Friday, January 29, 2010

The stimulus didn't work?



Just reported that the economy grew 5.7% last year, which was the fastest growth since 2003. Most of this came as a result of higher government spending that included programs like Cash for Clunkers, first time homebuyer tax credits etc.

There will be those in the media and conservatives on the right who will continue to say the stimulus didn't work, but that would be revisionism greater than anything ever attempted by a communist state.

True, jobs have not been create on balance, however, that is likely to come very soon.

What does it all mean for the stock market? Probably not that much help at all. The market looks ahead and what it sees, is Obama embracing the fiscal conservative approach, even as the evidence is clear that more of the same--stimulus--would have improved both the economy's fortunes and his own political clout as well.

57 comments:

Klusplatz said...

You have absolutely no clue as to what money is and how it works (yes, I've read your "money" page, which is the basis of my comments).

Try explaining to your readers exactly how prices rise without more money being added to the economy, and how that in turn creates money.

This defies all logic and all mathematics.

bubbleRefuge said...

This defies all logic and all mathematics. Why don't you explain yourself a bit better so we can discuss your ideas?

The Joker said...

Mike, I can sum this up with a rhyme: When the government spends, the private sector wins!

Unfortunately, our government is embracing a fiscal conservative policy that well hamper the recovery and send us into a deeper recession.

Our president is trying to please everyone. As our nation's leader, he cannot do this. He should embrace a policy of more stimulus to support aggregate demand.

I'm listening to Larry Kudlow on CNBC right now. He's so off the mark it's ridiculous.

Larry Staton Jr. said...

BEA reported that GDP for Q4 2009 grew at 5.7%, not the entire year. For the entire year, GDP shrank 2.4%, the lowest since 1946.

Of the 5.7% increase, gross private domestic investment contributed 3.82% for Q4 2009, but -3.49% for the entire year. I suspect that we'll see a much smaller contribution for Q1 2010 now that businesses have reloaded their inventories.

Government expenditures contributed -0.2% in Q4 2009 and contributed 0.38% for the entire year. The numbers show that the stimulus was not nearly large enough to sustain any type of aggregate demand. Indeed, personal consumption expenditures shrank for the year as consumers tried to shore up their personal balance sheets.

Because government spending provides funds for private savings, I don't think we'll see large PCE increases any time soon.

Unknown said...

Q4 GDP is out - stunning 5.7% (annualized) rate of increase.

The amusing part of the report is found in the personal income and outlays section:

Current-dollar personal income increased $119.2 billion (4.0 percent) in the fourth quarter, compared with an increase of $35.1 billion (1.2 percent) in the third.

Personal current taxes decreased $11.7 billion in the fourth quarter, in contrast to an increase of $3.5 billion in the third.

GOT IT? People aren't earning the money, the government is handing it out. You don't pay taxes on government handouts, for the most part. There was a potential "improvement" signal in the Q3 related to tax liabilities increasing, but that has now reversed - hard - which throws a big fat rock at the concept of employment turning in any meaningful way.
-from Karl Denninger

No disposible income = lower corp profits. 70% of economy. Market was and is way over extended. Many types of jobs are gone forever.

mike norman said...

Yeah, Kudlow's like an out of paradigm broken record. He's nauseating.

mike norman said...

Larry,

Yes, that's correct. I mis-stated. That was 5.7% for the quarter, annualized.

-Mike

mike norman said...

Brantley,

Yes, which shows how gov't factors in huge to income and savings of the non-governmental sector. It is the net supplier of nominal savings.

mike norman said...

Klutz:

Prices rise (broadly) when demand outstrips the physical capacity to produce the goods and services demanded. Are you saying that demand is so great now and capacity so tight (including labor capacity) that we can't produce what is in demand? If anything, it's the opposite.

Tom Hickey said...

Krugman: "inventory blip"

Without further stimulus, the "growth" is likely to peter out before a real recovery takes hold. The US is still in the midst of financial crisis that is largely unresolved and continues to affect the real economy.

Klusplatz said...

Alright, I’ll explain this briefly and tie it into the absurd notion that any stimulus could possibly help an economy.

Mike Norman (whoever he is) said:

"In a modern economy, prices are seldom driven by the money supply. More commonly, the money supply reacts to changes in the general price level."

He goes on to explain that corporations and workers can raise prices (without causing unemployment for themselves). Neither these nor any other explanation for rising prices can withstand scrutiny.

Here are the facts:

There are only two ways in which the average selling price of all the goods across the economy can each sell for a higher price: (1) there are fewer goods to be sold, or (2) more money is spent to buy the goods. On average, we do not produce fewer and fewer goods each year.

Absent an increase in the quantity of money, if some prices rise, others must fall. For example, a rise in Oil cannot raise all other prices. Other prices or the quantity sold must fall. The more unions drive up wages, the more unemployed they become (UNLESS, the fed prints money to help them out).

For all the talk about sacred “aggregate demand” increased nominal aggregate demand is merely an increase in money. If the central banks dumps twice as much money in the economy, aggregate demand will on average double. Real demand can only come about through real purchasing power, which can only derive from new goods or services being created with which to purchase, or “demand” other goods and services.

Similarly, GDP is only monetary demand. It means nothing. If the central bank prints more money it rises (showing that deflators don't really fully deflate)—THAT’S why GDP is up a “stunning" 5.7%.

In the absence of an increase in the quantity of money GDP would FALL every year as more goods and services were produced (real demand) while the money available to purchase them (aggregate demand) was constant). In fact, most productive capabilities are backed out of the GDP calculation—all that is left is a minuscule “Net investment.”

And this obsession with capacity kills me. Excess capacity makes little difference. Neither industrial production nor labor usage needs to be at full capacity in order for new money to cause inflation. Because of previous malinvestments, there is usually plenty of productive capacity that will not be used because it is now unprofitable to do so, since economic conditions have changed—namely that a bubble has imploded, and money transmission paths and relative prices have changed. As far as labor goes, there will generally be full employment at all wage levels above the price floors set by government and government-supported unions. But during recessions, whatever labor is unused is not taking part in bidding up prices. Therefore, new money passes around them, and passes through workers receiving paychecks. With excess productive and labor capacity unprofitable to use and left on the sidelines, there is effectively no excess capacity.


Thus inflation will cause rising prices—assuming enough of it flows into consumer prices instead of asset prices—even with “excess” capacity. Proof of this abounds, but a recent example is that of Zimbabwe, where unemployment is above 75%, few goods are produced and store shelves are largely empty (leaving excess production capacity), and inflation is over 4 million percent.

Klusplatz said...

