Economics and Government and Social Issues24 Dec 2012 08:15 pm

Most people have heard many times that the Fed has “injected liquidity into the market” and that we frequently make efforts to increase the “velocity” of money. We also have been barraged by a number of “bubbles” including the housing bubble and the tech bubble to mention but two of the more popular bubbles. So, one of the better images which captures “liquidity”, “velocity” and “bubbles” would be a bubble bath. Let’s take these elements of a bubble bath as a means of understanding our modern economy.

Okay, imagine, if you will, a large tub being filled with water and interacting with bath suds which we will call “stimulus” and “financial instruments” designed to produce increased wealth and financial activity. The water rushing from the faucet is the liquidity being added to the economy. The more we turn the knob up the more intense the velocity of the money being entered into the tub/economy.

Taking this image a step further we can say that interaction of “policies” and financial instruments as well as practices such as “flipping” in the housing industries cause the water to foam and form bubbles. Probably the largest producers of foam is the practice of derivatives and fractional banking.

So, the one ingredient missing in our analogy is debt. Debt is like the plug being removed from the bottom of the tub so that while “liquidity” is being entered into the bath the actual water level is not rising. So, the more debt the quicker the tub drains and the more liquidity with great velocity is needed to keep the tub from completely draining.

Therefore, the real economy of the people, represented by three inches of water in the tub has changed little over the last decade, and if anything, has actually shrunk a little towards the two inch mark. Yet, the foam caused by the interaction of derivatives and financial instruments with all the liquidity being injected (poured) into the market at amazing velocity and volume continues to rise and rise.

While the foam get frothier and frothier the underlying water level does not keep up with the debt draining the water out of the tub. When money borrowed, loaned or printed actually stimulates the economy and generates growth the level of the water rises and not just the foam.

In a healthy economy someone creates a $1.50 of growth in GDP for every dollar borrowed. This would be similar to our economy in the 1950’s. In the 80’s we began to fall behind where it took 5 or 6 dollars of borrowed money to generate one dollar of growth, hence the steady rise in the national debt we incurred during the Reagan years. Well, those day now seem golden in comparison where we probably need to borrow/print somewhere north of $20 to generate a dollar of actual growth.

Derivatives and the QE’s are forms of trying to increase the velocity of money to somehow get past the inertia of the existing mountain of debt. Yet, these “stimulus” packages and endless money printing are only creating more debt (bathtub leaks) and more froth (bubbles) like the bond bubble.

When people look at our current absurd economic situation (and system) they wistfully harken back to a time when money was pegged to a commodity of real value such as the gold standard. Yet, while having a gold standard is a tad more rational, it still ignores the fact that any form of money is arbitrary and a fiction. There is no inherent and stable value to anything, even gold. So, the title of this post is a little deceiving since money can never be or become real. Yet, we surely could make it much more tangible and practical.

The viewpoint that gold has tremendous intrinsic value is quite popular. Also I’ve heard it said many times that gold is a very vital, important and practical substance, and not just alluring and mystical. Yet, if gold were truly valuable and functionally important than how could we afford to house the majority of gold in vaults and buildings? If it were a vital and inherently valuable substance than you think its isolation and removal from functioning society would prove difficult or harmful.

Yet, at the moment I would like to talk about some of the trends regarding luxurious foam production and its ramifications of the average american and the shrinking american middle class. In reality there is a national bathtub, and then each individual and corporation has their own private bathtub.

The money being printed and the great velocity of water of printed money is finding its way into a very small number of bathtubs. These corporations and individuals bath tubs are being inundated with luxurious mountains of foam, and while the foam is frothy, it still can be popped down to quite a considerable amount of water.

The banks, corporations and financial elite not only get all of this water poured into their tubs, but they get low interest rates which have the water drain out of their tubs at a much slower pace. If this wasn’t bad enough for the rest of us, they have the Fed buy and transfer much of their debt into public debt causing the national bathtub to drain all the more quickly while it doesn’t receive the same pouring of water into its tub. The Fed and the government expect the recipients of this free water to create jobs and in this way disperse the water to our individual tubs.

So, while the personal tubs of the fraction of one percent get water and a better plug, the national tub gets almost no water and the leaks and drains become enlarged. The low interest rates make it easy for the wealthy to pay back their loans, and the little guys either can’t get a loan, or get them at much higher interest rates.

The transfer of bad debt from banks, corporations and wealthy individuals to the public makes the national bathtub drain all the more quicker while it isn’t receiving more water from neither the Federal Reserve nor the government. In fact, the government is now saying that we no longer have any rights to the money they took out of our paychecks for programs such as social security, and will gradually turn off that faucet.

Our individual bath tubs are no better than the national bathtub as personal debt rises while wages do not keep up with inflation. Not only are the corporations and wealthy not sharing their windfalls and bailouts through job creation or positive economic activity but are hoarding the money and taking jobs abroad.

In my next post I’ll discuss the ways in which the losing of jobs to China and the third world is a false flag regarding the cause of our economic and employment woes.

Jim Guido

2 Responses to “When Money Gets Real”

  1. on 25 Dec 2012 at 6:55 am louis vuitton wallet

    I like this site very much, Its a real nice place to read and get info . “Things do not change we change.” by Henry David Thoreau.

  2. on 25 Dec 2012 at 7:21 am a carnival of animation

    Hello there, You’ve done an excellent job. I will definitely digg it and personally suggest to my friends. I am confident they’ll be benefited from this site.|

Trackback this Post | Feed on comments to this Post

Leave a Reply