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jmherbener
ParticipantIn normal times, the Fed “targets” a level for the Fed Funds rate because it thinks that upward movements in the FF rate beyond the target rate indicate that reserves are too scarce and that downward movements in the FF rate below the target rate indicate that reserves are too plentiful. When reserves are too scare, the Fed supplies more to banks by stepping up open market purchases. When reserves are too plentiful, the Fed withdraws reserves by open market sales, or at least backing off open market purchases. The Fed uses the FF rate as a feedback mechanism to gauge what should be done about monetary policy. At least, this is the theory. In practice, the Fed tends to move the target rate with movements in the actual FF rate.
Here is the graph of the Effective Fed Funds Rate.
http://research.stlouisfed.org/fred2/graph/?id=FEDFUNDS
If you set the beginning date for drawing the graph to 1982-09-27, it will have the same time line as the graph of the Fed Funds Target Rate. Then you can compare the two graphs.
ParticipantThe “stag” in stagflation is already underway. Economic growth depends on investment and investment has been suppressed by government intervention and the downturn to the point that the capital stock in our economy is not expanding enough to generate economic progress. I cited Bob Higgs’s work in an earlier post.
The Fed’s expansion of its balance sheet and commercial banks’s build up of excess reserves provides the potential for the “flation” in stagflation. I lack confidence in the Fed to unwind this potential without significant price inflation. The Fed is dominated by officials who favor price inflation. If they make a mistake, they will err on the side of price inflation, not price deflation.
The purchasing power of money is determined by the money stock and the demand to hold money. If they are roughly balanced over time, then money’s purchasing power will be roughly stable. The chart shows that the CPI index in Japan has fallen from just below 103 in 2000 to just below 100 in 2012. In other words, prices were less than 3 percent lower in 2012 than 12 years earlier.
ParticipantSince 2008, the Fed has been using QE counter-cyclically. But expansionary monetary policy can be used pro-cyclically as well. Normal open market operations are used this way, i.e., to stimulate a boom. The Fed is a one horse show. No matter the economic conditions, it inflates the money stock through credit expansion.
No one knows how the Fed will unwind QE. Here is Bernanke on the topic in 2010:
http://www.federalreserve.gov/newsevents/testimony/bernanke20100210a.htm
Here is Bob Murphy’s response:
The only other time the Fed was faced with such a large build up of excess reserves in commercial banks was from its attempt at monetary inflation in the 1930s. Banks built their excess reserves to unprecedented levels during the mid-1930s and were still carrying enormous excess reserves into the Second World War.
Unless the government roles back its intervention and stops its expansionary monetary policy and profligate fiscal policy, I think the next 10 years will be a period of stagflation, like the 1970s.
ParticipantYes, commercial banks bought Treasuries in the past and hold a substantial portfolio of them. For the week ending Sept. 4, 2013, commercial banks were holding $1,760.6 billion in “Treasury and Agency Securities.”
http://www.federalreserve.gov/releases/h8/current/
The Fed is not permitted to buy Treasury securities directly from the Treasury. It must buy them in the “open market” and thus, the phrase “open market operations.”
ParticipantWhen a commercial bank sell Treasury securities to the Fed, its total assets are initially unchanged. However, the Fed permits commercial banks to hold less than 10 percent of the total checking account balances of their customers as reserves. With additional reserves, therefore, commercial banks are able to generate more than 10 times the additional reserves in checking accounts of their customers. They increase the checking account balances of their customers by extending them loans. So. the total assets of commercial banks increase (as do their liabilities) and the additional loans stimulate spending and production.
For example, Bank A sells $1 million in Treasury securities to the Fed and the Fed pays with $1 million in reserves. With $1 million more in reserves, Bank A can have $10 million more in checking account balances of its customers and still meet the Fed’s reserve requirement ratio of 10 percent. The bank then extends loans of $10 million to its customers and writes the loan proceeds into their checking accounts. The increase supply of credit pushes interest rates down. The lower interest rates and the spending of the newly-created money by the borrowers, pushes up prices of goods they are buying. Entrepreneur who are producing these goods expand production which increases the demand for inputs they are buying. The prices of the input they are using and the prices of the assets they are using both increase. The boom is underway.
