How to Control Inflation

[fmw]

No, the creation of money does not itself cause inflation. You got that part correct.

Actually it is the only cause of true inflation. Every dollar created reduces the value of all the existing dollars.

 

[JohnfrmClevelan]

Actually it is the only cause of true inflation. Every dollar created reduces the value of all the existing dollars.

You are making the (common) mistake of holding production constant.

What about when a business gets a bank loan to invest in increased production? Those are all new dollars, but production increases, too, as does income. Spend those dollars more than once, which is highly likely, and you have even more consumption/investment, with no further increase in the number of dollars.

And when the business pays off the loan, dollars are extinguished, while production normally remains at its elevated level.

 

[JohnfrmClevelan]

Decades ago inflation meant inflating the money supply by government spending money it doesn't have. By adding to the money supply the value of all existing dollars is reduced.

This was never the normal definition of inflation. The only people who equate inflation with increases in the money supply are Austrians, and thankfully nobody has ever listened to them.

 

[fmw]

You are making the (common) mistake of holding production constant.

What about when a business gets a bank loan to invest in increased production? Those are all new dollars, but production increases, too, as does income. Spend those dollars more than once, which is highly likely, and you have even more consumption/investment, with no further increase in the number of dollars.

And when the business pays off the loan, dollars are extinguished, while production normally remains at its elevated level.

They are not new dollars. Only government can increase the money supply. They are dollars probably borrowed from the FED. The act of borrowing or loaning money has nothing to do with the money supply. Repaying the debt extinguishes nothing. It merely returns the money to the bank. The money went from the FED to the bank to the debtor and then back to the bank. If those same dollars are loaned again nothing new is created other than a new debt. I've read this position before and I reject it. Sorry.

 

[OrphanSlug]

They are not new dollars. Only government can increase the money supply. They are dollars probably borrowed from the FED. The act of borrowing or loaning money has nothing to do with the money supply. Repaying the debt extinguishes nothing. It merely returns the money to the bank. The money went from the FED to the bank to the debtor and then back to the bank. If those same dollars are loaned again nothing new is created other than a new debt. I've read this position before and I reject it. Sorry.

That is not entirely accurate.

What you are talking about is physical currency, and it would be correct to say that the creation of physical money is a function between the Fed and the US Department of the Treasury.

However, well north of 90% of our money system is digital. How that is controlled, rather influenced, is very different.

What @JohnfrmClevelan is talking about is spot on. Every single time a bank makes a loan to a business or person it simultaneously creates a balance sheet 'deposit' in the borrowers bank account, in that act literally money is created by the bank notating the difference between an asset and a liability with an emphasis on reserves by regulated percentages. Something very similar occurs when the business or a person pays off the loan in reverse, most of those dollars are extinguished (against that balance sheet entry.)

This is influenced, greatly, by interest rate controls which is Fed monetary policy. And can be influenced further by Fed actions like buying and selling assets.

Go to the Fed yourself, and you will see how much this occurs and see that on average just the act of making loans increases the amount of digital currency well above 10% per year on average.

All of this is possible because there are multiple banks in our financial system all of whom only have to hold a fraction of their deposits as reserves, the rest is loaned out even between banks. Deposits increase and by effect so does the money supply.

 

[Mike_Iger]

An economy is a balancing act, inflation is when monetary and fiscal policy is misaligned. This was caused by shocks that made it difficult to stay upright during this uncertainty. Covid and the tax cuts were big cuts that caused the Federal deficit to increase and the Treasury to print money, now these days bank book entries, that exceeded what was necessary to purchase the existing economies goods available. As a result, more money circulates, and prices rise. The fix is to take money out of the system, reduce spending, and prices will decline along with economic activity, and possibly worsen any recession.

Inflation is the price we are paying for the year of a pandemic plus new shocks since. During the pandemic, people weren't working and the government kept them alive with support checks. Where did you think the money was coming from, lower tax revenues due to the tax cut, and government borrowing. Was it worth it, at the time most said yes, but now we have to pay it back with inflation, and now are saying no? As Economists say, no such thing as a free lunch.

