FED and Banks

[StarDust9182]

Money is created two ways: 1) the Fed prints it, and 2) fractional-reserve banks loan it into existence (credit money). Focus on #2. Credit money puffs up during the up-swing of the business cycle. Then it contracts during the down swing because everybody deleverages. There's plenty of money in the higher echelons of the system but it isn't turning over. Each dollar gets re-spent fewer times per year (velocity is down). Credit money shrinks. That's deflationary. Meanwhile the Fed prints. That's inflationary. The actual inflation rate (which is higher than the reported rate) is the sum of the two.

“The enemy isn’t conservatism. The enemy isn’t liberalism. The enemy is bulls**t." —Lars-Erik Nelson, political columnist

Thanks for having the courage to reply.

The original name for economics was political economics. Somehow the political was lost (not politically correct enough perhaps?).

It is my understanding that the FED doesn't print money (in the sense of dollars and coins). They print credit (or at least circulate credit). Is that wrong thinking?

IMO printing money is NOT INFLATIONARY. If I photocopy dollar bills and stuff every neighbor's basement full of money, and check it every day, the volume will stay the same. The "economy" will not know or care (don't try this at home unless you like orange suits!) about changes in amount. We don't care about amount anyways but wealth. Given more money and more wealth as a choice, I would choose wealth (something relative IMO). Only (I suspect) the FED would choose money - Odd!

As you said let's focus on a "number two".

" ... There's plenty of money in the higher echelons of the system but it isn't turning over...."
There is that (insufficient) amount thing again, same as 1. Higher echelons just have bigger basements? Money is unlike manure, which one has to turn over to let it age and get better. Money doesn't age, but people do.

Velocity (money velocity) is change in amount over time. What is this circulation thing? If I move the money from basement to basement, I don't think that the economy knows or cares about it either. The Fed seems mainly to deal in number two. So why does the Fed believe people are to blame and not their actions? So a plumber breaks a pipe but the resulting mess is your fault?

I don't understand how your amount (plenty of money) mathematically becomes a velocity in economics? IMO, velocity of money is simply an abstraction to hide truth behind.

Sincerely, please show where my argument is in error and help me pass the economics test. Where have all the economists gone - into hiding? It is getting pretty quiet out there from the days of Gentle Ben.

Should I stir the water in the bucket and then more will appear (as if magic)? You can see how confused I am.

 

[Steve Ladd]

Stardust,

You are correct. About 98% of the "printing" the Fed does now is with computer keystrokes, not bills and coins.

Irving Fisher invented the quantity theory of money, which states that the quantity of money times the velocity of circulation equals prices times the number of transactions. In other words, money x velocity equals GDP. Last I checked, velocity was at a historic low. This explains why inflation is low even though quantity is high.

The Fed is the bank where normal banks keep their reserves. These days those reserves are much larger and more inert than usual. The banks could lend more and still meet their fractional reserve requirements, but they choose not to.

Another piece of the puzzle is government borrowing. National governments typically borrow more when private parties are de-leveraging, to moderate the reduction in money and demand. This is a central tenet of Keynesianism.

 

[Gotcha]

The banks could lend more and still meet their fractional reserve requirements, but they choose not to.

Is this really the case? Isn't the whole point of introducing negative interest rates to stimulate people to go out and spend money? Its not enough that people don't want to borrow money when it costs next to nothing, but some countries now have to charge people/banks to hold money because they are trying to get people to spend it instead of hoard it.

You can't get blood from a stone, and likewise, no matter how much governments try to get the economy going, you just cannot make people buy stuff they don't want, or need or can't afford. Stimulating an economy only works so far. Its really a joke that the government only has two ways to control the economy, never mind even having the idiotic thought that they are in control. All they really do is either make it cheaper to borrow money, so people borrow and spend, which they already did plenty of, or they can spend the money themselves on wars or infrastructure, which of course has to come from somewhere at a later date.

