Thread: M1 Goes Over The Cliff - Bernanke Has Lost Control

Uh Oh..... Monetary Flat Spin



That has gone "just below" 1.0.

What is this?

I could go through the derivation of how money supply works in a fractional reserve monetary system (any), but won't, because most readers would have their eyes glaze over.

The important part of this graph is what it denotes. Bernanke has lost control of "N" (or velocity), which is the actual knob that he is trying to diddle when borrowing rates are changed (and in fact its the market that sets that, despite his protests.)

In fact the most useful tool in The Fed's box in terms of influencing monetary policy is the soapbox, that is, jawboning (whether it be by cajoling or threatening.)

The problem with an M1 multiplier below one is that the effect of printing money is of course multiplied by the velocity. That is, if you print up $10 into the economy the impact it has on economic activity depends on how many times that $10 circulates in a given amount of time. The more it circulates the higher the impact and the more your efforts do for the economy.

The bad news is that when the multiplier is less than one the more money you spew into the economy the worse the impact, as you get less for each additional dollar.

If you remember the "GDP for each dollar of debt" graph....



M1's multiplier going below 1 strongly implies (but does not yet prove) that we have reached that "zero hour".

Why? 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!

As I have said for more than a year the only way out is to force the bad debt out into the open and default it. Yes, this will produce bankruptcies - lots of them, including some for "inconvenient" people like Paulson's buddies on Wall Street.

But until and unless that happens adding more debt to the system depresses the multiplier effect of that debt on circulation further, and harms, rather than helps the situation.

I don't expect our government officials to understand the math on this, nor would trying to go through it help 99% of the readers, but unfortunately, mathematics is the only true science - and you can't twist it, no matter how hard you try.

Bernanke knows this at an intellectual level, just as the diver - or pilot - knows that if he holds his breath (or pulls the stick) he is going to die.

The question now becomes whether Bernanke can overcome not only instinct but also political pressure to do the wrong thing and instead use his intellect - and the math - to do the right thing.

What is the right thing? Paradoxially, it is to withdraw liquidity and by doing so force the bad debt into the open where it does (and must) default.

How far can the above ratio contract before we cross an "event horizon" from which there is no escape?

I don't know.

But I do know that there is a "too late" point, as there is for all such things, and that we are approaching it, as I have been saying for months.

BTW, evidence that Bernanke's Monetary Flat Spin is already impacting the economy in ways that may do critical (if not fatal) damage was found this morning in the Case-Schiller numbers. Everyone, including Bernanke, was expecting the rate of home price declines to start to slow in the second half of the year. Instead, they accelerated.

We're in uncharted territory folks, and the forecast is for dark-and-stinky storms.

Buckle up.

PS: Congress, and the rest of America, can't say they weren't warned. They were - right here. http://market-ticker.denninger.net/arch ... g-You.html

http://market-ticker.denninger.net/arch ... -Spin.html

As I have said for more than a year the only way out is to force the bad debt out into the open and default it. Yes, this will produce bankruptcies - lots of them, including some for "inconvenient" people like Paulson's buddies on Wall Street.



Exactly. I'm not overly fond of, nor good at, math so someone, please correct me if I'm wrong about this.

I'm not quite understanding WHY they are throwing money at banks, corporations, Wall Street.....whoever they are throwing it at.....when the end result is going to be massive bankruptcy ANYWAY.

I know that the general opinion is that this is just providing a certain segment the delay necessary to recapture, and/or accumulate more $$$ which they can shelter offshore, but in reality......how many of these folks involved are actually going to avoid crashing and burning right along with the rest of us?

Not many that I can tell. The world economy is in a literal shambles, basically setting a you-can-run-but-you-can't-hide type of scenario.

So what, in the end, is the point of all of this instead of just letting these people go under now so we can get down to the business of corrections and recovery?

"We the people" have been duped by a corrupt, greedy government. And our part in this mess has been careless spending with no eye to the future.

"In my many years I have come to a conclusion that one useless man is a shame, two is a law firm, and three or more is a congress." -John Adams, Second President of the United States

"In my many years I have come to a conclusion that one useless man is a shame, two is a law firm, and three or more is a congress." -John Adams, Second President of the United States

LOL....isn't it simply amazing just how brilliant our founding fathers were? Way back then they were able to see what's going on today........

On the topic of money and in cartoon format,

This Video Should Be Required Viewing For Every American


http://video.google.com/googleplayer.sw ... wave-flash

whether a kid in middle school, or a "kid at heart" who is 80 years old!

The multiplyer is below 1.0 because people are not spending and expecting a depression. What Bernanke wants is for banks to lend and people to spend (multiply of money). That isn't happening so the creation of money hasn't turn out to be the cure all.

Originally Posted by FreedomFirst

On the topic of money and in cartoon format,

This Video Should Be Required Viewing For Every American


http://video.google.com/googleplayer.sw ... wave-flash

whether a kid in middle school, or a "kid at heart" who is 80 years old!

This one too!

http://video.google.com/videoplay?docid ... 3936&hl=en

Paulson and Bush have probably done more damage to this country than they realize. The "full faith and credit of the US government," the only thing backing our treasury obligations has been totally destroyed. Since that is the only asset backing our money these days, the rest of the world realizes it is only smoke-and-mirrors rhetoric, not hard assets which our monetary system is based. The guarantee of payment of interest on these debt obligations is dependent on just a few things: the American taxpayer having income on which to pay taxes (which more and more won't) and the ability of salesmanship selling zero-interest obligations to the rest of the world. And there are plenty of foreigner investors beginning to sell these obligations, finding greener pastures in Brazil and South Korea.

A good read, about 6 pages but it's big type, http://www.byronwine.com/FILES/1871.pdf

Here's a good one too.

http://www.youtube.com/watch?v=XRLPG_Hp ... annel_page

http://video.google.com/videosearch?hl= ... &ct=title#

http://video.google.com/videosearch?hl= ... &ct=title#