All stimulus spending does is create increased consumption and divert resources away from productive activity. A stimulus cannot create any real wealth. The supposed secret to the stimulus is the magic multiplier. But this is no different from Santa Claus. The only thing increased spending can result in is increased profits: Business costs remain the same, but the additional spending increases sales revenues. But nothing new is created, no investments are made, and no wages are paid.

Indeed, the mathematics of the multiplier theory is sound, but the assumptions are not. Since it is only productive expenditure, not consumption expenditure, which pays wages, the multiplier could only result in additional profit income, not wage income (the Keynesians specifically state that the multiplier works if incomes are spent, not saved and invested).

To understand this concept better, suppose you spent $100 at the book store. Then the bookstore owner, instead of re-investing in his business, spent the money at the grocery store. The grocery store owner then takes the $100 out of the cash register and spends it on a new appliance. The appliance store owner spends it on movies, carnival rides, or whatever. The spending goes on and on in this fashion. In this case, the money was never not spent. If it were not spent, it would instead be saved.

If people spent all their incomes, there would be no funds available with which to invest and to pay wages. It is saving, i.e., not spending, that pays for additional capital goods and labor. Had any of the above businesses saved the $100 and invested it in their business, they could buy new machines or hire more workers. Had they saved the $100 in a bank, other businessmen, in borrowing these funds, could have expanded their operations or started new ones.

If all monies were spent and not saved, we would soon consume all existing goods. Since we would not have produced any new goods to replace those consumed, we would soon have literally no goods of any kind, including food or housing (after our food was eaten and our houses deteriorated).

Matt Franko said...

K,

"Absent an increase in the quantity of money, if some prices rise, others must fall."

What about 'discretionary purchases'?

I've just given your comment a once over but you seem stuck in some sort of 'gold standard' or convertabilty of the USD type of paradigm.

Resp,

Klusplatz said...

Matt, I said nothing about gold or the US dollar.

I don't understand your question about discretionary spending. Any spending can only come from cash or a bank account - i.e., the part of the money supply (excluding barter).

There is no particular type of spending that changes what I have said.

mike norman said...

Klutz:

"A stimulus cannot create any real wealth..."

So the goods and services produced and consumed as a result of stimulus were not real? What were they, figments of our imagination? Were the cars sold not real cars? What are you talking about not real????

And all the plastic crap and consumer goods that ends up in landfills, polluting, thanks to the wonderful resource and capital allocation of the private sector is the real wealth??

Klusplatz said...

Mike:

Are you serious? You really think I’m saying that without the stimulus there would have been no goods or services created at all? Don’t say stuff just to say it—be serious.

Cars and the like would have been produced regardless, as they were long before a stimulus came along. Do you think the private sector would not produce on its own without the government taking money from it to give back to it so it will produce?

What I was saying was that NO NEW NET WEALTH was created by a stimulus. If you disagree with this, please explain to me in detail how this could possibly be!!!

And you failed to account for what was NOT produced because capital was taken from the productive sector and consumed in stimulus spending. And what counts is not merely producing something, but producing what people want. The government could steal via taxes and printing money used to produce butter and leather and incentivize/coerce others into making hula hoops or abstract paintings with that money instead, but standards of living do not rise unless the things being produced are what people want and need, as shown by their purchasing decisions—ultimately in the form of profits.

Therefore, stimulus spending to produce unprofitable cars such as GM’s result in a net destruction of wealth; in a decrease of it, not an increase. We could print and spend money to pay each other to scratch each other’s backs—GDP would increase but our standards of living and real wealth would decline.

The “plastic crap” and pollution (which has declined for over 200 years), is a byproduct of giving us heat, air conditioning, medicines, entertainment, and the like. They have helped you enjoy your life and stay alive and write this blog of disinformation. It’s easy to bite the hand that feeds you once you’re fed, isn’t it? As for landfills, who the hell cares? They take little space (most people have never even seen one) and take less space by the year, thanks to the thing you rail against – capitalism.

Thus, I ask: what are YOU talking about!!??

mike norman said...

Klutz:

Output was contracting so, YES, there was a declining quantity of goods and services produced prior to the stimulus. And incomes were falling as well.

As for your statement that, "capital was taken from the productive sector and consumed in stimulus spending," that makes no sense at all.

What capital was consumed?? Capital "consumption" refers to depreciation. Are you talking about the funds used/spent/invested for the stimulus? Those funds are matched dollar for dollar by additions to reserves by the Fed. If that were not the case, all money would cease to exist and interest rates would rise to infinity.

With the Fed keeping interest rates at zero (or even in a simple declining rate scenario) more funds are being put in than are being taken away by government sales of securities. Therefore, one can say that the money to pay for Treasuries comes from gov't spending itself.

You are very mixed up. Go back to Schiff's blog. You use the same, idiotic language that he uses.

Klusplatz said...

“Output was contracting so, YES, there was a declining quantity of goods and services produced prior to the stimulus. And incomes were falling as well.”

I’m not talking about the several months when the volume of spending slowed, causing production to slow as well—I’m talking about in general, absent government spending, companies still produce stuff on their own.

“As for your statement that, "capital was taken from the productive sector and consumed in stimulus spending," that makes no sense at all. What capital was consumed?? Capital "consumption" refers to depreciation. Are you talking about the funds used/spent/invested for the stimulus??"

Depreciation is depreciation—deterioration. Consumption of capital is when you reduce the amount of capital existing by using it to produce things that result in LESS capital (i.e., unprofitable investments), OR you divert money from productive areas (tools, machines, factories, etc.) to consumption. An example is when you increase taxes, where money goes from being used as capital supporting production and is instead spent, or, when you print money, where money is redistributed from savings to spending via the changes in purchasing power.

“Those funds are matched dollar for dollar by additions to reserves by the Fed. If that were not the case, all money would cease to exist and interest rates would rise to infinity.”

Your first sentence is merely saying that the stimulus is paid for by printing money. This is true. (and credit creation consumes capital in numerous ways, by causing recessions and financial market collapses, among others.).

The second sentence makes no sense at all. If the Fed failed to create new money, how would money disappear? Due to credit contraction and deflation? There would be a stopping point, and plenty of money would be left. Money can only disappear by becoming worthless, by printing too much of it, not by having too little.

How in the world could interest rates go to infinity if there were no money? Who would be bidding infinite rates when they had no money? Who would be wanting to borrow money when there was no money being used in an economy? Interest rates can only be as high as the highest average profits (this considers hyperinflation as well). If the rates of interest was higher than the rate of profit, who would afford to borrow money? It would be a losing proposition. The only way interest rates can be infinite is if profits equaled sales revenues.


“With the Fed keeping interest rates at zero (or even in a simple declining rate scenario) more funds are being put in than are being taken away by government sales of securities. Therefore, one can say that the money to pay for Treasuries comes from gov't spending itself.”

