Financial markets live on price-inflating bubbles?

Avner Mandelman has an interesting, and possibly critical, argument in a recent Globe and Mail article, In a world where money moves at a mouse click, Fed’s in a tough battle. Excerpts:

Money supply is the monetary base times the velocity of money. The first is how many dollar bills and dollar deposits are in circulation. But the latter is how many times each dollar (virtual or physical) circulates in a year.

The Fed can control the first – but it cannot control the second.

50 years ago a dollar bill changed hands perhaps four or five times a year. Then, when business began to be done by credit cards, this rate increased dramatically. And today, when many individuals and corporations pay their bills online, where payments are super-fast, the velocity of money has soared yet again. So even if the Fed withdraws some monetary base, it is that second part of the equation that today matters most. Furthermore, that research also showed that once money velocity approaches instantaneous, the money supply tends toward the infinite.

But because there are not that many opportunities, this electronic money latches on to anything with a credible story and moves fast into the new category. This movement starts the category moving – which causes more hot money to slosh into it – which in turn causes Wall Street to satisfy the money-slosh by generating more product.

The most recent such bubble was subprime mortgages, which were sliced and diced and packaged, then traded electronically – until they crashed. Now we are seeing the beginning of a commodity bubble.

So we’ve had the dot com bubble, housing, commodities (food!), and now possibly energy.

If this is true, then we have uncontrolled systemic forces artificially inflating prices, creating wealth for a few, and suffering for literally millions. If it is true, it is costing the world billions, if not trillions, let alone human lives – surely changing or stopping this should be a number one and immediate priority. So how can we validate, verify, and graphically communicate this? Can Global Sensemaking tools, Gapminder, et al help?

Is this a critical acupuncture point that needs immediate confirmation and decisive intervention? Are there other global systems effects that are operating on their own, like Artificial Intelligences not obeying the three laws of robotics?

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2 Responses to Financial markets live on price-inflating bubbles?

  1. Pingback: Acupuncture points for Global Sensemaking? « Global Sensemaking

  2. jackpark says:

    Another news item that might merit further research:
    “peak rare earth elements”

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