Replaying 1929?
From the eekly Update of: May 22, 2001
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Replaying 1929? From the eekly Update of: May 22, 2001 |
Implication of the Mazurok-Ure Correlation: Lowering Interest Accelerates Declines
Printing Money: Weimar America?
Is it time to start thinking about gold? Thinking about getting highly levered into real estate, and other hard assets? Maybe so. For a very long time, as this site has been documenting the replay of 1929, obvious in the Nasdaq, but pretty well hidden in the Dow, I've been advising you that the Fed really seems to think the outcome will be different this time, than things were the last time we went through one of this periodic major economic depressions. I've suggested to you in past columns that the Fed is trying to inflate, just fast enough, to avoid a hyper-inflation of Weimar Germanic proportions, while at the same time, manipulating things so that no one will seem to notice.
We've come to the point where we have to start making some value judgements about what will happen down the road and there are two major signposts that most of the economic prognosticators seem bent on ignoring. And the signs are (he said, tearing open the envelope)?
First is that the Fed's move this week is what, the fifth rate reduction in a row? That in it self might not be so worrisome, except that when the central bank of Japan was busy cutting rates at the end of the 1989 bubble in that country, they managed to go all the way to zero without doing anything other than making the use of money "free". When the Fed cut didn't do much of anything, except really create some yawns, the Fed opened the purse and purchased about $11-billion in repos, a move that John Crudele of the NY Post accurately notes just spurs the hell out of markets because it puts ready cash in the hands of bankers, who are ready to spend - as long as it is someone else's money.
That there have been five rate cuts and wild conning and manipulations of the money supply should give you cause for concern. Maybe it's a precursor to Alan actually retiring. Now would, after all, be a fine time to "exit, stage left". I mean, if you were the Chairman, wouldn't you want to exit about now with the Dow close to a new high? Dman straight. And that high Dow which you could say is "firmly headed for recovery and new highs to come" would be the perfect cover for the Nasdaq, (measured by the IXIC) which has tanked from the mid-5,000's down to 2198 last Friday. Again, because few people really look at the "big picture" which presumably you get here by considering the Aggregate Index approach in the weekly charts below, most of the so-called "investors" in this market will be totally taken by surprise.
Money Creation: Out of Control
But, there's a much more sinister thing happening in the background, that is out of the view of most people. And, it is? When you think about it, the problem the Fed has is that money creation is no longer under their control. Yeah, they can manipulate things in how they handle the money supply, but if you look at the ratio of M1 to M3 - it shows that M3 is being pumped up at an annual rate of around 10%. That M-3 means debt has begun to feed upon itself and the role of M-1 is quickly declining. To underscore this point, click over to the Fed's own pages on money supply:
Let me give you a simple ratio to look at. It's a simple way to see how much control the Fed has (with M-1) compared to the amount of real "fiat money chasing goods" which is either (depending on your tastes in such things) M-3 or MZM. For the purposes of this thought exercise, let's use M-3 because the Fed provides the numbers.
So on the link above, look at the ratios from May of 1999:
MONEY STOCK AND DEBT MEASURES Billions of dollars
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------------- Date M11 M22 M33 Debt4
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------------- 1999-May 1100.9 4494.3 6190.0 16764.5
The long and the short of it is that "money" is created whenever you issue "debt". Let's do some ratios and see what we get:
In 1999:
Debt was 15.23 times the M-1 (narrowest masure of money supply) M-3 (a much broader measure of the money supply was 5.62 times M-1.
Now, let's fast-forward to the latest numbers from the Fed site and see what's happening to the ratios more recently:
2001-Jan. 1101.3 4994.3 7196.3 18364.8 Feb. 1101.6 5039.5 7262.1 18462.5 Mar. 1111.5 5100.7 7330.1 18573.4 p (That little 'p' after the debt measure preliminary, but it's probably close enough for classroom use.)
In March of 2001
Debt was up to 16.71 times the M-1 (again, the narrowest masure of money supply) M-3 (a much broader measure of the money supply was 6.595 times M-1.
These ratios maybe don't sound really scary until you "flip" things over, and look at the percentages. In 1999, M-1 was 17.78% of M-3. More recently, M-1 was down to 15.16% of M-3. We can generalize that M-1 (the narrow measure) has contracted (17.78%-15.16%=) 2.62% over the past 2-years.
The same sort of simple math also say that in May 1999, M-1 was 6.57% of debt and more recently, that ratio has dropped to 5.98% of debt. What does that mean?
I'm not going to tell you that I'm a whiz-bang economist, because in real life, I'm a technical college vice president of admissions (sales) and before that, a high tech sales manager for communications equipment and battery instrumentation, who also spent about 13-years as a journalist. So so despite the MBA, I don't have "standing" to make a lot of pronouncements. But, it doesn't take a highly refined "philosphy of inquiry" to look back a few years and wonder, "Gee, what were things like in the 1970's or 1960's?
To get the answer, the Fed's web site has historical data that you can look up yourself at:
To give you a couple of examples, let's look at 1959.
1959-Jan. 138.9 286.6 288.8 643.7
Debt was 4.63 times M-1, or looking at it the other way, M-1 was 21.58% of debt.
If we fast forward to 1969:
1969-Jan. 198.7 569.3 607.9 1245.3
Debt was 6.267 times M-1, or looking the other way, M-1 was 15.95% of debt.
By 1979, we had gone to
1979-Jan. 358.2 1371.2 1656.4 3233.5
Debt was 9.027 times debt, or the other way around, M-1 was down to 11.07% of debt.
