Lkruvant, excellent explanation. However, don't those assumptions depend on all of M1 actually being used in the economy?

Therefore, I have one question. Given that (a) interest rates are close to zero meaning that new debt doesn't cost much to service, (b) the reason for MULT being below 1 is the massive amount of HP money doing nothing in the Fed's vault with a MULT of zero - couldn't it be that those large sums in the Fed's vaults might not be actually hurting or helping us at all? Couldn't the frightening MULT print be illusory? It's not every J6P sticking his cash in his mattress, it's a few large banks sticking their cash in the Fed's mattress. Smaller banks are still out there happily making loans.

Again, new here. Be kind.

The point Grf is that the high powered money sitting in the vault is doing no good, where The Fed is TRYING to make it do good.

The signal isn't that we're "blackholing" money, it's that the attempt to crank velocity (via credit) isn't working - the market has said "nuts!" to Bernanke's thesis.

Gen, I agree. What Lkruvant states is the blackholing scenario, and it's not happening. Blackholing would only occur if every J6P started stuffing cash in the mattress. What we're seeing is only big banks stuffing cash in the mattress, not J6P - and that's what's affecting MULT.

even if the banks start lending, what is to say the consumer will spend enough to service the new debt? i just don't see it. i don't care how much $ is given to the autos, the consumer needs to be qualified and buy which can't happen on a large enough scale to cover existing debt.

if the multiplier is under 1 then mathematically speaking, how would more debt inclusive of lending increase the multiplier? wouldn't it continue to decrease unless it was offset with real production?

lk, i agree with grf, great, great explanation.

I would venture a guess that this is the underlying reason why M1 is starting to dip.



And why they are easing off on the base money supply gas pedal.

Brucelee, I think that lk's thesis only applies if it's J6Ps everywhere stuffing money into the mattress. If you just have a couple banks sitting on billions in the Fed's mattress, M1 can be less than one but without all the dire consequences lk outlines so well.

The ironic thing is that any money stim aimed at J6P (say Obama's infrastructure projects or a direct helicopter drop) is just going to be used to retire debt anyway, reducing money supply more.

What kills me is how any sane person could think any of this is inflationary.

Something to consider:

Although M2 has been exploding lately it has come at the expense of debt. Take a look at the Fed's H.8 report.

You can see that since October deposits are ramping but borrowings are down almost as much with the difference coming out of the residual.

The banks are basically using the new money to pay off maturing debt since it would be too costly to roll them. CDs have much lower rates. This is why V is falling.

Bank credit actually fell in the same timeframe.

http://www.federalreserve.gov/releases/h....

What I mean by that is this:

Think of the 0.915 as the internal exchange rate for the US dollar.

When a fiat currency system works fine, you get inflation.

Put a dollar into the economy through the CB or Federal Reserve, and it creates XX worth of new debt, new GDP, as it works its way through the economy. Until recently this figure was 3 or 2 or 1.7.

What we have now is we put $1 into the economy, but we are only getting 91.5 cents out. As we pump more, we get less, and our ROI drops to below par. Worse, the pumping itself accelerates the tendency to get less back for each buck sent out into the economy. To correct this they pump even more out, but they get an even lower return on that.

If you spent a dollar, but only received back .915 worth of goods, if you handed a dollar to the bank clerk and they gave you change and it was 92 cents, what would you do? How would this affect your economic behavior?

Take it to the extreme. Ben pumps out a dollar, but gets back one penny of monetary activity. So to sustain a money supply of 900B, he needs to have 90T in the money supply.

This causes the system to reset, and by that I mean that the monetary system ceases to function as more money is created, but less usable money ends up in the system, forcing the creation of more money, and the feedback loop goes round and round.

To fix this the debt must clear the system. This means Ben has to let many banks fail, and get the sound ones to lend. Debt must be defaulted, balance sheets exposed, Mark to Market on all asset classes.

Otherwise what will happen is that FOMC and Ben will pump trillions into the economy, with rapidly diminishing returns, ending up at a point of monetary reset, dollar devaluation, or US Sovereign Debt default.

do you think Obama will do what it takes to fix the system? if he is in the process of enacting the new stimulus package then it doesn't seem like that's the route he's going to take. also, once the multiplier goes under 1 i would think it's very hard to reverse course. another question, since it is under and if proper actions aren't taken, does this ensure a reset?

