trying to understand Money-Supply ?

[Widdekind]

currency in banks ?

MB = [currency in circulation] + [currency in bank-vaults] + [Reserves in banks]
= M0 + Mv + R

Mv = MB - M0 - R
%Mv = Mv / MB = 1 - [M0 + R]/MB

Prima facie, bank-vaults were "cleaned out" in

• 1960 (JFK elected)
• 1980 (Reagan elected)
• 2008 (Obama elected)

decreasing by one to two-thirds.



required Reserves ?

R/MB

From the Vietnam War to 9/11, required Reserves decreased steadily, from 40% to 5%, then increased suddenly by 13x (to two-thirds), after c.2008.



currency in circulation ?

M0/MB

From the Vietnam War to 2008, the fraction of currency in circulation steadily increased by half, from 60-90%, then suddenly decreased to one-third. Prima facie, since 2008, "everybody (including foreign holders ?) parked their money in banks". Indeed, since 2008, the Velocity of the (total) Money-Base (VB = GDP / MB [#/quarter]) has decreased by 3x (from 18 to 6 [transactions/quarter]):

The impact, of 2008, on the Velocity of (active) Currency, was less pronounced, decreasing by one-sixth (from 18 to 15 [transactions/quarter]):

[currency] = [currency in circulation] + [currency in bank-vaults]
MC = MB - R

VC = GDP / MC

Ipso facto, USD still in circulation are "moving" almost as fast as they were before 2008; but, large amounts of USD were de-circulated into "frozen" Reserves. Plotting both (VC > VB) together:

Growing convergence, of VC & VB, reflected de-Savings.



2000 Savings spree ?

Prima facie, c.2000, a sudden "spree" of Savings doubled the amount of (non-Reserve) Currency "on hand" in banks (i.e. "in cash registers behind counters"), from 3.5% to 7% of total Money Base. The "spree", perhaps associated with the tense 2000 Presidential election, ended as suddenly as it began.



Fed hoarding excess Reserves ?

before 2008, the Federal Reserve system held negligible excess-Reserves; after 2008, excess-Reserves increased allot, accounting for nearly all of the (above trend) increase in Money-Base:

required Reserves, total Reserves, MB, MB - excess Reserves = MB - (total Reserves - required Reserves)

Ignoring excess-Reserves, in Federal Reserve bank "hoards":

M0* = [currency in circulation] + [currency in bank-vaults] ("circulating currency")
= MB - [total Reserves]
MB* = M0* + [required Reserves] ("active currency")
= MB - [excess Reserves]

V0* = GDP / M0* ("circulating currency velocity")
VB* = GDP / VB* ("active currency velocity")

Money Velocities of ~15 per quarter equate to ~1 per business-week.



miscellaneous notes (for future reference)

when utilizing the "FRED" online financial data grapher,

[M1] - [Currency] = [demand Deposits] = "total checkable Deposits"​

according to Wikipedia

[MZM] - [M1] - [savings Deposits] = "money-market funds"
[M2] - [M1] - [savings Deposits] = "money-market accounts"
[M3] - [M2] = "bonds"

{[M3] - [Currency]} +{[MZM] - [M1] - [savings Deposits]} = "checking + saving Deposits" + "bonds" + "money-market funds"
= "all extra-Currency pseudo-Monies"

MMFs, MMAs, Bonds, pseudo-Money

M3 "bond" component sky-rocketed after 1993 NAFTA ratified; M3 is no longer reported, perhaps because China holds all of the (tacitly implied) long-term debt (>$3T) ?

de facto Reserve ratio has decreased, from ~2% under Reagan, to ~1% under Clinton, to <1% under Obama:

[pseudo-Money] / [required Reserves] = [de facto Reserve ratio]

Federal Reserve requirements comprise

• no-reserve tranche of 0% (less than $12M)
• low-reserve tranche of 3% (less than $71M)
• high-reserve tranche of 10% (more than $71M)

naively, that overall average Federal Reserve ratios are "more like" 0%, than either 3% or 10%, suggests that most pseudo-Monies are held in "small" accounts (<$12M). Prima facie, pseudo-Monies have expanded under "one single regime" since the 1993 NAFTA.



components of "pseudo-Money"

in big round numbers, by 2005, total "pseudo-Money" was ~$12T:

