US printing money?!? I need some help with Macro Economics

[German-Lefty]

I did some digging to find out why the dollar keeps going down. Is the US gov. printing money? Wouldn't it be nice to know how many dollars are out there! Here's some stuff I found out:

The fed uses three ways to count the dollars in existence this figure M1, M2, and M3. M2 is considered the best. During the 80s the Fed used to watch M2 to make monetary decisions. By 2000 they had decided it was worthless. The money supply (M2) has gone from 3.5T$ to 6.5T$ since 1995!

Or make your own graph here:
http://www.economagic.com/em-cgi/charter.exe/fedstl/m2ns

Now to me this seems like a big deal. About 2T$ dollars were printed since Bush took office. Could this be the cause of the dollar sinking?

I need some help from people who understand macro economics. I don't understand 100% how the fed works. Tell me if I'm right about these points:
* I read here that the magic moment when the Fed creates new money is when it buys bonds in open market transactions. Is this the main or only way new dollars are created?
http://ingrimayne.saintjoe.edu/econ/Banking/FedMonPol.html
* How does this tie in with deficit spending? My gut feeling is an increase in deficit spending leads to an increase in interest rates or if the fed fights that, an increase in inflation. I don't understand the mechanism very well.

My guess: the US sells bonds. This sucks money out of the banks to buy the bonds. The banks having less money will raise thier interest rates(inter-bank rate). This would normally hurt the economy. To keep interest rates low, the Fed prints money and buys the bonds from the banks. This keeps the interest rates low, but increases the money supply, leading to inflation. Did I get all that right?!?

[kick-ass-bob]

1. The printing of dollars and the Fed's actions are not the same thing.

The Fed does not print currency, they manipulate policy by buying/selling T-bills. Printing of currency usually is only to replace old dollars, as they have a life of about a year. I have not checked to see if they have been printing more than normal, but, by itself, having more currency would lead to a lower value. (Think, beanie babies, if there are a lot of one, it is worth less than one that had a limited production). But money is much more than just currency, especially in the US.

That last site's explanation leaves a lot to be desired, I'm going to go look for something better.

[kick-ass-bob]

2. This explains the effects better...

http://economics.about.com/cs/money/a/policy.htm

[rockymountaindem]

3. The value of the dollar can be impacted by many things...

The important thing to remember is that national currencies are traded like any other resource. Therefore they are impacted by supply and demand which influence their values.

The first supply and demand issue is others' demands for our US dollars to buy our goods. If people don't want to buy our goods, then they don't need as many US dollars to purchase them. This drives down the dollar. If, on the other hand, everyone is gaga over US goods, they'll need to stock up on US dollars before they can purchace them. This will drive up demand and increase the value of the dollar.

Another influence is government printing. The more dollars that are printed, the higher the supply is. From here it's rather simple; more supply, lower demand. One reason the government prints money is to replace paper currency that wears out. US paper currency has an average 18 month lifespan. Therefore, it is possible to print dollars without having an effect on the value, because as paper money wears out and is disposed of by banks, that keeps things relatively stable. However, if the government is ever in crisis, they can print a great deal of money, which will drive up the supply.

Now for interest rates. This is kind of tricky. I'm not completely educated in all this yet, but from what I understand, there are two reasons to raise and lower the interest rate. One is to regulate the pace of the national economy, and another is to regluate the value of our currency.

Every economic boom is followed by a slowdown. If the economy is growing by leaps and bounds, the ensuing slowdown may be quite harsh. In this situation, the government may raise interest rates little by little in order tap the breaks on the economy and make the ensuing slowdown less severe. On the other hand, if the economy is lackluster, then lowering the interest rate may lead to a pickup.

Secondly, interest rates effect the return on our bonds. If people have high confidence in our ability to repay our debt, they'll accept a low rate on our bonds. If they're not confident in us, then they'll want a higher rate to justify the higher risk that we may not pay them back.

Hope that helps.

[On the Road]

4. The Dollar's Decline

is largely a matter of market psychology -- how currency holders view the future of the dollar. Part of that comes from expectations of future inflation, economic growth, and balance of payments (whether the US will keep buying imports with US dollars that someone has to hold onto). It also involves how likely it is the US government will default on the debt. Even though that's a remote possibility, the market's very sensitive to those things.

The US isn't printing excess money to spend the way small countries sometimes do, or the way Germany did in the Weimar period. The Fed has allowed the money supply to grow a lot, which is OK as long as inflation is kept under control. As I understand it the chief means of increasing the money supply is by regulating how much financial institutions can lend and how much they pay the Fed for short-term loans. But the effect on the dollar is indirect -- the dollar has been strong during many periods of increasing money supply, like the late 1990s.

Another long-term factor is that up to now, large international transactions like oil contracts were often done in dollars. The dollar was used like an international currency, which kept demand for the dollar high and the value of the dollar up. But increasingly, the Euro is being used partly because it's seen as a more stable currency. (For example, before the invasion, Iraq was switching from the dollar to the Euro.) Governments and corporations don't need as many dollars, reducing the demand and driving the value of the dollar down.

Just like the stock market, there are all kinds of other factors which can surprise you. China and Japan want to keep exporting to the US, and have an interest in keeping the dollar high. So they keep buying dollars to support the currency, even if it's a questionable investment.

As I understand it, the value of the dollar is like any market commodity -- it's affected by supply, demand, and expectations. M2 and government bonds are involved indirectly, but are not the prime movers.

Note: I'm in business management but am not an economist. Maybe a more savvy DUer can correct me on some of this.

[oecher3]

6. dollar is like any other good affected by supply and demand

demand can be anyone who needs dollars and wants to sell other currencies, like tourists,
foreign companies having to employees in dollars but don't have any themselves, people wanting to invest in the US, b/c the interest rate is greater here than in their country.

supply can be anyone who doesn't need dollars, speculants on, savers, companies having to pay bills in foreign currencies, government loans to tsunami struck countries.

Of. course the U.S. Government and Federal Reserve can act as supplier and demander of dollars as well, if they are willing to use the foreign currency reserves they have.

The money market, supply and demand of money, like M2, alone is also indirectly an influence on the foreign exchange market. Since this money market influences interest rates and those can spike an inflow of money or outflow of money to or from the US. But for the foreign exchange market one has to know what people of other countries are doing or what US citizen or companies do in foreign markets, it's in relation to the others currencies.

[On the Road]

7. That's True,

although supply and demand is influenced by all sorts of economic factors, expectations, and international pressues that don't usually apply to demand for ordinary products.

You could say that stock prices operate by supply and demand, too, but that doesn't give much insight into why particular stocks go up and others go down.

[oecher3]

8. but the dollar is a very specific "stock"

it is a signal that shows more than just lets say one tiny tech stock. It is as if GE or another large Blue Chip, or better all blue chips altogether move in one direction.
You can tell by the shock what the dollar will do. There are only so many important currencies in the world., like yen, euro, dollar, that a remark, i.e. by Treasury Secretary Snow two weeks ago, send the dollar rising against the euro and now the dollar falling against the euro, b/c foreigners doubt that the debt is going to be reduced.

Maybe, I am not quite sure what you are trying to say "that doesn't give much inside into why particular stocks go up and others go down." In my view, the dollar ups and downs are much easier to explain than some stock movements, and than again that can sometimes be easily explained, too.

What was your point again? Sorry.

[On the Road]

9. My Point Was That

the number of factors that influence supply and demand are much greater for a currency than they are for products like lumber or automobiles. For most products, supply is driven by production capacity and estimates of demand; demand is driven by discrentionary income (for consumer products) or anticipated production (for businesses).

Using only those factors to understand supply and demand for stocks (stock prices) or currencies would leave most price movement unexplained.

