Hoarders!

Looks like a lot of people have been hoarding US dollars, in both physical cash and checking accounts. Since the 2008 credit fraud crash, M1 money has grown quickly and steadily. Note that cash and checking deposits both earn effectively 0% in interest in today's world of ZIRP, but people still prefer to hold them.

The growth in M1 pales in comparison to the growth in the monetary base, M0. It appears that the Fed has an even greater appetite for dollars than the US population. The M1 multiplier fell off a cliff.

Despite all the extra dollars that everyone has, they are not being spent very quickly. The velocity of M1 has fallen dramatically and continues to slide. Another episode of hoarders.

Compulsive hoarding (or pathological collecting) is a pattern of behavior that is characterized by the excessive acquisition of and inability or unwillingness to discard large quantities of objects that would seemingly qualify as useless or without value.

To Infinity...and Beyond!

From Brussels With Love: The EU welcomes the opportunity to pour 100 billion euros into the black hole that is Spain, while forcing austerity on the population with increased taxes and job cuts. (/sarcasm off).

Death Spiral...in Spain?

Mike Shedlock titled a post on this blog Death Spiral in Spain; Six Spanish Regions Seek Aid; Bankrupt Spain to Bail out Bankrupt Regions

Is this the start of a wave of Death Spirals? Hey, I was talking about death spirals long before they became trendy in Europe.

The Magic of Compound Interest (2012 edition)

During a recent discussion with Stagflationary Mark about negative interest rates on short term government bonds, he referred me an article by Richard Russell on the magic of compound interest using 5 year US treasury notes or T-bills and the importance of starting early to save for retirement.

The article features a startling table of investment returns, showing that you really only have to save for seven years to secure your retirement if you can earn 10% on your savings. I have recreated the table below:

.	Richard Russell's DOW theory magic of compound interest (original)
.
.		Investor A		Investor B
.	Age	Contribution	Year End Value	Contribution	Year End Value
.	8	0	0	0	0
.	9	0	0	0	0
.	10	0	0	0	0
.	11	0	0	0	0
.	12	0	0	0	0
.	13	0	0	0	0
.	14	0	0	0	0
.	15	0	0	0	0
.	16	0	0	0	0
.	17	0	0	0	0
.	18	0	0	0	0
.	19	0	0	2000	2,200
.	20	0	0	2000	4,620
.	21	0	0	2000	7,282
.	22	0	0	2000	10,210
.	23	0	0	2000	13,431
.	24	0	0	2000	16,974
.	25	0	0	2000	20,872
.	26	2000	2,200	0	22,959
.	27	2000	4,620	0	25,255
.	28	2000	7,282	0	27,780
.	29	2000	10,210	0	30,558
.	30	2000	13,431	0	33,614
.	31	2000	16,974	0	36,976
.	32	2000	20,872	0	40,673
.	33	2000	25,159	0	44,741
.	34	2000	29,875	0	49,215
.	35	2000	35,062	0	54,136
.	36	2000	40,769	0	59,550
.	37	2000	47,045	0	65,505
.	38	2000	53,950	0	72,055
.	39	2000	61,545	0	79,261
.	40	2000	69,899	0	87,187
.	41	2000	79,089	0	95,905
.	42	2000	89,198	0	105,496
.	43	2000	100,318	0	116,045
.	44	2000	112,550	0	127,650
.	45	2000	126,005	0	140,415
.	46	2000	140,805	0	154,456
.	47	2000	157,086	0	169,902
.	48	2000	174,995	0	186,892
.	49	2000	194,694	0	205,581
.	50	2000	216,364	0	226,140
.	51	2000	240,200	0	248,754
.	52	2000	266,420	0	273,629
.	53	2000	295,262	0	300,992
.	54	2000	326,988	0	331,091
.	55	2000	361,887	0	364,200
.	56	2000	400,276	0	400,620
.	57	2000	442,503	0	440,682
.	58	2000	488,953	0	484,750
.	59	2000	540,049	0	533,225
.	60	2000	596,254	0	586,548
.	61	2000	658,079	0	645,203
.	62	2000	726,087	0	709,723
.	63	2000	800,896	0	780,695
.	64	2000	883,185	0	858,765
.	65	2000	973,704	0	944,641
.
.		Less Total Invested	-80,000		-14,000
.
.		Net Earnings	893,704		930,641

Awesome! Both investors retire with almost a million dollars. Investor B cruised after age 25, not having to invest a single dollar more.

But what happens if you can't earn 10% a year on your money? Instead of 5 year notes, let's go to the long end of the curve in 2012 and load up on 30 year treasury bonds at 2.6%. How do our investors fare now?