No, money to pay for treasuries comes from the central bank itself (though that is, in fact government-controlled). Government spending, besides taxes and borrowing, comes from credit creation at its central bank. But what’s your point?


“You are very mixed up. Go back to Schiff's blog. You use the same, idiotic language that he uses.”

I’m mixed up – right. You can’t even follow real economics.
You should think about what you said here. Schiff proved you wrong ten ways to Sunday, yet you still criticize him (that’s how I learned about you, from that viral video showing you being so rude and offensive to laugh out loud as he was trying to speak. I’m not a huge fan of Schiff, it was the disrespect that made me dislike you). He was right, you were wrong. You admitted you can’t follow what he’s saying--you should try to LEARN that language. Don’t’ you think that YOU should be on his blog learning what he knows? You should learn real economics. It’s because of your cockiness that I decided to hit you and test you today. I would calm down and get some humility if I were you. You might then learn how things really work.

mike norman said...

Get off this blog, idiot!! I have no time for jerks like you.

mike norman said...

Everything Schiff said IS wrong, WAS wrong and CONTINUES TO BE wrong!

Klusplatz said...

Still without humility eh? Don't you think you should be kinder? And isn't that what socialists are all about?

Since you still insist on being so right why can't you even show me where the things I've said are wrong?

You haven't debated any of them. You can start by explaining how prices can rise if there is no new money in the economy to push prices higher.

Unless you have the guts to have your pompous self try and address my queries and statements (or unless others do), I will leave you alone.

But start being rude and antagonistic and I'll come back and do the same to you again.

MortgageAngel said...

Klusplatz:
“All stimulus spending does is create increased consumption and divert resources away from productive activity.”

Who should determine how much I want consume or what I want to consume?

As an example, how many unproductive resources would you site in the following:

• Two 2 week family vacations every year.
• Investing in a new idea.
• Tithing.
• Employing a housekeeper and a butler to hand me my things whether I’m leaving for work or for play.
• Taking all of my laundry to the cleaners rather than doing it myself.
• Giving money to my widowed friend whose husband died from a mentally disabling disease that detoured him from managing his finances in a way that would have provided for his family after his untimely death.
• Paying a gardener to pull weeds ahead of me doing the fun gardening.


If my family wants to pay for it then it’s productive, period.

Are you a socialist? I think you are and you don’t even know it!

As far as Mike Norman goes, do you even know who you’re talking to? You’re talking to a man who, not so long ago, subscribed to the same concepts you do. He was raised and schooled in these concepts. He understands every bit of what you believe and he understands much of why you believe it.

Haven’t you ever been really sure about something and then found out what you believed to be fact, truth whatever, was not?

How did it go? Did you reject the truth in bitterness or did you find it fresh, even liberating?

If it was an “ah-Ha” moment then you might be in the right place because patient and verifiable explanation abound here on this blog.

mike norman said...

Jill,

You're wasting your time.

-Mike

bubbleRefuge said...

Sorry I missed all of this. I'll reply to your statements in line.

There are only two ways in which the average selling price of all the goods across the economy can each sell for a higher price: (1) there are fewer goods to be sold, or (2) more money is spent to buy the goods. On average, we do not produce fewer and fewer goods each year.

better said inflation is caused by increases in aggregate demand or decreases in aggregate supply

Absent an increase in the quantity of money, if some prices rise, others must fall. For example, a rise in Oil cannot raise all other prices. Other prices or the quantity sold must fall. The more unions drive up wages, the more unemployed they become (UNLESS, the fed prints money to help them out)

1) what about deflation? when marginal propensity to consume declines, that is, if the private sector decides to rein in spending and to save more as has been occurring over the past few years, prices decline. In the past couple of years we've had the government spending more and yet a deflationary environment because people are saving more.
2) The fed does not print money.
Whatever print money means? The Feds job is to control interest rates, ie the price of money, not the quantity. Thats a fact. The quantity of money is determined by the fiscal authorities which is the treasury department and the federal government. The treasury department has an account at the fed where its spending is channeled through.


For all the talk about sacred “aggregate demand” increased nominal aggregate demand is merely an increase in money.
No you are inventing your own definitions of things. nominal demand = real demand + demand caused by increased inflation rate. And you don't get demand side inflation until you are at full capacity

If the central banks dumps twice as much money in the economy,
again incorrect, central bank never dumps money. The fiscal authority creates new money when it spends
aggregate demand will on average double.
even if they did "dump money" thats false because people may decide to save it -again look at mpc Real demand can only come about through real purchasing power, which can only derive from new goods or services being created with which to purchase, or “demand” other goods and services.
I don't understand this argument. either people feel like spending or people feel like saving or somewhere in between

Similarly, GDP is only monetary demand. It means nothing. If the central bank prints more money it rises (showing that deflators don't really fully deflate)—THAT’S why GDP is up a “stunning" 5.7%.
if the federal government spends more money then real GDP goes up by that amount until we reach full capacity at which time only nominal GDP increases unless we can increase productivity.

In the absence of an increase in the quantity of money GDP would FALL every year as more goods and services were produced (real demand) while the money available to purchase them (aggregate demand) was constant). In fact, most productive capabilities are backed out of the GDP calculation—all that is left is a minuscule “Net investment.”
this reads as nonsensical. go back to the fundamentals. what is money, where does it come from. etc. read mandatory readings on Mosler's site www.moslereconomics.com and I'd be happy to answer any questions you may have about MMT. Its kind of hard and count-intuitive at first. I had it backwards my self even with an economics degree.

Klusplatz said...

MortageAngel,

No, I do not know anything about Mike Norman, except that he’s a very rude and arrogant SOB, and treats others very badly. That is the only reason I have not written to him with courtesy and respect, whereas otherwise I would.

I can assure you that he did not come from my school of thought. And how do you know what mine is? Further, I don’t think Norman knows what all the different schools are, given this statement from him on his main page: “You've been brainwashed by the hard right, fiscally conservative, Austrian economics coterie.” Austrians and the hard right are poles apart, but he thinks they are somehow related.

And I’m sure you asked if I were a socialist merely because I (Rightly) accuse Norman of being one, but in case you’re serious, I ask you: do you know what socialism actually is?

To your first question regarding who should decide who spends your money: YOU should. You should do any of those things you mentioned to whatever degree you want. But if you follow Norman’s philosophy (with his absurd notion that too much government spending will bring prosperity—why not have all our spending done by government and none by us?), and that which currently controls Washington, your ability to consume will be diminished by having your money taken and spent in other ways than you choose. And even your remaining money will be spent differently than you would otherwise choose due specifically to how the government spent the part of your income it took from you (for example, you will buy more of one good than you otherwise would have because some of the money taken from you was used as subsidies which artificially change the relative prices of the product and competing products).

