One part is false. The fed does not control only short term interest rates. It controls the creation of federal money.
Federal money growth has lagged the private creation of dollars for years.
As long as the decline in federal money vs private money is not reversed deflation will remain the major risk.
Bernanke so far has had a big mouth. But now he needs to walk the talk.
And I'm not sure markets will wait for greenspan to step down to panic.
the leading indicators are red, housing median prices are falling : world wide, debt is through the roof, and on top of that there's a global scare of hurricanes, asian flu and the like.
And I'm not mentionning Iran-israel, chinese-japan, chinese-taiwan growing tensions...
Protectionism is on the rise and nothing will stop it.
The US economy may need 'Rooseveltian' resolve? Thats what happpened after the last speculative mania took place- we have been is a speculative mania for 10 years now- first it was tech, then housing. When this things falls- and it may fall fast and deep- a 'Rooseveltian' type solution will be needed in public policy, taxes, healthcare, and above all economic fairness.
DF's
"Bernanke so far has had a big mouth."
launches me.
Hard to couch that view of housing (Bernanke's) in the real world and yet ascribe to the same man the respect that nearly everyone gives him.
But here it is: like the helicopters, he knows what to say when to get on base. It's our job to recognize that marketing is not an insignificant part of the Fed. If you don't have the respect and history (wrinkles), you will have to resort to buttons, baseball caps... SOMETHING to get the public's attention. Bernanke is well aware of the Greenspan/Kennedy study that documents some $600B of equity extraction from houses.
I'm on CR's record for saying the recession starts in a month, which sounds like a harsh view but it does not include Vader's blood and guts in the streets. [The quiet voice is repetitive.]
Skytrekker's 10yr view of speculative mania has the merit IMO of looking at the huge gush of credit issuance that supported the hi-tech boom that is now coming to a close with what Bernanke calls a "savings glut" (the Chinese savers)[and which some here have cried 'No, it's a Capital glut'). I think he is genuinely mistaken here. The problem is that too few have too much.
Mulling over the tan socks story, it is some comfort to think that one person can make an impression on the thoughts and conduct of the rest (look at me) [No, look at Harriet and see what happens when this comfort is absent.] but another to think that one person or one committee can make that impression on the general public many of whom have more serious concerns than dress code. [Ok only slightly unfair]
The weight of the underprivileged is underestimated.
Private creation of dollars? I thought that was illegal.
Ya I'd like more info on this also - DF if you have good links please provide them, I'm curious too.
I know the financial markets have created a WHOLE LOT of credit instruments which is in many ways 'private fiat money'... but I really don't understand this part of economics at all... from the contradictory stuff I read I'm not sure anyone really gets it... even the derivative & hedging markets that supposedly play in with these all the time.
If anyone has any interesting (but reliable - please no tin hats)... I think a lot of us would find them useful.
Poor vader only sees who is in charge until late January 2009 and his record for making bad things worst, and a possible civil war in the GOP leaving a complete leadership vaccuum during this delicate time.
As well as the fact that we are in very much uncharted financial/economic waters at such a time.
So it then becomes like an aircraft who has one or more system failures and a leadership failure in the cockpit.
Maybe in times past or other assumptions, these system failures could have been handled by the folks in charge or at the least not made worst. But now......
I'll take a laypersons stab at private money creation.
Once only federal licensed banks could make loans. These would be controlled by federal rules.
Loans 'create' money. X deposits 100 dollars into savings. The bank lends out 90 dollars to Y who deposits into the bank, now there are 90 new dollars in existance. THere are rules and regulations on the quality of loans and just how much money is needed to be kept on hand as 'reserves' so that depositors can get money as needed.
Things change, now AnyJoe can make loans. Joe is not a bank and so when he takes in $100 from a sell of debt or equity, he can make a $100 loan. When Joe does this, he creates $100 dollars.
I suspect DF is referring to fractional reserve banking and private credit expansion. Currently the private creation of dollars is illegal, but the private creation of money is not. This is a very interesting topic, but my views may differ from DF's so I'd rather hear his explanation before I ramble on about banking systems and perhaps misconstrue his meaning.