• savings ~$4T
• MMAs ~$2T
• MMFs ~$2T
• bonds ~$4T

[pseudo-Money] = [checking + savings Deposits] + [money-market Deposits] + [money-market funds] + [bonds]

over-simplistically, private individuals Save into banks (savings Deposits & MMAs), then banks Invest into businesses & Governments (bonds & MMFs), with some "spill over" if-and-when Invested Money buys securities from private individuals. By such "Money flows", private individuals' Savings is re-loaned, as Investments, back out to

• private individuals for Consumption (C)
• businesses for Capital Investment (I)
• Governments (G)

naively, but based on the approximate co-relation, of "Savings" & "bonds", and "MMAs" & "MMFs", total "pseudo-Money" ($12T) may be doubled, by both private individual Savers (lenders), and institutional Investees (borrowers), "counting the same money" ??



estimating "pseudo-Money" ?

using "savings Deposits" as a proxy for "bonds", we can construct a proxy for "pseudo-Money":

[savings Deposits] ~= [M3] - [M2]

[pseudo-Money] = {[M3] - [Currency]} + {[MZM] - [M1] - [savings Deposits]}
~= {[M2] + [savings Deposits] - [Currency]} + {[MZM] - [M1] - [savings Deposits]}
= [MZM] - [Currency] + [M2] - [M1]

in big round numbers, the top two curves (pseudo-Money vs. estimate) correlate closely.

also in big round numbers, total non-savings Deposits of private individuals approximates total investments into Money-Market Funds:

[MMF] = [MZM] - [M1] - [Currency]
~= [checking Deposits] + [MMA]
= [M2] - [M1] - [savings Deposits] + [checking Deposits]

i.e. "banks use your 'checking accounts' & 'money-market accounts' to Invest in MMFs (which Invest in short-term Government & business bonds)"; banks offer MMAs "to compete against MMFs".

 

[Widdekind]

M4 = "all Money"
~= MB + [MZM - M0] + [M2 - M1]

M4* = "all Money less Reserves"
~= M4 - [domestic Reserves + foreign Reserves]

V4 = GDP / M4
V4* = GDP / M4*
[M4* < M4] => [V4* > V4]
V4* --> 1 transaction per year

M4*/M4 ---> 0.8 today

 

[DSGE]

Dude, you really need to do a little bit of exposition. You can't expect us to follow some maths and graphs and know what you're thinking about. Is there a question you have? An idea you're trying to explore? Something in particular which confuses you? What kind of reply would you like to elicit from people here?

 

[Widdekind]

Dude, you really need to do a little bit of exposition. You can't expect us to follow some maths and graphs and know what you're thinking about. Is there a question you have? An idea you're trying to explore? Something in particular which confuses you? What kind of reply would you like to elicit from people here?

Money supply - Wikipedia, the free encyclopedia

According to the table, "all Money" (all entries) = MB + (MZM-M0) + (M2-M1)...

where that last term is an approximation, assuming that "savings Deposits" ~= "long-term time-Deposits"...

which approximation i demonstrated above.

if you let me call "all Money" M4, the rest is simple:

M4 = all of it
M4* = M4 - all Reserves (estimated) = "non-Reserved Money" = "active" Money

V4 = GDP / M4
V4* = GDP / M4* ~= 1 per year (at present)

V4*/V4 ~= 0.8 (at present)

Naively, that implies a "Demand for [holding] Money" of ~20% ?

 

[DSGE]

Dude, you really need to do a little bit of exposition. You can't expect us to follow some maths and graphs and know what you're thinking about. Is there a question you have? An idea you're trying to explore? Something in particular which confuses you? What kind of reply would you like to elicit from people here?

Money supply - Wikipedia, the free encyclopedia

According to the table, "all Money" (all entries) = MB + (MZM-M0) + (M2-M1)...

where that last term is an approximation, assuming that "savings Deposits" ~= "long-term time-Deposits"...

which approximation i demonstrated above.

if you let me call "all Money" M4, the rest is simple:

M4 = all of it
M4* = M4 - all Reserves (estimated) = "non-Reserved Money" = "active" Money

V4 = GDP / M4
V4* = GDP / M4* ~= 1 per year (at present)

V4*/V4 ~= 0.8 (at present)

Naively, that implies a "Demand for [holding] Money" of ~20% ?