So you are right about your list of things being valid ways to consume—no question, and every bit of your income should go to those things if you so choose. When I use consumption, I am talking about consumption of wealth in the overall economy, as opposed to the creation of wealth. What I meant was that when government confiscates incomes so as to spend on others, capital and real wealth (things that make our lives better) are consumed, because most of the money is taken from the wealthy, who keep most of their incomes in the form of saving, which becomes capital, which enables us to produce more wealth. By confiscating funds and redistributing them, capital used in productive capacities (capacities creating new wealth) is instead used in unproductive (consumptive) capacities.

Lastly, you are right about the Ah-Ha moment. But it happened differently for me. For me it was in learning for certain—and learning exactly how it is—that government cannot manipulate and intervene in an economy to create a better outcome than can individuals making their own decisions. The fact that you all believe that there are market failures—which are really failures of govt. manipulation—and that some smart economists can lead us to a better place (though they never have and have always been wrong) shows me that you have not yet had all of the Ah-Has that you could.

Sorry for the bad writing - in a hurry.

Klusplatz said...

bubbleRefuge,

Thanks for your comments. I’m afraid we disagree. Let me comment.

--better said inflation is caused by increases in aggregate demand or decreases in aggregate supply

For fear of misleading people to think that we should think in aggregates, I would not like to phrase it this way, but for our purposes, yes, correct.


--1) what about deflation? when marginal propensity to consume declines, that is, if the private sector decides to rein in spending and to save more as has been occurring over the past few years, prices decline. In the past couple of years we've had the government spending more and yet a deflationary environment because people are saving more.

I think you are really referring here to velocity. In that case, you are correct, and I failed to address this. I failed to address it because, in general, velocity and the volume of spending do not have a life of their own—they are mainly affected by the change in supply of money and it’s rate of increase/decrease.

--2) The fed does not print money.
Whatever print money means? The Feds job is to control interest rates, ie the price of money, not the quantity. Thats a fact. The quantity of money is determined by the fiscal authorities which is the treasury department and the federal government. The treasury department has an account at the fed where its spending is channeled through.

--You are absolutely 100% mistaken. First, I do use the phrase “printing money” even though that no longer technically applies. I should say that the Fed creates money. The Fed is the only entity that can create money. The Fed does control the quantity, indirectly, but it is the only entity capable of changing the quantity. In changing the rate, the fed changes the size of the monetary base, which changes the size of the money supply. The quantity of money is in no way determined by the “fiscal authorities.” The Treasury does not issue currency directly, on its own authority. It acts as an agent of the Federal Reserve System. It does not issue notes or coins. The federal government cannot create money in any way. It can only spend money that is taxed, borrowed, or created by the Federal Reserve. And if the treasury could create its own money, why would it need an account at the Fed!!?? This is all Money and Banking 101. It is surprising that you would go to the trouble to debate over such a thing that you are not that knowledgeable about. You should read about how the bank of England began in the 1600s. This will give you a better idea of the relationships.

Klusplatz said...

continued...

---Now you are inventing your own definitions of things. nominal demand = real demand + demand caused by increased inflation rate. And you don't get demand side inflation until you are at full capacity

I’m afraid you are stuck to deep in Keynesianism, which is simply one giant fallacy. What I was saying is that an observed increase in your “real demand” is not really an increase in real demand—it’s only monetary purchasing power. An increase in “real demand” would result in lower, not higher, prices (see below on Says law).

---again incorrect, central bank never dumps money. The fiscal authority creates new money when it spends

Again, you are really confused. Check out a basic M&B 101 text book. In the mean time, try and answer the question: in your view, how does the “fiscal authority” create money to spend?


---even if they did "dump money" thats false because people may decide to save it -again look at mpc

bubbleRefuge, forget so-called MPC and MPS—they are meaningless. But you’re right, some might be saved (I should have qualified with “on average” or “in general” or “for the most part”. But this is a very minor issue. If the money supply doubles, ON AVERAGE, prices double. Even if the relationship is 1:.9, or even 1:.5, the original point I was making was that aggregate demand (as opposed to real, true, demand (see on Say’s law below)). only increases when the quantity of money increases. Thus, when the MS increases, AD increases in either the same, or slightly less proportion.

---I don't understand this argument. either people feel like spending or people feel like saving or somewhere in between

Here I address Say’s law: Loosely stated as “supply creates its own demand.” What this really means is that your real ability to purchase comes from what you have produced (increasing the supply of that thing). We work (increasing supply) to have something (the good produced, or money we were paid to produce it with) to exchange for the goods we want. Merely printing more money does not bring increased purchasing power, it simply raises prices. Thus to have more real demand (purchasing power) we must produce more (supply). Thus, supply (production) creates demand (purchasing power). Also, supply increases demand by lowering the prices of goods (due to the new supply), creating increased purchasing power, since things then become cheaper.

---if the federal government spends more money then real GDP goes up by that amount until we reach full capacity at which time only nominal GDP increases unless we can increase productivity.

This is so crazy it would take too long to unwind this and explain all the flaws. Simply put, government spending might increase so-called GDP, but it does not increase the economy’s true net output. Forget about the capacity fallacy—see my comments above from Friday.

this reads as nonsensical. go back to the fundamentals. what is money, where does it come from. etc. read mandatory readings on Mosler's site www.moslereconomics.com and I'd be happy to answer any questions you may have about MMT. Its kind of hard and count-intuitive at first. I had it backwards my self even with an economics degree.

---Unless it is just my bad writing (which it well could be), not understanding this is to not understand basic economics. True wealth is increased (true economic growth occurs) by producing more goods and services. As more goods are produced, the price of each good falls, and real incomes rise, because there are only so many monetary units circulating (UNLESS, good ole Keynesians turn up the printing press, in which case prices of wages rise faster than prices of goods, still raising real incomes).

Klusplatz said...

MortgageAngel:

I realized I might not have made a specific point clear.

The market, on it's own (individuals and their income)would choose to invest in productive process by way of saving their money and loaning it out. But with government coercion, with deficit spending, those people cannot decide how to spend that money because it is stolen and used to by consumer goods instead of being saved and invested where it would pay wages and purchase capital instead of being spent forever. Bottom line: people would have chosen to create new wealth but the government forced upon them a destruction of wealth.

bubbleRefuge said...

Ok thanks for response. I'm going
to focus on 1 key point first because the dialog is getting big and un-weidly. The point of this site, moslers site, the UKC blog
and others others is to refute monetarism i.e. -mainstream textbook theory- and they do so in debt if you wish to indulge. All your points have been refuted many times in debt on these blog sites by people who know 100 times more than you or I. Nevertheless, I will regurgitate my interpreation of those arugments against monetarism which you appear to be defending.


