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  • Would A Sovereign Money System Be Flexible Enough? [View article]
    To Asbytec

    << If we have full reserve banking, where does the new money creation come from. This sounds like a fixed money scheme. And deflationary. >>

    It seems obvious to me (being simple minded) that QE was practically a fully reserved system.

    So, if the reserve requirement was 100%, the Fed would have to sell enough bonds to grow the money supply as predicted by, say, the Taylor Rule. There are obvious objections, but no better solutions.

    The PM doesn't seem to agree with my assessment, in fact, it sounded like PM was spouting off some variant of MMT which made my eyes roll.

    Anyway, you've heard my criticism of MMT and I mentioned criticism of fully reserved banking in a post in this thread earlier to today. I thought it was good, but no one seems to have read it.
    May 16, 2015. 12:54 AM | 1 Like Like |Link to Comment
  • Warren-Vitter And The Lender Of Last Resort [View article]
    Oops -

    "Are you aware that the bankers had seen fit to reduce their Debt/Asset ratio from 10% decades earlier (I think) to just 3% prior to the Crisis?"

    I meant to say -

    "Are you aware that the bankers had seen fit to reduce their Equity/Asset ratio from 10% decades earlier (I think) to 3% prior to the Crisis?"
    May 15, 2015. 08:40 PM | 2 Likes Like |Link to Comment
  • Warren-Vitter And The Lender Of Last Resort [View article]
    To Salmo trutta

    Ah, come on, you have to agree that the Crisis was going hit sooner or later, whether Dr. Bernanke tightened or not. And there's arguably no way Dr. Bernanke could have known what stupidity the banks had been up to, even though it had been going on for years.

    Surely, if you saw the Case-Shiller Home Index in 06-Jan-2006, you would have done someting about it on Feb 6 2006, once you had taken the oath of Office.

    Take a look at the Case-Shiller Home Index, 1980-2012, on Wikipedia:
    http://bit.ly/1EN2eVo

    How was anyone supposed to know that the Banks had been signing NINJA loans (home ubyers with No Income, No Job, No Assets) and the "indepedent" ratings agencies had been posting fraudulently high ratings on CMOs containing pools of the NINJA loans?

    Furthermore, if you had known about these unconsciencable deals, what could you have done to contain the damage? What would you have done, let it ride?

    Dr. Bernnake was doing his job. The Crisis would never have been a crisis if the bankers had been doing their jobs. Perhaps bankers ought to be taking a similar oath (similar to Bernanke's) when they're put in high positions.

    Bankers are supposed to be smarter than you or me, they're supposed to be acutely aware of what will happen to the money supply, and the economy, if they render their banks insolvent.

    And what about the banks' ability to absorb losses? Are you aware that the bankers had seen fit to reduce their Debt/Asset ratio from 10% decades earlier (I think) to just 3% prior to the Crisis? Why would any smart banak executive allow that to happen? Could it possibly be because they wanted their stock options to get a maximum slice of the bank's equity, and they were blinded by greed?

    The banks simply couldn't absorb losses. Tell me which asute investor was aware of all this stupidity and clearly foresaw the Crisis.

    Why is it that just a handful of crappy sub-prime mortgages on the banks' books (being processed into pools of CMOs, to be sold) could have taken down the Banks? Easy - no bank knew exactly how much such crap was on others' books, and therefore no bank could trust the financial statements of a month ago; thus no banks were willing to lend to one another. The credit markets froze, due to such distrust. Within a day or 2 after Lehman's bankruptcy (which was reportedly almost averted) even GE couldn't get a loan.

    A great swath of bankers should be in jail for failing their fidiciary duty to shareholders, not Bernanke. Blaming Bernamke for anything without any proof whatsoever is nothing short of a ludicrous character assassination. Not funny.
    May 15, 2015. 07:35 PM | 5 Likes Like |Link to Comment
  • Would A Sovereign Money System Be Flexible Enough? [View article]
    To alcyon

    << The idea is to separate the payments system from risky lending activity, so that failure of investments does not pose any risk to the payments system or other crucial parts of the financial infrastructure. >>

    You seem to misunderstand full reserve banking.

