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alstry (35.78)

What is Money

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January 19, 2009 – Comments (16)

Company after company has announced that they are cutting workers.  Many of you know I have documented hundreds of these announcements.  It seems practically every company in America is cutting more or less about 10% of its workforce....some major business are shutting down completely and letting  everyone go.....such as Circuit City on Friday......

But the day before, without much fanfare Saks announced the following:

ATLANTA, Jan 15 (Reuters) - Department store chain Saks Inc said on Thursday it would cut 9 percent of its workforce, lower capital spending and reduce other costs as demand for luxury goods declines in the tough U.S. economy.

Most of you don't understand how to count money.  Just like you I learned about M1, M2, and M3 in my Economics classes.  However, after developing Alstrynomics, I learned these numbers were actually very small components of total money.  Money actually equals cash PLUS debt.....and the majority of money is created by debt creation....not government printing.

And so long as people, businesses, and municipalities CAN'T borrow.......total money is actually contracting as EXISTING debt continues to implode.  Never in American history has debt imploded to the magnitude we are experiencing.  Yes the government is printing cash, but no where near the rate that debt is evaporating.  Not only is it evaporating, very little new debt is being created to supplement the government printing.

As a result, prices and wages are crashing everywhere.......and they will continue to crash until debt reaches sustainable levels or new debt starts to ramp up.......

The Motley Fool writers have done a terrible job of explaining this concept to you.....as well as most mainstream news publications....but I doubt many of them have studied Alstrynomics.  As debt continues to evaporate.....so is total money......and as this process continues to run its course.....expect much more deflation and economic shutting down.

16 Comments – Post Your Own

#1) On January 19, 2009 at 2:56 AM, angusthermopylae (43.21) wrote:

Ahh...the nub of the problem.  "Cash" on the books as being owned or owed is shrinking...just ask a guy who bought his $350,000 house and now it's only valued at $250,000...or even less.  The bank is still calling it $350,000, I'm sure, because that's what their mortgage says.  He, however, is probably only going to call it $250K for his personal assets...and that's probably higher than what he can actually get.

On the other hand, where the debt "cash" is makes a big difference, too, imho.  Private citizens are caught between original debt and actual value.  Banks are just beginning to get the feel for this; that's why they are so scared, because they don't know how bad it's going to get, and they probably can't trust their own balance books.

The government, on the other hand, is intentionally increasing its debt...based on the faith and reputation of its money.  But how much actual value is there in that?  Basically, you've been saying "Not much..or even none.."  And I tend to agree...

I think this attempt to catch every falling knife will be relatively short-lived.   A couple of reasons:  First, the tax base for governments and municipalities will keep dropping for a while (give it 18-36 months).  Before it recovers, there will be a couple of spectacular crashes "that no one could foresee" (Excuse me while I wash my mouth out..I hate that phrase, especially lately.)  While everyone is cheering the new housing numbers ("They weren't that bad!"), there will be a heap of bank closures, bankruptcies, and probably one or more of the auto parts companies (brakes, paint, glass, something) will fold...which will kill at least one of the major auto makers ("Holy Shikies!  Who could have foreseen that?")

The second reason it will be short-lived is that the social, environmental, and regulatory programs will start fighting it out...in a very ugly way.  When the 2010 election cycle starts up, lots of politicians are going to have to face all those starving families and have to justify why they gave a bank the same amount of money that would fund a state unemployment program for 2-3 years.  Or they'll have to answer why saving a spotted owl or some such is more important than funding the local schools or propping up the state retirement system.

(And if you think selfish political decisions don't change the course of the economy and the country, just look at the history of the military and fruit and sugar growers overseas.  There's a good reason the phrase "banana republic" came into being.)

Yep...it's going to be ugly by Nov 2010.  I can't wait to see...

But the big question is how will the stretch between private deflation and public super debt play out?  Will the government default on some debts?  Will the cry for a balanced budget take root and cut everyone to the core?  Or will we do what we always do...pass it on to the next House and Senate to worry about?

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#2) On January 19, 2009 at 3:45 AM, kaskoosek (97.92) wrote:

Debt/GDP = Inflation

If GDP decreases faster than debt, then you will have inflation in the long run.

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#3) On January 19, 2009 at 4:31 AM, Bupp (29.39) wrote:

Kaskoosek your equation is nonsense.

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#4) On January 19, 2009 at 5:23 AM, whereaminow (76.24) wrote:

But Alstry, what if the entire idea that there is a "Credit Crunch" is built on a fallacy itself.

Have you seen this report?

http://mises.org/story/3288

Probably the most important measure of credit-market conditions is the amount of commercial-bank credit outstanding. These figures show that although the middle part of 2008 does stand out in the long view, it does so not by virtue of credit's frightening contraction, but only by virtue of its hitting a six-month plateau from April through September.

At no time during that interval, however, did the amount of commercial-bank credit outstanding fall below the amount outstanding at the beginning of the year. In short, credit was actually ample, indeed, at an all-time high; it simply stopped growing as usual for six months, stuck at about $9.4 trillion, while one Wall Street wizard after another told NPR that "no money is moving, the credit market is completely shut down" or some such cock-and-bull story.

After the six-month pause, commercial-bank credit zipped upward again, so that by the end of the year, the amount outstanding stood more than 8 percent higher than it had a year earlier. Some credit crunch! Année terrible, indeed.

Regards,

David in Qatar

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#5) On January 19, 2009 at 10:05 AM, alstry (35.78) wrote:

David. 

Yes.....I read the article....but the conclusions are idiotic.......

Now if you can explain why.....that would be impressive.