That didn't actually answer any of my questions. Though I'll make a comment on the demand for money thing: In my understanding, the demand for broader monetary aggregates doesn't matter. That kind of money grows endogenously to offset changes in demand. The kind of money that does matter, that kind that drives the nominal economy, is base money. That doesn't grow endogenously, but is set by the central bank.

Again though, it'd be helpful to know what the point of this exercise is.

 

[Widdekind]

the demand for broader monetary aggregates doesn't matter. That kind of money grows endogenously to offset changes in demand. The kind of money that does matter, that kind that drives the nominal economy, is base money. That doesn't grow endogenously, but is set by the central bank.

MB = currency + Reserves

for USD, 2/3 resides abroad; Reserves are required to sit inside banks doing nothing

how can 1/3 of the (US) currency supply, plus "frozen" Reserves, drive the nominal economy? When people purchase online, via Ebay or Amazon, they use no MB, but (M1-M0) instead. China does not have trillions of dollars of USD in MB; they have claims on trillions of (M1-M0) USD. (i'm relying on the Wikipedia table for understanding all the "M" symbols)

What does "grows endogenously" mean? If demand increases, MV = PQ --> PQ + PdQ, then people borrow broader Money, M --> M + dM, to finance purchases ?

 

[DSGE]

MB = currency + Reserves

for USD, 2/3 resides abroad;

Yep. So?

Reserves are required to sit inside banks doing nothing

No they're not. Banks need to hold reserves totalling 10% of their demand deposits (required reserves). Other than that, any excess reserves they have they can loan or buy things with.

how can 1/3 of the (US) currency supply, plus "frozen" Reserves, drive the nominal economy?

Because inside money is endogenous. It's increases in outside money which cause monetary disequilibrium and force changes in the price level/nominal spending.

When people purchase online, via Ebay or Amazon, they use no MB, but (M1-M0) instead. China does not have trillions of dollars of USD in MB; they have claims on trillions of (M1-M0) USD. (i'm relying on the Wikipedia table for understanding all the "M" symbols)

Yeah, we don't always use base money for final purchases. So?

What does "grows endogenously" mean? If demand increases, MV = PQ --> PQ + PdQ, then people borrow broader Money, M --> M + dM, to finance purchases ?

Again, I don't understand what your notation means. Please, please, start using words to describe your ideas. Nobody can follow your personal notation.

"Grows endogenously" means that the supply of that money automatically changes in response to fluctuations in demand. Inside money (money created inside the financial system) is basically an obligation to provide outside money (money originating outside the financial sector, Federal Reserve notes) at some time. So if a bank issues inside money (say a demand deposit), and somebody tries to spend that money, the money will end up being deposited in another institution. That bank doesn't want to hold demand deposits at another bank, what they'll do is cash in the demand deposit for reserves through the clearing system. Since the first bank now has fewer reserves (which it needs to back its issues of money), it has to contract its liabilities. The second bank has more reserves now, it can expand its liabilities (issue more of its own demand deposits).

The upshot is, if money starts being spent quicker (say some reservoirs of money that used to be held are now being spent), banks feel more drains on their reserves. When their reserves shrink, so must their issues of money. When the demand for money falls (people start spending it quicker), so does the supply of that money fall automatically.

Vice versa, when people start holding on to that money more now, less money is going through the clearing system, banks feel lower drains on their reserves which allows them to issue more money. An increase in the demand for money is automatically accommodated by an increase in its supply.

That doesn't apply for base money, base money is fixed by the central bank. If the demand for base money changes, the nominal supply doesn't automatically adjust to restore equilibrium. So a change in demand for base money results in real money balances being either too high or too low. To equilibrate the supply and demand for base money, the price level has to change, changing the purchasing power of a dollar (and hence demand for it). It can also trigger changes in the broader aggregates; if people want to hold more currency (and that's not accommodated by an increase in the money supply from the central bank), that means they withdraw currency from their banks. Now banks have fewer reserves and must shrink their own issues of money, as above.

It's the base (outside money) that drives the nominal economy.

