The Disappearing-Money Paradox

For those of you considering the credit crunch storm, headwinds, uncharted waters, typhoon, CDO hurricane over, I offer the following two thoughts.

Paraphrased from James Grant.

It is time to stop worrying about what the risk free rate of return is and start worrying about the risk associated with free returns.

Those of you familiar with a 1bp T-bill will understand this.

For others who think of the financial world as the Dow or equities, please have a look at the current A2P2 spread. These are dark days indeed.

The money is disappearing faster than we can bail it back into the system. No money is almost as bad as poorly distributed money. I assume most of you are finding your inner bankishness a la Goldman and filling out your TARP forms. Trickle down economics 2.0 in action.

Image source: the entertaining XKCD

Comments

[Jason Rines...:]

In other historic times of depressions, the money supply decreased to 25%-30% over a three to four year period. The Fed vastly increasing the money supply is not reaching the over-all market as intended (to your TARP) reference. Government not introducing serious fiscal stimilus in 2008 didn't help the economic outlook nor the sentiment that this government either wasn't aware of the conditions on the ground or was obtuse. With these problems of the stimulus mismanagement being properly addressed, the depression should be short and I do believe our government and Central banks will coordinate to keep us from outright collapse. All in all, we will be in an era of frugality for a long time as debt is paid down. The good news is that this prior era of moronic thinking and shitty attitudes based on debt illusion of wealth will change and for that, it is almost worth paying the price to help restore our nation.

2008 Dec 09 12:21 PM

[Adam O.:]

Ha, the "Discount rate history" chart is just priceless. Relieved the Fed decided to jump in and stabilize the situation.

2008 Dec 09 02:58 PM

[Crashnburn:]

Another stolen quote:

"The return ON capital is not nearly so important as the return OF capital!"

2008 Dec 09 03:14 PM

[nmelendez:]

The money is dissappearing because it's ELECTRONIC(real only in bank format). If you consider the total real investments on a 1 to 1 scale it was about 500 billion. Hedge it 40 to 1 average, what do you get? 20 TRILLION that needs to be produced. jejeje. Anyone spare a dime?

2008 Dec 09 09:22 PM

[Asbytec:]

I agree, Thinkbig.

To think we're wealthy because you can borrow money from someone in the form of a mortgage or huge credit card limits is a bit crazy. But, it's they way money is made...literally made out of thin air. Real wealth is not debt.

Now, the high multiples on huge derivative sums became an enormous amount of money...money (credit) became available to loan out. With the money multiplier, the available money grew way out of control.

This money is disappearing faster than the Fed (and other central banks) can replace it. So, the Fed will inflate until prices stabilize or begin to reverse. Then, we hope, they will tighten a bit in a coordinated, global manner. I suspect this is part of the big plan. And it should entail getting control over our money supply and prevent the dollar (all currencies) from plummeting into obscurity.

Now that hedge funds are paying out, that money (credit) is no longer available. In fact, it puts banks in a bind. It's very similar to a run on the bank. They have no money left. Couple this with the strain the CDS are placing on banks, and we have a real problem. A money supply problem.

I certainly hope Obama, the Fed, and the treasury outlaw insurance functions in the banking system (CDS), regulates the amount of money created from derivatives, and get's control over the money supply.

It'll be okay to keep the banking system on life support until debt and money winds down...the bubble finally runs out of air...then revive it. On the other end of this thing, we need tighter control over money available...the money supply cannot be infinite.

If the dollar is still worth something by then, well, those bonds should be good as gold...and if China believes and understands this, maybe they'll continue funding our debt for a while longer. I mean, after all, they owe us a huge sum in trade deficits...

2008 Dec 10 11:02 AM