"www.freedomtofascism.com"  wrote in message 
news:7uu3m4tqh9gq8tn0bbu5o5rer634ibasfu{at}4ax.com...
> Uh Oh....  Monetary Flat Spin
>
http://market-ticker.denninger.net/archives/703-Uh-Oh.....-Monetary-Flat-Spin.html
>
> M1 money multiplier
> http://market-ticker.org/uploads/MULT_Max_630_378.png
>
> 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....
> http://market-ticker.org/uploads/debt-contribution.serendipityThumb.jpg
>
> 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/archives/618-Congress-What-Bernanke-and-Hank-Arent-Telling-You.html
>
>
>
>
>
> This post originated from Supernews,
> not newsrazor.net. The idiot posting
> from newsrazor.net is forging the nym
> www.freedomtofascism.com in hopes that
> people reading Google will think we're
> the same person.
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