He's right about the falseness of Krugman's statement, but I'm sure Krugman did not intend it that way. Krugman is well aware of the operations of the banking system, and how far they go beyond just controlling short term rates. Krugman just made an inaccurate statement.
I think which operations of the central bank and the banking system people focus on changes over time. The markets used to pay closer attention to announcements of money supply changes as an economic indicator, but this has changed. Now there is a focus on short term rates. If federal funds rate manipulation does not yield desired economic results, I wouldn't be surprised to start hearing about other kinds of banking operations again in the popular media. Not that this will explain anything. I think you really have to understand the history of banking and money to get at understanding certain economic factors. But our media is fairly compliant and intellectually weak. They don't even ask basic and obvious questions like:
"If the Federal Reserve is trying to maintain price stability, why is it that goods and commodities cost so much more than they did in 1913, when the Federal Reserve was created?"
In that instance Joe has not created $100 as a private lender. He has simply transferred his money (reserves) to the account of a borrower in exchange for an IOU. He is not adding money to the money supply; he is simply transferring existing money. This is different than a bank. As you noted, when a bank loans out, say $90 of the $100 in Joes savings account, it means there is now $190 dollars in the money supply (assuming Joes account qualifies as a regulated account at a 10% reserve requirement.) That is to say, Joe still has $100 he can access and use at any time, while the new borrower also has $90 that can be accessed and used at any time. The bank has created $90, and that is private money creation, and it and other banks will continue to pyramid on top of the original $100 as far as compliance with banking regulations will allow. Government money creation on the other hand, occurs through the conduct of open market operations where the Federal Reserve buys securities, typically but not limited to federal debt instruments, with money that it simply creates at will. Banks have demand deposits with the Federal Reserve that are credited when these purchases occur (the security becomes the Federal Reserves asset while the demand deposit is a liability.)
Assuming a US savings rate of 0 or -, then Joe is getting his money from overseas, and overseas dollars are not part of the dollars counted in the US as 'money'.
Also note that Joe, having no reserve requirements, can create more new dollars than the bank, so the effect is inreased.
Now assume the $100 is used to pay for services, and that $100 enters the 'real' banking system. Now there is no doubt of money creation.
Joe being unregulated, can not only lend more but can make more risky investments and offer higher yields, thus attracting foreign $ that otherwise might go into say factories or the purchase of US governments or flow to other uses outside of the US.
Lol, I didnt realize that was what you meant by Joe. We are in agreement then. You just need to get the economists and central bankers to start viewing money supply differently. There was recently a discussion of this on a few economist's blogs where they were refuting, or attempting to I should say, the credit expansion view of global excess liquidity.
would a global currency erase all these concerns about current account deficits and such?
Then Bernanke could have this new global currency thrown from BLACK helicopters taking off from secret bases near Area 51... the tin hat crowd wouldn't mind a bit.
I think I'm going to agree with David Altig, that perhaps their view on money supply is a bit old-fashioned.
I agree (and always agree with vader - wink).
The current concept of money is VERY old fashioned... just about anything I can use as collateral to get credit - especially if I leverage aggressively - can be thought of as money. Some is 'more efficient' than others - more liquid - and certainly some is riskier than 'traditional money'... but I think there are more ways to 'create money' than any of us want to imagine... financial alchemy lives.
If We are back in 1950's, when joe uses 100 dollars, he uses 25 federally printed green bucks. Those dollars have been printed by the fed at close to no cost. THey have been added to the federal budget, which is cool for the federal budget and the tax payer.
On top of that, I don't know the level of reserve requirements, but let's say they are at 2% and apply to the rest of the 75% of money created.
So close to 27% of money supply is fed issued money.
Now we are in 2005 and green bucks account for less than one percent of the money. There are still 2% fractional reserve, but banks only make up 60% of money creation. The rest is created by different actors on the market.
So federal issued money is now 2% of the money supply.
THe creation of money business has basically been privatised of 45 years.
If I sum up, in 1950 75% of money is debt based. In 2005 98% of money is debt based.
