Lately, my posts have become more about the warnings of government actions and their longer term effects on mortgage rates. Ultimately, I have been talking about increased inflation, the mortgage rate bubble, and mortgage rates breaking into double digits, all of which could very well happen in the not-so-distant future as a result of Paulson and Bernanke’s actions, along with continued “economic stimulus” packages.
Many have questioned why I am talking about rampant inflation when the chief concern right now is deflation? I have eluded to the answers in my posts, however I have not been able to come up with a great analogy. Well, as much as I would like to say I came up with this one, I didn’t and actually found it in a place most of you have not even heard of, the Taipan Publishing Group.
Yes, the best analogy I have seen to date was presented by Justice Little, where he used rabbits running around a tree to describe monetary velocity, which is quite stagnant right now and the reason the Treasury and Fed are printing money left and right. here is how he describes it…
Run, Rabbit, Run
“Imagine youâ€™re standing in front of a large tree trunk. There is a brightly colored marker on the trunk, and there are rabbits running in circles around the tree itself. Every time a rabbit passes the marker on the trunk, you note it down on your clipboard: one X per pass.
Now letâ€™s say you tally up your results and note you made twenty Xâ€™s in the space of 60 seconds. Assuming you had your reasons, how could you double the number of Xâ€™s in the same amount of time?
There are two ways you could double the number of Xâ€™s on your clipboard (to forty per minute in this case). You could increase the number of rabbits running around the tree… or you could go with the same number of rabbits and try to make them run faster.
(Remember, you donâ€™t care if itâ€™s the same rabbit or a different rabbit when you jot down your X. Youâ€™re just counting the number of passes.)
As you might have guessed, the rabbits are analogous to money in the system. Money thatâ€™s just there is inert… In order to have an affect on the economy, the money has to move.
So when money is â€œhotâ€ and the rabbits are running at top speed, fewer rabbits are needed to fill up the clipboard with Xâ€™s. The rabbits speed around the tree very quickly â€“ analogous to high turnover, or money changing hands very quickly.
When money is â€œcold,â€ on the other hand, the rabbits are lethargic, and you need more money (i.e. more rabbits) to get a decent number of Xâ€™s on the clipboard. If money stops changing hands entirely â€“ as it seemed to have for a brief span in late September and early October â€“ itâ€™s like the rabbits coming to a dead stop. They arenâ€™t moving at all.
So when the Fed pumps the system full of money, itâ€™s the equivalent of dumping more and more rabbits into the equation. As the Fed gets desperate, maybe they round up dozens or even hundreds of rabbits.
But if all the rabbits are half comatose, the clipboard stays blank (or fills up much too slowly). The Fedâ€™s efforts fail to have the desired effect.
So the upshot is that the Fed can have a direct impact on the quantity of money in the system, but not the velocity of money in the system. It canâ€™t make the rabbits run.”
In today’s economic environment, all of the rabbits are lethargic, and the Fed keeps dumping more and more of them into the economy, failing to get enough to pass the mark to keep the economy going right now. Bernanke’s focus is on avoiding deflation, but his beliefs send force him to focus on the wrong solution, adding rabbits…
“…the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.” (source: Bernanke’s Speech)
As cute as rabbits may be, these rabbits will likely be more like the Rabbit of Caerbannog from Monty Python and the Holy Grail. Or, the rabbits may become as devious as Bugs Bunny in the future. As Elmer Fudd used to call Bugs, “wascally wabbit”, we can expect them to wake up and start running again eventually, and when they do, they will wreak havoc on the economy with the numbers and the Fed will not be able to round them up fast enough. Justice Little summed it up nicely…
“The Fedâ€™s stimulus-pump actions do matter in one particularly awful way. The more money a desperate Fed pumps into a non-responsive US economy, the closer we edge to systemic breakdown for the fiat currency system as a whole.
…The Fed will pump and pump until the total pool of dollars in the system makes the United States look like a banana republic.”
So, we have the Fed looking for twenty passes per minute, but now using hundreds, if not thousands of rabbits to attain it, and even then failing to succeed and adding more. We can only hope that we can remove some of the rabbits from our economy before they wake up and start running, because when they do, watch out. If the Fed wants twenty passes per minute and they have thousands of running rabbits, they are going to have to start shooting fast or it won’t be long before they get a over a hundred passes per minute.
And as for mortgage rates, since they do not like inflation, you can bet that when the rabbits come out to play, mortgage rates will go through the roof.
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