sinkhole routing. While this may sound a lot like some Star Trek episode, it’s important for us to understand what each is, and more so how to implement them. Sinkholes are designed to attract traffic and keep it (for analysis or whatever reason). Blockhouse, on the other hand, are designed to attract traffic and never let it be seen again. In larger networks (and what we simulate in our CCIE labs) both of these techniques are typically done via BGP. So let’s start with the sinkhole idea. To create a sinkhole, we want to attract traffic. The first question we need to ask is Why? Whenever you advertise a network out, you inadvertently attract traffic to that IPs. That traffic may be good, or it may be bad. From a security perspective, I’m sure everyone has heard the term Honeypot used before. There is a specific purpose to attract traffic. So let’s say that you have a /24 network advertising to the Internet through various connections. Traffic can come in and wend its way through your network to the destination network segment. You notice a Dos attack, or some huge amount of traffic towards one of your web servers. Where do you secure against this? How do you secure against it? Are you still moving traffic all the way through your network to one final router before the segment? Are you tying up all your link’s bandwidth while doing this? Sinkholes spread throughout your network are a way to break apart and analyze the traffic, perhaps cleaning it and moving the good stuff on through. But multiple routers would need a focal point, or different way to route that traffic. You may simply change the destination for a single IP out of that /24. Most-specific routing always wins, so that’s an easy way. Maybe you have multiple analysis points in your network to segment the traffic and reduce load and bottlenecks in your topology. Either way, follow the lab instructions and you are creating a sinkhole. You may even be advertising extra networks just to attract traffic for analysis (like a Honeypot idea). Just watch what’s being asked, but that’s the concept of a sinkhole. Blackhole routing on the other hand wants to kill traffic. Simply enough, we could go to all of our routers and install some Null0 routes. In real life, this is not a scalable approach. Hence the term remotely-triggered blackhole routing, and we’ll use BGP. Killing a route via a routing protocol is not a simple concept. No matter how hard we try when advertising a route, Null0 is not a valid next-hop to pass along to someone else! So every router needs to have a seed route to Null0. Pick something that isn’t used. Ip route 1.1.1.1 255.255.255.255 null0 That goes on every single router now. Of course, we would also have BGP setup between all of our internal routers. Perhaps not really moving any “real” routing information, just used to kill things. Now we need the trigger. On a central router (wherever an admin is anyway) we’ll do our maintenance for what routes we want to kill. Ip route 192.0.0.0 255.0.0.0 null0 tag 86 ip route 100.100.100.0 255.255.255.0 null0 tag 86 ip route 200.200.200.0 255.255.255.0 null0 tag 86 Notice the tag on those static routes. This will be used for redistribution to help only get the “bad” routes from a router that may actually have many other static routes. Ok, not in the real lab, but we’re pretending that the skills we learn on our way to CCIE have some real-life intrinsic value, right? So once we have decided on our central router what routes we want to kill everywhere, then we pass them out through BGP. Route-map KillRoutes permit 10 Match tag 86 Router bgp 65000 Redistribute static route-map KillRoutes That all seems very simple, right? Well, yes it does, but it won’t help us. At this point, all of our iBGP routers would see the central router as the next hop for each of the routes. Ok, yes, that creates a blackhole. Because it pulls all of the packets into the middle of our network and then kills them locally with a Null0 next-hop. But we are wasting LOTS of bandwidth in doing this. Always filter as close to the source as possible. Good design rules! In order to do this, we need to change the next hop of the route from our central router’s IP address to that of the distributed Null0 route (1.1.1.1 in my example). Route-map NH-Change permit 10 Match tag 86 Set ip next-hop 1.1.1.1 Route-map NH-Change permit 20 Router bgp 65000 Neighbor x.x.x.x route-map NH-Change out (repeat for each of your neighbors unless you’re using peer groups!) The last permit statement of the route-map was to pass-through any other routes that you may want to run in BGP unchanged. Only make the next-hop change