My best girl, EC Scott.
"A mountain of money piled up to my chin."
Light posting because I've been sitting here watching the Treasury Bubble grow and holding my mildly throbbing head. (I've turned a corner here in my recuperation, folks. If only the Obama administration would do the same for our ailing financial infrastructure.)
It's been 6 months since Henry Paulson announced the $700 billion plan for buying toxic assets. On February 10 treasury secretary Geithner upped the ante to $1 trillion and floated reports that the program would be expanded to include things like credit card debt and student loans. Unfortunately, details have yet to be forthcoming.
To further complicate the situation:
The fed announced yesterday their intention to purchase $300 billion of
long-dated Treasuries over the next six months, its first
large-scale purchases of government debt since the early 1960s,
while also boosting buying of mortgage-backed securities and
agency debt in its bid to rescue the economy.
This raised concerns that a sharp expansion of the Fed's
balance sheet -- which has already doubled in size in the past
six months -- would lead to oversupply of the world's main
reserve currency, triggering the sell off. Lackluster U.S. data early on Thursday, however, tempered
some of the dollars decline - but that is only expected to be temporary as the markets absorb this news.
Our
National Debt exceeded ELEVEN trillion this week GULP.
And even more troubling is this little remarked upon factoid illustrating just exactly why we are pretty much screwed until the issues in our financial infrastructure are addressed and set on the road to recovery. My problem? Like
my occipital neuralgia, the Obama administration's cure is definitely shaping up to be worse than the disease.
From Investor's Business Daily.
In the economy, money's productivity is measured by its velocity — the ratio of money income to the stock of money. Friedman showed money's velocity declines during economic contractions, increases during expansions and does so in proportion to the size of each.
How much work money does can be calculated by comparing the size of the money supply to the size of the economy supported. It is instructive to look at money velocity now. As the adjacent table shows (beneath the fold), velocity — of both M1 and M2 — appeared relatively stable in 2007. In that year's fourth quarter, M2's velocity swung slightly negative and has remained there since.
M1 did not turn negative until the third quarter of 2008. When it did, it did so with a vengeance.
Both measures of money fell precipitously in 2008's fourth quarter — when real GDP dropped 6.2%, its sharpest decline since 1982.
This seems akin to the circumstances in the Depression, when a collapse of the financial infrastructure slowed money velocity by nearly a third from 1929 to 1933.
However, there's a crucial difference between the two downturns.
As the table shows, rather than constricting money supply as it did during the Depression, the Fed has been aggressively increasing it in the current crisis.
According to the Fed's statistics, M1 grew at a seasonally adjusted annual rate of 17% in 2008 while M2 grew at a 9.9% rate. Both accelerated rapidly as the crisis deepened — M1 increasing at a 39.6% and M2 at a 18.4% SAAR in 2008's fourth quarter.
In contrast with the Depression, money's velocity during the current crisis is not slowing because its supply contracted. Instead, the channels that had distributed it throughout the economy abruptly ceased to function.
Following the irrigation simile, a vast extent of the economy is now parched.
What has made the current financial crisis so unnerving to policymakers is a realization that even the vigorous use of conventional monetary tools has had little effect.
Without a sophisticated financial infrastructure, our economy cannot function at the level America expects.
As more and more of its sophisticated mechanisms fail and the infrastructure becomes more basic, we see this clearly.
The current financial crisis is similar to the Depression in its collapse of financial facilities. However, it has done so for dissimilar reasons. The current collapse wasn't caused by a constricted money supply, and it hasn't been cured by an expanded one.
Even with a larger money supply, the financial infrastructure has broken so quickly and effectively that it can't distribute the increased money supply.
What defines the current crisis is not its similarities or dissimilarities to the Depression, but its uniqueness.
It's hard not to sympathize with policymakers trying to disburse liquidity around a failing system. They're like a bucket brigade seeking to disperse water — trying to prime a pump here and repair a channel there.
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