Financial assets, whether they be stocks, bonds, or currency, are in some sense driven by supply and demand, but it's of a very different sort and includes all kinds of factors you don't see in other markets -- estimates of future interest rates, economic growth, gvoernment debt, and national mercantile policy including which currency a state prefers conducting business in.

I was just trying to elucidate the "supply-and-demand" aspect of currency. No specific criticism or axe to grind.

[oecher3]

10. good point in your last response - I gotcha! n/t :-D

[oecher3]

5. here is how it works...

1.) The U.S. Treasury Dept. issues U.S. Government bonds. These are I-Owe-You's (IOUs) from the Government. They give those to the Federal Reserve for the safe-keeping.
2.) The Federal Reserve Open Market Committee can sell these bonds to banks, thus influencing the interest rate, not setting it, by allowing x-amount of bonds to circulate into private hands.
3.) Banks give money to the Fed to buy those bonds. But this is a contraction, hence M2 would shrink.

Here,
The Treasury Dept. gave the order to print more bonds, in order to get more money from the Federal Reserve Bank. They buy the right to print more money. That's why the national debt is rising so much. The Bush administration is printing IOUs in form of government bonds, like the Treasury Bill (T-Bill), and gets the right to print money for it, or a nice extra balance in their account at the Federal Reserve Bank, which is also the Bank of our U.S. government. That is also why the interest rate drop in the market, the more bonds are available to more money is in circulation (look at money multiplier theory) and the less the government is willing to pay in interest for borrowing from the public.

This is an active measure of the Fed to counteract the slow economy. By bringing more money in circulation and dropping interest rates (a signal to the banking industry), companies are more willing to invest into new technology, sometimes even hire workers (but that isn't the case so much - thus a "jobless recovery") and hence get more money to their partners or employees. And everybody feels better and spends more, more is produced and the economy swings back into gear.

HOWEVER, this is a temporary measure and very difficult. It often brings along inflation. People have more money and are willing to pay higher prices, more demand for goods and companies raise the price of goods! And with the national dept, all those IOUs the government gives out, interest has to be paid from the governments pockets.

How do you pay these interest payments as administration?
a)
Write more IOUs, but that is working only so long as people believe you are one day being able to pay back not only the interest but also the money borrowed. Look at countries like Venezuela or Brazil, where government gave out bonds with 30% interest and nobody would buy them be/c everyone new they would never get their money back, if lucky the interest was paid!
or
b)
RAISE taxes so you have enough income to pay back what you borrowed.

That is why so many people are outraged about giving tax cuts at the same time as running up enormous debts! There is nothing wrong with giving the economy a bit of help, in my opinion, but not with the sledge hammer of both tax cuts and trillions of new debt.
Responsibility means with temporary doses and not permanent or as incentives to companies that don't create new jobs.

or
c)
Inflation would help, too. Now the debt to be paid back is not so much any more. But it also shows lack of credibility of your central bank (or lack of independence) to fight inflation. A bit is not dangerous, only the hyper inflation is hard. Think of Germany in the 30s. Not quite sure this is a proper way to go about it and don't trust any government that allows high inflation rates!

Anyway, you see there is a direct connection between the Fed and US treasury. If they act independent fine, but it seems lately that Secretary Snow and Alan Greenspan have too many meetings that in my view there is a strong question mark behind the independence of the Fed. Nor is it proved in my eyes that supply side economics of shoving money into the hands of corporations and the rich helps efficiently getting the economy going!

[stevebreeze]

11. while the tax cuts did have some limited stimulus effect

they could hardly have been designed to have less. The largest amount of stimulus was forced on them by the Dem's and poor publicity it would have forced by giving ONLY to the rich instead of primarily to the rich as was done.

[Rapier2]

12. notes

Where to begin?

I've started seveal times and am defeated. There is no shame in not getting all these matters of money and finance. It is too bad so few people even try to understand it because it isn't all that hard to understand the basics.

Understanding money is made difficult I think because money is so personal and emotional and so integrated into everything we do. There is an almost universal idea that matters of money must be left to the high priests of finance. There is also the matter that progressives often take pride in dismissing matters of money and finance as a point of honor. In many seneses this is an honorable thing particularly on an individual basis but it has had devastating consequenses politically for within the world of finance gone mad, which is todays economic reality, lies the cause of so many of our complaints. Not only economic compliants but also our cultural and political ones.

As to your questions and proposed answers they are so far off the mark or at best half right as to be sort of cartoons. Again, don't take that as a slam.

For understanding money there is no better starting place than JK Galbraith's 'Money'.

[German-Lefty]

18. Am I at least right about where the money comes from?

As to your questions and proposed answers they are so far off the mark or at best half right as to be sort of cartoons. Again, don't take that as a slam.
Well so far nobody has said if I'm right or wrong about the fed creating the new money for open market transactions. When they bonds from the open market, I'm guessing they print the money. Ok they don't "print" the money; the Fed credits banks' reserves, but that's equivalent to giving them cash.

[Rapier2]

21. notes

When the Fed purchases Treasury paper in open market operations,called repos, they are said to be monetizing debt. This operation does increase money in the system but they don't pull that money out of thin air, just 'print it' so to speak.

The Fed is a bank and they have the cash. Member banks are required to hold cash accounts at the Fed bank. How much they have I don't recall and am getting to the limits of my knowlege. However much they have it isn't really a lot in the big picture. Let's say they have several hundreds of billion at hand but M2 is in the trillions.The total amount of Treasury bonds notes and bill extant, which IS the debt, is over $7 TRILLION. They do not have enough to expand the money supply a great deal over the long term.

Their repos are usually for periods of just days. Overnight,2 day, 5 day, 14 day repos are the norm. Today, 1/24, they did a $4 billion dollar OVERNIGHT repo. Also today $1.75 billion in repos expired for a net add of $2.25 billion. That sounds like alot but really isn't. This week alone they are auctioning over $30 billion in 20 year bonds and 2 year notes, as well as the usual 13 and 26 week Tbill auctions. Nowdays that isnt a big week. Mitigating those huge numbers is the fact that much of this is to replace old expired paper. In other words holders of bond just expriring who relend the money. This is a rolling over of the debt, not an addition per say.


The Fed has been 'expanding it balance sheet' of treasury paper at a fast clip for quite awhile.

The thing about these transactions is they have nothing to do with the banks. Virtually ALL these repos are done with their dealers. The so called primary dealers, the gang of 23 mostly Wall Street firms. So this is high powered money. The dealers have inventories of the Treasury paper. This afternoon they traded that for the above mentioned $2.25 billion in cash and of course put it right to work, one assumes much of it probably going into their own trading accounts.

I'll go no further in this. There ARE big doings here. However they are not secret, nor underhanded. Money isn't being 'printed'.

[German-Lefty]

27. Ok, but if I'm wrong, who does it work?!?

When the Fed purchases Treasury paper in open market operations,called repos, they are said to be monetizing debt. This operation does increase money in the system but they don't pull that money out of thin air, just 'print it' so to speak.

The Fed is a bank and they have the cash. Member banks are required to hold cash accounts at the Fed bank.
Ok, but in the long term where is the new money coming from? In the long term the money supply is growing. If the open market ops don't introduce it, where does it come from?

* Decreasing reserve requirements would increase the deposit creation multiplier increasing M2. However I don't think they can use this in the long term, because you can only go so low.

* Decreasing the discount rate could increase the money supply, but only in the short term. In the long term the banks are borrowing money from the Fed and paying interest to her.

Am I missing something here? Is it possible for the banks to loan the money from the fed, multiply it, and then pay the original back? How the hell does it work?!? Look at the currency part of the money supply (M0), it's growing. How? It can't be that every actor in the system doesn't create M0, treasury, Fed, banks, private sector.


Sorry I'm getting a bit frustrated here. It feels like this is some strange gaurded conspiracy with a "someone else's problem field" around it.

