Comments on: The Velocity Factor http://www.ritholtz.com/blog/2008/12/the-velocity-factor/ Macro Perspective on the Capital Markets, Economy, Geopolitics, Technology, and Digital Media Sat, 20 Mar 2010 04:01:13 -0400 http://wordpress.org/?v=2.9.2 hourly 1 By: inf http://www.ritholtz.com/blog/2008/12/the-velocity-factor/comment-page-1/#comment-141104 inf Thu, 22 Jan 2009 22:57:36 +0000 http://www.ritholtz.com/blog/?p=12030#comment-141104 What good is a helicopter drop if the money lands into a black hole? The solution isn't just printing money or "printing money intelligently." The solution, or the solution of all solutions, which will fix this once and for all, is marking to market everything. Until this happens, when we give banks money(some say negative interest loans even), they will keep that money because they can't trust anyone because everyone is as bad as them. Game theory is at play. They don't trust each other, so they don't lend, economy does worse, and it becomes a self-fulfilling prophecy, even if they're ready to invest in productive capacity, there isn't any. So, before it gets to that point, the problem must be solved. That is mark to market, but the last stimulate package addressed mark to market: it said mark to market wasn't to be applied! That's right, we did the exact opposite of what needs to be done. Of course if we marked to market this junk debt, banks would collapse overnight. So what needs to happen is taking in this junk debt, selling it for pennies on the dollar to the free market. This may require going to homeowners and getting income for all these no doc loans. This is the hard part which must be done, but once it's done, we replenish banks, some will go bankrupt, yes. But after this is done, the market has information to invest wisely, right now it doesn't because everyone's hiding assets. Hiding assets needs to be illegal, everything must be mark to market, otherwise you're in handcuffs. Anything less is not going to cut it, Ben's helicopter drop is a theory. It hasn't been tried in practice, but I can tell you it will not work. The underlying problems must be addressed, the bad stuff needs to happen quickly, then we can get on to creating businesses with loans. What good is a helicopter drop if the money lands into a black hole? The solution isn’t just printing money or “printing money intelligently.” The solution, or the solution of all solutions, which will fix this once and for all, is marking to market everything. Until this happens, when we give banks money(some say negative interest loans even), they will keep that money because they can’t trust anyone because everyone is as bad as them. Game theory is at play. They don’t trust each other, so they don’t lend, economy does worse, and it becomes a self-fulfilling prophecy, even if they’re ready to invest in productive capacity, there isn’t any.

So, before it gets to that point, the problem must be solved. That is mark to market, but the last stimulate package addressed mark to market: it said mark to market wasn’t to be applied! That’s right, we did the exact opposite of what needs to be done. Of course if we marked to market this junk debt, banks would collapse overnight. So what needs to happen is taking in this junk debt, selling it for pennies on the dollar to the free market. This may require going to homeowners and getting income for all these no doc loans. This is the hard part which must be done, but once it’s done, we replenish banks, some will go bankrupt, yes. But after this is done, the market has information to invest wisely, right now it doesn’t because everyone’s hiding assets. Hiding assets needs to be illegal, everything must be mark to market, otherwise you’re in handcuffs.

Anything less is not going to cut it, Ben’s helicopter drop is a theory. It hasn’t been tried in practice, but I can tell you it will not work. The underlying problems must be addressed, the bad stuff needs to happen quickly, then we can get on to creating businesses with loans.

]]> By: Winston Munn http://www.ritholtz.com/blog/2008/12/the-velocity-factor/comment-page-1/#comment-131670 Winston Munn Tue, 09 Dec 2008 01:19:20 +0000 http://www.ritholtz.com/blog/?p=12030#comment-131670 Thanks for the post. Regardless of the argument about Velocity Scientistics (As Hayak might call it), monetarists rule the roost at the present, and thus you have done great service to explain those theories and show their monetarist plan of action. Thanks for the post. Regardless of the argument about Velocity Scientistics (As Hayak might call it), monetarists rule the roost at the present, and thus you have done great service to explain those theories and show their monetarist plan of action.

