Monetary Overhang?

[pete richardson]

Henry mentioned this in his recent report and BCA Research has
also suggested that rapid growth in M-3 relative to GDP through
2002 has left the US with liquidity overhang, perhaps to stoke housing
or oil or what have you.

Money disappears. Trillions of $ went up in smoke in the tech / telecom
bubble and economic crash. It is what I have referred to often as
'liquidity Burn-off". We experienced it in 2000-2002 and prior in 1987
when the mini-bubble in the market blew out. It is what ultimately
happens to excess monetary liquidity when it flows to fund financial assets.
It is a highly deflationary moment when it occurs.

There are high tech portfolios out there that had a market value of
$100 mill. at the top in 2000. Some went down to $5 mill. with no
sales and have recovered perhaps to $10 mill. So where did the
other $90 mil. go? It went poof!

The more I look at 2000-2003 the more I think that The US almost
bought the farm over this period.

It was that close in my view.

PR

[nodoodahs]

Money disappears. Trillions of $ went up in smoke in the tech / telecom bubble and economic crash.

Let's track this at a transaction level.
(1) Henry and Bill both buy "bubbledotcom" (symbol: BUBL) at it's IPO for $50. Transactional analysis: $50 from each of Bill's and Henry's wallets to BUBL.
(2) At the most recent trade, Pete buys BUBL from Henry for $250. Transactional analysis: $250 from Pete to Henry.

Does Bill have any more money because the last trade in BUBL was $250? Can I take a bunch of those stock certificates and buy a car, or gold, or new gutters for the house with them? Does each stock certificate represent a par value redeemable for $250 now? Are stock certificates legal tender?

(3) Investors get tired of the lack of profits at BUBL and start selling. Pete notices this, and sells in a panic. By the time Pete sells, the price is $50 again.

Did Pete's money supply diminish by $200 because of transactions (2) and (3)? Or did Pete's money supply diminish by $250 in transaction (2), and increase by $50 in transaction (3)? Pete has a net loss of $200 on these transactions. Henry has a net gain of $200 on these transactions. Money in = money out, no money disappeared. On the transactions with Bill and BUBL, again no money disappeared. Bill still holds his stock, he has lost only $50 (purchase price at IPO) and BUBL has gained $50 (purchase price at IPO) in their transactions.

Buys and sells are transfers of money. When the stock market collapses, it represents the actualization of a transfer of money from those who bought high and sold low, to those who bought low and sold high.

In/deflation are monetary phenomena and nothing more. Only the transactions of the Fed, banks, and lendors create or destroy money (unless we take the trivial example of actual physical destruction of printed federal reserve notes). It's apparent to those who track the monetary aggregates that, in the post-Bretton Woods era, there has never been a (monetarily) deflationary event. There have, however, been instances where the transfer of money has been drastic, from one asset class to another, i.e. stocks to bonds in several market crashes.
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.