Tom Lehman
Relative Decline of M1 Destroying the Middle Class
by Dick Eastman
The middle class is shrinking because the money supply that the middle class uses, M1, is being contracted while the wide-transaction monies exclusively used by the financial elite and multinational corporations are being expanded. So instead of the whole economy undergoing a boom followed by a bust as the state alternately inflates a commonly shared currency and bank credit and then tightens it; today we see the middle class languishing on an M1- money contracted ³bust loop² (the internal ³little peoples economy) even as big banks, multinational corporations and billionaire currency traders enjoy an easy money boom that captures most of the real-goods ³economic pie² for itself and, more important, all the claims to future economic pie (the result of savings/investment on the elite loop) while the middle class, lacking even the money to meet its expected commitments goes into debt (receiving pieces of ³negative economic pie² for the future).
The M1 money supply (think: cash and check-book money, or in bigger words, domestically circulating currency and bank-loan generated checking accounts called demand deposits), both as a stock and as a flow, has been SHRINKING with very little fanfare since the current Fed Chairman assumed his position under Ronald Reagan. This means the circulating money media of the middle classes--which the middle classes use to pay their debts, buy clothes for school, and take the family out for dinner, fix up the house, buy a new
car, or make donations to the local orphanage --has been less and less each year. (This explains the shocking rise in middle class debt(that the prostitute press downplays falsely attributing the rise as the result of
³spend-now-rather-than-later² decisions of middle class people themselves--as if they had any choice in the matter!
But while the Fed has been shrinking M1 it has been allowing the monies of the elite, the so-called ³wide transactions monies,² M2 and M3 to expand. Under Greenspan and during the Presidencies of Reagan, Bush and Clinton,
the Fed has been holding M2 and M3 (each of which includes M1 monies, but then adds the wide transactions money-supply components used the multinational-loop transactions of of elite institutions. I¹m talking about money market deposit accounts and general purpose money market mutual funds, but more important, the overnight Eurodollar deposits issued to US residents from foreign US banks and, most powerful of all the overnight and continuing contract REPURCHASE AGREEMENTS. These are the privileged money-supply components that the middle class never gets to touch. What
owner of a vacuum-cleaner repair shop or a machine shop parks his ³excess liquidity² at a commercial bank in the form of a short-term loan to the bank, with a REPO, redeemable the next day for principle and interest? And which middle class guy with ³an idea for a better mouse trap² gets to borrow that cash?
By the way, don¹t be fooled by the ³overnight² aspect of these loans. The banks accepting these loans know that they can count on sufficient ³parked money² each and every night to permit highly significant, i.e., huge, loans on the basis of them. This is a source of money that the little ³building and loan association² managed by ³good ol¹ George Bailey² could never touch for the residents of Bedford Falls (the character in Frank Capra¹s populist film of pre-WWII Americana: ³It¹s a Wonderful Life.²)
The REPO is a computer data entry that, for all practical purposes is money. I¹ll go even further: since it is a banks IOU and can claim the creation of new demand deposits when it is electronically ³turned in²
it functions exactly like the private-bank generated monies of the early days of the Republic, in the relatively unregulated days before the (American) Civil War.
I am telling you that the elite have their own private loop for their own less-regulated AND more-privileged monies. It is these monies of the elite that are the components of money-supply definitions of M2 and M3 within the definition of M2 and M3 that have expanded as the M1 component has been shrinking. (In other words, the relative share of M1 has been shrinking
against the REPO¹s and CD¹s within M2 and M3.) Thus M2 appears to be stable, to be ³held relatively constant,² ostensibly to ³keep inflation under control² in the manner of monetarists.
This money circulates in the multinational corporate and financial realms of Wall Street, not in your home town or backwater state. (WHY are some states backwater states?; a related topic for another time.)--and when it is spent it is spent on new factories on the Communist mainland of China, or a new Wal Mart that will put ³Ma and Pa² stores of your home town OUT OF BUSINESS. (Ma and Pa spend their PROFITS in your town; Wal Mart sends its profits to Arkansas. Get it? The Waltons (billionaires) get the profits that used to go to middle-class mom and pop. (Ma can be seen today offering you free samples of cheese spread as an a senior-citizen employee of Wal Mart. (I am not knocking Wal Mart. I¹m just saying that the capital for those giant stores came from a lending source unavailable to Ma and Pop.
