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Tuesday, May 13, 2008


twice as much money in six years?

calculated risk praises this episode of chicago public radio's 'this american life' called "the giant pool of money" which addresses the housing bust.

early in the narrative, the stage is set by highlighting what ben bernanke has called the "global savings glut" -- the massive growth in global savings that, in the final analysis, was funneled to mortgages in america, britain, spain and elsewhere through the vehicle of mortgage-backed securities and collateralized debt obligations (CDOs). it is noted that global savings has doubled in the six years of the housing boom, up to some $70tn.

where did this money come from? it's unsatisfactory to simply say "poor countries got rich", as the essay does -- were global money a zero-sum game it would imply wealth transfer, but clearly it isn't a zero-sum game. money was created here. and how is money created?

the answer is banking -- in effect, we're talking about an increase in the global velocity of money, the multiplier, the level of financial and trading activity.

the global savings glut is an outgrowth of the nexus of globalization and financialization -- it is a product of systemic international leveraging through global banking.

and it is, i suspect, only as durable as the velocity that created it.

at the heart of the instability of the financial system -- and the radical and panicked response of american central banking -- is the threat presented to velocity by default and deleveraging. a significant slice of global wealth could be destroyed in a deflationary disaster.

the final line of this synopsis of monetary velocity says a mouthful.

Financial innovation creates new types of money that are not included in the money supply definitions.

the unwinding of that innovation is what we are faced with -- what satyajit das called nuclear deleveraging, with large economic implications already manifesting per s&p.

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