Why NOT Shrinking Credit In Recession = U R Screwed

Today’s lesson that you should have derived from your elementary and middle-school math is served…. smiley

Let’s recap first.

GDP = C + I + G + (x – i), where “C” is consumption, “I” is investment, “G” is government spending and (x – i) is net exports.

GDP must be bought with something, and that “something” must either be money or credit.  Since each “unit” of money or credit “turns over” in the economy some number of times in a year, and the unit of time in GDP is a year, we have:

GDP = ((M + C) * V), where “M” = money (earned output from personal production), “C” = credit (a promise to produce tomorrow) and “V” = Velocity (number of times the “M” or “C” turns over.)

Now let’s look at “M”, or “money.”  We think of “money” as cash, but in fact “M” is a subset of something larger, otherwise known as “wealth”, or “W”.  Wealth is that which you’ve previously earned and retain.  “M” is that which you can immediately dispose of and is a subset of “W”.

There are two forms of “C”, or credit.  “C” either comes into existence because you sequester some of your “W”, or it comes into existence without such a sequester.

When you take a loan backed by collateral you are making liquid current wealth.  In doing so you post as reserve something you hold as wealth.  This is not inflationary for that reason — you withdraw from the market the potential use of that wealth during the time the loan is outstanding by posting it as security.

But when you have unsecured credit outstanding that is pure monetary inflation because you posted exactly nothing against it other than your word you will pay, and that has no wealth  value (it is “on the come” that you will earn wealth tomorrow.)

All this should be clear by now if you’ve been following these discussions for a while.

Now let’s talk about what happens when GDP declines.

The common rubric from the Keynesians is to “print more money!” and “spend in deficit!”, which is the emission of unbacked credit into the system.

This is in fact exactly mathematically backward.

Remember that GDP = (( M + C ) * V)

Therefore, if GDP declines since “M” is a subset of earned wealth it cannot decline.  You therefore have exactly two things you can do — you can reduce “V” (which can only be indirectly controlled — for example you could raise bank reserve requirements) or you can withdraw “C”.

If you don’t then the people have the effect of inflation, as their wages do not go up (if anything they go down during a recession!) but since GDP declines and the equation must balance there are more units of “C” or “M” required to buy each unit of GDP!

That’s destruction of your purchasing power and it is exactly what must, mathematically, happen if the government engages in “pump priming” and other similar stupidity!

It’s exactly backward folks!

Worse, history proves I’m right.  In 1920-21 we had an extremely sharp deflationary recession.  Rather than “prime the pump” The Fed (which existed at the time) raised interest rates, thereby constricting “C” and the government balanced the budget, therebyremoving the excess “C” emission it was involved in.

What happened?  The economy cleared the excess capacity and employment recovered within 18 months, with the posting of the largest y/o/y industrial production gain ever in the history of the nation.

The Keynesians are wrong, Obama is wrong, Romney is wrong, Johnson is wrong, Bernanke is wrong, Krugman is wrong and the basic mathematics that everyone agrees upon, if you bother to look at them, prove it.

Mathematics just are.  The fundamentals of mathematics present truth, whether you wish to admit to them or not.  Pi = 3.141592654…. no matter what you may declare.  2 + 2 = 4, irrespective of what you declare.  And GDP = (( M + C ) * V), andmust, because every unit of GDP must be bought with something, and all of those “somethings” are either a unit of money or credit.

These people therefore are not “wrong”, they’re either incompetent or intentionally screwing you.

Pick one.

More to the point, no candidate or politician who takes a position contrary to this mathematical fact is fit to hold office as he has announced his prior intention to steal from you.

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