Bank of England Paper shattering common misconcpetions

[ludin]

When it comes to inflation and money supply you actually see an inverse, or negative correlation.

And it makes sense to see that, as more money = more sales = more competition = lowered prices (assuming this happens in industries where production can increase, think the opposite of housing and oil).

View attachment 67204363

https://hereticaldruthers.wordpress.com/2012/12/31/how-does-inflation-occur/

You can read the linked article where I explain how inflation occurs, and also read a good one by John Harvey on Forbes.

That only applies then there is demand in the system for more dollars.
If you just print money to print money with 0 or little economic growth
Then you will see inflation like crazy.

See Zimbabwe for a great example of this.
People are billionaires down there to bad it costs 100k per egg.

 

[JP Hochbaum]

That only applies then there is demand in the system for more dollars.
If you just print money to print money with 0 or little economic growth
Then you will see inflation like crazy.

See Zimbabwe for a great example of this.
People are billionaires down there to bad it costs 100k per egg.

And there is only demand for more dollars when a country produces enough. I explained that in the article. And the US has unlimited capacity to produce to meet any demand.

 

[ludin]

And there is only demand for more dollars when a country produces enough. I explained that in the article. And the US has unlimited capacity to produce to meet any demand.

Their are other things that can happen that can reduce demand like recessions.
A healthy economy has a natural inflation rate of 2-3% a year.

Printing money in general is a bad idea that is why few countries do it.
Not so sure now we don't have the manufacturing base that we use to.

Some factories would have to be restored and overhauled to meet the same level
That was the industrial revolution or even ww2

Not that it would be a bad thing.
I think those jobs are important and could still be done
The only thing that would interfere would be unions.

 

[JohnfrmClevelan]

Non bank entities didn't apply as the federal reserve only deals with banks.
Again you are wrong.

Use your head - all transactions go through private banks, but non-bank entities sold their assets, too. And that added some real dollars to the economy, as well as MB.

 

[JP Hochbaum]

Their are other things that can happen that can reduce demand like recessions.

And in those cases it is usually due to a lack of demand. And to spur that demand you need to make sure there is the ability to buy things.

 

[ludin]

Use your head - all transactions go through private banks, but non-bank entities sold their assets, too. And that added some real dollars to the economy, as well as MB.

Private Lenders are not banks nor are they associated with the federal reserve in anyway shape or form. They do not have to follow the same compliances
except for interest rates that banks do. They are not required to have reserve funds or anything else.

The only thing they have in common with banks is that is where they keep their deposits maybe credit cards and such.
so yes use your head you are grasping at straws. Private lenders were not a part of QE.

 

[JohnfrmClevelan]

Private Lenders are not banks nor are they associated with the federal reserve in anyway shape or form. They do not have to follow the same compliances
except for interest rates that banks do. They are not required to have reserve funds or anything else.

The only thing they have in common with banks is that is where they keep their deposits maybe credit cards and such.
so yes use your head you are grasping at straws. Private lenders were not a part of QE.

Your post has nothing to do with the subject at hand. Bank regulations and compliance are simply not relevant here.

If non-bank entities sell assets (and they did), then M1 and MB both increase when the Fed purchases those assets. MB because all transactions go through private banks, and M1 because a non-bank entity has received new money in their account from the government.

And still, no inflation to speak of.

 

[ludin]

Your post has nothing to do with the subject at hand. Bank regulations and compliance are simply not relevant here.

We know your post has nothing to do with anything. that is why you continue your failed argument from the beginning.

If non-bank entities sell assets (and they did), then M1 and MB both increase when the Fed purchases those assets. MB because all transactions go through private banks, and M1 because a non-bank entity has received new money in their account from the government.

The only thing that went through the bank was the transfer of money.
Most private lenders raise money through investors.
you are wrong and just reaching for whatever you can to get yourself out of it.

And still, no inflation to speak of.

Yea none of the money actually entered the system.
Why Didn't Quantitative Easing Lead to Hyperinflation? | Investopedia

the banks never distributed it. they kept it in their own vault.
however that was just one factor.

keep grasping.

 

[JohnfrmClevelan]

The only thing that went through the bank was the transfer of money.

That's kind of a key point.

Most private lenders raise money through investors.

Again, that has nothing to do with what we are talking about. When the government buys assets, they use new money, and they go through private banks.

you are wrong and just reaching for whatever you can to get yourself out of it.

I'm not trying to get myself out of anything. I would like you to eventually get this right, so I don't have to keep on correcting you.

