“Well, you already know my name. I come here to, uh, unwind, because my job can be intense. I often dream I’m Clint Eastwood.” – Psyche
A picture from the last Federal Reserve® meeting.
There are several things that are wrecking the economy. One of them that isn’t Joe Biden (or his sidekick, the Amazing Giggle Girl) is the sheer amount of cash in the system. M2 is one of the broader definitions of currency – it includes ready cash, savings accounts, quarters under seat cushions, winning lottery tickets, tears from Leftists over Elon buying Twitter™ and, really, anything that can be spent fairly rapidly.
I want to send a shout-out to the guy who plays the triangle in the orchestra. Thanks for every ting!
I’ve brought up before that this measure, M2, has shot up. It sort of has to – the national debt doubles every eight years so they have to get more and more into the system to build that sort of debt. Half of M2 has been created since September 2013. In the United States, we have so much debt you could rename the country “Owen”.
Although (in theory) cash is supposed to grow in tandem with the economy, inflation has been the inevitable result, especially since the dollar is no longer backed by anything other than kind wishes and Nancy Pelosi’s belly button lint.
So why aren’t things worse?
Velocity.
What’s velocity? A simple definition is how fast cash moves in the economy. I’ve had a collection of pennies in a piggy bank since I was in junior high. Why pennies? I spent all of the dimes, nickels, and quarters on beer when I was underage stuff, so over time, it became a penny fest. But those 1,000 or so pennies are definitely part of M2, but have had zero velocity since I could drive.
So, inflation happens when you line up bikini girls in order of height?
The $20 in cash I spent at Walmart® moved to the bank, where it was deposited. Walmart™ then got a deposit and spent it on wages to a clerk. The clerk then spent it on PEZ®, and then it was recycled again. That currency had a pretty high velocity, just like that one girlfriend that told me she needed time and distance. That’s velocity, right?
Some cash moves around. Some doesn’t.
Here’s the dirty secret of the economy since 2008: the velocity of M2 has dropped from a “healthy” economy velocity of 1.7 or so to a “piles of cash under the mattress” level of 1.1.
People hang on to both cash and ratty underwear (this is true – one sign of a depression is lowered sales of men’s underwear) during times of uncertainty, and a quick view of the chart shows that despite all of the “quantitative easing” that the Federal Reserve™ has done since 2008, things are still broken. Cash is sitting in piggy banks, in accounts, and at least some is sitting in dark pools in accounts to prop up the reserves of the banks.
Things get tough right around the elbow.
We’re seeing the stock market dip now, in a system awash in cash. Why is the stock market dipping when prices of everything are skyrocketing? What is the dipping sauce, is it ranch? Why aren’t stock prices going up, too?
Certainly, some companies are having record profits – oil companies, timber companies, fertilizer companies. But how many people are going to buy luxuries when the price of eggs is $5.00 a dozen and a hamburger costs a kidney “donation” at McTransplants®?
So, is this a kidney Bean?
Inflation causes failure. At first, it looks good. It increases some profits, like that fertilizer company’s profits. Housing prices take off. Most people enjoy this, at first.
But after it gives, then inflation takes away. Prices have to go up at the restaurants because beef and broccoli and potatoes go up in price. Then, people look and decide that they can cook at home for cheaper. And those higher house prices? The result is higher taxes on the property.
Now prices at the restaurant have to stay up, because the restaurant can’t make up for higher prices by charging less than it costs to keep the lights on. But there are fewer customers.
So businesses, especially businesses built on disposable income, fail harder than Joe Biden on a crossword puzzle. But that’s just the start, at least as long as we keep Joe away from actual decisions.
The scary part (besides Joe hanging with his invisible friend, JoJo) is that no one really knows what happens when all of it unwinds.
Well, it’s sort of like a bikini picture.
What will make the velocity of currency go up? When people are afraid to hold on to their money because they’re worried that it’s losing value.
But that is (my guess) not quite yet.
I do expect, especially when the stock market unwinds to see a deflation first, across multiple asset classes. It will be “catch a falling knife” time because in many cases it won’t be clear what is a good bargain, and what’s junk. In 2008, gold dropped from nearly $1,000 to $710 as the market melted down.
Gold was obviously safer at that time than the stock market, but even it was driven downward – because cash was vanishing from existence as home loans defaulted. How does that happen? Remember, if I have $100 in the bank, it’s not really there. The bank loaned it out.
So, I think I have $100, but so does the person who borrowed it from the bank, so M2 shows that there is $200. When the loan defaults, there’s only $100. And it’s $100 the bank is on the hook to pay back to me, so they have to borrow it from someone else.
Yup. Defaulting loans and business failures cause the economy to contract, even during inflation. And if that causes the Fed® to print more money?
We’ll be in even bigger trouble.
Update: our appeal at Google® was approved. The podcast was restored (LINK). Our livestream is on tonight (Wednesday at 9 Eastern), at our channel.