergence....

[Arkie]

This graph doesn't look very good. The grey areas are recessions. Even in our current recession we were moving along sideways and then nose dived!

Uh Oh..... Monetary Flat Spin. (http://market-ticker.denninger.net/archives/703-Uh-Oh.....-Monetary-Flat-Spin.html)

http://market-ticker.org/uploads/MULT_Max_630_378.png

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....

http://i27.photobucket.com/albums/c179/gjbronco/debt-contribution.jpg?t=1231545452

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)

[Paladin]

I appreciate the lesson. I do not yet understand all of it, but I will come back and study it some more.

Thanks.

[Arkie]

Enjoy this story about the wascally wabbits!



Run, Rabbit, Run! The Importance of Monetary Velocity
by Justice Litle, Editorial Director, Taipan Publishing Group

Today I want to talk about the concept of monetary velocity. (I know, I know... monetary what? You'll see the importance by the time we're done.)

Let's start with some background. In Taipan Daily, regarding the Gnomes of Zurich, we noted that short-term interest rates have fallen to multi-year lows. The flip side of falling interest rates is rising bond prices. When bond prices rise, interest rates fall and vice versa.

This means investors and traders have an impact on interest rates through their buying and selling decisions. When investors pile into bonds, for example, they push bond prices up - and interest rates down.

We can see this by looking at a chart of the 2 year Treasury note, which went into lift-off mode in mid-2007 (right around the time the credit crisis began).

As you likely know, investors are piling into U.S. treasuries now (particularly short-dated ones) because they are scared out of their wits and don't know where else to go.

And right now they are scared of deflation.

The Dreaded "D" Word
For the month of October, the Wall Street Journal reports the Consumer Price Index (CPI) saw its largest single-month decline since World War II.

This dramatic drop has the word "Deflation" on everyone's lips.

It's quite the switch, actually. As recently as this summer, everyone was worried about Inflation.

Now, according to some estimates, use of the word "inflation" in the popular press has dropped by nearly a third... and use of the D word, deflation, has more than tripled in the past two months.

This is a head scratcher, especially in light of what we've been hammering on this past week. How can the markets be worried about deflation when the Fed is printing money like there's no tomorrow?

Better still, how is it even possible to see the specter of deflation on the horizon when trillions of dollars are being pumped into the system?

To answer those questions, let's delve into the concept of "monetary velocity."

Run, Rabbit, Run
Everyone knows about the basic concepts of inflation and deflation. They are often described in terms of supply and demand: inflation is "too much money chasing too few goods," deflation is "not enough cash to go around," and so on.

But it's important, too, to recognize that the inflation/deflation equation depends not just on the quantity of money in the system, but also how fast that money is moving through the system. This is where monetary velocity comes in.

It's a slightly challenging concept to explain - the best analogy I've found is a bit goofy, but it works. So here we go...

Imagine you're standing in front of a large tree trunk. There is a brightly colored marker on the trunk, and there are rabbits running in circles around the tree itself. Every time a rabbit passes the marker on the trunk, you note it down on your clipboard: one X per pass.

Now, let's say you tally up your results and note you made twenty X's in the space of 60 seconds. Assuming you had your reasons, how could you double the number of X's in the same amount of time?

There are two ways you could double the number of X's on your clipboard (to forty per minute in this case). You could increase the number of rabbits running around the tree... or you could go with the same number of rabbits and try to make them run faster.

(Remember, you don't care if it's the same rabbit or a different rabbit when you jot down your X. You're just counting the number of passes.)

As you might have guessed, the rabbits are analogous to money in the system. Money that's just there is inert... In order to have an effect on the economy, the money has to move.

So when money is "hot" and the rabbits are running at top speed, fewer rabbits are needed to fill up the clipboard with X's. The rabbits speed around the tree very quickly - analogous to high turnover, or money changing hands very quickly.

When money is "cold," on the other hand, the rabbits are lethargic, and you need more money (i.e. more rabbits) to get a decent number of X's on the clipboard. If money stops changing hands entirely - as it seemed to have for a brief span in late September and early October - it's like the rabbits coming to a dead stop. They aren't moving at all.