This privatisation of the creation of money is the money side of the growth in the debt/GDP level.
THe fed (and central banks worldwide) coud technically crowd out money creation. They could create lots of central bank money and raise interest rates, reserve requirements, or ask for tougher bank-market regulations. Everyone can see that they have not chosen to do so.
I wrote something related in french on my blog.
I do not have exact figures, I never spent time looking for them, I'm more convinced by clear ideas than exact figures, I know some people prefer hard data and no reasonning.
If any find the graph of public-private money creation ratio and can post it alongside overall debt-GDP ratio.
Then great.
It states
M0 he amount of actual physical cash M0 was $688 billion in 2004
M3 about $9.7
Which makes 7% of money being cash.
reserve requirements apply only to M1, check accounts ?
Here is what wikipedia states
The point is simple. Commercial, industrial and consumer loans no longer have any link to bank reserves. Since 1995, the volume of such loans has exploded, while bank reserves have declined.
It seems that because the dollar is used as the international currency the cash/debt based money ratio is higher within the USA (the fed issues central bank dollars that are used to generate credit worldwide, not only within USA)
The bulletin contains weekly data about different types of credit expansion and a host of other data and news related to the housing bubble, credit creation and financial economics. Previous Credit Bubble Bulletins are archived there as well and are a great source of information and analysis.
There's so much going on out there with derivatives, hedging, arbitrage, etc. They've been doing anything to get paper out there, all in the chain get their fees, and have someone else owe it.
Too many involved in and too many foreign central banks in against us and for their own national purposes.
Did many of you know that even our layered govt. entities are involved in too? This is in addition to the Pension Debacle that will be occurring
any year now. San Diego down 1.4B is only the tip of that submerged iceberg. (and I don't think the public is going to pay what was promised all these govt. employees and univ prof. thieves. CA issued how many billions 15?) in bonds just to meet its budget remember?
It's thieving because: The benefit give-aways were due to govt. unions campaign money and votes to politicos campaign steeping stones to the next office--for years and/or politicos who wanted to fatten their own porky benefits along each step.
And, they issued bonds carte blanche without the public knowing really what they were up to. All pension bonds should be up to public vote.
There were no smart non-partisan adults as Guardians over spending or out there for ex. as an influential grouping on C-Span (like myself & some others as a Grouping ) to make clear that job security and health benefits alone were worth @50% of any govt. or univ. or other educat. spot.
In my view, the key flaw in all levels of govt.: We needed the old "Guardians" (from Greeks/or another name to be used ) rather than allowing politicos & lawyers such powers to spend. Let them stand there and shoot off all that hot air they want...it's the spending is the chief concern.
I took a college level pension accounting course 2 years ago. Orginally, pensions were paid out of pocket. Because the bulk of retirees were in the future, the current payout was not affected by the promises.
When the accounting folks pointed out that there was a huge future liability, management balked. After all it would not happen on their watch yet they would have to pay for it. (also get less bonuses and performance pay). ALso there was not any way to really quantify pensions, if the person left the liablity left also.
SO there was a lot of unknowns.
Adjusting to this required a lot of political compermises not most of which have solved the problem.
I don't know much, but there is going to be a lot of baby boomers without savings and whose pensions just got creamed by corporations.
Vader, you can say that all companies are thieves because they promised pensions that they can't ensure to pay in the future. And most of them are likely to passe the burden to the tax payer.
And it was outright stupid in the first place to have private pension plans and private healthcare as national scheme work much more efficiently and reduce the boom-bust effect.
One part is false. The fed does not control only short term interest rates. It controls the creation of federal money.
Federal money growth has lagged the private creation of dollars for years.
As long as the decline in federal money vs private money is not reversed deflation will remain the major risk.
Bernanke so far has had a big mouth. But now he needs to walk the talk.
And I'm not sure markets will wait for greenspan to step down to panic.
the leading indicators are red, housing median prices are falling : world wide, debt is through the roof, and on top of that there's a global scare of hurricanes, asian flu and the like.
And I'm not mentionning Iran-israel, chinese-japan, chinese-taiwan growing tensions...