    Banks would still have to eat their losses on bad loans. They are at risk. They would need to be just as prudent.
    May 15, 2015. 04:02 PM | 1 Like Like |Link to Comment
  • Would A Sovereign Money System Be Flexible Enough? [View article]
    To Salmo

    << If we can't get Treasury-Reserve collaboration in our present arrangement, (e.g., during the Great-Recession), there's absolutely no way it will be achieved by allowing the Federal Gov't to usurp the Federal Reserve's current power. >>

    Whose says there is no collaboration? The Fed's goals are already in line with Treasury's goals, and always will be, unless there's inflation.
    May 15, 2015. 03:59 PM | 1 Like Like |Link to Comment
  • Would A Sovereign Money System Be Flexible Enough? [View article]
    To Ralph Musgrave

    << That is, government and central bank could, if they wanted, print and spend a trillion trillion trillion trillion dollars or pounds any time they want. .... and as often pointed out by MMTers, there is only one constraint on stimulus, namely inflation. >>

    True, the 22 primary dealers could buy heck of a lot of newly issued bonds from the Treasury and sell them all to the pulbic and the Fed. But the public may only be willing to buy US bonds if they feel certian that Uncle Sam will pay a modicum of interest and won't default. The risk of default is misunderstood by MMT, who erroneously beleive that Uncle Sam can print money to redeem bonds. No, that's against the law.

    Default is nearly impossible because if bonds aren't selling, the Treasury can simply increase the yield offered, until the required number of bonds are sold.

    And only in times when demand is very weak (like due to an economic crisis) can the Fed buy in huge quantities (but still far short of what you assert). Yet, the Fed does have to worry about the detrimental effects of so much bond buying - putting banks out of the lending business hurts small businesses, lower bond yields helps Big Business. And truly hge bond purchases may endanger the Fed's solvency if large numbers of high priced bonds fall in value when interest rates rise. The Fed has a vested interest in a slow recovery, because a quick recovery brings higher interest rate sooner, which could make the Fed insolvent, just as happened to commercial banks in 2007.

    Finally I gotta laugh at anyone who believes in MMT:
    MMT is based on "unbacked" money, which leaves a big question about the existence of the central bank. Is the central bank just a hoax?

    The only real difference between "backed" money issued in exchange for assets, and "unbacked" money which is issued in exchange for goods&services (or nothing at all, as in a helicopter drop) is that the asset-backed money can be easily retrieved from circulation to fight inflation.

    Unbacked money cannot be so easily retreived. It can be taxed out, which slows the economy needlessly, or borrowed out, which raises interest rates, which slows the economy. And if there's no Central Bank, then the economy is "missing" the biggest bond-buyer in the market (resulting in higher interest rates) ... and any QE program would be impossible.

    Every dollar bill has three words at the top center of the front side.
    Federal Reserve Note, which evidences each dollar as being backed by assets owned by the Fed.

    Explain those 3 words, all you MMTers.
    May 15, 2015. 03:43 PM | 3 Likes Like |Link to Comment
  • Would A Sovereign Money System Be Flexible Enough? [View article]
    To Ralph Musgrave

    << if someone gets a loan to buy a house which already exists, there is little effect on GDP (apart from a few days' work for bank staff, lawyers, surveyors, etc.). Ergo we should favor "GDP increasing loans." >>

    Most home loans don't increase the money supply by much because the proceeds go to pay off the existing mortgage, which is usually smaller due to a lower purchase price and some amortization on the loan.

