An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
Reserves are not a hot potato in the sense that banks don’t pay much attention to reserves when deciding whether to lend. So Shilling is wrong there.
But reserves ARE A HOT POTATO in the sense that reserves or “monetary base” are part of what MMTers refer to as “private sector net financial assets”. And the larger the stock of those assets, all else equal, the more everyone tries to dispose of them: they get passed from hand to hand just like hot potatos, which raises demand.
"When the economy resumes normal growth after the Age of Deleveraging is over, these excess reserves will spawn huge loans and money expansion, propelling the economy past full employment and into serious inflation. So the Fed's major job is to get rid of these excess reserves by selling securities. [Gary Shilling]
Of course, a more relevant metric is total private net financial assets, i.e. reserves plus Treasury bonds. The balance between reserves and Treasuries is not a big deal, as is well known to MMTers.
If private sector net financial assets are enormous now, what is holding back the economy? Is it temporary and abnormal deleveraging, or is it the deflationary impact of globalization and low wages in the developed world?
The trend is to asset inflation, not inflation in consumer goods, which ultimately means assets become overvalued and deflate. Deleveraging and a return to "normal growth" will not happen until incomes return to "normal growth". It's something of a chicken and egg situation as to whether increased private loans will trigger income growth, or whether income growth is required to trigger private loan growth. With the deficit plunging this year as growth picked up a bit, we note the existence of counter-cyclical forces which will restrain the scenario envisioned by Shilling...
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Reserves are not a hot potato in the sense that banks don’t pay much attention to reserves when deciding whether to lend. So Shilling is wrong there.
But reserves ARE A HOT POTATO in the sense that reserves or “monetary base” are part of what MMTers refer to as “private sector net financial assets”. And the larger the stock of those assets, all else equal, the more everyone tries to dispose of them: they get passed from hand to hand just like hot potatos, which raises demand.
But Ralph are they not different from "normal" financial assets in that they only can get passed around to other banks?
rsp,
"When the economy resumes normal growth after the Age of Deleveraging is over, these excess reserves will spawn huge loans and money expansion, propelling the economy past full employment and into serious inflation. So the Fed's major job is to get rid of these excess reserves by selling securities. [Gary Shilling]
Of course, a more relevant metric is total private net financial assets, i.e. reserves plus Treasury bonds. The balance between reserves and Treasuries is not a big deal, as is well known to MMTers.
If private sector net financial assets are enormous now, what is holding back the economy? Is it temporary and abnormal deleveraging, or is it the deflationary impact of globalization and low wages in the developed world?
The trend is to asset inflation, not inflation in consumer goods, which ultimately means assets become overvalued and deflate. Deleveraging and a return to "normal growth" will not happen until incomes return to "normal growth". It's something of a chicken and egg situation as to whether increased private loans will trigger income growth, or whether income growth is required to trigger private loan growth. With the deficit plunging this year as growth picked up a bit, we note the existence of counter-cyclical forces which will restrain the scenario envisioned by Shilling...
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