for those routes that are evil. You could also set this next-hop within the original redistribute route-map. I just split it out for pointing out the differences. At this point, all of your other routers have learned some routes via iBGP, with a next-hop of 1.1.1.1 and since they have a local static route to Null0 for that next hop, all routes learned this way will be killed. We have now used blackhole routing in a remotely-triggered manner. Kinda cool, huh? Not difficult either, just a matter of thinking about what we are trying to accomplish. As noted, these techniques have been listed more explicitly on both the Security (2.0) and Service Provider CCIE tracks. I don’t see any reason why they can’t be used in Routing & Switching as well, so it never hurts to think these things through! For some extra information, check out: scenario carefully. Makes notes and diagrams as necessary, but think like the router does. Think things through one step at a time and all of these complicated things suddenly become much easier. Cheers, Scott Scott Morris is IPexpert’s Vice President of Curriculum and Senior Technical Instructor. With over 20 years of technical training and consulting experience and a wealth of technical certifications, Scott Morris has proven to be among the elite in the technical training industry. Scott is one of the few people in the world who currently hold four separate CCIE certifications, but is one-of-a-kind by having added Juniper Network’s expert level certification. He is also actively preparing for the CCIE Voice. Scott has years of experience both writing and teaching CCIE lab preparation materials with an outstanding track record of success. Over the past seven years, Scott has also been involved in many aspects of training directly for Cisco’s internal staff on a variety of advanced technical topics. His knowledge and real-world experiences have been sought after for many projects. Scott has also participated in editing, writing and reviewing training books for Cisco Press, Wylie, Sybil, Que. Publishing and McGraw-Hill. His contributing author work includes Cisco Press’ Managing Cisco Network Security book ( ISBN: 1578701031) – Chapters on the PIX Firewall; and Cisco Press’ CCIE Practical Studies, Vol. 2 (ISBN: 1587050722) – Chapter on Multicast. Scott can be reached sinkhole routing. While this may sound a lot like some Star Trek episode, it’s important for us to understand what each is, and more so how to implement them. Sinkholes are designed to attract traffic and keep it (for analysis or whatever reason). Blockhouse, on the other hand, are designed to attract traffic and never let it be seen again. In larger networks (and what we simulate in our CCIE labs) both of these techniques are typically done via BGP. So let’s start with the sinkhole idea. To create a sinkhole, we want to attract traffic. The first question we need to ask is Why? Whenever you advertise a network out, you inadvertently attract traffic to that IPs. That traffic may be good, or it may be bad. From a security perspective, I’m sure everyone has heard the term Honeypot used before. There is a specific purpose to attract traffic. So let’s say that you have a /24 network advertising to the Internet through various connections. Traffic can come in and wend its way through your network to the destination network segment. You notice a Dos attack, or some huge amount of traffic towards one of your web servers. Where do you secure against this? How do you secure against it? Are you still moving traffic all the way through your network to one final router before the segment? Are you tying up all your link’s bandwidth while doing this? Sinkholes spread throughout your network are a way to break apart and analyze the traffic, perhaps cleaning it and moving the good stuff on through. But multiple routers would need a focal point, or different way to route that traffic. You may simply change the destination for a single IP out of that /24. Most-specific routing always wins, so that’s an easy way. Maybe you have multiple analysis points in your network to segment the traffic and reduce load and bottlenecks in your topology. Either way, follow the lab instructions and you are creating a sinkhole. You may even be advertising extra networks just to attract traffic for analysis (like a Honeypot idea). Just watch what’s being asked, but that’s the concept of a sinkhole. Blackhole routing on the other hand wants to kill traffic. Simply enough, we could go to all of our routers and install some Null0 routes. In real life, this is not a scalable approach. Hence the term remotely-triggered blackhole