[jmherbener]

Treasuries have varying maturities from 3 months to 30 years. Investors buy them despite longer maturities because there are active secondary markets in which they can sell Treasuries to other investors anytime. Both stocks and bonds have secondary markets making them highly liquid.

[jmherbener]

If you’re referring to the Fed and not commercial banks, then we can look at its balance sheet to see which liabilities increase as it increased its Treasury holdings.

The PP slides on the Fed’s balance sheet are in the lecture on monetary policy.

Here’s the summary:

On Jan. 30, 2003 the Fed held $630 billion in Treasuries (an Asset) against $643 billion in Federal Reserve Notes (a Liability).

On April 4, 2012 the Fed held $1,669 billion in Treasuries and $837 billion in Mortgage Backed Securities against $1,060 in Federal Reserve Notes and $1,542 billion in Deposits.

The Fed has expanded base money from $669 billion to $2,602 billion to buy the additional assets. The Fed’s equity (past “profits” it is holding) rose from $17 billion to $55 billion over the same period. So, clearly, the Fed did not draw down its accumulated “savings” to pay for acquiring the additional assets.

[jmherbener]

Banks pay higher interest rates to borrow from savers than they earn from Treasuries of the same maturity. So, they would suffer losses intermediating credit in this way.

http://www.bloomberg.com/markets/rates-bonds/government-bonds/us

http://www.bankrate.com/cd.aspx

They could, of course, borrow short term and lend long term and earn an interest rate differential. But this is risky and issuing fiduciary media, while also risky, is more profitable.

[jmherbener]

If you total the value of capital markets in the world it comes to $212 trillion. U.S. bonds make up 24% of the total value of all bonds and U.S. stocks constitute 45% of the total value of all stocks. If you want to raise capital, the biggest markets are denominated in dollars. This is the main reason that the dollar is the world’s reserve currency.

http://qvmgroup.com/invest/2012/04/02/world-capital-markets-size-of-global-stock-and-bond-markets/

[jmherbener]

A falling purchasing power of money (or rising prices in general) occurs when the money stock increases relative to the demand to hold money. Although the money stock has been increasing during the past few years, the demand for money has been rising also. On balance, then, prices have not increased much.

Here’s the great economic historian, Bob Higgs, on the topic:

http://blog.independent.org/2012/12/15/more-monetary-peculiarities-of-the-past-five-years/

[jmherbener]

Yes, the U.S. Treasury department has to pay the to the holder of T-Bonds, T-Notes, and T-bills the interest due each period and the principle on maturity. Someone who is holding Treauries can maintain his overall amount by buying more as some of them mature and are paid off.

As you can see from the following chart, China has been reducing its holdings overall in the last few years and now holds around $1.2 trillion:

http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

Someone who is holding Treasuries can sell them right now for cash in capital markets to other holders or buy Treasuries right now from other holders. But these secondary market trades do not involve the U.S. Treasury directly.

[jmherbener]

Roger Garrison has explained and critiqued Friedman’s argument against boom-bust theories in this article:

http://www.auburn.edu/~garriro/fm1pluck.htm

[jmherbener]

Corporate profits are cyclical, running up during booms and down during busts. The recent recovery in corporate profits has been influenced by Fed expansionary monetary policy.

http://research.stlouisfed.org/fred2/series/CP?cid=109

National income varies much less. So as a percent of national income, profit vary quite a bit.

http://research.stlouisfed.org/fred2/series/NICUR?cid=109

As the charts show, in Q3 2012, national income was $13,912 billion and corp. profits were $1,752 billion. So corp. profits were 12.6% of national income.

[jmherbener]

The losses were realized when the Fed bought toxic assets from banks and other financial institutions paying them cash at face value and putting the assets on its balance sheet. The losses were born by society at large. The investors who were bailed out received new money which they used to outbid others who hadn’t received the new money. These other people bore the loss by suffering a reduced command over resources.

[jmherbener]

The federal government provided bailout funds to AIG of $182.3 billion starting in September 2008. These funds were used to buy toxic assets from AIG and its counter parties. In the initial bailout of $85 billion, $62 billion went directly to counter parties.

http://www.washingtonpost.com/wp-dyn/content/article/2010/01/23/AR2010012302832.html

As a condition of the bailout loan, the federal government demanded an 80% equity position in AIG. When AIG paid back the loan (and the warrants were exercised with the higher share price, if they were exercised) the federal government received $22.7 billion.

http://online.wsj.com/article/SB122156561931242905.html

So the “return” of $22.7 billion on an investment of $182.3 billion is 12.5% over four years. Private entrepreneurs, like Tim Cook, did much better. Society at large would have been better off if the government had left the $182.3 billion in the hands of private capitalists.

[jmherbener]

The argument against bailouts is that they supplant entrepreneurial decision making about production in society with political decision making. Entrepreneurs must economize for society at large to earn profits and avoid losses. By turning production decisions over to politicians, standards of living suffer, since their decisions are not subject to the test of profits and losses.