And before someone tells me that Wal Mart is better than Ma and Pa; let¹s switch our example to restaurants. Could your grandmother cook a better
meal than McDonalds? Then why hasn¹t she driven McDonalds out of business? Maybe she does not belong to the little circle of pals on the closed investment loop, closed to little guys that is.
At this point we need to consider the effects of a monetary contraction.
The 1929 crash destroyed a third of the money supply. That monetary contraction (caused by the mass calling in of bank loans to meet the cash demands brokerage houses that investors meet their margins (they had bought stock on credit during the good times) plus downward rigidity of wages (there is less money circulating and lower prices at the stores but no one cuts wages to bring them into balance with other depressed prices--they settle for firing a third of the work force instead, so that those who kept their jobs now have their old wage and lower prices in the store. That is why those who kept their jobs in the Great Depression where much better off than before, as one can see by comparing the average home build in the twenties with the average home of the 30¹s. (And I think the massive margin calls by brokerage firms was deliberate--why else would Winston Churchill have been on Wall Street that day? (Britain needed the crash because Churchill, the Chancellor of the Exchequer had set the gold content of the Pound too high considering the weakened economic condition of Britain after WW1; Wall Street Relatives were willing to help out, and wipe out a lot of their competition from middle-class businessmen at the same
time.) It is true. It is as John C. Calhoun said back in 1836: ³A power has risen up in the government greater than the people themselves, consisting of many and various and powerful interests, combined into one
mass, and held together by the cohesive power of the vast surplus in the
banks.² Today such a vast surplus exists, but only for the benefit of those with access to the privileged money-circulation loop.
The elite-serving media denies that the middle class is hurting. The truth is the upper income groups have had great growth in income and wealth accumulation, the poor are slightly better off (except for their prospects of entering the middle class someday), but the middle has been hollowed out. Real wages of the middle class are dropping in the Clinton "boom."
Think of the manufacturing jobs (the ³elite of the blue collar² jobs) gone to China. Think of the middle-management jobs eaten up by mergers and downsizing (increasing monopolistic concentration of firms). Think of the Ph.D.'s driving cabs. Think of the burger-flipping jobs awaiting college graduates. Think of the small businesses that have vanished due to Wal Mart and a middle class that can no longer afford their advantages. Think of the designer tee-shirts that pass for fashion. (It is amazing how the servitors of the Establishment can conceal our own impoverishment from us. (Kids today have no clue how good it once was for the typical person). And the gains of the poor are not moves towards the middle class but toward
greater dependency: more transfer payments (the result of vote buying) and benefits at the expense of middle-class, not fat-cat, taxpayers. (A good example of the deception is the way legislators call an increase in the minimum wage "middle-class legislation."--unless the middle-class teens on their first jobs are all the middle class they are
talking about)--the minimum wage increases ruin small-business restaurants for example. The point is, that is small potatoes as help for the middle class.
There is an identity recognized by all economists which can be simply stated as
MV = PQ.
Which means that the money exchanging hands in a year (MV) equals the total of receipts for goods and services (PQ). M= money supply, V=velocity, P=price of goods and services. Q equals the goods and services purchased. (P can be thought of as an average or index or, or a mathematical vector and so can Q). Now velocity (V) is fairly constant due to institutional factors such as: 1)the fact that we are usually paid every two weeks or every month; 2)that we usually receive
government transfer payments every month etc.--so if EVERYONE was paid every month V would equal 12, get it?)
But if V is constant than MV = PQ means PQ is a function of money supply (M) alone.. But a change in M can affect either P (meaning inflation or deflation) or Q (meaning more or less economic pie, a change in the standard
of living as measured by consumption of goods and services). If M has been shrinking we must have either deflation (P goes down) or people ending up worse off (Q goes down).
Now the question is: Should the Federal Reserve use M1 as the money supply it watches or one of the wide-transactions definitions, M2 or M3, the equation MV = PQ? Milton Friedman suggested and argued for M1 and
Greenspan says he ³sometimes² looks at M2, but has definitely stopped monitoring M1. But if M1 is all that a large segment of the economy
(the middle class) ever cycles through its household and if that M1 is contracting then these households are either experiencing deflation or a fall in their standard of living. (You¹d better read that again.)
But prices ARE holding steady. Then the middle class must be loosing in goods and services, since in MV = PQ both V and P are relatively constant and M (here M1) has fallen.
The lower middle class only have M1 (far from being financial asset
holders, over 51 percent of American households have 0 or negative net wealth; (due to mortgage, consumer debt etc. think of the rise in bankruptcies.)