As The Money Tree Grows

From Russia Today (RT) is this bit:

Nevertheless, optimism isn’t universal when it comes to what ending QE3 means for the world economy.

“Well there are some improvements, but we can’t say that it is recovering as everyone hoped,” Nour Eldeen Al-Hammoury, a chief market strategist at ADS securities in Abu Dhabi, told Euro News recently. “GDP is growing based on the inventories, which doesn’t mean that sales are increasing. The slack in the economy remains and so far there is no clear strategy on how this slack will be resolved. Moreover, the slowing down in Europe and Asia will be something to consider as the US economy is unlikely to grow on its own.”

So we’ve got inventory build, but not a lot of sell through… Hmmmm….

They then give an interesting ’round robin’ of other folks. Yes, it’s RT. Yes, they have an agenda so will be picking quotes. But still, not an enthusiastic set of folks:

Even in the west, that pessimism is present: Pedro Nicolaci da Costa wrote for The Wall Street Journal this week that the Fed may deploy another round of quantitative easing if the decision to end the third series proved to be unsuccessful, which, according to his report, may be the case.

“Many of the studies of large-scale asset purchases, known as quantitative easing or QE, agree they worked very well to prevent deflation and stabilize the financial system during the 2008 crisis, but disagree about how effective the programs have been in boosting growth since then,” da Costa wrote.

Although Bernanke has attributed QE with cutting unemployment, da Costa wrote, Fed researchers and academic economists have for years studied the practice and are split with regards to how successful the rounds have been, and what the eventual outcome will be when all is said and done.

“I do think they’re overly optimistic,” Barbara J. Cummings of the Boston Private Bank & Trust Company told CNBC this week. “The market and the Fed are definitely saying two different things. And the market is right. It usually is.”

To some, the outcome is even drearier. “Without another dose of stimulus, the US will likely slide into recession,” Worth Wray, chief strategist at Mauldin Economics, predicted to Equities earlier this month.

So The Fed is trying to just stop buying MORE “assets” (continuing to roll over the existing $Trillions as they mature) and it might or might not work. Then the growth in the economy is to some significant extent in building inventory, not all sell through. This after 6 years of “recovery” and $Trillions of “stimulus”. With food and fuel (and hotel rooms and…) prices up significantly per my purchase history, While pay is not and while jobs are still dear. Sure sounds like stagflation to me…

How does the money velocity / supply picture look? ( A discussion of VM = PQ was in comments on the prior thread here: remember that it is something of a descriptive tautology. Velocity x Money supply = Prices x Quantity. )

Velocity Of Money 2014

Velocity Of Money 2014

And how much money?

Mbase is a new money 'base' measure including M2 and bank holdings

Mbase is a new money ‘base’ measure including M2 and bank holdings

M2 is stuff like currency and checking deposits. The Fed used to report M3 (that included some longer term holdings in banks) but stopped. Similarly they used to report something called BOGUMBNS that was a very broad bucket full of all sorts of bank and similar holdings. Now that is replaced by Mbase that is similar, but different… For more, see that have nice graphs too. Mbase includes the stuff the banks are sitting upon in their vaults and at The Fed.

Now notice that the Velocity line looks much flattened. It is still the same line, just scaled so that it is on the Mbase scale. Gives a bit of clue how much The Fed et. al. have monetized things sitting in their vaults. But is it ONLY The Fed? How have money supplies been growing in other parts of the world?

M2 in the UK, EU, USA and Japan

M2 in the UK, EU, USA and Japan

Hmmm…. Looks like all the major economies of the “western world” are pumping money supply in parallel. (and in the wiki on Money Base you can see the EURO money base rising about like the US$ one, so they, too, are doing a TARP of some sort…) You folks smug in your UK Pound have the same problem, per this graph. But the one I find interesting is Japan. Notice that in about 1980 – 1990 they were slow parabolic. Then tried to stop it, and transitioned into a long nearly linear ramp (with a slight rise at the end). Japan had a deflation interval about then, and avoided a collapse, but has never quite ever recovered “good times” since. IMHO, they are the model we are all trying to follow now. This argues that “good times” are on hold as we accept “tolerable” for a generation. But that is just a guess on my part.

What about those ‘special’ places like China and Russia? Lets add them:

M2 Brazil Russia China EU USA Japan

M2 Brazil Russia China EU USA Japan

Now some extra expansion of M2 is reasonable when an economy is rapidly expanding. As the Q of stuff sold goes way high, to keep P stable, either V has to rise a lot, or M can increase to match. But look at those curves and tell me that Russia is not printing like crazy and Brazil too. We are in a world that is awash in paper money, and it is still not “stimulating” enough. IMHO due to policy actions that throttle real productivity (and China poaching what growth is happening via Mercantilist Policy).

At present, metals (gold, silver) are still in a funk too. No joy holding them.

So what does all this mean? What is going to happen? At this point I don’t have much of an opinion. I’m still in the “problem admiration” phase. But I’d speculate that the Japanese model is the “goal” (that is, semi-stagnant and ‘good enough’ but not ‘good times’) and the reality will not be as clean. Especially in the Euro Land area. (Too many social / cultural stresses and divergences). Also job recovery is dismal:

Europe Unemployment vs USA

Europe Unemployment vs USA

Hard to find anything that makes the USA unemployment data look good, but in comparison to the EU, we look great. Never mind that folks with Honors Degrees are getting jobs serving coffee… (someone I know) and that others are taking significant pay reductions or part time jobs. At least we have some kind of job growth. But that is not the stuff of grand recoveries nor of ‘good times’. But the EU data just look dismal.

In Conclusion

IMHO we had a huge asset bubble (due to policy shoving tons of money, literally tons of it, at housing; and the follow on of ‘creative financing’) that the globe has been trying to monetize ever since. All in an attempt to hide the stupidity of a policy that forced lenders to lend for homes to folks with no ability to repay and in districts that were a poor investment. That collapsed, and we’ve been trying to prevent the recognition of the reality (over building of assets in the wrong places owned by the wrong people at the wrong prices) ever since. This will take a generation to diffuse (as the mortgages run for 30 years…) and during that time, we have stagnation.

Banks (especially Central Banks) are attempting to monetize all that crap, and putting those $Trillions (or € Trillions) on their balance sheets as ‘assets’. Eventually this will spread that ‘value’ into the entire economy as price inflation. But since none of this produces actual productivity growth or real goods production, we have M rising, Q stagnant, and V plunging. Prices will wobble upward as the difference between M and V rates of change. We can only hope that a lot of Mbase doesn’t matter as long as M2 is kept lower… “But hope is not a strategy. -E.M.Smith”…

That it is global, and that the BRICS are in the pickle too, does not bode well at all. It also implies that doing ‘currency compares’ across those currencies will make everything look fine, as they move together. We need a different ‘rubber ruler’ to measure them against. That metals have dropped implies that we don’t have enough economic activity to make those assets interesting (and inflation fears are offset by bad times…) and they, too, are not a good ruler of value. Sigh.

OK, time for work. So I’ll ponder all this a while and try to find a reasonable way to measure the value of all those piles of paper and metals. It is clear that the formal government measures and currencies are not fit for that purpose. In the mean time, if the present high snow levels and cold oceans are decent predictors, it is going to be a long cold winter with rising food and fuel prices. Layering onto that “necessarily skyrocketing” electricity prices (via government policy) is not going to be a good idea. Squandering what productive capacity we have on building boondoggles (like wind parks) is just going to make the problem worse. (REAL productive capacity needs to grow, not ‘feel good / works bad’ government projects and subsidies).

The only solace I can take in this (so far) is that the folks raking in buckets of currency / subsidy / ‘assets’ are getting loads of ‘funny money’ rapidly headed to low value and loads of ‘assets’ that are anything but. Unfortunately, the rest of us are not even getting that.

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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58 Responses to As The Money Tree Grows

  1. philjourdan says:

    The major problem with economics is the time delay. Those who do the deed are long gone when the bubbles burst, and so the media and the left find scapegoats and blame them for the debacle. This is no different. It is possible the bubble will last another 10 years, doubtful, but possible. But when it does burst, the people who will not be blamed are Obama and Bernanke. And it is all on their head (well, Yellen is not helping, but she did not start it).

    The sad part is we know this bubble is going to burst. But no one is listening. They did not listen in the 90s – they proclaimed a new paradigm. They did not listen in the 00s – ditto. And they are not listening now.

  2. Jason Calley says:

    Hey E.M.! Great post, and food for much thought.

    One consequence of fiat monetary creation is the cantillon effect; those with access to the new, so-called “hot” money get to spend it at full value, while the receivers further down the road only get to spend it at its lower value after the effects of price inflation have kicked in. This cantillon effect pumps wealth from the later users into the pockets of the early users — especially the pockets of whoever created the money. Because the US dollar is the world reserve currency, much international trade only takes place in dollars. Other countries have to swap their currency for dollars so that they may trade. The excessive creation of dollars (since Nixon broke the Bretton Woods Agreement) has pumped untold wealth from other nations into the coffers of the US (and also effectively shifted inflation of US prices for goods, into overseas inflation for everyone who has to use dollars.) How can a non-US nation protect itself from being robbed by excessive dollar creation? As long as the US dollar is the world reserve currency, the only way I can see is for them to simultaneously create mountains of their own currency. Sure they get cheated every time they are forced to buy dollars — but they are doing a double cross by buying the dollars with similarly fraudulent currency of their own.

    Other nations have two stark choices; inflate their own currency to match dollar creation, or withdraw from use of the dollar as a mandated world reserve currency. Phrased a bit more harshly, the only way a nation can have a stable value for their monetary system (which is a great boon to all market calculation) is to dump the dollar — just as the BRICS are beginning to do.

  3. Peter Shaw says:

    I think your plot of US base money sufficiently remarkable to publicise it widely and often.
    It repays some inspection:
    Pre-2007 base money increased in steady proportion (doubling in around 10 years). Assuming the Fed generally got this “about right”, it has in ~5 years issued ~30 years worth of base money.
    IOW it has effectively outsourced base-money supply to the major private banks for the next 25 years. There perhaps has been time enough to assess whether the latter are better at it.

    You might also plot Treasury Securities held by the Fed with base money, all at constant dollars. This indicates what QE buys.

  4. Larry Ledwick says:

    I think one of the base line problems many are not considering is the huge change in manufacturing capacity and productivity over the last 50 years or so. It is difficult to admit that one of the reasons that the U.S. was such a power house economy in the post war years is that thanks to the destruction of WWII the Allies basically bombed all their industrial competition into oblivion. The U.S. basically had a near monopoly on undamaged manufacturing infrastructure at the end of the war. Much of it new or near new built out during WWII mobilization. We then helped Germany/Europe and Japan rebuild their infrastructure but it was not until the late 1950’s and mid 1960’s that they really got their industrial base back into production.At that time the U.S. Europe and Japan were the dominant manufacturing powers in the world and had the entire world as a market.