routing, and we’ll use BGP. Killing a route via a routing protocol is not a simple concept. No matter how hard we try when advertising a route, Null0 is not a valid next-hop to pass along to someone else! So every router needs to have a seed route to Null0. Pick something that isn’t used. Ip route 1.1.1.1 255.255.255.255 null0 That goes on every single router now. Of course, we would also have BGP setup between all of our internal routers. Perhaps not really moving any “real” routing information, just used to kill things. Now we need the trigger. On a central router (wherever an admin is anyway) we’ll do our maintenance for what routes we want to kill. Ip route 192.0.0.0 255.0.0.0 null0 tag 86 ip route 100.100.100.0 255.255.255.0 null0 tag 86 ip route 200.200.200.0 255.255.255.0 null0 tag 86 Notice the tag on those static routes. This will be used for redistribution to help only get the “bad” routes from a router that may actually have many other static routes. Ok, not in the real lab, but we’re pretending that the skills we learn on our way to CCIE have some real-life intrinsic value, right? So once we have decided on our central router what routes we want to kill everywhere, then we pass them out through BGP. Route-map KillRoutes permit 10 Match tag 86 Router bgp 65000 Redistribute static route-map KillRoutes That all seems very simple, right? Well, yes it does, but it won’t help us. At this point, all of our iBGP routers would see the central router as the next hop for each of the routes. Ok, yes, that creates a blackhole. Because it pulls all of the packets into the middle of our network and then kills them locally with a Null0 next-hop. But we are wasting LOTS of bandwidth in doing this. Always filter as close to the source as possible. Good design rules! In order to do this, we need to change the next hop of the route from our central router’s IP address to that of the distributed Null0 route (1.1.1.1 in my example). Route-map NH-Change permit 10 Match tag 86 Set ip next-hop 1.1.1.1 Route-map NH-Change permit 20 Router bgp 65000 Neighbor x.x.x.x route-map NH-Change out (repeat for each of your neighbors unless you’re using peer groups!) The last permit statement of the route-map was to pass-through any other routes that you may want to run in BGP unchanged. Only make the next-hop change for those routes that are evil. You could also set this next-hop within the original redistribute route-map. I just split it out for pointing out the differences. At this point, all of your other routers have learned some routes via iBGP, with a next-hop of 1.1.1.1 and since they have a local static route to Null0 for that next hop, all routes learned this way will be killed. We have now used blackhole routing in a remotely-triggered manner. Kinda cool, huh? Not difficult either, just a matter of thinking about what we are trying to accomplish. As noted, these techniques have been listed more explicitly on both the Security (2.0) and Service Provider CCIE tracks. I don’t see any reason why they can’t be used in Routing & Switching as well, so it never hurts to think these things through! For some extra information, check out: scenario carefully. Makes notes and diagrams as necessary, but think like the router does. Think things through one step at a time and all of these complicated things suddenly become much easier. Cheers, Scott Scott Morris is IPexpert’s Vice President of Curriculum and Senior Technical Instructor. With over 20 years of technical training and consulting experience and a wealth of technical certifications, Scott Morris has proven to be among the elite in the technical training industry. Scott is one of the few people in the world who currently hold four separate CCIE certifications, but is one-of-a-kind by having added Juniper Network’s expert level certification. He is also actively preparing for the CCIE Voice. Scott has years of experience both writing and teaching CCIE lab preparation materials with an outstanding track record of success. Over the past seven years, Scott has also been involved in many aspects of training directly for Cisco’s internal staff on a variety of advanced technical topics. His knowledge and real-world experiences have been sought after for many projects. Scott has also participated in editing, writing and reviewing training books for Cisco Press, Wylie, Sybil, Que. Publishing and McGraw-Hill. His contributing author work includes Cisco Press’ Managing Cisco Network Security book ( ISBN: 1578701031) – Chapters on the PIX Firewall; and Cisco Press’ CCIE Practical Studies, Vol. 2 (ISBN: 1587050722) – Chapter on Multicast. Scott can be reached