--You are absolutely 100% mistaken. First, I do use the phrase “printing money” even though that no longer technically applies. I should say that the Fed creates money. The Fed is the only entity that can create money. The Fed does control the quantity, indirectly, but it is the only entity capable of changing the quantity. In changing the rate, the fed changes the size of the monetary base, which changes the size of the money supply. The quantity of money is in no way determined by the “fiscal authorities.” The Treasury does not issue currency directly, on its own authority. It acts as an agent of the Federal Reserve System. It does not issue notes or coins. The federal government cannot create money in any way. It can only spend money that is taxed, borrowed, or created by the Federal Reserve. And if the treasury could create its own money, why would it need an account at the Fed!!?? This is all Money and Banking 101. It is surprising that you would go to the trouble to debate over such a thing that you are not that knowledgeable about. You should read about how the bank of England began in the 1600s. This will give you a better idea of the relationships.


1) Yes the Fed has the computer program which manages the federal reserve system. We know that. But it has no fiscal authority. The treasury department has an account at the fed in which it writes its check against. This is a fact. There are no limits to how many 'checks' if you will the treasury can draft against its fed account. There are rules like the so-called debt ceiling that congress has the authority to increase. Not the fed. The fed has no power over how much money is spent on goods and services by the goverment.

2) Government finance 101.
The Monetary base is the amount of
reserves in the system. Banks that are members of the federal reserve system have reserve accounts at the fed, the sum total of these accounts is the monetary base. The Treasury, via its account at the Fed, creates new reserves when its spends and destroys reserves when taxes. In order to hit interest rate targets, the fed 'drains' these reserve accounts via the necessary amount by selling treasury securities ( or repo agreements) for the purpose of hitting the federal funds rate
target. The fed can drain reserves or add to reserves by exchanging them for treasury securities. In a aggressive fiscal policy environment the fed must drain reserves to keep the federal funds rate on target. That's all the fed does: add or remove reserves that were created by federal spending. The fed does not do any spending.

3) The monetary base does not having anything to do with the amount of money available to the public as you think it does. Money is created in two places: bank loans or credit ( or so called horizontal money) and federal deficit spending. The fed can influence the amount of credit in the system by lowering the price of money via the federal funds rate, but this is a weak force as evidenced by today's climate. People do not want to borrow money
and banks don't want to take to many chances. When the federal government spends, new money is injected into the system (vertical money) and GDP increases by whatever amount they spend on because federal spending is actually buying something that is produced by the private sector.
Based on your politics, we could debate the merits of what they federal government should spend on
etc but I want to focus on economics.

Klusplatz said...

Hi bubbleRefuge,

My responses are below yours, and broken into sections/postings. (I can’t figure out how to bold my text).

---Ok thanks for response. I'm going to focus on 1 key point first because the dialog is getting big and un-weidly. The point of this site, moslers site, the UKC blog and others others is to refute monetarism i.e. mainstream textbook theory- and they do so in debt if you wish to indulge. All your points have been refuted many times in debt on these blog sites by people who know 100 times more than you or I. Nevertheless, I will regurgitate my interpreation of those arugments against monetarism which you appear to be defending.

(When you write “debt” do you really mean to say “depth”?)

I am certainly not a monetarist. I am a free-marketer. Though I am against monetarists' activist policy theories, their economic theory regarding the Quantity Theory of Money is accurate.

I have done a check of Moseler’s site. bubbleRefuge, I must tell you, his and Norman’s site are equivalent to economic cults. As we know, cult leaders are never right, and they mislead their starry-eyed followers. It is downright scary to follow people who as Mosler does, promotes forced labor, states that unemployment is due to a lack of deficits, says that one person can only become employed if another sells financial assets, says that a profit-seeking monopolists can set prices arbitrarily, says that the Saudis control the price of oil, etc… These things are just nutty.


I am with you regarding how mainstream textbooks and mainstream economists are wrong, but I can assure you that these guys are not right. Their arguments could really not withstand very much scrutiny. You appear to have learned your economics through their web sites only. I have two economics degrees, have read hundreds of economics books—Marxist, Keynesian, Classical, Austrian, Supply Side, etc.—daily, over the last 20 years, read hundreds of journal articles, written two books, and successfully traded financial assets—equities, commodities, currencies—for the last 20 years. I can assure you I know what I’m talking about—I will go head to head with either of these guys. Believe me, you are being suckered into a false ideology and pseudo economics.

--- 1) Yes the Fed has the computer program which manages the federal reserve system. We know that. But it has no fiscal authority. The treasury department has an account at the fed in which it writes its check against. This is a fact. There are no limits to how many 'checks' if you will the treasury can draft against its fed account. There are rules like the so-called debt ceiling that congress has the authority to increase. Not the fed. The fed has no power over how much money is spent on goods and services by the goverment.

There is no computer program (that’s what the Monetarisits advise to be the case). There is a board who decides monetary policy, chaired by Ben Bernanke—it’s manual, not automated. The treasury’s account at the fed is not related to money creation 99% of the time. There is absolutely a limit for checks; the Fed does not have power to stop the government from borrowing or taxing more, but it has absolute power to stop the government from having spending power beyond these sources.

Once again, besides, taxing and borrowing from individuals and institutions, the ONLY way government can spend more is by having the treasury issue bonds, which are bought by commercial banks, who get the purchasing power to do so by way of the Fed issuing them reserves. Without the Fed issuing the reserves for the commercial banks to buy treasury bonds with, THE GOVERNMENT CANNOT SPEND IN EXCESS OF WHAT IT BORROWS AND TAXES!!!

Klusplatz said...

---2) Government finance 101.

I’m breaking this into pieces:

---The Monetary base is the amount of
reserves in the system.

Close enough, I suppose, but it also includes physical currency.

---Banks that are members of the federal reserve system have reserve accounts at the fed, the sum total of these accounts is the monetary base.

Don’t forget currency in circulation.

---The Treasury, via its account at the Fed, creates new reserves when its spends and destroys reserves when taxes.

Let’s zoom in here, as this seems to be the basis of your arguments about government creating money by spending. The fact is, without the Fed, the treasury (the government) COULD NOT GET ADDITIONAL FUNDING. The government/treasury can spend beyond the amount taxed or borrowed only by selling additional bonds to banks, and in some special circumstances (like during war), directly to the Fed. To reiterate: the government cannot get additional funding, and have additional spending, without collecting more funds from issuing bonds. Only the Fed can create the money to buy these additional bonds. Without the existence of the Fed, the government could not continue to spend.

Otherwise, you have to ask, why would the Fed exist? You would also have to explain (as I’ve asked you to do previously, if the Fed did not exist, by what means would the government be able to spend more than it taxes or borrows. If you think that it creates money merely by spending, HOW DOES IT SPEND TO BEGIN WITH? What money does it have to spend besides taxes and borrowed funds? Please explain this!!!