 

[Widdekind]

Banks need to hold reserves totalling 10% of their demand deposits (required reserves). Other than that, any excess reserves they have they can loan or buy things with.

at which time, "excess Reserves" would stop being "excess Reserves" ? According to the Fed website, they require no Reserves, on accounts up to $11.5M; and 3% on accounts up to $71M. Only larger accounts require 10%. Are personal Deposits "special" ?



most of the "active" Money in modern economies is "inside" Money:

Inside money is a term that refers to any debt that is used as money. It is a liability to the issuer. The net amount of inside money in an economy is zero. At the same time, most money circulating in a modern economy is inside money

ergo, in the EoX "MV = PQ", most of that "M" is "inside" Money. ipso facto, spending flows are dominated by "inside" Money ?

Relying on the Wikipedia table, i calculate the total "free" Vault-cash (MB-M0-(reqRes+excRes)); and total "free-able" excess-Reserves; and even total "tied-down" required-Reserves, of US banks:

Totaling a few tens-of-billions-of-dollars, VC & R are negligible components of MB, compared to currency (M0), two-thirds of which resides outside the US. More-than-less, how can one-third of the currency, the only "available" outside-Money, "out-muscle" tens-of-trillions-of-dollars of broader Money, which comprises the majority of Money circulating through the "streams-of-spending" ?

"Grows endogenously" means that the supply of that money automatically changes in response to fluctuations in demand... if a bank issues inside money (say a demand deposit)...

are you talking about credit-cards ? when can banks "issue inside-Money" ?

if money starts being spent quicker... banks feel more drains on their reserves. When their reserves shrink, so must their issues of money. When the demand for money falls (people start spending it quicker), so does the supply of that money fall automatically.

Vice versa, when people start holding on to that money more now, less money is going through the clearing system, banks feel lower drains on their reserves which allows them to issue more money. An increase in the demand for money is automatically accommodated by an increase in its supply.

That doesn't apply for base money, base money is fixed by the central bank. If the demand for base money changes, the nominal supply doesn't automatically adjust to restore equilibrium... To equilibrate the supply and demand for base money, the price level has to change

approximately, for "inside" Money, MV=constant, or at least is stabilized by "self-correcting" feedback. And, for "outside" Money, like FR notes, only M=constant (per the central bank). So, changes in the Demand-for-[holding-]outside-Money, being changes in the Velocity-of-outside-Money, influence spending "normally".

But, in the EoX (MV=PQ), the only spending (PQ) affected, by changes in the Demand-for-[holding-]outside-Money, is spending done in outside-Money, i.e. currency. Conversely, spending done "on Amazon" with "checking accounts" via credit-cards, is "oblivious" to hard currency cash-flows...

unless hard currency cash-flows are being "spent into" the same markets ("physically entering a book-store")...

but dozens of times more spending proceeds "online w/ checking accounts", than in cash...

so how can markets (PQs) be dominated by cash, when the cash economy is small compared to the non-cash electronic "cyber" economy ? Again, "most currency in circulation is inside-Money", i.e. non-cash, "cyber money". Spending in markets (PQs) would, logically, be dominated, by the dominant "currency" spent in those markets. Our "cyborg" economy, mingling "physical cash" with "electronic cyber-money", resembles a multi-specie economy, in the ancient world ("gold & silver"), within which spending (PQs) would be dominated, by the dominant coinage used ("almost everything is bought with gold, but sometimes somebody shells out silver" [say]).

if people want to hold more currency (and that's not accommodated by an increase in the money supply from the central bank), that means they withdraw currency from their banks. Now banks have fewer reserves and must shrink their own issues of money

for the past century, seldom has the public "made runs on banks"; you told me, when the public does, the Fed prints paper notes, to pay the public. I.e. "people seldom appreciably demand more cash" (which is why they've let two-thirds escape the US); and if-and-when they do, "the Fed prints 'em more" (the Fed has a "Star-Trek replicator & materializes 'silver' whenever they need to"). Meanwhile, the amount of cyber-money "gold" far exceeds the amount of physical-cash "silver", in our "multi-specie" cyborg economy, so that spending in markets (PQs) is largely determined, by the flows of "gold", not "silver".