    The average length of ownership for a house is usually 5 to 7 years, so presumably the pay-off of an average mortgage would have 6 years of amortization.
    May 15, 2015. 03:12 PM | Likes Like |Link to Comment
  • Would A Sovereign Money System Be Flexible Enough? [View article]
    To Ralph Musgrave

    << What does get economies out of recession is extra government spending, which in turn encourages more commercial bank lending. >>

    Extra governement spending?
    When has "extra" gov't spending ever been "temporary"? I'm appalled to admit that the US gov't has plenty of infastructure spending to do which could be temporary (but should be done on a continual basis), but can we afford it? Seems dangerous to increase taxes, or increase Debt, when the economy's not strong, and the Debt is $18 trillion and counting, and the Fed is still bloated, and future social program spending is well known to balloon real soon.

    << (Incidentally I'm assuming that the market forces which get economies out of a recession - Say's law, the Pigou effect, etc. ... do work to some extent. >>

    High taxes reduce the incentive to work by decreasing the opportunity cost of leisure, which reduces output, which reduces income, which reduces tax revenue. IF taxes aren't very high, you don't get much benefit by reducing taxes, and you can't reduce taxes for any benefit if the taxpayers hoard money because they know taxes will be higher later on, as set forth by Ricardo.

    << But I agree with Keynes, who said that those market forces were not effective enough, and that in a recession, government-implemented stimulus is needed.) >>

    That's WAY off the mark. Keynes was strictly speaking about The Great Depression. That's a fa,r far cry from an ordinary recession.

    It's Keynes' disciples, most American Keynesians, who came up with such rubbish, not Lord Keynes.

    Keynes was roughly 20 years older than Hayek, and Hayek admired Keynes for trying to save his country (Austria). Over the years in which Keynes and Hayek were adversaries, they slowly became friends, in spite of their philosophical differences. (They reportedly spent at least one night by themselves on a roof in Cambridge, reporting fires caused by German bombers during WWII.)

    In November 1977, (on the W.F.Buckley Show, available in both print and video on the internet) Hayek claimed that he asked if Keynes was concerned about the craziness (my words, not Hayek's) which Keynes' followers were advocating, and if he (Keynes) would put a stop to it. Keynes reportedly replied that he would have no trouble putting a stop to it, if things got out of hand. But Keynes had been sick for years, and died 6 months later.
    May 15, 2015. 02:59 PM | Likes Like |Link to Comment
  • Would A Sovereign Money System Be Flexible Enough? [View article]
    To Ralph Musgrave

    << So what's the big difference for the commercial bank system as between the [fractional reserve system] and a [fully reserved system]? Not much, far as I can see. i.e. as far as the much vaunted "flexibility" goes, there's not much difference. >>

    I disagree again:

    In a fully reserved system, the Fed creates all the money, which means banks create no money, which increases competition for bank deposits, which increases yields on bank deposits, which raises banks' cost of capital. which makes banks less profitable, which requires banks to charge higher rates and make fewer loans, which hurts economic growth and makes banks more likely to succeed by being large, larger and, yes, yes, too large to fail.

    If the Fed creates all the money, then the Fed must buy more bonds, which drives the price of bonds higher, and the yield on bonds lower, which makes bank loans less competitive, which means banks lose some loan opportunities, which means the bond market has lower rates, which primarliy benefit Big Business, which would be at the expense of Small Business, and worsening the Giny Index of Inequality.
    May 15, 2015. 02:37 PM | 2 Likes Like |Link to Comment
  • Would A Sovereign Money System Be Flexible Enough? [View article]
    To Ralph Musgrave

    << Where an economy is at capacity, and commercial banks want to create extra money out of thin air and lend it out, the effect when that extra money is spent will be inflationary. >>

    Not always.

    Personal loans are more likely to result in inflation because the increased demand and increased money supply are NOT offset by increases in output capacity. More money chases the same number of goods&services.

    Business loans are not likely to result in inflation because the increased demand and increased money supply ARE offset by increases in output capacity. More money chases more goods&services.

