Can the Fed raise interest rates? • Hacker News Board

Re: Can the Fed raise interest rates?

#31

Post by carsongross » Wed, Sep 16, 2015, 7:58 PM UTC

amluto wrote: post #24

nostromo wrote: post #15

Earlier quoted context omitted.

Here's a great article that describes exactly this phenomenon in more detail. http://www.theguardian.com/commentisfree/2014/mar/18/truth-m... > There's really no limit on how much [money] banks could create, provided they can find someone willing to borrow it. They will never get caught short, for the simple reason that borrowers do not, generally speaking, take the cash and put it under their mattresses; ultimately,…

I don't see any inherent problem in having the sum of all deposits far exceed the actual amount of cash in existence. I do find it odd that the Fed and Congress permit the banks to exert strong control over the total money supply by adjusting how much cash they hold in reserve rather than having the Fed itself control the money supply.

Of course there is an inherent problem with it: it's fraud. Just because it's fraud we are used to doesn't make it any less so.

Demand deposits should be covered via reserves. Loans by banks should be duration-matched to financial instruments offered to the public. Presto, no bank runs and the interest rate is driven by a market expression of societies time preferences.

Economic stimulus is done via government spending, rather than jamming money into an already bloated financial sector. I would favor a universal citizens dividend for this, to minimize corruption.

Re: Can the Fed raise interest rates?

#32

Post by HCIdivision17 » Wed, Sep 16, 2015, 7:58 PM UTC

acd wrote: post #19

jpollock wrote: post #11

Earlier quoted context omitted.

As several people keep hammering into my head, inflation is not the same thing as what people would consider "growth". Depending on your school of economic thought, inflation represents the increase in money supply. So, if I took away every $1 bill and replaced it with a $100 bill, the willingness of everyone to now pay $100 for a coke is inflation. It seems to be an accepted principle that we want to keep people fro…

Point taken about inflation. But the thermophysics part still hold true though. You cannot increase economic output a lot without using more energy which will make earth boil.

The economy doesn't follow natural law, or - in many ways both literal and figurative - any laws at all.

If you think it should, then it'll appear to violate all sorts of principles all the time. In some cases it behaves like a closed system (employment in countries), in others it's an open system (companies). Some cases money is conserved (double entry booking), in others money behaves more like a Banach-Tarski ball (think bank money multipliers).

Re: Can the Fed raise interest rates?

#33

Post by irln » Wed, Sep 16, 2015, 7:59 PM UTC

carsongross wrote: post #25

amluto wrote: post #4

That 10% reserve number is interesting. I learned about the 10% reserve ratio in macroeconomics class, where I also learned that there's this thing called the money multiplier. See, if banks are required to hold a fraction r (10%) of their deposits in reserve, then obviously they'll lend out the rest, which will in turn be held or spent by the borrower, and one way or another it'll end up back in a bank. So a (1-r) f…

With sweep accounts, the reserve ratio is far, far worse than 10%. This is why we are screwed: we've been expanding the fractional ratio for 60 years and it's finally starting to matter as the U.S. economy slows and stops growing fast enough to paper it over. There is no exit. The Fed cannot raise rates.

Why is having a lower reserve ratio far worse?

Re: Can the Fed raise interest rates?

#34

Post by carsongross » Wed, Sep 16, 2015, 8:00 PM UTC

irln wrote: post #33

carsongross wrote: post #25

Earlier quoted context omitted.

With sweep accounts, the reserve ratio is far, far worse than 10%. This is why we are screwed: we've been expanding the fractional ratio for 60 years and it's finally starting to matter as the U.S. economy slows and stops growing fast enough to paper it over. There is no exit. The Fed cannot raise rates.

Why is having a lower reserve ratio far worse?

See above.

Or, ask yourself: why is there any reserve ratio at all?

Re: Can the Fed raise interest rates?