Take a look at Murray Rothbard’s book, What Has Government Done to Our Money.
The reasons that QE3 is not producing this chain of effects are first, in a depression, when banks sell assets to the Fed the hold the reserves and do not create credit. Excess reserves, which are typically between 5 and 10 percent of checking account balances are currently well over 100 percent. And second, in a period of unpredictable policy measures, investors hold cash instead of investing in production.
Take a look at Robert Higgs’s article, “Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War.”
ParticipantCommercial banks don’t hold “securities accounts” at the Fed. The Federal Reserve Bank of New York has a “System Open Market Account” in which it holds securities that the Fed has purchased in Open Market Operations.
http://www.newyorkfed.org/markets/soma/sysopen_accholdings.html
The Federal Reserve’s balance sheet shows that its liabilities do not include “securities accounts” held by commercial banks. Commercial banks hold “reserve balances” with the Fed. For the week ending on Sept. 11, these were $2,265,831 million.
The balance sheet shows that the Fed’s assets include “Securities Held Outright.” For the week ending on Sept. 11, these were $3,394,176 million.
http://www.federalreserve.gov/releases/h41/current/
Here is a description of how the Federal Reserve Bank of New York conducts open market operations.
ParticipantI should have added that for each person:
Income = Consumption Expenditures + Investment Expenditures + Changes in Money Holdings
The last category is the money you hold onto instead of spending on consumption and investment. The money stock is all the money and money substitutes people hold onto.
ParticipantEvery dollar of money and money substitutes is held by someone. Money and money substitutes are valuable goods and so every dollar of them is owned by someone. All the funds in your checking account in any moment are being held by you and not spent. And the same is true for everyone else.
Money Stock = Money + Money Substitutes
To calculate the money stock, one adds up all the money, which is cash (currency and coins), and money substitutes, which are claims redeemable for money on demand at par (mainly checking accounts and saving accounts). The money stock that you are holding at any moment is the cash you have plus your checking and saving account balances. And the same is true for everyone else.
ParticipantStock markets allocate capital funding by increasing or decreasing the asset values of a company. Investors buy a company’s stock on the basis of their anticipations of the future net worth of the company. If they think the net worth will rise, then the buy the stock which bids up its price today. Because the company itself is the largest shareholder, its share holding increase in value. But its shareholdings are an asset on its balance sheets. Therefore, its net worth rises today providing the opportunity for the company to take on larger liabilities today. In other words, it can borrow funds today.
he same thing happens in all asset markets. If homeowners bid the price of houses up in my town, then the price of my house rises. This creates equity in my house, which I can borrow against.
A share of common stock is an ownership claim on a portion of a company’s net worth. If a company has $100 million of net worth with 1 million shares of stock, then each share has a claim on $100. There are two main factors in increasing net worth. One is acquiring assets with greater value than the liabilities incurred to acquire them. The other is earning net income.
If investors anticipate an increase in future earning of net income, then they will pay more for the stock toady. But they will not pay $1,000 today to acquire $1,000 of earnings in the future. Because of time preferences, they will pay only a price today discounted according by the rate of interest which is the inter-temporal price of money. If an investor can earn $1,100 at the end of one year by investing and the rate of interest is 10 percent, he will only pay $1,000 today to acquire these earnings.
ParticipantSome of both. Most of the economics literature discusses German-style banking in terms of the efficiency of capital allocation versus capital markets and, therefore, has little on the causes of the German system. For example:
http://research.stlouisfed.org/publications/review/98/05/9805cf.pdf
For more history, here is the volume on German-style banking in a four volume work on the history of banking in different countries:
ParticipantThe Fed’s balance sheet shows total assets of $3,601 billion. Securities held are $3,380 billion. So 94 percent of Fed assets are securities that it has purchased, not loans. Loans are $227 million (yes, million with an “m”) or 0.008 percent of Fed assets. And $154 million of that $277 million are “seasonal loans” which have nothing to do with the crisis.
http://www.federalreserve.gov/releases/h41/current/
The Fed did not loan money to banks. It bought securities from banks. The Fed paid banks by crediting checking account balances that banks hold at the Fed. This is the normal manner in which the Fed generates monetary inflation. The Fed buys securities from banks and pays with newly created money substitutes, the banks then use the money substitutes as reserves and issues their own money substitutes (i.e., customer checking accounts) by making loans to customers.