 

[JohnfrmClevelan]

They are not new dollars.

That's not accurate.

Only government can increase the money supply.

That's also not accurate.

They are dollars probably borrowed from the FED.

Again, not accurate.

The act of borrowing or loaning money has nothing to do with the money supply.

Wrong.

Repaying the debt extinguishes nothing. It merely returns the money to the bank.

Super-wrong.

The money went from the FED to the bank to the debtor and then back to the bank. If those same dollars are loaned again nothing new is created other than a new debt.

Completely wrong.

I've read this position before and I reject it. Sorry.

Well, maybe rejecting how banking actually operates is why your comments were so wrong. This isn't a "position," this is fact. There are theories, which are fine to disagree with, but you can't just disagree with operational facts. Combustion engines work a certain way. Water is heavier than oil. You have to fit your theories into the existing fact framework.

************************

As for your contention that only the government can change the money supply, consider this: the government deficit spends this way - treasury issues bonds, the private sector buys those bonds, and the government spends the proceeds right back into the economy. Where is the increase in the money supply?

 

[fmw]

That's not accurate.

That's also not accurate.

Again, not accurate.

Wrong.

Super-wrong.

Completely wrong.

Well, maybe rejecting how banking actually operates is why your comments were so wrong. This isn't a "position," this is fact. There are theories, which are fine to disagree with, but you can't just disagree with operational facts. Combustion engines work a certain way. Water is heavier than oil. You have to fit your theories into the existing fact framework.

************************

As for your contention that only the government can change the money supply, consider this: the government deficit spends this way - treasury issues bonds, the private sector buys those bonds, and the government spends the proceeds right back into the economy. Where is the increase in the money supply?

I enjoyed your in depth defense of your position. Obviously we disagree. Best of luck.

 

[JohnfrmClevelan]

I enjoyed your in depth defense of your position. Obviously we disagree. Best of luck.

Hey, I have described, in great detail, how both federal finance and commercial banks operate, more times than I care to count. The information is out there for anybody who cares to learn.

 

[fmw]

That is not entirely accurate.

What you are talking about is physical currency, and it would be correct to say that the creation of physical money is a function between the Fed and the US Department of the Treasury.

However, well north of 90% of our money system is digital. How that is controlled, rather influenced, is very different.

What @JohnfrmClevelan is talking about is spot on. Every single time a bank makes a loan to a business or person it simultaneously creates a balance sheet 'deposit' in the borrowers bank account, in that act literally money is created by the bank notating the difference between an asset and a liability with an emphasis on reserves by regulated percentages. Something very similar occurs when the business or a person pays off the loan in reverse, most of those dollars are extinguished (against that balance sheet entry.)

This is influenced, greatly, by interest rate controls which is Fed monetary policy. And can be influenced further by Fed actions like buying and selling assets.

Go to the Fed yourself, and you will see how much this occurs and see that on average just the act of making loans increases the amount of digital currency well above 10% per year on average.

All of this is possible because there are multiple banks in our financial system all of whom only have to hold a fraction of their deposits as reserves, the rest is loaned out even between banks. Deposits increase and by effect so does the money supply.

I appreciate that you actually defended the position unlike the Cleveland person who was unable or not motivated enough to do it. I understand your position and have read it many times. But I don't see it that way. The money, digital or otherwise isn't created. It is transferred from the assets of the bank to the debtor. The new debt creates an asset for the bank but that is erased by the asset transferred. It can be complicated to understand how a digital transaction is managed but it isn't any different than the bank making a funds transfer in cash currency. It still transfers an asset to someone else in return for a promissory note and some interest. If the asset weren't in one of the bank's accounts it couldn't be transferred. It didn't get there by waving a wand. The bank earned it or borrowed it.

Using your concept I could go to the bank and cash a check. The teller could count out currency. It is a simple transfer of funds from my account to the bank's account with the paper bills representing the amount transferred. The transfer would be the same as if the bank had paid my check by crediting my credit card which is digital. Money has to come from somewhere if you aren't the government. Only government can spend money into existence.

