Go, Economy!

[Gooch]

[Anthony]

I read through some of this thread, and I think its important to point out that the value of currency is not simply related to what money is available physically, but also how quickly money is being used.

For example, if a woman gets $100, but stores it under her bed for eternity, the money is as good as gone, and the speed of usage (turnover, whatever you want to call it) is zero.

Just a simple idea that I thought might help those who don't have a strong grasp on econ.

[Bojack]

I read through some of this thread, and I think its important to point out that the value of currency is not simply related to what money is available physically, but also how quickly money is being used.

For example, if a woman gets $100, but stores it under her bed for eternity, the money is as good as gone, and the speed of usage (turnover, whatever you want to call it) is zero.

Just a simple idea that I thought might help those who don't have a strong grasp on econ.

Indeed, all the cash hoarding these days has brought cash flow to a screeching halt stunting the economic recovery big time.

[Gooch]

I read through some of this thread, and I think its important to point out that the value of currency is not simply related to what money is available physically, but also how quickly money is being used.

For example, if a woman gets $100, but stores it under her bed for eternity, the money is as good as gone, and the speed of usage (turnover, whatever you want to call it) is zero.

Just a simple idea that I thought might help those who don't have a strong grasp on econ.

Empirical measures
Money is used in final settlement of a debt and as a ready store of value. Its different functions are associated with different empirical measures of the money supply. Since most modern economic systems are regulated by governments through monetary policy, the supply of money is broken down into types of money based on how much of an effect monetary policy can have on each. Narrow measures include those more directly affected by monetary policy, whereas broader measures are less closely related to monetary-policy actions. Each measure can be classified by placing it along a spectrum between narrow and broad monetary aggregates. The different types of money are typically classified as Ms. The number of Ms usually range from M0 (narrowest) to M3 (broadest) but which Ms are actually used depends on the system. The typical layout for each of the Ms is as follows:

M0: currency (notes and coins) in circulation and in bank vaults, plus reserves which commercial banks hold in their accounts with the central bank (minimum reserves and excess reserves). M0 is usually called the monetary base - the base from which other forms of money (like checking deposits, listed below) are created - and is traditionally the most liquid measure of the money supply.

M1: currency in circulation + checkable deposits (checking deposits, officially called demand deposits, and other deposits that work like checking deposits) + traveler's checks. M1 represents the assets that strictly conform to the definition of money: assets that can be used to pay for a good or service or to repay debt. Although checks linked to checking deposits are gradually becoming less popular, debit cards linked to these deposits are becoming more popular. Like checks, debit cards, as a means to complete a transaction through their links to checkable deposits, can also be considered as a form of money.

M2: M1 + savings deposits, time deposits less than $100,000 and money market deposit accounts for individuals. M2 represents money and "close substitutes" for money. M2 is a broader classification of money than M1. Economists use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions. M2 is a key economic indicator used to forecast inflation.

M3: M2 + large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets. M3 is no longer published or revealed to the public by the US central bank. However it is estimated by a web site called Shadow Government Statistics.

[Error]

[Anthony]

Hmm yes indeed that is the term. I didn't want to go overboard in my example, but thats a great guide there for a basic understanding of the concept, which is really critical to understanding how modern economics works.

[Gooch]

[D_N_G]

watched un-broke when it was on TV last week. the whole show was pretty funny. my woman was laughing her ass off at that cribs segment.
where's my hose at?

overall it seemed like a good way to slap the face of the dumbed down masses with some basic financial sense

[Doc Holliday]

AMERICANS GROW UP?
By Tim Paradis, AP Business Writer
On Monday August 17, 2009, 11:57 am EDT

NEW YORK (AP) -- Investors' rising fears about consumer spending are turning stocks into a risky investment again.

Stocks plunged and Treasury prices soared Monday as investors around the world feared that consumers are too anxious to lift the economy into recovery. The losses on stock exchanges extended the heavy selling that began Friday with a disappointing reading on consumer confidence. And bond investors, once again searching for a safe investment, bought heavily into Treasurys.

The Dow Jones industrials fell 165 points, while overseas, the Shanghai stock market tumbled almost 6 percent and the major indexes in Europe fell more than 1.5 percent.

Stocks fell across all industries as investors worried that consumers' reluctance to spend will hurt corporate earnings. Many companies second-quarter results were boosted by cost-cutting, not higher sales, and the fear is that without a pickup in sales, earnings will fall.

While other parts of the economy, including housing and manufacturing, are showing signs of progress, the country cannot have a strong recovery unless consumers are spending more freely. Their spending accounts for more than two-thirds of U.S. economic activity.

Traders got more bad news about the consumer Monday when home improvement retailer Lowe's Cos. said poor weather and cautious consumer spending caused sales to fall 19 percent in the second quarter. The company's results missed analysts' forecasts.

The market's reaction to news of a reluctant consumer had many questioning whether a five-month rally was way too optimistic. At its recent high the S&P 500 index had climbed almost 50 percent from a 12-year low in early March.

Joe Saluzzi, co-head of equity trading at Themis Trading LLC, said the market had risen too far and that the selling was warranted.

"The economics obviously don't support where we've been," he said.

Other analysts were more upbeat, saying some retreat was to be expected.

"We have come an awful long way. To not expect a sell-off after the degree of increase -- I think you're dreaming," said John Merrill, chief investment officer of Tanglewood Wealth Management in Houston.

