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  • Central Banks' Biggest Concern Should Be Market Stability [View article]
    Maybe the Fed should buy silver?

    What does any of this have to do with the Fed's mandate and the greater domestic economy? Sure, the Fed needs the means to make sure the financial markets function to that end, but it does not tell investors where to seek risk. But does anyone really think they should defend silver prices? That's a free market thing.
    Sep 21 07:58 AM | Likes Like |Link to Comment
  • Why Can't Academic Economists Understand Endogenous Money? [View article]
    Seth, did you create it from thin air? :)

    Excellent point, by the way. You're right. Lots to be said about that. We normally settle right away with legal tender "for all debts public and private." Your credit can trade as money based on the debtor's creditworthiness. Nice comment.
    Sep 21 07:36 AM | Likes Like |Link to Comment
  • What If Deflation Comes To Pass? [View article]
    "Yes the liquidations of the malinvestment like last decade's crash are painful, but it is better to deal with the pain..."

    What if your small business was liquidated and labeled a mal investment despite the loans you took and the hard work you put into making it successful simply because the economy veered into recession through no fault of the sweat from your brow. How would one even know he was mal invested until it came to light when the economy weakened to find out we were slightly less competitive than the other guy but still making a go of it? Should no one care, including those who lost their jobs and you loosing your attempt at wealth creation? Is economics a description of loan defaults, failed business, and lay offs? A description of hell?

    "and acknowledge the error of government intervention..."

    It's always the government's fault, isn't it. Need a scapegoat, I guess...government is good as any.
    Sep 21 06:12 AM | Likes Like |Link to Comment
  • What If Deflation Comes To Pass? [View article]
    "Inflation is always and everywhere a monetary phenomenon."

    That's true. The full quote relates the money supply to our capacity to produce goods and services. In a "price stable" economy, the money supply should grow with the amount of goods and services produced or slightly faster. Since all money today is debt, growth in productive capacity means increasing aggregate debt over time. If money supply falls, we cannot buy all ten items. If it rises, we can and compete for additional earnings.
    Sep 21 06:01 AM | Likes Like |Link to Comment
  • What If Deflation Comes To Pass? [View article]
    "Then, without increasing the money supply, I would ask them to pay MORE for each product, on the average. You CANNOT DO IT."

    Not if you live within your means. You could do it by increasing the money supply, of course. But, where did you get the original $10? Find it laying around?

    From above, "In fact it punishes the borrower, who more often than not refuses to live within his means."

    If we all lived within our means, not even sure what that 'means', presumably there would be no bank credits to pay us whatever means we might strive for. We'd have to pan gold, engage in barter, or exchange labor for a few sea shells.

    As for deflation, I'd not be in business long stocking my shelves for $5 and selling them for $4. Workers would have to be laid off without pay, then the next guy would bid down his prices so as to not be the last one left holding inventory.
    Sep 21 05:44 AM | Likes Like |Link to Comment
  • The Worst Call Of The Last 5 Years [View article]
    "The bank must have deposits, equity or other sources of funds from which to make loans. It cannot magically create funds to lend out. This is basic accounting, and the point of my comments."

    Understood. Really, a bank can extend credit without having a single dime in deposits. It must, however, get a hold of some reserves pretty quick, but it can be done. A loan asset offsets the deposit liability exactly (not counting interest to be paid.)

    In fact, if the bank is short clearing balances because it made a loan without attracting deposits, the Fed will inject reserves to clear a check written and then charge the bank a penalty. But, the point is, the bank /could technically/ make a loan from thin air with nary a deposited dime to it's name. It's an extreme example, surely, but the money supply (in circulation) is created in such a magical way.
    Sep 21 04:55 AM | Likes Like |Link to Comment
  • The Worst Call Of The Last 5 Years [View article]
    " - it has been loaned to others."

    If you can get over this fallacy, you'd actually understand what Larry and I are debating with you. This is what we were taught in college, it's untrue.

    "Loans do not create deposits. You cannot fund a loan with proceeds from the borrower because the borrower has no funds until after you make the loan."

    Of course they cannot, no one said they could fund a new loan deposit from the prospective borrower. That's crazy. Well, unless it's a secured loan - secured by our own savings, which is possible.