[oecher3]

20. got the RIGHT answer?

"As to your questions and proposed answers they are so far off the mark or at best half right as to be sort of cartoons."

I challange you to find a better answer, or at least refute the ones that are wrong in your opinion! :D

[Rapier2]

13. Notes

OK, instead of trying to answer all the questions I'll dabble in them one at a time.

MONEY SUPPLY
There are four measures M1 to M3 and MZM, which is money zero maturity, the broadest measure of all. If you want the data on the M's then go here http://research.stlouisfed.org/fred2/series/M3SL/28
That is the St. Louis Federal Reserve Bank, the main keeper of these things. They also keep all sorts of data on money flows in the banks and the financial markets.

You are right that in the 80's the money supply was a big deal and was said to be used by Volker's Fed to set monetary policy. Usually the Fed looks at broad measures of economic activity then selects the interest rate it wants. (They only set the shortest of short term rates, not all rates.) In order to kill the inflation of the period Volker and the Fed used this targeting of money supply growth as a sort of excuse and political cover to raise rates to the highest in history. This sort of thing is always unpopular of course but there was at the time a broad consensus that slowing money growth was the right thing to do.

That consensus sprang from the work of 'conservative' economist Milton Friedman. Most will rememer him as the most lauded economist of the time. His main work, for which he go the so called Nobel Prize in economics was for his theory that inflation was TOTALLY a monetary phenomenon.

While probably true in the broadest sense there have been some interesting twists and turns concerning the theory. The main twist is that Freidman himself rejected his own theory about 4 years ago. Yes, that's right. Moneterism is dead, as declared by its own high priest.

Why is that. Well if you go look at the long term charts of the various M's you will see that starting in the mid 90s they exploded upwards. You also must know that inflation, as measured by the CPI and various other indexes has been tame to absent during the period.

That would seem to be all the proof necessary to bury the theory. Well it would but there is a form of inflation that is not recognized as inflation. It is a form of inflation that benefits the top rung. That is the inflation of financial assets. Think stocks. Other forms of financial assets have inflated as well. Real Estate has too but the government inflation numbers do a good job of masking the inflation of real estate, especially residential real estate.

So there was inflation during the doubling of the money supply over the last decade but it was inflation of assets. Now it is verbotten to even broach this idea in the mainstream. No, stocks and financial assets of all kinds and real estate have gone up because their 'value' has risen is the conventional wisdom.

Freidman himself never considered asset inflation as inflation after all so it's little wonder he was willing to abondon his theory. Besides, his main clients, Republicans and 'conservatives' have reaped gigantic rewards from the inflation of assets so it would be rather silly of him to point out that their newfound wealth was not the result of genius or hard work or the triumph of their ideology but rather plain old inflation. That's is what it has been afterall. Plain old inflation as the money growth has mostly gone into bidding up the prices of assets.

While jobs and income from jobs have been totally flat for several years now, a record only matched in modern times in the depression the conventional wisdom is that the 'economy' is doing OK. How is that? Because while there was a scare when the stock market swooned in the 2000 to 2002 period they have recovered and housing prices have marched relentlessly higher. So everyone who owns these assets feels wealthy.

In fact it could be said the we now have an asset based economy. EVERYTHING economic is now contingent upon the maintenence and further inflation of asset prices. The record setting Fed engineered plunge in interest rates starting in Jan 01 was aimed firstly at inflating the financial world. Yes, that inflation has engendered a worldwide spurt in growth,expecially in asia but that was a secondary result.

As everyone knows America is suffering huge trade and budget deficts. The best way to look at this is that we are consuming more than we can afford so we borrow in order to keep consuming. (Econ 102 explains, partially, why borrowing is the engine of monetary growth. Something I may try to get into in another post) The key to our willingness to borrow and spend is the feeling of 'wealth' engendered by the inflation of our assets. Stocks and financial assets for the elite and residential real estate for everyone else. The serial mortgage refi booms and the home equity borrowing boom has been the thing which has kept our consumption going thru the 'recession' of 01 02 and right on thru today

(There is additionally a self reinforcing cycle in all this. When assets prices inflate we can borrow using the assets as collateral. Then the borrowing goes into more buying of the inflating assets which continue to inflate so more borrowing is engendered, and so on and so on. This is espeically evident in residential real estate but plays out in the totality of the financial world as well)

It is the reason why things in aggregate appear not so bad despite the fact that the job/job income trends are at depression levels.

I'm running out of breath. I'll continue later if anyone cares to encourage me. The main point now is to understand that the stupendous monetary growth of the last decade has gone into inflating asset prices and that has lead to the perception that we are building wealth.

In fact we are not building wealth. If Adam Smith heard this story that inflated assets were wealth building he would retch. Inflation of assets as the main measure of wealth building is in fact an abomination of market, or so called 'free market' capitalism. Traditional capitalism recognized real cash flow profits and savings as the source of wealth building on a national scale, as in The Wealth of Nations. Real cash flow profits and savings in America are in the dumpster and the cognitive and ideological ju jitsu used to ignore this fact will someday be exposed as the lie that it is.

[DaedelusNemo]

14. Encouragement! Interesting stuff

The main question i'm left with is 'how can value be effectively distinguished from money, its symbol?' Is there a way to measure whether a price has gone up due to inflation or due to increasing value?

[Rapier2]

15. notes

I suppose this gets into philosopical or at least semantic issues. I can offer no final answer.

When the cost of living was rising relentlessly in the seventies did anyone ever say it was because the 'value' of the things you bought were rising? Of course not.

Prices should rise when supply falls behind demand, that most basic of economic equations. In that case the value of the thing rises. Almost inargueably the inflation of the 70's which included the rise in price of almost everything was not primarily due to the supply demand balance. You might recall that during the period the term stagflation was used to describe conditions. Economic growth was not booming. Overall growth was below the post WWII trend which strongly implys that the supply/demand equation was not resposible for the rising prices.

Shifting to the inflation of financial assets and real estate I propose the first evidence lies in the most basic measure of 'value' of stocks. That is their dividend yeild. The long history of stocks says that the average dividend return of stocks is 3%. Currently the dividend yeild of the Dow aveage is below 1%, the S&P is not much higher and the NASDAQ, well the NASDAQ for the most part is comprised of stocks which offer no dividend at all.

There has been a relentless PR campaign dating to the bubble years and before which said that dividends were no longer a good measure of value. In fact it is now the recieved wisdom that it is better for corporations to keep that money and not pay shareholders because the companies themselves are better at 'investing' that money in order to grow. While this is a nice arguement let's be clear on what 'investment' is. A thing can only be called an investment if it offers a good chance of a positive cash flow return. If money is put into anything purely on the chance or expectation that it's price will rise is not an investment it is a speculation. Buying stocks without any expectation of a reliable dividend return is thus a speculation.

If you think that is semantics then consider nearly half of much vaunted long term return of stocks, variously quoted at around 10%, was in fact due to the dividends paid by stocks. As it currently stands with dividend yeilds around 1% stocks must appreciate in price 9% a year just to match that average. (That 10% a year thing is actually bogus because it inevitably based upon stock indexes which are shifting things. If you held the stocks in the DJIA from the 20's today you would have a portfolio consisting of mostly worthless paper stock certificats, most of the companies now being defunct.)

One can believe down to your soul that stocks are properly valued today but to beleive that is to belive we are in a new era. That things are different now. One way or another that is the arugement being drummed into us every day but for me I go with history. History says stocks are overvalued because they are not returning a proper cash dividend.

How about residential real estate? Let's look at the value of that against that against cash flow return. For huge swaths of the nation it is impossible to rent out a home and make a decent cash return on it vis a vis either its current 'value' or against its cost in terms of mortgage payments and taxes. Everyone 'knows' home prices almost always go up so they think of it as an investment. Again wrong. Counting on profit simply due to increased price is simply speculation.