sinkhole routing.

While this may sound a lot

like some Star Trek episode, it’s important for us to understand what each is,

and more so how to implement them. Sinkholes are designed to attract traffic

and keep it (for analysis or whatever reason). Blockhouse, on the other hand,

are designed to attract traffic and never let it be seen again.

In larger networks (and

what we simulate in our CCIE labs) both of these techniques are typically done

via BGP. So let’s start with the sinkhole idea. To create a sinkhole, we want

to attract traffic. The first question we need to ask is Why?

Whenever you advertise a

network out, you inadvertently attract traffic to that IPs. That traffic may

be good, or it may be bad. From a security perspective, I’m sure everyone has

heard the term Honeypot used before. There is a specific purpose to attract

traffic.

So let’s say that you have

a /24 network advertising to the Internet through various connections. Traffic

can come in and wend its way through your network to the destination network

segment. You notice a Dos attack, or some huge amount of traffic towards one of

your web servers. Where do you secure against this? How do you secure against

it? Are you still moving traffic all the way through your network to one final

router before the segment? Are you tying up all your link’s bandwidth while

doing this?

Sinkholes spread

throughout your network are a way to break apart and analyze the traffic,

perhaps cleaning it and moving the good stuff on through. But multiple routers

would need a focal point, or different way to route that traffic. You may

simply change the destination for a single IP out of that /24. Most-specific

routing always wins, so that’s an easy way. Maybe you have multiple analysis

points in your network to segment the traffic and reduce load and bottlenecks in

your topology.

Either way, follow the lab

instructions and you are creating a sinkhole. You may even be advertising extra

networks just to attract traffic for analysis (like a Honeypot idea). Just

watch what’s being asked, but that’s the concept of a sinkhole.

Blackhole routing on the

other hand wants to kill traffic. Simply enough, we could go to all of our

routers and install some Null0 routes. In real life, this is not a scalable

approach. Hence the term remotely-triggered blackhole routing, and we’ll use

BGP. Killing a route via a routing protocol is not a simple concept. No matter

how hard we try when advertising a route, Null0 is not a valid next-hop to pass

along to someone else!

So every router needs to

have a seed route to Null0. Pick something that isn’t used.

Ip route 1.1.1.1

255.255.255.255 null0

That goes on every single

router now. Of course, we would also have BGP setup between all of our internal

routers. Perhaps not really moving any “real” routing information, just used to

kill things. Now we need the trigger. On a central router (wherever an admin

is anyway) we’ll do our maintenance for what routes we want to kill.

Ip route 192.0.0.0

255.0.0.0 null0 tag 86

ip route 100.100.100.0 255.255.255.0 null0 tag 86

ip route 200.200.200.0 255.255.255.0 null0 tag 86

Notice the tag on those

static routes. This will be used for redistribution to help only get the “bad”

routes from a router that may actually have many other static routes. Ok, not

in the real lab, but we’re pretending that the skills we learn on our way to

CCIE have some real-life intrinsic value, right?

So once we have decided on

our central router what routes we want to kill everywhere, then we pass them out

through BGP.

Route-map KillRoutes

permit 10

Match tag 86

Router bgp 65000

Redistribute static route-map KillRoutes

That all seems very

simple, right? Well, yes it does, but it won’t help us. At this point, all of

our iBGP routers would see the central router as the next hop for each of the

routes. Ok, yes, that creates a blackhole. Because it pulls all of the packets

into the middle of our network and then kills them locally with a Null0

next-hop. But we are wasting LOTS of bandwidth in doing this. Always filter as

close to the source as possible. Good design rules!

In order to do this, we

need to change the next hop of the route from our central router’s IP address to

that of the distributed Null0 route (1.1.1.1 in my example).

Route-map NH-Change permit

10

Match tag 86

Set ip next-hop 1.1.1.1

Route-map NH-Change permit 20

Router bgp 65000

Neighbor x.x.x.x route-map NH-Change out

(repeat for each of your neighbors unless you’re using peer groups!)

The last permit statement

of the route-map was to pass-through any other routes that you may want to run

in BGP unchanged. Only make the next-hop change for those routes that are

evil. You could also set this next-hop within the original redistribute

route-map. I just split it out for pointing out the differences.

At this point, all of your

other routers have learned some routes via iBGP, with a next-hop of 1.1.1.1 and

since they have a local static route to Null0 for that next hop, all routes

learned this way will be killed.

We have now used blackhole

routing in a remotely-triggered manner. Kinda cool, huh? Not difficult either,

just a matter of thinking about what we are trying to accomplish.

As noted, these techniques

have been listed more explicitly on both the Security (2.0) and Service Provider

CCIE tracks. I don’t see any reason why they can’t be used in Routing &

Switching as well, so it never hurts to think these things through!

For some extra

information, check out:

scenario carefully. Makes notes and diagrams as necessary, but think like the

router does. Think things through one step at a time and all of these

complicated things suddenly become much easier.