If the government had not bailed out AIG, then the inferior entrepreneurs who drove AIG into bankruptcy would have been supplanted by superior entrepreneurs who built and maintained their capital. Capitalists are the ultimate entrepreneurs in the market economy, funding superior entrepreneurs who earn profits and avoid losses and withdrawing funding from entrepreneurs who do not earn profits and suffer losses. The decisions of the superior entrepreneurs (who would have been put in place by the capitalists) would have been more profitable than the decisions of the inferior entrepreneurs (who were left in place by the politicians).

A rising stock price is no more evidence of a successful bailout than the creation of “green” jobs is evidence of the success of government subsidies to electric car manufacturers. To pass the test of profit and loss, a decision must generate more value in the chosen alternative than the value of the alternative given up.

Finally, the taxpayers will not receive a penny of the $22.7 billion. It will go to politicians who will use it to bid resources away from economizing uses by entrepreneurs in the market into their own inefficient political decisions.

[jmherbener]

1. The demand for money is the demand to hold money. People are building up their cash holdings by selling other assets and reducing their disbursement of income on spending. Demand to hold money does not affect interest rates. Along with the stock of money, the demand to hold money determines money’s purchasing power.

2. Yes, federal government borrowing has increased, but the net increase in demand for credit has been relatively small. The Fed has increased its holding of Treasury Securities from less than $500 billion in 2008 to almost $1.7 trillion today and it is adding $45 billion a month. Foreigners, mainly central banks, have increased their holdings from $3.3 trillion in 2008 to $5.5 trillion today.

My quote that you cite is not referring to the demand side, but to the supply of credit by bank fiduciary issue. I didn’t say there was “no demand” for credit, but only that demand for credit hasn’t increased sufficiently to start pushing up interest rates.

3. The Fed can directly manipulate only the Federal Funds Rate. It does this by providing more reserves to banks. For other interest rates to be affected by expansionary monetary policy, the banks must issue fiduciary media and create credit and supply it into the various credit markets. In normal times, banks do just that with additional reserves they obtain. But, in depressions they tend to hold reserves and restrain from issuing fiduciary media and creating credit.

[jmherbener]

Anyone who thinks that data can verify or falsify economic theory doesn’t understand what economic theory is (as Austrians conceive of it).

Economic theory demonstrates that if the money supply is larger with money demand the same, then the purchasing power of money would be lower. So there are two possibilities in the current situation. First, the monetary base is only part of the money stock and the relationship between the monetary base and the overall money stock is not mechanical, but depends on the actions taken by bankers. Since the crisis, they have been selling assets to the Fed in exchange for reserves (which are part of the monetary base) and holding the reserves in excess of what the Fed requires. As a result the money stock has not dramatically increased. Second, money demand has risen. People tend to hold more money during a depression to bolster both their liquidity and solvency.

[jmherbener]

First, he seems to suffer from a mercantilist fallacy, that money is wealth or spending equals prosperity, which is the Keynesian version of the fallacy. Prosperity depends on our physical productivity (which depends on our resources, technology, capital capacity, labor skills) and not at all on our aggregate spending.

He gives no account to how the market adjusts to changes in people’s demands. If people’s time preferences fall and they reduce their consumption spending (save) in order to increase their investment spending, then resources would shift out of producing consumer goods and into producing capital goods with no ill effect on the overall economy. If people increase their demand to hold money and therefore reduce both their consumption and investment spending, then prices of all goods, both of outputs and inputs, will decline. The smaller amount of aggregate spending will still be sufficient to buy all the goods produced. The profit of production processes will be unaffected.

Second, he denies scarcity. He claims that government spending creates more total employment (and presumably, more materials and more machines and more factories for the workers to work with). In reality, resources shift away from other alternatives and so there is no net increase. Even in depressions, there are reasons why owners of producers goods are holding them back from immediate employment in order to put them to other employment in the future. Robert Higgs has a famous paper on this point:

http://www.independent.org/pdf/tir/tir_01_4_higgs.pdf

Total spending on infrastructure is a fraction of the government’s budget. In 2011, the federal government’s spending was $3,600 billion. It ran a budget deficit of $1,300 billion. Spending on infrastructure (highways, streets, transportation, power, water, and sewer) was around $130 billion.

Moreover, infrastructure projects are notoriously wasteful. If half the money government spends on infrastructure is wasted (paid to workers to stand around watching) how does it make us more prosperous? Private entrepreneurs could have produced goods twice as valuable with the same money expenditures.

Third, he denies the economic theory demonstrating the efficiency of entrepreneurs making production decisions and the inefficiency of government bureaucrats making production decisions.

He misdirects attention from the primary to the secondary effects of debt. The primary effect of debt financing of its expenditures by the government is that command over resources is transferred from private hands to the government right now in the present when the debt is sold by the government. Decisions over the use of resources are no longer made by private entrepreneurs but by government bureaucrats. Prosperity suffers. The secondary effects of who winds up holding the debt and what happens when the debt is paid back are less important.

[jmherbener]

Mises has a broader conception of rationality than the typical neoclassical economist. Action is by nature rational for Mises. But neoclassical economists accept the narrower concept of the rational choice model.

http://en.wikipedia.org/wiki/Rational_choice_theory

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