Mark McHugh

Shhhh…It’s Even Worse Than The Great Depression

In Open Thread on Sunday, August 19, 2012 at 12:25 pm

According to Wikipedia, Narcissistic personality disorder (NPD) affects one percent of the population and has little to do with looking at yourself in the mirror.  It has a lot to do with unrealistic fantasies of success, power and intelligence.   Some NPD sufferers become cult leaders or mass murderers, the rest become  economists and policy-makers.   Despite having a highly elevated sense of self-worth,  narcissists have fragile self-esteem and  handle criticism unpredictably, so let’s keep this to ourselves….

 Velocity of money is the  frequency with which a unit of money is spent on new goods and services.   It is a far better indicator of economic activity than GDP, consumer prices, the stock market, or sales of men’s underwear (which Greenspan was fond of ogling).  In a healthy economy, the same dollar is collected as payment and subsequently spent many times over.  In a depression, the velocity of money goes catatonic.  Velocity of money is calculated by simply dividing GDP by a given money supply.  This VoM chart using monetary base  should end any discussion of what “this” is and whether or not anybody should be using the word “recovery” with a straight face:

In just four short years, our “enlightened” policy-makers have slowed money velocity to depths never seen in the Great Depression.  Hard to believe, but the guy who made a career out of Monday-morning quarterbacking the Great Depression has already proven himself a bigger idiot than all of his predecessors (and in less than half the time!!).  During the Great Depression, monetary base was expanded in response to slowing economic activity, in other words it was reactive  (here’s a graph) .  They waited until the forest was ablaze before breaking out the hoses, and for that they’ve been rightly criticized.  Our “proactive”  Fed elected to hose down a forest that wasn’t actually on fire, with gasoline, and the results speak for themselves.  With the IMF recently  lowering its 2012 US GDP growth forecast to 2%, while  the monetary base is expanding at about a 5% clip, know that velocity of money is grinding lower every time you breathe.

The Fed’s refusal to recognize the importance of velocity of money quickly goes from idiotic to insidious.  Here’s a question:  If I give you 50¢ and as a result of that transaction, you owe me $1.00, what interest rate have I charged you?  Obviously, I’ve charged you 100% interest and I don’t give a rat’s ass about you or your kids.  I’m pure evil and you’re pure stupid.  But believe it or not, this kind of master-slave  arrangement isn’t enough to satisfy a true narcissist.   The narcissist needs to be exalted for his actions, no matter how unjust. 

He likes to be thought of as “accommodative.”

In 2011, every dollar of GDP growth created $2.08 in debt.  In real life, that’s 108% interest plus the nominal rate, and our twisted leaders want  you say, “Thank you sir, may I have another!”

2011 wasn’t an anomaly either; it’s the new normal.  Since the Bush deficit increases (to call a spade a spade) went into effect,  the rise in debt has exceeded the rise in GDP 6 of the last 10 years (the four years of positive GDP-minus-Debt can be directly attributed to the housing bubble).  That never happened in the U.S. during Great Depression/WWII era.  One place where it did happen was in the Weimar Republic (which shortly thereafter became known as Nazi Germany) .  No one’s ever done a better job of explaining how quickly things unraveled there than Art Cashin (this is an absolute MUST read):

In 1920, a loaf of bread soared to $1.20, and then in 1921 it hit $1.35. By the middle of 1922 it was $3.50. At the start of 1923 it rocketed to $700 a loaf. Five months later a loaf went for $1200. By September it was $2 million. A month later it was $670 million (wide spread rioting broke out). The next month it hit $3 billion. By mid month it was $100 billion. Then it all collapsed.

 ….In 1913, the total currency of Germany was a grand total of 6 billion marks. In November of 1923 that loaf of bread we just talked about cost 428 billion marks.

So I’ve got a whole bag of “Fuck You!” for anyone who still thinks nothing could be worse than another Great Depression.  The path we’re on ends with mountains of corpses when the great experiment fails. 