So when the Fed pumps the system full of money, it's the equivalent of dumping more and more rabbits into the equation. As the Fed gets desperate, maybe they round up dozens or even hundreds of rabbits.

But if all the rabbits are half comatose, the clipboard stays blank (or fills up much too slowly). The Fed's efforts fail to have the desired effect.

So the upshot is that the Fed can have a direct impact on the quantity of money in the system, but not the velocity of money in the system. It can't make the rabbits run.

You're a Rabbit, I'm a Rabbit
The "rabbits" can also be thought of as entities that buy and borrow and lend - banks and businesses and consumers (like you and me). When banks refuse to lend and consumers stop buying and borrowing, monetary velocity goes down - even as the dollars in the system pile up.

Over the years you may have heard comments like, "The Fed has absolute control over the money supply." That is misinformation. The Fed has zero control in some very important areas. What's more, they don't even have the tools to properly measure many of these areas.

When we talk about the velocity of money, for example, we're not just talking about visible dollars. We're talking about abstract concepts like people's willingness to borrow and lend. That kind of thing is impossible to measure on any kind of precise basis.

For example, if five million Americans wake up tomorrow with a sense the world is okay and an urge to go buy something, then that cheery mindset will positively impact the velocity of money in the system - even though you can't put "optimistic mindset" on a balance sheet.

Conversely, if five million Americans wake up fearful for the future and determined not to borrow another dime if they can help it, that translates into a negative impact. Again, there's no way to precisely gauge these moods. We can only make rough guesstimates.

So why do we have a grim outlook for deflation right now, even as the printing press money piles up? Because monetary velocity has crashed. Bank balance sheet woes and consumer debt overhang are such that the new attitude towards buying, borrowing and lending - creating turnover, moving cash through the system - is "Thanks, but no thanks."

Simply put, the rabbits are tuckered out.

Okay, some of you may be thinking now, so the dollars are piling up because the velocity of money has crashed. The Fed's stimulus remains untapped, like an idle oil tanker filled with cash. But if that's the case - and if deflation worries could worsen - then why buy gold?

It's a good question. Most of the talking heads don't bother thinking the answer all the way through. They stop at step one without progressing to steps two or three. "Gold's no good in a deflationary environment," they say. "Prices are going down and that's that. So why would you want gold?"

Well, let's see.

First recall that deflation is every central banker's worst nightmare. (Particularly central bankers who spent the bulk of their academic lives studying the Great Depression.)

That's why Fed Chair Ben Bernanke gave a defining 2002 speech titled, "Deflation: Making Sure 'It' Doesn't Happen Here."

If you'll indulge this quick recap, here is the key paragraph from Bernanke's deflation speech:

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost... We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

The underscore emphasis is mine. What Bernanke believes amounts to this: The printing press is an irresistible force. There is no deflation so immovable that the printing press cannot smash through it.

An irresistible force sounds most impressive. When we think back to the velocity problem, though - recall the lethargic rabbits - the printing press starts looking like the wrong cure for the wrong ailment.

This is because as far as money in the system goes, a velocity problem is different than a quantity problem. The printing press speaks to quantity, but on the question of velocity, it remains mute.

Going back to our tree trunk analogy: Bernanke could round up a thousand rabbits, he could round up ten thousand rabbits, or he could round up fifty thousand rabbits. If the rabbits don't feel like running around the tree, quantity does nothing. If banks and consumers cannot be goaded into the old patterns of buy, spend, borrow and lend, then it just doesn't matter how much the Fed pumps in.

Except for one thing: To say it "just doesn't matter" is not wholly correct. The Fed's stimulus-pump actions do matter in one particularly awful way. The more money a desperate Fed pumps into a non-responsive US economy, the closer we edge to systemic breakdown for the fiat currency system as a whole.

Breaking Down the Breakdown
My use of "breakdown" in this case refers to the point at which the world loses faith... the point at which investors realize in dawning horror that the world's reserve currency is doomed.

The trouble lies in the fact that the Federal Reserve has staked its whole crisis-response plan on the power of the printing press. The Fed, in other words, has but one play in the playbook... the play outlined in Bernanke's deflation speech.