Quote:

If you spent a dollar, but only received back .915 worth of goods, if you handed a dollar to the bank clerk and they gave you change and it was 92 cents, what would you do?

Well if I was printing the **** up in my basement (the FED) then I'd turn that bitch on high and have the out of work truckers lined up down the street ready to haul that **** down to the bank and cash out baby. Who gives a **** if you get 92 cents for a dollar if you can PRINT all you want. Yippppeeeee. Fire up the presses.

@Lera....NICE EXPLANATION.

They'll spend until debt default.

No doubt about it in my mind.

Is there any evidence to the contrary?

Mo is right - when you have a Keynsian hammer, every problem looks like an "opportunity for government financial 'support'" nail

Lera wrote..

what will happen is that FOMC and Ben will pump trillions into the economy, with rapidly diminishing returns, ending up at a point of monetary reset, dollar devaluation, or US Sovereign Debt default.

Damn the torpedoes, full speed ahead!

Aye, Aye Captain Ben.

Mo & Inflam - Agreed.

They are politicians. Their goal is to stay elected.

People are not educated about this, and want to see that politicians are doing SOMETHING to fix the situation. If they don't do something they'll be replaced by politicians who will.

Their only hammer is spending money, they'll bang away with it until the head snaps off.

Chameleon:

"Well if I was printing the **** up in my basement (the FED) then I'd turn that bitch on high and have the out of work truckers lined up down the street ready to haul that **** down to the bank and cash out baby. Who gives a **** if you get 92 cents for a dollar if you can PRINT all you want. Yippppeeeee. Fire up the presses."

That's Ben and Obama's point of view. What if you were an end consumer who couldn't print and your dollars were being manufactured in such a setting? How would you behave? The banks are sitting on their money, buying up other banks, and you still cannot get credit, and the economy is tanking into a deflationary drecession. Do you spend or save? Buy an Xbox or food, ammo, a gun, efc.?

@Lera....



hehehehe.....

My comment was sarcasm if you couldn't tell. I can't say what I really think or I'll get banned. The truth stings DEEEEEEEEP.

"Therefore, I have one question. Given that (a) interest rates are close to zero meaning that new debt doesn't cost much to service, (b) the reason for MULT being below 1 is the massive amount of HP money doing nothing in the Fed's vault with a MULT of zero - couldn't it be that those large sums in the Fed's vaults might not be actually hurting or helping us at all? Couldn't the frightening MULT print be illusory? It's not every J6P sticking his cash in his mattress, it's a few large banks sticking their cash in the Fed's mattress. Smaller banks are still out there happily making loans."

I didn't really think I discriminated between the two. Credit growth is credit growth, whether it is J6P or a bank or a corporation. Clearly, analysts and prognosticators are not seeing a lot of opportunity for yield except in insanely risky endeavors, which is not odd because we have inhabited a gigantic speculative ponzi for nearly a decade. The Fed is a supply-side agency; they can offer but they cannot force borrowing.

Interest rates as a market factor reflect demand for money and the FFR along w/ the mult figure clearly show that demand for money is zilch. And, who is all that eager to lend at negative rates? Only the Fed can do that and stay in business. How can a negative rate NOT produce deflation? A bank that does it MUST lose money...you will necessarily be repaid less than you lent. As this "interest" compounds, so do the losses. It defies reason that the Fed would try this, but I guess they only plan to "shock" the system or else flood the banks with imaginary capital.

The Fed is and has clearly been trying to drive credit growth by making money cheaper, but this is entirely akin to dropping the prices as demand wanes. The economy left the realm where real things could compete with ponzi finance long ago. This is how we had a "jobless recovery" and the GDP prints got increasingly out of touch with street reality. I think the truth is that the banks really are so insolvent that they are concealing losses far more massive than anyone imagined. If we conjecture that the SP500 EPS that was "financial" was, for a decade, fictional and driven by a ponzi scheme, it's clear to see that the black hole is far more vast than was believed. I don't think banks are hoarding, I think the reality is that dGDP/dDebt has reached 0...no amount of supply-side rate intervention can cause an increase in economic activity now. It's important to note that a very substantial portion of our economy was for at least 5 straight years from the 01 collapse till 2006 or so, entirely synthetic and this drove demand for money, not real production. But, it has vaporized. The notional values of these subordinated tranches of synthetic CDOs based on defaulted CDSs are now zero, down from whatever fantasy mark they were accorded in July 07.

