Posts Tagged ‘economy’

#MoneyVelocity ; The Economic Recovery’s Gas Pedal

Posted: February 21, 2014 in Excess and Algorithms
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eanda logoby @anarchyroll
2/20/2014

What is money velocity? It is the speed at which the M2 money supply moves from one transaction to another.  What is the M2 money supply? It is all the liquid cash assets in the country from cash, savings accounts, mutual funds, certificate of deposits (CDs), checking deposits, or basically any kind of money stored in any kind of account, or mattress if you’re old and senile.

How can money velocity be used to gauge economic strength? Because money velocity ends up being the ratio of the size of a country’s economy to the size of the money supply. So there shouldn’t be more cash than there is gross domestic product (GDP) or less than. If there is more/less, then inflation/deflation occurs as a market correction.

I may sound very smart with the above explanation, but a recent article in Bloomberg Businessweek did all the heavy lifting for me. The article is short, quick, to the point, and keeps everything in plain language, as I try to do with this blog.

The concept of money velocity fascinated me because; I had never even heard or come across the term before, was unaware it is a relatively accurate economic indicator, and was surprised that the slower money moves the safer we are from inflation or another recession. Why is that? Hasn’t the Fed been flooding the markets with freshly printed money for over three years? They have, but people and businesses aren’t spending it, they’re saving it. Which is good for now because inflation could stop the economic recovery in its tracks.

But the money will have to start flowing sooner than later. Especially as QE gets tapered off over the next 18 months. Fading out QE and fading in inflation wouldn’t do much damage to the economy. It would be like getting autumn before winter or spring before summer, our bodies acclimate to the changing weather because of a gradual transition. This could be the case with money velocity. It was refreshing to learn that the low money velocity we are seeing now is historically normal, and has in the 60s and 80s preceded boom periods.

But those booms were just bubbles. We all must keep one eye on Wall Street to make sure that our country isn’t held hostage by a bursting bubble again. That is why they teach consumer ed in high schools folks, it’s not just to give an elective teacher a pay bump.

So now you know what money velocity and M2 money supply are. It’s used as an economic indicator because of its ratio to GDP. Lower velocity means lower prices and deflation while higher velocity means higher prices and inflation. Drop those in conversation at the cocktail lounge but not the night club, depending on how fast you want to move the cash in your wallet to keep the other parties interested…

#QE = Economic Crack Part 2

Posted: January 28, 2014 in Excess and Algorithms
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eanda logoby @anarchyroll
1/28/2014

Click Here for Part One

Getting high, if it wasn’t fun, why would so many people do it? The only problem is that the high doesn’t last forever. The come down is often a crash, back to reality, damnit there’s still the law of gravity. Oh no, the stash is gone. What to do? Face life and the world as it is? Okay, but only for as long as it takes to get the next hit.

The sky was falling in the fall of 2008.  Not just millions, not just billions, but TRILLIONS of dollars evaporated from the global economy.  The wound wasn’t just opened, it was hemorrhaging blood.  What to do? Let the free market run free until it corrected itself?  Use taxpayer money to try and plug the leak? Bomb another middle eastern country?

Desperation causes people to do things that they don’t fully understand. Under intense stress and scrutiny many human beings seek a temporary escape from reality in mind or mood altering chemical substances produced naturally or artificially known to many simply as drugs.  Coffee, cigarettes, alcohol, marijuana, molly, mushrooms, lsd. cocaine, heroin, meth, crack.  Those who shake their head and thumb their nose at drug users often substitute adrenaline, food, binge screen watching, and other socially accepted mind altering reality escapes in place of the illicit stuff, but it’s all the same.

The federal government and federal reserve bank of the United States of America is run by human beings. Human beings susceptible to the same highs, lows, pros, cons, disciplines, and vices as you and me.  In the midst of panic, desperation, and catastrophe a series of steps were taken to stop the economic bleeding, stabilize the markets, and attempt to spur future growth.  However, the policies were all nothing more than reality escaping substances on a meta scale.

First came TARP. Then came the auto industry bailout.  Those got the headlines and the public ire or support depending if you’re a political elephant or jackass.  However another, much less sexy, but equally if not more important was the Federal Reserve Bank’s $85 billion per month bond buying program known as Quantitative Easing.

There have been three waves of QE from 2009 through present, it is expected to end in 2015.  But if it’s expected to end clean, at a predetermined time, why the drug analogy?

The problem, is that the markets have become dependent, on the fed flooding the market with cash, now there is a new bubble, that could bring the market(s) down in flames.

So the withdrawal pains, in the form of inflation and higher interest rates, could cause a relapse into recession or worse for both the US and global economy.  QE has been like an alcoholic going to rehab and starting a two pack a day cigarette habit.  Our recovery has been artificially enhanced by QE. We haven’t quit cold turkey, we’re on synthetic drugs. It isn’t until all the meds are out of our system that we’ll know if the economy has recovered or not.

Where does QE go from here?  I’ll cover that in part 3…

Quantitative Easing = Economic Crack Part 1

Posted: January 17, 2014 in Excess and Algorithms
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eanda logo

by @anarchyroll
1/17/2014

Quantitative easing is a hard concept to comprehend and I would not classify it as easy to write about either. I wanted to write an article about the subject in August. I sat down to do my research and gather sources. When I decided to take a break, I saw that I had been reading articles, watching videos, and listening to audio clips on the subject for five hours. And I felt like I had barely scratched the surface of the subject. And I just wanted to write a blog, not a graduate school thesis.

The economic collapse of 2008 and the fallout of it, part of which being quantitative easing, are the fuel for me wanting to write economics articles in simple language.

QE (quantitative easing’s often used abbreviation) is a tool in the monetary policy tool belt of the a country’s central bank. In the case of the QE being used by the United States Federal Reserve Bank (not associated with the federal government) to ease credit flow or encourage lending by banks to small businesses and citizens, buy up government bonds with freshly printed money to keep the financial markets stabilized, and encourage large scale investors to invest in safer more boring assets than riskier/sexier assets (derivatives, credit default swaps).

So the Fed is printing money and buying government debt with it to stop the bleeding, close the wound, and aide in the rehab of the US financial sector and the global economy.

Sounds good right? The central bank of the United States is using their stroke to end a financial crisis and prevent another one…..except…Many signs and indicators are pointing to the economy becoming or already being dependent upon QE, hence the crack analogy/drug metaphor. There are also signs pointing to an asset bubble growing in the debt market. What do both of those last points mean? I’ll explain and expand in part two…

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