    In the last 30 years this has all changed, China, Korea, Japan, and all the Asian countries along with India and Brazil have become modern industrial powers and at the same time modernization has drastically reduced the number of people it takes to make stuff. The result is probably 1/4 of the worlds capacity could supply 100% of the worlds needs if it was fully utilized. That means lots of idle capacity,and people out of work or under employed. Our economic model has always been built on continuous growth. If you run out of sales locally, sell it to Europe or Asia. The grand plans of the 1980s to sell to China went up in a puff of smoke when they built out capacity at an astonishing rate of 10-12% growth for years, and at the same time they and India due to their huge population pools and cheap labor “stole” basic manufacturing jobs from the rest of the world due to low wage levels. The old high paying manufacturing jobs like foundry work is almost all now done in China at a fraction of the wages those jobs held in developed countries. Same with textiles and other labor intensive jobs. Throw in a few thousand assembly line robots and more high paying jobs went up in smoke to be replaced by a handful of automation technicians who keep the robots running. Same thing happened in the machinist trade.

    When I took my machinist apprentice training most machine work was still done by individuals standing at a lathe or milling machine. Now CNC machine centers have replaced almost all those people. One CNC machine tool can produce nearly perfect parts at a rate that would kill 5 machinists and takes up a fraction of the floor space and power to do it. All you have to do once it is programmed, is to feed it tool bits and raw materials and haul away the finished parts. Things that can be done easily by third world tool operators with a fraction of the training and skill of the old time machinist.

    If you look at factory initialization rates world wide, none of us is really using our industrial capacity to do productive stuff. China has kept their boom going for some time by doing make work projects building flashy cities where no one lives and other dead end projects.

    The economies will not get back on their feet and employment return to historic full production levels until this mismatch between capacity and demand gets resolved. I hope it is not resolved in the WWII model where a large fraction of the industrial capacity is turned into rubble and the “winners” can use their remaining industrial capacity for a generation to replace all the broken stuff.

    If Africa were to industrialize at the same rate as China the mismatch would be even worse. We are in a sense victims of our own success. That, I think is the real basis for unemployment and under employment world wide. No one has a new market demand to sell into, and like too many gas stations fighting over a limited number of gas tanks the entire world is in a price war trying to keep their capacity alive by cannibalizing the sales of other manufacturing centers instead of developing a new market to sell into.

    All we need to do is find another earth like undeveloped planet to sell stuff to …

  5. p.g.sharrow says:

    The “silver lining” to this push to official Quality and almost no interest cost is super cheap cost to service government debt.If they allow real interest cost, the government debt service will crowd out nearly all discretionary spending. For the last 6 years the Fed has been enabling the progressive Democrat spending spree. Now that is coming to an end and the Republicans will get the chore and blame involved in cleaning up this mess. This is the same game that has been played for the last 100 years. The Internet will be our tool to break this Liberal Progressive manipulation of opinion and history rewrite. The constant harangue against AGW and EcoLoon green energy is sinking into the public conscience and opinion. This will make it easier to extend the blame for problems on government regulation over reach. The key to a Renaissance is major reduction in government control, both local and national. This was done once before in the aftermath after WW!! when much of the FDR administration imposed controls were discarded.
    The last few years has proved to me that our constant drum beat of fact and logic does seep into the minds of those that make opinion. Talking heads and politicians do read the internet posts and comments, They don’t have the time and inclination to actually do the research and thinking needed to make the correct conclusions. They are glad to take credit for the wonderful Ideas.
    ” It is much easier to create progress IFyou don’t care who gets credit.” pg

  6. R. de Haan says:

    Larry Ledwick says:
    30 October 2014 at 4:15 pm

    “All we need to do is find another earth like undeveloped planet to sell stuff to …”

    I don’t think so.

    The infrastructure in the West, Europe as well as the USA is crumbling by year of neglect.
    We need new bridges and new roads in astonishing numbers and length.

    The problem is that Governments invest their money in a wasteful way (Energiewende, windfarms, solarprojects and do everything to kill off the middle class with lunatic regulations and taxes).

    We have crazy targets for electric vehicles which nobody wants while the cars that could be sold get taxed to hell so nobody can afford them any longer. Just look at the car sales in countries like Germany, the land of the Autobahn where your 2001 diesel isn’t allowed to drive into a Green Zone anymore while at the same time the city with the Green Zone has a garbage incineration plant burning 100 million tons of imported waste from Italy and the UK.

    Our entire Western civilization is sabotaged from our financial system, our energy infra structure, our economy, our foreign policy, our immigration policy, you name it.

    I simply wonder why there haven’t been any substantial protests against all this madness.

    We now have arrived at a point of no return.

    This broken system will go down and our civilization will be faced with very harsh times, incredible hardship and possibly war.

    How broken the West has become is illustrated by this article at WUWT telling us that the US military has caved to endless Global Warming Attack.

    A none problem but a very costly one.

    All wasted money just to end this devious consumer society that “kills the planet” and replace it by the NWO that will exploit our populations like chicken in a mega egg farm.

    Screw them all.

    Get a sailing boat and travel the SH for the next two decades because the West will turn into a slaughterhouse.

  7. R. de Haan says:

    Sorry for mentioning the WUWT link for a second time, missed that comment.

  8. Svend Ferdinandsen says:

    I dont know if it is the hen or the egg, but the very low interest rates the federal banks uphold to spark the economy, as they say, is more or less like pissing in your pants to keep you warm.
    As an example take the housings (real estate) market. Houses are sold for what peoble can afford, so when the interest rates drop you can invest more money in a new house or you can take some loan in the existing and use them for whatever. To really put fire on that market, Denmark allowed loans with only interest payments meaning you could invest the double as before, and they did. They needed it anyway if they wanted a house. The bubble busted and many are stuck in the hauses because they are less worth than the loans. And not even speaking of the possibility that the interest rate goes up again.
    The feds dont like to increase the interest rate because many banks will then go down.
    All the society is locked up, and if it holds for private housing, why should’n it hold for factory prising too. When money does’n cost anything you can pay what you like.
    It does’n mater if they produce anything as long as you can sell it again to a higher prise.
    Your writing, i think, pinpoints the problem when capital gets disconnected from the goods it produces and represents.
    It is a simple analysis of the problem, unfortunately without a solution.

  9. Larry Ledwick says:

    In a way I sorta feel sorry for the Central bankers and elected officials who think they are managing the economy. In reality it is a fools errand. To successfully manage the economy you need lots of information with near infinite precision that is very timely and you need to handle both short term impulses and at the same time engage in long term (very long term 10-50 years) strategic planning for a system which is inherently chaotic due to all the degrees of freedom due to individual choices and world events which can impact the world and national economy.

    In the book Fiat Paper Money; the History and Evolution of Our Currency the author goes into an exhaustive history of paper money systems world wide back to its beginning in China. In the process he points out that every single example of Fiat Money world wide over the past 1400 years since the Tang Dynasty (618–907) has eventually collapsed and in all cases if followed a similar pattern.

    The fact is that the political pressures and needs of expediency in the real world over time push elected officials and leaders to make poor choices to serve the needs of the present at the expense of the future. This always leads to abuse of the money making authority without the built in physical restraint of a fixed asset based currency.

    Over time folks get sloppy, complacent of just ignorant of history and shoot themselves in the foot.

  10. Larry Ledwick says:

    sorry for the run on sentences, composed on the fly while doing several other things.
    I wish word press would allow an edit window to fix that sort of stuff.

  11. Jason Calley says:

    @ Svend Ferdinandsen
    “Your writing, i think, pinpoints the problem when capital gets disconnected from the goods it produces and represents.”

    Hey Svend! Yes, I think you make a good point — and because that capital comes into being without being connected to the production of goods, it sends a wrong signal to anyone who planning a new or expanded business.

    In a non-fiat system, capital comes into being as excess production of goods greater than consumption. Because it took effort and expense to create those goods, that capital is valued by the person who created the excess. How much value does he place in that capital? (Or, stated differently, how much interest will he demand for the use of that capital?) In times of economic hardship or uncertainty — times when the creation of capital is difficult — he will demand either a very safe investment or a very high interest. This will help to prevent anyone with a frivolous or non-productive project from from borrowing his capital. Additionally, in hard times the possibility of earning high interest will encourage other producers to produce more than they consume and further increase available capital. Borrowers with foolish or non-productive uses of capital will be driven out of the market, and given some time, the market will correct itself toward prosperity again.

    With artificially created capitol and low interest rates, the situation is very different. Excess production beyond consumption is discouraged when interest is near zero. The creation or expansion of businesses which offer no immediate likelihood of profit begin to look like good investments. People will borrow money for simple purchase and consumption of goods — even though it will lead to no long term increase in their ability to produce more new goods than they consume. Instead, their consumption leads to even more businesses borrowing more money so that they may build factories to produce goods which are temporarily pleasant but long term just end up in the land fill. And all the while, levels of debt build higher and higher…

    When capitol is created through production, the market becomes self-correcting. When capitol is produced artificially, the market suffers positive feed-back, bubbles and an ultimate crash.

  12. Jason Calley says:

    Ha! I am not sure how I managed to have so much “capitol” with an “o” instead of “capital” with an “a”. My apologies to the residents of Washington, DC, and to any surviving worshippers of Jupiter.

  13. p.g.sharrow says:

    Jason, No problem, your essay was about wealth and not about geography so there was no confusion here. I flunked most of my spelling tests in school, Dyslexic, Thank god for spell checkers, the most wonderful computer tool created. Almost as good as my wife at correcting my errors! 8-) pg.

  14. David A says:

    I was told not to worry about being dyslexic, as 10 out of 4 people are.

  15. Speed says:

    The velocity myth

    Today we no longer have sound money, whose purchasing power was regulated by human preferences across national boundaries. Instead we have fiat currencies whose purchasing power is formalised in foreign exchanges. When the Icelandic krona on 8th October 2008 halved in value, it had nothing to do with changes in the quantity of money or Iceland’s GDP. Yet if we try to interpret velocity in this case, we will find ourselves pleading a special case to explain its substantial increase as domestic prices absorbed the shock imparted through the foreign exchanges.

    Iceland’s currency collapse is not an isolated event. The purchasing power of a fiat currency varies constantly, even to the point of losing it altogether. The truth of the matter is the utility of a fiat currency is entirely dependent on the subjective opinions of individuals expressed through markets, and has nothing to do with a mechanical quantity relationship. In this respect, merely the potential for unlimited currency issuance or a change in perceptions of the issuer’s financial stability, as Iceland discovered, can be enough to destabilise it.