In 1989, the trend continued with:
1989-Jan. 784.7 2997.0 3934.7 9518.5
Debt was up to 12.1 times M-1, or the other way, M-1 was down to 8.24% of debt.
By January of 1999, we were at:
1999-Jan. 1097.5 4405.6 6055.4 16355.4
Where Debt is 14.9 times M-1, or M-1 was 6.7% of debt.
What does this look like on a graph, you ask, know that playing the ratio our will show trends easier than trying to do derive the trend in our heads? Well, check it out:
It becomes clear, when you look at these numbers, that at some point, the portion of M-1 as a percentage of debt, will drop to something near zero. It's clear how we got here: The fractional banking system lets you put a dollar in one bank, which then lend 0.95 cents and when the reserve requirements are lowered, the single dollar of "real money" multiplies to hundreds. Crank in derivatives, and derivatives or derivatives, and you can see how the simple act of borrowing money has cascaded into the Debtberg of today and how that is now in the process of rolling over. It happens when the narrowest measure of money is literally swamped by the "papering over" of our economic problems. It's all fine - until the debtberg gets to such a point in its non-linear portion of the curve (where we are now erntering) that no matter how much the rates are cut, the debtberg is non-linear and we can never print enough or lower enough to ease our way out of the problem. Ego, my advise to Alan Greenspan: Time to retire - and quickly - before everyone figures it out! Come out to SF and let's go sailing - spend a little time traveling for fun - not work.
Let's do a little thought experiment and see what this declining role of M-1 means. First, it means that the US dollar has been effectively replaced by something other than a simple medium of exchange (fiat money). It means that instead of relying on money, we are relying on debt and a promise of payment in the future. Taken to its extreme, there's no reason for money any longer: The Debtberg is that big.
Given that payment in money is has changed in nature, from a storehouse of value, to something that's little more than paying down of personal debts, then you can see that from a policy standpoint, government can keep people all working in something like modern-day indentured servitude by taxing income - which has the same impact of...how do I say this...regulating how fast you can buy down your debt. Of course, if you pay down your debt too fast, you won't be in debt enough, and the whole game of Debt (instead of savings) must be played by everyone, right?
And it means what?
Next time you get a paycheck, I want you to stop looking at it as a chance to hang on to something for future use. Forget the "storehouse of value" crap in economic textbooks. The new game is this: Your paycheck only pays down existing debts that you have - in other words, you are working not for savings, but for debt forgiveness.
So if there's one thing that has really changed about the modern situation, compared with the 1930's event, it is that people recovered because they saved in the past. But, this time around, people have been hoaxed and cajoled into a huge mountain of debt. So this time around, we are working our way out of a debtors prison instead of just paying off a few misinvestments.
When I do things like this, it worries me. So, what do I do about it? Stare at the charts that depict how we are replaying the 1929-1937 period, and wonder why no one else seems to get it.
Readers? RIGHT!
Letter of the week:
Has it ever occurred to you that there are just too many people running around saying that we're in repeat mode--circa 1929-30 for it to be ANYTHING LIKE 1929-30? We are living in the age of the " pseudo-seer" whose tea leaves has now become all of past history. Who are we to blame for this I wonder.--Hegel and all those other great philospher idealists perhaps, who thought all things into a godless " sum " and believed that God was, finally for human-kind, simply...FATE
It is, perhaps, our modern day obsession with " final ' answers which compels us to always look back for the EASY answer which will provide a tidy sum and neat explanation for all that go's on around us in our angst ridden world. And how ironic it is that that the source of this angst and the derivation of our neatly packaged and tidy answers have their origins in the very same source--THE FEAR OF CREATING A NEW WORLD, AND THE EQUAL FEAR OF LEAVING THE OLD ONE BEHIND
Yes, it has occurred to me. But, I've rejected it because everytime there has been a major shift in the supply/demand equilibrium, there has been massive econoic displacement. I don't care if the shift is textile automation, the railroad, the car, or more recently, the net. The reason for focussing on the 1929 event is, in my view, a chance to see how a blow down of an economy varies, when many of the controls that were put in place the last time around have been subverted through dishonesty in government. Hold up those IOU's in the Social Security Trust accounts, for examples, please. We know that debt accumulates, and at some point expands to the point where it blows up. There is, in the final analysis, a limit again which computer horsepower can not push. We can become marginally more efficient, but in the end, as Ehor Mazurok and I have been saying, efficiencies can only buy you just so much breathing room once you're in the non-linear portion of the curve. Supply/demand is linear, while accumulated debt compounds and at some point goes non-linear.
Yes, there are people who try to escape to the a simple answer - in the past, and in doing so, fail to see clearly into the future. But, it's also true that those who fail to loearn from the past are doomed to repeat at least some aspects of it. Whether those aspects are an increase in tatoo's lilke the late 1920's, or whether it's desperate lowering of rates, as in the 1930's and more recently in Japan, matters little. We can look forward as well as behind, and thus have a better sense of direction. My sense is that the "huge run up" in the markets will amount to perhaps a 50% retracement..abnd maybe even a 66% retracement from the Aggregate high. But with the Middle East, Taiwan, India and North Korea all potential flash points, and with Russia merely awaiting the right new tyrant along the lines of a Hitler, it seems likely that the economic "recovery" will soon give way to a new down wave.
When it does, remember where you've been reading about it for the past 4 years...
Write when you get rich...
All contents (c) 1998-2001 by George A. Ure, MBA, except authors as linked or noted