Friday, February 13, 2009

Brent's guest post on the economy

I can't listen to Glen Beck or Sean Hannity without being horribly annoyed because they always distort the truth to further their neocon views which lead to government expansion.
In this video, Glen Beck doesn't understand the very graph he is trying to explain. He said that it was "the amount of money that we print and have in the system at any given time", however this isn't even remotely the case. If this were true then around 2006 Bill Gates personally owned nearly 10% of the currency in the system.
The "amount of money in the system" which causes inflation/deflation is the amount of printed (or physical) money multiplied by the amount of money created through the fractional reserve banking system multiplied by the rate at which it circulates. Right now we are hitting a severely deflationary market despite the fact that the incompetent Fed is trying to print their way out of a global depression. The reason for this deflationary period is three-fold.
1. Because of the housing/lending financial bubbles popping, which is leading to bank failures and the derivatives markets crashing, large quantities of money are being lost from the system (the fractional reserves portion of our currency). No physical money has been or will be lost in this process.
2. As a result of the recessionary/deflationary economic times people are attempting to hold on to more of their money slowing down the circulation and therefore deflating the currency.
3. When deflation kicks in businesses can't afford to expand and therefore make more cuts again pushing us further into deflation. As confidence drops, money is pulled out of the stock markets which is a combination of created currency and circulation gone crazy. This is leading to an all around nose dive of the total amount of money we have in the system.
So despite the fact that the Federal Reserve is printing up large sums of physical currency, they haven't even come close to printing at the rate that we are losing it. As that graph of printed money is shooting up like a weed, the amount of money in the system is dropping like a rock. Until the day when those numbers pass each other, we will see deflation rocking the United States so bad that we will be begging for the affects of inflation to kick in. Anyone in debt will basically be stretched in a financial torture rack. Anyone with a stable job and even the slightest ability to stay out of debt will be able to weather the storm rather favorably. During this time, cash will be king.
We will learn to live and cope with the deflationary market as did past generations during the Great Depression. Then one day inflation will sweep through our system like Australian wildfire incinerating the deflationary demon and completely devouring all wealth from anyone but the wise and prudent. On that day only hard tangibles will have value and the dollar will be used for toilet paper.


  1. His chart is of M0, but you're talking about M1 or M2.

    So you're both right, in that M0 which he's talking about has never been larger or printed more freely than it is now, and you're right in that M1/2 have taken a huge hit with all the defaulted loans and evaporated, unspent money.

    However, it seems like the Fed is trying to replace the lost M1 with pure M0, which, when/if people and companies start taking loans again, and particularly with The Fed's insanely low reserve requirements, we'll be on the Express Train to Inflation City .