    "What you call "money" and what is counted AS "money" in the money supply are simply different things. The former is never made out of thin air, but the latter is made out of thin air all the you won't be contradicting us or, for that matter, even disagreeing with us."

    And, "There is simply nothing special about the loan in terms of funding."

    Further, "The amount of base money - what you call "money" - does not change, but base money doesn't chase goods; bank money does that."

    Sep 21 04:46 AM | Likes Like |Link to Comment
  • Why Can't Academic Economists Understand Endogenous Money? [View article]
    "In other words, banks "borrow" from depositors at a low rate, and then lend that money to borrowers at a higher rate."

    You state explicitly banks borrow from depositors. The only way to do that is to debit their demand deposit where their money resides as a bank liability. Once you deposit cash into a bank, that cash is a bank's asset. It's not ours, we are a creditor to the bank. The bank lends it's assets (cash, reserves) to other banks, not to the public. Reserves never leave the banking system (except as currency in circulation which are base money but are no longer reserves.)

    "They don't take the money out of your account with a debit.
    That is not how bank accounting works.
    Your account is just an obligation of the bank.
    The money is not sitting in a vault waiting for you."


    "The bank lends that money to borrowers, without changing the amount they owe to you, and show in your account."

    By "that money" I presume you mean either vault cash or reserves resulting from a check, deposit, or sale (crediting them to another account in the same bank.) In a sense that's true, they need reserve clearing balances held on the asset side. But the borrowers money is still not a bank asset, it's a bank liability just as you state. That liability is created with a computer keyboard entry while the reserve balance does not change. Exactly as you say, the loan agreement increases assets offset by a credit to the liability side. Our money (asset) is a bank demand deposit (liability.)

    The latter are digits credited from thin air opposite the loan agreement - not actual cash. If we prefer cash, both bank assets and our account are debited by that amount.

    Maybe we're saying the same thing but talking from different sides of the balance sheet. In a sense, since we are creditors to banks, when a deposit clears in our name or we deposit cash, the bank get's funds. One can say being a creditor, and the bank a debtor, there is a loan to the bank from the depositor. That's true. But it does not change the fact banks create loans as creditors to us (we become debtors) from thin air by crediting the liability side of their balance sheet while holding onto their own assets.
    Sep 21 04:28 AM | Likes Like |Link to Comment
  • Why Can't Academic Economists Understand Endogenous Money? [View article]
    "Banks make their money by charging borrowers more than they pay to depositors. In other words, banks "borrow" from depositors at a low rate, and then lend that money to borrowers at a higher rate."

    Banks borrow from each other at the funds rate to that end. They can attract deposits, but it's not the liability side entry they are after. They are after the excess reserve position created through the payments system when deposits and checks clear into the bank.

    As far as I know, non of my bank accounts have ever been debited to accommodate someone else's loan.
    Sep 21 12:52 AM | Likes Like |Link to Comment
  • The Worst Call Of The Last 5 Years [View article]
    The only funds a commercial bank must acquire are clearing balances of adequate reserves. It can "get" these funds by attracting deposits and other means, but it does not lend either the new deposit (belonging to someone else) nor the reserve assets. It simply acquires sufficient reserves through the payments system to cover the liquidity required (clearing balances) to make a "thin air" loan on it's liability side opposite the loan asset.

    When a check clears into the bank, they are credited with reserves through the payments system in that amount and often in excess of any reserve requirement. This excess reserve condition means they can enter a loan agreement without having to "get" more funds. Commercial banks "get" funds to credit our liability side loan deposit by simply entering it into a computer.

    Loans create deposits. Loan deposits do not have to be funded in any way, shape, or form. They do, however, require sufficient clearing reserves, either "gotten" from another bank to include the Fed itself or they already have them on hand by accepting deposits. Commercial banks have tons of excess right now as a result of Fed asset purchases which is why the funds rate is low...little demand for clearing balances exist in a very liquid banking system.

    Unlike commercial banks, non deposit taking banks and non banks must "get" the funds they lend...creating markets for assets by bringing creditors and debtors together. This is how non deposit taking institutions "get" funds. So, it matters which banking system you're talking about when we discuss lending from thin air - which the both the Fed and commercial banking system are fully capable of doing.

    Just as the government is able to conjure debt from thin air, as well. You just have to understand the fiat currency from other than a gold paradigm.