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#6) On January 19, 2009 at 10:14 AM, SAMarketplayer (< 20) wrote:

This is the most important question for the deflation/inflation debate as I see it... And you touched upon it right here. I was never sure how it worked. When central banks created/loaned out new money in the last 10 years, what percentage of it was actually printed?  I would have assumed all of it which would make printing more money today inflationary, even with asset depreaciation. However, if it was never printed in the first place, like alstry is suggesting, the relativly small amount being created today (printed or not) wont make a dent.

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#7) On January 19, 2009 at 10:58 AM, whereaminow (76.24) wrote:

Alstry,

You're very combative. I didn't come here to start a catfight with you in order to see who could debase the value of the exclamation point faster. You have very strong opinions about inflation/deflation that, as far as I can tell, resonate from an understanding of Friedman's "A Monetary History of the United States." I could possibly be giving you too much credit, but I prefer to err on the side of compliment.

However, it's not the conclusions of the article that I'm interested in. The author has an Austrian School bias to approach government activity in the marketplace with suspicion, which is a wise approach regardless of one's feelings on the question of money as having inherent value as a commodity.

I merely point out that there is a distinct possibilty, supported also at www.shadowstats.com, that the Credit Crunch was tremendously overblown, if it even existed at all.

If you haven't properly discounted this possibilty, it could lead to a course of action that is precisely the opposite that you would want to take.

Since I'm invested partially in gold, I'm curious to hear your thoughts on this. If you can persuade me to believe that the Credit Crunch was real, with hard data, then I'd be forced to reconsider my position and view the inflation possibilities as negligible as well.

Regards,
David in Qatar

 

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#8) On January 19, 2009 at 11:41 AM, alstry (35.78) wrote:

My friend David.....as far as I can see, there is not a single exclamation point in the entire blog.......this time:)

I too have an Austrian bias.....but that is the subtle point I was trying to determine if you could see how silly the authors conclusions and implications were based on that bias......

Of course the credit crunch was overblown....there was NO NOT NEVER a credit crunch....however, there was and is definitely a borrower crunch....simply, too few borrowers qualified to borrow under current terms.

Go out and try to borrow a few million on a real estate project......gook luck....... check out how credit card companies are reigning in debt limits and doubling minimum payments, try to get a home equity loan, or auto loan....or just about any loan for that matter...the money is there, just not many qualified to borrow......and those that are don't want to borrow.

And it was borrowers over the last eight years that created tens of trillions additional money that drove the growth in total money....not the relatively small few trillion of government printing.

And I don't simply rely on charts that others print to justify my positions......I survey borrowers, presidents of banks, loan officers, and others to gain perspective as I sit down over coffee and talk to them in their baby blues. 

Let's go back to your chart on the mises web site.....if you paid close attention, you would notice the chart is only five years old in TOTAL time span....yet total debt almost doubled.....think about that for a second and what the graph would have looked like if you went back 30, 40 or 50 years.

Then ask youself how many major companies drew down their entire lines of credit in the September thru November time frame to create defensive positions and what implications it had on total credit oustanding towards the end of the year after the "plateau."

Now if you want to talk about inflation, we can talk about China and India.......but as far as the US and Europe goes......deflation is the way its going....

You should expect the incidence of riots to start spreading through out Europe very vey soon.  When people can't eat...they tend to get a bit angry at their respective governments.

Alstrynomics is the application of practical information.....not the practice of theorizing on applied theory.

PS...if you find my style not to your liking, I suggest you go to the ballet or theatre......but remember, it is you that is a guest in my house and me giving you my time to respond.  Now what does that say about my respect for you comment????

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#9) On January 19, 2009 at 12:11 PM, Entrepreneur58 (53.80) wrote:

The anti-deflation forces are about to invade....

Jan. 19 (Bloomberg) -- Top advisers to President-elect Barack Obama signaled they will emphasize getting credit to consumers and businesses rather than helping banks as the new administration deploys the second half of the $700 billion rescue fund.

 

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#10) On January 19, 2009 at 12:33 PM, whereaminow (76.24) wrote:

Ok Alstry, those are interesting thoughts. It's late over here in the shithole and I gotta turn in, but I'm gonna chew on that for a while. Thanks for taking the time to respond.

David in Qatar

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#11) On January 19, 2009 at 8:21 PM, JGus (29.47) wrote:

Here are a few great 5-6 min. videos that explain what Alstry is talking about, complete with pictures, charts, etc.

What is Money?

Money Creation

The Fed - Money Creation

A Brief History of US Money

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#12) On January 19, 2009 at 8:44 PM, BigFatBEAR (30.28) wrote:

Not to detract from the conversation, but I think the more important question is: What is love?

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#13) On January 19, 2009 at 9:19 PM, binve (< 20) wrote:

BFB: LOL !

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#14) On January 19, 2009 at 11:09 PM, SAMarketplayer (< 20) wrote:

Awesome articles JGus, explains a lot....

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#15) On January 20, 2009 at 1:53 AM, kaskoosek (97.92) wrote:

rwilso01

I'll rephrase it.

debt=money

therefore

money supply = (prices) * (total production)

If production decreases faster than money supply is destroyed, then we will have inflation.

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#16) On January 21, 2009 at 6:18 PM, MoneyAsWealth (< 20) wrote:

False Inflation Model

Zimbabwe

Money Creation 

Solution to Social Security

Answers to our Economy's Debt Dilema

This is a new blog and a new and robust solution.  We are getting feedback from college macroeconomics professors and several of them are changing the way they teach their students about Money Creation and Inflation.

 For some answers: Money As Wealth, Read Bottom to Top 

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