At best, you might be thinking about the money multiplier, and how money is pyramided. Through these means, government spending does in fact cause SUBSEQUENT deposits and money to be created. BUT, it cannot undertake the initial act of spending without the Fed having created the money for it to spend in the first round.

---In order to hit interest rate targets, the fed 'drains' these reserve accounts via the necessary amount by selling treasury securities ( or repo agreements) for the purpose of hitting the federal funds rate
target. The fed can drain reserves or add to reserves by exchanging them for treasury securities. In a aggressive fiscal policy environment the fed must drain reserves to keep the federal funds rate on target. That's all the fed does: add or remove reserves that were created by federal spending. The fed does not do any spending.

First, you put the cart before the horse. Reserves, net net, are not created by Federal Spending. Federal spending is created by reserves. If you disagree, you must explain exactly how spending money accumulated from taxes or borrowing creates NEW reserves that were not already in the system. Hint: the money multiplier does not have an effect here because the dollars the government receives and spends to create new deposits were first deposits removed from another bank—deposits were not created, but merely relocated. Thus, there is no new net deposits created.

Second, you miss the most important point here. By “only” adding or removing reserves, the Fed creates money (it never removes reserves on a net basis). Adding or removing reserves is the very basis, of the whole, entire process of generating, new money, inflation, on-going government deficits, rising stock and bond markets, rising housing markets, GDP increases, and the subsequent, recessions, financial crises, financial asset busts, etc.

Klusplatz said...

---3) The monetary base does not having anything to do with the amount of money available to the public as you think it does.

Do you understand what the monetary bases is (besides the narrow definition you gave above)? There could not be more money available to the public without the monetary base expanding. ALL NEW MONEY IS PYRAMIDED OFF OF THE MONETARY BASE.


---Money is created in two places: bank loans or credit ( or so called horizontal money) and federal deficit spending.

The first source is correct. The latter source is false, as I have shown. The onus is on you to prove how the government can create new money by spending, absent the Fed.

---The fed can influence the amount of credit in the system by lowering the price of money via the federal funds rate, but this is a weak force as evidenced by today's climate. People do not want to borrow money
and banks don't want to take to many chances.

Ok.

When the federal government spends, new money is injected into the system (vertical money) and GDP increases by whatever amount they spend on

Ignoring this part, as I’ve disproven it above. Again, if you think I’m wrong, you have some explaining to do.

---because federal spending is actually buying something that is produced by the private sector.

What does this even mean? Almost all buying is buying something produced in the private sector. That’s where things are made.

---Based on your politics, we could debate the merits of what they federal government should spend on
etc but I want to focus on economics.

We certainly could.

Klusplatz said...

Also, bubbleRefuge,

I just thought about that regarding government spending creating money, you might also be talking about Keynes’s spending multiplier. If so, this is a myth. Please see my original posts that explain this. Besides the fact that spending does not pay wages (it only pays for final goods), there is no way that spending $1 could create another dollar. If it somehow magically could, both the CPI and GDP would rise in double or triple digits every year.

mike norman said...

"The onus is on you to prove how the government can create new money by spending, absent the Fed."

This is merely a technicality. Since the Treasury is prohibited from running a negative balance in its account at the Fed, it must first "borrow" from the private sector the funds needed to cover expenditures. However, the Fed matches those reserve drains with an equal amount of reserves so as to ensure its target rate remains stable. And the Fed is normally accomodative due to banks' propensity to seek higher returns on excess reserves, so there are always sufficient funds to buy Treasuries.

Congress could easily eliminate the rule that the Treasury can't run overdrafts and if it did that would take the Fed completely out of the picture.

Klusplatz said...

Mike, your comments still do not address the question of mine that you quoted, and the reason you apparently responded: Absent the Fed, how would the government (treasury) create new money which is in addition to funds taxed or borrowed?

If the Fed was out of the picture, as you say, how would the treasury get it's money? You said yourself that "the Fed is normally accomodative due to banks' propensity to seek higher returns on excess reserves, so there are always sufficient funds to buy Treasuries." If the Fed was not there to be "accomodative," how would as many treasury bonds be sold? How would they be purchased? With what money, and by whom? If you think treasury bonds are not needed? How would the Treasury create money to spend?

mike norman said...

Bubble Refuge already answered that.

Klusplatz said...

No he hasn’t!!! He has merely stated that it’s possible without explaining how. That’s precisely why I keep asking over and over how it’s done.

If you really believe that he did explain, please copy and paste the specific explanation in a new post.

If you or bubbleRefuge do not reply explaining exactly how it’s done, I can only assume you all are bluffing, or merely stating things that you don’t know for a fact to be true, and arguing about subject matter you don’t fully understand.

Klusplatz said...

And Mike, neither have you yet explained how an increase in prices can cause an increase in the money supply.

bubbleRefuge said...

To bold your text use html tags before and after )
(When you write “debt” do you really mean to say “depth”?)
yes typo

I have done a check of Moseler’s site. bubbleRefuge, I must tell you, his and Norman’s site are equivalent to economic cults. As we know, cult leaders are never right, and they mislead their starry-eyed followers. It is downright scary to follow people who as Mosler does, promotes forced labor, states that unemployment is due to a lack of deficits, says that one person can only become employed if another sells financial assets, says that a profit-seeking monopolists can set prices arbitrarily, says that the Saudis control the price of oil, etc… These things are just nutty.

I think they are brilliant and this stuff is the holy grail of economics.

I am with you regarding how mainstream textbooks and mainstream economists are wrong, but I can assure you that these guys are not right. Their arguments could really not withstand very much scrutiny. You appear to have learned your economics through their web sites only. I have two economics degrees, have read hundreds of economics books—Marxist, Keynesian, Classical, Austrian, Supply Side, etc.—daily, over the last 20 years, read hundreds of journal articles, written two books, and successfully traded financial assets—equities, commodities, currencies—for the last 20 years. I can assure you I know what I’m talking about—I will go head to head with either of these guys. Believe me, you are being suckered into a false ideology and pseudo economics.

goto warren's site and have at it but don't give me your credentials and say "trust me, I know." Economics is math, accounting, statistics and logic, so prove your points.


There is no computer program (that’s what the Monetarisits advise to be the case). There is a board who decides monetary policy, chaired by Ben Bernanke—it’s manual, not automated.

Thats not what I'm talking about. I'm talking about the federal reserve system itself how reserves are created and the mechanism for the payments system. The federal funds market, etc. Its computerized. We are not using fred flintstone technology.