  16. philjourdan says:

    @larry Ledwick – to “manage” the economy, you need omniscience. You have to know what everyone is thinking and doing. The free market is not perfect as we see lots of short term shortages. But that is the beauty of the free market. It adjusts quickly to those shortages. No organization or idiot can do that.

  17. philjourdan says:

    @P.G.Sharrow – Amen to Spell checkers! Before the first PC was created, I wrote a crude Word processing program on a Honeywell mainframe due to my atrocious spelling (and I can only spell that word now because of the spell checking in the browsers. ;-) )

  18. Jason Calley says:

    Hey Speed! Interesting article… In it the author says:

    “Amount of Money x Velocity of Circulation = Total Spending (or GDP)
    Assuming we can quantify both money and total spending, we end up with velocity. But this does not tell us why velocity might vary: all we know is that it must vary in order to balance the equation. You could equally state that two completely unrelated quantities can be put into a mathematical equation, so long as a variable is included whose only function is to always make the equation balance. In other words the equation of exchange actually tells us nothing per se.”

    He has a point. Without an independent way of measuring velocity (is there one? Do economists track individual transactions closely enough to actually measure “velocity”?) the equation above is sort of like defining “Average Income” as “Total Income” divided by “Number of People”, and then saying
    Number of People X Average Income = Total Income
    True, but not very useful.

    Another quote:
    “GDP is only an accounting identity: no more than that. It ranks gin with golf-balls by reducing them both to a monetary value. Statisticians select what’s included so it is biased in favour of consumer goods and against capital investment. Crucially it does not tell us about an ever-changing economy comprised of successes, failures, and hard-to-predict human needs and wants, which taken all together is economic progress. And because it is biased in its composition and says nothing about progress the value of this statistic is grossly exaggerated.”

    Yes, and I think that many economists never point out the importance of this, that not all products and services are equal, even when their prices are equal. Someone please inform me if they know more about this, but I have read ( IIRC from some Chinese economists a year or two ago) that a large part, maybe as much as 30%, of the US GDP is composed of what are essentially financial transactions that do not produce any new wealth. I am reminded of the joke about the two economist who become millionaires (on paper!) by selling the same hat back and forth to each other. If GDP is being manipulated as much as the unemployment and inflation figures are, that would put a more uncomfortable interpretation on any comparison of national debt with GDP.

  19. Larry Ledwick says:

    I think there is some merit to that concept that velocity of money is not a physical metric. In my mind it includes both a physical reality that money is not moving in the economy, ie folks cannot get loans or businesses are slow paying bills and fast billing their accounts to try to get ahead of the curve. I think it is also valid to consider that velocity of money also includes a psychological component of the public’s willingness to spend money. This would be a measure more of their decision cycle on purchases. In good times folks walk into a store and see an item they want and the purchase it on the spot. In uncertain times they still might purchase the new washer and dryer but the instead spend a few days or weeks price shopping, and comparing with friends about how reliable the item is. In short they become more careful about decision making. This slows down the flow of money just as much as a physical reduction in the availability. It is a psychological availability of money. Velocity of money includes both the availability of money and the willingness to spend it.

    If everyone puts off buying new shoes until the old shoes are completely warn out because they are not sure they want to spend the money, the shoe manufactures sees a slowdown in orders just as surely as if the buyers did not physically have the money to buy new shoes.

    The tough nut to crack is to determine if the current cratering of velocity of money is because folks do not physically have access to the money or they are unwilling to spend it, or as a third possibility are they spending their money only on dead end uses which tie up the money so it falls out of the pool of money being passed around to service debts.

    They can spend $100 dollars on groceries, they can spend that $100 paying down a debt or they can stick it in shoe box under their bed. Those three different uses for the money have different impacts on the general flow and velocity of money in the economy. The $100 spent on groceries gets immediately used to pay salaries for employees at the grocery store and truckers for delivering the goods to the store or farmers for growing the goods. That money turns over quickly (ie high velocity). The $100 spent to pay down a credit card, Is out of their pocket in the form of a future line of credit, so it represents potential spending, but spending that will not occur unless the person chooses to make a purchase. The money went into the credit card companies revenue but if they are not increasing credit lines or sitting on capital it may or may not go into the general economy flow. It might be gathering dust in some long term investment rather than being recycled quickly to pay bills. The $100 in the shoe box disappears from the accounting balance sheet as it does not appear in any ledger entry. It is as if it disappeared, even though it really physically exists. As far as book keeping is concerned it does not exist in any form that the government can track. I think a significant part of this slow down in velocity of money is the later two cases. People are liquidating debt, and slowing down their decision cycle due to caution, and also socking some money away in non-banking reserves, whether this is in the form of a shoe box of cash under the bed, keeping the gas tank full instead of half empty, or a hand full of precious coins I think some consumers are getting more cautious about how and when they spend money.

  20. Pouncer says:

    Those of us with a conservative inclination look to our history for comparisons. I’m wondering if we might glean the grain (and leave the chaff) of Henry George’s dianogses in our current situation. Governments in general can’t create value — but the conditions ( “land”? )AROUND a government’s creations may sometimes be exploited — sold or rented, then taxed. The recent US auction of “digital frequencies” to expand the number of TV channels is the sort of thing I have in mind. What else — like control over a broadcast channel — does a government control under old rules, that might be sold off to a new buyer for a newer and more profitable use? A traditional Georgist might look at the the corridors or medians along US interstate highways. The news is already discussing use of FAA controlled “corridors” in our airspace for use by unpiloted, drone, aircraft for mapping, crop dusting, parcel delivery… Space launches will require ground-side launch sites, which might be leased or sold from government-owned bases. The “brownfields” of old military sites, or old powerplants, might be sold and repurposed. I understand the ex-Soviets made something of a market for selling nuclear hazardous waste (scandium, I think) from their failed atomic weapons programs.

    I tend to agree with the Libertarian bias that governments never make “products”. But I suspect there are many products that can’t be made until the governments surrender or sell off — severed to private ownership — various kinds of control over various “things” that we have not historically valued as “things”. The Conservative bias constantly points out ways governments seek to control new understandings of such “things”. Efforts to avoid “light pollution” and “preserve viewing” of stars in the night sky, for instance. Star-viewing as a luxury good to be purchased by the taxpayers can be seen — but what sorts of “luxuries” does the government now hoard, almost forgotten in their vaults, that might be sold off?

    Imagine the warehouse at the end of “Indiana Jones and the Raiders of the Lost Ark” — and suppose you could explore it for treasures to exploit… So, what of a virtual warehouse of stuff owned or controlled, but not studied or understood? What “land” might a clever person buy from a government for a dime, and rent to the public for a dollar a day?

  21. p.g.sharrow says:

    Larry Ledwick says:
    31 October 2014 at 1:27 pm “I think some consumers are getting more cautious about how and when they spend money.”
    Exactly! When money is in short supply, everyday bills for food and fuel are paid. Dinners at the “Outback” are curtailed. My work clothes and boots are worn until they fail. Velocity of money to the essentials has increased, they have to be paid. But new clothes can wait, dinners out are out, the failing TV can be ignored, money in a shoe box…………. who in the hell has money to put in a shoe box??? my taxes just went up, prescription costs were just increased to cover the government reduction in medicare subsidies to the pharmacy and our car needs tires. I was able to save an old silver dime and take it out of circulation! 8-) velocity just went down 10 cents! pg

  22. Jason Calley says:

    @ Larry Ledwick
    Wow! That is really a thought provoking comment… I am still relatively new to economics (I always preferred the sciences) and I really appreciate it any time I find a comment like yours that is so clear and makes so much sense. Economics seems to be one of those fields where the professionals seem to value obfuscation more than clarity!

  23. E.M.Smith says:

    A quick comment on slow money… ;-)

    “Velocity of money” is more complicated that I’ve presented here, mostly due to the different types of “M” and somewhat due to the nature of people and regulation. But the core concept as presented here is a valid one. There actually IS velocity to money. (Though I’d quibble over the potential of ‘over averaging’ in using the average velocity of money vs, as P.G. pointed out, the specific velcities in different sectors… but Economists tend to use gross averages… and big ones too ;-)

    @Jason Calley:

    Like most fields, Economics has its own jargon. As I like to ‘speak plainly’ (maybe that Amish influence ;-) I tend to translate out of the jargon. But, in fact, I’ve seen more obscure jargon in medicine, in law, in engineering (parsing the jar file contents?), in biology ( codons of RNA?) and more. So please accept my assertion that economics is no worse than most, and better than many in that regard.

    With that said: Economics deals with a very fuzzy field of study. It is, at core, based on human behavior. Worse, often on the aggregate behaviour of groups (with all metrics changing) in systems of fundamentally chaotic nature. Trying to sort out ANYTHING you can depend on in that mess / context is a huge effort (and subject to obscurant prolix predilections… ;-)

    So yes, sometimes it’s a bit opaque. But a bit of familarity with some not-all-that-hard jargon and a lot of it is very attainable.

    @Velocity Question….

    Yes, GDP has “issues” of mixing broken windows with too much gin with invention of the iPod with mining gold. But for calculating average velocity of money, that doesn’t matter. Someone took some money and bought the crap, so the money moved, so it had velocity. (It does matter to net national wealth / growth…)

    Yes, my shoebox of money has a different velocity than your credit card… but we look at the average (and hope that makes the detail not-relevant…)

    (Yes, I have a shoebox – really a cigar box – of money. Several sliver dollars minted long long ago. It sits inside a bigger metal box… that is inside a safe… that is inside… Well, let’s just say that V has been zero since I was about 8 years old… )

    One thing I learned to love about Econ is how it sharpens the mind to see past all the irrelevant distractors, to winnow out the chaos, and see a small gem of understanding. Some folks can do that. A lot can’t (and publish some horrid dreck as a result…) But it was the skill from that practice that got my hackles up with Global Warming. Seeing dreck and chaos and confusion passed off as gems. It just reeked. Largely because of the simlar errors used as examples in my Econ classes…. So please don’t disparage Economics too much…

    So back at Velocity: Yes it exists. Yes it is real. Yes it can be measured (indirectly… sometimes very indirectly…). It is NOT a fiction.

    Now there really are several velocities, and you could likely do a dissertation or three on the different velocities and how they interact. Most always that is simply ignored. While it might make for interesting papers (and more jargon…) it probably would not enlighten much. First up, we have the diffent ‘M’s to deal with. The most fundamental is “currency”. That’s the paper stuff and coins. It has a known physical stock (inside some small error band), and can be fairly well accounted (Total sales minus sales on credit cards / checks / transfers leaves cash…) so could be worked out if desired. It has been steadily shrinking as a part of the total and is now seen as mostly not that relevant.