If deflation's grip is not broken soon, then Bernanke will double down on the printing press strategy... and then double down again. The Fed will pump and pump until the total pool of dollars in the system makes the United States look like a banana republic.

It is this scenario, by the way, that keeps Jerome Whitehead awake at night. Whitehead, now 86 years old, is a former chairman of Goldman Sachs.

"I see nothing but large increases in the deficit, all of which are serving to decrease the credit standing of America," Whitehead says. "Before I go to sleep at night, I wonder if tomorrow is the day Moody's and S&P will announce a downgrade of U.S. government bonds... Eventually U.S. government bonds would no longer be the triple-A credit that they've always been."

Mr. Whitehead is right to worry.

Wake Up and Smell the Bullion
Recall too, in case you've forgotten, in times of crisis gold serves a proxy for cash. And in times of deflationary crisis, gold is the only form of cash not subject to the ravages of a printing press. (This might explain why there is a run on gold coins taking place. The U.S. Mint has been forced to ration them out.)

It may take a bit longer for Wall Street (and the world) to wake up and smell the bullion. But as to what happens in the medium to longer term, the distribution of outcomes is pretty cut and dry.

If deflation is vanquished and money starts to move again, interest rates will stay low for a good long stretch of time (so as not to cripple a convalescing economy). In this scenario inflation returns, much to the Fed's relief, and gold resumes its upward climb.

If, instead, the Fed fails utterly, Bernanke will not go gentle into that good night. He will print his way into spectacular oblivion (as all but promised in his 2002 speech)... and Mr. Whitehead's bad dream will be realized... and gold will respond accordingly.

[baja]

What it means is your green backs soon will not be worth the paper it was printed on so buy the stuff you need to get through the next year even if you have to go into debt for it.

[watermock]

It's not that the wabbits dont want to run, they have anchors around their feet from debt burden. Meanwhile, banks, expecting ever increasing defaults, want to be sure that THEY stay solvent.

Also,m you are seeing tighter lending practices to also protect the bank.

All these forces compliment each other as well.

[baja]

It's not that the wabbits dont want to run, they have lame feet from debt burden. Meanwhile, banks, expecting ever increasing defaults, want to be sure that THEY stay solvent.

Also,m you are seeing tighter lending practices to also protect the bank.

All these forces compliment each other as well.

It's the perfect storm my friend and what's most amazing is so few see it coming, maybe that is part of perfect.

It's gonna be bad...


What's your plan?

[watermock]

I have a plan but no access, and mom broke the trust, we're insolvent.

Good timing huh, especially with me crippled.

800k my brothers lost farming in 2 years.

There is still some escrow money for cap-gains taxtaxes, but I ncant get her to hide it, and i'm given no access to the books. Basically, my brother blew 1m.

It's a nightare.

[baja]

watch the documentary 2012

here is a trailer;

http://www.sonypictures.com/movies/2012/

It's not going to be about the money, in fact it will be better to not have any you will be more self reliant.

[watermock]

We used to have 13 farms.

Check your pm's

[baja]

check yours

[BroncsRule]

watch the documentary 2012

here is a trailer;

http://www.sonypictures.com/movies/2012/

It's not going to be about the money, in fact it will be better to not have any you will be more self reliant.

I dunno Baja - money buys cool stuff like solar arrays, a water drilling rig, RV's, farming equipment, fuel caches, boats for fishing, water filtration and storage systems, etc., etc..

[DenverBrit]

watch the documentary 2012

here is a trailer;

http://www.sonypictures.com/movies/2012/

It's not going to be about the money, in fact it will be better to not have any you will be more self reliant.

You're exactly right! Can I have yours?? ;D

[baja]

I dunno Baja - money buys cool stuff like solar arrays, a water drilling rig, RV's, farming equipment, fuel caches, boats for fishing, water filtration and storage systems, etc., etc..

True that but when it comes down to it those that have used money to get everything done for themselves will likely not have the knowledge or the intestinal fortitude to strategize and preserver in a time when the traditional systems are no longer functioning. I meant money in that sense, insulated form the rigors of life so to speak.