And, if they do resort to raw printing and check-handing, the money will not end up in new businesses. THEN is when you will see hoarding.

I really don't see an economic problem except for the oil supply situation and other resource constraints. This appears to be a credit money issue, with the deflation being driven by purely monetary issues. Obviously, if oil supply is contracting as has been mentioned elsewhere (e.g., Pemex thread), then this would drive monetary collapse, but the noose we're in seems to be because of debt-based money. I wonder if they will take up Friedman's advice to print at a level rate of growth irrespective of other factors in order to try to get out of this box.

Lk,

It's bad because the HP money that the FOMC pumped is the result of various programs, and these programs must be financed through Treasury Auctions. The Fed has a balance sheet; they cannot conjure money out of thin air without dramatic repercussions. To fund the programs we must issue Tsys. If we do not then the entire house of cards collapses as SWF and FI realise that we are just adding numbers to a cell in a spreadsheet, nothing more.

The Fed is pumping trillions out into the economy, the banks are not lending it, the return or MULT on that money is less than par (it costs us money to get a new dollar of GDP or debt into the system), and we took on trillions of debt that must now be issued out into a global depression via the Treasury Complex.

What could go wrong?

Yeah, I'm aware of the source of the money, but I do not believe that the consequences of thin-air conjuring would be dramatically worse. At some point, can anyone offer any path out of this other than print-and-dispense? We all know where this will lead, but is the endgame different than the present course? If we cram down the debt and default en masse, the deflative effects are equally catastrophic.

I agree with you 100% that the system of debtmoney is fatally broken and the metrics you cite demonstrate that conclusively. The FOMC has dipped its toe in the waters of QE/printing and if there is not a dislocation, they have no choice but to proceed further. This is zugzwang for the Fed we are at and the only move they have left to make is to print. If we assume that they will make the only move they have in order to prolong the game, then how do they mitigate, give m1 growth over to a computer? The banks are finished anyhow.

If they continue to try to lend, the deficits needed to finance a negative M1mult will as a mathematical necessity march geometrically to infinity...the proverbial "bond vigilantes" and sovereign buyers must alread know this. Should they not have already pulled the plug?

Paradoxically, a negative rate of interest in excess of the rate of deflation means you are less in debt as a function of interest compounding, which ceteris paribus, would have a further deflationary effect. The Fed simply MUST drive rates sharply positive and create some inflation (expectations) in order for any supply-side measure to work. The prevailing rate trend seems to indicate an oversupply of credit available but little demand. So, what are they gonna do?

The Fed can raise interest rates.

The Slosh swamp would drain, many large banks would not make it, but this would create some inflationary expectations.

Were that to happen the equities markets would go straight down for days.

Because Ben and Hank/Tim believe their job is to preserve banks and financial firms that have made bad decisions, this likely will not happen.

No one wants to do the right, smart, or adult thing.

A couple weeks ago I emailed this to Prof Hamilton who posts on Econbrowser.. and he replied that it reflects the accumulation of excess reserves - just what was stated in this thread.

http://www.econbrowser.com/archives/2008....

Essentially the same thing as all of this thread - using professor-ish language.

Higher rates would also deliver a fatal blow to the already moribund housing market.

Politicians also believe that it is their job to save homedebtors who made bad decisions.

As Lera said, no one wants to do the right, smart, or adult thing.

This could get the Most_frightening-thread-of-the-month award. Leraconteur, if the equation is that simple, why are they going down that road? Have they just painted themselves into a corner, do they have another endgame planned, or ... All the other CBs are doing the same, there must be someone somewhere who knows exactly what you knows, and acts rationally. Most likely they know more, what part of the picture are we missing?

i agree varg, i would like that question answered. if it's that painfully obvious then why go down that road? lera? c'mon, we know you're there! ouroboros?

When I looked into it this came down to the M1 number not including borrowed reserves while M0 does, or checking accounts disappearing.