Thursday, January 21, 2010

VELOCITY ZERO - Yet Ripples Propagate Through Time…

Velocity Zero
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VELOCITY ZERO -Yet Ripples Propagate Through Time…

Please allow me the discretion to begin this discussion seemingly far removed from the primary topic of Velocity Zero. Not to worry, we will circle back around.

You see, my last surviving grandparent, Marion Temple, passed away this past weekend. She was the quintessential grandmother, the perfect one with the gumdrop jar on the counter in which little hands were welcome. She made it to 90 years of age living independently on her own terms and passing on her own terms too. She was a model American of the 1950s era, and could have played the part of June Cleaver, today’s Martha Stewart, or yesteryear’s model on the black and white television introducing the latest in modern appliances and time saving conveniences.

An interesting note about her is that she worked for 33 years at Chaffee’s department store in Everett, Washington. Chaffee’s was then like Nordstrom’s is today for that area. She retired after all those years and began drawing her defined benefit monthly pension. Not more than six months after retirement, and after dedicating the prime of her adult life to the store, they went bankrupt. With no P.B.G.C. at the time, she never received another penny of her benefit plan, living her later years certainly not at the standard she deserved. And yet she found a way to send money to a grandchild in business and flight school. Splash, a Ripple propagates through time.

Her passing, of course, leads to introspective thinking. Again, please allow me some latitude.

It occurs to me that everything in nature is made up of energy and ALL energy moves in cycles and waves, passing from one state to the next. Modern theories even tie energy to the force of gravity. A person carries with them a “life force” if you will; it is their being, their energy, their soul, or what have you. But no matter what you believe – each person, and their energy, interacts with all the other people and energy, influencing others along the way. That influence ripples through time. My grandmother’s energy and influence will ripple through time for centuries, through me and through her other grandchildren, and great grandchildren.

When Freedom’s Vision has a profound effect on society, her life force will have contributed greatly to its success, and yet she may not have realized the role she played.

The same is true for everyone reading this. You all have roles to play in the shaping of America. Many of you feel that implementing change is beyond your power or is even beyond our collective power. It is not. The change that is coming will be forged by you and the direction in which you cast your ripples through time.

Everything in nature moves in cycles, the markets and economy are no different. Yet we can’t currently model the economy effectively because current beliefs are built upon so many half truths and totally false notions. Also because the data we use to measure the economy is now skewed beyond recognition. Scientific research in the field of economics is nonexistent not because it’s not possible, but because it would provide transparency and hinder the current power structure’s insider advantages. Not taught about economics or money in school? No money for research? Gee, ever wonder who sets those priorities?

This lack of priority, in turn, fosters a lack of understanding of how our money system is backed by debt and controlled by central bankers. This, I believe, has caused the entire world economy to become “DEBT SATURATED.” The current crop of politicians and mouthpieces do not understand the concept of debt saturation. Debt, of course, is leverage that pulls future earnings forward in time. Splash, ripple.

Anyone who has ever Spent Time with the Good Dr. Bartlett knows, things that grow over time compound upon themselves and eventually that growth will lead to an exponential rise and parabolic shaped curve. That is currently happening to our money and to our debt. Below is a classic parabolic shaped curve, that of the Total Current Public Debt which is now more than $12.2 Trillion:

All exponential growth eventually ends with the curve collapsing. That’s just a fact of nature, our money system is no different, and eventually this curve will begin to roll over just as the following chart of Household Credit Market Debt Outstanding is now:

Another classic parabolic shaped curve, household debt came very close to reaching $14 Trillion before rolling, and rolled it has. Most parabolic rises result in collapse down to the base of the beginning of the parabolic move. Will these curves collapse to that extent? Well, what matters for debt is the ability of incomes to support it – not GDP or anything else! What’s happening to people’s income? Stagnant or down. Here’s the same chart showing how dramatic the fall off in Household Credit (Debt) has been over the past couple of years:

More than $1.5 Trillion removed top to today. This is what happens when incomes can no longer support the debt, and this is with interest rates at all time historic lows.