 

[Widdekind]

Total debts, of individuals & corporations & Government, are nearly $60T; of individuals nearly $15T. Total Money-supply, of all forms, is $20T ("inside" + "outside"); of currency nearly $3T ("outside"). If all "inside" Money derives from creation of equal amounts of debt; then how can $17T of "inside" Money (checking Deposits + savings Deposits + bonds + money-market-funds), reflecting $17T of created debt, have come to reflect 3x as much accumulated debt ? interest-plus-principal ?

total debt
M4 ("all Money")
HH debt

(paul kedrosky citing morgan-stanley)​

the ratio of total debt, to total "inside" Money, increased from two to four, before falling to three:

in an ancient economy, new Money was mined & minted (perhaps plundered), entering the economy with "no strings attached"; in a modern economy, "new" Money is new debt, entering the economy today "on a yo-yo", with an obligation to repay principal-plus-interest tomorrow ("i mined & minted a kiloton of gold today, i have to shove two kilotons back into the ground tomorrow [so i'll have to borrow more from the mountain]"). Naively, eventually interest payments will consume the economy, at which point the "ship-of-economy" sinks ?

 

[DSGE]

Banks need to hold reserves totalling 10% of their demand deposits (required reserves). Other than that, any excess reserves they have they can loan or buy things with.

at which time, "excess Reserves" would stop being "excess Reserves" ?

Yes. And during normal times excess reserves are about zero.

According to the Fed website, they require no Reserves, on accounts up to $11.5M; and 3% on accounts up to $71M. Only larger accounts require 10%. Are personal Deposits "special" ?

That's not on individual accounts, that's total transaction account liabilities for the entire bank. Also if a bank has less than $71M in liabilities, that's a pretty tiny bank. But either way, it doesn't matter. The point you made was that reserves are required to sit there doing nothing, for small banks there are no reserve requirements and for normal banks it's only 10% of transaction account liabilities that have to sit there doing nothing.

most of the "active" Money in modern economies is "inside" Money:

Inside money is a term that refers to any debt that is used as money. It is a liability to the issuer. The net amount of inside money in an economy is zero. At the same time, most money circulating in a modern economy is inside money

ergo, in the EoX "MV = PQ", most of that "M" is "inside" Money. ipso facto, spending flows are dominated by "inside" Money ?

That doesn't follow. The M in "MV=PQ" can be any measure of M you like. Though some are better than others.

Totaling a few tens-of-billions-of-dollars, VC & R are negligible components of MB, compared to currency (M0), two-thirds of which resides outside the US. More-than-less, how can one-third of the currency, the only "available" outside-Money, "out-muscle" tens-of-trillions-of-dollars of broader Money, which comprises the majority of Money circulating through the "streams-of-spending" ?

You explain why yourself later in your post. For endogenous money MV = constant. We need exogenous shocks, like a change in the quantity of outside money, to change MV.

are you talking about credit-cards ? when can banks "issue inside-Money" ?

Or demand deposits, or bank bills, or whatever. When you get a loan from the bank, the bank creates a demand deposit for you - backed by its reserves - which you can go out and spend. "Inside money" is debt that gets used as money in transactions. When you go to the store and pay with your bank card, you're not paying them in currency (outside money). You're paying them with a debt obligation. The bank has promised to give them $X in some way, either by letting them withdraw cash or by transferring reserves to their own bank. Demand deposits are a debt obligation, and people use them in transactions as money.

approximately, for "inside" Money, MV=constant, or at least is stabilized by "self-correcting" feedback. And, for "outside" Money, like FR notes, only M=constant (per the central bank). So, changes in the Demand-for-[holding-]outside-Money, being changes in the Velocity-of-outside-Money, influence spending "normally".

Exactly right.

But, in the EoX (MV=PQ), the only spending (PQ) affected, by changes in the Demand-for-[holding-]outside-Money, is spending done in outside-Money, i.e. currency. Conversely, spending done "on Amazon" with "checking accounts" via credit-cards, is "oblivious" to hard currency cash-flows...

No, because remember that outside money acts as bank reserves. If everybody decides they want to have more cash (and banks aren't allowed to issue private banknotes), then banks give you outside money. But that outside money was acting as reserves, backing liabilities the bank had on issue. So since those reserves are now gone, the bank must contract their liabilities (like the number of demand deposits it creates for bankloans). Changing the demand or supply for base money also changes the supply of broad money.