The money is out there, its available, but either its only going down the drain (as in bad loans such as in China), or its just sitting there and isn't in the hands of the people who would actually spend it on stuff to get the economy going. I'm not even saying the economy needs this because spending more just pushes the can down the road. What is really needed is a major rethink of what it means to grow an economy.

People grow from a baby to an adult... and after puberty, the only growing left is getting fat, which isn't the same type of growing. If all you ever do is grow and get fatter, you will die sooner. Growing the economy isn't the answer.... its thinking about sustainability. Its learning to produce and consume enough to keep it at a healthy balance, just like keeping your body healthy!

 

[der_kommissar]

Agreed Gotcha...Just look at Japan over the past 25 years...They've re-written the book on monetary "stimulus" and the economy has only briefly found growth "spurts" following ZIRP for decades at a time...They've been the 800lb elephant in the room for years now, but their situation is always conveniently ignored in the narrative spin for ever more radical monetary stimulus.

 

[Gotcha]

Agreed Gotcha...Just look at Japan over the past 25 years...They've re-written the book on monetary "stimulus" and the economy has only briefly found growth "spurts" following ZIRP for decades at a time...They've been the 800lb elephant in the room for years now, but their situation is always conveniently ignored in the narrative spin for ever more radical monetary stimulus.

Yup.. Japan is a prime example. But I guess when you really have no other choices... then what do you? Just more of the same!

I think part of the problem with Japan is that the young people leave, and they have firm rules about immigration. Europe and North America are big on immigration because this allows you artificially increase demand, never mind how eventually when people get older, they end up needing more resources than they provide to an economy, but of course these problems are further down the road and will be for some other elected governments to solve. There is a reason after all why the age cutoff is 30 for immigration visa's in many countries.

 

[ironchef]

Japan's situation seemed to be unique to Japan: Current account surplus every year, most of Government debts are owned by the Japanese people and corporations, so a Government deficit and corporations' and citizens' surplus kind of balance out, like taking money from one pocket and put it in another. In spite of huge Gov deficit their overall country wealth is increasing every year.

The US is different: Huge current account deficit, high consumer debt, high corporate debt (?), low investment, low saving.... If we don't print money, we have to borrow from others, like China and Japan. The Chinese are already too smart to keep taking in our bonds, therefore, their people are buying US assets, real estates, corporations buying US corporations, farm lands...., using our paper money, pretty soon, the foreigners will own most of us and we will be indenture servants. As a layperson, I do not understand our economic policy and do not understand how we are going to get out of it.

Maybe our government officials have a game plan. Just hope it is not keep printing more and more money or borrowing more and more from the Chinese.

Perhaps, we should elect Trump. He will just declare bankruptcy like many of his corporations and force others to forgive our debt so we can get out of debt, free. No wonder the Republicans like him.

 

[ETcallhome]

the crazy thing is, rates are low and they can't make people buy anything. How bout trying higher rates so the banks can make some money? At 6% there's probably a lot of homes out there and fine hardworking people the banks (because they are so selfless and patriotic) would just love to loan money to. But for some reason at 3% they are just not that motivated to take risks on some poor guy trying to buy a house and start a family.

 

[StarDust9182]

Stardust,

.......
Another piece of the puzzle is government borrowing. National governments typically borrow more when private parties are de-leveraging, to moderate the reduction in money and demand. This is a central tenet of Keynesianism.

Thanks. I have been reading about this velocity fellow. Is the quantity theory of money generally accepted in economics? So the helicopter idea was that printing money and stirring increases the "GDP" water? Or that printing, stirring while chanting, and passing laws increases the water? It's a little late to be experimenting, isn't it?

One flaw I see right away is that he lived when there was a risk free choice (Gold). I think gold is not the solution this time round (sorry gold bugs). I would give the reasoning but they cannot hear it. Perhaps the Irving formula is missing something crucial similar to when Einstein changed Newton's laws to fine tune them.