Crypto currency is all digital. Yet it is immune from the addition or deletions of the number of "coins". The amount of crypto currency units is fixed. Its value can and does change. Banks couldn't loan crypto currency without first having it in its wallet or account.

 

[fmw]

Hey, I have described, in great detail, how both federal finance and commercial banks operate, more times than I care to count. The information is out there for anybody who cares to learn.

Really you didn't but someone else came to your defense and explained your position.

 

[JohnfrmClevelan]

Really you didn't but someone else came to your defense and explained your position.

Orphan only scratched the surface in the comment you are referring to. But you did mention that you have heard the explanation before. So why should I be forced to repeat it? It involves a lot more typing than your retort, which was just "I don't believe it." So let's get on to what you believe...

How do you explain the fact that there are far more dollars in bank accounts than the government has created?

How do you think dollars are created in the first place?

 

[OrphanSlug]

I appreciate that you actually defended the position unlike the Cleveland person who was unable or not motivated enough to do it. I understand your position and have read it many times. But I don't see it that way. The money, digital or otherwise isn't created. It is transferred from the assets of the bank to the debtor. The new debt creates an asset for the bank but that is erased by the asset transferred. It can be complicated to understand how a digital transaction is managed but it isn't any different than the bank making a funds transfer in cash currency. It still transfers an asset to someone else in return for a promissory note and some interest. If the asset weren't in one of the bank's accounts it couldn't be transferred. It didn't get there by waving a wand. The bank earned it or borrowed it.

The issue you are going to run into is the below...

Understanding Bank Deposit Growth during the COVID-19 Pandemic

The Federal Reserve Board of Governors in Washington DC.

www.federalreserve.gov

It is a literal explanation of trends pre and post Covid on "Bank Deposit Growth." Admittedly, not all of this is exclusively about bank transactions resulting from issuing loans but it does have an adequate secondary but in practice explanation for how reserves, *LOADS*, leases, and securities impact how money is made.

Roughly 1/3rd down the page... "This is consistent with the idea that deposit growth very early in the pandemic reflected, in part, the initial dash for cash by firms which drew on their bank lines of credit."

Two paragraphs down... "In addition, the more subdued pace of deposit growth during the previous rounds of QE is consistent with the slower extension of loans and the smaller purchases of securities by banks."

And in the conclusion... "Macroeconomic trends could also see a pickup in loan demand, and banks' may be generally well positioned to fund loans should demand for credit increase given their holdings of liquid securities and high reserve balances."

In the same paragraph, and finally, "When banks make loans to nonbanks or buy assets, such as marketable securities, from nonbanks they create new bank deposits by transferring the loan or payment amount to the borrower or security seller."

These are nothing more than more complicated explanations for how banks create money based on notations from a loan. Again, that source is not designed to be an fiat money systems explanation tool but more a practical application of how and why this happens.

The money stock measures (link) below confirm how money is made which is not entirely dependent on the issuance of debt (the monthly auctions of new debt issued by the government.)

Federal Reserve Board - Money Stock Measures - H.6 - April 25, 2023

The Federal Reserve Board of Governors in Washington DC.

www.federalreserve.gov

If what you were saying is true there would be a direct to the penny correlation of money stock measures to treasury auctions and physical currency creation, but there is not.

The biggest illustration of this point is the total dollars in these accounts is greater than the money the government created (it is right there in the graphics on the page in that second link.) The explanation for that is what I've told you, banks create money literally by ledger entries once a loan is made. It is really that simple.

Using your concept I could go to the bank and cash a check. The teller could count out currency. It is a simple transfer of funds from my account to the bank's account with the paper bills representing the amount transferred. The transfer would be the same as if the bank had paid my check by crediting my credit card which is digital. Money has to come from somewhere if you aren't the government. Only government can spend money into existence.

