Does someone want to take a crack at explaining this to me( Fed/Inflation ).

[Isidore]

Ok, that makes more sense, for some reason I was thinking the Fed started raising rate back last year. Likely because it's just been a really bad couple of years with all the goings on in the world.

The Fed probably should have changed to a more inflationary fighting policy last year, but it appears they were more concerned about the possibility of the economy stalling again due to a resurgence of Covid. In general, they usually seem slow to act (although I'm usually looking at the situation with the benefit of hindsight).

In addition to looking at the numbers from the Fed, you may also want to read their press releases. They often give some insight into their general outlook (even just the periodic, very brief Federal Open Market Committee statements).

The intention to reduce the size of their balance sheet was outlined early this year.

Principles for Reducing the Size of the Federal Reserve's Balance Sheet

The Federal Open Market Committee agreed that it is appropriate at this time to provide information regarding its planned approach for significantly reducing t

www.federalreserve.gov

Plans for Reducing the Size of the Federal Reserve's Balance Sheet

Consistent with the Principles for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in January 2022, all Committee participants agreed

www.federalreserve.gov

 

[jpn]

So the Fed is said to be fighting inflation, but I don't see it, I mean I know interest rates are up but the Fed is not deleveraging.
As a matter of fact they are still buying:https://www.federalreserve.gov/releases/h41/20220630/h41.htm
If you look at the top line numbers, the Reserve Bank credit, we can see that the Fed has "printed" +850,130 Million out of thin air to buy US securities over what it had on Jun. 30th 2021.
So explain to me how that is not going to add to inflation? " printing" .85 trillion new dollars to buy US securities?
I always thought that the Fed would sell more securities than it bought to fight inflation, this must be some of that "new math" they didn't teach yet when I went to school.......

I can try, but you have to accept what I'm saying:

Part of conservative orthodoxy, thanks to Milton Friedman, is that printing money always causes inflation. That's wrong.

As Jerome Powell said in late December, "“The connection between monetary aggregates and either growth or inflation was very strong for a long, long time, which ended about 40 years ago …. It was probably correct when it was written, but it’s been a different economy and a different financial system for some time.”

To be sure, when governments print huge amounts of money to pay their bills, so that the money supply grows by hundreds or thousands of percent per year, high inflation is inevitable.

But matters are much less clear when monetary growth is less extreme. The connection between monetary policy and either inflation or growth more or less disappears when interest rates are near zero.

So you need to banish from your mind the idea that printing money causes inflation. It does in some, rare, circumstances. But it's just not a thing in modern, relatively stable economies.

 

[The Stars Tremble]

So you need to banish from your mind the idea that printing money causes inflation. It does in some, rare, circumstances. But it's just not a thing in modern, relatively stable economies.

Rare circumstances like 2020's near global economic instability, though?

Containing inflation with higher interest rates sounds a bit like shutting down Chernobyl: before the desired effect is achieved, the opposite effect will happen. People will hurry to get fixed-interest loans before they go up, meaning MORE spending when what is required to contain inflation, is less spending.

There's also a recession happening. Isn't that "stagflation" and how is it even possible in a "modern economy"?

 

[Kushinator]

There's also a recession happening. Isn't that "stagflation" and how is it even possible in a "modern economy"?

Stagflation is a situation where you have high inflation and high unemployment.

A slowdown in economic growth isn't a recession....

 

[fmw]

I can try, but you have to accept what I'm saying:

Part of conservative orthodoxy, thanks to Milton Friedman, is that printing money always causes inflation. That's wrong.

As Jerome Powell said in late December, "“The connection between monetary aggregates and either growth or inflation was very strong for a long, long time, which ended about 40 years ago …. It was probably correct when it was written, but it’s been a different economy and a different financial system for some time.”

To be sure, when governments print huge amounts of money to pay their bills, so that the money supply grows by hundreds or thousands of percent per year, high inflation is inevitable.

But matters are much less clear when monetary growth is less extreme. The connection between monetary policy and either inflation or growth more or less disappears when interest rates are near zero.

So you need to banish from your mind the idea that printing money causes inflation. It does in some, rare, circumstances. But it's just not a thing in modern, relatively stable economies.

