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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Raymond Duray who wrote (4410)	8/26/2001 11:26:15 PM
From: John Pitera	Read Replies (1) \| Respond to of 33421

Hi Ray, a truly excellent post on several fronts, very thought provoking and a pleasure to read. You've got you mental engine firing on all cylinders; Kudos. It's very true that this US Economic Supertanker seems to have been moving into more turbulent waters and the monolithic size and nature of Tanker, may keep it moving in this this less appealing direction. Reflecting a bit on the FED's experiment with Monetarism in the Late 1970's and early '80's, we have to realize that the composition of what comprised M1A, M1B, M2 ( which have since been streamlined with the letters now gone) underwent very substantial shifts. I don't have all of the specifics handy tonight, but we used to live in a world where Checking accounts could not bear interest, Money Market accounts did Not exist (I believe) Negotiable Orders of Withdrawal (NOW) were more prevalent and tax rates were considerably higher. There was a massive Banking deregulation that passed Congress in 1980 and it changed the composition and holdings that were contained in the different Monetary Aggregates. And As Jude Wanniski has recently pointed out, the tax rates, both in the corporate and individual sector, can impact the liquidity demand to shrink (if this is true) I do know that the Velocity of Money plays a huge roll in Inflation or the lack thereof, and it seems to be affected greatly by psychology (If my dollars are worth less next month, I'll buy things I need immediately and stock up on them, not wait for bargains) Here is some of Wanniski's piece................ Shultz, a labor economist from the University of Chicago, where he taught with Milton Friedman, persuaded Nixon to abandon any thought of opening the gold window again and try Friedman's monetarism. They had the backing of Citicorp's Walter Wriston, a Friedman admirer who had hired several dozen monetarists for the bank's economic unit. Instead of worrying about the foreign-exchange value of the dollar, the Treasury and the Fed would now concern themselves with the quantity of dollars created by the Fed, the money supply. The idea was to feed the banking system with a steady 3% rate of increase in the quantity of money. What nobody understood at the time, including Nobel prizewinners past and present, was that the demand for dollar liquidity would change as the tax structure changed. Higher tax rates caused liquidity demand to shrink and vice versa. In 1979-80, the Fed was pouring liquidity into the banks while the inflation-swollen tax brackets and Jimmy Carter's credit controls were sinking the demand for money simultaneously. The Ms looked like they were behaving, but the velocity of money was going through the roof and so was the price of gold, hitting $850 in midday trading on February 1, 1980. When it became clearer that Ronald Reagan would defeat Carter and then cut tax rates, the demand for liquidity rose and the price of gold began an 18-month decline to $300 from $850; the Fed was still fighting inflation when deflation had become the problem. The 1981-82 Reagan recession was the worst since the 1930s and almost destroyed the economy and his presidency. The deflation ended in the week of August 11, 1982, when Fed Chairman Paul Volcker was faced with a crisis in Mexico, which could not pay interest on its $80 billion in debt to U.S. banks. He had to tell the Reagan Treasury he could no longer worry about the money supply because he had to monetize $4 billion in Mexican peso bonds. The price of gold rose $56 that week and the financial markets skyrocketed -- bonds, stocks, the S&P 500, with Nasdaq out front. The experience should have persuaded policymakers even then that a floating unit of account could do deflationary as well as inflationary damage. Here we are again, though, puzzling at the odd behavior of the financial markets, debating whether the dollar is too strong or too weak, and not quite realizing how heavy a price is being paid by everyone on the planet for not having a fixed standard of value................. It does appear that working with the Rates of Change of Growth and Modifying those may work better than dealing with the growth of the Raw Aggregates. I feel that this is an evolving system and we don't have all of the answers and are still trying to understand, the Macro economic cycle's Expansion and Contraction of Economic and Credit Growth. Hence I'm highly receptive to all thoughtful discussion, regarding these issues and I'm looking forward to engaging in some additional reading and research on this most Intriguing Subject. And I have to close with the simple statement that quite sure I don't have all the answers on this, It would be the height of Hubris to think I did....but it's interesting. John