Money. Doing it Right this Time.

[El_Machinae]

Hmmm the money for growth loans can come primarily from consumption loans and from failed growth loans. BUT, the demand for loans increases with consumption loans. So, growth loans need to pay 'consumption loan' premium. All growth loans end up shooting for the interest rate, instead of the actual growth rate (e.g., you take out a growth loan if you expect to beat 5%, when in truth society only averages 2%)

Now, if interest rates fell to the growth rate, then it should be infinitely sustainable. You can end up borrowing money to buy an apple tree and then sell me the apples using the money I borrowed to make a pie-making company.

The consumption loans then add liquidity. But, this liquidity comes at the price of growth enterprises only starting if they feel they can beat the 'consumption loan premium' increase in debt costs.

 

[Azale]

Here is a totally DOPE paper from the Bank o' Merry England on money in the modern economy.

Only downside is how it's uneditable in PDF programs.

 

[Hygro]

totally dope is also how I would describe that paper.

The Bank of England has become since the crash probably the greatest central bank in the world.

 

[anyoldguy]

That is one GNARLY paper.

 

[Cutlass]

Hmmm the money for growth loans can come primarily from consumption loans and from failed growth loans. BUT, the demand for loans increases with consumption loans. So, growth loans need to pay 'consumption loan' premium. All growth loans end up shooting for the interest rate, instead of the actual growth rate (e.g., you take out a growth loan if you expect to beat 5%, when in truth society only averages 2%)

Now, if interest rates fell to the growth rate, then it should be infinitely sustainable. You can end up borrowing money to buy an apple tree and then sell me the apples using the money I borrowed to make a pie-making company.

The consumption loans then add liquidity. But, this liquidity comes at the price of growth enterprises only starting if they feel they can beat the 'consumption loan premium' increase in debt costs.

That, and the consumption loans are also sales for those who took out the growth loans. So sales loans justify growth loans. Imagine what the auto industry or home building industry would look like without consumer credit.

 

[Cutlass]

The BoE paper really is interesting. Another recent approach which is becoming a lot more accepted is the idea of fractional reserve banking not really existing anymore. I believe it was Monsterzuma who was pursuing that line earlier in the thread. While there's a good argument for it, I'm not convinced yet.

 

[El_Machinae]

That, and the consumption loans are also sales for those who took out the growth loans. So sales loans justify growth loans. Imagine what the auto industry or home building industry would look like without consumer credit.

Yeah, I've been playing with my model, trying to figure that out. Consumption loans have this weird interaction, where they end up decreasing the number of profitable growth loans (by crowding out investors) while providing liquidity for growth loans to succeed.

The super-interesting part is that all consumption loans are voluntary, where the person has basically 'consented' to decreased future consumption in excess of the growth rate.

Ugh, I cannot figure them out. My intuition is that they're a net drag, but I'm not 100% sure. That liquidity really pops up as an important factor. Their contribution might really be U-shaped.

 

[Cutlass]

The super-interesting part is that all consumption loans are voluntary, where the person has basically 'consented' to decreased future consumption in excess of the growth rate.

Ugh, I cannot figure them out. My intuition is that they're a net drag, but I'm not 100% sure. That liquidity really pops up as an important factor. Their contribution might really be U-shaped.

It's more complex than that. But because of that, it's also situational. So the utility to the borrower may still be greater after paying the interest on the loan. Also, some loans are borderline between consumption and investment. Cars and houses both fall into that category. Because people can finance these things, they may 'consume' more car or more house than they absolutely need. But they think they get utility from doing so. But the car and the house are also an investment. The car is a means of transport. Most people need some form of transport. A house is a place to live. Everyone needs to live somewhere.

But many other things are financed when necessary too. I didn't have any spare cash the week my computer crapped out. So new one on the credit card, and pay it off as soon as I can afterwards. Now technically I could have lived without the new computer. But it really would have set me back in a number of ways.

 

[Hygro]

The BoE paper really is interesting. Another recent approach which is becoming a lot more accepted is the idea of fractional reserve banking not really existing anymore. I believe it was Monsterzuma who was pursuing that line earlier in the thread. While there's a good argument for it, I'm not convinced yet.

