Simon Johnson has consistently argued for the breakup of the companies that are labeled ‘too big to fail’, and I agree with him.
The highly awesome economics blog written by the anonymous negative convexity, total U.S. debt, and the OTS’s TARP, if you aren’t already reading Zero Hedge, you’ll probably be drawn in by the highly technical yet easy to understand format. Go to link »
There is a formula for Fiat Currency, a Fractional Reserve Monetary System, which is what we here in the United States, and most of the world operates as fractional reserve monetary system as well.
Ms=Mor^(N)
I’m just going to quote most of this because it’s a very good explanation of a very serious problem. Leraconteur has given a very thorough explanation and quite a number of people are watching this very closely. I recommend reading that entire thread a few times to get the whole picture:
Ms=Mor^(N)
Ms = Money Supply
Mor = Prior Money Supply (This is NOT M0, M ZERO)
N (Vm) = Velocity of money.Mo Mor = original aggregate money supply
Ms = Money supply AFTER adding in velocity of money.
This is just a shorthand to show that if Vm<1 then output is less than input.MULT = Vm
Vm = GDP/MZMH = Ms or total monetary base
MZM is what M3 was.
MZM = Σ currency in circulation + checkable deposits + traveler's checks + savings deposits, time deposits less than $100,000 and money market deposit accounts for individuals + large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets.
M2 = Σ currency in circulation + checkable deposits + traveler's checks + savings deposits, time deposits less than $100,000 and money market deposit accounts for individuals .
M1 = Σ currency in circulation + checkable deposits + traveler's checks.
M0 = Σ currency (notes and coins) in circulation and in bank vaults.
M0 is the physical stuff
Ms=Mor^(N)
This equation cannot be changed. It is the foundation of a monetary system.
FOMC policy has, up until this year, been to take actions that modify (N). Now they are modifying Mo and Ms, as the Federal reserve has lost control of (N).
N>=1, money supply grows or stagnates, velocity increases or maintains money supply.
N<1, money supply shrinks.
Here is a simpler way of thinking of it:
Think of the M1 multiplier as the internal exchange rate for the US dollar.
When a fiat currency system works fine, you get inflation.
Put a dollar into the economy through the CB or Federal Reserve, and it creates XX worth of new debt, new GDP, as it works its way through the economy. Until recently this figure was 3 or 2 or 1.7.
What we have now is we put $1 into the economy, but we are only getting 88.5 cents out. As we pump more, we get less, and our ROI drops to below par. Worse, the pumping itself accelerates the tendency to get less back for each buck sent out into the economy. To correct this they pump even more out, but they get an even lower return on that.
If you spent a dollar, but only received back .885 worth of goods, if you handed a dollar to the bank clerk and they gave you change and it was 88 cents, what would you do? How would this affect your economic behavior?
Take it to the extreme. Ben Bernanke pumps out a dollar, but gets back one penny of monetary activity. So to sustain a money supply of 900B, he needs to have 90T in the money supply.
This causes the system to reset, and by that I mean that the monetary system ceases to function as more money is created, but less usable money ends up in the system, forcing the creation of more money, and the feedback loop goes round and round.
To fix this the debt must clear the system. This means Ben has to let many banks fail, and get the sound ones to lend. Debt must be defaulted, balance sheets exposed, Mark to Market on all asset classes.
Otherwise what will happen is that FOMC and Ben will pump trillions into the economy, with rapidly diminishing returns, ending up at a point of monetary reset, dollar devaluation, or US Sovereign Debt default.
When N=ZERO, the result is monetary reset, dollar devaluation, or US Sovereign Debt default.
Here is the current chart, released today:
Below is the extrapolation, with average decline in N (since it fell off the cliff) being 0.055 per reporting period:
(Note that these are linear extrapolations: this means if it continues at the current rate, these are the numbers we will see.)
2009-02-11 0.830
2009-02-25 0.775
2009-03-11 0.720
2009-03-25 0.665
2009-04-08 0.610
2009-04-22 0.555
2009-05-06 0.500
2009-05-20 0.445
2009-06-03 0.390
2009-06-17 0.335
2009-07-01 0.280
2009-07-15 0.225
2009-07-29 0.170
2009-08-12 0.115
2009-08-26 0.060
2009-09-09 0.005
Here’s another extrapolation:
Actual:
12/3/2008 1.025
12/17/2008 0.951
12/31/2008 0.944
1/14/2009 0.915
1/28/2009 0.885Projected:
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
That’s very bad news. When N=ZERO, the result is monetary reset, dollar devaluation, or US Sovereign Debt default.
Karl Denninger gave an explanation called “Uh Oh… Monetary Flat Spin”.
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!
So what happens when monetary reset, dollar devaluation, or US Sovereign Debt default happens?
Think Iceland.
The 2008–2009 Icelandic financial crisis is a major ongoing economic crisis in Iceland that involves the collapse of all three of the country’s major banks following their difficulties in refinancing their short-term debt and a run on deposits in the United Kingdom. Relative to the size of its economy, Iceland’s banking collapse is the largest suffered by any country in economic history.
The financial crisis has had serious consequences for the Icelandic economy; the national currency has fallen sharply in value, foreign currency transactions were virtually suspended for weeks, the market capitalization of the Icelandic stock exchange has dropped by more than 90%, and a severe economic recession is expected.
But wait let’s think about it. Iceland is a small, peaceful (and very cold) country. The United States is not. When our creditors come to collect, I do not think it will end peacefully with the sale of the United States’ assets. It seems, for the moment, war is inevitable.
Tonight, if you weren’t watching, the House of Not-So-Representatives passed the GM-Chrysler bailout, with the vote coming in at 237 yes to 170 no votes. Billions gone down into yet another black hole. This bailout is only a little better than the previous bailout Congress voted on.
While the House has passed the yet-another-bailout-bill, it has to pass the Senate, where it actually has some resistance. I will give Senator Shelby quite a bit of credit, as he said he would top Strom Thurmond’s record filibuster to stop this from passing.
Below is a hilarious screens from the latest Mark Fiore animation, “The Clapper”, which details a new visionary product where you clap on capitalism when things are awesome and clap off for state socialism when times are tough!
I’ve been looking for a great metaphor to describe the American people’s refusal, ignorant or blatant, to act against those who are destroying our country, that we elected, and I saw one tonight as I was catching up on the news and blogs and forums that I follow:
I’m becoming increasingly convinced that bandied-about “issues” like these (education is another, a huge soak upon anyone who doesn’t have kids) are deliberate mis-direction attempts by our government. Everybody who’s had their arm cut off is supposed to stand around the bubbling cannibal pot and try to fish it back out while beating off everyone use who jabs a fork in – instead of focusing on the guys wielding the knives.
The metaphor is very excellent. Think about the different parts: the arms, the cannibals, the people who have their arms cut off, the forks, the knives, the boiling cannibal stew, the act of standing around the pot and trying to get that lost arm, attacking others who are in the same predicament instead of the people doing the cutting, and so on.
For the record, I don’t recommend either the metaphorical cannibal stew nor the literal cannibal stew. Check out a more healthy, tasteful alternative: vegetable stew!
