Global Economy Bursting?

[Randolph Kinney]

Jobs report: 54,000 jobs added, but lower end. Unemployment up to 9.1%.

Markets are headed down on the news.

Looks like June will fit the normal pattern for June.

 

[Randolph Kinney]

Moody’s Warns of Downgrade for U.S. Credit

http://www.nytimes.com/2011/06/03/us/politics/03congress.html?_r=1&nl=todaysheadlines&emc=tha2

The Moody’s report was unexpected. In April, Standard & Poor’s lowered its outlook for the AAA rating on United States debt — but not the rating itself — to negative from stable.

 

[Big ole Boy]

... I'm sure Randolph is probably right about GDP and the size of government .... but I caught the tail end of a conversation this morning ....... on the radio ...

..... that 64% of every dollar spent in the US is in someway connected to a government subsidy .......

.... Randolph, or anybody, how can we increase the velocity of money ?

.... is there any way to ot it?

 

[Randolph Kinney]

... I'm sure Randolph is probably right about GDP and the size of government .... but I caught the tail end of a conversation this morning ....... on the radio ...

..... that 64% of every dollar spent in the US is in someway connected to a government subsidy .......

.... Randolph, or anybody, how can we increase the velocity of money ?

.... is there any way to ot it?

While the relationship between money supply, money demand, the price level, and the value of money presented above is accurate, it is a bit simplistic. In the real world economy, these factors are not connected as neatly as the quantity theory of money and the basic money market diagram present. Rather, a number of variables mediate the effects of changes in the money supply and money demand on the value of money and the price level.

The most important variable that mediates the effects of changes in the money supply is the velocity of money. Imagine that you purchase a hamburger. The waiter then takes the money that you spent and uses it to pay for his dry cleaning. The dry cleaner then takes that money and pays to have his car washed. This process continues until the bill is eventually taken out of circulation. In many cases, bills are not removed from circulation until many decades of service. In the end, a single bill will have facilitated many times its face value in purchases.

Velocity of money is defined simply as the rate at which money changes hands. If velocity is high, money is changing hands quickly, and a relatively small money supply can fund a relatively large amount of purchases. On the other hand, if velocity is low, then money is changing hands slowly, and it takes a much larger money supply to fund the same number of purchases.

As you might expect, the velocity of money is not constant. Instead, velocity changes as consumers' preferences change. It also changes as the value of money and the price level change. If the value of money is low, then the price level is high, and a larger number of bills must be used to fund purchases. Given a constant money supply, the velocity of money must increase to fund all of these purchases. Similarly, when the money supply shifts due to Fed policy, velocity can change. This change makes the value of money and the price level remain constant.

The relationship between velocity, the money supply, the price level, and output is represented by the equation M * V = P * Q where M is the money supply, V is the velocity, P is the price level, and Q is the quantity of output. P * Q, the price level multiplied by the quantity of output, gives the nominal GDP. This equation can thus be rearranged as V = (nominal GDP) / M. Conceptually, this equation means that for a given level of nominal GDP, a smaller money supply will result in money needing to change hands more quickly to facilitate the total purchases, which causes increased velocity.

The equation for the velocity of money, while useful in its original form, can be converted to a percentage change formula for easier calculations. In this case, the equation becomes (percent change in the money supply) + (percent change in velocity) = (percent change in the price level) + (percent change in output). The percentage change formula aids calculations that involve this equation by ensuring that all variables are in common units.

The velocity equation can be used to find the effects that changes in velocity, price level, or money supply have on each other. When making these calculations, remember that in the short run, output (Q), is fixed, as time is required for the quantity of output to change.

What is the effect of a 3% increase in the money supply on the price level, given that output and velocity remain relatively constant? The equation used to solve this problem is (percent change in the money supply) + (percent change in velocity) = (percent change in the price level) + (percent change in output). Substituting in the values from the problem we get 3% + 0% = x% + 0%. In this case, a 3% increase in the money supple results in a 3% increase in the price level. Remember that a 3% increase in the price level means that inflation was 3%.