Ask yourself how wealth is really created if the price of assets increases yet there is no cash return which can be saved or reinvested. The answer is that individually the holder of the inflating asset is richer but as a nation we are not.

Getting back to the monetary aspect of this. When credit is cheap and plentyfull (crdit being the mechanism of money 'supply' growth) it is human nature to use that the new money, the liquidity, to move into markets which are inflating. In the inflation of the 70's the hot money moved into things. Since the 80's the money has been moving into financial assets. Real estate has been the benificiary in both periods but this time it has been fueled by the easy money mortgage mania.

My arguement\, that inflation in either case IS a monetary phenomnon.

Now we get into a very tricky political aspect of this. America's money from its founding was mostly gold based. This was 'hard money'. By the late 1800s the forces of hard money, that being Wall St. and the financial elite were under attack by the populists who wanted easier money. While a straight line from the populists and progressives of that era to this is probably misleading it must be understood that until just now it was populist, and anti reactionary for Americans to suspect hard money went hand in hand with slow growth, limited economic opprotuntiy and domination both political and economic by finance and the financial elite.

Now things are being turned 180 degrees. If your getting my gist it is obvious that I am now bemoaning easy credit and easy money. Even more strangely one occasionally finds that here and elsewhere among liberals and progressives some sentiment for hard money up to and including a return to strictly gold based money.


Whatever the politics it should be understood that the American economic powerhouse of the last century was primarily due to financial innovation and by extension credit and money creation. Was wealth created? Yes, without doubt. Also created was a crass decadent consumer culture, environmental destruction and the ability, if not the necessity of military/political adventurism.

In essence what is understood to be the American way economicaly is based in the end on some degree of monetary inflation. Inflation is the grease which makes things move. During the 1800s decades of stagnation were the norm under the hard money regeim. IF one looks at poor nations everywhere they always have economic systems which limit credit and money from the masses.

In pointing out the issues related to money and credit, economics really, one will always find things to criticize. As in all things human perfection will never be achieved. Hard money is no more a cure for our problems than profligate credit and money growth. What is necessary for the greatest degree of individual freedom is for the system, any system to be made responsive to the maximim number of people. not the elites. For excesses to be minimized.

We are in a period of financial excess the likes of which have never been seen and any unraveling will bring tremendous pain and change. While I belive that day is close and inevitable I may be proven wrong. If I'm right then it is vital to know the causes and for that knowlege to be made widespread. For if it isnt than the vast propoganda machine now in place will place the blame for the troubles in the wrong place. On us, the liberals and the 'others' of all stripes, domestic and foreign and the growing fear of some sort of facist regiem will be put into place, with the consent of the people, such as it is with todays sad weak deomocratic political process.

[German-Lefty]

17. CPI isn't seeing inflation, how not?

Well if you go look at the long term charts of the various M's you will see that starting in the mid 90s they exploded upwards. You also must know that inflation, as measured by the CPI and various other indexes has been tame to absent during the period.

That would seem to be all the proof necessary to bury the theory. Well it would but there is a form of inflation that is not recognized as inflation. It is a form of inflation that benefits the top rung. That is the inflation of financial assets. Think stocks. Other forms of financial assets have inflated as well. Real Estate has too but the government inflation numbers do a good job of masking the inflation of real estate, especially residential real estate.

So there was inflation during the doubling of the money supply over the last decade but it was inflation of assets.
Ok, yes I've also wondered if perhaps what we're seeing when the stock market and GDP rise is the dollar really just falling. If this were the case though there would have to be some mechanism to manipulate the market prices of Capital vs. consumer goods.

* I mentioned foreign exporters like China buying up our dollars, which in a way is a subsidy keeping their goods cheap in dollar in the US. I wonder if that affects the CPI.
* I think you kind of lean toward the stupidity breeds stupidity view of the prices. People see rising real estate and stock prices and therefor assume they'll always rise and invest in a pyramid scheme.
* Someone might try to connect the dots to a Fannie Mae/Freddie Mac trick to inflate real estate prices?

I'm not trying to encourage too much tin foil hat stuff here, but there would have to be some kind of manipulation to explain unnatural or increasingly unnatural prices.

[German-Lefty]

16. I think I'm right then, here's a simpler way of looking at it

Sorry I've was gone for the weekend. I've been trying to come up with a simplified model for this stuff.

Let's say there is only one type to T bond. It has zero interest and they all expire 10 years and pay 1 dollar. The value of such a bond is the value of the currency in 10 years. If there is no inflation or risk of default, the yield of such a bond would be determined by the market and would equal the going expected rate of return on private sector investments. If your investment idea will only find investors, if the expected rate of return exceeds what they'd get investing in bonds.

Deficits
If the government borrows and spends, it trades dollars 10 years from now for dollars now. This will have a negative impact on the economy. What happens is that yields will have to beat the private sector's rate of return. Instead of investors investing, they loan to the government. As long as there is no threat of default or inflation, this borrowing won't effect the money supply now or in 10 years. Fiscal policy and monetary policy are independent.

Fed Open Market Operations
Here's where I think the money is being "printed" (created). The fed buys back the government bonds in open market operations. The money used to do this did not exist before. (Correct me if I'm wrong.)

This increases the money supply now as well as in 10 years. This is fine for keeping away deflation. The money supply should grow as the economy grows, if goods are to maintain constant prices, all things like velocity, reserve requirements, etc staying constant.

My theory what may be happening
In order to keep the interest rates lower the fed has been buying bonds with this "new money". That is printing money that's good now, and with it buying money of the future, 10 years ahead in our model. Essentially what this is doing in conjunction with the regular treasury, is printing money:
A) Congress spends 1B$.
B) Treasury auctions off 1B$ worth of bonds say for 1.5B$ in 10 years.
C) The fed buys back those bonds for ~1B$.
A+B+C=) Congress prints 1B$ and spends it.

Now that's ok, as long as the amount of new money is in line with economic growth. My theory is that it isn't. Looking at the graphs of M*s they don't seem to slow down with the recession/slowdown. We've seen a ~40% increase in M2 since 2000, but we haven't had a 40% increase in GDP/velocity have we?

The exchange rates do show the dollar falling ~40% during this time period. Next Question: Why is there still so much domestic demand for the dollar? I imagine part of it may be that consumer goods (which the CPI use) are made by the likes of China which are artificially keeping their currencies low relative to our dollar.

Does anyone know where I can find numbers for how much the Fed, "prints" and spends in open market transactions? Some of M* increasing may be due to the other two instruments discount rate and reserve requirement.

[oecher3]

19. only quick since I have to leave soon...

...
inflation is usually the included "price" or interest rate. A bonds interest rate reflects the expectation of future price as well as the current price level. In other words if bond buyer/seller expect high inflation in the future, so the price for buying that bond has to reflect this expectation, or they want to get as buyer at least more money back in interest to cover the loss a value due to inflation.

As for your open market operations, government bonds can be printed and create new money if sold the fed to receive money/credit balances for the government and to the government only! Otherwise it makes no sense. If the fed sells already existing bonds, they would tighten the Ms by taking money out of circulation. They would only expand Ms by buying bonds back, but that would bring an upward pressure on interest and that hasn't been the case. Correct me if I see this wrong.

Fed operations should be found in their notes from FOMC meetings, but they are published 3 weeks later.

[Rapier2]

22. notes

That's what the textbooks say. That is what rational actors would do. With the caveat that the biggest factor is TODAYS inflation rate. Few pretend they can predict the inflation rate 10 years out.

The CPI last year was over 3% and the average yeild on the 10 year Treasury Notes was probably about 4.25%. That means a real return of 1.25%. Thruout American history the benchmark for expected real return on Treasury Bonds was 3%.

