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Good afternoon. Has everyone done their reading? Good. Let's take a closer look at the tail end of that chart:
This is a biweekly calculation of the M1 Money Multiplier, zoomed in to the most recent data over the last six months. Now: what is the M1 Money Multiplier? It is essentially a measurement of the money created for economic use when M1 money (cash, deposits, simple money) is grown. It's not an active agent; printing up a shiny new US dollar does not automatically trigger anything; it's a calculation of the result of such actions as they actually happen.
The historical average for this figure is around 2.5; for every dollar of M1 created, 2.5 dollars of real-economy money/fungible debt is created in the forms of interest, loans, and so forth. It is a measure of what is called the velocity of money.
So with that in mind, recall now what the M1 is doing - spiking up, massively, thanks to various Treasury and Fed actions. It's undergoing a substantial spike up. You now know that this multiplier indicates how many new dollars are being created in the actual economy by these new M1 dollars, per new M1 dollar.
As you can see in this chart, that ratio has dropped off a cliff in the last few months. When they talk about the economy taking a cliffdive in November, this is one of visible measurements of that fact. The new money being issued by the Fed (well over US$1T and counting) is not keeping up with money destruction, even at these rates of creation. Money is being hoarded rather than lent out (as we already knew); the velocity of money is slowing, sharply, so that the amount of economic activity money created per additional dollar of M1 is less than one, at around 0.95. For every new dollar of M1 Mr. Bernanke throws out in the form of treasuries, printing, and so forth, 5¢ of it goes away, leaving 95¢. That's not a huge loss, in most measurements, but the fact that it is a loss is huge.
Now, Mr. Bernanke's thesis is fundamentally that if he keeps shovelling out money long enough that multiplier will go back up as all losses and debts are "covered" by the Fed through government issuance, printing, or whatever, and banks begin to lend out the excess they've been given. I have several problems with this operating thesis, not the least of which being that the losses continue to be understated, transparency continues not to exist, and, worse, there's lots more losses to come. But we'll leave that aside for the moment.
To achieve his goal through treasury swaps - which is to say, by borrowing against future tax revenues, which is what treasuries are - the demand for US treasuries must not dissipate. the current US treasury demand bubble has to stay a bubble and not pop. The alternative is true printing, and we're already seeing printing on a small scale, indicating Mr. Bernanke et al are indeed worried about this possibility.
And so far, well, you can see the results of all this treasuries-based infusion into M1: the situation has been deteriorating, not improving. What if Mr. Bernanke's thesis is wrong?
We may not find out until the Treasury resorts to true printing. However, in a true printing environment, the currency loses trust and credibility. When that happens, economic activity falls over, because there's no way to exchange goods and labour abstractly; you must exchange them concretely, which is hugely inefficient. At that point, you could add as much cash as you want and it's not going to do any good, because the new-dollar per new-M1-dollar ratio approaches or even reaches zero. No one lends, because no interest rate could cover against the losses in currency value alone; no one borrows, because interest rates are too scary.
This is the worst-case of the liquidity trap: you can add all the debt (and money) to the banking system and economy that you want to, and it doesn't do anything. Return on new dollar is zero or negative; adding money destroys economic activity rather than increasing it.
And that's what I keep talking about when I keep talking about the end of the currency, and why I keep saying to watch the M1. Don't get me wrong; we're not there yet. There's not a treasury bubble burst, and, for that matter, Mish doesn't think there's a treasury bubble at all. Hopefully, he's right. But no matter what you think of that, this is a disturbing graph.
This is a biweekly calculation of the M1 Money Multiplier, zoomed in to the most recent data over the last six months. Now: what is the M1 Money Multiplier? It is essentially a measurement of the money created for economic use when M1 money (cash, deposits, simple money) is grown. It's not an active agent; printing up a shiny new US dollar does not automatically trigger anything; it's a calculation of the result of such actions as they actually happen.
The historical average for this figure is around 2.5; for every dollar of M1 created, 2.5 dollars of real-economy money/fungible debt is created in the forms of interest, loans, and so forth. It is a measure of what is called the velocity of money.
So with that in mind, recall now what the M1 is doing - spiking up, massively, thanks to various Treasury and Fed actions. It's undergoing a substantial spike up. You now know that this multiplier indicates how many new dollars are being created in the actual economy by these new M1 dollars, per new M1 dollar.
As you can see in this chart, that ratio has dropped off a cliff in the last few months. When they talk about the economy taking a cliffdive in November, this is one of visible measurements of that fact. The new money being issued by the Fed (well over US$1T and counting) is not keeping up with money destruction, even at these rates of creation. Money is being hoarded rather than lent out (as we already knew); the velocity of money is slowing, sharply, so that the amount of economic activity money created per additional dollar of M1 is less than one, at around 0.95. For every new dollar of M1 Mr. Bernanke throws out in the form of treasuries, printing, and so forth, 5¢ of it goes away, leaving 95¢. That's not a huge loss, in most measurements, but the fact that it is a loss is huge.
Now, Mr. Bernanke's thesis is fundamentally that if he keeps shovelling out money long enough that multiplier will go back up as all losses and debts are "covered" by the Fed through government issuance, printing, or whatever, and banks begin to lend out the excess they've been given. I have several problems with this operating thesis, not the least of which being that the losses continue to be understated, transparency continues not to exist, and, worse, there's lots more losses to come. But we'll leave that aside for the moment.
To achieve his goal through treasury swaps - which is to say, by borrowing against future tax revenues, which is what treasuries are - the demand for US treasuries must not dissipate. the current US treasury demand bubble has to stay a bubble and not pop. The alternative is true printing, and we're already seeing printing on a small scale, indicating Mr. Bernanke et al are indeed worried about this possibility.
And so far, well, you can see the results of all this treasuries-based infusion into M1: the situation has been deteriorating, not improving. What if Mr. Bernanke's thesis is wrong?
We may not find out until the Treasury resorts to true printing. However, in a true printing environment, the currency loses trust and credibility. When that happens, economic activity falls over, because there's no way to exchange goods and labour abstractly; you must exchange them concretely, which is hugely inefficient. At that point, you could add as much cash as you want and it's not going to do any good, because the new-dollar per new-M1-dollar ratio approaches or even reaches zero. No one lends, because no interest rate could cover against the losses in currency value alone; no one borrows, because interest rates are too scary.
This is the worst-case of the liquidity trap: you can add all the debt (and money) to the banking system and economy that you want to, and it doesn't do anything. Return on new dollar is zero or negative; adding money destroys economic activity rather than increasing it.
And that's what I keep talking about when I keep talking about the end of the currency, and why I keep saying to watch the M1. Don't get me wrong; we're not there yet. There's not a treasury bubble burst, and, for that matter, Mish doesn't think there's a treasury bubble at all. Hopefully, he's right. But no matter what you think of that, this is a disturbing graph.