Yea none of the money actually entered the system.
Why Didn't Quantitative Easing Lead to Hyperinflation? | Investopedia

the banks never distributed it. they kept it in their own vault.
however that was just one factor.

THIS PROVES THAT YOU STILL HAVE NO CLUE HOW BANKING WORKS. (Nor does the guy that wrote that Investopedia article.)

Banks do not "distribute" MB. Aside from the normal demand for cash (which remains pretty stable), MB stays in reserve accounts at the Fed, whether banks create loans or not. And when banks create loans, that doesn't change the level of MB.

Anyway, when the govt. buys assets from a bank, they do it by adding to that bank's reserve account, and the bank makes the necessary changes to its own books (no net change, though). But when the govt. buys assets from a non-bank entity, they do it by adding reserves to the NBE's bank's reserve account, and then the bank increases the NBE's account balance, thereby increasing M1. And that's why QE did add some dollars to the economy. When the govt. writes you a check for $1000, MB goes up by $1000 (increased total reserves), AND M1 goes up by $1000 (your increased bank balance).

 

[ludin]

That's kind of a key point.

Not really.

Again, that has nothing to do with what we are talking about. When the government buys assets, they use new money, and they go through private banks.
[\QUOTE]

They don't by people bank accounts you don't know what you are talking about you should stop.

I'm not trying to get myself out of anything. I would like you to eventually get this right, so I don't have to keep on correcting you.

Sure you are you knowingly made and continue to double and triple down in the fact that you were wrong.
So far the only person wrong here is you as I have already proven.

Private lenders have nothing to do with the fed. QE only involved banked owned assets nothing to do with private lenders.

THIS PROVES THAT YOU STILL HAVE NO CLUE HOW BANKING WORKS. (Nor does the guy that wrote that Investopedia article.)

Banks do not "distribute" MB. Aside from the normal demand for cash (which remains pretty stable), MB stays in reserve accounts at the Fed, whether banks create loans or not. And when banks create loans, that doesn't change the level of MB.

Anyway, when the govt. buys assets from a bank, they do it by adding to that bank's reserve account, and the bank makes the necessary changes to its own books (no net change, though). But when the govt. buys assets from a non-bank entity, they do it by adding reserves to the NBE's bank's reserve account, and then the bank increases the NBE's account balance, thereby increasing M1. And that's why QE did add some dollars to the economy. When the govt. writes you a check for $1000, MB goes up by $1000 (increased total reserves), AND M1 goes up by $1000 (your increased bank balance).

Yes we know you don't understand how banking works which is why we constantly wonder why you ignore actual professionals that tell you that you are wrong.

The fed doesn't deal with no banking entities. You still don't seem to understand that.
Ignoring the article I posted only shows how dishonest you really are.

 

[Kushinator]

The Fed only purchases/sells assets from/to primary dealers. The list of primary dealers is as follows:

Bank of Nova Scotia, New York Agency
BMO Capital Markets Corp.
BNP Paribas Securities Corp.
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Capital Markets America Inc.
Deutsche Bank Securities Inc.
Goldman, Sachs & Co.
HSBC Securities (USA) Inc.
Jefferies LLC
J.P. Morgan Securities LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Mizuho Securities USA Inc.
Morgan Stanley & Co. LLC
Nomura Securities International, Inc.
RBC Capital Markets, LLC
RBS Securities Inc.
Societe Generale, New York Branch
TD Securities (USA) LLC
UBS Securities LLC.
Wells Fargo Securities, LLC

With that said, most non-bank financial entities deal with these broker dealers in one form or another.

 

[Kushinator]

Has the money supply grown rather dramatically since the Fed has increased the monetary base?

Inflation does not have a relationship with the money supply; i.e. a 10% growth in m1/m2 doesn't result in a 10% increase in prices.

 

[austrianecon]

Has the money supply grown rather dramatically since the Fed has increased the monetary base?

Inflation does not have a relationship with the money supply; i.e. a 10% growth in m1/m2 doesn't result in a 10% increase in prices.

And I would argue.. this argument of a relation of inflation and the money supply being used here is shorted sighted and missing some facts. Most people who do believe in money supply growth causes inflation happily accept these facts.

1) The economy was deflationary

2) Bank leverage ratios were so high.

3) US and world Banks had high debt ratios and were failing stress tests.

4) Most of the QE (increase in money supply) were actually buying bank assets (mbs and cds)

5) US banking lending actually fell and Banks were holding.

 

[JohnfrmClevelan]

And I would argue.. this argument of a relation of inflation and the money supply being used here is shorted sighted and missing some facts. Most people who do believe in money supply growth causes inflation happily accept these facts.