Cheers,

Scott

Scott Morris is

IPexpert’s Vice President of Curriculum and Senior Technical Instructor.

With over 20 years of technical training and consulting experience and

a wealth of technical certifications, Scott Morris has proven to be among the

elite in the technical training industry. Scott is one of the few people in the

world who currently hold four separate CCIE certifications, but is one-of-a-kind

by having added Juniper Network’s expert level certification. He is also

actively preparing for the CCIE Voice. Scott has years of experience both

writing and teaching CCIE lab preparation materials with an outstanding track

record of success.

Over the past seven years, Scott has also been involved in many aspects of

training directly for Cisco’s internal staff on a variety of advanced technical

topics. His knowledge and real-world experiences have been sought after for many

projects.

Scott has also participated in editing, writing and reviewing training books for

Cisco Press, Wylie, Sybil, Que. Publishing and McGraw-Hill. His contributing

author work includes Cisco Press’ Managing Cisco Network Security book ( ISBN:

1578701031) – Chapters on the PIX Firewall; and Cisco Press’ CCIE Practical

Studies, Vol. 2 (ISBN: 1587050722) – Chapter on Multicast. Scott can be reached

Did you find this article useful?  For more useful tips and   hints, points to ponder and keep in mind, techniques, and insights pertaining to Internet Business, do please browse for more information at our websites. <a rel=”nofollow” onclick=”javascript:_gaq.push(['_trackPageview', '/outgoing/article_exit_link']);” href=”http://www.adsence-dollar-factory.com”>http://www.adsence-dollar-factory.com</a> <a rel=”nofollow” onclick=”javascript:_gaq.push(['_trackPageview', '/outgoing/article_exit_link']);” href=”http://www.100earningtips.com”>http://www.100earningtips.com</a>

People today have varying needs. Now, they want to have a place where they can live comfortably. It has to be somewhere near their work place that does not require a lot of maintenance. Most want to have a home that fits their lifestyle. In order to answer these needs, new types of property have been developed. Among the said properties is the townhome.

Many people have encountered the term townhome or townhouse. However, very few people are able to distinguish its difference from other properties. A townhome is like a condominium and a single-family home rolled into one. Townhomes are several units linked in one structure. The units have the design of single-family homes. However, they are placed next to each other. They usually have two stories and they do not have neighbors positioned above and below them.

Many people are investing in this type of property because of the several things it offers. One, it provides a comfortable dwelling. It is also perfect for people who have busy schedules. Its other benefits are listed below:

It is less expensive than the single-family home. This means that those who wish to have a single-family home can have a cheaper alternative. They will still enjoy a comfortable home at a much affordable price. Families will not need to worry about privacy. This is a major concern for homes that are closely linked with each other. Although this is the case for townhomes, each homeowner has their own doors. They do not have to worry about nosy neighbors because they do not have neighbors above and below them. Outdoor maintenance is a breeze. This is another thing that separates it from the traditional home. It does not have a vast yard to maintain regularly. Although its exteriors will still need some cleaning, the process will not be that tiring. You will feel more secured. This is because the houses are close to each other. The residents know their neighbors. They will easily recognize strangers in the property. In addition to that, neighbors will easily hear suspicious noises, which can make them respond more quickly. It is also easier to socialize. If you live in a townhome, it will not be difficult to familiarize the faces of your neighbors. This makes it easier to make friends. You do not have to walk far to meet them. A simple hi to a resident next door will already help you make friends. You will also enjoy several amenities. There are several amenities provided for the residents. One is the swimming pool. They can enjoy swimming there anytime they want. Most townhomes have fitness centers and playing areas as well. People on the go will also appreciate townhomes. This is because there are several townhomes near the workplace. They can choose townhomes that will suit their needs. If they find one near their workplace, they will surely save on transportation expenses and travel time.

Many will benefit from living in a townhome. If you think that this is a property for you, invest in one.