The treasury’s account at the fed is not related to money creation 99% of the time. There is absolutely a limit for checks; the Fed does not have power to stop the government from borrowing or taxing more, but it has absolute power to stop the government from having spending power beyond these sources.
No. The federal government can spend as much as it wants. This is a fact. Yesterday they increased the debt ceiling once again.

Once again, besides, taxing and borrowing from individuals and institutions, the ONLY way government can spend more is by having the treasury issue bonds, which are bought by commercial banks, who get the purchasing power to do so by way of the Fed issuing them reserves. Without the Fed issuing the reserves for the commercial banks to buy treasury bonds with, THE GOVERNMENT CANNOT SPEND IN EXCESS OF WHAT IT BORROWS AND TAXES!!!
Incorrect. The treasury spends beyond what is taxed and borrowed in the following way: it writes checks against its account at the fed. If there is not enough money in the account, the Fed must credit the money into the account. I don't know the microscopic details and obviously you don't either, but my understanding is the fed buys treasuries securities from the treasury department by crediting the account. Treasury checks don't bounce dude. How exactly it happens is a good question but it happens.

bubbleRefuge said...

do you understand what the monetary bases is (besides the narrow definition you gave above)? There could not be more money available to the public without the monetary base expanding. ALL NEW MONEY IS PYRAMIDED OFF OF THE MONETARY BASE.
which comes from deficit spending first and then is drained away via bond sales. The fed must control the size of the monetary base in order to hit interest rate targets. Banks also create new money so to speak in unlimited amounts when they create loans


The first source is correct. The latter source is false, as I have shown. The onus is on you to prove how the government can create new money by spending, absent the Fed.
see above. never said absent the fed. The fed is the tool, the government decides how much to use it


Ignoring this part, as I’ve disproven it above. Again, if you think I’m wrong, you have some explaining to do.
you haven't disproved anything Where?


What does this even mean? Almost all buying is buying something produced in the private sector. That’s where things are made.

yes, the government creates money when it buys goods and services which contributes to GDP

bubbleRefuge said...

Mike, your comments still do not address the question of mine that you quoted, and the reason you apparently responded: Absent the Fed, how would the government (treasury) create new money which is in addition to funds taxed or borrowed?

If the Fed was out of the picture, as you say, how would the treasury get it's money? You said yourself that "the Fed is normally accomodative due to banks' propensity to seek higher returns on excess reserves, so there are always sufficient funds to buy Treasuries." If the Fed was not there to be "accomodative," how would as many treasury bonds be sold? How would they be purchased? With what money, and by whom? If you think treasury bonds are not needed? How would the Treasury create money to spend?
Again they fed buys bonds from the treasury department and puts the money in the treasury account at the fed making it effectively limitless. Its called monetizing the debt. But I'll make a logical case for you. If you were correct, then the supply of money would be limited and the deficit could never go beyond the supply of money in the system. Like a gold standard. But we know and have seen deficits increase dramatically. If there is a structural limit to the size of the deficit, the what is it ?

bubbleRefuge said...

Klusplatz, stay tuned. You are correct in saying that the treasury is operationally constrained to spending only what it has in bond sales and tax revenue. My statement about the fed buying treasuries from the tresury department is wrong. Warren is explaining the details to me in private email conversation. I will get a more precise answer, but the treasury can always sell bonds to primary dealers in order spend. In other words their is never a liquidity problem for the treasury as a practical manner. But these are unnecessary rules that are created by congress. Since currency is electronic and is issuable by the treasury via its fed account, their is no theoretical limit to how much the government can spend.

Klusplatz said...

bR,

Thanks, now you’re getting on the right track. Everything you said below is correct. I’m starting to feel relived, whereas before, I was completely exasperated and stunned.

I would like to clarify this more myself, and show you that we have been talking in circles because you have contradicted yourself and you’ve not paid attention to some things I’ve said. I will lay it all out in a little while.

bubbleRefuge said...
This comment has been removed by the author.
Klusplatz said...

Ok, here I walk through past comments and clarify confusions.

The clarity came today when you wrote: “never said absent the fed. The fed is the tool, the government decides how much to use it

But this contradicts what you have been arguing, as I’ll explain.


Originally, you wrote:

The Feds job is to control interest rates, ie the price of money, not the quantity. Thats a fact. The quantity of money is determined by the fiscal authorities

and

central bank never dumps money. The fiscal authority creates new money when it spends

But in fact, the Fed is the ONLY entity that can control the quantity of money. It, not the government decides how much money exists and how much can be spent. The govt. cannot spend it if the Fed hasn’t ALREADY created it. But, in fact, the Fed will create as much as the government wants.

You confirmed my statement regarding the fact that the Fed itself creates money by later saying: The fed can influence the amount of credit in the system

And by saying:

Banks that are members of the federal reserve system have reserve accounts at the fed,

And by saying:

Money is created in two places: bank loans or credit ( or so called horizontal money) and federal deficit spending.

The Fed creates money (expands the monetary base), which creates excess reserves for banks to lend out. Once they lend it out, new money exists in the economy and the money supply is expanded—i.e., the quantity of money is expanded. Separately, the fed can create “reserves” (demand deposits at the Fed).


Influencing the amount of credit in the system is in fact influencing the quantity of money in the system.

bubbleRefuge said...

Its better to approach this debate one issue at a time in order to avoid over saturation and make progress. The Government, as an issuer of non-convertible fiat currency is not constrained in how much it can spend regardless of taxes and bond sales. That is the fundamental axiom behind post Keynesianism. Lets debate that and get to the bottom of it. I'm researching the exact procedure the fed gets around the constraint of bond sales and taxes. Dr Scott
Fullwiler wrote a paper on it and I'm sending him a request. So we don't loose touch, here is my email
jcmccutcheon at yahoo.com , send me a ping.

Klusplatz said...

That brings us to your comment:

The monetary base does not having anything to do with the amount of money available to the public

It is only by expanding the monetary base—deposits of commercial banks at the Fed (as you stated)—that banks can obtain new reserves that enable them to lend more money. New money can get into the economy solely by this method. In other words, the treasury could never spend a single amount above what it taxes or borrows and we could have massive inflation merely by the PUBLIC getting new credit and spending that money in the marketplace.


Which brings us to your comment:



The fed has no power over how much money is spent on goods and services by the goverment.

The government can only spend additional money (in excess of what it borrows or taxes) by having the central bank FIRST, FIRST, FIRST!!!! give commercial banks excess reserves with which to buy newly issued treasury bonds, to primary dealers, as you mentioned.

Which brings us to your comments:


The Treasury, via its account at the Fed, creates new reserves when its spends

And your comment:

There are no limits to how many 'checks' if you will the treasury can draft against its fed account.