America’s most prestigious education institutions have become grooming salons for malignant narcissists.  Men and women high on their own self-important sense of entitlement, but short on any sense of honor or duty (like passing a budget or arresting someone who stole a billion dollars) and devoid of any real insight or achievement.  So far it’s working out quite nicely for them:

Fun fact:  Washington DC now boasts, by far, the highest and fastest growing income per capita in America.

No matter what color Kool-aid you prefer, a Harvard Law School graduate who wipes his ass with the constitution will occupy the White House  until 2016.   Any flavor difference you think you detect is artificial.  Neither party has any intention of balancing the budget or stopping the generational rape of America.  They exist only to give you the illusion of choice.

There’s another reason nobody wants you thinking about velocity of money and triple-digit principle-based interest rates.  When you get comfortable with the idea that the same dollar gets spent over and over in the economy,  you’ll begin to reconcile that notion with the fact that total government spending (Federal, State and Local) accounted for over 40% of GDP  in 2011.  Then it becomes clear that you are already living in on of those countries where the government controls everything (call it whatever -ism you want).   Next thing you know,  you’ll start connecting the dots between the nation’s skyrocketing public debt and the private fortunes amassed by a select few, and no one who’s in on the fix wants that.

Better than one in seven Americans are now on food stamps thanks to Washington’s disastrous policies, but narcissists refuse to recognize the consequences of their own actions.  That’s how they sleep at night.  They see themselves as saviours, feeding the inferior huddled masses too stupid to fend for themselves, so of course they deserve more money.  The only thing they learn from shitty results is that they need more power, more control and more money.  

The so-called “fiscal cliff” represents nothing more than a return to policies proven far less dysfunctional than the current ones, but Washington doesn’t see it that way. Instead they want you to beg them to save you from this horrific monster and adore them when they double down on policies that serve to increase your dependency on them.

By any and all reasonable measures, it’s worse than the Great Depression, and still deteriorating.  Just remember that truth is the narcissist natural enemy before you speak.


 Notes for nerds:

 The Fed calculates and publishes M1 velocity, M2 velocity (currently at all-time lows) and MZM velocity (also at all-time lows), however velocity of monetary base (which has data back to 1918) must be calculated manually by dividing GDP by monetary base.   Here’s the link to that chart with downloadable data:

William T. Gavins Fed paper on understanding recent changes to the monetary base:

This chart, with downloadable data compares changes in National Debt vs.  Changes in GDP, so it shows how much bang for the buck you’re getting.  2002-2011, 9.3 Trillion in National Debt has produced 4.8 Trillion in GDP growth, making the effective interest rate (based on repaying principal only) 94%.

If you’re not familiar with malignant narcissism (I wasn’t until very recently): 

Art Cashin’s terrific piece on the Weimar collapse:

Foodstamp data:

2011 Total Government spending:

  1. [...] expanding at about a 5% clip, know that velocity of money is grinding lower every time you breathe.READ MORE August 20th, 2012 | Tags: Cult leades, Money, Narcissistic, personality disorder, Self-worth | [...]

  2. This is quite interesting. I spend quite a bit of time looking at revolving credit and am certainly of the opinion that no recovery is happening, but velocity is not anything I looked at. Can you please provide any additional information as to why this is so critical? Certainly the first chart speaks volumes from a comparison standpoint, but is there more to it?

    Obviously the total debt is the key point here, that alone is enough to put the kibosh on any long term prosperity.

  3. Imagine a small, self-sufficient town of one thousand people with a million dollars in currency ($1,000 per person). That town could be hell on earth, with all the wealth concentrated in a few hands (and thus a GDP of zero), or it could be bustling with activity, with each person earning their keep and then spending on other businesses. If everyone in the town earns $1000 and spends $1000 each month the GDP of the town is twelve million, so velocity of money is twelve.

