Monday, September 30, 2013

Reponse to Odie

Odie, you wrote:

"Instead it will be income for the bank which it will use to pay e. g. one of its employees by crediting its account. No money being created are destroyed there, simply shifting funds around. For those $1200 the bank's deposit liabilities stay the same. (More maybe later)"

I agree with everything in your comment up until that part!

There's two separate and completely independent IOUs at play here between you and the banking system in aggregate: Your IOU to them (the mortgage) and their IOU to you (your deposit). You are each others creditors and debtors. If you pay $2000 to them with your deposit, that is accomplished by them debiting your deposit account. Now it so happens that $800 of that payment is principal, so it also affects your IOU to them, so they mark that IOU down by $800 for that. Your mortgage though is not a medium of exchange and thus it is not "inside money." $2000 of inside money was destroyed in this example: $800 of your IOU was also destroyed for a net gain by the banks of $1200 of equity (the abstract dollar amount of the value of assets in excess of the value of liabilities). They have no obligation to turn around and create more inside money by crediting other people's or entities'  bank deposits with $2000 or $1200 or any other amount. There's no law of the preservation of bank deposits. You and I can't destroy bank deposits because to us bank deposits are "outside money." "Inside" and "outside" are relative terms. Relative to non-bank private entities, bank deposits are outside. Relative to the private sector (the usual vantage point from which to define "inside" and "outside") they are "inside." If we included the Fed in our vantage point, then Fed created money (reserve notes and Fed deposits) would also be "inside" and only coins and the extremely rare "US notes" would remain "outside." If you and I write out our own IOUs and use them as money, then we CAN destroy those and that "money" would be "inside" us.

Friday, September 13, 2013

Equation Test

λb0 λb0 λb0

λ<sub>b0 </sub>λ<sub>b0</sub> λ<sub>b0</sub>


Another equation test, this time from this blog:

r = \frac{1}{\kappa} \; \frac{\langle I\rangle}{M_{0}}


$$ r = \frac{1}{\kappa} \; \frac{\langle I\rangle}{M_{0}} $$

$$ K_{h,g'} = \frac{1}{\theta}$$
$$ K_{y',g'} = \frac{1-\theta}{\theta}$$

$K_{h,g'} = \frac{1}{\theta}$

$K_{y',g'} = \frac{1-\theta}{\theta}$

How about in the middle  $K_{h,g'} = \frac{1}{\theta}$ of a sentence?

(1) r=dIdM=1κIM

Answer for Macroman

macroman, I’m with you up to here:
“It is these reserves that the banks can then use to lend out money or do with it whatever they please.”
1. If you’re talking about banks lending reserves to each other (which I’m pretty sure you’re not) then this is correct. Since reserves are defined as base money HELD BY THE BANKS, you can see how this is true. Yes banks loan each other base money:
“MB: The total of all physical currency plus Federal Reserve Deposits (special deposits that only banks can have at the Fed). MB = Coins + US Notes + Federal Reserve Notes + Federal Reserve Deposits.”
2. If you’re talking about something else, this is not true. About the closest thing you could say that IS true is that a cash advance is a loan of base money in the form of “physical currency.”
“Because the federal reserve does not have to have the MONEY on hand to buy the bond, but rather can use a made-up reserve, it is the equivalent of printing money.”
Check this out:
Notice how reserves flow out of the Fed, and assets flow in, in equal proportion.
As for the rest of your email, check this out:
Especially the balance sheets at the bottom: “Public (simplified)” and “more simpflified.” Especially this bit:
public’s stock of money = L + B + F = bank deposits + cash
It’s the “F” part you’re worried about. But the thing to keep in mind though is that this does NOT affect the public’s equity!
public’s equity = T
QE changes the composition of the public’s stock of money, but has NO effect on the public’s equity.

Friday, September 6, 2013


Below is a test reply comment to Fed Up and winterspeak in JKH's post on Market Monetarism. My original posted comment is here, but as of this writing it's "awaiting moderation" (I'm sure because there's more than one link in it), but it still let me grab a link to it, so it'll be interesting to see if people can see the original even though it's awaiting moderation.

 Fed Up & winterspeak,
“Tom Brown, does this sound familiar?” — Fed Up
Yes, this sounds very familiar, which is why I posted a link to my post “Nick vs Scott” on this subject above. And Nick’s response above again highlights a difference with Scott. Let’s review: Scott Sumner, in this post explaining the hot potato effect (HPE), used as an extreme example under which the HPE still applied a “cashless economy” (his case 7):

7. Now let’s assume a cashless economy where the MOA is 100% reserves. Still no change; reserves are still a hot potato.
Using Scott’s hypothetical case 7 a basis, I asked Scott and Mark Sadowski the following question:

OK, let’s start with your own example #7 from this post: “7. Now let’s assume a cashless economy where the MOA is 100% reserves.”
You’ve clearly identified the MOA there: reserves. Banking doesn’t matter, so why not assume a single commercial bank? And my other assumptions: no taxes, gov spending, foreign trade, etc.
So if initially the CB buys $X in assets, this gives us an initial $X in reserves, which you’ve identified as MOA.
Since we have an MOA, we will reach a steady state price level, P, right?
Now what if the CB sells 1-epsilon of its assets? The new eventual price level should be:
new steady state price level = P*(epsilon*X/X) = P*epsilon
So as epsilon approaches zero, the new steady state price level should approach zero too??
At which point I added

Scott, of course the reserve requirement = 0% too.
Scott’s response was:

Tom, Yes, as the level of reserves go to zero, so does the price level.
Mark Sadowski agrees with Scott, although he complains about the realism of my (actually Scott’s!) hypothetical cashless society:

Tom Brown,
I agree with Scott. However, any example that doesn’t include currency is excluding what has been the most important part of the monetary base historically. In short it is extremely unrealistic.
This is quite different than what Nick writes above:

If there were just one commercial bank, and if nobody used central bank currency, and if there were no legally required reserves, then that single commercial bank would not need to hold any reserves. That single commercial bank could ignore the central bank. The central bank would disappear.
Nick wrote nearly the same thing when I first presented him with my version of Scott’s hypothetical, however after showing him Scott’s response, he wrote this:

Tom: you really do need to distinguish between the *demand* for reserves going to zero and the *supply* of reserves going to zero. (And *both* supply and demand going to zero.) I read you one way, and Scott read you the other. It’s supply AND demand.
He also later saw my notional chart (animated version here) of my interpretation of what he meant by this and wrote:

Tom: thanks. looks roughly right on a first glance.
though to be fair, the version he saw was slightly different, but not substantially so (embedded in the comments here).

Tuesday, September 3, 2013

Sumner's HPE Explanation

Geoff's comment:

"If somebody gives me, say, $500 in cash but my wallet is already full, then I’m going to do something else with it. I might spend the cash on real stuff or convert it to another kind of financial asset like a bond or stock. That’s the HPE in action, right?
But there is only one problem. The Fed can’t just give me $500 in cash. All they can do is buy an existing financial asset from me (aka an asset swap).
I know Dr. SS understands this. So what am I missing?
PS I agree with your post, Cullen. Sorry for going O/T :)"

Geoff, I agree that's a problem. Just giving you the $500 is what the MMists call a "Helicopter Drop."

But what Scott's saying in his gold analogy, the difference between cases 3. and 4. is that gold is the MOA in 4 and prices are "'sticky" (meaning they don't move instantaneously).

Therefore in case 3, the price of gold drops in half instantly. That's still the HPE. In case 4 this happens more gradually, and what changes instantly are things like "interest rates."

Make sense?

BTW, to comment easily select "Name/URL" then you can put any URL you want in there, including