Monthly Archives: July 2013

Global Warming Update

We just came across the data compiled by Dr. Roy Spencer in a June 6, 2013 article titled STILL Epic Fail: 73 Climate Models vs. Measurements, Running 5-Year Means. He plots predictions from 73 climate models showing their mean prediction. He also plots 6 data set s on observations made by satellite and balloons. The result is shown in Figure 1 taken from his blog.

Figure 1. Temperature data, model predictions versus real observations.

This Is How It’s Done!

The Fed has been desperately trying to goose the US economy for years with various forms of quantitative easing, largely without success. As we have argued, there is no way of separating the effect of QE on recovery from the last recession from normal economic forces that have lead to economic recovery from every recession in history. Now, we have a new and measurable way of creating economic growth independent of QE.

Courtesy of the Commerce Department, we find that simply by revising the way GDP is calculated – cooking the numbers – we can achieve instant economic growth. The following chart from MarketWatch illustrates this achievement:

This result is even more remarkable than at first appears. Looking carefully at the two bars covering the period 1959 to 2007, we find there is essentially no revision to the growth numbers. It all occurs since 2007. Keeping in mind that the last recession started in 2007 and recessions are normally marked by negative GDP numbers, the significant difference in growth between the two methodologies for the recent period shown is actually compressed into the recession recovery since 2009.

As we said, if you can’t create economic growth by dumping tons of liquidity onto the market, simply cook the numbers to get the growth you want.

How Effective Has QE Been?

under construction

We have written a number of essays on quantitative easing (QE) as practiced by the Fed. We also have just finished our series on Understanding Money with the publication of Understanding Money: Part 5 – It’s All Money. As we were finishing we realized that a number of questions in our mind about QE might be tidied up using our ideas on money. This essay examines the monetary mechanics of QE and attempts to quantify its impact on the money supply and hence the economy.

A Brief Note on Gold As a Currency

With the refinements our ideas on money in Understanding Money: Part 5 – It’s All Money, we decided to apply them to a topic we have addressed in the past, that of the return to a gold standard.

There is an audience for the idea that the change from a gold standard to a pure fiat paper currency is a root cause for the current financial crisis. In particular, a paper currency allows for the expansion of the monetary base in an undisciplined fashion. We suggest that a pure fiat currency and a gold-backed currency both represent MZMc or the currency component of money with zero maturity whose composition or nature is irrelevant to the money creation process. To understand our thinking, refer to the series of articles on “Understanding Money” at the end of this essay.

A Brief Note on the Velocity of Money

Mathematicians understand the simple fact that in an equation containing a number of variables, at least one has to be a dependent variable. That is, when you have a number of properties you are measuring independently and try and relate them mathematically, you need a dependent variable to make the equation work. A classical relationship in economics is GDP = MV where GDP is just that, M is a measure of the money supply, and V is the velocity of the money being referenced.

As Wikipedia describes velocity, V:

The velocity of money (also called velocity of circulation) is the average frequency with which a unit of money is spent on new goods and services produced domestically in a specific period of time.

We would add spending to buy debt to the above definition. Velocity can be considered to be a function of the amount of our cash we intend to spend and the length of time we hold it before we spend it. It is inversely related to the duration of ownership of money based on whatever definition of ‘money’ is used.

Velocity increases when the economy is growing faster than the money supply. The inverse relationship also holds. Generally, V is viewed as an indication of the health of the economy. When V is decreasing, we are holding money in reserve longer and economic activity is slowing. The economy may be headed for a recession. If V is increasing, the economy is growing because we are spending our money faster.

We discuss the current state of V in our economy below and examine some aspects of its changes. Click on any graph to enlarge in a new window.

Western Foreign Policy Success Updated

Recall how in our efforts to overthrow evil tyrants and bring peace and democracy to the oppressed, we invaded Iraq, deposing the murderous Saddam Hussein. We thought you might like a current measure of the fruit of our labour. From NightWatch yesterday:

On Friday, 84 people were killed and 77 wounded in attacks in 12 towns. Most of them were shooting intermixed with a few bombings. On Saturday, 46 people were killed and 106 were injured in 17 towns. Most of the attacks were bombings, with a few shootings and clashes. On Sunday, 77 people were killed and 223 injured by bombings and shootings in 18 towns.

That’s 207 dead and 406 injured in 3 days. Not bad! The Iraqi people are so much better off now. Right? And now that we are just about finished bringing peace and democracy to Afghanistan, think of how bright their future will be for Afghanis, especially for those who collaborated with the allied forces. They’ll be paraded through the streets as heroes, right? Surely Syria is about ready for Western intervention and salvation. And Egypt is just warming up. Such exciting times ahead for Western foreign policy wonks.

The Banks Are Not Lending ….

We began a note on this a year ago (Are Banks Afraid to Lend? unfinished), mainly to document our thoughts and correspondence on the issue. At least as far back as 2009 we were considering the possibility that lending was not occurring, a common critique of the system at the time, because there was lack of demand or lack of willing credit-worthy borrowers. This was certainly not a common viewpoint. Unfortunately, the ignorance that produces this viewpoint remains. We summarize the issue below.

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