1) The economy was deflationary

2) Bank leverage ratios were so high.

3) US and world Banks had high debt ratios and were failing stress tests.

4) Most of the QE (increase in money supply) were actually buying bank assets (mbs and cds)

5) US banking lending actually fell and Banks were holding.

What were banks holding?

 

[austrianecon]

What were banks holding?

Banks boosted their reserves. Even your King Billy talked about it.

 

[JohnfrmClevelan]

Banks boosted their reserves. Even your King Billy talked about it.

Yeah, but you make it sound like banks are hoarding loanable funds, which they are not. And here is what Bill Mitchell had to say about it:

From the perspective of Modern Monetary Theory (MMT) such a question is a non-issue. It is as simple as understanding that banks do not lend bank reserves. They are integral to the payments (settlements) system only. Banks are never reserve constrained when it comes to lending and will extend credit to any worthy customer who seeks it.

...which is exactly what I have been saying as well.

 

[Kushinator]

And I would argue.. this argument of a relation of inflation and the money supply being used here is shorted sighted and missing some facts. Most people who do believe in money supply growth causes inflation happily accept these facts.

1) The economy was deflationary

2) Bank leverage ratios were so high.

3) US and world Banks had high debt ratios and were failing stress tests.

4) Most of the QE (increase in money supply) were actually buying bank assets (mbs and cds)

5) US banking lending actually fell and Banks were holding.

Your points are all good and fine, but you will observe from the following data that there is no correlation between money supply growth and higher prices. If you were to run a regression analysis of the data, the r value would be very close to zero.

Even if people believe money supply growth leads to inflation, the data does not support this idea. Other factors, such as what you mention above, have FAR more influence on the general price level.

 

[Kushinator]

The only role government should play in the economy is as a ref.

Opinion noted but not shared.

When the U.S. decides to go to war, or build infrastructure, it plays a role in the economy.

The government doesn't have to run a deficit to keep the economy running.

Show me where i argued anything of the sort? I have echoed sentiments that were established more than 75 years ago, and are applied throughout the developed world. Running fiscal deficits will increase economic growth. The government has an obligation to do so when the economy is running below potential.

Government that constantly runs deficits is an irresponsible one.

Opinion noted, and not shared. A more accurate statement would be: government that runs deficits does so for a reason; e.g. the economy is operating below potential.

The economy can grow just fine without deficits.

Sometimes this is very true, other times it is nothing but ignorant tripe. Market failure does exist, and has the potential to lead an economy off path.

Deficits and debt take money out of the economy. It puts more of a burden on taxpayers and businesses.

This is nonsense. Deficits take up pools of unutilized capital, that would have sat idle had it not flown into government bonds. The way to test if this is true is to observe private credit spreads. Demand for U.S. treasuries is currently at an all time high, which can be observed in the yield curve.

 

[ludin]

Opinion noted but not shared.

When the U.S. decides to go to war, or build infrastructure, it plays a role in the economy.

your opinion is noted and irrelevant. see I can do that as well.

Show me where i argued anything of the sort? I have echoed sentiments that were established more than 75 years ago, and are applied throughout the developed world. Running fiscal deficits will increase economic growth. The government has an obligation to do so when the economy is running below potential.

Show me where the government is obligated to spend trillions of dollar or even billions of dollars that does nothing to help the economy?
you argued it in your previous post.

Opinion noted, and not shared. A more accurate statement would be: government that runs deficits does so for a reason; e.g. the economy is operating below potential.

Opinion is irrelevant see I can do the same thing. No it is irresponsible of government to constantly run deficits. more so when it is not needed.
a government propped up economy is a failing economy. a healthy economy is able to stand on it's own two feet with little help from government.

Sometimes this is very true, other times it is nothing but ignorant tripe. Market failure does exist, and has the potential to lead an economy off path.

market failures are and should be expected. just as to big to fail is tripe. there is no such thing as to big to fail in a real economy.
if you fail there is a reason you failed. it is time for someone else to take over and correct the mistake you made.

This is nonsense. Deficits take up pools of unutilized capital, that would have sat idle had it not flown into government bonds. The way to test if this is true is to observe private credit spreads. Demand for U.S. treasuries is currently at an all time high, which can be observed in the yield curve.

yes this is nonsense. deficits become debt unless paid for. the only way to pay for the debt is through taxes. the higher the debt the more tax money you need to pay it off.
that in turn requires higher tax rates on people and businesses. no deficits is government spending more money than what it brought in. it is basically spending borrowed money.