Crypto currency is all digital. Yet it is immune from the addition or deletions of the number of "coins". The amount of crypto currency units is fixed. Its value can and does change. Banks couldn't loan crypto currency without first having it in its wallet or account.

None of this part is valid, mainly for the reasons I've listed above.

 

[OrphanSlug]

Really you didn't but someone else came to your defense and explained your position.

Take it easy, even though @JohnfrmClevelan and I see eye to eye on most things economics we do have our disagreements.

Regardless we do explain things a little differently as well.

Then I have a Bourbon or two and there goes the filter.

 

[ModernDiogenes]

Probably the best thing we can do, given the current situation being mostly caused by supply chain issues, is more domestic production and raw materials investment, investments in automated trucking (especially if trucker attitudes about safety regulations continue to be a problem), and finding more land to put ports on. This will not be a quick fix though.

Supply chain.... bogus.

It is nearly two decades of printing money like it is going out of style.

Common sense says: If your money is based on something [our GNP in the US], and that something is worth "X" at any given point, each dollar is worth "Y%" of "X". As you print more money each dollar is worth less as "X" hasn't increased.

It is only the fact that the dollar is the currency language of global finance that keeps the dollar's value artificially inflated. That can't last forever. The E.U. has been trying to knock off the dollar as the default currency of global finance for decades, replacing it with the Euro. If they are ever successful in it, and we haven't tightened up on devaluing our dollar by printing so many of them, just watch how it falls.

The dollar could wind up looking like the Yen.

 

[fmw]

The issue you are going to run into is the below...

Understanding Bank Deposit Growth during the COVID-19 Pandemic

The Federal Reserve Board of Governors in Washington DC.

www.federalreserve.gov

It is a literal explanation of trends pre and post Covid on "Bank Deposit Growth." Admittedly, not all of this is exclusively about bank transactions resulting from issuing loans but it does have an adequate secondary but in practice explanation for how reserves, *LOADS*, leases, and securities impact how money is made.

But not created from thin air. A growth in bank deposits results from people and businesses spending less and saving more. That certainly happened during covid.

Roughly 1/3rd down the page... "This is consistent with the idea that deposit growth very early in the pandemic reflected, in part, the initial dash for cash by firms which drew on their bank lines of credit."

Deposit growth and a dash for cash are unrelated to the topic and, frankly, not even consistent with each other.

Two paragraphs down... "In addition, the more subdued pace of deposit growth during the previous rounds of QE is consistent with the slower extension of loans and the smaller purchases of securities by banks."

QE is creating money out of nothing. It is done by government, assuming you view the FED as government as I do.

And in the conclusion... "Macroeconomic trends could also see a pickup in loan demand, and banks' may be generally well positioned to fund loans should demand for credit increase given their holdings of liquid securities and high reserve balances."

Liquid assets and high reserve balances has no bearing in creating money. All of that money came from somewhere.

In the same paragraph, and finally, "When banks make loans to nonbanks or buy assets, such as marketable securities, from nonbanks they create new bank deposits by transferring the loan or payment amount to the borrower or security seller."

Yes but this doesn't create money. It transfers it.

These are nothing more than more complicated explanations for how banks create money based on notations from a loan. Again, that source is not designed to be an fiat money systems explanation tool but more a practical application of how and why this happens.

Creating money means somebody added to the money supply from nothing. I reject this definition.

The money stock measures (link) below confirm how money is made which is not entirely dependent on the issuance of debt (the monthly auctions of new debt issued by the government.)

Federal Reserve Board - Money Stock Measures - H.6 - April 25, 2023

The Federal Reserve Board of Governors in Washington DC.

www.federalreserve.gov

If what you were saying is true there would be a direct to the penny correlation of money stock measures to treasury auctions and physical currency creation, but there is not.

The term auction insures that this is true.

The biggest illustration of this point is the total dollars in these accounts is greater than the money the government created (it is right there in the graphics on the page in that second link.) The explanation for that is what I've told you, banks create money literally by ledger entries once a loan is made. It is really that simple.



None of this part is valid, mainly for the reasons I've listed above.