In the long run, the equation for velocity becomes even more useful. In fact, the equation shows that increases in the money supply by the Fed tend to cause increases in the price level and therefore inflation, even though the effects of the Fed's policy is slightly dampened by changes in velocity. This results a number of factors. First, in the long run, velocity, V, is relatively constant because people's spending habits are not quick to change. Similarly, the quantity of output, Q, is not affected by the actions of the Fed since it is based on the amount of production, not the value of the stuff produced. This means that the percent change in the money supply equals the percent change in the price level since the percent change in velocity and percent change in output are both equal to zero. Thus, we see how an increase in the money supply by the Fed causes inflation.

The way to increase the money velocity is to increase GDP for a fix quantity of money as stated by the formula V = (nominal GDP) / M.

GDP growth has been engineer over the past years by increasing debt through lending by fractional reserve banking. That is to say, for example, $1 of deposit typically can generate $10 of debt through lending or $10 of new spending. Banks are required to keep only a fraction of deposits for reserves and the rest is lent out. However, the drag on GDP is that debt has to be serviced (payments). That net factor (10 - debt service) goes to GDP.

As debt grows and or payments on debt rise, the net factor falls and so does money velocity. The other problem we have is that the banks are not lending so the money velocity drops for that reason.

 

[Austin]

Something else affecting the velocity of money may be generational. I was born in 1945 and on the vanguard of the baby boom generation. I used to worry about how I could maintain my life style if I retired. Then generational things started to happen in my early 60's. Both the wife and I started eating about 1/3rd of what we used to eat. Just can't eat it anymore. Not only that but I developed an old urge to grow my own garden and be self sufficient. It gets worse with age. Three weeks ago a friend who owns a condo at the beach invited the wife and I for a few days. I cashed a $400 check and gave half to the wife for trip spending money. That was three weeks ago and out of my $200 I still have $60 in my wallet. I don't need anything, I don't want anything, I don't want to go anywhere and am perfectly happy working with my hobbies and around the farm all of which is paid for. I fill the car up with gas about every 2 or 3 weeks. I even enjoy not spending money. I even cut my own hair to save $10. It is the old age mindset, I ain't spending money I don't have to because I might need it some day. If this is typical of all baby boomers you can kiss the velocity of money goodby because our generational velocity is down to a crawl. Less is better than more, slower is better than faster...... It was the high velocity of this generation that inflated this bubble and the slow velocity in old age will deflate it. Get used to it, it is the new economic order.

 

[Workbox]

OMG!! what a freaken day!!!, I took some profits when my stock hit resistance. I got in, then out and then in again, then out before the close and made some little mad money. Not rich but it was some cheese.

The plunger team is really trying to keep the SPX above 1295. If it goes lower we will get a correction. We are anticipating that they are going to try to drive the SPX up to 1360 area, but have to level out in the 1300 area first. Once it gets there, we anticipate a 20% or more correction. Right now is not the time.

Trying to get get there will be choppy. But you can make some money both in the long and the short. If they can shore it up to the 1360 area which might be around the fall, get ready for the big correction.

I lost my voice today due to screaming at the computer......Beer time......Blessings to all.

 

[Terrel L. Shields]

I don't work the stock market like some of you...I ain't that bright. But I am waiting on a pull back to buy a little more oily stocks....again, I stay away from the ones CNBC or Bloomberg talk about.. I like the anonomous companies...and right now my monthly checks on royalty are nigh double that of 2 years ago.

 

[Austin]

My dad once told me that playing the stock market is like making love to your next door neighbor's wife. Just when you think you are getting good at it the husband comes homes early one day and shoots you in the act. The moral of the story is playing that game will get you in trouble sooner or later but it will get you. It is kind of like saying: "I snookered the MAFIA in a business deal."

 

[Couch Potato]

My dad once told me that playing the stock market is like making love to your next door neighbor's wife. Just when you think you are getting good at it the husband comes homes early one day and shoots you in the act. The moral of the story is playing that game will get you in trouble sooner or later but it will get you. It is kind of like saying: "I snookered the MAFIA in a business deal."

That certainly expresses your thoughts very well.

Jobs report: 54,000 jobs added, but lower end. Unemployment up to 9.1%.

I find the rise in unemployment to be a positive indicator. It occurred because people who had given up on finding a job started looking again. That means they have at least enough hope to turn of the TV and try. Optimism is always a good sign. Maybe they will even find a job and help the economy. :laugh:

 

[Randolph Kinney]