The credit markets are broken. Interest rates are too low. Ultra low interest rates have DISCOURAGED savings. Little wonder the household savings rate is now about ZERO.

Instead we are forced to SPECULATE in stocks and real estate and they call it INVEASTMENT. With no cash return of course. Just the hope it will make us rich latter.

Why are the credit markets broken. Long story. I dont know it all. Think Greenspan and the Wall Street paradigm. (The latter instituionalized under Clinton/Rubin)

Of all the delicious ironys in todays world none compare with the worship of Greenspan and his supposed control of interest rates and the markets. Firstly the control of interest rates, such as it exists within the Fed, is anathma to 'free markets' yet the free market accolates and priests adore it. Go figure. Then the idea that one man controls the markets, Greenspan, is another several orders of magnitude removed from individualism and free markets so as to be incomprehensible. Turgocharged cognitive dissonance reigns supreme.

[oecher3]

23. you have a good point here...

It does seem like the credit markets are broken and there is a famous example of a country, which went through an almost exact similar problem: Japan. Close to zero real rate of return while a stock market can offer at least 8% unless you are really playing it bad. Not a good omen.
(This should give velocity another kick, since no reserve requirement can slow down money creation, the money is invested in corporal capital and dividends get re-invested, or speculation of small margin gains in short-term investment keep the money in the market.)
Additional there is a house market bubble in real estate, where it is almost impossible to get turned down for any kind of financing, no matter to what value (up to 110%). Talking about unhealthy risk.
Finally, I do find Greenspan's behavior under Bush weird. He seems a different person than under Clinton.His reactions are less careful and almost counterintuitive. Now he wants to raise interest rates as fast as he can. Temporary low interest rates to get the economy going are not bad, right that is textbook. But without seeing much improvement now that the election is over, boom, they are supposed to rise. Now we have inflation thread that we don't see in the CPI. Oh, and sorry, it was another jobless recovery, like Bush I.

[German-Lefty]

24. No, I think this explains the low interest rates

As for your open market operations, government bonds can be printed and create new money if sold the fed to receive money/credit balances for the government and to the government only! Otherwise it makes no sense. If the fed sells already existing bonds, they would tighten the Ms by taking money out of circulation.
Yes if the Fed wanted to, they could make new bonds and sell those to tighten Ms. I think they're doing the opposite in net, making new dollars and buying up the bonds.

They would only expand Ms by buying bonds back, but that would bring an upward pressure on interest and that hasn't been the case. Correct me if I see this wrong.
No I think you're wrong. As long as inflation isn't effected, buying up bonds should increase their price, decreasing their yield. This fits, the low interest rates.

What I'm not so sure about is the effect on inflation or expected inflation. If you steadily pump out trillions of new dollars won't people expect inflation and demand higher bond yields? Or maybe the bond prices don't reflect the inflation, because banks expect to be able to sell them back to the Fed way before they mature.

Arg, I'm still kind of lost.

[oecher3]

25. getting closer?

"Yes if the Fed wanted to, they could make new bonds and sell those to tighten Ms."

Don't get confused, the Federal Reserve Bank can't issue bonds, it is the Department of Treasury that issues bonds, in other words the federal government, to keep central bank "independence", although it seems that Mr. Greenspan is working closely with Secretary Snow, so the Independencece is to be debated.

"What I'm not so sure about is the effect on inflation or expected inflation. If you steadily pump out trillions of new dollars won't people expect inflation and demand higher bond yields? Or maybe the bond prices don't reflect the inflation, because banks expect to be able to sell them back to the Fed way before they mature.

Arg, I'm still kind of lost."

This is, if people realize that the " money press" is running. And I do think people feel confused in terms of wages, they don't seem to be increasing much (in some cases seem to be decreasing -- or laid off). So they don't see their monetary base expanding. Interestingly enough, I suspect that the in-debtness of most household is increasing; however, consumption is not effected. So this is not quite picture book perfect! Is there maybe misperception of how our economy is doing in the view of the average Joe Doe! Maybe the propaganda press of B* and Co is so well functioning that people do not anticipate inflation or refuse to see it. Would it be inflationary, if the wages go down but prices remain at the same level? So to speak, the relative price-to-wage ratio increases with the CPI constant. After all this is a jobless recovery we are experiencing.

From a personal standpoint, I am looking for a job and people are now hiring, but they hire a) at salary level that is 50% below what it was before the bubble bursted and b) they expect a senior level of experience for an entry level position. The only explanation I have for this is that they laid off experienced people enough to hire them now back at a lower salary level, a sort of downward wage correction, without hiring new graduates.

[oecher3]

26. check out this one...

Paul Krugman, The New York Times
http://www.iht.com/articles/2005/01/25/opinion/edkrugman.html

Wednesday, January 26, 2005

PRINCETON, New Jersey Alan Greenspan, the Federal Reserve chairman, is expected to retire next year. The Bush administration, because of its nature, will have a hard time finding a successor.
.
One Fed chairman famously described his job as being to "take away the punch bowl just when the party gets going." Bond and currency markets want monetary policy in the hands of someone who will say no to politicians. When a country's central banker is suspected of having insufficient spine, the result is higher interest rates and a weaker currency.
.
Today it's even more crucial than usual that the Fed chairman have the markets' trust. The United States is running record budget and trade deficits, and the foreigners we depend on to cover those deficits are losing faith. According to Monday's Financial Times, central banks around the world have already started shifting into euros. If Greenspan is replaced with someone who looks like a partisan hack, capital will rush to the exits, the dollar will plunge, and interest rates will soar.
.
Yet George W. Bush, as you may have noticed, only appoints yes-men (or yes-women). This is most obvious on the national security front, but it's equally true with regard to economic policy. The current Treasury secretary has no obvious qualifications other than loyalty. The new head of the National Economic Council apparently got the job because he is a Bush classmate and fund-raiser.
.
Of course, Greenspan himself has become a Bush yes-man. When Democrats held the White House, the chairman acted as a stern father figure, demanding fiscal rectitude. But he turned into an indulgent uncle when Bush took office. First, he urged Congress to cut taxes in order, he said, to prevent an excessively large budget surplus. Then, when surpluses were replaced by huge deficits, he supported a highly irresponsible second round of tax cuts.


--- Does this one help?

[German-Lefty]

28. I found some numbers, I think I'm right. Help!

http://zfacts.com/p/480.html
Debt held by the Federal Reserve System is purchased by printing money; the purpose of these "open market operations" is to put more currency into circulation. The most recent figures used for this part of the federal debt are available from the St. Louis Fed.


It's at about $700.3B and grew about $50B last year. Now that may not seem like much. It's <1% of our deficit, but remember this is 100% real money(M0). Look these numbers are almost identical to the "Currency Component of Money Stock"


http://en.wikipedia.org/wiki/Money-creation_primer
The money multiplier effect says:
Total Deposits = Deposit / cash reserve ratio
So the current cash is ~700B, not all of which will sit in banks multiplied, but we can calculate an upper bound on M2. Let's say the Federal Reserve Requirement was 10% (actually it's only 3% for the first $47.6 million). Anyway we have:
TD= 700B/0.10 = 7T$
This matches the slightly more than 7T$ M2. Ok that looks good.

This may sound radical, but here me out. Even though the fed is printing 50B$ last year in M0, it is actually printing ~500B$ in M2, because of the multiplier effect.

Picture this story:
1) Treasury loans 50B$ in a year and spends it.
2) The banks buy the 50B$ of bonds.
3) The banks sell them to the fed for 50B$.
4) Then people show up with the money and deposit it in banks.
5) The banks have to take 10% of the deposited money as reserves.
6) The banks take 90% of the money and loan it to the government to spend.
7) Repeat steps 4-6 until all the money is sitting as reserves.
The end result is that people have 500B$ more sitting in bank accounts. The government has spent 500B$, but no taxes had to be collected. In other words ~500B$ of last year's deficit was payed for by the printing press.

