Short quote on the important of the external factor (exports and imports).
The Case for Concerted Action
Wynne Godley’s Views About How The Economy Works
V. Ramanan
https://www.concertedaction.com/2022/07/24/wynne-godleys-views-about-how-the-economy-works/
Devil's advocate
ReplyDeleteLending by the Reserve and commercial banks is inflationary, whereas lending by the non-banks is non-inflationary, ceteris paribus. If you bottle-up savings, you are pressured to offset the decline in AD, the decline in velocity, with money products, or QE forever.
The hypothetical Wicksellian natural rate of interest has an incalculable impact on AD, in both magnitude and timing. Whereas the injection of new money has a fixed impact on AD, in terms of magnitude and timing.
The increased lending capacity of the financial intermediaries is comparable to the increased credit creating capacity of the commercial banks in only one instance; namely, the situation involving a single bank which has received a primary deposit. But this comparison is superficial, since any expansion of credit by a commercial bank enlarges the money supply, whereas any extension of credit by an intermediary simply transfers the ownership of existing money.
Our money and banking system has been grossly mismanaged. One root cause has been the inability of the Fed, the Congress, and academia, to recognize the crucial importance of the difference between money creating institutions and financial intermediaries. This misconception has been aided and abetted by the universal opinion held by the public that they loan out the savings of the public.
The differentiating question ostensibly illustrating the pseudo economic reasoning is: How is the growth of bank-held savings explained in the consolidated balance sheet of the Federal Reserve System ?
The answer is that it cannot be explained in the consolidated balance sheet because monetary savings, from the standpoint of the banking system, is a function of the velocity or rate of turnover of deposits, it is not a function of volume.
The growth of bank held savings thus results in no alteration in the “footings’ of the consolidated balance sheet. Interest-bearing deposits signify a transfer from non-interest-bearing deposits in the same institution, or a derivative deposit from a system’s perspective. I.e., the banks pay for what they already own.
Banks don't lend deposits. And all monetary savings originate within the payment's system. Those are givens. But the banksters wanted a bigger piece of the loan pie. And down that road lies Japan.
The American stock market will resemble the Japanese versions. Won't resemble stock prices but broad based asset prices.
Keynesian economists have achieved their objective, that there is no difference between money and liquid assets. The Keynesian macro-economic persuasion maintains a commercial bank is a financial intermediary, joining savers with borrowers.
That ignores the fact that it's virtually impossible for the DFIs to engage in any type of activity involving its own non-bank customers without an alteration in the money stock.
And lending/investing by the DFIs is largely for existing assets. There is not any assurance that an increase in the money stock will be matched by an offsetting addition to the supply of new goods and services in our market economy.
we can only expect more of the same, only worse. The remuneration of interbank demand deposits guarantees it.
Laubach, Mishkin, and Posen (1999, pp. 315–20) describe a two-year lag between policy actions and their main effect on inflation as “a common estimate.
ReplyDeleteBoth the BOE and ECB are finally realising it.
bankofengland.co.uk/external-mpc-discussion-paper/2001/the-lag-from-monetary-policy-actions-to-inflation-friedman-revisited.
It is stock vs. flow. That’s our specious accounting system. An expansion of commercial bank time deposits (savings) is prima facie evidence of a leakage which collects in the form of unspent balances.
With time deposits in our payment’s System now exceeding $15 trillion, it is undeniable that this is an important factor retarding the growth of the economy.
The stoppage in the flow of monetary savings (funds held beyond the income period in which they are received, income not spent), which is an inexorable part of time-deposit banking, has a longer-term debilitating effect on demands, particularly the demands for capital goods (CAPEX).
Philly FED Capex v stock market
https://d3fy651gv2fhd3.cloudfront.net/charts/united-states-philly-fed-capex-index@2x.png?s=usapfci&v=202207211230V20220312&d1=20170725&url2=/united-states/stock-market
Question:
ReplyDeleteIf a commercial bank makes a loan and are not reserve constrained.
If a non bank that pools savings makes a loan it is pooled savings constrained.
What does the double entry accounting look like for both types of lending?
Are they different ?
If there is a difference does it tell us anything valuable ?
Not a trick question just curious.
Way I see it.
ReplyDeleteFinancial assets are always two sided in that the creation of a financial asset adds a liability to one entities balance sheet and adds an asset to another’s.
For private credit creation, the asset and the liability remain in the private sector.
I think, but not sure...
Overall how do they increase the money supply. What money supply are they increasing.
