Sep 26

We talked about the Taper, today, I’ll share my bigger concern, the potential wave of inflation. We first need to understand a couple things. First, a look at M1 –


From the end of the recession, M1 (Defined as “M1 includes funds that are readily accessible for spending. M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler’s checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts.”) has gone up by a Trillion Dollars, or over 60% in just about 4 years. This doesn’t tell the whole story. We need to look at Velocity –


Velocity is the reason why the required money supply doesn’t need to equal an entire year’s GNP. It’s defined as the average frequency with which a unit of money is spent on new goods and services produced domestically in a specific period of time. The time unit is nearly always defined as one year. So, we stare at the growth of M1, but see that velocity has tanked. We exited the recession with about $1.6T in ‘cash’ times about 9 giving us a result of $14,4T. Now, M1 is nearly $2.6T, but velocity has dropped to 6.5 resulting in $16.9T. Barely a 17% increase over 4 years time. (Note, GNP is running at just over $16T for the year, so my eyeballing the numbers here is resulting in a bit of rounding error.)

I don’t know when the economy will gain some steam, but it will happen eventually. When that happens, velocity will go back to more normal levels, and that will potentially create a wave of inflation that will catch many by surprise. But just as the banking crisis was predictable, so is this. The only way to avoid a highly damaging level of inflation is for the Fed to quickly drain excess liquidity. So as we move forward, the money supply is an important part of the equation, but don’t take your eye off velocity. It’s the indicator that will tell you whether the Fed has to act, and act fast.

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Sep 24

We are living in interesting times. The Fed Funds Rate is targeted at 0-.25%. The last time it was this low was in the late 1950’s, so it’s fair to say that for most of us, these are the lowest rates we’ve ever seen. As I became interested in finance in the late 80’s, fed funds rose from 6% to 10% before starting its long decline to where we are today. In a grad school economics class I recall a discussion on monetary policy, and the question came up – If the Fed Funds Rate ever went to zero, what tools would the Federal Reserve have to push the economy out of a recession?

We saw the answer. It’s called quantitative easing. Instead of simply driving interest rates down, the Federal Reserve began buying mortgage backed securities, 40 billion per month in the early rounds, now, also long term treasury bonds for a total of $85 billion per month. In effect, this is money being printed and pumped into the system, in the hope that this money will help to spur the economy. The results appear to be a bit questionable. Last August, I wrote Cash Hoarders – QE3 won’t help, in which I discussed the enormous cash hoard that U.S. companies have in their coffers. If their $2 trillion dollar nest egg isn’t encouraging them to expand their businesses and hire more workers, why would QE cause them to behave any differently?


Interest rates on mortgages are also at near record lows, but many who desperately need to refinance to take advantage of these rates are unable to secure a new loan. The banks are requiring higher FICO scores than they did years ago, and people are still stuck with under water mortgages at rates far higher than they should be paying. The money that’s pouring our of the Fed appears to be propping up the stock market, but doing little to help the economy.

Now, for the Taper. When the Fed is satisfied that the economy is on track, as measured by a lower unemployment rate and improving GDP, they will reduce the purchases. Not bring them to a halt, not reverse their position, just Taper a bit. For some reason, the prospect of this happening freaks the market. To be clear, QE which the Fed says is needed because the economy isn’t really as healthy as it should be, and will slow down as the patient improves. But the market prefers the bitter medicine instead of a healthy economy?

Next (on Thursday) – The Velocity of Money. This little understood phenomenon is part of the potential wave of inflation that may occur after QE ends.

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Sep 21


This week, The Bernanke, along with the Federal Reserve, decided the economy wasn’t growing enough to end QE, and would hold off on the taper. The market breathed a sigh of relief and rallied on this news.  We’ll talk more about QE and the Taper this coming week.

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Jun 02

Let’s start this week with Andy Hough’s My Retirement Blog. Andy wrote why you should Take Advantage of a Stretch IRA, along with excellent examples of the kind of withdrawals required at various ages. The difference between taking the money and running and taking the deposits over the years can be huge. As long as the tax code still permits, consider the stretch if you are fortunate enough to inherit an IRA account.

Still on the IRA topic, at 20 Something Finance, G.E. Miller wrote Roth vs. Traditional Retirement Accounts: Why Roths are Not Always the Clear Winner. You see, there’s a bit of forecasting required, what bracket are you in now, and what might it be in the future? Those who retire with all their money in a Roth IRA have left money on the table, or worse, in Uncle Sam’s pocket.


Barb Friedberg asked (and answered) What Happens When Fed Exits From Stimulus? Yes, that’s the million dollar question. No, I’m not going to give you the punchline, just tell you that Barb offers a great discussion on the topic, tell her I sent you.

The discussion surround Apple and its offshore cash hoard seems to be fading in the news. One last article on the topic from Robert D Flach, the Wandering Tax Pro. Robert says Don’t Blame Apple, and agrees that they are simply following good business practice. If you have a congressman who is your friend, neighbor, or just in your pocket, why not tell them to suggest that the fault isn’t with Apple, but with our tax code, It’s congress’ job to fix this.

Andy Hough also guest posted at Tight Fisted Miser. He was still stretching, but this time he wrote How to Stretch your 5% cash back. A clever strategy to get 5% on more than just the select categories your card offers that quarter.

We’ll close this week’s roundup with William Cowie’s guest post at Five Cent Nickel – What do you do with your windfalls? A great question, as I often observe how people will treat their tax refund as a windfall, yet, it’s money out of their check every pay period. Check out Will’s thoughts on windfalls.

I’ve been tinkering a bit with a PB blogger feed. A page of the last couple posts that bloggers I follow have written. So far My Favorite PF Bloggers  is how I follow the PF bloggers I like best.

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Nov 07

This week, Canadian Finance Blog offers Tips To Prevent Running Out Of Money In Retirement. Some advice and a warning to be careful about how you choose your post retirement withdrawal level.

Len Penzo touches on The Fed’s Disgraceful War on Average Americans. QE2 anyone? Will all this money thrown into the system propel the next economic upturn or simply spark inflation? We’ll see.

The Oblivious Investor discussed 401(k) or IRA? What to Do If Your 401(k) Stinks. Some excellent insight, as a 401(k) with poor choices of investments or high expenses within the funds can quickly negate any tax benefits you hope to achieve.

Darren guesting at Money Help For Christians gives 4 Tips to Pay Off Your Debt ASAP. Some basic advice thats worth repeating. Those cards can carry some crazy high rates, pay them off and save a bundle.

Kevin at Out of Your Rut tells us why Your Kid Doesn’t Need a New Car. He actually offers five reasons to rethink your decision if you are going down this path. Good article Kevin, as I tweeted you, J2 will get her mom’s ten year old car when she starts driving.

Last, BSimple at Simple Financial Lifestyle posted Simple Weekend Reading – Retirement Edition, a nice roundup I was proud to be included in. Thanks, B.

Remember to change your clock – spring ahead, fall back!

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