Question: Why would the banks participate, especially at such low interest rates?
If the banks think the currency is going to decline, you'd think they'd invest in something other than the currency like stocks, real estate, or gold. One theory is that banking regulation such requirements on Risk Weighted Assets, make it hard for banks to put their money in non-dollar denominated assets.

I had a theory for a while that the 50B$ of Fed investment was driving down the bond yields, but that seems unlikely considering the 500B$+ being sold a year. HELP!

[Rapier2]

29. notes

RE: Debt held by the Federal Reserve System is purchased by printing money

This is wrong and wrong headed. There is no simple shorthand way to understand these things. Especially if one is looking for some sort of smoking gun which would explain everything.

Forgetting open market operations for a moment. Here is how money is created.

In preface you must remember that most 'money', what counts as currency in the M's isn't currency but is a bank deposit. A blip on a screen and a number on a peice of paper. That isn't to say that the money isn't real.

Fractional reserve banking is the mechanism of money creation. In the late 1800's this idea was controversial. Later it became orthodoxy. (It is orthodoxy in the bad sense now because there is a much bigger engine of 'money' creation nowdays, or at least liquidity, as the modern financial system has created new forms of money far more abstract than bank deposits. I won't get into that here.)

Banks have to keep only a fraction of their deposits on hand,

The other conceptiual thing to keep in mind is that it's best to think not of individual banks but all banks as being one so as to understand how the SYSTEM generates new money. We will just call it The Bank.

The Bank has $100k in deposits. Company Z comes in for a loan for $50K to buy some equipment. The loan is approved so the Companies account is credited with $50K. Now the bank has $150K in deposits. Money has been created. The bank can loan most of that deposit, since they dont have to keep it all on deposit. In reality all the money doesn't end up in 'The Bank' for lending but much does and therin lies the tale.

Simple as that.

You see most people think of getting a loan, like for a car then spending it and the money is gone. Yes, it is gone from their account at their bank, but some of it arrives in someones account in their bank, eventually, which is why I stipulated that it's best to think of just one bank. Thus fractional reserve banking creates money by creating deposits which allow more lending and more borrowing, etc. etc. etc.

While this is falling down simple there are cognitive blocks to understanding it due as I have said before our total immersion in money. For the ordinary citizen money means currency in the pocket or a bank statement they trust can be converted to currency in an instant. Currency is a small portion of what we call money. As I said most money traditionally was in bank deposits and household deposits were a small part of the total. If you think in terms of your little car loan you missing the big picture.

(Again, todays world of 'securitization' of assets is creating a tidal wave of 'money'. It isn't traditional money. Traditional for our purposes being bank deposits and paper currency, which are really abstractions. Older traditions of money meant gold and silver coins. Gold itself being an abstraction in terms of 'value', if you get right down to it.
Rambling on.... You see money itself is an abstraction. Perhaps that is why understanding it is so difficult. It seems so real, or maybe what it does makes it seem so real. Our dollars seem so real but someone from a few hundred years ago would laugh at the 'reality' of our dollars. While money is deadly serious, holding almost total sway over the life choices or even chances for individutals and nations never forget it's just a game.)

[oecher3]

30. correct!

I agree with your abstraction of money. That's how you get the money multiplier and it depends as said before on the velocity of money, how fast it changes hands and how much reserve is kept and what is isn't mentioned the risk that lenders take by securing a loan. I have noticed how many offers I got for a mortgage of 100-110% of property value (80% is considered risk-avert) and I did finance my house with 80% first mortgage and 10% additional mortgage (and got an offer for an additional line of credit that would be more than 10% of the value of our home). But this is a gambling strategy lenders are using. They count on the real estate bubble to continue and hope that they don't have to foreclose on anybody. This creates an extra momentum in the sense of velocity.

Fact is that M2 has increased tremendously and the question remains why.
I think it has to do with the exuberant deficit this country is facing and with the fact that debt is not considered a problem for risk assessment in financial markets.

[Rapier2]

31. notes

Debt creates money.

Think of my example.

Debt creates money.

Uncle Sams debt is small potatoes. SOme $7 trillion. Sounds like a lot doesn't it? But the total credit market debt outstanding in the US is now approaching $35 TRILLION.


It is an unrestrained disfunctional credit market which is fueling the money explosion.

Never forget however that the American people themselves have always loved credit. That love waxes and wanes, the latter when hard times hit but none the less it's popular. Blame our leaders for sure for a system out of control but we all share the blame as well.

For some good charts quick on the M's and total debt. along with some discussion of inflation look here.

Should be free for a while. A (pay)site I highly recommend for outside the box thinking run by a guy who against all type when it comes to finance is an old line progressive.

The site is new, a morphing of an older site with a very strongly bearish cast. Denizens of the site have a tendency to libertarianism with the occasional more crude rightest tint but in the world of markets and bears on the net which inevitably become mini Free Republics this is a minor annoyance. You might learn a lot by rooting about.

http://wallstreetexaminer.com/index.php?itemid=112

[oecher3]

32. nice page!

Well, I do think that we have a bubbled economy, in terms of real estate and other assets.
Questions is, if those bubbles all burst like the stock market. I am surprised that there is no inflation on hand. Is the CPI really a good indicator? If you look at the chart at the bottom of that article (I couldn't get the picture into here), you can tell how there is a big gap between personal income and wages and salaries. Where is the wealth coming from if not from wages and salaries. It must be income from investments that fill this gap. Is the wage increase (or even wages decreasing) in general below the inflation level, thus giving the impression that maybe prices stay stagnant but wages don't adjust right to the price level.
Or could it be that technological advance lowers prices and keeps inflation in check because certain things get cheaper and newer innovations with higher prices are introduced, keeping the price level in balance?
Can this increase in money go on long term or is there going to be a correction as well?Finally why is the scare of inflation so big to begin with? Isn't inflation actually something positive showing growth, as long as we don't have double digit or worse hyper inflation?
But the lack of inflation does worry me.

[German-Lefty]

35. Answers

Or could it be that technological advance lowers prices and keeps inflation in check because certain things get cheaper and newer innovations with higher prices are introduced, keeping the price level in balance?
GDP increases. In order for prices to be stable the currency has to grow with it. Let's say you have an "old economy" and later you have a "new economy" too. You want the goods in the old economy to have the same prices, so you measure how much the new goods/services are worth in old goods/services how many potatoes does the plane cost. Then you let money supply grow so that potatoes cost about the same, and "new economy" has currency.

Can this increase in money go on long term or is there going to be a correction as well?
Yes, as long as GDP keeps growing.

Finally why is the scare of inflation so big to begin with? Isn't inflation actually something positive showing growth, as long as we don't have double digit or worse hyper inflation?
Inflation makes it hard for people to use currency, especially if it's unpredictable inflation. A change inflation is wealth redistribution. Lenders loose wealth to borrowers. It's also kind of a tax. Your money is decreasing in value just sitting in the bank. If you're trying to plan investment, retirement, or anything else, you want prices to remain stable.

But the lack of inflation does worry me.
Negative inflation, deflation can be very bad for an economy. The thinking is it's best to have tiny bit of inflation to keep deflation away.

[German-Lefty]

34. How the currency games works

Fact is that M2 has increased tremendously and the question remains why.
M2 increases because currency increases. We're injecting 50B$ cash a year into the economy. When you put it together, it's just print and spend. It may seem like a bad idea, because it could lead to inflation.

The first effect that is seen though is on the currency markets. The dollar falls when there are more of them. Some industries see this as a good thing, it helps exports and makes imports more expensive. Of coarse industries in Japan and China don't see this as a good thing. They get their government to buy up dollars with their national currency in order to keep their currency low.