    If they lose confidence in one another, they’ll spend less. If everyone spends less, everyone earns less. If avtivity drops to $500 per person per month, GDP drops to $6 million and VoM is now 6.

    And as I said before, if the town allows a few citizens to hoard all the money, velocity goes to near-zero, and people starve.

    Hope that makes sense.

  4. …In other words, velocity of money is what determines the town’s GDP. VoM is so important because if VoM is good you don’t need to print more money to have a thriving economy.

  5. [...] the economic recovery keeps going this strong, none of us will survive it. Link excerpt: According to Wikipedia, Narcissistic personality disorder (NPD) affects one percent [...]

  6. [...] velocity of money this guys pretty good. quote: So I’ve got a whole bag of “Fuck You!” for anyone who still thinks nothing could be worse than another Great Depression. The path we’re on ends with mountains of corpses when the great experiment fails. quote: No matter what color Kool-aid you prefer, a Harvard Law School graduate who wipes his ass with the constitution will occupy the White House until 2016. Any flavor difference you think you detect is artificial. Neither party has any intention of balancing the budget or stopping the generational rape of America. They exist only to give you the illusion of choice. he tells it like it is. Shhhh…It’s Even Worse Than The Great Depression http://acrossthestreetnet.wordpress….at-depression/ [...]

  7. Just dropped by to say wonderful article Mark. Well done!!!

  8. Thank you, nmewn, I’m a big fan of yours, too. Although I don’t understand your handle.

  9. [...] could continue to fall, especially considering that the monetary base is expanding faster than GDP as noted by Mark Mchugh on Across The Street. This could facilitate an even more precarious scenario. If the CPI continues [...]

  10. Historical data shows us that in times of relatively stable inflation ( e.g. 1983 to 2003 ) inflation & money velocity correlate. In times of wildly fluctuating inflation ( e.g. 1932 to 1952 ) they don’t. What conclusion can we draw from the last three years? See the following graph for an illustration of the above.!/photo.php?fbid=477687228922082&set=a.432615543429251.107735.100000424278871&type=1&theater

  11. [...] August 21, 2012 by mktgeistmike Leave a comment Submitted by Mark McHugh from Across the Street [...]

  12. People never learn from the PAST

  13. [...] Read the rest @ Acrossthestreetnet.wordpress.comBe Sociable, Share! Tweet [...]

  14. [...] McHugh August 19, 2012 Shhhh…It’s Even Worse Than The Great Depression [H/T to Tyler [...]

  15. [...] Shhhh … It's Even Worse Than The Great Depression [...]

  16. I understand if the velocity of money is in good shape, the need for new money is not as great.
    But the fact that new money IS printed, will, in and of itself, reduce velocity, right?
    Don Levit

  17. You are correct, Don, but there’s a little more to it. You should add money to the system in hopes of increasing activity (VoM). The increase in activity should drive GDP growth, not all the extra money pumped in. When velocity falls, it takes more money (which means more debt public debt) to keep things status quo.

    A lot of people are dismissing the drop in VoM because the monetary base was expanded (as it was in the great depression). What I was trying to show is our fed isn’t concerned with VoM, they are concerned with GDP and that focus makes us borrow $1 to get .50 in growth.

  18. There’s some great prose above, Mark, wow! (Of course I do not dismiss the drop in VoM–I’ve been watching the same FRED graph myself for about a year now–but, ever resourceful, The Bernanke has been incorporating this data into his GDP [Grand Desperate Plan], watching the markets and talk-pumping his way through to–well, to The End, as you say! Kerplow! KUTGW)

  19. Mark:
    Thanks for your reply. A fellow on Zero Hedge brought this up recently, and it was the first time I had heard it, and the first time I looked at velocity in that way.
    You are correct about GDP, and how every dollar of government spending, including the deficits, is added in.
    It does make GDP look better than it really is.
    I made a copy of your article, and have it “stored” with a few other important articles.
    Thanks for writing this.
    Don Levit

  20. Thanks very much, Don.

  21. Thanks. Honestly, I hope it doesn’t come to that, but it doesn’t look good.

  22. Mark… Very nice work!!! thanks!!!

  23. [...] Submitted by Mark McHugh from Across the Street [...]

