Monday, November 13, 2006

Money Matters

Elevator goin’ up

Saturday’s NY Times had an article on the increase of Junk Bonds being issued and how more and more firms are getting less than investment-grade credit ratings, yet aren’t having problems getting capital. The same Times had write-ups on the highest amount ever paid for a painting - Jackson Pollock, $140 million, sold in the last couple weeks to whom it is a mystery - and the most for a pre-modern era American painting (they usually aren’t that interesting but it still fetched I think around 40 mil.) Plus as we all know, the stock market has gained 15% in the last few months.

What this all has in common is money. Most people think the Fed controls money through its interest rates, but there is more than meets the eye. The money supply (dollar bills in circulation) is also going up, although the Fed has stopped reporting this figure (known as M3). This means more money chasing the same amount of goods – or more realistically more money chasing a little less more goods. Therefore, yes prices are going up and money is available for less than stellar business uses. Thus the problem. This is what causes business cycles.

When too much money is pumped into the economy unsound investments are made. Then when the “animal spirits” (Keyne’s words for human psychology) get wind that something is amiss, the downward cycle is worse than it should be because of these bad business investments (I am not saying a Pollock is a bad investment, as wouldn’t know, still whoever owns it sure pays a lot per each time he or she looks at it!).

When the economy takes a downturn investments which shouldn’t have been made because money was overly available turn bad quickly – and we are stuck with the fall-out. If the money supply isn’t tampered with then investments are more sound and economic growth (and jobs) more steady and solid.

Workers doesn’t like to sound-off negatively on the economy as humans have a remarkable tendency to grow and prosper despite setbacks along the way, still as someone once said, “what has the government done to our money?”.