Martin Zweig, in his investment book “Winning on Wall Street” points out investors should not “fight the Fed”. In his book, he discusses the relationship between the discount rate and the performance of the US stock market. As he showed, most of the time, a rise in the discount rate leads to a lower average share prices. A drop in the discount rate leads to higher average share prices. Another concept called “two tumbles and a jump” indicates that two decreases in the discount rate within a six-month period lead to a jump up in the stock market. On the other hand, one or two rate increases within a 6-month period are moderately bearish for stocks. Three or more rate increases are extremely bearish.

Martin’s point is you should not fight the Fed when they are intent on moving interest rates either up or down. Given that this is still true in today’s environment, what might take place over the next six to twelve months with interest rates, especially the discount rate?

Monetary Policy

Before I get into a way to assess when interest rates will begin to rise, it is important to understand monetary policy responsibility of the U.S. Federal Reserve. As stated on the Federal Reserve site the Federal Reserve is responsible for:

Conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices and moderate long-term interest rates

The responsibility for the pursuit of maximum employment, stable prices, and moderate long-term interest rates can be on conflict, especially in times of economic trouble. Presently, the Fed is doing all it can to encourage economic growth and avoid deflation. Part of this effort comes through near zero interest rates and by adding a lot of money to the financial system. Once it does succeed in overcoming the deflation threat, the U.S. will be threatened by the potential for inflation, as all the money pumped in by the Fed looks for a return. To help offset rising inflation the Fed will raise rates and sell securities it holds to absorb some of the excess money. Higher rates will slow economic activity and slow job growth. There in lies the conflict.

Role of Money in the Economy

In a normal economy, the amount of monetary stimulus we are witnessing would quickly lead to higher inflation. In fact, many people are worried that the U.S. will face very high interest rates in the next several years as all the money that has been created will cause another asset bubble and an inflationary spiral. After all Milton Freidman taught us, that inflation is a matter of printing too much money. Depending on the measure you use, the Fed has been printing a lot of money.

The St. Louis Federal Reserve Bank through its FRED database has an extensive set of economic and monetary information. The chart below shows the adjusted monetary base, which is cash plus bank reserves held at the Fed. All banks must keep a certain amount of money with the Federal Reserve.

Money is not a simple item. Depending on where and how it is used or held, it is counted in a different way. The adjusted monetary base is one of the simplest form of money.

As you can see, the adjusted monetary base grew at a slow pace year after year until recently. Then in late 2008, the monetary base exploded up, more than doubling. This huge expansion in the monetary base is what makes so many analysts worried that the U.S. is facing high inflation. Just talk to a gold bug as they see this chart as a clear indication the price of gold will more than double to $2,000 and ounce due to higher inflation. However, there is more to the story.

One of the important factors to understand when looking at the money supply is what is knows as the velocity of money, which is the average frequency an amount of money is spent over a specific period of time. This can get complicated quickly.

Let’s take a small economy that existed on your street when you where a child. You set up a lemonade stand and sell a glass for $1. Your friend sets up a cookie stand and sells cookies for $1.00. Another friend down the street sells icicle pops for $1.00. Each of you starts with $5.00 in cash for a total of $15, equivalent to a monetary base of $15. Things are a little slow so you buy three cookies and two icicle pops from your friends spending all of your $5.00. Your friends are thirsty and buy $5.00 worth of lemonade from you. Then your two friends spend their remaining $5.00 on cookies and icicle pops from your other friends. In the end, everyone ends up with $5.00 while having enjoyed cookies, icicle pops, and lemonade. Since the money spent has only passed through each hand once, the velocity of money for that day is 1. The Gross Domestic Product for this little economy is $15.00.

On the next day, the same thing happens. Everyone spends their $5.00 and ends up with $5.00. Now the money has changed hands twice over two days. In this case, the velocity of money is 2 over the two day period. Yet the amount of money in place remains at $15.00. The GDP for this little economy is $30.00 over the two-day period. The monetary base remains at $15.00.

For the mathematicians out there you can make this into a simple formula of nominal GDP = Money * Velocity or Y = M*V.