  24. Keep in mind that this is only part of the problem. The larger one is fallout from a trillion dollars in subprime lending, part of over a quadrillion dollars in unregulated derivatives, something which even policy makers cannot solve.

    Ultimately, the problem lies not just with government but financial big business which it served and households purchasing happily through heavy borrowing and spending.

  25. No argument here, Monk.

    The good thing about a collapse is it teaches people painful lessons that stick. Maybe you shouldn’t run trade deficits for forty years (or whatever ut’s been), maybe houses don’t always go up, maybe deficits do, in fact, matter. When you lend money to people you shouldn’t, you go to the poor house. etc etc

    Right now everybody is looking for someone else to “fix” what they don’t like. Which would be OK if it didn’t always involve sticking somebody else with the bill. We haven’t even begun facing reality.

  26. [...] occasional Congressional Representative is willing to admit. The next step will be the big one. The monetary situation is direr than the Great Depression and, according to the World Bank, the economic recession ahead will be more severe than the [...]

  27. [...]  ….In 1913, the total currency of Germany was a grand total of 6 billion marks. In November of 1923 that loaf of bread we just talked about cost 428 billion marks. Please read full and follow at: [...]

  28. Thanks Mark, a new facet of the economic disaster that I can bring up in class! My Keynsian prof. hates me, I think. Tough shit! Thanks again.

  29. Interesting that you go on to slam the FED about velocity of money with not a word about how the FED’s actions have caused velocity to plummet…

    And talk about Art C “explaining” the unraveling of things in Germany when all he does is describe price action in the market.


    Great analysis.

  30. Interesting that you felt the need to comment on an article you either didn’t read or didn’t comprehend.

    Sorry to wake you. Go back to sleep.

  31. @ socialsity,

    I’m not saying that you should buy into the shit their selling, but with the price I’m sure your paying for your education, try to get good grades first.

    And while its relatively easy to see the flaws in any existing system, it’s not so easy to design ones that work well and are fair. I may seem like a total hard money advocate, but that’s not totally true. Hard money systems tend to be deflationary. The reason that’s bad is when the purchasing power of money goes up when you do nothing with your money, people will do nothing with their money. It makes it very hard for people with good ideas to raise capital.

    Learn as much as you can, my friend, because your generation is going to have one hell of a mess to clean up.

  32. How wonderful the 80′s were…

    Powerful, excellent work Mark

  33. [...] For much more discussion on this, please check out this article. [...]

  34. Great article, Mark.
    I don’t think the velocity figures would look as cataclysmic if you removed from the total monetary base the trillion$ that the commercial banks are not lending, but instead leaving on deposit at the Fed (essentially so they can claim they’re solvent). Would you agree? Or do the AMBNS figures already take this into account?

  35. That’s absolutely true, Bill (and no the figures aren’t adjusted). The main reason I used AMBNS is it is the only monetary data going back to the GD. I thought if I wrote 20 paragraphs on all the differences between then and now, no one would read the article. Currency in circulation had to increase in the thirties because people withdrew funds and stuck them in the matress. The dynamics in play are very different, but the end result is the same (i.e. slowing economic activity). The proof that velocity is dropping precipitously is that all the money blasted into the economy by the federal government isn’t showing up in GDP. Example: Say VoM = 3 and the hypothectical money supply is $5T, so GDP = $15T. If you blasted a Trillion in that economy, GDP should go to $18T (3 * $6T) provided VoM stayed the same. If it goes above $18T VoM must have increased, if it goes to anything below $18T, VoM has slowed. So if GDP stays at $15T, VoM has slowed to 2.5. If you bazooka in another trillion via deficit spending, you now have a $7T money supply, so if GDP doesn’t budge, VoM is now 2.14 ($15T / $7T).

