The Trajectory of Money

February 22, 2009

 

Many mainstream economists will remark on something called ‘the velocity of money’ – the ease and speed with which money moves through the economy, generally associated with the number of times a given sum of money moves around the economy within a specific time period.  The velocity of money is expressed by economists, mathematically, as:

 

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What few mainstream economists are discussing, however, is the trajectory of money: the direction in which money is flowing within the economy.  One dynamic that has received little attention over the past 12 – 18 months is the increasing flight of capital from the middle class to the upper, and now lower, classes. 

 

While there is no formula for the trajectory of money, simply put, in a healthy economy, money circulates back and forth between producers and consumers, to the benefit of both groups.  The lines between producers and consumers blur, as producers themselves are enriched and consume, while consumers are employed in the act of production.  Money circulates up and down the economic spectrum as goods and services are produced, consumed, reproduced, further consumed, etc.  In an unhealthy economy, the dynamics of the production /consumption cycle slow down considerably and money is concentrated at the upper end of the economic spectrum as production slows and jobs are lost.  This dynamic disproportionately affects the middle class – the production and consumption class, rather than the ownership or dependency classes.  This dynamic is then exacerbated as government steps in.  In the case of our current economy, government facilitates the movement of money towards the ownership class (in the form of TARP) and towards the dependency class (in the form of Spendulous).

 

Many have observed the ineffectiveness of TARP in ‘solving’ the financial crisis.  I would argue, however, that TARP has been extremely effective in transferring wealth to the upper, ownership classes.  Executives, first and foremost, have been very well taken care of as a result of TARP’s outlays.  These payouts have been well-documented, and there is not much use in reliving them here.  For more detail, see my “Let them eat cake” series of posts.  Now Obama’s Spendulous package will work to move money towards the lower end of the economic spectrum in the form of a temporary increase in manual labor jobs: ‘infrastructure’ projects.

 

However, for the increasing hoards of middle class workers who have lost their jobs, or are imminent danger of losing their jobs; who have lost the equity in their homes; and who have lost upwards of 40% of their retirement savings, there is little help to be found.  It is extremely unlikely that an increase in road construction jobs will be of much benefit to a 45 year old white collar worker.  And $60 a month in tax savings will only go so far.

 

The myth of government money

 

Remember once again that the state has no money.  The only money the state can spend is that which is pillaged from the middle class either overtly through confiscatory taxation, or more subtly through borrowing, which ultimately is paid for by the middle class in terms of inflation – the stealth tax on every dollar earned or owned.  What we observe, therefore, in the trajectory of money is its rapid movement away from the middle class to the opposite extremes of the economic spectrum.  This dynamic, and the erosion of the middle class, is what we associate with third world countries: wealth concentrated in the hands of a small upper class and a large, dependent lower class.  The development of an independent middle class can be associated with political liberalization throughout history.  Unfortunately, the opposite is also true.

 

Meanwhile, the one policy that would actually help with both the velocity and trajectory of money, the one policy that would serve to truly benefit the middle class – an extended tax holiday – has not even been seriously considered.  Trillions upon trillions of dollars spent by our overlords in Washington, but under no circumstances can the people be trusted to spend their own, hard-earned money.  “Oh”, but you say, “what about the ‘paradox of thrift’?  If people are just given their own money, they will pay down debt and save it.  This will not help get the economy going again.”  This is what you’ll hear parroted by the talking heads on TV, and what you’ll hear from our ‘leaders’ in Washington.  Unfortunately, it’s simply not true.  Yes, for a short time many may pay down debt or put money in the bank.  But ultimately those who have put off large purchases or minor projects around the house will begin to spend money.  That money will put people back to work.  The money will get products and services moving again.  And that money will come at the expense of the state, not at the expense of those who earned it.  Further, this relaxation of taxes on earned income will serve to ‘starve the beast’ of government.  The alternative, of course, is to let our central planners in Washington determine how your money is best spent.  The recent help-for-homeowners plan is a good example.

 

‘Help’ for homeowners?

 

The data charted here serve to highlight the disingenuousness of  the state as it regards ‘helping’ the middle class.  While I am an opponent of any government spending in the economy, clearly serving up further power consolidation disguised as aid for homeowners is the height of cynicism – though nothing more than we should expect from the state.

 

 delinquencies

 

Unintended Consequences?

 

With the plan only targeted at mortgages held or guaranteed by Fannie Mae or Freddie Mac, the data suggest one unintended consequence of the current mortgage plan will be to further reduce the market value of private mortgage backed securities, and to render further private securitizations implausible.  However, this is so obvious to anyone with even a rudimentary understanding of finance as to beg the question: just how ‘unintended’ is this consequence?

 

There are many disadvantages to a nationalized mortgage market.  But for certain entities there are also advantages.  Discern between the potential winners and losers to understand the state’s strategy here.  As always, this plan has little to do with citizens and much to do with power dynamics.  As I have long argued, this is not ineptitude on the part of the state, this is failure by design.

 

Large financial institutions beholden to the state increase the power and scope of our overlords in Washington.  Similarly, the power to control who receives a home mortgage and who does not, who is deserving of ‘assistance’ and who is not- these are great powers indeed.  There has been a slow-motion coup going on in congress.  If you don’t see it, don’t worry – you’ve already missed it.

 

Nationalization?  “Possibly”

 

Now Senator Dodd says that while the Obama administration is looking to avoid nationalization, in fact bank nationalization “may possibly” happen.

 

Some of the concerns are that bank nationalization may ‘kill off’ the financial sector for years, even decades to come.  In reality, while nationalizing the banks will have a number of adverse effects, killing off the financial sector will not be one of them. 

 

Walking Dead

 

There are currently no private MBS securitizations to speak of.  Commercial MBS are mirroring RMBS from 12-18 months ago.  The writing is on the wall (and has been) for commercial real estate.  Nobody is securitizing and the only secondary market exchanges are pick-ups by vulture funds – and even they are losing money.  One notable example is a private equity firm partnered up with a mortgage lender that recently bough several large CDOs for cents on the dollar.  The plan was to waive principle balance, as needed, and roll the individual receivables into government loans.  Problem is, none of the bank investors will buy the paper.  Now they are stuck with non-performing CDOs they can’t sell or break up into individual contracts of any value.

 

The financial sector is already dead.  For at least the past 18 months they have been walking dead and only three things have prevented this from being a commonly understood truth:

 

1. Media coverage that can only be described as Orwellian.

2. Outright lies by Treasury and the federal reserve

3. Massive infusions of state (read: taxpayer) cash

 

The inanity of the state’s approach to these problems, from TARP through Spendulous, can only be understood as intentional.  These programs are designed to fail.  Sadly, not before consolidating political and economic power in Washington at the expense of the states single largest threat: the middle class.  Only the middle class stands between a government and its full consolidation of power within society.  What we are observing is a systematic breakdown of the middle class and the creation of dependency on the state.  Many in the middle class are even asking for help, shouting that the state must “do something”.  Indeed the state is doing something, and will do many more things over the coming months and years.  The result, sadly, will be the further unraveling and dependency of the middle class, further stratification of income, and the erosion of the final barrier between the people and the state.

 

 

 

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