So the entire scheme looks something like this:
1) US prints dollars and spends them.
2) The colony's government buys up dollars, with it's currency.
3) US consumers buy goods from the colony with that cheap currency.

Why would the colony do something this dumb? Often they have export driven economies and feel it may be better to subsidize the exports a little to keep their economy going. They may also have an interest in keeping the US happy. They may also want to get leverage on the US being able to threaten them with inflation if they dump their reserves.

[German-Lefty]

33. You're wrong Rapier

Thanks for replying but you're just wrong.

Fractional reserve banking is the mechanism of money creation. In the late 1800's this idea was controversial. Later it became orthodoxy. (It is orthodoxy in the bad sense now because there is a much bigger engine of 'money' creation now days, or at least liquidity, as the modern financial system has created new forms of money far more abstract than bank deposits. I won't get into that here.)
Wrong, Fractional reserve banking can't be used forever, and it isn't the way money is created in the long term. To things prove this:
1) Look at the cash component of money; it is increasing exponentially. Fractional banking does nothing to increase the cash component of money.
2) Yes, you can use fractional reserve banking to effect deposits. I gave the standard formula above for how this works assuming banks leave no extra reserves:
max deposits = currency / reserve requirement
Plug in our 700B$ currency and 10%(0.1) reserve requirement and you get 7T$, exactly in line with the Ms.

You can't have indefinite exponential growth of deposits with a fixed amount of currency, unless you have indefinite exponential decay of the reserve requirement. That would be dangerous!

Say the money supply as far as deposits go doubles every 10 years. Then you would have to cut the reserve requirement in half every 10 years. Right now it's at 10% (for big banks). In 40 years it would be at 10%/2^4=0.625%. You'd have banks crashing with such low reserves. Use the same formula with -40 years and you get that the reserve requirement 40 years ago was 160%. reductio absurdum


New currency has to enter the system for it to work properly. New currency does enter the system, as show in the charts. I've found 3 websites saying currency is injected into the system during open market operations by the Fed. If you have a single shred of evidence to the contrary, I'd like to hear it. For now I'm going to assume you don't know what you're talking about.
:spank:

[oecher3]

36. creating new currency..

"I've found 3 websites saying currency is injected into the system during open market operations by the Fed. If you have a single shred of evidence to the contrary, I'd like to hear it."

But this doesn't mean that it is newly printed currency, it just means that currency is brought in circulation that has been held by the Fed backed up by treasury bills. But as I have said before, the large increase in govt debt has to go somewhere and it sure shows up as money, question is if it indeed released as currency or just remains in bond form.
The Fed also has cash reserves. They also take older money out of circulation and replace it with new currency 1:1, f.e. a $1-bill has only a lifespan of 1.5-2years and needs to be replaced after that.

"U. S. Currency is printed by the Bureau of Engraving and Printing (BEP), in Washington D. C., and Fort Worth, Texas. Each year, Federal Reserve Banks instruct the BEP on how many bills of each denomination to print. Each Federal Reserve Bank then orders the amount of new currency that meets the demands of financial institutions and replaces worn currency." http://www.federalreserveeducation.org/fed101_html/services/dollar.htm

If this helps, the Fed asks BEP to print money for them and then the Fed brings it into circulation. But the money multiplier system is also a way to create money in M2, just not any currency. Why do you think the debt mountain in this country is rising so much?
However, I wonder why credit cards are still not considered money. Any who can explain that?

[German-Lefty]

37. The Fed injects some the new currency

But this doesn't mean that it is newly printed currency, it just means that currency is brought in circulation that has been held by the Fed backed up by treasury bills.
Here are the two quotes that make me think I'm right:
When the Federal Reserve buys securities, it creates the funds with which it buys T-bills. It pays with a check drawn on itself, and when a commercial bank submits this check for payment, the bank gets reserves that did not previously exist. http://ingrimayne.saintjoe.edu/econ/Banking/FedMonPol.html

Debt held by the Federal Reserve System is purchased by printing money; the purpose of these "open market operations" is to put more currency into circulation. http://zfacts.com/p/480.html

Now the Fed doesn't have to inject new currency every time it does an open market operation. Sometimes it sells bonds and removes money from the economy which it later can use to buy bonds. On the whole though they do "print" money. Last year it was ~50B$ in currency, a ~1/10th of our deficit.

But as I have said before, the large increase in govt debt has to go somewhere and it sure shows up as money, question is if it indeed released as currency or just remains in bond form.
No, a government can borrow money without effecting the money supply. Fiscal and monetary policy are independent. Even with the gold standard the government could borrow gold, but you can't print gold. The rest of the government sells bonds; the fed decides how much of that should be bought back in exchange for new cash.

But the money multiplier system is also a way to create money in M2, just not any currency.
The money multiplier effect multiplies the base currecy into bank deposites. The current ratio is ~10 deposited dollars / 1 real dollar. Currently they are increasing the base not the ratio. (see graph of currency)

Why do you think the debt mountain in this country is rising so much? However, I wonder why credit cards are still not considered money. Any who can explain that?
Because of a consumerist culture. Credit cards are just another way banks loan out money to people. As with all loans banks are limited in doing this by the reserve requirement. Someone's credit card debt isn't in the Ms, but the money I deposit which was loaned out to someone via credit card, is.

[Rapier2]

38. notes

Fed purchases of securities does inject money into the syatem. I said that before. I also said that the amounts, while big, account for less than 20% of the total.

The Fed publishes it's balance sheet which says how much it has bought ongoing and in total but I rely upon others to tell me the numbers and cannot find the source right nowbut Ill repeat, THE FED ALONE DOES NOT AND CANNOT keep the money supply growing at the rate of the last decade. Their influence is big, some of it being indirect but it does not account directly for the majority of monetary growth.

I cannot address your posts anymore for reasons that close readers of the thread might recognize. Essentially it's hopless. If anyone wants to chat about this, and by this I mean general info on monetary policy I'll be glad to join in.

[German-Lefty]

40. Suddenly we seem to be on the same page!

Fed purchases of securities does inject money into the syatem. I said that before. I also said that the amounts, while big, account for less than 20% of the total.
Oh ok. Suddenly we seem to be on the same page! You seem to agree it injects new cash. I agree it's "less than 20%" of the growth in Ms and the national deficit which seem to be in the same ball park right now. It was 50B$ last year.

Maybe the point where I lost you is when I argued they were creating new money to cover most of the debt. The way I got there was that since the ~50B$ currency a year gets to multiply in the banks by ~10 times, a new 500B$ is being created in new money. When you look at it like that, it seems like the fed is creating new money for the banks to finance the debt with.

The Fed publishes it's balance sheet which says how much it has bought ongoing and in total but I rely upon others to tell me the numbers and cannot find the source right nowbut Ill repeat
Try this site I used, they've got a bunch of data and will make nice charts for you. Most of the stuff you want is under St. Louis Fed.
http://www.economagic.com/em-cgi/charter.exe/fedstl/m2ns

THE FED ALONE DOES NOT AND CANNOT keep the money supply growing at the rate of the last decade. Their influence is big, some of it being indirect but it does not account directly for the majority of monetary growth.
I disagree. Making new money is easy; getting rid of it is hard. If they wanted to, the Fed could purchase bonds like crazy and put out 500B$ a year in new currency. We'd then be financing the deficit Weimar style!

I agree with you if what you mean is "the fed should not keep the money supply growing at the rate of last decade."

[whistle]

39. We could actually have fewer American dollars in circulation....

...and the value of the U.S. dollar would still drop if we have nothing that anyone else wants to trade for.

The U.S. has now come down to having two things the world wants, our expertise (intellectual property, patents and process know-how) and our technology, especially as it applies to weapons and war! We as a country on the other hand, want practically everything that the world has to offer, and we want it as cheap as possible.