Sorry, every expansion of the money supply makes the dollar worth less. Every time. No exceptions. The dollar has lost about 90% of its value over my lifetime. All of it resulted from expanding the money supply. It doesn't have anything to do with CPI because that is controlled by supply and demand. But if the dollars people have are worth less, more of them are required to make payments. There is a term called inflationary spiral that results from expanding the money supply followed by wage increases to compensate. It isn't a good way to manage a government yet virtually all governments do it.

But the inflationary spiral doesn't affect the CPI either. The CPI is just supply and demand. You have a perfect example with fuel prices. They went up because of supply shortages and now are falling because supply has declined. It is confusing that the economics world likes to include prices in the term inflation and I wish they would separate them. The causes, effects and corective action are all different. In other words Friedman was quite correct but he wasn't talking about what we refer to today with the term inflation. The Jerome Powell quote backs this up. It isn't so much that the financial system is materially different. It is that we have modified economic definitions. Hope that helps.

 

[nvflash]

Sorry, every expansion of the money supply makes the dollar worth less. Every time. No exceptions. The dollar has lost about 90% of its value over my lifetime. All of it resulted from expanding the money supply. It doesn't have anything to do with CPI because that is controlled by supply and demand. But if the dollars people have are worth less, more of them are required to make payments. There is a term called inflationary spiral that results from expanding the money supply followed by wage increases to compensate. It isn't a good way to manage a government yet virtually all governments do it.

But the inflationary spiral doesn't affect the CPI either. The CPI is just supply and demand. You have a perfect example with fuel prices. They went up because of supply shortages and now are falling because supply has declined. It is confusing that the economics world likes to include prices in the term inflation and I wish they would separate them. The causes, effects and corective action are all different. In other words Friedman was quite correct but he wasn't talking about what we refer to today with the term inflation. The Jerome Powell quote backs this up. It isn't so much that the financial system is materially different. It is that we have modified economic definitions. Hope that helps.

It's always the battle cry of those that want to "print" that monetary inflation isn't real, even tho it works out the same everywhere it's ever done. They debase the currency as sure as coin clipping did, then blame the "marketplace" for price inflation.

There are unique things about the American system, with the dollar being the "reserve currency" of the world. We get to "farm out" our inflation, but that always comes back to bite us on the ass when oil rich nations drive the price of oil up in response to our "printing". Pushing the inflation we set on them right back on us.

One must remember that the Fed is not the only mechanism of expanding the dollar, all banks create money out of thin air when they make loans, but as those loans are settled on their books, that money ceases to exist. It came from nothing and it returns to nothing, as surely as if the Fed sold all it's holdings the reserve bank credit would evaporate, but what that would do to interest rates would be catastrophic, as well as the impending downward deflationary spiral. Bad for borrowers, but good for savers, just as inflation is a tax on savers.

The "easy money" of inflation has grown the economy by leaps and bounds, but the cost is very real in price inflation. We came too far too fast and we are paying a price for that in many ways, we've learned new ways to feed the masses, but we are in the trap that we must continue to care for the population inflation, and that is taking its' toll on our environment. Deflation would lead to starvation for 90% of the world's population, and that is the real trap.

 

[JohnfrmClevelan]

It's always the battle cry of those that want to "print" that monetary inflation isn't real, even tho it works out the same everywhere it's ever done. They debase the currency as sure as coin clipping did, then blame the "marketplace" for price inflation.

Give us a few examples of this "work(ing) out the same everywhere it's ever been done," please.

 

[fmw]

It's always the battle cry of those that want to "print" that monetary inflation isn't real, even tho it works out the same everywhere it's ever done. They debase the currency as sure as coin clipping did, then blame the "marketplace" for price inflation.

There are unique things about the American system, with the dollar being the "reserve currency" of the world. We get to "farm out" our inflation, but that always comes back to bite us on the ass when oil rich nations drive the price of oil up in response to our "printing". Pushing the inflation we set on them right back on us.

One must remember that the Fed is not the only mechanism of expanding the dollar, all banks create money out of thin air when they make loans, but as those loans are settled on their books, that money ceases to exist. It came from nothing and it returns to nothing, as surely as if the Fed sold all it's holdings the reserve bank credit would evaporate, but what that would do to interest rates would be catastrophic, as well as the impending downward deflationary spiral. Bad for borrowers, but good for savers, just as inflation is a tax on savers.

