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The ballooning money supply may be the key to unlocking inflation in the U.S.

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Re: The ballooning money supply may be the key to unlocking inflation in the U.S.

#151

Post by [deleted] »

marvin wrote: post #142
jgalt212 wrote: post #104

Earlier quoted context omitted.

I think you're sort of trying to have it both ways here. The Fed has been printing money for 12 years in hopes of increasing CPI. But real people, who buy the stuff in the CPI basket, don't have M2, so no CPI bump. It took a long time for central banks to realize this. And even astute minds like John Paulson got tripped up on this one. Starting in 2009, he bought as much gold as he could because he feared rampant CPI…

To get CPI up, why don't they just deposit money straight into ordinary people's bank accounts? I think that would do the trick.

[deleted]

Re: The ballooning money supply may be the key to unlocking inflation in the U.S.

#153

Post by RobertoG »

nostrademons wrote: post #124
smallnamespace wrote: post #49

The Fed is only creating bank reserves, which does not create more money. Therefore, the Fed has not been printing money. When the Fed buys assets (government bonds, Fannies, etc.) from a bank, the bank gets back 'bank reserves', which are just a number in the bank's Federal Reserve account somewhere. Those reserves can't be lent out. The bank can make no change to its lending, because it's a one-to-one swap (highly…

Bank reserve ratios [1] operate as a percentage, so by creating more bank reserves, you create more money that can be lent out. Say that the reserve ratios requirement is 10%, which it currently is. Then for every dollar it has in reserves, the bank may create $10 in loans. The bank reserves don't themselves circulate as money, but they let the bank create more credit, which does circulate as money. [1] https://www.i…

Actually, that it's not how it works in practice.

The credit department of a bank, doesn't check if the bank have enough reserves before lending. They only check if the new lending make senses from a business perspective. If it does, it concede the credit to the customer.

The bank is legally obliged to have the reserves, so, a posteriori (and not before) the bank will try to get the reserves in the inter-bank market (from other banks). If there are not enough reserves in the system the price of the reserves will go up. That's the interest rate.

Central banks don't target the quantity of reserves, they only care about the interest rate. So, if they want to keep the interest rate in their target, they have to create new reserves. So, it's the lending what create reserves, not the other way around.

https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

http://bilbo.economicoutlook.net/blog/?p=6617

http://bilbo.economicoutlook.net/blog/?p=14620

Re: The ballooning money supply may be the key to unlocking inflation in the U.S.

#154

Post by dnautics »

RobertoG wrote: post #127
pedro_hab wrote: post #106

Earlier quoted context omitted.

This is the new definition, in old dictionaries inflation was defined as increase in money supply. Using products to measure inflation, is a terrible mistake in my estimation, because cost has been falling, so stable prices don't mean no inflation. It just means the governments got wise to just take what they can get without being noticed.

You can't define inflation as you want. Inflation is an government official indicator with a very clear meaning.

do you always trust the government's definitions of things?

Suppose the government defined "eastern time zone" to be a geographical area. And you live in western indiana, and commute to work in chicago.

Suppose the government defined "torture" to not include "waterboarding".

Re: The ballooning money supply may be the key to unlocking inflation in the U.S.

#155

Post by skybrian »

pedro_hab wrote: post #106
skybrian wrote: post #86

Earlier quoted context omitted.

Consumer inflation actually is inflation, by definition. This isn't being confused, this is understanding how inflation is defined and using terms correctly. Inflation is about the prices people actually pay, on average. Your neighbor's house getting sold for a lot of money isn't a real cost to you like rent. Someone paid that price, but they are not necessarily typical. Inflation does include rent (or "imputed rent"…

This is the new definition, in old dictionaries inflation was defined as increase in money supply. Using products to measure inflation, is a terrible mistake in my estimation, because cost has been falling, so stable prices don't mean no inflation. It just means the governments got wise to just take what they can get without being noticed.

It was once thought that the money supply was directly related to inflation, but they were never the same thing. The classic equation was MV = PY, and M (the money supply) and P (the price level) are different. They are only proportional (according to this equation) if everything else remains the same.

In any case, the "money supply" is an abstract macroeconomic variable with multiple possible definitions. Why do we care about it? Because it might have a real-world effect on us via price changes.

Gathering data about prices directly is a better way of understanding price levels (and inflation) than mucking around with less measurable quantities.

To the extent that the money supply matters, it's because it might result in higher prices in the future. But this doesn't seem to happen in any mechanical way. Just because people have money doesn't mean they want to spend it. In the classic equation, V (the velocity of money) can slow down.

This is particularly true when we are talking about institutions and rich people who already have savings. Higher numbers in their bank accounts doesn't automatically result in more spending, either by them, by the banks, or by companies whose stock prices get bid up.

It would matter more if the money went to people who actually need to spend it.

Re: The ballooning money supply may be the key to unlocking inflation in the U.S.