In midday trading, the Dow fell 163.16, or 1.8 percent, to 9,253.10. The broader Standard & Poor's 500 index fell 21.22, or 2.1 percent, to 982.87, while Nasdaq composite index fell 48.13, or 2.4 percent, to 1,937.39.

About 2,700 stocks fell while only 280 rose on the New York Stock Exchange, where volume came to 471.9 million shares compared with 435.2 million shares traded Friday.

The Chicago Board Options Exchange's Volatility Index, also known as the market's fear index, surged 13.2 percent Monday. The VIX rose 3.22 to 27.49. It is down 31 percent in 2009 and its historical average is 18 to 20. It hit a record 89.5 in October at the height of the financial crisis.

Meanwhile, the yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.49 percent from 3.57 percent late Friday.

Overseas, Japan's Nikkei stock average fell 3.1 percent as investors weren't satisfied by news that the country had emerged from recession in the second quarter. China's main market fell 5.8 percent as investors worried that stocks had risen too quickly and the government would tighten bank lending policies.

In afternoon trading, Britain's FTSE 100 fell 1.8 percent, Germany's DAX index fell 1.9 percent, and France's CAC-40 fell 2.2 percent.

Stocks fell Friday following a sharp drop in the Reuters/University of Michigan consumer sentiment index, which followed a surprisingly weak July retail sales report from the Commerce Department.

The mixed economic readings of the past several months aren't surprising. A turnaround produces mixed messages because not all parts of the economy recover at the same speed and some indicators start to show life before others.

Analysts say investors who had expected the economy would rocket higher got ahead of themselves by sending stocks up so quickly. Many economists have predicted a gradual recovery in the economy, in part because unemployment rates could remain high.

Investors are worried about consumers and unemployment because that could make it harder for the economy to return to growth. In downturns over the past 60 years, the S&P 500 index has hit bottom on average four months before a recession ended and about nine months before unemployment reached its peak.

Oil prices also extended their losses, reflecting the growing concerns about a weak economy that will curtail demand for energy. A barrel of crude oil fell $1.74 to $65.77 a barrel on the New York Mercantile Exchange.

Among companies reporting results Monday, Lowe's shares fell $1.99, or 8.7 percent, to $20.84.

The dollar rose against other major currencies, while gold prices fell.

source

[Gooch]

As we sit here nearing the end of yet another year, one cannot help but look back at where we were at the end of last year and as recent as Q1 2009. S&P 500 had fallen to 666, retirement accounts had been decimated, the global banking system on life support, world economies in a state of panic, the end seemed near.

What happened?

Quantitative easing by global central banks, i.e. printing of money, restored liquidity back into the markets. Implicit and explicit govenment guarantees made on toxic assets (bad loans, bad securitized products) in effect set a floor on the plunging asset values. Government sponsored programs flushed cash into banks in the form of electronic debits keep banks on life support. The issuance of an obsence amount of additional national debt in the form of U.S. Treasuries are funding our way out of this recession. Is this artificial stimulus? Yes. But with continuing rising employment, which means more people out of work, results in ever accelerating defaults on outstanding loans, futher eroding the capital of banks, must be offset by additional capital reserves. Banks still aren't lending out of fear. Can they outearn the pace of the write-offs to perserve their fragile capital levels or even increase them?

We've seen the S&P rally back as high as 1120, we've seen the Dow reach above the 10000 level, but we've also seen the plummeting of the value of the U.S. Dollar, which believe it or not is beneficial to our economy by making our exports more friendly to foreign importers, boosting the earnings of our own domestic corporations. We've also seen a back-and-forth between deflationary and inflationary fears, but still no added velocity to all the money that had been printed.

With all the excess cash printed and a limited pool or assets remaining (due to the destruction of previously existing asset classes or at least the abandonment of many assets) you have now a situation of too much cash, too few assets. Fund managers sitting on existing assets under management have to chase yield in order to receive their bonus compensation. Banks and insurance companies who sell liabilities much seek yield to ensure they can pay off the liabilities associated with the products they sell are forced back into risk assets. We've seen a re-inflation of those deflated asset values, but it has all been due to artificial stimulus that we as taxpayers much pay for.

But all this artificial stimulus can only end one way. We are witnessing the asset bubbles in their infant stages. It is not wise to short the market with so much cash still sitting on the sidelines waiting to be deployed, but it is a fragile situation that is akin to dancing on a broken dance floor. We've seen gold continue to rally despite even days when the dollar rallies, making one wonder if there is an implicit move back to the gold standard before our eyes, or at the least as a hedge against the fear of fiat currencies failing.

We've seen banks get bailed out by governments across the globe to prevent their bankruptcy. We've seen too big to fail banks consolidate and get even bigger. Who goes bankrupt next? The ones who bailed out the banks: the governments.

These are all the worst case scenarios that hopefully will not come to fruition. We appear to have avoided another Great Depression. But is this sustainable? Have we just compounded the economic crisis only to have to deal with it again down the line? 10% unemployment may be the new normal. Reduced leverage and reduced returns. The U.S. may have reached its peak. Global fears of a declining dollar and our incredibly increasing debt lead to lost confidence in the U.S. Is this just a bear market rally or more? Are we in line for a double-dip recession or will we somehow miraculously transition from artificial stimulus to sustainable economic growth not reliant upon government backing and the excessive printing of money?

Interesting times.