Maybe it'd be helpful for you to think about it in terms of a "money multiplier". If a bank gets $100 in reserves, if it wants to make loans with it, it only has to hold 10% in reserve and can loan the rest out. This multiplies the amount of money in the system by 10, into an extra $1000. Now if somebody comes and asks to turn their demand deposit into currency, the bank gives them $100 in currency. It's now lost $100 in reserves, but because of the money multiplier that multiplies up through the broader money measures to reduce the total money supply by $1000. Is that easier to think about?

for the past century, seldom has the public "made runs on banks"; you told me, when the public does, the Fed prints paper notes, to pay the public. I.e. "people seldom appreciably demand more cash" (which is why they've let two-thirds escape the US); and if-and-when they do, "the Fed prints 'em more" (the Fed has a "Star-Trek replicator & materializes 'silver' whenever they need to"). Meanwhile, the amount of cyber-money "gold" far exceeds the amount of physical-cash "silver", in our "multi-specie" cyborg economy, so that spending in markets (PQs) is largely determined, by the flows of "gold", not "silver".

I said that's what they're supposed to do. I also said they're incompetent.

 

[DSGE]

Total debts, of individuals & corporations & Government, are nearly $60T; of individuals nearly $15T. Total Money-supply, of all forms, is $20T ("inside" + "outside"); of currency nearly $3T ("outside"). If all "inside" Money derives from creation of equal amounts of debt; then how can $17T of "inside" Money (checking Deposits + savings Deposits + bonds + money-market-funds), reflecting $17T of created debt, have come to reflect 3x as much accumulated debt ? interest-plus-principal ?

All inside money is debt but not all debt is inside money. Does that answer your question?

 

[Widdekind]

That's not on individual accounts, that's total transaction account liabilities for the entire bank. Also if a bank has less than $71M in liabilities, that's a pretty tiny bank. But either way, it doesn't matter. The point you made was that reserves are required to sit there doing nothing, for small banks there are no reserve requirements and for normal banks it's only 10% of transaction account liabilities that have to sit there doing nothing.

ratio of "inside Money" (M3-M0) to required-Reserves exceeds 200, de facto the aggregate required-Reserves ratio is a few tenths of a percent

outside money acts as bank reserves... backing liabilities the bank had on issue. So since those reserves are now gone, the bank must contract their liabilities (like the number of demand deposits it creates for bankloans). Changing the demand or supply for base money also changes the supply of broad money.

Maybe it'd be helpful for you to think about it in terms of a "money multiplier".

every dollar withdrawn, must be replaced, by another dollar, from "excess Reserves"; with an effective required-Reserves ratio, of hundreds-to-one, any dollar withdrawn, which could not be replaced, would "pull down a house of currency" worth hundreds of dollars.

However, XR have never fallen below $100M, even at their lowest ebb, during the 1974 recession ("oil & Vietnam"?). Ipso facto, "inside Money" has never "collapsed" due to "outside Money" ebbing & flowing from & to banks; no "outside Money tsunami" has penetrated banks "excess-Reserves barrier wall".

So, due to banks successfully "hedging" against fluctuations, in Demand-for-[holding-]outside-Money, inside-Money has been successfully "sheltered"; outside-Money has never successfully threatened inside-Money; both have functioned as "separate species of Money", outside "gold" & inside "silver", in our "bi-metallic" economy.

In the EoX,

PQ = MV = Mgold Vgold + Msilver Vsilver​

so, cash currency joins credit-card cyber-currency in the "streams-of-spending", jointly determining PQs; the latter swamps the former. Unless Demand-for-[holding-]outside-Money "eats through" excess-Reserves, inside-Money is "insulated", and remains "obliviously aloof", as an independent "secondary alternate currency", co-determining spendings ("without credit-cards, nobody could sell as much, for as much").

 

[DSGE]

ratio of "inside Money" (M3-M0) to required-Reserves exceeds 200, de facto the aggregate required-Reserves ratio is a few tenths of a percent

Required reserves applies to demand deposits, not all inside money. Not even sure why we're talking about it. Recall that it originally came up because you said reserves are required to sit there doing nothing. I assume we now agree that that's not true?

every dollar withdrawn, must be replaced, by another dollar, from "excess Reserves"; with an effective required-Reserves ratio, of hundreds-to-one, any dollar withdrawn, which could not be replaced, would "pull down a house of currency" worth hundreds of dollars.

Have no idea what you're talking about here. Little more explanation?