#156

Post by gen3 »

KaoruAoiShiho wrote: post #36
jlmorton wrote: post #27

Earlier quoted context omitted.

Because the dollars have not been permanently pumped into the economy, and the world has faith that the Fed will shrink its balance sheet. Printing money and lending it out, and then burning the money when it's repaid, is very different than printing money and using it to buy goods and services.

I think this thread needs an ELI5 for how the whole process works from the ground up as there seems to be a lot of popular misconceptions.

This Planet money episode addresses the whole topic of where the Fed is getting all the money from, and how inflation fits into the picture. I found it pretty helpful.

https://www.npr.org/transcripts/821787090

Re: The ballooning money supply may be the key to unlocking inflation in the U.S.

#157

Post by dnautics »

foota wrote: post #87
toomuchtodo wrote: post #35

Earlier quoted context omitted.

Inflated asset prices means most folks are never going to be able to purchase a home, and equities (which generates wealth with no further effort besides the capital invested, for the most part) will continue to be owned by the wealthiest. Inequality worsens when asset prices increase faster than wages.

This doesn't check out to me (well, the home part does, but I'm not sure we've seen significantly above normal growth there compared to historical norms, outside of hot coastal markets), but for other assets the price doesn't matter, as you can just get a fraction of them or they're split.

> well, the home part does, but I'm not sure

Hey, this checks out with the very thing that the younger generation complains about, correlates with social injustice in the grandest scale (homelessness), that is one influencing factor in major social unrest in the country (racial disparity in access to real estate). But let's ignore that.

Have you considered that the deflection in the economy caused by the inflation happened to manifest itself unevenly across various market segments, and the primary direction that the deflection moved into is the very one you're ignoring?

Re: The ballooning money supply may be the key to unlocking inflation in the U.S.

#158

Post by jfengel »

freeone3000 wrote: post #115
SonOfThePlower wrote: post #107

Earlier quoted context omitted.

No, FED does not print money - bank reserves are not legal tender. If they had printed money, inflation would have skyrocket. My only question is why banks agree to this deal: exchanging U.S. treasuries for bank reserves (which they only can use as a collateral for lending) ?

Inflation (in the consumer goods sense) only happens when the value of money goes down for the average person. The price of lettuce isn't going to rise because the fed isn't buying lettuce with faerie money, they're buying securities. And the stock market has gone up and to the right, despite all logical indicators on the ground indicating it should go solidly opposite. Securities are hugely inflated.

That turns out to be the answer I've been trying to figure out for years: regardless of the technicalities of "printing money", all this quantitative easing should have been causing inflation. And it is... in the stock market, which doesn't figure into the consumer price index.

The CPI, meanwhile, has been stable, or even under the Fed's target. Presumably because those are basics, and you don't really need to buy much more of the basics just because you have more money. (The people with newfound stock wealth, that is; the people without it don't have any more money to spend in the first place.)

It's still a little unclear to me why the S&P 500 has remained in the "inflated but not insane" through most of the past decade -- though for the past week or so it's trending back to "insane" (a P/E ratio well above 20). That means that earnings were coming from somewhere, and if not from core consumer products, then presumably from other things that the stock-market-wealthy were buying from each other, at presumably inflating prices, or at least quantities.

Re: The ballooning money supply may be the key to unlocking inflation in the U.S.

#159

Post by david927 »

des429 wrote: post #30
alexjray wrote: post #23

The fed has pumped 2.3 trillion dollars into the economy in the past six weeks.... I don't see how the dollar won't crash eventually. Why would foreign countries still buy US bonds?

Because what's the alternative to US treasuries? Everything else in the world is either more unstable or offering zero yield.

Gold

Zero yield is golden for the next x number of years. A ship in the harbor isn't making you money but it's also not getting destroyed in the storm.

Re: The ballooning money supply may be the key to unlocking inflation in the U.S.

#160

Post by neilwilson »

darawk wrote: post #109
smallnamespace wrote: post #49

The Fed is only creating bank reserves, which does not create more money. Therefore, the Fed has not been printing money. When the Fed buys assets (government bonds, Fannies, etc.) from a bank, the bank gets back 'bank reserves', which are just a number in the bank's Federal Reserve account somewhere. Those reserves can't be lent out. The bank can make no change to its lending, because it's a one-to-one swap (highly…

Creating bank reserves absolutely creates money. Bank reserves are the fulcrum around which bank leverage ratios operate. Yes, they can margin treasuries to borrow reserves from other banks, and in that sense, they are fungible. But the total amount of bank reserves in the system at any one time is still what bounds the total amount of money creation that can happen via leverage. Increasing the absolute amount of ban…

Reserves have nothing to do with the amount of bank lending. Only the price of such lending.

https://onlinelibrary.wiley.com/doi/abs/10.1111/pbaf.12249

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