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Saturday, February 7, 2009

Monetarism is Still Dead

"Peter Schiff Was Wrong" - Mish

That's right, I'm still with Mish on this one, and Peter Schiff, even after his 'defensive video' and explanation? He's still wrong. Because Monetarism is dead. And it has been, for a long time.

Usually, I try to steer clear of the math surrounding economic theory. Because I'm trying to make economics simple to understand. And if it's one thing that I know? That as soon as pull out the following equation ...

... everyone's eyes start glazing over.

But stick with me for a moment. I really will try to break this down, and make it simple to understand.

For those not familiar with it, this is an equation dealing with the ol' Quantity Theory of Money. As it relates to the current discussion, look at the second set in this equation: V and T. This describes the velocity of money. In other words, how fast is money circulating in a given time frame? And this changes. This is an accepted truth. But there is more to our economy, than the speed of money, whether it's "hot" or "cold". Not only does it change, but in the last thirty years, complex leveraged instruments have come into existence that money leaks towards. That's what you have to keep in mind. And those leveraged instruments are trumping any Monetarist view regarding the velocity of money. Monetarists believe that somehow, all of this bailout money will leak out into the economy, and cause hyperinflation. That's what this is all about, and let me explain why.

Well, at this point, one usually hears:

"But look at the money supply!", many neo-Monetarists will cry! (You like that one? Neo-Monetarists?)

Let's do that.

First of all, I hope everyone understands just how difficult it is to track the real money supply. Some of those difficulties I will discuss later on in the vlog entry that accompanies this blog entry. But I will admit, yes ... the money supply has increased. But what has happened to the velocity of money? It's slowed to a crawl.

I know right now, that many of these new Monetarists will simple say: "Ah yes, but wait until that velocity once again changes! All that money will flood the system" (Sorry, I'm just sort of smiling at that thought), "and wham! Hyper-inflation!"

Really? Seriously?

And no doubt, at this point, the Monetarists will cry:

"We look at 'Velocity of Money' more than any other factor! It's the basis of Monetarism!" True. But ironically? Monetarists ignore all of the factors that affect the velocity of money such as a government that is ready to put the largest Keynesian infrastructure expense into play. They ignore factors having to do with taxation.

Good grief, those two factors alone are the two biggest issues facing the economy at the current time!

So while we are looking at the money supply? I would ask you to apply Lucas' contributions, (ironically) and I would ask you this simple question:

"What happens to created money when it is applied to over-leveraged derivative losses?"

I discuss that in the following vlog entry ...

(Video Included. If you're seeing this entry elsewhere and cannot see the Video? Click this link to view the entry ...)

Here is the link to the version to this video.

And yes, I have read and watched "Peter Schiff's" defensive video, as well as the article. And I couldn't help but think one thing: Every position trade has to have two connected things (though I'm no position trader). An end. An end of the position; and thus an exit strategy to control and manage risk if you're wrong. Peter has no risk control mechanisms! That's violating the very first rule of money management principles.

So what's Peter's defense to this charge? If you can believe it?

"There's no chance I'm wrong". That's the battle cry of the loser trader. Seriously, listening to him sounds like listening to a losing trader, who doesn't want to admit he's wrong and take the loss on the trade, so he sticks with it, and losses everything. I know. I used to be that guy.

I'll have the "Week in Review" podcast up here in a little bit ...

Edit: I've been getting a few questions on this one, so let me emphasize that if a position is leveraged? It's speculation for money that doesn't exist, using a small portion of money as good faith deposit.

So let's say you put down $2.00 for leverage on something that costs $30.00. If it goes up in value to $40.00? Awesome. You put down $2.00, and you gained $10.00 in value, and the entity is worth $40.00.

But what happens if it goes down $10.00? You put down $2.00. In essence? You're in the hole. There's no money on the table, and you owe. That's basically what happened. So in essence, it's like when I was sending money to my account? But I wasn't exiting the trade.

In essence? The money was neither created, nor destroyed. To maintain the positions, the books need balanced. But the leverage has gone nowhere, since it's a derivative, and is based on the underlying. It's as if a rich uncle is trying to cover his nephew's gambling losses. The money is leaving the rich uncle (the government), but the losses are still overleveraged losses.

It's an attempt to simply 'maintain' what once was, or the illusion of what once was.

* * *

Note: This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have 13 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders who should make their own decisions based off their own research, and tolerance for risk.

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