I'll think about it and read more. For now it doesn't make any common sense to me at all. I think a lot of the issue is that we harbor different definitions for some of these actions.

 

[JohnfrmClevelan]

Supply chain.... bogus.

It is nearly two decades of printing money like it is going out of style.

Common sense says: If your money is based on something [our GNP in the US], and that something is worth "X" at any given point, each dollar is worth "Y%" of "X". As you print more money each dollar is worth less as "X" hasn't increased.

It is only the fact that the dollar is the currency language of global finance that keeps the dollar's value artificially inflated. That can't last forever. The E.U. has been trying to knock off the dollar as the default currency of global finance for decades, replacing it with the Euro. If they are ever successful in it, and we haven't tightened up on devaluing our dollar by printing so many of them, just watch how it falls.

The dollar could wind up looking like the Yen.

Well then, where was the inflation for the first 19 years of those two decades?

Inflation is extremely low in Japan, sometimes bordering on deflation. The JCB has been trying in vain to induce inflation for years now.

 

[JohnfrmClevelan]

Creating money means somebody added to the money supply from nothing. I reject this definition.

Well, where does money come from originally, then?

I'll think about it and read more. For now it doesn't make any common sense to me at all. I think a lot of the issue is that we harbor different definitions for some of these actions.

I will try to make it make sense for you, even if I have to type a bunch more.

The government no longer issues dollars. Treasury used to issue currency, but they have long since stopped. I think these were called U.S. Notes. You can find more on Wikipedia.

Now, Treasury only issues bonds. Private sector buys these bonds, ultimately with reserves, and the government spends them right back into the economy. No change in the number of dollars, but there are more bonds.

In a separate transaction, the central bank buys or sells assets, normally Treasuries, from/to the private sector; they do this to effect monetary policy, and to make sure there are sufficient reserves for smooth interbank settlement at the end of the day. They pay for these bond purchases by marking up the reserve account of seller's bank. Seller's bank, in turn, marks up seller's account. New MB and new M1 have just been created, all on ledgers.

Reserves, which (along with cash) are liabilities of the central bank, are ONLY used for settlement. They are not loaned out to bank customers. Banks create loans 100% using credit; when you get a loan for $1000, the bank marks up your account by $1000 (a bank liability), and holds your promissory note as their asset. As you make payments, the bank marks down both your account and the value of the promissory note. This extinguishes dollars - they disappeared from your account, and to the bank they were only liabilities.

When you spend the proceeds of your loan, that is when reserves come into play. You write a check to Bank B. Your Bank, Bank A, marks down your account; Bank B marks up the account of payee. At the end of the day, in settlement, the Fed (settlement agent for banks) transfers reserves from Bank A's reserve account to Bank B's reserve account.

I'll answer any more questions you have, but this is how money is created, and how it exists - on ledgers. All of the accounting works.

 

[OrphanSlug]

Creating money means somebody added to the money supply from nothing. I reject this definition.

You can reject it all you would like but when even the Fed is giving you numbers telling you banks create money by issuing a loan I tend to not put much weight behind what you reject or accept.

Moreover, you cannot seem to articulate who that "somebody" is that added to the money supply or even how that somebody did it.

I'll think about it and read more. For now it doesn't make any common sense to me at all. I think a lot of the issue is that we harbor different definitions for some of these actions.

Modern economics is still something I read on every now and then, and it took me years post college to really understand modern economic principles and understandings with fiat money systems. However, not only is it all explainable (which we have tried to do) but we have numerics to suggest it is happening (all documented in the thread.)

There is no credible source out there that disproves banks making loans creates money.

Those that try bend the definition of asset and liability, all the way down to what money really is now.

 

[fmw]

You can reject it all you would like but when even the Fed is giving you numbers telling you banks create money by issuing a loan I tend to not put much weight behind what you reject or accept.

Moreover, you cannot seem to articulate who that "somebody" is that added to the money supply or even how that somebody did it.