    In the long run, when commercial banks lend to businesses:
    "Successful" bank loans raise output capacity.
    "Unsuccessful" bank loans add -0- to output capacity, but reduce bank capital, which reduces excess reserves, which increases interest rates and/or reduces the money supply.

    (Furthermore, when the economy is producing near output capacity, one can bet that interest rates are high, and high interest rates practically ensure that only the best, most productive projects are undertaken, which increase output the most.)

    In the short run, bank loans increase the money supply immediately, and increase demand immediately, but a rise in the general price level takes months to be felt, giving time for output to be increased, or money supply to be decreased by the Fed.

    There's always demand-pull and cost-push in the economy, but when the money supply is held constant, the pulls and pushes offset one another, netting to -0-.

    When the Fed buys bonds with newly printed money, there's more money in the bond seller's bank account, and no increase in output capacity.

    Inflation is always and everywhere a monetary phenomena according to Milton Friedman.
    May 15, 2015. 02:10 PM | 1 Like Like |Link to Comment
  • BitChip The Bitcoin Killer - The Merchant's Solution To The Bitcoin Problem [View article]
    To alcyon

    << There is no need for elasticity in a currency that isn't based on debt/fractional reserve. Bitcoin is, for all intents and purposes, infinity divisible and its use it limited only by its market cap, which will continue to grow. >>

    Yes sir, the debt/fractional reserve system is what makes the dollar elastic. And "elastic" means that the dollar can be expanded (to accommodate economic growth) or contracted (to fight inflation).

    (Bitcoin is not "elastic" by this definition because it is "unbacked". There is no means to withdraw bitcoin out of circulation, except by "taxing it out of circulation", or "borrowing it out of circulation". Both are poor alternatives: All taxes slow economic growth. And all borrowing has an interest expense which someone must pay. Who pays?)

    Admittedly, there's no need to withdraw Bitcoin from circulation because it's not a dominant national currency, which could cause inflation. But having "no need to withdraw it" doesn't make it elastic.

    So, what you've actually said is that "There is no need for elasticity in a currency that isn't elastic."

    We all have to agree there's no need for Bitcoin to be elastic, but that's only because Bitcoin is not a dominant nor national currency.

    A need for elasticity naturally comes from being the sole national currency, as is the dollar. Relying on higher velocity to expand the currency is dangerous as velocity seems to have natural limits, though with a digital currency, the velocities are easy to increase.

    But surely it'd be impossible to run the economy with just $1 of digital currency whose velocity is exactly equal to annual GDP, therefore I'm sure you'd have to agree that the velocity of a digital currency must have some finite limit, albeit ill-defined

    Relying on deflation (increasing value of money) to expand the currency will always be problematic because personal computers can only carry out division to 15 decimal places. Thus, digital currencies will never be infinitely divisible. Very divisible, yes; Infinitely divisible, no.

    Besides, when a currency deflates (i.e., become more valuable), it's not a currency per se, but a speculators vehicle. Re-worded: if bitcoin goes up up up in value, it becomes "an idle depository haven" which can deny liquidity to businesses that would like to borrow bitcoin, thus dampening its popularity and slowing the spread of its use.

    And if bitcoin's value gyrates in value, it reeks havoc on some and windfall profits on others. That's not the reason people use a currency for transactions, further reducing popularity as a currency.

    On the other hand, what if bitcoin succeeds wildly?

    A need for elasticity also arises from a currency that has attained so much popularity that it dominates most (if not all) other currencies. In such a situation, I might want to borrow moey to buy a car with bitcoin, from a dealer who accepts bitcoin, as, say, my income is mostly bitcoin.

    If enough businesses accepted bitcoin as payment, then bitcoin "wallets" could lend bitcoin and become economically viable "bitcoin banks" and individually set their own fractional reserve requirements (based on their own opinions to safeguard their banks), which profits the bitcoin banks to make the bitcoin currency elastic. So now arises a similar system that we had in the 1800s and early 1900s.