The "easy money" of inflation has grown the economy by leaps and bounds, but the cost is very real in price inflation. We came too far too fast and we are paying a price for that in many ways, we've learned new ways to feed the masses, but we are in the trap that we must continue to care for the population inflation, and that is taking its' toll on our environment. Deflation would lead to starvation for 90% of the world's population, and that is the real trap.

Sorry I don't accept that banks create money. They transfer money, they earn money but they don't create it. You will probably prefer discussing this with the John from Clevelend who is likely to respond here.

 

[nvflash]

Sorry I don't accept that banks create money. They transfer money, they earn money but they don't create it. You will probably prefer discussing this with the John from Clevelend who is likely to respond here.

What you'll accept has no bearing on the truth.

 

[fmw]

What you'll accept has no bearing on the truth.

Sure it does. The idea doesn't meet the requirements of common sense. It is a nonsensical concept dreamed up by some economist. I put little confidence in the dreams of economists. I've heard it many times and never made sense to me. That is my truth. Sorry.

 

[JohnfrmClevelan]

Sure it does. The idea doesn't meet the requirements of common sense. It is a nonsensical concept dreamed up by some economist. I put little confidence in the dreams of economists. I've heard it many times and never made sense to me. That is my truth. Sorry.

It is simply double-entry accounting. Assets and liabilities are not the invention of economists.

I'd be happy to spend some time and effort explaining both banking and double-entry accounting. It would make a useful thread all by itself.

 

[fmw]

It is simply double-entry accounting. Assets and liabilities are not the invention of economists.

I'd be happy to spend some time and effort explaining both banking and double-entry accounting. It would make a useful thread all by itself.

No thanks. I've been in business for half a century and have a pretty good handle on basic accounting. We both know that the purpose of accounting is to record and report financial transactions, not to create things. When a bank writes a loan it puts an asset on its books. At the same time it pays out whatever was borrowed. So most of one asset was traded for another, the difference being the interest and any fees. In effect the bank is making a purchase. It is buying a contract that will return the money spent with a profit.

 

[JohnfrmClevelan]

No thanks. I've been in business for half a century and have a pretty good handle on basic accounting. We both know that the purpose of accounting is to record and report financial transactions, not to create things. When a bank writes a loan it puts an asset on its books. At the same time it pays out whatever was borrowed. So most of one asset was traded for another, the difference being the interest and any fees. In effect the bank is making a purchase. It is buying a contract that will return the money spent with a profit.

OK, let's use your bank example. Before making a loan, the bank has a balance sheet of 1 million dollars; one million in assets, and one million in (liabilities + equity).

Then, they make a $10,000 loan (in effect, they have purchased a promissory note) and disburse the funds. How big is their balance sheet now?

 

[fmw]

OK, let's use your bank example. Before making a loan, the bank has a balance sheet of 1 million dollars; one million in assets, and one million in (liabilities + equity).

Then, they make a $10,000 loan (in effect, they have purchased a promissory note) and disburse the funds. How big is their balance sheet now?

It is the same. You debit notes receivable and credit cash.

 

[JohnfrmClevelan]

It is the same. You debit notes receivable and credit cash.

Lending bank's balance sheet grew by $10,000 upon making the loan (~$10K more assets, $10K more liabilities). That created $10K more M1 money.

Then they disbursed the loan. Lending bank is back down to a $1 million balance sheet.

But payee's bank's balance sheet has increased by $10K. (liability is payee's $10,000 deposit, asset is the $10K reserve transfer.)

M1 has increased by $10,000. Money created from nothing more than double-entry accounting.

 

[Juggernaut74]

It is the same. You debit notes receivable and credit cash.

You seem to be under the impression that when you sign loan paperwork the banker waddles back to the vault and takes out 100 $100 bills and gives them to you. That’s not how it works. They simply increase your available funds in your account (a liability to them) and increases their note receivable. Their cash balance doesn’t change.

 

[The Stars Tremble]

Stagflation is a situation where you have high inflation and high unemployment.

OK.

A slowdown in economic growth isn't a recession....