Monsterzuma and Innonimatu were articulating it earlier, and I've caught on more recently. Fractional reserve lending never made sense, only in that if your reserve requirement is 10%, you'd lever up the 90% on top, not wait for deposits to come back. That is what I intuited earlier this thread before... finding out I was right

There's no "loaning out", there's just creation of loan asset/liability pairings.

 

[El_Machinae]

Ugh. I've run into a cognitive block when it comes to the real world. If a new dollar exists this year, where did it come from, and how did it enter the economy? If banks haven't lent all of their ... um, anti-reserve ... I can see where that dollar comes from, but where do the new dollars come from?

Some of it can come from the Fed buying gov't debt, but that cannot be the whole source? Or does each dollar borrowed (and spent) by the gov't end up becoming 10 dollars due to fractional reserve banking, which would cause there to be more than enough money to grow the money supply.

 

[Hygro]

Ugh. I've run into a cognitive block when it comes to the real world. If a new dollar exists this year, where did it come from, and how did it enter the economy? If banks haven't lent all of their ... um, anti-reserve ... I can see where that dollar comes from, but where do the new dollars come from?

Some of it can come from the Fed buying gov't debt, but that cannot be the whole source? Or does each dollar borrowed (and spent) by the gov't end up becoming 10 dollars due to fractional reserve banking, which would cause there to be more than enough money to grow the money supply.

The government spends it into existence. Gov't employee wages, direct purchases and contracts, social security, medicare, etc.

 

[El_Machinae]

So, gov't deficit spends the entirety of the new money into existence (which then gets multiplied through FRB)? You need to distinguish between the Fed and the Gov't in your answer, or else I won't understand.

edit: if it's not clear, I'm asking a generic question. Basically, it's a question of how the Fed is getting new money into the economy

 

[El_Machinae]

And what does a bank use as collateral when it borrows from the fed?

 

[Hygro]

Banks will create loans when they deem their being a profitable loan opportunity. The banking sector as whole gets its new reserves from deficit spending (newly minted money that only leaves the economy via taxation), and by borrowing from the Fed (newly minted money they owe back into the dark void + interest).

So at the core of it, new money comes from deficit spending by the Gov't, and lending by the Fed. Only the former is not leveraged.

edit: When banks borrow from the Fed they use their status as banks to borrow from the Fed. If the Fed does not oblige, it loses control of the interest rate, so it must oblige. I suppose the loan the bank made that necessitated the loan from the Fed to meet reserve requirements is the collateral.

edit 2: http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf is the best easy to read primer on the topic.

 

[El_Machinae]

So, the spread they make on dollar I invest is vastly higher than the spread they make on the dollar they borrow from the Fed. One wonders why savings account interest rates are so dissimilar from the Fed's lending rate, then?

Oh, wait, certificates of deposit. I understand now.

My initial confusion was regarding the borrowing of money from the Fed by banks. I just assumed it wasn't done very much.

 

[Bootstoots]

When the Federal government briefly ran a surplus in 1998-2000, did this cause any problems with money supply? And what might the negative consequences have been if, say, the Bush administration had continued running surpluses for several more years?

 

[El_Machinae]

Ugh, sometimes the easy explanations don't offer obvious answers. How can a multiplier effect end up less than 1? An eventual* MPC of less than 1? What does that mean? I need an example.

*It doesn't need to be less than 1 in the first cycle, since the MPC can change between cycles.

 

[Kaitzilla]

Some people are paying an awful lot of money to hear the ex-Fed chief talk.
http://www.reuters.com/article/2014/05/16/us-usa-fed-bernanke-insight-idUSBREA4F0OG20140516

(Reuters) - In a series of quarter-million-dollar dinners with wealthy private investors, Ben Bernanke has been clearer than he ever was as chairman of the Federal Reserve on his expectations that easy-money policies and below-normal interest rates are here for a long time to come, according to some of those in attendance.

Bernanke, who retired from the U.S. central bank in January, has predicted the Fed will only very slowly move to raise rates, and probably do so later than many forecast because the labor market still has a lot more room to recover from the financial crisis and recession.

The accounts of the discussions come from attendees as well as those who heard second-hand what was said at the dinners, where hedge fund managers and others willing to foot the roughly $250,000 bill for each event asked the former Fed chairman questions in a free-flowing round-table fashion over recent weeks.

Bernanke has no constraints on expressing his views in public or private, providing he does not talk about confidential Fed matters. He declined to comment on any of his remarks at the private events.