    Even goldsmiths created gold certificates from thin air as a form of lending in a fractional way with no way to ever make good on all outstanding liabilities - claims against the gold held - during a run. Goldsmiths never lent out the gold deposits of it's creditors, they only created claims against them because they knew almost no one ever drew down their gold deposits.
    Sep 21 12:46 AM | 1 Like Like |Link to Comment
  • The Worst Call Of The Last 5 Years [View article]
    "The loan then creates a new asset (the loan Note, a contractual agreement) that replaces the money asset that is transferred/loaned to the borrower. Assets still balance with liabilities.

    No money created, just moved around."

    Moved around from where? Another deposit? In this case deposit liabilities would not increase with the increase assets, namely the promissory loan agreement. As soon a you sign the agreement, the bank simply makes a "thin air" entry of dollars into your account without debiting money (liability side demand deposit) from someone else. If a commercial bank did not create money from thin air, there would be no expansion of the money supply (meaning currency in circulation, not necessarily base money.)

    The loan asset does not displace anything, it creates a demand for reserves as clearing balances (if the bank is short after all transactions clear.) It is a new asset offset by increasing liabilities, not shifting liabilities around.
    Sep 21 12:24 AM | Likes Like |Link to Comment
  • Why Inflation Will Remain Muted For Next Several Years [View article]
    "The money velocity picks up when banks start lending and consumers start spending. The ultra-low money velocity is a symptom of a deep economic malaise. Increase in velocity of money indicates increase in aggregate demand and subsequent inflation."

    And, "The junk bonds, high dividend yielding stocks and medium term corporate bonds will continue to perform well. The broader stock market also will continue to perform well in near term (1-2 years)."

    I think these two statements summarize monetary policy acting alone. In order to drive consumption (global and domestic) and servicing debt, consumers need to have money. Hopefully this will be in the form of better pay. Money chasing higher commodity prices tends to push higher prices on a beleaguered consumer: under water, less creditworthy at low interest rates, labor market slack, etc.

    Inflation is a monetary phenomenon, it exists where the money is. In the US, monetary policy puts money into the financial markets leading to some asset inflation globally rather than into the US economy driving consumption which, in turn, should have placed higher demand on commodities from the aggregate demand side.

    A price stable economy needs enough currency in circulation and circulating at a velocity to close the output gap and to begin stressing our capacity to produce which usually means jobs and upward wage pressures. This is healthy inflation, where simply chasing input prices higher with a devalued currency, a money illusion, is not.

    I am thrilled the dollar is gaining, this means monetary dollars are returning to the US where they might actually stimulate the US economy, finally. As Bernanke mentioned, the global economy needs a healthy US consumer.
    Sep 20 10:22 PM | Likes Like |Link to Comment
  • What Does The Rising Dollar Mean For Equity Markets? [View article]
    Wouldn't it mean you get to buy more when you cash out? You can either buy something with more trashed dollars or with fewer stronger dollars. The money illusion is an illusion, after all.
    Sep 20 09:45 PM | Likes Like |Link to Comment
  • Are The Effects Of The Minimum Wage Starting To Show Up? [View article]
    Interesting, Coffee. Never would have guessed Fox News would have reported such a thing without spinning it to blame Obama. I think the truth is simple, people need money to spend on shelter, food, and other basic needs at least as, well as to service their debt. You cannot run the world's largest economy consuming the world's output on burger flipping wages. Not that everyone deserves CEO sized pay packages, but somehow income has to be redistributed in the form of wages. Barring that, food stamps seem one way to go. Once debt is tapped out, growth slows.

    You may be right about wages lagging productivity for decades, since the period of great moderation when pre-approved credit cards began piling up on our kitchen table. We began dis-saving and increased consumption. I assert Reagan knew how to drive the economy through fiscal policy - out spending the Russians then taxing as needed. Early in the great moderation, it was a great time to be alive. It was until the period crashed leaving the US consumer not only indebted, but many bankrupt as home prices fell.

    I assert it was not home prices that failed us, it was our economic model that collapsed by skewing toward dependence on debt driven consumption while leaving wages stagnate increasing the gap in equality.
    Sep 20 09:14 PM | Likes Like |Link to Comment
  • The Worst Call Of The Last 5 Years [View article]
    Depends on which banks or non banks you're talking about, Au.
    Sep 20 08:58 PM | Likes Like |Link to Comment