#35

Post by jayfuerstenberg » Wed, Sep 16, 2015, 8:03 PM UTC

nostromo wrote: post #15

amluto wrote: post #4

That 10% reserve number is interesting. I learned about the 10% reserve ratio in macroeconomics class, where I also learned that there's this thing called the money multiplier. See, if banks are required to hold a fraction r (10%) of their deposits in reserve, then obviously they'll lend out the rest, which will in turn be held or spent by the borrower, and one way or another it'll end up back in a bank. So a (1-r) f…

Here's a great article that describes exactly this phenomenon in more detail. http://www.theguardian.com/commentisfree/2014/mar/18/truth-m... > There's really no limit on how much [money] banks could create, provided they can find someone willing to borrow it. They will never get caught short, for the simple reason that borrowers do not, generally speaking, take the cash and put it under their mattresses; ultimately,…

The documentary "Four Horsemen" (link below) goes into these topics at length, especially money creation. Most people's jaws drop when they learn that 97% of all money in the world isn't in paper/coin form but rather 0s and 1s in a database and that it is all willed into existence as debt by a bank.

https://www.youtube.com/watch?v=5fbvquHSPJU

Re: Can the Fed raise interest rates?

#36

Post by kuschku » Wed, Sep 16, 2015, 8:06 PM UTC

jpollock wrote: post #11

acd wrote: post #9

Most central banks dictate that there should be 2% inflation, which means the economy needs to grow 2% per year. But we live in a world with linear resources so unless we talk about virtual goods the economy cannot grow that much and still be sustainable over the long run. Basically it will violate a nature law which says we cannot ventilate that much heat into space as the economic growth requires. "At that 2.3% gro…

As several people keep hammering into my head, inflation is not the same thing as what people would consider "growth". Depending on your school of economic thought, inflation represents the increase in money supply. So, if I took away every $1 bill and replaced it with a $100 bill, the willingness of everyone to now pay $100 for a coke is inflation. It seems to be an accepted principle that we want to keep people fro…

Inflation would mean that also people need to get more money. Currently, inflation is at 2%, but wages stay the same, as wages are coupled to economic growth usually. So only those who already were rich before profit from the current situation – while originally, inflation was meant to prevent people from hoarding money.

Re: Can the Fed raise interest rates?

#37

Post by Animats » Wed, Sep 16, 2015, 8:08 PM UTC

The US Treasury could raise rates on their paper (T-bills and bonds) to push rates up, but then the Treasury would be paying above market rate.

Re: Can the Fed raise interest rates?

#38

Post by mpweiher » Wed, Sep 16, 2015, 8:08 PM UTC

roymurdock wrote: post #18

The crux of the problem is that the Fed is "pushing on a string" - playing with the supply side of money while having absolutely no effect on the demand side. Thomas Palley [1] sums this up nicely in a 2011 critique of QE: The underlying problem is structurally deficient demand caused by thirty years of neoliberal economic policies that have undermined the income and demand generation process (Palley, 2009). However,…

You mean: "we keep pouring money in at the top, but it just isn't trickling down" ?

Re: Can the Fed raise interest rates?

#39

Post by jayfuerstenberg » Wed, Sep 16, 2015, 8:10 PM UTC

carsongross wrote: post #25

amluto wrote: post #4

That 10% reserve number is interesting. I learned about the 10% reserve ratio in macroeconomics class, where I also learned that there's this thing called the money multiplier. See, if banks are required to hold a fraction r (10%) of their deposits in reserve, then obviously they'll lend out the rest, which will in turn be held or spent by the borrower, and one way or another it'll end up back in a bank. So a (1-r) f…

With sweep accounts, the reserve ratio is far, far worse than 10%. This is why we are screwed: we've been expanding the fractional ratio for 60 years and it's finally starting to matter as the U.S. economy slows and stops growing fast enough to paper it over. There is no exit. The Fed cannot raise rates.

Keep in mind also that the 10% reserve doesn't mean physical money (paper/coins). When a bank loans money, it can create $9 out of thin air for every real $1 it holds (be it in paper or in DB entry). When loans are being paid back, the banks count that payment as "real" money against which they can loan 9x the value again. In theory at least, this process can repeat to infinity.

I wonder if anybody unit tested this design for flaws.

Re: Can the Fed raise interest rates?

#40

Post by irln » Wed, Sep 16, 2015, 8:10 PM UTC

carsongross wrote: post #34

irln wrote: post #33

Earlier quoted context omitted.

Why is having a lower reserve ratio far worse?

See above. Or, ask yourself: why is there any reserve ratio at all?

As long as a loan is collateralized by an asset that a reasonable market would value at or above the amount of the loan, the only issue is liquidity...right? So whether the ratio is 10%, 2%, etc. is kind of irrelevant. If folks want their money all at once, no reserve requirement would be sufficient. But at least the idea here (not that it has been followed) is to keep things stable enough so no large group runs for the exits and so long as conditions are maintained that don't foster those runs, the system should work.