    This post is already too long. I suppose you can see where I'm going with this, so I'll relent.
    May 15, 2015. 11:49 AM | Likes Like |Link to Comment
  • Richard Thaler Misbehaves - Or, Rather, Behaves [View article]
    Re: Brad De Long

    << 'the endowment effect,' which leads individuals to systematically value things they already own much more than the identical item in someone else's hands >>

    Who's never put sentimental value on something truly worthless?

    << The canonical Chicago theoretical paper became an explanation of why a population of rational optimizing agents could route around and neutralize the impact of any specified market failure. >>

    Who's never been vulnerable to panic like a herd of wildebeests headed for a cliff?

    << Milton Friedman would argue that economists should reason as if people were rational optimizers as long as such reasoning produce predictions about economic variables - prices and quantities - that fit the data. >>

    People can "change" when they gain experience,
    but that "expereince" is not easily handed down to the next generation.

    How does one explain the success of Casinos at attracting rational optimizers?
    How does one explain the failure of addiction in supposedly rational optimizers?

    Not everyone is always a rational optimizer. I used to think these were small effects overwhelmed by the majority's rationality. Now, I dunno.

    It's easy to explain the "butterfly effect" in chaotic systems; perhaps economic systems aren't exactly chaotic. (Nor weather systems, perhaps.)

    Does Godel's Theorem (circa 1931) apply to economics? Feels that way.
    May 15, 2015. 05:53 AM | Likes Like |Link to Comment
  • Department Of 'Huh?': Noah Smith Claims The British Economy Today Is Not In A Keynesian Slump [View article]
    Re: Brad De Long

    << But that [many Britons have taken so many low-pay low-productivity jobs in the past three years] gives us little reason to think that the British economy is now a full-employment at-capacity-utilization economy in which aggregate demand is now equal to potential output. >>

    Well, 100% of the British economy's productive capital (factories, worker skills, etc.) may have been "perfectly allocated" for it's aggregate demand in the years leading up to 2007.

    But in 2015, perhaps aggregate demand reflects a significant change in the mix of goods&services desired, now there's less demand for many goods&services and more demand for many other goods&services, which means productive capital (which creates aggregate supply) is now, suddenly, recognized as misallocated.

    I cannot pretend to know much about the British economy, but as I timidly pointed out in one of your previous articles, the pre-2007 US economy was "turbo-charged" by unsustainable banking practices, which stimulated the housing industry, which stimulated the whole US economy.

    Lots of Americans dedicated their careers to Real Estate, or started businesses dedicated to supplying the housing industry, and then "puff", it was gone. Something similar could've happened in the British economy, wherein significant amounts of productive assets (such as careers & businesses) are now, suddenly, recognized as massively misallocated. When productive capital is misallocated, it takes time to reallocate.

    So, right now both Britian and the US might be at "effective" productive capacity, but over time productive capacity can be increased by reallocating to more optimal uses, thus aggregate supply is increased, thus preventing inflation.

    In other words, if Britons find higher productivity jobs, then they'll have more income and spend more, which is higher aggregate demand. But being more productive, they will produce more, which is higher aggregate supply. When both aggregate demand and aggregate supply increase, there's no inflation.

    But wait a minute. If there were inflation, would it be correct to say "inflation is evidence that aggegate demand has exceeeded the potential productive capacity"? Nope, inflation could result from lowered aggregate supply and a steady money supply; or increased money supply and stable output (all else being constant).
    May 14, 2015. 10:58 AM | Likes Like |Link to Comment
  • Is A Fiscal Deficit Really 'Austerity'? [View article]
    To David de Los Angeles

    << Dr. Keynes had suggested that the government should spend more when there is an economic contraction. >>

    I'd say that Lord Keynes suggested that the government should spend more when there is an economic depression.