We pay with U.S. dollars so the countries are forced to deal with us in dollars. We also have flooded the international financial markets with more U.S. dollars than there is demand for. That currency only has value (unlike gold, for example) based on what it buys for the holder.

Every year fewer and fewer American products have an appeal to international markets as those markets gain their own capacity and capabilities to make those products and services themselves. They also have fewer investment opportunities as ownership in America's best and most stable companies yields less and less.

So, the international markets are stuck with U.S. dollars (in the form of paper) and nowhere to invest and nothing they really wish to buy. So they trade those dollars for other currencies or commodities with intrinsic value like precious metals, rather than have them sit around loosing value. When that happens, the value of the dollar falls. When a foreign country hordes U.S. dollars over a long period and then floods the market supply with massive amounts of the paper, the value of the dollar plummets, sometimes with disastrous effects.

The Fed is supposed to know where everyone of the U.S. dollar denominations are so they can prevent such financial dislocations. I have a feeling nobody knows anymore exactly where all of the U.S. dollars and notes are and that is not a good situation.

[Rapier2]

41. Random notes

Uncle Sam is auctioning $51 billion in Treasury bill and bonds this week. Probably a weekly record. This is how the US debt grows people. Week by week we sell our bonds and as surprising as it seems they have no trouble selling them. Well there might be abit of indigestion this week because of the amount.

The size, $51 billion, seem absurd to those not familiar with these things. Quietly this week the financial system will buy that much paper, with their dollars, which will go to the Treasury to pay our bills. (Tax refunds account for a lot of those bills this time of year)

The Fed conducts the auctions, they act as a sort of broker or agent for the Treasury. You can think of the Treasury as Uncle Sams bank. He has one big account and when he issues a check its drawn on his 'account' at the Treasury. That't why your refund check says Treasury. When the Treasury account doesnt have enough money it it they go out and borrow it, by, as I said, selling bonds at auctions, conducted by the Fed.

(Not a prediction, but for your own info... someday an auction might fail. Not enough buyers might show up. In which case the Fed would have to step in and buy. Again, I am not predicting that for now or maybe ever. Just pointing out it COULD happen. Such a thing could and probably would cause a financial panic}

M1 growth has been sluggish for most of the last 12 months. This in spite of the fact that the Fed has been very aggressive in its open market operations, GL's printing money. Over the period M1 has been growing at about a 2% rate while the Fed has been 'expanding its balance sheet' at a 15% rate. They are not getting the expected bang for the buck. It's pretty hard to make any broad conclusions about this but it does point to the fact that the Feds influence on the money supply is not what it is cracked up to be.

Among other things this aggressive monetization by the Fed at the same time they are raising short term rates presents a picture of absolute schizophrinia. They blabber about 'tightening' and do in fact raise rates with one hand but with the other hand they are boldly trying to pump money and liquidity into the system. With as I said, limited effectiveness.

[oecher3]

42. thanks for the reminder,

I missed this auction annoucement. It is certainly a large sum.
How are they getting rid off it, higher than usual interest rate? This would play into Greenspan's plan of raising the interest base? Or lower price?
One is left to wonder, like you siad before, what is going to happen, hypothecially, if not all bonds are sold? I doubt it will happen here, especially if a higher interest rate is offered. That would attract foreign investment and/or creat a bearish market.
I will have to follow that one!

[Rapier2]

43. correction

That number is over two weeks. This week $11billion in bills. Next week $40 billion in notes.

In the bill auction today rates wre up a tad.

Not sure what 'interst base' means. The Fed is raising short term rates, the only ones it dirctly controls. Long term rates are falling, In fact the 10 T Note is now at 12 month lows. The relationship of long term to short term rates is called the yeild curve. Typically longer term rates are higher primarily because longer term means more risk. When short rate get higher than long rates it is called an iverted yield curve. This virutally always means recession, for reasons I don't have time to explain. I am not predicting that for now, of course it could happen.

It is virutally imposible that an auction would not be successfull in terms of selling out. At the extreme the Fed would cover if it had to, something I don't think has ever happened. Typically there are bids for 2.5 times the amount offered. This ratio indicates the relative strength of the market. A 'failed auction' in practical terms would not require a failure to sell all but just a very small amount of bids compared to the typical 2 or 3 to one and a wide spread in the price of winning bids. The markets would perceive such as a failure. Again I am not predicting such. At the same time I would not be surprised if it happens. It could happen for reasons internal or external to the markets.

[German-Lefty]

44. Treasury auctions

It is virutally imposible that an auction would not be successfull in terms of selling out.
Yes. Here's how it T-Bond auctions work in general. A government finds itself in the hole X dollars, so they pick some security like a 10 year 0% interest bond and auction off a number of them N which they think will sell for about X dollars. They use a Dutch Auction where whoever wants bids and the lowest successful bid is the price all successful bidders pay. This is nice because bidders don't have to worry about overbidding.

Another way of thinking about it is that the government decides how much will be borrowed and the market decides how much yield they want.

A Dutch auction fails when less than N securities are bid for. This is very unlikely since there will always be someone to bid for the stuff, just at a very low price, in other words high yield. I'd buy some 10K$ T bonds at 0.01$ each. The only time such an auction fails is when the stuff is so worthless, it's not even worth bidding on because of transaction costs.

Typically longer term rates are higher primarily because longer term means more risk. When short rate get higher than long rates it is called an inverted yield curve. This virtually always means recession, for reasons I don't have time to explain. I am not predicting that for now, of course it could happen.
Here's a "what goes up must come down"-way of looking at it. There must be a risk of the yield curve inverting, otherwise it wouldn't be non-inverted. It seems long term rates, would be a function of the expected rate of short term rates of the longer period. A 4% long term rate with a 2% short term rate could be because there is:
50% chance of 2% yield if you buy short term bonds over the period.
+50% chance of 6% yield doing the same.

[SilverSurfing]

45. MONEY BELONGS to the PEOPLE, not the FEDERAL RESERVE!

The FEDERAL RESERVE isn't FEDERAL... It's PRIVATELY OWNED...

Congress gave away its Right and Obligation to Print MONEY and handed it over to a PRIVATELY OWNED ENTITY that TAXES the PEOPLE on their own Money!!!

[German-Lefty]

46. Thought experiment - I think they are printing money

Let's do a quick thought experiment. Let's say there's a Bank of the Industrial Military Complex(BIMC) controlled by government cronies. This bank invests all the money from deposits into government bonds.

There are four entities involved
(USG) The US Government
(IMC) The Industrial Military Complex
(IMCD) The Industrial Military Complex Dependents, like employees or subcontractors
(BIMC) Bank of the Industrial Military Complex

Watch the money go in a closed ring:
1) The USG starts off with some money.
2) It spends it, giving it to IMC.
3) The IMC pays it to IMCD.
4) The IMCD drop it into BIMC accounts.
5) The BIMC buys US Bonds with 90% of the money, giving that money to the USG. Repeat.

Note this is a closed ring. The new bonds being issued never leave our system. What this means is that they won't effect the rest of the bond market. So yields will stay unaffected no matter how much money is pumped through the ring and multiplied. As long as the IMCD drop most their money into BIMC accounts, the rest of the economy won't notice the new money. So there can be low inflation.

Of coarse this ring doesn't work if money leaks out. If banks would stop buying bonds at such low yields and instead invest elsewhere, the ring would break. There are some reasons this doesn't happen. First off their risk management rules set by the Fed require them to buy some.

The other way the ring can break is if IMCD stop putting all their money into bank accounts. If they were to invest in private industry, then the ring would be broken. My theory is that there is a lot of uncertainty about the stock market and the job market. Since the crash in 2000 people are leaving a good share of their money in their bank accounts.

Of coarse a ring like this won't work forever. We can't all have more money and have that money be worth the same. Sooner or later inflation will hit.