I’m very sorry it’s taking so long for me to get this out to you. Please know that I’m still working on it.
It first occurred to me in Real-Time on the day the new Sarah Palin book came out (9-20-11) and I went to the bookstore at 9AM and spent the whole day reading it (until 10PM); and I’m sorry I’ve been too exhausted to express the thoughts that came up about the economy that day.
The Rogue: Searching for the Real Sarah Palin [Hardcover] by Joe McGinniss (Author)
I was hoping to dig up some real dirt on her; but unfortunately the book only exposed her as an ordinary incompetent who fits neatly into the box I had originally stereotyped her with. Nothing more, nothing less.
Sorry, when I started seeing the market declines; both in the SP, Gold, and Oil–simultaneously; I guess I should have felt more obligated to say something sooner; but I was just too exhausted to get it out there in the usual manner; as I wanted it to be polished and correct.
So, here is my off the cuff, unpolished version:
I spent one part of the day on 9/20/11 thinking about what would actually constitute M1. Not the actual definition of M1; but what would simulate it to take the place of MQ in the equation.
The three points at issue were: savings accounts, CD’s, and Treasury-Bills.
I’ll skip the analysis, and get to the point of it. I concluded that a savings account would be part of M1 because you could immediately withdrawal its entire value, transfer it into a checking account, and then spend it immediately. A CD is not part of M1, because there is a penalty for early withdrawal and it’s not immediately liquid (at least at full value). So the real issue is T-Bills.
I came to the conclusion that a T-Bill WOULD be part of M1; because it is valued at full face, when it comes due. It could be bought and sold for a discount or premium; but once you already possess it, it is simply a piece of future cash; that activates on the day it matures.
I won’t get any deeper than that, except to say that once you expose T-Bills as part of M1; then the purpose of Operation Twist becomes a little clearer to you when you use the equation:
Supply of All Real Values * Price Level = Money Quantity * Money Velocity
With the above equation, the term “Price Level” means that of goods and services in the economy; not that of financial assets, stocks, or anything else. Just real goods: like gasoline, food, and gold.
This next part is a bit arbitrary, but at some point between 3-months, or 6-months to a year; a short-term T-Note (which is an ASSET) turns into a T-Bill (which is a piece of future CASH). The time period may have something to do with inflationary expectations (Money Velocity); but in the current moment that is stable, so at some point, a T-Note turns into a T-Bill, and it jumps across the equation to the other side.
Now, when the Federal Reserve starts selling massive quantities of short-term bonds, it is TIGHTENING the current money supply; and when it starts buying longer-term bonds, it is reducing (or making more negative) the slope of the yield curve.
The end of the last Oil/Gold boom had a negative sloping yield curve with short-term rates at 18%; and long-term 20-year rates at 15%. However, to start moving in that direction, or to generate its effects; all you really need to do is to start TWISTING the yield-curve in a negative direction; which appears to be what the Fed is currently doing.
So the point of “Operation Twist” is to TIGHTEN the current money supply, and to TWIST the slope of the yield curve in a negative direction.
Therefore, what you are getting is simply a massive appreciation of the U.S. dollar right now.
If STOCKS and OIL and GOLD: — ALL GO DOWN AT THE SAME TIME; it’s all coming from the FED’s “Operation Twist” and has nothing to do with anything happening in the real economy.
Be careful that they don’t force the price of gold back down to $900, or the price of oil back down to $40, or the SP below 800.
I just wanted to differentiate between something from Europe, or in the Stock markets, or in the Gold and Oil markets; and just simply say if they are all going down at the SAME TIME; then it is coming from the Federal Reserve, due to Operation Twist; and nothing more (or less).