To show you how weird things are getting,
John Mauldin of Frontlinethoughts.com writes about
the velocity of money, and for some inexplicable
reason, immediately seems to confuse it with
inflation when he writes, "When most of us think
of the velocity of money, we think of how fast it
goes through our hands. I know at the Mauldin
household, with seven kids, it seems like
something is always coming up. Velocity, at least
in terms of how fast money seems to go out the
door, seems faster than normal."
As an
interesting aside, he is the proud father of a
daughter getting married this summer, and as much
as I cry and wail about
inflation in the money supply
and inflation in prices, like gasoline climbing
towards US$4 per gallon and how suddenly everybody
in the family has to always need to be someplace
clear across town for some damned reason, which I
was just now wailing about until he said that if I
want to see real inflation in prices, "forget
gas", as he informs us that his daughter's
upcoming wedding has taught him that "you haven't
seen inflation until you start buying floral
arrangements."
Inflation in floral
arrangements! Wow! An indicator I never even heard
of! Thanks!
But what is the velocity of
money, really? Well, velocity is just a plug
factor that makes Fisher's equation balance out.
If you have forgotten, Fisher's equation (usually
written PQ = MV) famously balances the total of
goods sold (price of things sold multiplied times
the quantity of goods sold), which he says must
have been paid for by the other, money side of the
equation, namely the total amount of money spent
(money supply times the velocity with which the
money supply goes from hand to hand) that was used
to pay for the PQ.
So, I am sorry to say,
this is where velocity comes from; it is just the
number that makes the equation balance! Hahaha!
April fool!
And this doesn't even account
for taxation, which makes it all the more weird. I
mean, the after-tax money that Mr Mauldin spends
at the florist results in a smaller amount of
after-tax money being subsequently spent by the
florist for, say, a couple of days lounging around
the beach, and the hotelier spends a smaller
amount of that after-tax money on some lovely bit
of fluff at Miss Maggie's Magical Men's Club, and
the owner of the men's club used a little of that
after-tax money to buy gasoline to track down his
cheating girlfriend who is meeting some damned
florist at their little "love nest" at the beach,
and the gas station spends a little of that
smaller amount of after-tax money on paying me to
go away ("Here's a buck. Now scram!") and stop
bothering the customers by helpfully informing
them "We're freaking doomed to death by inflation
in consumer prices, and probably deflation in
asset prices, too, because the despicable Federal
Reserve created all the excess money and credit to
finance a series of bubbles that are now popping,
by creating the money to buy the enormous debt of
a system of governments that is now so large, so
freaking large, so overpoweringly large that our
system of government constitutes a full half of
GDP! Half! And which employs one out of every
seven workers! We're freaking doomed, you morons!"
But this is not about how people going
into a stupid convenience store are "bothered" by
me politely informing them about how stupid they
are, and how the last 4,000 years of human
economic history shows that they should be buying
silver and gold instead of an Extra Large Big Gulp
soda, a bag full of delicious highly-processed
foods (like Twinkies) and a handful of Lottery
tickets, but about the velocity of money, and
about how the power of velocity, as the money
cascades hand to hand in transaction after
transaction, is seemingly reduced at each step by
the tax rate.
So, what is the average tax
rate? 20%? If so, then the amount of money is
reduced by 20% at each transaction, and thus the
velocity of money is reduced. So out of the $1.00
you spend, the guy you gave it to can spend 80
cents, and the guy he gives the money to can spend
only 64 cents, and that guy can spend only 51
cents, and so on, until one day there is only a
penny left out of that original dollar that has
not been taxed away, and then 20% of that penny
will be paid in taxes, leaving that last guy in
line with, literally, nothing, sort of like how
you give the kid a $20 bill to buy you a couple of
Twinkies, and you never get the change back from
the twenty, only not all at once, but every bit as
real and as irritating.
But after all of
this, you suddenly realize that the money that was
taxed away comes roaring back into the economy as
government spending, making a mockery of the whole
thing, and then there is inflation to consider,
and soon my brain is whirling, whirling, whirling
until I have no idea what anything means anymore.
Mr Mauldin kindly senses my confusion, and
suggests that I "look at the adjusted monetary
base, or plain old cash plus bank reserves held at
the Federal Reserve. That is the only part of the
money supply the Fed has any real direct control
of. And it is not growing that much (less than
2%!), and a lot of the cash goes overseas, never
to come back to the US." He's right! The monetary
base is actually going overseas! Yikes!
But then, to show you how really weird
things are, he next says, "Also note that the
growth in the monetary base has been trending down
until recently." You look, and sure enough, he
includes a graph of the St Louis Adjusted Monetary
Base, whose source is given as the Federal Reserve
Bank of St Louis, and sure enough, it shows that
the monetary base has indeed been going down since
2005.
My eyes open in surprise and mouth
hangs open for the same reason because what makes
this so weird is that I also chart the monetary
base, using the data shown in the Federal Reserve
Data Bank in the Market Laboratory section of
Barron's, and it has been going up steadily since
1997!
An anomaly! I don't like it when
things are this kind of weirdly incongruous, and I
always start to panic, until I realize I own gold,
so I have nothing to worry about.
I
breathe a sigh of relief, and I look nervously
over my shoulder because I know that most people
do not own gold to protect themselves against
inflation, and they will soon become bold enough
to attack me from behind in their desperation.
Watch me and learn about the joys of inflation!
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 2008, The Daily
Reckoning.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
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