]]> By: DavidB http://www.ritholtz.com/blog/2008/12/the-velocity-factor/comment-page-1/#comment-131314 DavidB Sun, 07 Dec 2008 07:08:09 +0000 http://www.ritholtz.com/blog/?p=12030#comment-131314 I suppose the difference is that when the velocity is higher the house aka the taxman gets his take. If no one is trading then the house takes less of a cut. It is in the house's interest to create as many transactions as possible thus the focus and interest on GDP To me it appears that if people are hoarding money then the velocity does go down. Doesn't lowering interest rates cause people to horde money though because they know they will earn less in interest? If they raised interest rates some people would save more but that is because they would be earning higher interest on their money. That would give them more money to spend in the long run. If you know you have to save $1000 per month at 5% interest in order to retire then if interest rates are 10% you don't have to save as much and you can spend that extra money in the economy. Now if interest rates suddenly drop to 1% then you know you have to save a whole lot more and do new calculations just to get the same bang for your buck that your 5% got you I suspect this is not what it is all about. GDP sounds like a canard from the government designed to distract the argument from what this is really all about. I wonder how much the feds could save tossing the department that gathers that info out the window I suppose the difference is that when the velocity is higher the house aka the taxman gets his take. If no one is trading then the house takes less of a cut. It is in the house’s interest to create as many transactions as possible thus the focus and interest on GDP

To me it appears that if people are hoarding money then the velocity does go down. Doesn’t lowering interest rates cause people to horde money though because they know they will earn less in interest? If they raised interest rates some people would save more but that is because they would be earning higher interest on their money. That would give them more money to spend in the long run. If you know you have to save $1000 per month at 5% interest in order to retire then if interest rates are 10% you don’t have to save as much and you can spend that extra money in the economy. Now if interest rates suddenly drop to 1% then you know you have to save a whole lot more and do new calculations just to get the same bang for your buck that your 5% got you

I suspect this is not what it is all about. GDP sounds like a canard from the government designed to distract the argument from what this is really all about. I wonder how much the feds could save tossing the department that gathers that info out the window

]]> By: Winston Munn http://www.ritholtz.com/blog/2008/12/the-velocity-factor/comment-page-1/#comment-131311 Winston Munn Sun, 07 Dec 2008 05:13:35 +0000 http://www.ritholtz.com/blog/?p=12030#comment-131311 Sorry for the triple posting but I should give source in case someone is interested: http://www.mises.org/story/918 Sorry for the triple posting but I should give source in case someone is interested:

http://www.mises.org/story/918

]]> By: Winston Munn http://www.ritholtz.com/blog/2008/12/the-velocity-factor/comment-page-1/#comment-131310 Winston Munn Sun, 07 Dec 2008 04:52:17 +0000 http://www.ritholtz.com/blog/?p=12030#comment-131310 Another example: Farmer A grows 100 lbs. of potatoes each month and sells them for $100. Farmer B grows 100 ears of corn each month and sells them for $100. Total monetary base: $100 Velocity: 24 GDP: $2400 Farmer A grows and sells 100 lbs. of potatoes every other month and sells them for $200 Farmer B grows 100 ears of corn every other month and sells them for $200 Total monetary base: $200 Velocity: 12 GDP: $2400 Sorry, but I don't see an equivalent GDP - all I see is higher prices. Another example:

Farmer A grows 100 lbs. of potatoes each month and sells them for $100.
Farmer B grows 100 ears of corn each month and sells them for $100.
Total monetary base: $100
Velocity: 24
GDP: $2400

Farmer A grows and sells 100 lbs. of potatoes every other month and sells them for $200
Farmer B grows 100 ears of corn every other month and sells them for $200
Total monetary base: $200
Velocity: 12
GDP: $2400

Sorry, but I don’t see an equivalent GDP – all I see is higher prices.

]]> By: Winston Munn http://www.ritholtz.com/blog/2008/12/the-velocity-factor/comment-page-1/#comment-131309 Winston Munn Sun, 07 Dec 2008 04:28:45 +0000 http://www.ritholtz.com/blog/?p=12030#comment-131309 Frank Shostak of the Mises Instistute had this to say about velocity. "As logical as it sounds, neither money nor velocity has anything to do with financing transactions. Here is why. Consider the following: baker John sold ten loaves of bread to tomato farmer George for $10. Now, John exchanges the $10 to buy 5kg of potatoes from Bob the potato farmer. How did John pay for potatoes? He paid with the bread he produced. Observe that John the baker had financed the purchase of potatoes, not with money, but with bread. He paid for potatoes with his bread, using money to facilitate the exchange." IMHO, this shows the fallacy in monetarism - altering the facilitating mechanism of economic actions does not alter either the supply or the demand. Real productivity gain is required for growth in demand, and it is demand growth that spurs economic growth. An increase in velocity is a result of productivity gains spurring demand; it is not a monetary phenomenon. Frank Shostak of the Mises Instistute had this to say about velocity.

“As logical as it sounds, neither money nor velocity has anything to do with financing transactions. Here is why.

Consider the following: baker John sold ten loaves of bread to tomato farmer George for $10. Now, John exchanges the $10 to buy 5kg of potatoes from Bob the potato farmer. How did John pay for potatoes? He paid with the bread he produced.

Observe that John the baker had financed the purchase of potatoes, not with money, but with bread. He paid for potatoes with his bread, using money to facilitate the exchange.”