On the third day, another friend opens a hotdog stand but he does not have any starting cash, so the monetary base remains the same at $15.00. You and your first two friends decide to spend their $5.00 among the other three friends buying and selling lemonade, cookies, icicle pops and hotdogs. Let’s say the three original stores earned $4.00 and new one earned $3.00. On average, each person ends up with $3.75. ($15/4=$3.75). At the end of the day, the three original friends figure that they are in a depression. Sales have plunged to $4.00 on average. The new member of the economy is excited as she now has $3.00.

So what happened? GDP for the day stayed the same; it just was spread among more members of the economy. The total aggregate of money did not change, remaining the same at $15.00. The velocity of money stayed the same. Three-quarters of the population had a severe recession, while one is happy with her newfound money. Overall business is not good.

The next day a neighbor decides to spend some money and buy something from each child’s store, spending $1.00 at each store. If the each friend still spends their money as before, their $4.00 from the first three stores and the $3.00 from the new store, the GDP of our street economy just rose to $19.00 for the day. $15 + $4.00 from a benevolent neighbor = $19.00. The aggregate money supply rose to $19 as well. However, the velocity of money remained the same at 1 for the day. The three original stores took in $5.00 and the new store took in $4.00. Things are looking better.

The neighbor injected money into the economy to help it recover, much as if the Fed injects money into the economy. In fact, it is just like the Fed growing the money supply to encourage growth in the economy. In addition, while the money supply grew the velocity of money stayed the same.

The next day the same neighbor once again spends $4.00 at each store. The kids spend their $5.00 or $4.00, their earnings from the day before. The original stores now have $6.00 each and the newer store has $5.00, bring the total economy to $23.00. The aggregate money supply is now at $23 as well. Things are better than ever. The benevolent neighbor once again stepped in to help everyone.

Being an enterprising individual, you realize that there is more money to be made if you raised your prices from $from $1.00 to $1.50 for a glass of lemonade. After all, there is more money around and you want more of it. The next day you sell four glasses of lemonade to each of your friends for $1.50 collecting $6.00. Your strategy worked. Your friends keep their prices the same. Unfortunately, one of your friend’s store only sell $4.00 worth of goods while the others sell $5.00. Since you sold $6.00, only $17 was available for the other three stores to share. ($4.00 * 3 = $12 + $ 5.00 = $17.00). Your price increase caused the other stores to suffer, since the total money supply did not increase. Neither did the velocity of money as it only passed through one had during the day.

The next day the other stores raise their prices to $1.50. Once again, the neighbor bought goods from each store, spending $1.50 instead of $1.00. Now the total money supply increased to $29.00. The GDP for our street economy rose to $29.00 as well. Everyone is making more money, but it cost more to buy goods. In fact, you cannot buy more with your newfound wealth as inflation eats up your gains.

On the next day, you and your friends decide to spend part of your prior day’s earnings, keeping $1.50 in your pockets. The day’s sales for everyone are $23.00, the GDP. The aggregate money supply remains at $29.00 ($23.00 + ($1.50 * 4)). Since the GDP fell, the velocity of money also fell from 1.00, as it had been in previous days, to 0.79 (23/29). While everyone has some money in their pockets, they are worried that sales have fallen off. Being smart consumers each friend is being prudent with their money, saving some, rather than spending all of it. This is the situation the U.S. finds itself.

I am using this short story to give you an idea of how the Fed stimulates an economy and how money works in an economic system. In the real world, the Fed provides money through banks in a more complicated process. Nevertheless, the basic idea is the same.

M2 Money Stock

Returning to our world and the current situation of the money supply, the Fed has injected a lot of money, doubling the monetary base. Is this money doing what it is supposed to do, i.e. growing the economy. Look at the M2 Money stock measures to get a better look. M2 includes additional measures of money including savings, time deposits, money market funds, and other close to money substitutes. All things being equal, the M2 should grow substantially if the monetary base doubles. There is more money around, so more of it ends up in these close money substitutes.

As the chart below shows, the M2 money supply has not leapt up as one might expect. In fact, in the last couple of months, the M2 turned down rather than ramp up. Going back to our formula for the money supply it looks like the velocity for money has pulled back some, negating the simulative affects of the Feds doubling of the aggregate monetary base.

This raises several questions. Will the velocity of money increase to help support the stimulus of the economy? Is the growth of the aggregate money supply sufficient to keep the economy from falling into deflation? Will the doubling of the aggregate money-base cause inflation to take off?