    Credit Cards were, originally, seen as a grave risk to central banks since it was a ‘line of credit’ that was not fully backed by “cash”. You, the average Joe, could “increase the money supply” just by buying something. GASP! Well, over time, they observed that credit expanded in bad times and folks paid it off in good times. Since that is what central banks are supposed to do to dampen the business cycle, it is a net positive behavior. Nobody has talked about this since about 1980 near as I can tell. But it isn’t part of “currency”. Its in one of the other Ms.

    M2 includes “demand deposits”. Things like checks. You put your cash in the bank, it goes into a checking account. You can spend it like currency, but it isn’t. And “your check in the mail” has a different velocity… Banks also can lend out some of that check (and create more “money” in the process via fractional reserve banking) until you spend it (and it clears…). So ‘money supply’ will change as you shift from currency to checks to ‘whatever’.

    M3 included stuff like cash sitting in bank vaults and deposits of one bank at other banks. Usually low velocity. Then there are all the other Ms… As “money” moves between different kinds of M, the rules on fractional reserve banking change how much total ‘money supply’ there is / can be. All this is tracked and worried over in great detail by a bunch of Bank Gnomes at the global Central Banks, Regional Banks, Money Center Banks, etc. etc. For the rest of us, it is largely irrelevant. Part of why I didn’t follow up being a banker. Realized it was worse than bean counting… it was bean worrying… Some of them have jobs that essentially consist of being a feedback mechanism to assure if M3 rises some other M offsets it… or verse visa…

    But, at the end of the day, a bunch of Real Stuf ™ is made and sold. Phuny Muny or Real Money ™ changes hands for that stuff at a price. That’s the Q of stuff and the P of stuff. There is a specific quantiy of Money(s). So some fraction or multiple of it had to change hands. That’s the Velocity of the money. Have a $Billion. Sell $4 Billion of ‘stuff’. The money had to change hands 4 times on average. Like I said before, it is something of a definitional tautology. Like saying if you ran ten miles in 2 hours you had to have some average V near 5 mph, even if you sat still for 20 minutes.

    Given that, how can we use the concept of average V to understand what people are doing and what the future might hold? That’s where it goes off into speculation land and Bright Ideas that may be daft… or brilliant…

    For example, V in ‘bad times’. It might go down (hoarding cash in shoebox) or it might go up ( I must spend 100% of my income AND what was in the shoebox). Best is to watch what happens and measure it, but sometimes Economists have to make “good guesses”. My “good guess” would be both. First it slows down as folks “hunker down”, then it picks up for poor folks as times get desperate. For rich folks, they just hunker down more…

    So while the digression into the validity of Velocity of Money is valuable, and interesting, it is the use of the idea that has more benefit.


    Anyone can create value. Even governments. That they tend not to do so is more a function of the kind of people attracted to government and how badly people can fail at thinking….

    So Stalin created huge steel mills, that made LOTS of steel and that had LOTS of value. That was government creating value. That it was done not-so-efficiently and with the loss of millions of lives was government being stupid and callous and reflecting the poor character of Stalin…

    Where capitalism wins is in limiting the damage a sociopath / psychopath can do (they are attracted to power, government, and upper management… and preferentially accumulate there…) by putting them in competition with each other. Where “big government” fails is in NOT having competition for those urges (and the urges of ‘hangers on’ with an open pocket…)

    So long term, Capitalism (with some modest controls) creates much MORE stuff than the alternative systems. But nothing prevents creation of a Utopian Government that was just as efficient and effective. Other than human nature… Once that is fixed, no problem. (sigh…)

    It is, in fact, that potential to ‘get it right’ that keeps attracting folks to the ever larger government central authority paradigm. And it is the attraction of that ever larger power center to the *paths and rent seekers that eventually leads to the failure.

  24. Larry Ledwick says:

    I think the failure in managing market crashes and depressions is that they are viewed as a problem to be eliminated when in fact they are the cure for the actual problem. Like a body runs a fever to get rid of an infection and economy goes into a recession/depression to get rid of the pathological investments and behaviors that screw up the free market process.

    Like a small child learns not to run on a loose rug by slipping and falling, the players in the economy learn not to do stupid stuff when the market and economy slaps them up side the head.

  25. phlogiston says:

    Is money itself breaking down?

  26. Genghis says:

    What we are seeing is the monumental short squeeze of all time. It is the Fed against the world. Everyone (Nations included) are learning that you can’t fight the Fed. The problem for the Fed is that they are running out of assets to buy!

    We are starting to see the end game with stuff like the declining price of metals, oil, everything is going to start getting cheaper, food, goods, etc.

    This is the end game the Fed and the Government has been going for, unending borrowing by the Government to give to its supporters and increasingly valuable dollars. Brilliant really, until the world catches on of course.

  27. Larry Ledwick says:

    Please elaborate how you see a short squeeze in the current Monetization by the FED?
    How are their actions going to force someone to sell out a short position to limit losses?

  28. Genghis says:


    It is a short squeeze on the Dollar. Everyone who isn’t holding cash, i.e. investing in assets is essentially shorting the Dollar. Companies are hoarding cash, The beauty of QE is that for every dollar they create (or more) by lending to the Government they buy equity in the only real assets there are, essentially balancing inflation with deflation.

    The net result of all of this is that the Fed is forcing the value of the dollar just slightly higher, they are walking a tightrope.

    The problem with this kind of play is that there has to be a trading partner willing to lose. Right now the Saudi’s, Chinese and the American people are eagerly playing because they have their cake and are eating it too. The rest of the world doesn’t seem to have a choice.

    No one seemed to notice that the rules changed in 2008, even E.M seems focused on Mortgages. The real game changer is banks buying stocks and lending directly to the Government, that is the game changer.

    QE has nothing to do with stimulating the economy, it is simply the blatant acquiring of it.

    You heard it hear first, or maybe on Zero Hedge, or just watched the news and saw it in action. Hopefully Janet Yellen is a good master.

  29. M Simon says:

    Economies run on energy. The trouble is all we get are gross flows. Useful work done is not measured. But still… bbls of oil, cu ft of natural gas, electricity production might be a useful metric. It is real.

  30. M Simon says:

    Fully exploited endocannabinoid medicine would release between $1/2 trillion and $1 1/2 trillion a year. A big start could be done in less than a year. Medical cost reductions of significant value in 3 years. That would go a long way towards curing our disease. Heh.

    And yet – the interest – except among activists – is near zero. Well it would wipe out medicine as we know it. But still.

    If I was to prescribe a way out I wold say “study endocannabinoids”. And yet – from what I can tell my stuff gets dismissed as “the ravings of a dope fiend”. So what are people actually studying? Money. When even they know that money is not the answer. Improvements in the real economy is the real answer.

  31. Jason Calley says:

    @ M Simon ” And yet – from what I can tell my stuff gets dismissed as “the ravings of a dope fiend”.

    I don’t think that is true at this blog. It may be true out among the neurotypicals — but not here.

    “But still… bbls of oil, cu ft of natural gas, electricity production might be a useful metric. ”

    That may very likely be a better metric. Even better would be if energy usage were divided and measured for each sector, manufacturing, transportation, durable goods, etc.

  32. A while back EM had a talk about pork-belly dollars, steel dollars, energy dollars and similar ideas where the value of the money was tied to the availability of some actual goods. Conversion between such currencies would of course fluctuate with supply and demand. The advantage over fiat money is that it can’t be fudged easily – there are only so many pork bellies or tones of steel on the market.

    I’m sure bankers would still find a way to shaft us, but it would at least be a lot more obvious.

  33. p.g.sharrow says:

    @Simon Derricutt; I had that discussion with EM a couple of years ago so I know it is rattling around in his head. A spread sheet and database of all commodities could spit out a solid “Smith Credit” to gauge other currencies by. ;-) pg

  34. p.g.sharrow says:

    To continue;The use of energy units and labor hours should be the cost bottom line. Use local currency cost of local labor to set values of the currencies to escape official banker manipulations. Use the internet to gather information through unofficial channels to avoid government bureaucratic thumbs on the scale. pg

  35. Ghengis said:

    “The beauty of QE is that for every dollar they create (or more) by lending to the Government they buy equity in the only real assets there are, essentially balancing inflation with deflation.”

    Which hit a chord for me.

    The production of stuff by nations such as China, India et al should really have produced global deflation. Goods and services should have become cheaper as a resuilt of their low cost productive capacity.

    But it didn’t. Inflation continued everywhere.

    The reason must be that Governments inflated into that deflation and negated it by money printing. They did it to buy votes and create supplicants dependent on state benefits and salaries but also to avoid the consequences of increased debt servicing costs as a proportion of GDP which would have reduced the funds available to bribe their electorates.

    The trouble is that in doing so those Governments and their populations built up vast debts which are still there and increasing.

    The growth in the money supply is therefore represented by debt rather than real money.

    If that debt is repaid or even if it is just serviced at higher cost through higher interest rates then the money supply falls BUT real money in the form of credit balances remain and because credit declines the value of the real money increases rather than falling.

    In the usual inflationary scenario cash falls in value during the inflationary process but what we have now is underlying deflation in the cost of goods and services offset by credit based inflation.

    Thus whilst there is a balance between inflation and deflation cash holds its value despite the increase in the money supply.

    If the creation of credit then stops or goes into reverse then the value of cash rockets to restore the basic equilibrium.

    Asset values plunge and cash in the form of real money in credit balances becomes ever more valuable as the system catches up with the underlying deflation that had been hidden for so long.

    Hold cash, not assets.

    Of course there is then a problem as to which currency one should hold in cash since many will collapse.

    I guess one should hold cash in currencies with a relatively low debt to GDP ratio or in which the governments give a guarantee of some sort for cash deposits.

  36. Larry Ledwick says:

    @Stephen Wilde
    The production of stuff by nations such as China, India et al should really have produced global deflation. Goods and services should have become cheaper as a resuilt of their low cost productive capacity.

    But it didn’t. Inflation continued everywhere.

    I am not sure you can make that blanket statement. It depends on the product and the development cycles in each industry.

    Take for example desk top computers. The got much cheaper in both real and qualitative terms due to Moore’s Law effects. If you could buy a modern equivalent of an 8088 computer it would today be almost free. The 8088 cpu had a transistor count of 29,000, and came out in 1979, a modern i7 quad core has about 1,160,000,000 transistor count. In the early 1980’s you could spend over $1000 (worth 2.9x what today’s dollars are) on an early x86 desk top. Today far superior systems sell in the $400-$500 range depending on the bells and whistles included.