The demand for Bernanke's time shows that many of Wall Street's highest-profile brokers and investors see him as holding rare insight on how the Fed will react in the months and years ahead - and are prepared to pay big bucks to get private access to those views.

At least one guest left a New York restaurant with the impression Bernanke, 60, does not expect the federal funds rate, the Fed's main benchmark interest rate, to rise back to its long-term average of around 4 percent in Bernanke's lifetime, one source who had spoken to the guest said.

Under his direction, the Fed took the fed funds rate, its key policy lever, to near zero in late 2008 as the financial crisis raged. The central bank has held it there ever since in a bid to stimulate a stronger rebound in the world's largest economy.

Another dinner guest was moved when Bernanke said the Fed aims to hit its 2 percent inflation target at all times, and that it is not necessarily a ceiling.

"Shocking when he said this," the guest scribbled in his notes. "Is that really true?" he scribbled at another point, according to the notes reviewed by Reuters.

The sources requested anonymity because the dinners were private and they were not authorized to discuss the material publicly.

The Washington Speakers Bureau, which organizes the events and advertises the former chairman's availability on its website, did not return calls.

All very second-hand information.

But never seeing 4% again before he dies? Jeeez.
Guess this really is the new normal. At 0.09% currently,
http://research.stlouisfed.org/fred2/series/DFF

 

[Hygro]

So, the spread they make on dollar I invest is vastly higher than the spread they make on the dollar they borrow from the Fed. One wonders why savings account interest rates are so dissimilar from the Fed's lending rate, then?

Oh, wait, certificates of deposit. I understand now.

My initial confusion was regarding the borrowing of money from the Fed by banks. I just assumed it wasn't done very much.

It often isn't: the usually banks borrow from each other's reserves held at the Fed rather than from the Fed itself. This makes sense, because it keeps all the money in the system.

Here's before the crash. Each bar is a the sum total of that year's borrowing at the Fed discount window.

Spoiler :

Here's after the crash.

Spoiler :

This is with the volume of interbank lending

Spoiler :

Ugh, sometimes the easy explanations don't offer obvious answers. How can a multiplier effect end up less than 1? An eventual* MPC of less than 1? What does that mean? I need an example.

*It doesn't need to be less than 1 in the first cycle, since the MPC can change between cycles.

The money multiplier is a concept that reverses cause and effect. The wrong, and popular, way to look at it is that you add a dollar to the base and it "multiplies" into the economy. But loans aren't driven by size of reserves, as QE conclusively proved, they are driven by the amount of profitable loans, i.e. by demand. A multiplier of less than 1 I imagine means that the amount of reserves is exceeding the quantity of loans. Maybe it means something else. (I don't really care.)

So the multiplier "collapsed" but the multiplier is not a multiplier, it's a description of a ratio.

When the Federal government briefly ran a surplus in 1998-2000, did this cause any problems with money supply? And what might the negative consequences have been if, say, the Bush administration had continued running surpluses for several more years?

It caused the dot-com crash. The Bush administration was unable to continue running a surplus regardless, because recessions increase government spending via automatic stabilizers like unemployment insurance, and decrease tax revenues as people are out of work.

There was a hidden surplus before the 2007 crash, once accounting for the trade deficit. i.e. the private sector was losing more money to the government in taxes than the government was adding back into the private sector.

There was also a surplus before 1929. Most if not all US government surpluses are followed by recessions.

 

[Kaitzilla]

How does Canada manage to have budget surpluses?
http://www.reuters.com/article/2014/02/11/us-canada-budget-idUSBREA1A22J20140211

In the year ending March 31 of this year, the deficit is pegged at C$16.6 billion.
The budget shows a deficit of C$2.9 billion ($2.63 billion)in the 2014-15 fiscal year.
The government estimates a bigger-than-expected C$6.4 billion surplus in 2015-16...

...The Conservatives, in power since 2006, plunged into a deep deficit in 2008 as they pumped out stimulus money to deal with the recession after having cut taxes earlier. Previously, the Canadian government had an 11-year string of budget surpluses.

Probably by trade surpluses right?
http://www.tradingeconomics.com/canada/balance-of-trade

Exports 45% of GDP hmm.
Ya, big trade surpluses during the years with budget surpluses.


Is trying to create a budget surplus in Canada of $6.4 billion next year while running a trade deficit going to cause a recession up north?