Friday, August 23, 2013

Earning Money Off of Money

Click to enlarge.

The Good News: MZM can apparently generate roughly $800 in interest per month per capita (July 2013 dollars) in a "perfect" economy, regardless of how much MZM has grown.

The Bad News: The economy can apparently only stay "perfect" for a month. Further, the economy is about as far from "perfect" as it can get right now. $11.9 trillion in MZM is currently generating just $28 per capita per month in interest (July 2013 dollars).

As seen in the chart:

* In 1982, the interest earned took just one month to bottom. Nice bounce!

* In 1994, the interest earned took just one month to bottom. Nice bounce!

* In 2003, the interest earned took roughly 18 months to bottom. Sticky bounce!

* In 2009, the interest earned took at least 45 months to bottom. Yet to bounce!

Stickier and stickier!

The bottom of the trend channel cannot trend down forever. There will be a linear trend failure here. Guaranteed. It is impossible for interest earned on MZM to fall below zero. The best it can do is fall to zero and stick there semi-permanently. So what would happen if the economy needs it to fall below zero as part of some future recovery process? Or even this "recovery" for that matter?

December 1999
Japanese Monetary Policy: A Case of Self-Induced Paralysis? - Ben Bernanke

Among the more important monetary-policy mistakes were 1) the failure to tighten policy during 1987-89, despite evidence of growing inflationary pressures, a failure that contributed to the development of the “bubble economy”; 2) the apparent attempt to “prick” the stock market bubble in 1989-91, which helped to induce an asset-price crash; and 3) the failure to ease adequately during the 1991-94 period, as asset prices, the banking system, and the economy declined precipitously.

Talk about the pot calling the kettle black! House prices? Oil prices? Bubble economy? Hello?

The BOJ’s announcement that it would maintain the zero rate policy for the indefinite future is a positive move that may well prove helpful.

Oh, yes. Very helpful. Still doing it indefinitely! I shall end on a bumper sticker idea.

ZIRP Don't Werk!

This might be an "indefinite" money making idea! Well, maybe. Time will tell. Just be sure to have the bumper stickers ready in case the economy ever falls apart again. Keep in mind there is a risk here. I'm assured over and over that it can't ever happen again. The Fed has finally perfected monetary policy. Nothing but biscuits and gravy from here on out! It's therefore more of a contrarian play.

This is not investment advice.

Source Data:
St. Louis Fed: Custom Chart


Stagflationary Mark said...

Bonus Thoughts

Note the steepness of the interest earned crashes and recoveries. They are getting steeper over time, almost like we're becoming more and more overleveraged as a society.

What interest rate would it take, right now, to hit $800 again in the chart?

Roughly 2.1%. That's it. And it would last a whole frickin' month. Hurray.

And people wonder why I have purchased long-term TIPS with intent to hold to maturity.

Who Struck John said...

Umm. When you say that the MZM can't go below $0 real interest per capita, you are neglecting the possibility that the investment could actually lose money in real terms (ie. inflation adjusted interest plus principal could be less than principal initially invested).

Hate to say it, Mark, but for once you're not pessimistic enough!

Mr Slippery said...

MZM could generate negative interest if the Fed set such a policy. The ECB has openly discussed the idea of negative interest rates. The Fed might do the same. Of course, talking about it and doing it are very different things. It's a mad, mad, zirpy world out there.

Stagflationary Mark said...

Who Struck John,

You are absolutely right of course.

I had a hard time with the wording on this post. It's the inflation adjusted nominal interest generated, if that makes any sense. That does not mean that the interest itself is keeping up with inflation. At $28 it most certainly is not.

Between us, we can be even more pessimistic!

The only way you can personally generate a constant maximum $800 in interest (in today's dollars) is if your personal MZM has grown and continues to grow enormously. In other words, it's like trying to maintain weight during a tapeworm infestation! ;)

Stagflationary Mark said...

Mr Slippery,

A negative nominal interest rate policy would cause me to move my savings and checking directly to cash.

I suppose it would depend how low it went though.

-0.0001% wouldn't be enough perhaps.

-100% would see me racing to the bank at break-neck speeds! ;)

Stagflationary Mark said...

And don't even get me started on Mankiw's idiotic interest rate solution!