Socialism ( Keynes IMO) seems to be the theory that the water bucket can be influenced by very tight control and laws. If that doesn't work then tighter control and even more laws. If that doesn't work, then hunt for the guilty party and imprison them. If that doesn't work spy on them. If that doesn't work pass legislation to deal with foreign propaganda. Clearly evil spirits are the cause somehow. Aren't evil spirits just a projection?

In the dark ages people believed that everything happened due to magic. A stone rolled downhill because "it wanted to". Magic was replaced by Newton and then Einstein and then quantum mechanics etc. Perhaps if we sacrificed something (like in Aztec times) then the water would increase. The only problem with this was if you were caught BS-ing the tribe, you could become the next sacrifice and the problem wasn't solved either way.

Help me out with de-leveraging. Could you present a chart or anything whatsoever showing where deleveraging is happening please. The smart fellow (and I mean that sincerely) managing bucketfuls of money who believed in perfect deleveraging got perfectly tagged in the first quarter along with many hedge funds from my reading.

Einstein said something like if I only had a hour to solve a problem, I would spend most of the time thinking ABOUT the problem and a short time solving the problem. So in 1 sentence (for all who care) what is THE central issue with the bucket?

 

[StarDust9182]

Is this really the case? Isn't the whole point of introducing negative interest rates to stimulate people to go out and spend money? Its not enough that people don't want to borrow money when it costs next to nothing, but some countries now have to charge people/banks to hold money because they are trying to get people to spend it instead of hoard it.
......

Another thought is that NIRP is simply another bank bailout in disguise. The shark is drowning and we need to save it. Perhaps you could critique my reasoning.

Banks are a spread business. Business is bad. Asking for a new bank bailout package could be politically tough. TBTF means citizens guarantee the banks and their vig - I meant to say profits. How to give a spread with zero interest rates? How to look like you are doing something to fix the mess - invent ZIRP and BS and "try" it.

If there is only one currency anyways and people spreading everything, then the extent of the negativity should give a hint as to the desperation of the currency relatively speaking.

The prevailing theory is that "in the long run we are all dead anyways". Barring a miracle, that seems to be a truth. Some people see hell as hot but there is an argument that we are there now.

Interestingly enough 2% (must have inflation) is close to the (must have) spread.

 

[Gotcha]

Another thought is that NIRP is simply another bank bailout in disguise. The shark is drowning and we need to save it. Perhaps you could critique my reasoning.

Banks are a spread business. Business is bad. Asking for a new bank bailout package could be politically tough. TBTF means citizens guarantee the banks and their vig - I meant to say profits. How to give a spread with zero interest rates? How to look like you are doing something to fix the mess - invent ZIRP and BS and "try" it.

If there is only one currency anyways and people spreading everything, then the extent of the negativity should give a hint as to the desperation of the currency relatively speaking.

The prevailing theory is that "in the long run we are all dead anyways". Barring a miracle, that seems to be a truth. Some people see hell as hot but there is an argument that we are there now.

Interestingly enough 2% (must have inflation) is close to the (must have) spread.

I personally don't believe in inflation numbers. I'm not an economist, but it seems to me like its a number that can be heavily manipulated to serve a purpose.

Likewise, I also don't believe in GDP. If the economy is slow, and the government borrow 1 trillion dollars to build roads and bridges, then all of a sudden, wow, that is an extra trillion in business being done so that must mean the GDP is going to sky rocket! But where this money comes from is the kicker. GDP sounds great in theory, but I'm not really sure if its capturing the essence of what it means to grow an economy. Once again though, I'm not an economist.

The thing with NIRP from what I hear is that it really depends on how its going to be implemented. Are people really going to be charged to keep money in a bank? Or is it that the banks will just be charged for whatever balances they keep at the FED? If the banks have to absorb some cost, it will be passed onto consumers in some ways, although I doubt it will be an actual negative interest rate. I imagine most would take their money out, and now banks might have trouble meeting their fractional reserve requirements.

I doubt any of this will happen mind you. What will happen I don't know, but I doubt it will be something that most of us think of.