Protectionism is on the rise and nothing will stop it.
The US economy may need 'Rooseveltian' resolve? Thats what happpened after the last speculative mania took place- we have been is a speculative mania for 10 years now- first it was tech, then housing. When this things falls- and it may fall fast and deep- a 'Rooseveltian' type solution will be needed in public policy, taxes, healthcare, and above all economic fairness.
A Rooseveltian solition may not be, but blood, guts and gore in the streets.
Private creation of dollars? I thought that was illegal.
DF's
"Bernanke so far has had a big mouth."
launches me.
Hard to couch that view of housing (Bernanke's) in the real world and yet ascribe to the same man the respect that nearly everyone gives him.
But here it is: like the helicopters, he knows what to say when to get on base. It's our job to recognize that marketing is not an insignificant part of the Fed. If you don't have the respect and history (wrinkles), you will have to resort to buttons, baseball caps... SOMETHING to get the public's attention. Bernanke is well aware of the Greenspan/Kennedy study that documents some $600B of equity extraction from houses.
I'm on CR's record for saying the recession starts in a month, which sounds like a harsh view but it does not include Vader's blood and guts in the streets. [The quiet voice is repetitive.]
Skytrekker's 10yr view of speculative mania has the merit IMO of looking at the huge gush of credit issuance that supported the hi-tech boom that is now coming to a close with what Bernanke calls a "savings glut" (the Chinese savers)[and which some here have cried 'No, it's a Capital glut'). I think he is genuinely mistaken here. The problem is that too few have too much.
Mulling over the tan socks story, it is some comfort to think that one person can make an impression on the thoughts and conduct of the rest (look at me) [No, look at Harriet and see what happens when this comfort is absent.] but another to think that one person or one committee can make that impression on the general public many of whom have more serious concerns than dress code. [Ok only slightly unfair]
The weight of the underprivileged is underestimated.
Private creation of dollars? I thought that was illegal.
Ya I'd like more info on this also - DF if you have good links please provide them, I'm curious too.
I know the financial markets have created a WHOLE LOT of credit instruments which is in many ways 'private fiat money'... but I really don't understand this part of economics at all... from the contradictory stuff I read I'm not sure anyone really gets it... even the derivative & hedging markets that supposedly play in with these all the time.
If anyone has any interesting (but reliable - please no tin hats)... I think a lot of us would find them useful.
Has Krugman finally made a full retraction of all his lies yet?
Poor vader only sees who is in charge until late January 2009 and his record for making bad things worst, and a possible civil war in the GOP leaving a complete leadership vaccuum during this delicate time.
As well as the fact that we are in very much uncharted financial/economic waters at such a time.
So it then becomes like an aircraft who has one or more system failures and a leadership failure in the cockpit.
Maybe in times past or other assumptions, these system failures could have been handled by the folks in charge or at the least not made worst. But now......
I'll take a laypersons stab at private money creation.
Once only federal licensed banks could make loans. These would be controlled by federal rules.
Loans 'create' money. X deposits 100 dollars into savings. The bank lends out 90 dollars to Y who deposits into the bank, now there are 90 new dollars in existance. THere are rules and regulations on the quality of loans and just how much money is needed to be kept on hand as 'reserves' so that depositors can get money as needed.
Things change, now AnyJoe can make loans. Joe is not a bank and so when he takes in $100 from a sell of debt or equity, he can make a $100 loan. When Joe does this, he creates $100 dollars.
I hope this answers the question you asked.
I suspect DF is referring to fractional reserve banking and private credit expansion. Currently the private creation of dollars is illegal, but the private creation of money is not. This is a very interesting topic, but my views may differ from DF's so I'd rather hear his explanation before I ramble on about banking systems and perhaps misconstrue his meaning.
He's right about the falseness of Krugman's statement, but I'm sure Krugman did not intend it that way. Krugman is well aware of the operations of the banking system, and how far they go beyond just controlling short term rates. Krugman just made an inaccurate statement.