What’s happening to our own government’s income? Crashing, having fallen $400 Billion in the past year alone, and nearly $800 Billion in the past two years:

The velocity of money is simply an expression of how fast money moves through the economy – in other words, how many hands possess it in a given time frame. When debt levels are low, adding debt (new money) works to accelerate economic activity. But when debt levels near the saturation point, then the VELOCITY of money begins to tumble. This is only common sense. When any entity has the maximum amount of debt that their INCOME can support (with legitimate and conventional financing), then adding more debt onto that entity can only result in a future default. That is the definition of Debt Saturation.

Once saturation is achieved, then any entity receiving new money, through whatever means, MUST use that new money to service existing debt. In other words, new money simply circles right back around to the bank to service prior debt – zero velocity. Yet, DEBT is not even a component in most of economic theory’s major calculations, velocity is one! Here is a typical two page paper that presents the classic money quantity equation with velocity formulas taught at many business schools and most economists are familiar with – don’t be frightened, I show these formulas only to demonstrate that major components of REALITY are missing:

Do you see where the quantity of debt is any part of those equations? Well you might be surprised to know that these equations, such as the income equation MV = PY [M(oney supply) V(elocity) = P(rice) Y(eild)], which is an offshoot of the classic monetary exchange equation MV = PQ where;
• M is the total dollars in the nation’s money supply
• V is the number of times per year each dollar is spent
• P is the average price of all the goods and services sold during the year
• Q is the quantity of assets, goods and services sold during the year
…are straight line calculations that do not vary as debt enters into the equation. That’s because debt is not a part of the equation!

Below is the most recent chart of money velocity produced by the St. Louis “Federal” Reserve. These velocity reading have not been this low since the Great Depression:

MZM is currently the most broad money measurement, M2 is the second largest.

Related to velocity, the “Multiplier” measures the banking system’s ability to multiply new money using their fractional reserve ability. To my knowledge, the M1 multiplier has never been lower than it is right now:

For the uninitiated, M1 is: “The sum of currency held outside the vaults of depository institutions, Federal Reserve Banks, and the U.S. Treasury.” It is much narrower than M2.

The “monetary base” is an even more narrow measurement than M1 that measures currency, coins and the banks’ required reserves. It is what most people think of when they think of money, but is, in fact, a very small percentage of the actual overall money supply. To say that the velocity of the monetary base has stalled is an understatement of massive proportions:

Of course attempting to force more debt into a fully saturated system can only result in lower real velocity and also rising unemployment! This is deceptive because the relationship changes as more debt enters the system… there is a phase transition that occurs as the saturation point nears. That transition has lulled the “Keynesian” or neo-classically trained economists into believing that their debt money stimulus ways are successful. And they have generally worked up until now, but the phase transition has already occurred now that all levels of the economy are saturated.

This relationship between debt and employment has not been recognized because of the non-linear relationship. However, again if we apply some common sense, then we will understand that once debt saturation occurs, attempts to force more debt into entities will not produce more employment, it will produce less as the burdens of carrying and servicing prior debts stalls real economic and thus job growth.

Note that we have lost 6 million jobs in the past year alone from the civilian employment rolls, not the “2 million jobs saved” as claimed by our current administration who has taken the art of spin a little too far:

One reason they are able to claim an unemployment rate of only 10% (comparable historical figures are double that) is that people are leaving the working environment in groves causing the civilian participation rate to plunge:

Funny that the shape of this curve is the exact opposite of the debt curves above. This is not a coincidence.

Here are the charts that back the assertion that saturation has been reached. This first one shows the diminishing GDP returns from each dollar of new debt and runs through the end of 2008:

The above chart is based on yearly Z.1 data from the Treasury. The trendline is clearly targeting the year 2015 as the time at which each new dollar of added debt produces ZERO positive impact on GDP (Gross Domestic Product). This relationship is not tracked by the Fed as far as I’m aware, yet it is a critical measurement for an economy whose money is entirely debt based (only exception is coins). Fortunately I have a friend named Christopher Rupe who plots the data quarterly and there is a very unpleasant break of trend that occurred in the 3rd quarter of ’09 – you might even call it a phase transition. Again, this chart is a simple function of GDP growth over debt growth. The Q3 figure is NEGATIVE 15 cents:

That’s right, for each dollar of new debt produced it SUBTRACTED 15 cents from GDP. That is overall economic debt saturation, it has been reached. This is the result of the phase transition in the way the economy now behaves to more debt based stimulus.