    Keynes surely knew about the business cycle, and he surely knew about misallocations of capital, having studied under the venerable Alfred Marshall. And he surely knew that not all recessions end in depression.

    Keynes advocated more gov't spending (financed by deficits, but yes, the spending was the important thing) during a time when unemployment was over 25%, people were literally starving for lack of food production, there was no end in sight, in fact, things were getting worse and worse (perhaps due to poor gov't policies that hurt more than helped).

    Surely, Keynes would not have prescribed deficit-spending as medicine for any "run of the mill" recession, just as surely that Keynes would not have advocated "digging holes, depositing money, and then allowing ctitizens to dig them up" as good medicine for any odd recession. Keynes is (in)famous for advocating digging such holes as a solution to the Depression, as it would be better than doing nothing.

    Surely Keynes would have been concerned about potential ruin due to misallocations of capital when gov't spending is increased, especially if it results in bigger gov't. Keynes always advocated paying off the deficit (created to save the economy) when the economy recovered, which is not consistent with "big government".

    We thank Keynes for inventing macroeconomics which allows economists follow the economy and understand "what went wrong", and when data became available faster, "what was going wrong". But back then, Keynes didn't have that luxury.

    So, Keynes never knew the true cause of the Depression, so he could only focus on the symptoms of the Depression, not the cause.

    Had Keynes known that the U.S. Federal Reserve had caused the world-wide Depression by focusing on "Moral Hazard" (letting banks fail, supposedly teaching banks and investors that there are consequences to taking risks) rather than focusing on being the "Lender of Last Resort", Keynes might have offered a different solution during the depression, which might have been QE, certainly if the Fed's mistake had been caught early on. Keynes was certainly aware that not all recessions end with a depression and therefore a gov't solution is not always required.

    What we are supposed to have learned from the Great Depression is that when the economy does enter a vicious cycle (large enough to create a Depression) it is simply "too late" to focus on "Moral Hazard" ... yes, you could say that you have to treat the entire economy like an entity that is "Too Big to Fail". Sad but true.

    What we don't know even today is how to discern "when action is needed, and when it is not" but American Keynesians (starting in 1945 or so, I suppose) apparently concluded that "all the time" was a good answer, which Lord Keynes was not in agreement with, at least according to a personal friend of Keynes, named F.A.Hayek.

    Keynes was famous before he wrote his General Theory (which was not really a General Theory, but merely labeled as such to give it gravitas) because a decade earlier he had written the best seller, "The Economic Consequences of the Peace", after WWI, spilling his "insider knowledge" as one of the representatives of her Majesty's Government, and correctly predicting the consequences of the war reparations that Germany was required to pay.

    (In the case of France, Germany had to pay in French francs, which drove the price of francs up, and the price of German marks down, which quickly made the task impossible. The Weimar Republic was doomed from the start, and Keynes correctly predicted that Germany's future would be ripe for a demagogue; enter Hitler.)

    Keynes was roughly 20 years older than Hayek, and Hayek admired Keynes for trying to save his country (Austria). Over the years in which Keynes and Hayek were adversaries, they slowly became friends, (spending at least one night together on a roof in Cambridge, reporting fires caused by German bombers), in spite of their philosophical differences.

    In November 1977, (on the W.F.Buckley Show, available in both print and video on the internet) Hayek claimed that he asked if Keynes was concerned about the craziness (my words, not Hayek's) which Keynes' followers were advocating, and if he (Keynes) would put a stop to it. Keynes reportedly replied that he would have no trouble putting a stop to it, if things got out of hand. But Keynes had been sick for years, and died 6 months later.
    May 13, 2015. 07:33 AM | Likes Like |Link to Comment
  • Is A Fiscal Deficit Really 'Austerity'? [View article]
    To TeachEnglish

    How do you feel about bowing to Putin, or submitting to ISIS, or Kim Jung Il?

    Am I being unfair? Your call.
    May 13, 2015. 01:15 AM | Likes Like |Link to Comment
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