.	Richard Russell's DOW theory magic of compound interest (2012 edition)
.	Using 30 year US treasury rate of 2.6%
.
.		Investor A		Investor B
.	Age	Contribution	Year End Value	Contribution	Year End Value
.	8	0	0	0	0
.	9	0	0	0	0
.	10	0	0	0	0
.	11	0	0	0	0
.	12	0	0	0	0
.	13	0	0	0	0
.	14	0	0	0	0
.	15	0	0	0	0
.	16	0	0	0	0
.	17	0	0	0	0
.	18	0	0	0	0
.	19	0	0	2000	2,052
.	20	0	0	2000	4,157
.	21	0	0	2000	6,317
.	22	0	0	2000	8,534
.	23	0	0	2000	10,808
.	24	0	0	2000	13,141
.	25	0	0	2000	15,534
.	26	2000	2,052	0	15,938
.	27	2000	4,157	0	16,353
.	28	2000	6,317	0	16,778
.	29	2000	8,534	0	17,214
.	30	2000	10,808	0	17,661
.	31	2000	13,141	0	18,121
.	32	2000	15,534	0	18,592
.	33	2000	17,990	0	19,075
.	34	2000	20,510	0	19,571
.	35	2000	23,095	0	20,080
.	36	2000	25,748	0	20,602
.	37	2000	28,469	0	21,138
.	38	2000	31,261	0	21,687
.	39	2000	34,126	0	22,251
.	40	2000	37,065	0	22,830
.	41	2000	40,081	0	23,423
.	42	2000	43,175	0	24,032
.	43	2000	46,350	0	24,657
.	44	2000	49,607	0	25,298
.	45	2000	52,949	0	25,956
.	46	2000	56,377	0	26,631
.	47	2000	59,895	0	27,323
.	48	2000	63,504	0	28,034
.	49	2000	67,207	0	28,762
.	50	2000	71,007	0	29,510
.	51	2000	74,905	0	30,278
.	52	2000	78,904	0	31,065
.	53	2000	83,008	0	31,872
.	54	2000	87,218	0	32,701
.	55	2000	91,538	0	33,551
.	56	2000	95,970	0	34,424
.	57	2000	100,517	0	35,319
.	58	2000	105,182	0	36,237
.	59	2000	109,969	0	37,179
.	60	2000	114,880	0	38,146
.	61	2000	119,919	0	39,138
.	62	2000	125,089	0	40,155
.	63	2000	130,394	0	41,199
.	64	2000	135,836	0	42,270
.	65	2000	141,420	0	43,369
.
.		Less Total Invested	-80,000		-14,000
.
.		Net Earnings	61,420		29,369
.
.

Ouch! This time investor A came out way ahead, but both are still in very big trouble. A lifetime of saving has left them without enough to retire comfortably. Maybe they would have done better speculating in stocks or betting on horses.

Just for fun, what happens if we stuck with safe 3 month T-bills, waiting for higher interest rates?

.	Richard Russell's DOW theory magic of compound interest (2012 edition)
.	Using 3 month T-bills at 0.1%
.
.		Investor A		Investor B
.	Age	Contribution	Year End Value	Contribution	Year End Value
.	8	0	0	0	0
.	9	0	0	0	0
.	10	0	0	0	0
.	11	0	0	0	0
.	12	0	0	0	0
.	13	0	0	0	0
.	14	0	0	0	0
.	15	0	0	0	0
.	16	0	0	0	0
.	17	0	0	0	0
.	18	0	0	0	0
.	19	0	0	2000	2,002
.	20	0	0	2000	4,006
.	21	0	0	2000	6,012
.	22	0	0	2000	8,020
.	23	0	0	2000	10,030
.	24	0	0	2000	12,042
.	25	0	0	2000	14,056
.	26	2000	2,002	0	14,070
.	27	2000	4,006	0	14,084
.	28	2000	6,012	0	14,098
.	29	2000	8,020	0	14,112
.	30	2000	10,030	0	14,127
.	31	2000	12,042	0	14,141
.	32	2000	14,056	0	14,155
.	33	2000	16,072	0	14,169
.	34	2000	18,090	0	14,183
.	35	2000	20,110	0	14,197
.	36	2000	22,132	0	14,212
.	37	2000	24,157	0	14,226
.	38	2000	26,183	0	14,240
.	39	2000	28,211	0	14,254
.	40	2000	30,241	0	14,268
.	41	2000	32,273	0	14,283
.	42	2000	34,308	0	14,297
.	43	2000	36,344	0	14,311
.	44	2000	38,382	0	14,326
.	45	2000	40,423	0	14,340
.	46	2000	42,465	0	14,354
.	47	2000	44,510	0	14,369
.	48	2000	46,556	0	14,383
.	49	2000	48,605	0	14,397
.	50	2000	50,655	0	14,412
.	51	2000	52,708	0	14,426
.	52	2000	54,763	0	14,441
.	53	2000	56,819	0	14,455
.	54	2000	58,878	0	14,469
.	55	2000	60,939	0	14,484
.	56	2000	63,002	0	14,498
.	57	2000	65,067	0	14,513
.	58	2000	67,134	0	14,527
.	59	2000	69,203	0	14,542
.	60	2000	71,274	0	14,557
.	61	2000	73,348	0	14,571
.	62	2000	75,423	0	14,586
.	63	2000	77,500	0	14,600
.	64	2000	79,580	0	14,615
.	65	2000	81,662	0	14,629
.
.		Less Total Invested	-80,000		-14,000
.
.		Net Earnings	1,662		629
.
.

Oh my! The total of all interest earned from both investors combined over their entire working lives is less that $2,500. They both can now compete to be a Wal*Mart greeter, if they are better qualified than the other seniors. Surely they could have done better speculating in almost anything! (Caution: you are entering the sarcasm zone!)

Cash Out Auto Financing

The financial system is still rife with fraud and fantastical deals. Or maybe it is even worse than during the housing bubble as financial frauds are done in broad daylight with no consequences (MF Global, PFGBest, JPM "hedging", etc).

Here is something new I got in an email today from my credit union. An offer to finance 120% of a new or used automobile. Terms:

• Finance up to 120% of the MSRP or RNADA value!
• Flexible repayment terms!
• Online approval in minutes!

You get three different exclamation points and credit in minutes! (bonus exclamation point). I wonder if I could do a cash out deal on a used car. Caution, you are entering the sarcasm zone.