Minyanville.com had the headline, "Velocity of Money Comes to a Standstill."
The report starts off with the news that "Current consumption, which at $8.2
trillion is around 70% of GDP, has fallen US$150 billion from last year," and
that investment, which represents things like building factories, is $1.3
trillion or 11% of GDP, and down 23.3% from last year."
This is certainly bad news, although I am always leery of the concept of
velocity, as it is just the plug number that makes Irving Fisher's famous
equation (MV = PQ) work out, namely that the Money supply times the turnover of
the money (Velocity) equals the Quantity of things sold times the Price of
those things that were sold. Simple.
So since the Money supply (as measured by M2) is growing at
almost 9%, Prices overall (as measured by the broad CPI) are not growing very
much, and the Quantity of goods sold is way down as consumers stop consuming
since they are out of money and credit, then Velocity must, by arithmetical
necessity, be going down. Now do you know something that you didn't already
know?
But perhaps this seeming fascination with velocity has something to do with why
Bloomberg.com reports that "US household wealth fell in the first quarter by
$1.3 trillion, extending the biggest slump on record, as home and stock prices
dropped." Yikes! And in just the first three months of the year!
You may be thinking to yourself, "Well, since the Worthless Mogambo Idiot (WMI)
goes ballistic at the drop of a hat these days, probably as a result of his
having such a tenuous and apparently transitory grasp of reality, maybe he is
just over-reacting, and this is not so much."
If you are one of those people who thinks such things, then I laugh - Hahaha! -
in your face, and in response to the quizzical look on your face at my sudden
rude arrogance, I hold up the rest of the article where it says, "Net worth for
households and non-profit groups" is a nice, tidy $50.4 trillion, which seems
like a lot of money, but which is actually the "lowest level since 2004," and
which was down from $51.7 trillion in the fourth quarter.
For some reason, they add, "The government began keeping quarterly records in
1952," probably as a reassuring way of saying, "If you ignore the staggering
loss of buying power of the dollar, which one experiences as a rise in prices,
and you ignore the costs of all the taxes, fees and expenses of the cost of
holding and accumulating all this net worth, and you only look at nominal
prices then and now, then it looks like you are a lot better off than you were
in 1952, and we have records to prove it, no matter what that Stupid Mogambo
Loudmouth (SML) has to say about it!"
For homeowners, the bad news is that the report showed that "Owners' equity as
a share of their total real-estate holdings decreased to 41.4% last quarter
from 42.9% in the fourth quarter," which is bad news from the perspective of
The Bad Old Days (TBOD) when Mortgage Equity Withdrawal (where homeowners were
stupidly borrowing the increased "equity" that resulted from their houses going
up in value so that they could spend it on sex, drug and rock & roll), was
running in the hundreds of billions of dollars a year, fantastically
super-charging the economy.
The ugly bottom line is that "The economy contracted at a 5.7% annual pace in
the first quarter and consumer spending rose at a 1.5% pace."
Thus, the habit is engrained, as "Total borrowing by consumers, businesses and
government agencies increased at an annual rate of 4.1% last quarter compared
with a 6.2% gain the prior quarter. The gain was paced by a 23% surge in
borrowing by the federal government, reflecting spending linked to the stimulus
plan."
And this doesn't even count, of course, "Borrowing by state and local
governments increased at a 4.9% rate", as they continue their habit of spending
more than they can take in.
Bill Bonner here at The Daily Reckoning notes that, as we see, "some habits are
hard to break. The habit of getting something for nothing is one of them," and
at this rate, "The official US debt is exploding. Bill Gross says it will be
100% of US GDP within 5 years."
Instantly, my mind goes into some kind of weird dream and all I can see is
three numbers floating around, bumping into one another. One of them is $14
trillion (which is GDP), and the other two are the number $11.3 trillion (which
is the current national debt), and the last one is the number $3 trillion
(which is how much MORE national debt will accrue this year alone) because of
the sheer staggering amount of irresponsible deficit-spending the federal
government will almost certainly commit this year, including the
already-announced eye-popping $1.84 trillion in budget deficits and Another
Freaking Trillion (AFT) or so in "surprise!" emergency supplemental
appropriations as the year goes along, as is Congress's habit, altogether an
insane amount of new money that guarantees ruinous inflation in consumer
prices, which is the outward manifestation of the purchasing power of the
dollar going down due to unprecedented creations of more and more money
diluting the money stock, a devastating process which leads to social
upheavals, a prospect which scares me so much that statistical analysis shows I
usually pee in my pants in fear.
That is why I usually wear an adult-sized diaper when reading economics news, a
habit I suggest that you get into, too, if you are going to keep up with the
economics stuff, because you are going to get some nasty shocks, such as Bonner
saying that national debt exceeding GDP in 5 years is actually optimistic, and
that his "guess is that it will reach that level even sooner" which is one of
those dense oracular announcements that could mean anything, such as "We're all
freaking doomed because the damned GDP may go down by a lousy 20%, making
existing federal debt equal 100% of the economy Right Freaking There (RFT)!"
Or he could mean that "We're all freaking doomed because the damned economy
will remain at a standstill, at best, while the debt grows like a cancer,
resulting in a debt-to-GDP exceeding 100%."
Either way, the news is bad, except for those who have been buying gold, silver
and oil, and for them the news will be good! Whee! This investing stuff is
easy!
Richard Daughty is general partner and COO for Smith Consultant Group,
serving the financial and medical communities, and the editor of The Mogambo
Guru economic newsletter - an avocational exercise to heap disrespect on those
who desperately deserve it.
(Republished with permission from
The Daily Reckoning. Copyright 2009, The Daily Reckoning.)
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