    Point being, that the system dropped in price (inflation adjusted price) by a dramatic amount and simultaneously increased in performance by a similar factor. Part of that driven by the different demands of the operation system and application code used today. Much of that increase in capacity was driven by changes in the code. Modern programs are too big to even load on the earlier systems so minimum functionality increased almost as fast as the capabilities of the hardware. In products which are primarily electronic there is a huge deflation in cost with a simultaneous huge increase in value (ie more capability)

    The question is how do you measure purchasing power of the money, equal hardware or equivalent performance? Modern desktops would compete favorably with large mainframes costing millions of dollars in the 1970’s and 1980’s. By one measure they have gotten much cheaper than by the other (equal hardware vs equal performance). In other areas technology has also caused deflation but not nearly as much. Take for example firearms. A hunting rifle that cost $700-$800 dollars just 20 -30 years ago with much more expensive dollars ($700 in 1986 dollars is equivalent to $1,520 in 2014 dollars) yet today you can buy a functionally equivalent hunting rifle of the same brand and model on sale for $499, about 1/3 the real cost of the 1986 version.

    At the same time the inflation adjusted cost of some fixed commodities like gold or corn has not changed much at all.

    In 1969 regular gasoline cost $0.35 a gallon, today it is at $2.99/ gallon where the inflation adjusted value of $0.35 in 1969 dollars would be $2.27 in 2014 dollars, so gasoline has increased in real cost by a factor of 1.32 in 45 years. In 1980 the average inflation adjusted price of gold was $1946 in 2014 dollars, recent quotes place it at about $1174. I have seen articles which say this is near the real cost of gold in today’s gold mining operations. 1980 was of course the previous peak value for gold. Shortly after private gold ownership was again permitted in the U.S. by President Ford, gold prices settled to near $180 per ounce or $753.00 in modern 2014 dollars. Gold is still more expensive than it was after free gold markets resumed in 1976 and prior to the Iranian hostage taking in Nov 1979.

    In the case of corn, real cost has not changed a whole lot, with real prices today being very similar to the real cost of corn in 1983. In the early 2000’s it got so cheap that farmers were at almost break even costs and could not afford to grow it any more as they had almost no profit on the crop.

    As the saying goes, “its complicated”, which market basket do you use to figure out if we are inflating or deflating? It appears it matters a lot which products a user “must buy” as those are the ones that really count. Items like energy, food and housing being the leaders in that category.

  37. Larry,

    Which nations have deflated over the past 20 years ?

    A few may have done but overall the entire globe on average has been on an inflationary track.

  38. Larry Ledwick says:

    Off the top of my head I can think of no country who’s currency has deflated and stayed that way, but modern economies do occasionally have negative inflation. The modern central banks tend to use massive efforts to prevent it but sometimes it still happens.

    Individual commodities have deflated thanks to changes in production methods and access to raw materials.
    For example most automotive mechanics tools are cheaper in real dollars today than they were when I was in my teens. In about 1978 I worked as a machinist and regularly bought tools from the tool vans that stopped by the shop. Brand names like MAC tools, Snap On, Vulcan etc. I remember buying a handful of snap on wrenches 3/8 through 9/16 with their then new ‘flank drive’ design on the box end of the wrench. They cost me $110 as I remember and I was a bit numb as I stepped off the tool truck how much I had spent to buy them, but the shop owner assured me they were the best thing since sliced bread for some or our work as they would take off nuts that were badly beat up and rusted that no other wrench would turn without rolling off the corners of the nuts. He was right!

    Flash forward to today, you can buy an almost identical set of wrenches today over the counter in Home Depot made by Kobalt for about $27 last I recall. The inflation adjusted cost of those 1978 wrenches would be $401 in today’s dollars. The exact same product has come down in price by a factor of 14.85 in 36 years.

    In 1955 my parents bought a little 1000 sq ft house with full basement new for $13,250.00, in 1973 I sold it for $24,500. Today Zillow says that exact same home sold for $215,000 in 2013.
    Its inflation adjusted cost in 1955 is $117,683.24 in today’s dollars, Its 1973 inflation adjusted cost was $131,345.93, so just before the economy went nuts in the late 1970’s that home had appreciated (thanks to addition of a car port,patio and partially finished basement) by only 11%, yet due to subsequent inflation from 1979 to date and rampant speculation in home prices in real inflation adjusted terms its cost increased by a factor of 1.64 from 1973 – 2014, with only modest additional changes in the home.

    The point I was making, is without adjusting for inflation it is really hard to tell if in real terms costs have gone up. Even though the numbers are bigger today, due to inflation not everything really costs more than it did in the past. Some things in real terms are actually a lot cheaper today.

    In 2009 the US inflation rate for the year was -0.34% with 7 months having negative inflation rates ranging from -0.18 % to -2.10%. The US also had negative inflation rates in 1921-22, 1927, 1931 – 33, 1949 and 1955.

    Japan has been flirting with actual deflation for a long time now and in spite of massive QE efforts by the BoJ they are only barely able to sustain their inflation target of approximately 2% inflation. They just announced another huge effort to try and pump up their economy, but there is a lot of pressure for it to deflate and they are probably fighting a losing battle which will eventually cause their economy to implode.

  39. M Simon says:

    Jason Calley says:
    1 November 2014 at 1:58 pm,

    So who is writing endocannabinoid articles besides me? (Well and the aforementioned dope fiends.) Who is making such comments? The knowledge base needs to be expanded. Not that we are lacking in knowledge even at this early stage. What we are lacking is people who are putting in the effort to study it.

    I mentioned “endocannabinoids” on a Guardian thread and the response I got back? (approximately) “Any articles out there not written by junkies?” And that is on the left. The right is much worse.

    The study of money is a misdirection. Given the opportunities.

    It is terminally obvious that money isn’t working. So what would work? How about life extension. Keeping experience around and effective longer would have benefits aside from direct cost reductions.


    CHRONIC FUTURE – KILLING CANCER will premier on April 5th, 2012, at the Harkins Theater on Shea and Scottsdale Road in Scottsdale. Media are invited to the 5:00pm airing (limited seating) with a Q & A to follow. A VIP airing will start at 7:00pm. CRONIC FUTURE will remain in rotation through the month of April at this Harkins Theater.

    CHRONIC FUTURE is a documentary created by Henry Miller and Cory Pritchard. It tells the story of Arizona’s Governor, Janet Brewer’s attempt to close down medical marijuana dispensaries and Allan Sobol, along with advocate attorney Tom Dean, fight to keep them. After the win in court, the story continues as it introduces patient after patient with debilitating ailment where medical marijuana healing ingredients have successfully treated the disease.


    Here is something I wrote THREE YEARS AGO which is in the top 6 in a search for “cannabis life extension”.

    It is no wonder we are “stuck”. We are not even looking under the light for our keys.

  40. E.M.Smith says:

    @M. Simon:

    I’m not all excited about MJ as medicine for a couple of simple reasons (enumerated below). I post about money because it IS my academic major, and it IS central to the maintenance of my life and lifestyle.

    Why I don’t care about MJ as medicine:

    1) I, and every MJ user I have known (a non-small number) could get all they wanted any time at reasonable prices. Yeah, it’s a pain having risk attached. But from thousands of observations of use, I’ve seen exactly zero folks ‘busted’, so the risk is pretty low.

    2) In many places, such as California where I spent the first 1/2 century+ of my experience, nobody really cares if you use, or don’t, and they have medical MJ dispensaries all over. A very good programmer I knew showed me his card, while filling his bong, and asked if I wanted one… less trouble than getting a drivers license or even a ticket to a good concert…

    3) If it REALLY was that perfect a medicine and cured $Trillion+ / year; then my MJ smoking friends would be frightfully healthy. They are not particularly sick, but not all that spectacularly healthy either. One died of leukemia… So I detect (pardon the phrase) a bit of “sellers puff” in the assertion. (I DO think it has medicinal value, but maybe not quite that much…) Oh, and most all of the Muslim World would have dramatic anomalies in their disease rates. While alcohol is a horrible sin, there, MJ is typically just fine. To the best of my knowledge, such divergence is not the case.

    4) It has been used medicinally for a very long time. (See prior story of “Mom of friend of my Mom” selling it as a medicinal herbal in the UK. Yeah, it was about 90 years ago, but still, it was done. It isn’t a whole lot of news to me.

    5) There is already a wave of legalization spreading over the nation. Maybe not as fast as you would like, but moving right along. Florida, yes, deep south Florida, has a vote on it this election. If it passes, you will need to choose between California, Colorado, and Florida as ‘medicinal destinations’ (and likely some others I don’t know about).

    6) Back in the ’70s I developed a very simple and very effective “concentration” technique. The “active stuff” generally dissolves very well in acetone. Essentially, you make a room temperature tea out of it, then pour off the acetone into a shallow dish and let it evaporate (well away from ignition sources! Acetone is very flammable.) In the process, you can deposit the ‘green goo’ on just about anything. Regular tobacco. Paper. Chocolate chip cookies. Whatever. Anyone who needs stronger stuff can make it, trivially. Not a lot of high tech needed to extract (and even ‘sort’ via different solvents) the various ingredients.

    7) I’m not an “advocate” of much of anything political. Just not in my bones. I generally “have issues” with rampant stupidity and especially with fraudulent stupidity; so that’s what got me going on AGW (and to some extent the ‘stupid’ in our present Macro Economic behaviours). I just don’t see the “stupid” in MJ laws as being fraudulent, nor rampant. (Most folks are voting ‘yes’ on decriminalization laws). We have some stupid in the laws, inherited from the ’30s to ’50s that is slowly being erased, but a whole lot of folks are not advocating for those laws to be retained. Once one has said “It’s kinda stupid to make it a crime.” there isn’t much more for me to say. Not much my analytical skills nor Economic training can add to the topic. Basically, it just isn’t in my area of expertise.

    8) As stated before: After some experimental use in the ’70s, I found it was ‘not for me’ as it made me a bit stupid and shorted out my (otherwise quite good) memory. Took me nearly 6 months to get it back to ‘really good’ and it never was quite as ‘eidetic’ as before. (I had picked up some ‘coping skills’ so in many cases didn’t feel the need to keep memory as sharp. Still, I noticed as it ‘brightened’ back to nearly the former precision.) I was very surprised that the effect took so long to reverse. Something VERY persistent had changed. I was not interested in repeating the experiment to see if it was cumulative. (Others don’t seem to have this problem, so YMMV). In short, I “moved on” from the whole interest / topic.