These are both 1000% false!!!! You mentioned before that you don’t know the minute details and neither do I. Well, I don’t know the 10th level of detail, but I sure know the 6th or 7th, which is what’s required to comprehend this. If you understood that level of detail you would not have argued these points. I’ll explain:

The treasury’s account at the Fed is NOT for the purposes of creating money. It is for taxation and other minor purposes. The treasury does not get it’s money from the fed through this account! It gets its money by issuing NEW bonds to primary dealers. The Fed gives reserves to those dealers so that they can buy the bonds. This process is indirect, not direct. If it were direct, the treasury would receive “high-powered money” and it’s spending would kick in the money multiplier and the process would be wildly inflationary.

Thus, the treasury does not create new reserves through its account at the Fed. The Fed creates new reserves for the banks to buy treasury bonds from the treasury. Therefore, there are limits to how many checks the treasury can write from its account at the Fed – only the amount collected from taxing (and maybe some other minor things). When the Treasury is out of funds at it’s account at the Fed, it issues new bonds, which the Fed pays for indirectly.

Does this clear it all up?

To fully understand this, please see this terrific book.

http://mises.org/Books/mysteryofbanking.pdf

You can trust it—this isn’t economics per-se we’re discussing, it’s the actual, factual mechanics of the banking system. This book is a great work on this matter.

Klusplatz said...

bR,

Your last comment is accurate - the government is not restrained!

My only point in all this is that it is not restrained because the Fed will always provide it money.

Please see my new comments (strung out as they are), as I think it will clarify things for you.

Thanks for email address, I'll write there going forward.

Klusplatz said...

By the way, that is not only a post-Keynesian axiom, it is one that everyone has largely agreed on for well over a century.

bubbleRefuge said...

The Fed creates money (expands the monetary base), which creates excess reserves for banks to lend out. Once they lend it out, new money exists in the economy and the money supply is expanded—i.e., the quantity of money is expanded. Separately, the fed can create “reserves” (demand deposits at the Fed).
It can get confusing talking about to many things at once. Anyhow
banks do not lend out reserves to people they lend out reserves to each other. So the level of reserves do not have influence on the macro economy the way you and most mainstream economists think it does. Reserves are used for inter-bank check clearing and banks have reserve requirements that they must adhere to. Reserves have no effect on the supply of money that you and I have access to as private citizens. The fed doesn't control the quantity of money you and I have access to as citizens. Only to the extent that interest rates control the demand for borrowing does the fed have any influence. But that is a weak force at best( we can debate that later.) The Federal government controls the level of money in the economy via taxation and spending policy. Private citizens and banks control the level of money in the economy by how much is borrowed and lent respectively. But private lending creates an asset and a liability so is that really new net money?

bubbleRefuge said...

R,
Your last comment is accurate - the government is not restrained!
My only point in all this is that it is not restrained because the Fed will always provide it money.


Ok thats my main point that there are not restraints in how much money can be created in the current monetary system and its not limited by taxes and bond sales as most folks think it is. Yes you are right in that the fed works in concert with treasury to make this happen but the fed itself does not make decisions on how much spending is to occur or how much taxation is to occur. ( ie the size of the deficit) And it is these decisions that determine how much money the private sector has!
So I guess we can go to the next level which is...
What should we do about it as policy makers and what are the likely results of our polices?



Please see my new comments (strung out as they are), as I think it will clarify things for you.

Thanks for email address, I'll write there going forward.

Klusplatz said...

Oh my gosh! You still don’t believe me!

Excess reserves are what enable banks to create loans, to create money to lend out to people. Yes, reserves, affect the money supply – without new reserves enabling the banks to create new credit, the money supply cannot expand. The Fed controls the amount of reserves, the amount of credit, the amount of loans, and therefore the quantity of money.

The Federal government controls the level of money in the economy via taxation and spending policy. Private citizens and banks control the level of money in the economy by how much is borrowed and lent respectively. But private lending creates an asset and a liability so is that really new net money?

bR, this is starting to get ridiculous. You are missing the point because you don’t fully understand the process. Why are you debating so hard when you don’t understand what transpires?

Private citizens can control nothing – they can’t create money. Only banks, with new reserves can. All lending creates and asset and a liability. Yes, it’s new money. When a new deposit is created and new money that didn’t exist before is created and lent out, it is in fact new money.

The Federal government does NOT! control the level of money in the economy. You are flip flopping on this. You tell me government controls spending, then you admit the Fed controls it. Which is it. If you agree that the Fed controls excess spending by the government, please quit saying that the government controls it.

Klusplatz said...

Can't move on yet:

but the fed itself does not make decisions on how much spending is to occur or how much taxation is to occur. ( ie the size of the deficit) And it is these decisions that determine how much money the private sector has!

If, you are saying that the governemnt controls the amount of money in the economy because it decides how much to spend, you are right only partly, and only indirectly.

As I've already stated, new money comes not only from government spending, but also from new private loans. And, yes, the government decides how much IT wants to spend, and the Fed accomodates, it, but it is the Fed, not the government that actually expands the money supply and creates money. The government merely spends it.

Your argument is like saying it is consumers who create heat pumps merely because other companies create heat pumps because they know consumers will buy and use them.

Klusplatz said...

The Federal government controls the level of money in the economy via taxation and spending policy. Private citizens and banks control the level of money in the economy by how much is borrowed and lent respectively. But private lending creates an asset and a liability so is that really new net money?

It think i might get your angle on this. you are saying that because new loans go to people, they are part of the money-creating process. THis is still not true. The banks/Fed create the money, and people merely take it and use it.

mike norman said...

Keep it going guys, this is awesome! And Klusplatz, just so you know, I always wanted to be a cult leader!

Klusplatz said...

Herr Norman,

Awesome? Surely you jest, since you said that I was mixed up and had idiotic language.

bubbleRefuge said...

So where are we in the debate?
1 ) Government spending is unlimited in the sense that the government funds itself. ( we agree here )
2) What is the money supply and who controls it? ( we disagree )


Excess reserves are what enable banks to create loans, to create money to lend out to people.


Since banks do not lend reserves to people banks do not need reserves in order to create loans. Banks need reserves in order to clear checks among each other (the payments system) and banks have statutory reserve requirements imposed by the fed which are based upon their outstanding deposits, not loans.

Yes, reserves, affect the money supply –
without new reserves enabling the banks to create new credit, the money supply cannot expand.

see above
The Fed controls the amount of reserves, They manipulate the amount of reserves in order to hit interest rate targets. It is interest rate maintenance that drives everything the fed does
the amount of credit, No. How do the fed control the amount of credit ? Banks can create as much credit as they want subject to capital requirements and demand for loans from the private sector. So the Fed has little or no control over the quantity of credit.
the amount of loans, and therefore the quantity of money.
Again government spending and taxing power has the most powerful influence on the supply of money.