I think which operations of the central bank and the banking system people focus on changes over time. The markets used to pay closer attention to announcements of money supply changes as an economic indicator, but this has changed. Now there is a focus on short term rates. If federal funds rate manipulation does not yield desired economic results, I wouldn't be surprised to start hearing about other kinds of banking operations again in the popular media. Not that this will explain anything. I think you really have to understand the history of banking and money to get at understanding certain economic factors. But our media is fairly compliant and intellectually weak. They don't even ask basic and obvious questions like:
"If the Federal Reserve is trying to maintain price stability, why is it that goods and commodities cost so much more than they did in 1913, when the Federal Reserve was created?"
Vader,
In that instance Joe has not created $100 as a private lender. He has simply transferred his money (reserves) to the account of a borrower in exchange for an IOU. He is not adding money to the money supply; he is simply transferring existing money. This is different than a bank. As you noted, when a bank loans out, say $90 of the $100 in Joes savings account, it means there is now $190 dollars in the money supply (assuming Joes account qualifies as a regulated account at a 10% reserve requirement.) That is to say, Joe still has $100 he can access and use at any time, while the new borrower also has $90 that can be accessed and used at any time. The bank has created $90, and that is private money creation, and it and other banks will continue to pyramid on top of the original $100 as far as compliance with banking regulations will allow. Government money creation on the other hand, occurs through the conduct of open market operations where the Federal Reserve buys securities, typically but not limited to federal debt instruments, with money that it simply creates at will. Banks have demand deposits with the Federal Reserve that are credited when these purchases occur (the security becomes the Federal Reserves asset while the demand deposit is a liability.)
JS
True, but
It depends on where Joe gets the $100.
Assuming a US savings rate of 0 or -, then Joe is getting his money from overseas, and overseas dollars are not part of the dollars counted in the US as 'money'.
Also note that Joe, having no reserve requirements, can create more new dollars than the bank, so the effect is inreased.
Now assume the $100 is used to pay for services, and that $100 enters the 'real' banking system. Now there is no doubt of money creation.
Joe being unregulated, can not only lend more but can make more risky investments and offer higher yields, thus attracting foreign $ that otherwise might go into say factories or the purchase of US governments or flow to other uses outside of the US.
would a global currency erase all these concerns about current account deficits and such?
Vader,
Lol, I didnt realize that was what you meant by Joe. We are in agreement then. You just need to get the economists and central bankers to start viewing money supply differently. There was recently a discussion of this on a few economist's blogs where they were refuting, or attempting to I should say, the credit expansion view of global excess liquidity.
Economist's View: Is Greenspan Responsible for China's Asset Bubble?
I think I'm going to agree with David Altig, that perhaps their view on money supply is a bit old-fashioned.
would a global currency erase all these concerns about current account deficits and such?
Then Bernanke could have this new global currency thrown from BLACK helicopters taking off from secret bases near Area 51... the tin hat crowd wouldn't mind a bit.
I think I'm going to agree with David Altig, that perhaps their view on money supply is a bit old-fashioned.
I agree (and always agree with vader - wink).
The current concept of money is VERY old fashioned... just about anything I can use as collateral to get credit - especially if I leverage aggressively - can be thought of as money. Some is 'more efficient' than others - more liquid - and certainly some is riskier than 'traditional money'... but I think there are more ways to 'create money' than any of us want to imagine... financial alchemy lives.
Hi all, well vader and JS explained it all.
If We are back in 1950's, when joe uses 100 dollars, he uses 25 federally printed green bucks. Those dollars have been printed by the fed at close to no cost. THey have been added to the federal budget, which is cool for the federal budget and the tax payer.
On top of that, I don't know the level of reserve requirements, but let's say they are at 2% and apply to the rest of the 75% of money created.
So close to 27% of money supply is fed issued money.
Now we are in 2005 and green bucks account for less than one percent of the money. There are still 2% fractional reserve, but banks only make up 60% of money creation. The rest is created by different actors on the market.
So federal issued money is now 2% of the money supply.
THe creation of money business has basically been privatised of 45 years.
If I sum up, in 1950 75% of money is debt based. In 2005 98% of money is debt based.
This privatisation of the creation of money is the money side of the growth in the debt/GDP level.