However, XR have never fallen below $100M, even at their lowest ebb, during the 1974 recession ("oil & Vietnam"?). Ipso facto, "inside Money" has never "collapsed" due to "outside Money" ebbing & flowing from & to banks; no "outside Money tsunami" has penetrated banks "excess-Reserves barrier wall".

So, due to banks successfully "hedging" against fluctuations, in Demand-for-[holding-]outside-Money, inside-Money has been successfully "sheltered"; outside-Money has never successfully threatened inside-Money; both have functioned as "separate species of Money", outside "gold" & inside "silver", in our "bi-metallic" economy.

What? How do you think that excess reserves relates to any of that? That makes no sense.

so, cash currency joins credit-card cyber-currency in the "streams-of-spending", jointly determining PQs; the latter swamps the former. Unless Demand-for-[holding-]outside-Money "eats through" excess-Reserves, inside-Money is "insulated", and remains "obliviously aloof", as an independent "secondary alternate currency", co-determining spendings ("without credit-cards, nobody could sell as much, for as much").

Oh, I see what you were getting at. But no, that's not correct. The demand for excess reserves can be non-zero. If, for example, a bank perceives much more volatility in their deposits, they can voluntarily hold excess reserves (in reality required reserves are bullshit anyway). What we'd be likely to see is that in times where the monetary base contracts, creating liquidity problems and possibly financial panic, banks would be much more likely to hold large quantities of excess reserves to avoid illiquidity. They'd scale back on their liabilities instead.


But this is all irrelevant. If you want to test the idea that high powered money drives the nominal economy (which is basic monetary theory), grab the time series for the monetary base and NGDP from FRED (stopping at around 2007, since when IOR gets instituted reserves stop being high powered money), and tell me the correlation. I've done it myself before and found a correlation of about 0.97 or so.

 

[Widdekind]

Required reserves applies to demand deposits, not all inside money.

ergo, the small effective aggregate required-Reserves ratio (<10%) implies, that demand-Deposits are a small component, of all "inside Money" ?

The demand for excess reserves can be non-zero. If, for example, a bank perceives much more volatility in their deposits, they can voluntarily hold excess reserves

that's what they've been doing for decades ? XRs are "banks' wallets"; if you demand your $100 back (into your wallet), then they reach into "theirs", grab another $100, and use it to re-back the $1000 in loans that they had made, on your $100 ? XRs substitute for withdrawals 1:1 (no multiplier) ?

grab the time series for the monetary base and NGDP from FRED (stopping at around 2007, since when IOR gets instituted reserves stop being high powered money)...

VB = nominal GDP / MB has fluctuated 100%, varying from 10-20, over the past half-century:

 

[Widdekind]

All inside money is debt but not all debt is inside money.

where does the difference arise ?

 

[DSGE]

Required reserves applies to demand deposits, not all inside money.

ergo, the small effective aggregate required-Reserves ratio (<10%) implies, that demand-Deposits are a small component, of all "inside Money" ?

Depends on which definition of "money" you choose. It's a very large component of M1.

that's what they've been doing for decades ? XRs are "banks' wallets"; if you demand your $100 back (into your wallet), then they reach into "theirs", grab another $100, and use it to re-back the $1000 in loans that they had made, on your $100 ? XRs substitute for withdrawals 1:1 (no multiplier) ?

Assuming that their demand for reserves changes after the $100 is withdrawn. If their demand for reserves stays the same they'll have to shrink their liabilities.

grab the time series for the monetary base and NGDP from FRED (stopping at around 2007, since when IOR gets instituted reserves stop being high powered money)...

VB = nominal GDP / MB has fluctuated 100%, varying from 10-20, over the past half-century:

Okay? Yes, base velocity varies. That's the reason Friedman's k-percent money growth rule is a bad idea. That isn't relevant though. I just regressed log(NGDP) on log(Base) in Eviews; R^2 of 0.972. Fairly compelling evidence that the base drives the nominal economy.

 

[DSGE]

All inside money is debt but not all debt is inside money.

where does the difference arise ?

... Think of any debt. Say a bank makes a small business loan to you. Can that debt obligation be used as money? Can a bank go to buy a Treasury bill and pay for it with the your small business loan debt obligation? Probably not. You certainly can't go down to the grocery store and buy some milk with a T-bill. Can I go and buy a house with the rights to somebody else's mortgage payments?