Reserves of banks are funds they hold against their checking account balances. The Fed requires banks to hold these funds as either cash or checking account balances at the Fed. The Fed sets the reserve requirement ratio that banks must meet, which is roughly 10 percent of their checking account balances. Banks cannot hold less than required reserves, but they can hold more. Any reserves banks hold in excess of those required by the Fed are “excess reserves.”
For example, customers of Bank A have a total of $10,000,000 in their checking accounts. If the reserve requirement ratio for Bank A is 10 percent, then Bank A must hold a minimum of $1,000,000 as reserves. It can hold these reserves as either cash or in a checking account balance with the Fed. If Bank A actually holds $1,200,000, then it is holding $200,000 in excess reserves. The excess reserves, like any reserves, can be either cash or checking account balances at the Fed.
The money stock is not 90 percent above people’s spending levels. The additional checking account balances come into existence as loans to customers. The customers are borrowing to spend the money. the recipients of the money then apportion it between money holding, consumption spending, and investment spending. As the new money is spent on more and more goods, their prices rise. If any person believes that his money holdings are too large, then he spends it to buy goods or invests it (and the borrower spends it on goods) and the money continues to bid up prices further. At higher prices, i.e., lower purchasing power of the monetary unit, people need to hold more money to command the same purchasing power over goods. This is the process by which prices are bid up from the monetary inflation generated by the Fed. At the end of the process people desire to hold all the money that exists.
Yes, saving account balances can be money substitutes if banks have a practice of redeeming them on demand at par for money. The Fed sets a lower reserve requirement for them than it does for demand deposits.
The main assets of commercial banks are loans and securities.
http://www.newyorkfed.org/research/banking_research/QuarterlyTrends2012Q2.pdf
As the link below reveals, banks don’t have a significant portfolio of land and corporations.
http://www.federalreserve.gov/pubs/bulletin/2010/articles/profit/default.htm
ParticipantBank reserves are cash banks hold in their vaults and checking account balances that banks hold at the Fed. The Fed requires banks to hold reserves against the checking account balances banks issue to their customers. Roughly speaking in normal times banks hold 5-10 percent of their customers’ checking account balances as reserves. Any amount of reserves that banks hold above those required by the Fed are called excess reserves. Currently banks hold well over 100 percent of their customers’ checking account balances as reserves.
The Fed cannot evaporate the cash that banks hold as reserves and dare not evaporate the banks’ checking account balances. If it did this, banks would lose a valuable asset and their equity would be jeopardized. The funds which are bank reserves were not loaned to the banks by the Fed but were payments the Fed made when banks sold some of their assets to the Fed.
ParticipantCorporate financing in Germany relies more heavily on banks, i.e., financial intermediaries, while corporate financing in GB and the USA relies more heavily on financial markets, i.e., stocks and bonds. According to the following ECB study, in 2001 bank loans to the corporate sector in the Euro zone were 42.6 percent of GDP while only 18.8 percent of GDP in the USA. Outstanding debt of non-financial corporations was 6.5 percent of GDP in the Euro zone and 71.7 percent of GDP in the USA. Stock capitalization in the Euro zone was 28.9 percent of GDP in the Euro zone and 137.1 percent of GDP in the USA.
ParticipantThe McKinsey Report only goes back to 1990, but it gives an indication of the magnitude of increase in financial markets, 7.2 percent per year, which is much larger than increases in real GDP.
http://www.mckinsey.com/insights/global_capital_markets/mapping_global_capital_markets_2011
But it’s not their size that indicates their “power” vis-a-vis governments. As the report shows, the category of capital markets with the biggest increase is sovereign debt. Since breaking the fetters of gold, governments have used debt and monetary inflation more aggressively. Accordingly, they have made their own finances more dependent on capital markets.
ParticipantIn Freakonomics, Steven Levitt attempts to use mainstream micro-economic methods to analyze topics not usually considered part of the body of economics. So the premises of the book are not Austrian.
http://en.wikipedia.org/wiki/Steven_Levitt
The genesis of Freakonomics is the work of another Chicago economist, Gary Becker, who applied mainstream micro-economic methods to topics outside economics proper, such as the family.
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