    That’s about it. I am thankful for the experience, in that it did improve my social skills and did make me a bit ‘more normal’ in several ways.
    Just I decided I didn’t want to be quite that normal ;-)

    So I appreciate that this is your “hobby horse”, and you want to ride it. But it just isn’t mine.

  41. E.M.Smith says:


    I’m not “focused on mortgages”, I only mention them as they were the proximal cause of the problem and TARP along with various mortgage programs were the instruments the government pushed on us. Also, while The Fed is buying ‘loans’ many of which are mortgages, they are not in the stock market buying stocks nor in the market for metals (or any of many other asset classes). Finally, the total value of real estate makes stocks look like small change anyway. Pennies vs $100 bills…. So why focus on the ‘chump change’ and ignore the $100 bills? Better to look at the giant real estate market (and attached mortgages) along with the very large bond market and not both with stocks (for economic analysis purposes).

    I can also assure you that folks, including me, clearly saw the ‘rules change’ in 2008. The Fed has had spectacular growth of the balance sheet and it was (is?) widely covered on the financial shows. Watch CNBC during market hours and they constantly report on The Fed and what they are doing. Bond buying, issuing, Treasuries activities, mortgage bundles and all. It’s not a secret. What is the unknown is how the end game is going to turn out. As to other banks buying stocks, that changed when Glass-Steagall was repealed and every bank became an investment bank… (or, conversely, every real Investment Bank found it did not have the backing of The Fed and either converted to a ‘Regular Bank’ or went out of business once a run began.)

    Per Oil / Gas as value surrogate:

    Unfortunately, they have fairly volatile prices and hare highly manipulate by some key players (OPEC). Such volatility doesn’t make a very good standard of value ruler.

    Many commodities are highly volatile (such as crops due to weather, or copper due to business demand cycles) and that makes them hard to use as standards of value.

    My personal favorites tend to use a mix of commodities and labor. Things like postage stamps, bread, a “mans good suit”, a car.

    @Simon D.:

    I think you are talking about this one:

    Hard to believe it was 2 1/2 years ago…

    @Stephen Wilde:

    There’s an added bit… China pegged to the $US (later moved to a slowly moving peg). This means that the usual adjustment mechanism in trade imbalance was broken. The Yuan could not rise in price, raising the price of Chinese stuff in $US terms until the trade imbalance was fixed.

    The USA decided to “push it” and print up a load of $US until China blinked (as that would cause rampant inflation in China, while the USA would not notice).

    China responded by soaking up a few $Trillion of US$ (still holding about $1T IIRC) and still had a lot of rampant inflationary pressures (folks buying / building out whole cities rather than sit on the cash). Eventually knuckling under a little bit, and moving to the sliding peg. Since then the game of ‘chicken’ has dampened a little. However…

    The bubble burst and the whole globe realized this was a very dangerous game… and a whole lot of further machinations were done to try to prevent a collapse and also prevent runaway inflation. That then leads to our present ‘edge of deflation’ dilemma…

    So that ‘game’ played vs China needs to be in your understanding. China was doing various mercantilist things (we can’t sell there, they get open markets here, they demand 1/2 ownership and intellectual property rights for ‘joint ventures’, we don’t. Etc.) including the currency peg. We ought to have simply gone ‘tit for tat’ with them (“Be The Mirror”) but didn’t. Instead we did the “push loose money until they scream from inflation” as the peg ought to have caused the inflation to show up in THEIR markets, not ours (that were being depressed / deflated by their cheap goods and labor unemployment here). That part worked, more or less; but the consequences have been ‘not good’, IMHO.

    BTW, my favorite “go to currency” is typically the Swiss Franc. Holds value vs $US over the long haul. (Was about ¢20 now nearly $ each).

    Japan has been marginally deflationary (despite dramatic attempts to prevent it) since about 1980. See the WSJ recent issue. They just made a dramatic move to try to break out with massive investment of public retirement funds…

    @Larry Ledwick:

    Whole volumes are written on how to properly figure out inflation rate due to just those effects.

  42. M Simon says:

    3) If it REALLY was that perfect a medicine and cured $Trillion+ / year; then my MJ smoking friends would be frightfully healthy.

    Here is where your lack of knowledge is killing you. You think of MJ as an undifferentiated product. It is not. There are some 60 to 100 cannabinoids in cannabis and depending on your condition the ratios matter.

    And you are looking at people medicating for PTSD mostly – for which high THC is very good. And trying to figure why they are not healthier. Probably because they don’t have enough of the right cannabinoids for what else ails them.

    Let us look at one condition – childhood epilepsy. A plant – Charlotte’s Web – was bred specifically for that. It is now legal medicine in some 30+ states. Or look at cancer. For that you need very high doses of CBD and THC. Prohibition makes that expensive.

    And aside from the waste of $25 to $75 bn a year on arrests and incarceration (would stopping that give us better economic results?) what does prohibition do? It prevents medical studies on people. So what we are left with is mice. Which studies are generally counted as inapplicable because “mice are not like people”. Despite the fact that cannabinoids are present in every species with a backbone for about 600 million years.

    So as I have stated continuously – your lack of education has caused you to dismiss something you do not understand. Let me put it starkly. The cannabis question is identical in structure to the global warming question. Many people with opinions. Very few with knowledge. And understanding nearly absent. And those with understanding painted as fringe.

    You have more cannabinoid receptors in your body than any other type. And yet it is your opinion that study and use of this system (which is not taught in medical schools) would have no significant effect on medicine despite ample anecdotal evidence and mice studies that say other wise.

    On the question of medical schools and their dereliction of duty:

    Note: cannabinoids regulate the immune system. No effect on disease? We haven’t even scratched the surface. Depending on the disease you want to up regulate (agonists) some things and down regulate (antagonists) others. And yet all you get is THC. Which for people with PTSD (about 10% of the population) is a wonder drug. BTW PTSD is in part due to genetics (20% have the genes) and in part due to trauma (1/2 those with the genes get enough trauma to activate the syndrome). Why are we making war on the traumatized? And why are we making war on those with a genetic condition?

    I must say the propaganda on this question has been excellent – highlighting the dysfunctional (people with PTSD) who are currently the main users of cannabis.


    You know who knows about cannabinoids? Jews. The Reforms made it their mission in 2003 to teach it for a year. My former Rabbi, Jeffrey Kahn, has opened a dispensary in DC. When he visited our congregation a year and a half ago I was astounded at the level of knowledge and understanding. Because it was far, far, far, ahead of the general understanding. That may also have something to do with Raphael Mechoulam being the inventor of the field. He is in effect the Einstein of Medicine. And the reception of his discoveries (and those who work with him) is similar to the reception Einstein got for 30 or 40 years. Fringe science. Not creditable. Of no practical use.

    And I might add it is not just the Reforms. All the segments of Jewish theology are involved.


    Where to start? Difficult to say. But CB1 and CB2 receptors are the unifying dimension in the field. So that would be a good place. As to general health benefits this sub field is good – “cannabis cytokine aging”. It is not just for epilepsy, cancer, and PTSD. Cannabinoids can stall or reverse aging. Don’t you think that might be worth in the neighborhood of $1 trillion a year? In the USA alone.

  43. EM – thanks, it was the Star Bucks post. Still relevant. The exhortation to “buy land – it’s not being made any more” isn’t quite true but it does provide some long-term investment as well as somewhere to live and grow things. It seems though that any money system will get debased by dishonesty – are rancid and overlong-stored pork bellies worth as much as fresh ones? Would you pay a Star Buck for a cup of Robusta coffee?

    M Simon – if the anti-aging properties of cannabinoids are true, then at least you’ll have the satisfaction of having the last laugh (and burying the detractors). There are other reasons I’m interested in Hemp, though. Apart from the traditional uses and the more-publicised Hempcrete building material, the bast from it can also be used to make a much cheaper version of Graphene-like material that may well give us much-improved batteries and possibly other similar technologies. The legal difficulties with Hemp are really a solid shot in the foot. Possibly a discussion of this in the midst of a discussion on money is not ideal, and it could do with its own string.

  44. E.M.Smith says:

    @M. Simon:

    I just DID my educational dip into the pool on cannabinoids prior to that comment above. It isn’t my “lack of knowledge”, it is specifically the presence of what I know that causes me to be more ‘mute’ about the topic.

    Also, as Iv’e been badgered into looking into it, I did find some things of interest to me in the topic, so stated (likely in yet another thread) that I’m putting together a posting on it. I’d really really like to ‘contain’ the topic there (probably this afternoon).

    You are all excited that it pushes a lot of receptor sites. Well so do opiates and nicotine. So do a large variety of drugs, foods, and poisons. That you have a load of receptors is not nearly as important as “which ones” and “what happens when pushed?”. My comment about MJ smoking friends was a simple “reality check” on the expectation of “what happens” being some kind of nirvana of health. It simply isn’t.. (They still show up at work with colds, they still have aches and pains, and at least one of them died of leukemia… so it may well be wonderful medicine for some things, and the evidence I found indicates a moderate medicinal effect, but it isn’t going to banish cancer from the world nor prevent the common cold (or HIV). And yes, I did a ‘data dive’ on the various cannabinoids and their differential effects. (Most intriguing to me being that Indica has a more ‘medicinal’ ratio with lower THC, as I’d always wanted to grow some Indica and compare the species).

    So it isn’t that I’m ignorant, nor that my goal is to poo-poo the whole thing. It is just that my dive into the pool indicates to me that this plant is much like most medicinal plants. It has some modest effects, it can be useful for a few things, but it isn’t a panacea nor a miracle.

    While this steals a bit from my ‘work in progress’ ideas on a posting, and puts the discussion where it is unlikely anyone interested in it will ever find it again (on a money thread) I found this page particularly interesting: for a couple of particular points.

    The Indica mention, and a difference with Cannabidiol.

    Cannabidiol (CBD) is not psychoactive, and was thought not to affect the psychoactivity of THC.[14] However, recent evidence shows that smokers of cannabis with a higher CBD/THC ratio were less likely to experience schizophrenia-like symptoms.
    CBD shares a precursor with THC and is the main cannabinoid in low-THC Cannabis strains. CBD apparently plays a role in preventing the short-term memory loss associated with THC in mammals.