I would expect you to reject my position. You have more faith in government and economists than I do. Money is added to the money supply by the FED. If I forgot to say that, then I apologize.

Modern economics is still something I read on every now and then, and it took me years post college to really understand modern economic principles and understandings with fiat money systems. However, not only is it all explainable (which we have tried to do) but we have numerics to suggest it is happening (all documented in the thread.)

There is no credible source out there that disproves banks making loans creates money.

Those that try bend the definition of asset and liability, all the way down to what money really is now.

My college economics was in the 1960's. It was nothing like we see today but probably just as valid. Economists disagree with each other about almost everything. They did then and still do today.

Assets and liabilities are clear to everyone. The problem is that they define financial status, not money creation. I think banks loan existing money. Sorry.

 

[JohnfrmClevelan]

Money is added to the money supply by the FED.

Can you expand on this?

The Fed is a bank, much like any other bank, and banks are not in the business of handing out money and getting nothing in return.

Also - where does the Fed get new money from?

 

[OrphanSlug]

I would expect you to reject my position. You have more faith in government and economists than I do. Money is added to the money supply by the FED. If I forgot to say that, then I apologize.

Contrary to popular belief, economics is not about "faith" but rather observance of behavior and analysis of numbers.

And if the Fed is really adding the money created by a loan by some other bank then tell us exactly how they are doing that and more importantly why.

My college economics was in the 1960's. It was nothing like we see today but probably just as valid. Economists disagree with each other about almost everything. They did then and still do today.

Assets and liabilities are clear to everyone. The problem is that they define financial status, not money creation. I think banks loan existing money. Sorry.

The reason you should be questioning what was taught in the 1960s is the monetary system then does not equal the monetary system in place today. Principles of economic observance may be similar but conclusions on why something happened has room for interpretation. Then to now has different factors. You can argue the pros and cons of each monetary system to your heart's content but that does not change where we were then and where we are now.

The core reason Economists disagree is in determining why something happened from what was observed, the natural entry of political lean does not help things either.

I would even go so far as to say that modern liberalism and modern conservatism makes a habit of ignoring the principles of modern economics when making some political statement about economics.

 

[noonereal]

https://www.washingtonpost.com/us-policy/2022/01/26/inflation-white-house-experts/

Some common sense ideas in here, and some ludicrous ones

-produce more
-stop spending
-cure covid
-free child care
-tax the rich
-more chinese goods and Fed interference
-less regulation
-more regulation
-what inflation?
-free healthcare

And my favorite: price controls! And these are so called experts. Some of them more govt is solution to more govt the problem.

Not much we can do. This is a world phenomenon that has to work itself out.

This is gonna take years of pain.
Whoever is president in 4-6 years will get the credit.

 

[Checkerboard Strangler]

Here's the biggest problem with Republican TAX CUTS.
Tax cuts have reduced "the PERCEIVED cost of government" and thus RAISED rather than lowered demands for its assistance.
That is the OPPOSITE of what Republicans SAY happens when you cut taxes.
THEY think it "starves the beast".
It does, but in the end, ordinary people just wind up thinking government services DON'T COST ANYTHING, and then they get angry when there ARE NO services.
And they don't think back to WHO caused the services to GO AWAY, which suits Republicans just fine because guess who gets the BLAME instead?
Yup...you guessed it.

The Dead End of Small Government - Niskanen Center

The ideals of free markets and limited government are too important, and too relevant to meeting the challenges that now confront American society, to leave things here. We need to revive those ideals by reestablishing them on a sound intellectual foundation. I’ll present some thoughts on how to...

www.niskanencenter.org

 

[FurriesRock]

You are making the (common) mistake of holding production constant.

What about when a business gets a bank loan to invest in increased production? Those are all new dollars, but production increases, too, as does income. Spend those dollars more than once, which is highly likely, and you have even more consumption/investment, with no further increase in the number of dollars.

And when the business pays off the loan, dollars are extinguished, while production normally remains at its elevated level.

That part I put in bold is incorrect. Dollars are not extinguished once a loan is paid off.