"www.freedomtofascism.com"  wrote in message 
news:4962387b$0$22671$7836cce5{at}newsrazor.net...
>
> "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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