The demand for Us treasuries means that we are selling more debt to other people that we have to pay back.
that requires the government to take more money out of the economy to pay for it
unless you are one of these people that think the government can just print money with no consequences.

 

[Kushinator]

your opinion is noted and irrelevant. see I can do that as well.

Except for... well..., i didn't offer an opinion. My statement was positive (in terms of economics).

Show me where the government is obligated to spend trillions of dollar or even billions of dollars that does nothing to help the economy?
you argued it in your previous post.

Your question is loaded, as it is based off of the assumption that running deficits does not increase the size of the economy. This is basic stuff here. The government is obligated to help ensure that market failure doesn't grip the lives of entire generations, because doing so will ensure that the long term size of the economy will be larger than if it did not run these deficits. Again, this is not an opinion.

Opinion is irrelevant see I can do the same thing. No it is irresponsible of government to constantly run deficits. more so when it is not needed.
a government propped up economy is a failing economy. a healthy economy is able to stand on it's own two feet with little help from government.

You are arguing on the basis of your opinion, e.g. normative economics. You're not even able to properly support your own opinions, but that's more to do with a lack supporting analysis to draw from.

market failures are and should be expected. just as to big to fail is tripe. there is no such thing as to big to fail in a real economy.
if you fail there is a reason you failed. it is time for someone else to take over and correct the mistake you made.

Market failure has the capacity to force an economy to run far below it's potential permanently. While recessions are a part of market economies, what is achieved by allowing them to maximize their destructive forces?

yes this is nonsense. deficits become debt unless paid for. the only way to pay for the debt is through taxes. the higher the debt the more tax money you need to pay it off.

You are confusing cause and effect.

Given the level of debt growth, has there been a corresponding amount of tax rate increases?

that in turn requires higher tax rates on people and businesses. no deficits is government spending more money than what it brought in. it is basically spending borrowed money.

You are ignorant of the data.

Effective tax rates have remained in a band, while total debt has increased by many multitudes.

The demand for Us treasuries means that we are selling more debt to other people that we have to pay back.

No, demand for U.S. treasuries means that entities want to purchase them.

that requires the government to take more money out of the economy to pay for it

This is false. The money used to finance a deficit comes from existing stocks (wealth) and not flow (economy). You are clearly confused.

unless you are one of these people that think the government can just print money with no consequences.

Again, can you point out to where i stated anything of the sort? You must have me confused with someone else.

 

[austrianecon]

Your points are all good and fine, but you will observe from the following data that there is no correlation between money supply growth and higher prices. If you were to run a regression analysis of the data, the r value would be very close to zero.

Even if people believe money supply growth leads to inflation, the data does not support this idea. Other factors, such as what you mention above, have FAR more influence on the general price level.

But the following data is incomplete and you know this Kush. Implicit Price Deflator only counts all new, domestically produced, final goods and services in an economy. It's an incomplete picture and not designed to measure household inflation for those very reasons as it's a Global Economy in which US imports heavily in certain things. Can't sit there and claim that's a complete picture when there is a gap between IPD and CPI-U.

 

[Kushinator]

But the following data is incomplete and you know this Kush. Implicit Price Deflator only counts all new, domestically produced, final goods and services in an economy. It's an incomplete picture and not designed to measure household inflation for those very reasons as it's a Global Economy in which US imports heavily in certain things. Can't sit there and claim that's a complete picture when there is a gap between IPD and CPI-U.

It doesn't matter....

 

[austrianecon]

It doesn't matter....

You are gonna argue it doesn't matter if there is a different between 1% inflation and 1.5 or 2% inflation?

 

[austrianecon]

You are gonna argue it doesn't matter if there is a different between 1% inflation and 1.5 or 2% inflation?

I should add.. You have gaps between the two as wide as 8%.. that's a big miss. You know that inflation is a battle always has to be fought. Sometimes nothing has to be done, and sometimes something has to be done. Right now, a crappy world economy, key resources collapsing in value has saved the Fed having to raise interest rates, sooner and much more then it has. Which goes back to what I said and so many here want to ignore because its been "easy street" (who fundamentally nothing wrong with the Housing Market in 2007 or 2008).. bond rates are gonna rise at some point. When those bond rates are gonna rise, something is gonna have to be done as that's the first sign inflation is gonna hit the consumer economy.


It's something the MMT crowd doesn't understand. Government bonds are a way to battle inflation as it's literally taking excess dollars out of the world economy.

 

[Kushinator]

You are gonna argue it doesn't matter if there is a different between 1% inflation and 1.5 or 2% inflation?

I am arguing that there isn't a causative relationship between money supply growth and inflation, especially in post-industrial economies.