“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.
Money supply is the cup size.
Velocity is the jiggle physics.
And the economy is how old she is.
We’re moving from aged 65 to aged 90. At Ludicrous Speed.
“It’s not going to be pretty.”©
Ha! Now there’s a graph that might require some empirical testing.
“inflation causes failure.”
Lived through the early 80s debacle with a 21% rate on my first CRE property. It was OUCH CITY. Even with, perhaps 8-10% rates, the economy and realestate will crash, maybe to 1960ss levels.
That would be nice – but I can’t predict how far. Or how it will all unwind – but it will be messy.
Modern banking is a complete and utter scam. The reserve rate, set by the Fed at whim (this crushed small banks back in 2008), doesn’t work the way common sense would indicate. Common sense says that if the reserve rate was, say, 5%, then for every $100 in total deposits, they could loan out $95. That is, the bank could lend out 95% of deposits.
That was the old way.
Modern banking says that with a 5% reserve, for every $100 loaned out, there has to be $5 in total deposits. That is, the bank could lend out 2,000% of deposits.
By the way, the current mandatory reserve rate is 0%. You read that correctly. Zero percent. Banks can “legally” create as much money as they want. (Note that the “current” information is from September 2020.)
https://www.federalreserve.gov/releases/h3/Current/
Yup. The lowered the reserve to zero in March of 2020. They’re still scared.
Excellent bikini pictures, as always, sir. They are “that spoonful of sugar” that helps the medicine go down. (Wow, remember when Disney was Disney, instead of Hustler?)
And ScrewYouTube HAD to restore B&B. Otherwise, they were afraid the MuskMonster would buy them, too.
What a comparison. Wonder if Walt would be happy his company is sexualizing children?
“Well, it’s sort of like a bikini picture.”
In the words of Shepherd Book, “…the Special Hell.“
Perfectly used. At least I didn’t put up the hairy Kardashian.
That last “bikini” pic should have come with a trigger warning and a side of eye bleach.
Heh heh – couldn’t resist putting that one up.
SOME real estatte will take a hit:
– That which is heavily leveraged (not much, if any, equity, and a lot of high-interest debt).
– High priced real estate in the formerly hot markets (what Trump owned – but, I’ll bet that he re-fied for a low rate, and has largely sold what he can, and that he doesn’t directly manage).
– Commercial real estate – already a bad deal, as it is generally overpriced, and, due to COVID policies, probably lost tenants.
– Farm property – a better deal to own just your home and a small piece of land, and rent most of the land you need. Less convenient than having it nearby, but less risk to the farmer, and ties up less cash.
For most people, owning a home in the mid-range price for their area will not be all that risky, as long as they plan to stay there for a while, and build up the equity.
Farms, productive farms, are still (my guess) undervalued.
“and build up the equity.”
–that is what used to be true, but was predicated on house prices rising, ie. dollar devaluing, and low interest rates driving demand and increasing the buyer pool. I don’t think a house will be an investment for a long time after the crash. It will be a place to live, but not an appreciating asset.
Think about what happens as a neighborhood “changes”. For a while, people are selling and getting what they want. Then the “changes” begin to affect prices downward. There is a time when you can still sell and get some or all of your initial money back (which is still a loss because that amount will buy you a lot less due to inflation of the currency). But if you don’t sell during that first phase, or the second, you soon find you can’t sell at all, or can’t sell for any amount that would let you buy elsewhere. This is why granny is still in her old neighborhood, watching gangbangers sell crack from behind her curtains.
Once granny dies, the house is either abandoned, torn down, or sold for pennies. Eventually, the neighborhood enjoys a renaissance and the opposite phases happen, but it’s rare that the gentrification happens in the same person’s lifetime.
We are faced with our whole country becoming the “changing neighborhood.” There isn’t any “building equity” during that second phase of “change”. There is only riding it out, or getting out early. We’re stuck riding it out as there doesn’t seem to be any “better neighborhood” available to us. Australia and New Zealand looked like they might be that before the Lord of the Rings movies came out, but that sort of move wasn’t, and isn’t for everyone, and they’ve lost their minds too.