In most countries it is, but the US for some reason has an NGO decide whether it's a recession or not. Investors and pretty much everyone will go by "two consecutive quarters of negative GDP growth" but the government has a scam to say "nuh-uh"

Is the US in Recession?

Jeffrey Frankel explains why the upcoming Bureau of Economic Analysis release could mislead on this crucial question.

www.project-syndicate.org

 

[The Stars Tremble]

OK, let's use your bank example. Before making a loan, the bank has a balance sheet of 1 million dollars; one million in assets, and one million in (liabilities + equity).

Then, they make a $10,000 loan (in effect, they have purchased a promissory note) and disburse the funds. How big is their balance sheet now?

It's bigger I think. The promissory note is worth more (TO THEM) than the $10,000 or else they wouldn't have bought it.

 

[JohnfrmClevelan]

It's bigger I think. The promissory note is worth more (TO THEM) than the $10,000 or else they wouldn't have bought it.

That's true, but the difficulty in putting a value on that asset isn't worth it for our purposes.

My bigger point was that banks create loans by expanding their balance sheets, not by collecting dollars and lending them back out.

 

[The Stars Tremble]

That's true, but the difficulty in putting a value on that asset isn't worth it for our purposes.

My bigger point was that banks create loans by expanding their balance sheets, not by collecting dollars and lending them back out.

Sure, and hence why retail banks can nowhere near cover their lending with assets. I guess the only way out for (most) borrowers is to turn over part equity in their home, and the bank can count on that not happening from all borrowers at the same time. As long as it's only an occasional thing they can sell the home (collateral) and likely come out ahead.

 

[fmw]

You seem to be under the impression that when you sign loan paperwork the banker waddles back to the vault and takes out 100 $100 bills and gives them to you. That’s not how it works. They simply increase your available funds in your account (a liability to them) and increases their note receivable. Their cash balance doesn’t change.

Unless I take a cash payment from the account. The result is the same. It has no effect on the money supply.

 

[fmw]

Lending bank's balance sheet grew by $10,000 upon making the loan (~$10K more assets, $10K more liabilities). That created $10K more M1 money.

Then they disbursed the loan. Lending bank is back down to a $1 million balance sheet.

But payee's bank's balance sheet has increased by $10K. (liability is payee's $10,000 deposit, asset is the $10K reserve transfer.)

M1 has increased by $10,000. Money created from nothing more than double-entry accounting.

Phantom temporary money. It is a ridiculous idea. It is just accounting. It only records transactions. The M1 created for government spending is real and permanent.

 

[Juggernaut74]

Unless I take a cash payment from the account. The result is the same. It has no effect on the money supply.

Then they credit cash, and debit their liability to you. Balance sheet still grew by $10,000 in the interim though. And of course, that’s not how it works. You spend the money on whatever it is you took the loan out for. The bank’s balance sheet may ’return’ back to its pre-loan stage, but now someone else’s balance sheet is increased by $10k - wherever you spent the money that was just created.

Edited to add - even if you just take the cash, now YOUR balance sheet is $10k higher. The bank just created $10k of ‘money’ out of nowhere - or accounting entries if you will.

 

[fmw]

Then they credit cash, and debit their liability to you. Balance sheet still grew by $10,000 in the interim though.

Meaningless. It creates nothing. Accounting records and reports. It doesn't create. This is a silly notion. Sorry.

 

[JohnfrmClevelan]

Phantom temporary money. It is a ridiculous idea. It is just accounting. It only records transactions. The M1 created for government spending is real and permanent.

Where do you think "hard" money comes from? Those paper bills in your pocket? They are merely physical representations of ledger entries. The only difference is that those particular ledgers are those of the central bank. And the central bank creates "hard" money (reserves) the same way that commercial banks create money - by buying assets in return for increased account balances. When the Fed buys a Treasury from the private sector, they pay for it by marking up the reserve account of seller's bank. Presto! hard money has just been created "from thin air."

Also, M1 money is the money in our bank accounts, plus cash in pockets. MB, Base Money, is the stuff the central bank creates for government spending. M1 is a liability of commercial banks, MB is a liability of the central bank.

There is nothing permanent about MB, either. When the Fed sells an asset in return for reserves, they just mark down their liabilities (MB), and that "real" money disappears.