Dunno if that is correct and what the 2 double entry balance sheets would look like.
I can't see any difference myself apart from saving over investment.
ReplyDeleteThe right type of loans.
When banks were banks
ReplyDeletehttp://bilbo.economicoutlook.net/blog/?p=31855
Only way out of the mess we are in.
“ Lending by the Reserve and commercial banks is inflationary”
ReplyDeleteNot if they don’t increase the prices of the collateral products…
“All prices are a function of what govt pays for things and what the govt lets their banks lend against things”
ReplyDelete“Quantity of money!” (reification fallacy) doesn’t matter to price..,
"whereas any extension of credit by an intermediary simply transfers the ownership of existing money."
ReplyDeleteThe whole problem here is a belief that there is a fundamental difference between 'spending money' and 'non spending money'. In a world of negotiability that isn't the case. All 'non spending money' of any note is immediately negotiable. We don't have a world of 90 day bank accounts, and even if we did that would just add a 90 day lag to the negotiability function.
It's the same belief system that has caused the collapse of stable coins, which work in the same way - there is a 'spending money' part which is normally pegged to some 'international currency' and a 'saving money' part that floats and receives an interest rate.
Turns out such an arrangement is unstable. But it is the belief in that stability from which the consequences arise. And that can only occur in the currency area of the main International Reserve Currency with 'real money'.
That would explain why the belief only applies to the US dollar.
Ramanan still struggling with the concept that savings are an export product I see.
ReplyDeleteBless.
"That would explain why the belief only applies to the US dollar."
ReplyDeleteWhy I think anybody with a pulse could front run the macro portfolio managers. I call it the Super bowl model and would work similar to Mike's zombie trading.
It has 4 quarters with offense and defence and a clock.
Macro portfolio managers all suffer from GROUPTHINK and have all been potty trained the same way. They all act the same way and their actions are driven by the clock in the super bowl - The Fed.
I'm only going to give 3 examples out of thousands I've come across and also the fund managers I worked for in premium investments at Santander.
Example 1: https://seekingalpha.com/article/4461936-consumers-will-cause-a-recession-and-a-bear-market
Example 2: https://seekingalpha.com/article/4515633-options-market-and-business-cycle-point-bear-market
Example 3: https://themacrocompass.substack.com/p/tmi-2-the-macro-compass-is-trying
The 4 quarters in the super bowl is the business cycle that they divide it into 4 parts. All of them do it.
They all use the exact same leading and lagging indicators to let let them know what quarter they are in.
Depending on what quarter they are in they go defence or offense.
Alf's macro compass shows you what they all choose as offensive and defensive players.
The clock, the FED drives it all. The reserve currency and what we have just discussed above. The run to safety or confidence of $ zombies.
Knowing all of that you could either front run the portfolio managers or simply jump on and ride the quarterly trends.
It's not rocket science.
Hi Neil,
ReplyDeleteCan you go into a little bit more about stable coin and spending money/non spending money?
Are you saying that the reason stable coin collapse is they try and be a savings account and a term deposit at the same time?
Cheers
Ramanan will forever be in that trench.
ReplyDeleteI was looking back over some old material on Billy Blog looking for flow 5. Ramanan was there On every topic with his spade.
Just don't get greedy.
ReplyDeleteJump in, jump out and wait for the next quarter/ cycle.
That's why you see portfolio managers jobs advertised beside cleaners, retail assistants, engineers, doctors, chefs.
ReplyDeleteThere's a basic standard that they have all been trained to. The Super bowl index.
The reason algorithmic stable coins fail is because they are not dynamically stable. It ends up being a greater fool theory.
ReplyDeleteYou get the same with the spending money/non-spending money concept within Monetarism, the whole fetish with 'sterilisation' and the like. It's all based upon the same simplistic abstraction that has killed algorithmic stable coins.
Something called 'reflexivity' is usually the killer. Supply changes often reflexively amplify directional momentum. Splitting the money into two parts is an attempt to contain the reflexivity. Then you end up with a 'foreign reserve ratio' to try and dampen the reflexivity (partial collateralisation), but all that does is make the currency a derivative of whatever 'international currency' it is using as reserve.
MMT essentially says all that is silly and pushes the reflexivity out to the main FX market.
So stable coins not so much savings acct/term deposit, more like pegged currency. And like all pegged currency they eventually collapse because of reflexive momentum push past the supply of foreign reserves available and break the peg.
ReplyDeleteTether is $1 …
ReplyDelete