    How many more Trillions should we shoot in to maintain GDP? And why doesn’t anyone care about VoM?

    Because most of those trillions in deficit spending, supposedly trying to “recover” our economy, wind up in the pockets of people who were already rich when all this started.

    In some respects, I’d say comparing VoM in different eras is like comparing Babe Ruth to A-Rod, you can never get a pure apples-to-apples comparison. You could argue that Ruth wouldn’t even be good enough to be in the majors today (and that may be true), and I’ll point out that when Babe Ruth hit 60 home runs, most of the teams in baseball didn’t have 60 home runs TOTAL.

    It’s impossible for me to be 100% sure that VoM is worse now, just as I have no idea how many people couldn’t feed themselves during the GD, but I know this: The last time we accumulated debt at this pace, there was a very, very real world war in progress. Now, we invent enemies to boost GDP.

    Hope all this explains why I was comfortable with that chart. If I thought it was a cheat, I wouldn’t have used it.



  36. [...] Shhhh…It’s Even Worse Than The Great Depression. [...]

  37. This article leads me to ask the following: Are people not spending because they are afraid to, or are they not spending because they have no money? Is there any way to know?

    The mention of Greenspan judging the state of the economy by underwear sales strikes a chord with me. There is a local upscale men’s clothing store whose ads I use as an indicator of sales. Several years ago it was “buy one, get one at 50% off.” Over time the ads changed to: buy one suit, get two shirts and a tie free; buy one suit, get another suit free; and now it’s buy one suit, get TWO free suits.

  38. Hi Sharon,

    I think there’s a couple reasons for the drop in velocity of money. Inflation adjusted income per capita in most areas that are not Washington DC is falling. America’s aging population is trying to squirrel away money and most importantly, our present tax structure allows people to sit on mountains of cash, rather than force them to “use it or lose it.” I didn’t want to address that directly in the article because it attracts swarms of ideologues. You know “you can’t force people to give away THEIR money” yada yada. It’s not THEIR money, it’s MY KIDS’ money, and I don’t care to hear how they stole it fair and square.

    A “use it or lose it” tax policy for the super wealthy would do wonders for VoM, and the economy in general. If you’re going to bazooka deficit dollars into the economy, you need to try and suck as many of them back out as possible. Getting people to understand that ain’t easy.

  39. [...] McHugh reports:  Velocity of money is the  frequency with which a unit of money is spent on new goods and [...]

  40. [...] McHugh reports: Velocity of money is the  frequency with which a unit of money is spent on new goods and [...]

  41. I think what this fails to mention is how the effect of the velocity of money will have going forward when all that money that has been “pumped” and “printed” and hoarded by those rich and powerful are “used” in the economy. I think that when this money starts chasing those goods and services we are going to see overwhelming inflation. I mean I think we are seeing alot of this “printed” money finding its way into the stock market and commodities. I don’t think it has really hit the market yet. However, we all know that with there is only a limited amount of goods and services and if there is a dramatic increase in dollars chasing those goods we will have “inflation.” I believe the inflation that we will have soon will be unlike anything any American has seen in their lifetime.

  42. Scary times Mark, scary times…

    Great article.

  43. Thanks, Gomp

  44. So sad that < 2 % of Americans grasp what you're saying. This is why I refuse to vote party lines. Corrupt bastards they all are.

  45. [...] McHugh reports: Velocity of money is the frequency with which a unit of money is spent on new goods and services. [...]

  46. [...] According to this graph the velocity of money is now much lower than it was in 1960. But, this article has the same graph going back to 1920 and the current velocity of money, at 1.4, is worse than the [...]

  47. [...] According to this graph the velocity of money is now much lower than it was in 1960. But, this article has the same graph going back to 1920 and the current velocity of money, at 1.4, is worse than the [...]

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