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jmherbener
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.
Participant1. I don’t know of a work that discusses taxes in a regime a competing currencies. Here is Bob Murphy on Hayek’s scheme for competing currencies:
2. Changes in the purchasing power of money are determined by changes in both the money stock and demand to hold money. It’s a matter of judgment as to how much each factor contributed to a change in the purchasing power of money during some historical period. It’s never either or. Would MMTers blame the German hyperinflation of the 1920s or the Zimbabwe hyperinflation of the 2000s solely on changes from the goods side (which can only change the PPM by changing demand to hold money).
3. The interest rate is the inter-temporal price of money. The price paid when one trades present money for future money. Any person or institution that makes a credit contract with another person or institution will pay interest to borrow present money or receive interest to acquire future money. This is true regardless of the circumstances of the inter-temporal trade, e.g., for consumer loans, producer loans, government loans, direct investment in production, and so on. The interest rate is determined by the overall demand for and supply of present money for future money. The government is both a demander of credit and the source of supply of credit, through bank credit expansion. So, it’s participation influences the interest rate. Obviously, overall supply and demand conditions can be such that the interest rate is low even though government demand is high or conditions can be such that the interest rate high even though government demand is low.
4. The price of the inter-temporal trade of money cannot be zero because people have time preference. So Mike must be talking about something else besides the interest rate. For example, (one that he didn’t talk about) if the central bank lends money to commercial banks it can set the “interest rate” of its loans at zero. But this is not the price of inter-temporal trade of money, but a mere policy. The Fed could even pay banks to borrow funds,. but that would not be a negative interest rate.
ParticipantIf the low rates were enforceable, it would create a shortages in credit markets. The quantity supplied of credit would shrink. The general rate of interest in the economy would still be determined by time preference and could still be earned by direct investment in production. Some savors, striving to earn the market rate of interest, would abandon credit markets and adopt other methods supplying capital funding like buying stock or entering into partnerships or coops. The efficiency of the time market would be impaired as the volume and type of different transfers of capital funding would not align with people’s preferences. The majority of capital funding in our economy, however, is through self-financing. So, usury laws would not devastate production.
Depending on how widespread the usury law was (e.g. only on mortgages, or only on consumer loans, or on all consumer and producer loans), the effects would be more or less damaging. It would not create a recession per se, however, since that is the liquidation of malinvestment from a boom and the reallocation of resources misallocated during the boom. Obviously, without credit expansion pushing interest rate below their market levels, a usury law would not generate a boom and therefore, no recession would follow. As mentioned above, usury laws reduce the supply of credit. They would result in a reallocation of resources and reinvestment of capital funding especially for businesses that have built their business model on access to credit, either short term or long term. They would have to find alternative arrangements for short term credit, like accounts receivable and payable, and long term credit, like stock. If they could not do so, they would be liquidated and their assets reorganized, albeit, less efficiently.
ParticipantThe reason the surplus decreased is that outlays increased faster than receipts after 2006. During the downturn the number of people on disability has risen. Social security is projected to be in deficit starting in 2016. There was still a $62 billion surplus in 2012. So the data in Table 1.1 do not prove that SS is in financial trouble. But, the trend is not favorable.
Clinton, like presidents before him, used the entire SS surplus. Each year the Treasury spends all the receipts from SS. It “pays” for the surplus by giving SS non-negotiable bonds. The holding of these bonds by the SS administration constitutes the SS trust fund.
In the 8 years of Clinton administration budgets (FY 1994 through 2001), total outlays of the federal government rose from $1,462 billion to $1,863 billion or 27 percent. In the 8 years of the Bush administration budgets (FY 2002 through 2009), total outlays rose from $2,010 billion to $3,518 billion or 75 percent.
ParticipantFor a chart of the federal government’s receipts, outlays, and budget surplus or deficit, click on the link for “Table 1.1” at the following website:
http://www.whitehouse.gov/omb/budget/Historicals
The chart shows that the federal government’s “Total Budget” was in surplus for the years 1998, 1999, 2000, 2001 and that its “On-Budget” was in surplus for only the years 1999 and 2000. The difference between the two is the “Off-Budget,” which is mainly social security receipts, outlays, and surplus or deficit. All administrations use the social security surplus to partially offset the “On-Budget” deficit. So Clinton did not “raid” social security, at least not in any manner different than previous presidents.
(As an aside, the chart shows why Reagan called on Alan Greenspan to save social security in 1983. It had been in deficit since 1976 and Greenspan’s tax increase quickly brought it back into surplus by 1985.)
For a chart of the government’s net interest outlays, click on the link for “Table 3.1” at the following website:
http://www.whitehouse.gov/omb/budget/Historicals
The chart shows that net interest outlays fell from $241 billion in 1998 to $206 billion in 2001. And the “On-Budget” net interest outlays (which is the amount the Treasury paid to government bondholders) fell from $288 billion in 1997 to $275 billion in 2001. This reduction is much to small to account for the corresponding budget surpluses. Although, Clinton did have a policy of changing the time structure of federal government debt to take advantage of lower rates, but the policy did not generate the budget surpluses which were $69 billion in 1998, $126 billion in 1999, $236 billion in 2000, and $128 billion in 2001.
ParticipantWherever financial markets exist, they constrain government finance. International gold redemption, however, placed a tighter constraint on government monetary inflation and debt financing. The 20th century saw a relaxation of that constraint. After Bretton-Woods was destroyed in 1971, the federal government exercised monetary inflation and debt financing more vigorously and the financial markets reacted more severely.
ParticipantI don’t know the details of the cases you mention, but there are a few general principles involved. The bust is a process of liquidation of malinvested capital and reallocation of misallocated resources. These activities require entrepreneurial foresight. As with any exhibition of superior foresight, entrepreneurs earn profit. During the bust, the configuration of capital capacity controlled by various entrepreneurial groups within their own enterprises must be rearranged. Capitalist-entrepreneurs create value by appropriate downsizing of some firms as well as appropriate upsizing of others.
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