Oh man oh man oh man!!!
SO...for those not familiar with what I'd name a Peregrine Falcon if I had one for a pet, prepare to be enlightened. Oh yeah, this also has to do with economics and the difficulty in tracking the truth in our otherwise muddy completely centralized economic river. But one of the beacons, the true landmarks that never really falters, is money velocity.
And I know, you're thinking Nolies, I don't care, more jibbity-jabbery about the economy, I've got an Obama smells thread or a Romney eats babies thread to troll, but sit tight because this might just save you some bucks in the not-so-distant-future.
"In just four short years, our “enlightened” policy-makers have slowed money velocity to depths never seen in the Great Depression."
Just divide GDP by M3 and you get velocity, its pretty simple. What isn't simple is accounting for M3 anymore. We all know the Fed has been scooping up bonds left right and center and monotinizing them on the spot to pump into our biggest banks. This was theorized to liquidize the credit markets and bring stability to the retail markets as well as help banks offload the debt load of the housing crisis. In actuality what happened?
Well plain and simple we hit what is known as a liquidity trap (also one of my favorites). I know, at this point most of you are discussing why Romney's hair gives him an strategic advantage, but for those with slightly longer than average attention spans here's what's up. Liquidity traps are caused by the combination of an increase in the money supply (usually in the form of debt), and arbitrarily low interest rates. I say arbitrarily because low rates in a free economy are consistent with the supply/demand of credit.
What a liquidity trap is, is effectively, excess capital that has no place to run. It can't go anywhere because it isn't profitable to lend. After the housing bust, what we had was referred to as a "freeze" in the credit markets. Which isn't really true, credit markets are like blood vessels, what you had in the housing bubble was a gaping wound. Capital was effectively disappearing from the equation due to deflationary forces. A liquidity trap is closer to accepting a blood donation without widening any arteries or veins.
This has CATASTROPHIC effects on markets. Staying in a liquidity trap is bad news, coming out of one is bad news, sinking further into one is bad news. The Fed's hands are tied and I fear they may take the worst road. One of increasing interest rates. And while yes, this will soak up SOME liquidity, I think its going to lead to a massive inflationary state.
Banks have no loan demand, so the easy money is not flowing onto main street. I read that the gap between deposits and loans is now 1.7 Trillion. The average has historically been about 100 Billion.
So banks have all this excess liquidity, no loan demand, and as a result they are piling into treasries in volumes never before seen, which drives rates down even further than the artificially low levels that the fed manipulated. What a mess.
It will certainly ruin the future of our children, and likely ours as well. The govenment isn't issuing lots of 30 year debt, it is generally much shorter term, the payments come due, and more short term debt is issued.
At some point the Chinese will stop buying, and our government will than experience the opposite of a liquidity trap, and we will be finacing one year bonds at 10%.
I'm not entirely sure I'd suggest there is no loan demand. Its just that the banks can find much safer forms of yield if all they are looking at is charging 3% interest. They may as well buy the 10yr...which I think you accurately eluded to.
Also I think you said it in another post, but China is not our biggest owner nor our biggest buyer of debt. That wonderful entity in both cases is the Federal reserve. And yes, we've been issuing FAR more 10yr than we have 30.
i'd say loan demand is pretty light:
*Small businesses are pumping the breaks on expansion until our fiscal situation is resolved.
*The Ag economy has been minting money, so loans are not needed.
*Capital requirements, and other regulations have prevented banks from making loans to deserving customers.
You are correct in saying that China is not the biggest buyer or owner of our debt, but it they and/or japan failed to show up at the next treasury auction, the drastic increase in rates would sink a good portion of our banks nearly over night.
As you have probably guessed, I'm 100% in opposition to the Fed manipulating the yield curve, but if americans are too terrified of abolishing the Fed, than its powers should only be used for short term tweaks. Instead we've had QE1, followed by QE2, followed by operation twist, followed by the soon to be introduced QE.
Good call! The ag industry is ridiculously wealthy right now. Have you seen soybean prices (let alone corn)?
Yes,and the fixed costs of regulations that are soon to be imposed by Dodd-Frank will have an enormous impact on the smaller financial institutions, and will lead to massive consolidation. If anyone was concerned about too-big-to fail before, just wait until we have about 6 banks in the entire country.
*LOCKHART SAYS `MONETARY POLICY IS NOT A PANACEA' *LOCKHART SAYS ECONOMIC DATA HAVE BEEN `FIRM' IN LAST MONTH *LOCKHART SAYS HOUSING IS STABILIZING AND `ENCOURAGING' *LOCKHART: MONTHLY UNEMPLOYMENT RISE SHOULDN'T BE EXAGGERATED *LOCKHART SEES `MORE APPETITE FOR RISK'
*LOCKHART SAYS DISINFLATION, DEFLATION NOT NOW A CONCERN
Hrmm so much for my interpretation!
Hey man good to see you!
Yes you are right. We've talked about it in the past, right after the housing crisis if I recall, that raising rates, instead of lowering them, would result in better employment as well as fueling the credit markets.
I'm just unsure of raising rates right now because I think the potential for a hyperinflationary state looms if the change comes drastically. We've issued SO much excess debt which has in turn been monitized. If rates suddenly jump I think we will see an explosion in commodity buying, which doesn't bode well for food prices considering the drought we are facing.
I think we both disagree with engineering an economy by manipulating rates to begin with. I just think that at our current position, this liquidity trap might be the only thing saving us from a more serious outcome ala weimar/zimbabwe.