    So that ratio could be the explanation for my divergent memory loss sensitivity vs MJ Friends. (Either that, or they just didn’t notice the loss as much and it isn’t as hard to get a law degree as I thought ;-)

    But also of interest was the presence of similar receptor pushers in other plants:

    Phytocannabinoids are known to occur in several plant species besides cannabis. These include Echinacea purpurea, Echinacea angustifolia, Echinacea pallida, Acmella oleracea, Helichrysum umbraculigerum, and Radula marginata.[36] The best-known cannabinoids that are not derived from Cannabis are the lipophilic alkamides (alkylamides) from Echinacea species.[36] At least 25 different alkylamides (dodeca-2E,4E,8Z,10E/Z-tetraenoic-acid-isobutylamides) have been identified, and some of them have shown affinities to the CB2-receptor.[37][38] In Echinacea species, cannabinoids are found throughout the plant structure, but are most concentrated in the roots and flowers.[39][40] Yangonin found in the Kava plant is a ligand on the CB1 receptor.[41] Tea (Camellia sinensis) catechins have an affinity for human cannabinoid receptors.[42] A widespread dietary cannabinoid, beta-caryophyllene, a component from the essential oil of cannabis and other medicinal plants, has also been identified as a selective agonist of peripheral CB2-receptors, in vivo.[43]

    Most of the phytocannabinoids are nearly insoluble in water but are soluble in lipids, alcohols, and other non-polar organic solvents.

    In particular, Echinacea has been known as a medicinal plant for a long long time. Coneflower is a common treatment for a variety of ills. (I’ve grown it, used it, know it fairly well). That similar cannabinoids are also in green tea confirms some of the medicinal effects noted for it. (note, too, that my ‘dive’ included reading about the various receptors, where they are found, where there are thought to be other receptors but not proven, etc. etc. I’m a very fast study and prone to a ‘just suck it all in for a few hours’ data load. So I also know that the differential effects of the various cannabinoids depends on if they hit the Type 1 receptors, Type 2 receptors, or some of the implicit receptors not yet identified – there was an effect but neither 1 nor 2 were bound… so something else was happening.)


    That same thing that sparked my interest, that cannabinoids are in a load of plants, is the same thing that puts a big hole in the argument that this is Magic Medicine Cure for things like cancer and what-all. Again, if just pushing those receptors was a cure, then all the tea in China and India would have them significantly disease free on some fronts; and all those herbal Coneflower users would be having miracle cures.

    So yes, there is SOME medicinal value in those plants. Yes, there is SOME value in exploring the various cannabinoids. Yes, it is highly likely MJ has decent medicinal properties for a plant (with my money being on the Indica species). But the significant evidence is that is isn’t going to be a giant game changer on all things medicine. Well worth exploring, but hardly the end of cancer in our lifetime. My ‘first guess’ is that it will be a useful adjunct therapy. It will boost some immune response, cause apoptosis in some cancer cell lines, and ease some symptomatic issues (pain, appetite loss). Heck, may even cure some types. But will it be better than the present drugs? Or will it be better than the synthetic cannabinoids (of which there is along list)? Probably not.

    Once we know what buttons to push, and what shape molecule pushes them, we can usually make a synthetic drug that has stronger effect and lower side effects with a more selective focus. IMHO that is where cannabinoids will end up.

  45. M Simon says:

    Possibly a discussion of this in the midst of a discussion on money is not ideal, and it could do with its own string.

    $ 1 trillion a year (in the USA alone) is not money? Fooled me.

    And that does not even count the side benefits you mention.


    The problem here is that we have run out of (only seemingly) easy profits. And even people who are not per se Prohibitionists have been fooled into thinking they understand the subject and the understanding is “not very important”.

    And what is amazing about this understanding is that you can find volumes (from government sources no less) that show how important the subject is. Cannabinoids control every major system in the human body and when those systems go awry human body resources can be augmented by plant sources. Excepting of course that the plant is illegal.

    And the refrain I see often is “it (Prohibition) affects so few – why bother?” If you consider the benefits that are not being realized, it affects near everyone. But who are the targets of Prohibition enforcement? Youth from 15 to 25. Which is why the youth and those younger than 60 are nearly overwhelmingly anti-Prohibition. They have experienced the Police State first hand. And they don’t like it. Why the rest put up with a Police State is beyond me. Well no it isn’t. It is the usual “It doesn’t affect me so why should I care?” First they came for…. is why. Because ultimately Police States know no limits. They just haven’t gotten to you yet.

    And you think Police States don’t affect money? I can’t think of one that could afford to keep everyone in line long term. The expense – not to mention the friction – is a killer.

  46. M Simon says:

    Once we know what buttons to push, and what shape molecule pushes them, we can usually make a synthetic drug that has stronger effect and lower side effects with a more selective focus.

    If you have been reading the literature (heh) you would know that the ensemble effect potentiates the individual components. On top of that you would know that making “a synthetic drug that has stronger effect and lower side effects” has been tried repeatedly to no avail. It appears that the ensemble not only potentiates but also reduces side effects. You might want to read up on the effectiveness of Marinol (pure manufactured THC) vs cannabis.

    Our current general understanding is not ready for a new understanding because there are so many things we know that ain’t so. And on top of all that what is inherently better about big pharma controlling medicine vs growing your own? You might want to look up how much big pharma puts into Prohibition. They definitely consider cannabis a threat. Besides we will reap more economic benefits from gardening medicine than we will get from making it in a factory.

    And then there is chemistry. Cannabinoids are notoriously difficult to manufacture. Thus making them expensive. Where as the plant makes them very cheaply. In fact – so far – the cheapest method for manufacture is to have the plant do the manufacturing and then do separations in a factory. GW Pharmaceuticals is doing that.


    Really. You need to dig deeply into this before pontificating. I have been studying this field for 10 or 15 years. As far as I know there is no one book you can buy to bring you up to speed. You have to dig. And to do that digging well you have to start out with a Zen mind. “A Zen mind is an empty mind.” Assume you know nothing and that the popular press is either ignorant or gets it wrong. You know – the way they do with global warming. Not always true. But a fairly good assumption generally.

    Check your facts. Just to get you started:

    One that struck me particularly:

    “Clinical trials have demonstrated that the synergistic interaction of the combination of compounds listed above found in cannabis make it a far superior therapeutic option than the administration of Marinol alone.”

    We know of synergistic effects with food “Vitamin C plus calcium”. Why not medicine?

    Well any way. The old (because of a decline in endocannabinoid production after age 25 or 30) generally can’t learn things that wipe out too many previous areas of learning. But the youth still retain mental plasticity. It is one of the reasons it took 40 years for Einstein’s revelations to catch on. People who had the mechanical model of how things worked had to die off. The same is true of this field. Fortunately the 30 or 40 years required is just about up.

    “Truth never triumphs — its opponents just die out. Thus, Science advances one funeral at a time” Max Planck

    BTW I am an outlier. I have changed my mind in very major ways several times since my 30th birthday. It is an amazing feeling to be totally a “baby” at age 40 or 50. Disorienting. Uncomfortable even. I rather like it. And I don’t mind appearing stupid. But most folks don’t like it. They want to be smart. And that is perfectly natural.

    Relearning “everything” after 30 is not the usual course of events. Most people are old at age 30. Evidently it has survival value. Or used to have. Or we wouldn’t be like that.

  47. philjourdan says:

    @Larry Ledwick

    In the early 1980’s you could spend over $1000 (worth 2.9x what today’s dollars are)

    Where? IBMs were going for $5k, and “cheap” clones for about half that ($2,500).

    Other than that, I agree with your comments in general. By the late 1980s, hand me downs and low ends could be had for about $1k, but not in the early 80s.

  48. E.M.Smith says:

    @M. Simon:

    I’m finding your “disdainful tone” and repeated “admonitions” Tedious. FYI, I was pre-med prior to changing to Econ. Had chem through organic chem and bio through upper division genetics. I’ve had a passion for medicinal plants for a few decades. I know a great deal about this already and I’m not starting from zero. Oh, and worked “on the wards” in hospitals for a few years then too. I’ve read, literally, hundreds of medical charts. (Doing QA on them – yes, that’s a real job.)

    Our “disagreement” is NOT over what the plant does, how it does it, what receptors are involved, how it works. None of the things you assert I don’t know (but I do). It is entirely about my background and experience leading me to a different conclusion.

    There IS a history of medicinal drugs. It is clearly the case that MOST (not all, but MOST) ‘natural’ cures get analyzed into components, then the most effective is found, then it undergoes modifications to make it more effective and less prone to unwanted side effects. That is NOT an OPINION. It is historical fact. You may not like it, but there it is. Now, from that FACT, I’m willing to extrapolate that it is MOST LIKELY that MJ will follow the same path. I’ve bolded the words you tend to ignore.

    Now none of that says MJ can’t be different. None of it says MJ isn’t going to be a source of many good drugs. It lays out a “most probable” future path. I go with the “most likely” and not with the “unlikely”. (BTW, I specifically called out an example of the ‘ensemble’ effect with the reference to how different THC / CBD ratio might be involved in my different memory impacts vs friends). So you want to berate me with insinuations of poor thinking rather than just accept that I’ve “done my homework” but came to a different conclusion. Fine. But realize that “poisons the well” in many ways.

    1) I’m not doing a posting on Cannabis. Not now. I’ve had to consume that time dealing with your comments and angst scattered all over. Why light a match to a pile of angst? Besides, you’ve asserted I have no clue, so why bother. I was only going to do it to please you and give you a place to make your case. Not seeing the reason for that anymore.

    2) Cannabis discussions are NOT welcome on any non-cannabis thread. Since it just causes you to get your panties in a bunch and start behaving a bit unpleasantly, no need to spread that around between a whole bunch of threads. Also a thread dedicated to macroeconomics like money supply and Mbase vs M2 is not somewhere a year from how that the average reader will go looking for a discussion of MJ medicinal value. Key words are all wrong for searches too. So no, MJ is NOT a money topic.

    Finally, I might, someday, make such a posting on Cannabinoids. In particular I find it interesting that they are in Coneflower (a known herbal medicinal) and green tea. (You don’t like the fact, yes, fact, that the widespread use of those with at best tepid effects weakens the case for MJ as miracle drug. I like the fact that widespread use of those with some mild effects indicates that MJ ought to work, even if only modestly). Since pretty much all herbal medicines are ‘modest’ until they become poisons, that’s THE MOST LIKELY case. Now you can extract heroin from poppy sap, and you can make morphine from heroin. You can extract digitalis from foxglove. You can… well, it’s a long list. Then you can modify all those extracts to get entire families of drugs with good effects. You don’t like that, so poo-poo what has happened (history, not opinion) most in drug development. Making a ‘special pleading’ for MJ is not a particularly good argument.