This is the problem with money. When we say "money", the property we're looking for is "a medium of exchange". That's not a binary property though. Some things are useful in some exchanges but not in others. Banks can settle debts with T-bills but I can't buy milk with one. Different things have different amounts of "moneyness". So really your choice of what "money" is depends on context; on what question you're trying to answer.

 

[Widdekind]

Depends on which definition of "money" you choose. It's a very large component of M1.

what is "inside Money" ? is not "inside Money" equal to (M2 - M0) ?

Assuming that their demand for reserves changes after the $100 is withdrawn. If their demand for reserves stays the same they'll have to shrink their liabilities.

i'm confused. A bank "right now", has some slew of liabilities (customer Deposits, for which the bank is liable); simplistically, they have 10x as many assets (loans, fractionally-backed by liabilities). They also have some Vault cash. You withdraw your $100, and close your account. They have used your $100, to make 10x as many loans. So, they pull another (fungible) $100 from their Vault, and "re-back" the $1000 in loans, with their own Money. Their excess-Reserves decline by $100, their required-Reserves remain constant ?

I just regressed log(NGDP) on log(Base) in Eviews; R^2 of 0.972. Fairly compelling evidence that the base drives the nominal economy.

you said that, with "inside Money" created endogenously, increasing Money-supply should correlate with decreasing Money-Velocity. Now, the former has increased smoothly for decades; ergo, a "good" Velocity should have decreased smoothly ? If so, VZM = nGDP/MZM has declined steadily, whereas other Velocities (VB, V1, V2, V3) have risen & fallen.

at this moment, i don't understand what you mean about "regressing...in Eviews"

you're talking about a scatter-plot, of nGDP vs. MB, for numerous countries ?

 

[Widdekind]

Think of any debt. Say a bank makes a small business loan to you. Can that debt obligation be used as money? Can a bank go to buy a Treasury bill and pay for it with the your small business loan debt obligation? Probably not. You certainly can't go down to the grocery store and buy some milk with a T-bill. Can I go and buy a house with the rights to somebody else's mortgage payments?

This is the problem with money. When we say "money", the property we're looking for is "a medium of exchange". That's not a binary property though. Some things are useful in some exchanges but not in others. Banks can settle debts with T-bills but I can't buy milk with one. Different things have different amounts of "moneyness". So really your choice of what "money" is depends on context; on what question you're trying to answer.

according to Wikipedia, the net amount of "inside Money" is always exactly zero (for every $1 loaned, -$1 of debt was then-and-there created). So, how can debt (~$60T) exceed "inside Money" (<$20T) ? Vaguely, "debt doesn't go away", so that somehow "inside Money now" reflects "new debt now", to be added to "old debt from yesterday" ?

 

[DSGE]

Think of any debt. Say a bank makes a small business loan to you. Can that debt obligation be used as money? Can a bank go to buy a Treasury bill and pay for it with the your small business loan debt obligation? Probably not. You certainly can't go down to the grocery store and buy some milk with a T-bill. Can I go and buy a house with the rights to somebody else's mortgage payments?

This is the problem with money. When we say "money", the property we're looking for is "a medium of exchange". That's not a binary property though. Some things are useful in some exchanges but not in others. Banks can settle debts with T-bills but I can't buy milk with one. Different things have different amounts of "moneyness". So really your choice of what "money" is depends on context; on what question you're trying to answer.

according to Wikipedia, the net amount of "inside Money" is always exactly zero (for every $1 loaned, -$1 of debt was then-and-there created). So, how can debt (~$60T) exceed "inside Money" (<$20T) ? Vaguely, "debt doesn't go away", so that somehow "inside Money now" reflects "new debt now", to be added to "old debt from yesterday" ?

The net amount isn't zero, it's that inside money is a net zero asset. For everybody who holds inside money as an asset, there is a counterparty for whom that inside money is a liability. Whereas the monetary base forms a net asset since it originates outside the financial system.


I'm not sure what's so confusing. Debt is debt. You know how debt works. Some person gives another person a loan, a contract is formed. Inside money is a special case of debt where that contract can be used as a medium of exchange. Inside money is a subset of debt. Some debt can be used as money, some debt can't.