THe fed (and central banks worldwide) coud technically crowd out money creation. They could create lots of central bank money and raise interest rates, reserve requirements, or ask for tougher bank-market regulations. Everyone can see that they have not chosen to do so.
So far I know only of this website
MONETARY REFORM MONEY REFORM ECONOMIC DEMOCRACY REFORM PROSPERITY
the info is rather old, but very valid.
through google I found
Create Money, Not Taxes
http://www.comer.org/Videos/Money.htm
I wrote something related in french on my blog.
I do not have exact figures, I never spent time looking for them, I'm more convinced by clear ideas than exact figures, I know some people prefer hard data and no reasonning.
If any find the graph of public-private money creation ratio and can post it alongside overall debt-GDP ratio.
Then great.
NEVER underestimate wikipedia.
It's really a great resource and I encourage you all to take part in it.
here's the article on money supply
Money supply - Wikipedia, the free encyclopedia
It states
M0 he amount of actual physical cash M0 was $688 billion in 2004
M3 about $9.7
Which makes 7% of money being cash.
reserve requirements apply only to M1, check accounts ?
Here is what wikipedia states
The point is simple. Commercial, industrial and consumer loans no longer have any link to bank reserves. Since 1995, the volume of such loans has exploded, while bank reserves have declined.
It seems that because the dollar is used as the international currency the cash/debt based money ratio is higher within the USA (the fed issues central bank dollars that are used to generate credit worldwide, not only within USA)
DF,
You can check Doug Noland's Credit Bubble Bulletin that comes out on friday's at:
404 Not Found
The bulletin contains weekly data about different types of credit expansion and a host of other data and news related to the housing bubble, credit creation and financial economics. Previous Credit Bubble Bulletins are archived there as well and are a great source of information and analysis.
Yeah I look at it once in a while. But it does not say a thing about this ratio of free public money/debt based private money
There's so much going on out there with derivatives, hedging, arbitrage, etc. They've been doing anything to get paper out there, all in the chain get their fees, and have someone else owe it.
Too many involved in and too many foreign central banks in against us and for their own national purposes.
Did many of you know that even our layered govt. entities are involved in too? This is in addition to the Pension Debacle that will be occurring
any year now. San Diego down 1.4B is only the tip of that submerged iceberg. (and I don't think the public is going to pay what was promised all these govt. employees and univ prof. thieves. CA issued how many billions 15?) in bonds just to meet its budget remember?
why thieves ?
It's thieving because: The benefit give-aways were due to govt. unions campaign money and votes to politicos campaign steeping stones to the next office--for years and/or politicos who wanted to fatten their own porky benefits along each step.
And, they issued bonds carte blanche without the public knowing really what they were up to. All pension bonds should be up to public vote.
There were no smart non-partisan adults as Guardians over spending or out there for ex. as an influential grouping on C-Span (like myself & some others as a Grouping ) to make clear that job security and health benefits alone were worth @50% of any govt. or univ. or other educat. spot.
In my view, the key flaw in all levels of govt.: We needed the old "Guardians" (from Greeks/or another name to be used ) rather than allowing politicos & lawyers such powers to spend. Let them stand there and shoot off all that hot air they want...it's the spending is the chief concern.
I took a college level pension accounting course 2 years ago. Orginally, pensions were paid out of pocket. Because the bulk of retirees were in the future, the current payout was not affected by the promises.
When the accounting folks pointed out that there was a huge future liability, management balked. After all it would not happen on their watch yet they would have to pay for it. (also get less bonuses and performance pay). ALso there was not any way to really quantify pensions, if the person left the liablity left also.
SO there was a lot of unknowns.
Adjusting to this required a lot of political compermises not most of which have solved the problem.
I don't know much, but there is going to be a lot of baby boomers without savings and whose pensions just got creamed by corporations.
Vader, you can say that all companies are thieves because they promised pensions that they can't ensure to pay in the future. And most of them are likely to passe the burden to the tax payer.
And it was outright stupid in the first place to have private pension plans and private healthcare as national scheme work much more efficiently and reduce the boom-bust effect.