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Generational Dynamics Web Log for 13-Jan-2014
13-Jan-14 World View -- Iran will 'roll back' its nuclear program, starting January 20

Web Log - January, 2014

13-Jan-14 World View -- Iran will 'roll back' its nuclear program, starting January 20

Plummeting velocity of money explains deflation trend

This morning's key headlines from GenerationalDynamics.com

Iran will 'roll back' its nuclear program, starting January 20
Plummeting velocity of money explains deflation trend
France's 'First Lady' admitted to hospital

Iran will 'roll back' its nuclear program, starting January 20

Iran's foreign minister Mohamed Javad Zarif (Reuters)

Iran's foreign minister Mohamed Javad Zarif (Reuters)

U.S. Secretary of State John Kerry announced that the six-month deal reached between Iran and the West last November will begin implementation on January 20, when Iran will begin to eliminate some of its uranium stockpile. According to Kerry:

"As of that day, for the first time in almost a decade, Iran's nuclear program will not be able to advance, and parts of it will be rolled back, while we start negotiating a comprehensive agreement to address the international community's concerns about Iran's program."

The official Iranian news media confirmed the announcement, saying that Iran agreed not to expand its nuclear program and to suspend its 20 percent uranium enrichment in return for a limited easing of the sanctions imposed on the country. According to the deputy foreign minister:

"Today, we were informed that the six countries have approved the proposed solutions and have accepted them. And in Iran, the relevant organizations have also reviewed and approved the solutions.
The approval was announced in a telephone conversation ... and we agreed that the implementation of the first step of the agreement will begin on January 20."

Approval of the deal may have been motivated by threatened passage in Congress of a bill that would automatically increase sanctions if Iran failed to live up to its part of the deal. Support for this bill is high among both Republicans and Democrats, and even a threatened veto could be overridden. According to one Republican:

"I'm concerned that this agreement takes us down that path where sanctions pressure is relieved, but Iran maintains its ability to produce a nuclear weapon. Given these stakes, it's regrettable that the President does not want to work with Congress to bolster his negotiating hand with additional sanctions, which would go into effect should Iran fail to meet its commitments."

Among the total sanctions relief over the six months, $4.2 billion is in the form of access to currently blocked Iranian revenues held abroad. CNN and Tehran Times and Reuters

Plummeting velocity of money explains deflation trend

The strong deflationary trend in Europe ( "9-Jan-14 World View -- Eurozone plummets into deflation") is puzzling many people who don't understand why massive money "printing" by the Fed and other central banks isn't causing inflation or even hyperinflation in Europe, the U.S., and around the world.

Financial "experts" on CNBC and elsewhere are highly motivated to promote inflationary expectations, even if they have to lie, because they want to sell stocks. If they convince you that hyperinflation is coming, then you'll want to get rid of your cash and invest it in things like stocks, which can be expected to go up with inflation. They want to make sure that you don't worry about deflation, since then you would keep your assets in cash, rather buy stocks and pump up their commissions.

When the money supply goes up quickly, it doesn't always mean inflation, especially in the current world where central banks are "printing" money by purchasing bonds, and the money just goes into the banks and into the pockets of investment bankers. Almost none of this money is reaching the ordinary consumer, who would use it to buy things and push up prices, or the ordinary business, who would use it to hire people and push up wages. Instead, it's just sloshing around in the banking system and through the stock market, where it's been pushing the stock market bubble to new heights.

In Economics 1.01, the inflation rate is determined by the formula:

inflation-rate = (growth in money supply) x (velocity of money)

The "velocity of money" counts the number of times a dollar bill passes from one person to another, which is a measure of whether anyone is buying or hiring. Here's a graph of the velocity of money since 1959:

Velocity of Money, 1959-2013 (St. Louis Fed)

Velocity of Money, 1959-2013 (St. Louis Fed)

As you can see from the graph, the velocity of money started falling rapidly since the Nasdaq crash in the year 2000, and even more sharply since the financial crisis of 2007.

That's why there's been no inflation. The money supply has been increasing because the Fed has been "printing" a lot of money, but the velocity of money has been plummeting, with no change in sight, and when you multiply the two relevant factors together, the inflation rate has been fairly constant.

This is the generational change that happens in every "great depression." There is always a huge bubble from debt securitization, where pieces of paper saying "IOU" are traded as if they were money. This was even true in the famous Tulipomania bubble, where certificates were issued for tulips to be grown the following year. In the last decade, the certificates were synthetic securities created by slicing and dicing subprime mortgage debts, and fraudulently turning them into AAA securities. Once the bubble bursts, people save themselves by saving money and paying off debt, causing the velocity of money to plummet, leading to a deflationary spiral.

The generations that survived the Great Depression of the 1930s reacted to the stock market bubble of the 1920s by becoming savers and remaining so for the rest of their lives. As they were replaced by younger generations with no personal memory of the 1930s, a new debt securitization bubble occurred, and then burst. We're seeing a repeat of the 1930s today, with the worst yet to come. St. Louis Fed Velocity of Money

France's 'First Lady' admitted to hospital

France's "First Lady," Valerie Trierweiler, the official girlfriend of president François Hollande, was admitted to a hospital on Friday for depression, after a gossip magazine published photos and a report that Hollande was spending nights with another woman, actress Julie Gayet, as we reported yesterday. Trierweiler and Hollande are not married, but they've been together since 2007, and they live in the Elysee palace together. There have been recent rumors that Trierweiler and Hollande are becoming estranged, and that she may be leaving the Elysee palace.

Despite the fact that the French people claim that the president's sex life is nobody else's business, this has become major news in France. There is a major presidential news conference scheduled for Tuesday, and Hollande and Trierweiler are scheduled to visit Washington together next months. Hollande's approval rating is already rock-bottom, and this mess is expected to make it worse. BBC

(Comments: For reader comments, questions and discussion, see the 13-Jan-14 World View -- Iran will 'roll back' its nuclear program, starting January 20 thread of the Generational Dynamics forum. Comments may be posted anonymously.) (13-Jan-2014) Permanent Link
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Generational Dynamics Web Log for 13-Jan-2014 13-Jan-14 World View -- Iran will 'roll back' its nuclear program, starting January 20

Iran will 'roll back' its nuclear program, starting January 20

Plummeting velocity of money explains deflation trend

France's 'First Lady' admitted to hospital

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Generational Dynamics Web Log for 13-Jan-2014
13-Jan-14 World View -- Iran will 'roll back' its nuclear program, starting January 20