Only time will tell. For now, the decline in the velocity of money is partially off setting the rise in the monetary base. Going forward we need to monitor whether this will change, or is this permanent. With the velocity of money falling it reduces the current threat of inflation. On the other hand, it increases the potential that deflation could take hold.

Finally, the Fed itself is debating when it must “unwind” the expansion of the money supply. Federal Reserve governor Kevin Warsh indicated in a recent Wallstreejournal.com op-ed that the Fed might have to be more aggressive unwinding the easy money policy, much like it was aggressive in creating more money to begin with.

The falling velocity of money gives the Fed has some protection to maintain its easy money policy. This means the Fed can keep interest rates low for longer than some think. Remember, one of the Federal Reserve’s duties to is to pursue maximum employment. With unemployment likely to rise to ten percent, the Fed will not be in a hurry to raise interest rates to fast. As a result, I do not expect the Fed to raise interest rates until late in 2010. Moreover, when they do raise rate, it will be in slow measured steps as they try to drive unemployment down. They will be helped along the way by the falling velocity of money.

As investors, we need to monitor what the Fed says and does. For as long as Fed maintains its easy money policy stocks will do well.

Each year, millions of Americans choose to decorate their homes for Christmas. While many individuals keep the Christmas decorations on the inside of their homes, not all do.  There are a fairly large number of individuals who also choose to decorate the outside of their homes, namely their lawns. If you are interested in ornamenting your front yard for Christmas, there are a number of important factors that you may first want to keep in mind. These factors may reaffirm your decision to decorate your lawn for Christmas, but they may also want to make you change your mind.

Perhaps, the most important thing to think about is what type of decorations you want in your front yard.  In the United States, as previously mentioned, a large number of individuals decorate their front yards with Christmas decorations. These yard decorations come in a number of different formats. There are some homeowners who simply place a Santa yardstick in their yard or add lights to the outside of their home, but other homeowners go all out, some with huge inflatable Santa dolls and other colorful decorations.  The type of Christmas decorations that you plan on using, as well as how many will make it easier to determine whether or not you should decorate your lawn for Christmas.

Unfortunately, there are many homeowners who feel that they can do whatever they want to their property because it is their right to do so. While it is your right to decorate your home, as well as your front yard, you will want to take your neighbors into consideration. If you live in a highly populated community, there is a good chance that large lawn decorations, especially those with bright lights, may cause some discomfort among your neighbors.  You will not want to create a Christmas lawn display that has your neighbors up all night because your Christmas lights are shining into their bedroom. That is why it may be a good idea to speak to your neighbors before ornamenting your lawn, especially if you plan on creating a large display.  You may find that your neighbors do not even care.   

In addition to what your neighbors think, you may also want to be concerned with what your town, city, or county officials think. While you might not necessarily know this, there are some cities, towns, and counties that have strict regulations on what can or cannot be placed on a lawn. This is most commonly seen with business signs or election signs. While your local community may not have these restrictions, it is important that you check ahead of time. If you do set up a large Christmas display and you are legally prohibited from doing so, you will likely just receive a warning the first time, but action may be taken later. That is why it is important that you know what you are getting yourself into ahead of time.

Before deciding to decorate your lawn for Christmas, it might be a good idea to examine the cost of doing so.  While it is possible to find a number of low-cost Christmas decorations for the lawn, such as small lawn signs and outdoor Christmas lights, the larger you want your display to be the more you will have to pay.  If you are looking for large decorations, such as an inflatable Santa and reindeer set, you will need to pay quite a bit more money.  These decorations may cost fifty dollars or more.  If you are ornamenting for Christmas on a budget, it may be difficult or impossible for you to find large, affordable Christmas decorations, unless you are willing to buy used decorations.  It may also be a good idea to examine the cost of extra cost of electricity, especially if you are using a large number of Christmas lights.  

When it comes to ornamenting your lawn, as mentioned above, there are a number of advantages and disadvantages.  By keeping the above mentioned points in mind, you should be able to decide for your own whether or not it is a good idea for you to decorate the outside of your home for Christmas.