Saturday, August 13, 2011

The Who

Damn I love that band.  I was introduced to Quadrophenia 25 years ago and I still listen to it regularly.  The London riots made me pull it out again.  Although the source of the discontent in Brighton in 1964 – 65, newscast on the album, was painted as a clash between “Rival gangs of Mods and Rockers” it was really no different than the riots today.  Both are the result of discontent amongst youth who feel their future is limited.  So in more than four decades, the youth are still in discontent.  Nothing has changed.

Will America to make the same mistakes?  There is no denying America is in some kind of decline.  I am not saying this will last I am only saying it is where we are right now.  England has been in a decline since when, 1900?  Some say WWII was the passing of the mantel from England to USA but by then they were bankrupt and relying on US credit to keep them afloat.  Japan had a great run as one of the top economies in the world but they fell prey to an asset bubble that burst in 1989 and have experienced a flat economy since.

The question we face, must America follow the path of former powers in decline or can we rebound and provide a climate where fantasies become reality again?  Is it possible to enjoy prosperity in times of slow growth that inevitably follow expansion?  A healthy economy requires too things, enough money in the system to go around and the money to go around fast enough that it is available for people to use.  So the fed is trying to save our economy by printing gobs of money but any economist will tell you, increasing the amount of money in the economy creates inflation. Inflation is basically too much money chasing too few goods making prices rise.  Think of it like supply and demand for money itself, if there is a bunch of money around, supply is high; price is low, so it takes more of money to trade for a pig.

Our problem is the second factor that impacts economic growth monetary velocity.  Monetary velocity is the rate at which people spend their money.  The faster money changes hands the more people get to use the money to buy something.  If a dollar is spent 6 times a day it’s like there are 6 dollars in circulation but if the first person puts it in a bank and bank does not lend it out, whoa, the buck stops there.  Spending money faster effectively means reducing personal savings rates.

Given how much money the fed is pumping into the system why aren’t we seeing inflation?  Where is all the money going?  Simple, you may remember personal savings was at an all-time low just a couple of years ago but now savings has returned to levels of the early 80s?  People are sticking their money in the bank.  Unfortunately the banks are not lending it out and this slows the velocity of money WAY down.  It is proving impossible to print us out of this mess because instead of spending that dollar 6 times it’s only getting spent 3 so the feds would have to double the amount of money in the system.

As a result, too little money is chasing too many goods fueling disinflation.  Disinflation is the opposite of inflation low supply of money = high price.  This means people would rather keep their money than buy the pig as a result prices drop to get people to part with their hoard.

You say wait, I am certain my bill at the grocery store went up last month.  Yes because it takes time for consumers to change their buying habits, particularly for necessities like food.  Once those behaviors change we are going to experience disinflation.  That might actually be a good thing for the dollar this time.  I wonder.  It will definitely be bad for business.

Do your part, charge up your credit cards againJ  Maybe then our kids will have a future and not loot the local best buy of flat screens and burn down my Chipotle.

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