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Money multiplier may be ramping up
- Thread starter scriabinop23
- Start date
Quote from jueco2005:
Regardless of what's happening.................FRL............keeps on being a huge problem.
The lower the RR the higher the risk and debt.
A way to minimize this risk is to have higher RR. Ideally about 20 to 25% of RR.
yes. To keep prices stable though, the Fed will have to double or even triple the monetary base from here if they were to move to such a model.
Quote from scriabinop23:
yes. To keep prices stable though, the Fed will have to double or even triple the monetary base from here if they were to move to such a model.
Do you think that is a viable solution to maintain prices? I recently listened to an interview of James Rickards, and he said that managing inflation in a severe deflationary environment is dynamically unstable. That ultimately, deflation or severe inflation will triumph. The forces are just too great on each side.
Quote from Misthos:
Do you think that is a viable solution to maintain prices? I recently listened to an interview of James Rickards, and he said that managing inflation in a severe deflationary environment is dynamically unstable. That ultimately, deflation or severe inflation will triumph. The forces are just too great on each side.
One can only assume the Fed's mandate of price stability is there for good reason. Severe moves in either direction definitely make a tougher business and employment environment. Whether it is a futile policy to pursue is perhaps more philosophical in nature. But regardless of that fact, the fact that money aggregates (assuming they were measured accurately) were so stable through this crisis are a testament to the success of the Fed's current abilities.
I agree that less maximum bank leverage is the solution as well. I imagine there is a sweet spot of bank leverage that would prevent bank blowups for the most part in the future. Too much of the money creation falls outside the framework of reserve requirements as well (making this type of analysis I'm trying here kind of pointless at some level), where infinity is the limit to money creation. I still need to learn much more myself about these . different 'shadow lending' mechanisms... I imagine the solution is not only higher reserve requirements, but increased regulation to prevent infinity type money creation from occurring (on transactions that 0% reserve requirements effectively apply). Again, to maintain price stability amongst those new regulations, I have no doubt we'll need to see money bases grow many fold. But the future holds brighter after these changes happen. I think a lot of people would misread the pursuit towards such policies as inflationary. or even hyperinflationary....
Scriabinop23, with regard to printing money, just to be very clear, you and I both know that there is no real printing going on, what we are talking about is digital transactions between bank balance sheets. So, we are talking about digital âmoneyâ creation. In that context most of the Fed balance sheet expansion is a transfer of unfortunately illiquid bank assets constructed from troubled loans to the Fed balance sheet at an arbitrary value in exchange for a transfer to the banks of credits in the banks reserve accounts. Fed took in assets that they don't have to reserve against for quality and the fed created money in the banking system against those assets.
I am wrestling with a reformulation of the Quantity Theory of Money as a theory of âinflation.â One of the problems with that theory is that it doesnât explain the actual mechanism of how an increase in âmoney supplyâ actually translates through the fractional reserve banking system into an increase in prices of all goods and services in the general economy. It appears to me that the transfer mechanism has to be aggregate private debt creation. You clearly address this issue when you observed that deleveragingâ¦seen as the reduction of aggregate debt, or loan assets on the Fed H.3 report, is a deflationary event.
It appears that no matter how much money is created by the Fed, so long as it is not translated into the general economy through net positive aggregate private debt expansion, there can be no âinflationâ, or stated differently, prices in the general economy will not increase until credit begins to expand.
This observation raises the question of how money supply itself should be defined. Does the Fed really expand the money supply by creating money that remains in the banking system as reserves? Perhaps the concept of âmoney supplyâ needs to be expanded to include some factor of bank asset expansion?
I appreciate your insights into fractional reserve banking (which I believe is a blind spot for most academic âEconomistsâ) and I would like to consider your reaction to these issues. Thanks,
I am wrestling with a reformulation of the Quantity Theory of Money as a theory of âinflation.â One of the problems with that theory is that it doesnât explain the actual mechanism of how an increase in âmoney supplyâ actually translates through the fractional reserve banking system into an increase in prices of all goods and services in the general economy. It appears to me that the transfer mechanism has to be aggregate private debt creation. You clearly address this issue when you observed that deleveragingâ¦seen as the reduction of aggregate debt, or loan assets on the Fed H.3 report, is a deflationary event.
It appears that no matter how much money is created by the Fed, so long as it is not translated into the general economy through net positive aggregate private debt expansion, there can be no âinflationâ, or stated differently, prices in the general economy will not increase until credit begins to expand.
This observation raises the question of how money supply itself should be defined. Does the Fed really expand the money supply by creating money that remains in the banking system as reserves? Perhaps the concept of âmoney supplyâ needs to be expanded to include some factor of bank asset expansion?
I appreciate your insights into fractional reserve banking (which I believe is a blind spot for most academic âEconomistsâ) and I would like to consider your reaction to these issues. Thanks,
Quote from scriabinop23:
One can only assume the Fed's mandate of price stability is there for good reason. Severe moves in either direction definitely make a tougher business and employment environment. Whether it is a futile policy to pursue is perhaps more philosophical in nature. But regardless of that fact, the fact that money aggregates (assuming they were measured accurately) were so stable through this crisis are a testament to the success of the Fed's current abilities.
I agree that less maximum bank leverage is the solution as well. I imagine there is a sweet spot of bank leverage that would prevent bank blowups for the most part in the future. Too much of the money creation falls outside the framework of reserve requirements as well (making this type of analysis I'm trying here kind of pointless at some level), where infinity is the limit to money creation. I still need to learn much more myself about these . different 'shadow lending' mechanisms... I imagine the solution is not only higher reserve requirements, but increased regulation to prevent infinity type money creation from occurring (on transactions that 0% reserve requirements effectively apply). Again, to maintain price stability amongst those new regulations, I have no doubt we'll need to see money bases grow many fold. But the future holds brighter after these changes happen. I think a lot of people would misread the pursuit towards such policies as inflationary. or even hyperinflationary....
But keep in mind: There are TWO battles the Fed is waging. The first is what we are discussing, that is, fighting the forces of deflation in the banking system. But there's one more:
Devaluing the dollar to better service our ballooning deficit. We also need to devalue against every other currency to affect our current account deficit. And every country in the world is doing the same thing. Despite what Euroland, China, the US, Japan, and the UK say - they ALL want to devalue their currencies against every other currency either to a)better finance their debts, or b)to maintain or grow their exports, or both a&b. All this during a banking crisis!
So when every currency is trying to devalue against eachother, and there are severe unresolved banking issues that still persist as well as mushrooming sovereign debts that need to be rolled over... How does one not see that as an inherently unstable environment that the Fed and other CBs face? That's why I lean towards the collapse theory. That ultimately, the dollar reserve standard will collapse to be replaced by a super-sovereign currency. But I'm getting ahead of myself. I just wanted to mention the dual battle the Fed faces.
Quote from Misthos:
But keep in mind: There are TWO battles the Fed is waging. The first is what we are discussing, that is, fighting the forces of deflation in the banking system. But there's one more:
Devaluing the dollar to better service our ballooning deficit. We also need to devalue against every other currency to affect our current account deficit. And every country in the world is doing the same thing. Despite what Euroland, China, the US, Japan, and the .................................... the Fed faces.
I dont think they want to devalue the currency. I think it will happen anyways because they have to issue trillions in order to save us from the (supposed) evil of deflation.
MOre important.............I think after this healthcare thing congress will regain attention to restrict the Fed's power.............to audit it.