IMHO, this shows the fallacy in monetarism – altering the facilitating mechanism of economic actions does not alter either the supply or the demand. Real productivity gain is required for growth in demand, and it is demand growth that spurs economic growth.

An increase in velocity is a result of productivity gains spurring demand; it is not a monetary phenomenon.

]]> By: KJ Foehr http://www.ritholtz.com/blog/2008/12/the-velocity-factor/comment-page-1/#comment-131306 KJ Foehr Sun, 07 Dec 2008 03:53:52 +0000 http://www.ritholtz.com/blog/?p=12030#comment-131306 Great article and very timely. It addresses directly the debate that is raging now between the deflationists and the hyperinflationists. It explains how apparently wildly increasing money supply, monetizing the debt, etc. will not necessarily lead to high inflation. It is impossible for anyone to know how much money is enough to avoid deflation or cause inflation, and it implies that the aftereffects will depend on how skillfully Ben or his successor withdraws much of the money they inject into the economy in the coming quarters. At least that’s my take on it; I hope I am understanding it correctly. Thanks Great article and very timely. It addresses directly the debate that is raging now between the deflationists and the hyperinflationists. It explains how apparently wildly increasing money supply, monetizing the debt, etc. will not necessarily lead to high inflation. It is impossible for anyone to know how much money is enough to avoid deflation or cause inflation, and it implies that the aftereffects will depend on how skillfully Ben or his successor withdraws much of the money they inject into the economy in the coming quarters.

At least that’s my take on it; I hope I am understanding it correctly.

Thanks

]]> By: wunsacon http://www.ritholtz.com/blog/2008/12/the-velocity-factor/comment-page-1/#comment-131285 wunsacon Sat, 06 Dec 2008 23:11:45 +0000 http://www.ritholtz.com/blog/?p=12030#comment-131285 Great article, John. Thank you. No points deducted for using graphs from the Fed that other writers use as well. Also, I read Mish every day but don't remember him discussing the velocity of money in this much detail. Also, the "lessons", viewpoint, and policy prescriptions from you and Mish seem (from my perception) to be quite different. It's good to see a different point of view. Vic, thanks for posting that link. I'll read that next. Great article, John. Thank you.

No points deducted for using graphs from the Fed that other writers use as well. Also, I read Mish every day but don’t remember him discussing the velocity of money in this much detail. Also, the “lessons”, viewpoint, and policy prescriptions from you and Mish seem (from my perception) to be quite different. It’s good to see a different point of view.

Vic, thanks for posting that link. I’ll read that next.

]]> By: Mark E Hoffer http://www.ritholtz.com/blog/2008/12/the-velocity-factor/comment-page-1/#comment-131280 Mark E Hoffer Sat, 06 Dec 2008 22:22:23 +0000 http://www.ritholtz.com/blog/?p=12030#comment-131280 on a happier note, with this: "...to honor Richard Russell for his outstanding contribution of over 50 years to not only the craft of investment writing but to the lives and investment portfolios of his readers. He is one of my personal heroes as well as a good friend. At 84, his writing today is better than ever, and now he writes every day, not just once a month! Richard is an institution in the investment writing world, and after talking with his wife Faye he has said he would let us plan the dinner." Mr. Mauldin, you may still have time to strike a Silver Round to commemorate the event, and RR's contribution. @U$D 200/seat, an extra U$D 35 won't cause anyone to blanch.. on a happier note, with this: “…to honor Richard Russell for his outstanding contribution of over 50 years to not only the craft of investment writing but to the lives and investment portfolios of his readers. He is one of my personal heroes as well as a good friend. At 84, his
writing today is better than ever, and now he writes every day, not just once a month! Richard is an institution in the investment writing world, and after talking with his wife Faye he has said he would let us plan the dinner.”

Mr. Mauldin,

you may still have time to strike a Silver Round to commemorate the event, and RR’s contribution.

@U$D 200/seat, an extra U$D 35 won’t cause anyone to blanch..

]]> By: mkkby http://www.ritholtz.com/blog/2008/12/the-velocity-factor/comment-page-1/#comment-131259 mkkby Sat, 06 Dec 2008 20:06:46 +0000 http://www.ritholtz.com/blog/?p=12030#comment-131259 I wouldn't pay for your service. It all is just a cut/paste from other sources I read. This whole article on velocity looks exactly like something Mish did a year ago... even the charts are exactly the same. But if you had something unique, someone other than myself might be interested in paying. I wouldn’t pay for your service. It all is just a cut/paste from other sources I read. This whole article on velocity looks exactly like something Mish did a year ago… even the charts are exactly the same. But if you had something unique, someone other than myself might be interested in paying.

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