    But what you CAN’T do is make the immune system a miracle worker with super powers. At best you can turn it on a little more. (Turn on parts of it too much you get cytokine storms and start to kill yourself – that’s how H1N1 flu does damage – and why healthy 20-somethings were most killed by it. Turning on too much immune response is a bad thing. BTW, I’ve known this since about 1975 or so. Not a new topic to me.) This puts an upper bound on what any immune system stimulus can do. You ignore that and see pushing all those receptors with agonists as the way to just cure all sorts of things. I see it as a limited (but potentially positive) effect. You don’t like my demure evaluations, so assert it is due to stupidity. It isn’t. Get over it.

    Now I don’t know why you have your panties sooo in a bunch over my having a more subdued opinion (yes, only an opinion, and subject to change if the facts on the ground change) that you have (with evident advocacy); but I do know that telling someone their opinion is invalid is also a very poor technique. Much better is to just recognize their opinion as validly theirs, and then “move on” to explore in more detail what is known and knowable. You have poisoned that well with failure to ‘catch a clue’ and wait a day for a proper thread and with the tone of your (nearly insulting) assertions of non-competence. OK, your choice.

    I have to go to work, and I’ve had to make this reply rather than make a posting. Again, your choices lead to this point. So please, let go of the topic, as I don’t really want to add you to the moderation queue.

  49. EM – thanks for the information about Echinacea. I’ve found it does build up immune systems, and now I have an inkling as to why. It also doesn’t have the unpleasant (for me) side effects.

    The money discussions are also very useful. It does seem that any money system is going to depend on trust in the end. Even down to the trust that someone will want your piece of Gold so much that he’ll exchange it for food when you want food. There’s no real reason why a soft metal that’s useful for protecting against corrosion should be that much more valuable than, say, Chromium except that the supply is limited. If we solve the problem of transmutation at a reasonable price will that devalue the Gold that’s around? Probably – can’t rely on nuttin’. Other things depend on an artificially-limited supply, such as Diamonds and Coffee beans (that could devalue the Star Buck, after all). My personal view (somewhat simplistic) is that an item such as a tractor, knife or a pound of coffee are real wealth – you can use them and enjoy them. Where people count the money as wealth it requires a bit of self-deception since if someone won’t swap something real for that money it has no worth.

    Picasso used to pay his grocery bills with a signature on a piece of paper. The shopkeeper could get more for the signed bit of paper than the grocery was worth. There’s some value in being famous….

  50. Jason Calley says:

    @ Simon Derricutt “If we solve the problem of transmutation at a reasonable price will that devalue the Gold that’s around? Probably – can’t rely on nuttin’. ”

    History says “yes”. After the Spanish Empire began bringing back absolutely stunning amounts of gold and silver from the New World the Spainards suffered large scale inflation. To the best of my knowledge, this was the first time that a major power suffered inflation not by debasing their money, but by actually increasing the supply of precious metals faster than the nation’s productivity could increase. (Someone might want to look up what happened to the ancient Athenians after they captured some of the more productive silver mines of the time.) I suspect that one of the reasons why productivity did not keep up with increased gold supply is that much of the gold went to pay troops who were busy expanding the Empire not just in the New World but around Europe as well. Spanish Armada, anyone? They also suffered from increasing stratification into the very-rich and the very-poor since the new incoming gold was spent into circulation by the already powerful and wealthy. Sounds strangely familiar… but inflating the money supply — even with gold! — will produce such effects.

    During the 16th and 17th centuries, the University in Salamanca in Spain was home to teachings in economics which some people maintain became the precursors of the Austrian School of Economics.

  51. p.g.sharrow says:

    @Simon; I used to do that, but later the shopkeepers demanded that I buy back the paper and my signature for more ! Where is the fun in that. ;-( I wonder if we can force the bankers to buy back their paper for the wealth that they have acquired with it? Not likely as modern bankers have hired the government to protect them in their scheme.
    Somehow I have a hard time getting deflation from a massive over supply of “money” but as of now I am seeing both inflation and deflation at the same time. Costs of necessities going up as income is stagnate or decreasing. There maybe a lot more money in the banks but it is not out on the streets. pg

  52. Jason – thanks for that bit of history. That adds a certain clarity to the problems we’re seeing now.

    pg – I don’t see a painless way of redressing the imbalance that the banksters have developed. I’m also seeing rising costs of both necessities and taxes while income is not rising. That QE money all seems to have gone into the financial institutions rather than into productivity or new enterprises. There is also the underlying pressure of automation forcing both the price and quantity of labour down, so there is bound to be an increasing percentage of the population who either have no jobs or are doing a make-work job. What ought really to be an age of plenty (since so few man-hours are actually needed to produce what we need) is instead a time of increasing hardship for everyone. The hardships are forcing businesses to cut down further on employment to avoid the taxes and still be competitive. It does seem to me that there will need to be some major changes in the underlying systems in order to give our kids a good life rather than almost-universal penury (with a few Extremely Rich Bastards at the top).

  53. E.M.Smith says:


    Stagflation is an odd edge case, most of the time. You have a stagnant or shrinking economy. Call it 2% / year decline (though higher is possible). But money supply is increasing at 4% / year. So you will end up with about a 2% / year reduction in ‘real value’ and about 2% increase in “currency value”. Stagnant with inflation.

    Now deflation is even more odd. Let’s say your economy is shrinking at 7% / year. Money supply growing at 4%. While you might expect that 4% to cause a 4% price rise, in a shrinking economy, competition causes prices to fall more than that. (Ought to be about a 3% nominal drop IMHO). Now folks start to say “Why buy a house or car today if it will be cheaper next month or year?” and slow spending. You are now in a Race To Hell with that 7% increasing with positive feedback…

    Unless the added money dump exceeds that rate of shrinkage growth, monetary policy can’t fix it.

    Even IF the money dump is run up to 7%, that money (as now) may be piling up in bank vaults or the pockets of rich folks who don’t spend it due to their fears. Also IF there are added incentives not to spend nor invest (such as laws forbidding doing things that make sense…) pushing more money at the system doesn’t result in more investment and spending.

    Add in that you can only print 7% more currency / year for a little while before folks start to have even more doubts and worries, well, you can see the worry trap that starts to build up.

    Essentially IMHO there is a real economy that sometimes responds to monetary games, but only in a narrow window. If there are laws, rules, whatever that prevent it from responding, monetary games do little or nothing. One of those “things in the way” is if folks start to doubt the currency. Another is government rules. Yet another is bad economic times causing widespread worry (or inflation expectations).

    It’s kind of like having a throttle on an engine, but connected with a large rubber band with a flexible hoop in the middle and a flyball governor that sometimes sticks…. Depending on all those parts relative positions and sticking, well, stuff happens… Then add in a load that has long lag times, and a clutch that doesn’t always work…

  54. Larry Ledwick says:

    That rubber band throttle linkage is exactly what got Carter and his FED in trouble in 1979-1980. As mentioned in “Secrets of the Temple” they data they were working with to monitor the economy was always out of date because of the time lag necessary to gather and process the data. When the data told them the economy was slowing down rapidly they stepped on the gas peddle. Unknown to them it had already turned around and was accelerating fast as they hit the gas. It was like a classic electronic oscillator with the proper feed back phase shift. They kept doing these things exactly 180 degrees out of phase with the real economy because of that data lag and pushed it into wild gyrations as they repeatedly with the best intentions did exactly the wrong thing at the wrong time.

    Then as you mentioned the basic nature of the economy changed because the participants in the economy developed a perfectly logical expectation of wild inflation and started betting on that behavior with their decisions. This only reinforced the inflation pressures.

    This is why Volker had to simply stand on the brakes and practically bring the economy to a stop and then hold it there long enough for that expectation of inflation to bleed out of the public consciousness and allow them to modify their expectations and bets on inflation. Only after that behavior changed could the economy truly recover and return to stable behavior.

    People keep forgetting that the economy (and the people who participate in it) like any organism adapts to changes and there is always some sort of push back or adaptive behavior that literally changes the economic behavior as they begin there intervention.

    Like now investors have baked into the cake an expectation that QE dumping will continue and they are playing the hand that is being dealt to them. Lots of folks have structured their investment behavior around that reality. Like alcoholics they are now addicted to that economic structure and need to be pulled off their bender slowly to avoid major pain.

  55. p.g.sharrow says:

    AH yes! I remember The Carter Stagflation very well. My farm costs went up 22% in one year and the return on the crops went DOWN. I went from being an up and coming young farmer to a dead broke, laborer living in my old pickup truck in less the 2 years. Volcker saved the bankers and wiped out a generation of farmers.I generally can win any game if I know the rules, but these guys kept changing the rules faster then I could cope. After producing the best crops ever seen on 2 of my farms, Carter embargoed all farm exports late that summer and crashed the prices we received for our crops. That did prevent a food price spike. So it was good for some people. pg

  56. p.g.sharrow says:

    @EMSmith; Well you seem to be right so far. The price of gold and oil is in free fall $1150 and $77 per other commodities down as the availability of bank resources to speculators is being reduced and world wide economic activities is sliding. The drop in fuel costs means people will have more money left in their pockets at the end of the month. Good for money flow out on Main Street. pg

  57. E.M.Smith says:

    @P.G. & Larry:

    There’s about a 2 year lag (varies by details of exactly what and amount of monetary pressure) between Monetary Policy changes and their impacts. As the typical president is unwilling to wait 2 years to be seen “doing something”, they are most often doing exactly the wrong thing at the wrong time. The Fine Art of Central Banking is to think at least 1 year ahead of the economy, and prefereably 2 years, and do THAT right now…

    Per the farm: Part of why I despise government intervention. They typically get it wrong, usually make things worse, and at best save the rich at the expense of the poor. Why my Dad grew up on a farm in Iowa, but after the Great Depression did not have a farm in Iowa…. They did manage to eat well during the worst of it; but by the ‘end is near’ couldn’t hang onto it for lack of cash. And folks wonder why I’m not a fan of FDR and his progressive policies…

    Oh well. On the bright side, I was able to grow up without needing to do Farm Chores every day, and without needing to butcher hogs or make silage. My Dad made sure I knew how to dig a well (we made one together), raise and butcher animals (birds and mammals), grow a large garden, put up the produce, etc. etc. (That Amish ancestry of his, I suspect). But it was all toy scale and for fun.

    He had 5 acres outside of town with a barn and a few cows. We had lots of beef in the freezer… He’d pick two veal each year, fatten them on rolled oats for a couple of weeks, then swap to ‘rolled oats with molasses’ for 2 weeks. The local feed store special ordered it. The veal got a red color closer to mature beef, but stayed tender… and you could taste a bit of molasses in it. A remarkable experience. If you get a chance, make some… Can’t get it in any store.

    Yeah, those commodities are saying not a lot of world demand at the moment and deflation pressure building. Silver at $15.xx and dropping. Yikes! Copper holding up a little better, but still, not strong. Gold and oil in a drop.

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