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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Steve Lokness who wrote (29345)	5/4/2005 3:25:22 PM
From: Elroy Jetson	Respond to of 116555

If you have been to any depository institution over the past year, you have heard their pitch to lock up your money for some duration to get a slightly higher yield. This was not the case two years ago. The higher yields on offer at banks as opposed to money market funds has also been noticeable. From what I know, coordinated moves like this are often initiated by the Fed to draw money out of speculative markets and even slow money turnover aka velocity. *** Here's an economic mind twister. In 1802 English economist Henry Thornton demonstrated that the issuance of credit and additional paper money are merely an increase in money velocity, not an increase in capital. Here's why. At any given time, an economy has a fixed amount of capital. Issuing credit or printing additional money does not increase the amount of capital, it merely devalues all existing money. Issue new credit equal to the amount of capital and each dollar now represents 50 cents. Yet because the credit or currency bills issued have doubled the number of bills, the velocity of the turnover in that capital has doubled. Pay the credit all back and each dollar once again represents a dollar, yet the velocity of turnover falls in half. When the Fed is being "liberal with credit" they are actually taking the value from people who have money and distributing it to borrowers. When the Fed is "tight with money" they are merely taking the value back from borrowers and returning it to its true owners. .