While the Fed’s velocity formula produces a still barely positive number, the velocity of new debt is now subzero. By extension, since most money is backed by debt, the actual velocity of money is also for all practical purposes zero. This is no small or minor detail! It is the end, the limit has been reached. This is exactly why our Fed has had to resort to buying up trillions of dollars worth of GSE mortgage debt and has been buying our own debts via “quantitative easing,” otherwise known as money printing or what I prefer to call piecemeal default. However, that method of default does NOT cleanse the debt from the system, and arbitraged wages (competition from overseas) means that servicing more debt becomes impossible.

If that were not enough, there is also a crisis coming in upper-end housing that is going to rock the banks just as hard as subprime did. Of course this is in addition to CRE problems, states who are running out of money and the list goes on and on. Here is the latest version of the option-ARM reset chart, you can see that we are in the valley now:

Think back through your knowledge of history and recall how many currencies have ever reached the point where the base unit of expenditures reached into the Trillions. In just one lifetime, since our money became backed by debt, the units of government expenditures have risen from the thousands, to millions, then billions, and now onto trillions. What currency has ever survived to the next step in the progression, quadrillions?


Zimbabwe was the last to attempt it. They reached the quadrillions, but their monetary system did not survive. There have been no exceptions, and obviously the Dollar will not be the first.

Why have the politicians allowed our money system to get to this point? That is at the heart of why it is incumbent upon us to separate special interest money from politics.

Why should you support Freedom’s Vision?

Because without intervention our country’s current monetary system is rapidly headed into dustbin of history. And I am certainly not the only one who sees massive change ahead. Author Mark Hodgins just published a book titled The Great Reset.

I just finished reading his book and can tell you that he is on the same page. It’s a swift 192 page read that walks you through what’s happened, what is happening, and what is going to happen – The Great Reset! Here’s hoping that Freedom’s Vision will be the way in which The Great Reset does happen! In fact, Mark is a public supporter of Freedom’s Vision and is joining in with many other notable supporters who will all be listed on our new web site. If you’re interested in learning more from Mark’s book, you can pick it up at by following this link to The Great Reset.

Make no mistake, failure to act now means that we quietly sit by and watch the coming historic events unfold. Instead, we can stand up the way that Americans do and ensure that we remain in control of our own destiny. The height of crisis is not a time that we will be thinking clearly about the roots of our problems, it is a time that people act emotionally, the exact opposite of what is needed for a superior outcome. However, with crisis comes opportunity and a historic opportunity is upon us.

“The Chinese use two brush strokes to write the word 'crisis.' One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger - but recognize the opportunity.”
John F. Kennedy (1917 - 1963)
Deleveraging the bogus “paper economy” gives the world an unprecedented one time opportunity to turn the deflationary forces of clearing out the leverage into a counter force and directional change. Our world economy is built on an unsustainable platform of debt and leverage. One way or another, this over-leveraged system is going to be replaced by something else. Those who believe in the march of human freedom have a historic opportunity to guide humankind into a new money system which is sustainable because it is just.

Freedom’s Vision is a program that realistically controls the quantity of money, allowing the monetary needs of the world to be satisfied, while also allowing the prices of goods and services to remain steady overall and over time. Real economic growth is thus enabled, but growth in prices is not. Shocks are absorbed, but then cleansed. In this way, a dynamically stable and enduring system is built and is passed on to future generations.

SPLASH! We must cast our collective ripples through time, creating a tsunami of change!

Love you Grandma, our ripples will meet again…

Somewhere over the Rainbow - Eva Cassidy:

Artwork by AZ Rainman