Whoever rises to the top after this great reshuffling of the world is over will come looking for bargains, and we’ll see if we can sell them some, and re-bootstrap ourselves back to some sort of prosperity. But in the mean time, we’re going to be watching the criminals on the street thru our drawn curtains, so to speak, and wishing we’d done something when there was still time.
nick
Indeed… Everyone says “Get out of California!” So they move to Idaho… The guy in ID sees the guy from CA coming and says “I can make a KILLING selling my house for DOUBLE it’s worth to the CA guy. This drive up the housing prices in ID, not only for the people trying to escape CA, but for anyone in ID who wants to buy a house. This has been cascading from state to state as people “escape” blue states. Of course the people in the receiving states blame the outsiders, even though the RECEIVERS were the greedy ones and priced themselves out of their own neighborhoods! Now there’s no place to escape to. Between greedy sellers and the Biden “administration, the entire country has become California… So… if I’m going to be living in a 3rd World country… i might as well stay where the weather is good and I can garden all year…
Was talking to a guy who just moved into our area from California after living there for six years. He told me for the last year, working part time, he was only making $ 1,000 a month. His crappy one bedroom apartment cost him $ 950 and his gas was over$ 400/mo. He was losing money and decided to get out before all his savings were gone and he couldn’t afford to leave. Evidently, he had done his post graduate school at our prestigious ACC football powerhouse and liked the area. Hopefully he left his California sensibilities back in California and doesn’t bring them here.
Oddly, in Modern Mayberry, we’re still (after more than a decade) nearly the new kids on the block. People just don’t move as fast here.
You managed to find a bikini graph with four girls with butter faces in a row, that is impressive.
They look like sisters and frankly, if I was a single guy, I wouldn’t throw any one of them out of bed for eating crackers.
Heheh – it fit the graph. I think they’re from Malta, which is my highest (per capita) nation that visits, outside the United States.
People talk about a “red hot housing market,” and that it is this that is driving up house prices. REALLY??? A “red hot housing market” doesn’t produce the number of “OPEN HOUSE” signs I’m seeing in my area! They’re VERYWHERE! Those signs mean one thing; houses are not selling, and the RE agents are actually having to WORK to unload them. PERIOD. In a “red hot housing market” houses disappear as soon as they’re listed; often times BEFORE they’re listed. And this is after the “bidding wars” end.
In my area the average price of a house is around a half mil. No one can afford this. Renting costs even more. This means that people can’t afford to buy, and they can’t afford to rent. They can’t afford SHELTER. SOMETHING… IS… ABOUT… TO GIVE…
It’s location, location, location. We receive a monthly flier from Sweetie’s RE agent she used to buy her condo. Sales average is 96-100% of listing price. But, they don’t sell overnight, more like 45-60 days after listing.
This is for Metro Charleston, SC, so it’s an outlier.
Our small town (5k people), NW Washington, houses are typically on the market for less than a week and selling at or above asking price. I think that is changing a bit, however, as sellers are overpricing their houses based on that. Mobile home in poor condition on small unbuildable lot across the street from me, asking $410k. 1200sqft house completely renovated interior next to it on busy street asking $690k !!!!! I bought my two storey 1909 on a corner lot for $94k over 20 years ago and it was just appraised at $430k for a refi to do some long awaited renovations (new foundation, main bathroom, kitchen). Assuming based on comparables that it will be $50k more when I’m done but since right now I’m not selling it doesn’t matter to me. I just want the house I want until I’m ready to leave. Assuming that housing prices in places I eventually want to be will come down but also assuming that my house will be worth less at some point, so there’s that.
I suppose the smart move would be to cash out and live in a crappy rental for the next couple years til my $$ are worth more in the real estate market. But I won’t. Cause my house isn’t an investment, it’s my home.
With the anticipated hyper-inflation, you can’t get enough $ for your home to have it worth enough to buy ANYTHING when ‘it all falls down’, unless you convert that cash into something tangible – like precious metals (Gold, Silver, Lead & Brass, etc). Anyone that doesn’t convert their ‘ready’ cash (on-hand and in savings) into some tangible asset will functionally lose it all when the dollar collapses. So waiting for your $$ to be worth more in the real estate market is a fool’s errand, as your $$ will only ever be worth less.
Yup. The current housing price is insane – everywhere.
I asked to not tap the sign again… but there it is.
https://machciv.com/2022/03/03/the-ria/
Ha! And so it rhymes.