Income Inequality and Monetary Policy

[oldfart]

I suggest you read and study "Free to Choose" to get some basics down. Economics is too complicated to start speculating on your own

Dear, dear Ed. Do you not realize that the book is based on a PBS television series in 1980? To be a consistent conservative you must oppose the liberal establishment that tries to thrust subversive material such as Sesame Street and Milton Friedman down our throats. No, wait.....

 

[JimmieD]

When the Fed "prints money", the money that's created doesn't go into the economy.....it doesn't "go" anywhere - it stays on accounts at the Fed. And it's not exactly created out of nothing - it's swapped for some other financial asset (ie, treasury bills/bonds, MBS', etc...).

 

[EdwardBaiamonte]

I suggest you read and study "Free to Choose" to get some basics down. Economics is too complicated to start speculating on your own

Dear, dear Ed. Do you not realize that the book is based on a PBS television series in 1980? To be a consistent conservative you must oppose the liberal establishment that tries to thrust subversive material such as Sesame Street and Milton Friedman down our throats. No, wait.....

why not cut the liberal BS and say something substantive against Friedmans's economics or admit as a liberal you lack the IQ to do so.

 

[EdwardBaiamonte]

What do you mean "inflation distorts price signals"?

when inflation is 0% you know the the true cost of stuff. When the libturds inflate the currency, prices rise erratically and you lose track of relative prices and so cant make good comparative purchase decisions. This reduces the efficiency of the economy because you cant compare items as easily and then don't know which is really a better buy.

I always thought it was the artificial manipulation of the interest rates of the FED.

inflation is the artificial manipulation of interest rates downward so people will borrow enough money to inflate the currency and thus distort price signals as the money flows through the economy raising prices erratically.

 

[pinkwaxfish]

When the Fed "prints money", the money that's created doesn't go into the economy.....it doesn't "go" anywhere - it stays on accounts at the Fed. And it's not exactly created out of nothing - it's swapped for some other financial asset (ie, treasury bills/bonds, MBS', etc...).

Exactly! The first people to reap the benefit are those who own assets like these.

 

[EdwardBaiamonte]

When the Fed "prints money", the money that's created doesn't go into the economy.....it doesn't "go" anywhere - it stays on accounts at the Fed.

sorry, wrong!! the entire idea of so called "printing money" is to put money into the economy to stimulate the economy. This is what the Fed did to enable all those people to buy all those homes that they could not afford. Did you think the explosion in spending and prices was caused by new Girl Scout cookies or freshly printed money from a very liberal Fed?

 

[JimmieD]

sorry, wrong!!

No, I'm right. I know how the banking system works.

the entire idea of so called "printing money" is to put money into the economy to stimulate the economy.

The idea is to manage inflation expectations. This idea comes from the breakdown of the Philips Curve in the 1970's.

This is what the Fed did to enable all those people to buy all those homes that they could not afford. Did you think the explosion in spending and prices was caused by new Girl Scout cookies or freshly printed money from a very liberal Fed?

....except the money the Fed creates doesn't go anywhere other than reserve accounts at the Fed. The money the Fed creates doesn't go anwhere else. It gets counted as bank reserves which decreases the baks loan/capital ratio which should theoretically make it more profitable for a bank to create more loans. The money creation that hits the economy comes in the form of bank loans and increased bank deposits. Fortunately, this loan creation by private banks hasn't really happened, despite Fed policy to encourage it.

 

[EdwardBaiamonte]

you said the money the fed prints doesn't go anywhere.
This is, in effect, incorrect, they create or print money that people will borrow to stimulate the economy or to at least prevent deflation.

 

[pinkwaxfish]

....except the money the Fed creates doesn't go anywhere other than reserve accounts at the Fed. The money the Fed creates doesn't go anwhere else. It gets counted as bank reserves which decreases the baks loan/capital ratio which should theoretically make it more profitable for a bank to create more loans. The money creation that hits the economy comes in the form of bank loans and increased bank deposits. Fortunately, this loan creation by private banks hasn't really happened, despite Fed policy to encourage it.

You're only referring to one of the Fed's tools. When they buy assets like mortgage backed securities that is a direct injection of cash into the financial markets.

 

[EdwardBaiamonte]

....except the money the Fed creates doesn't go anywhere other than reserve accounts at the Fed. The money the Fed creates doesn't go anwhere else. It gets counted as bank reserves which decreases the baks loan/capital ratio which should theoretically make it more profitable for a bank to create more loans. The money creation that hits the economy comes in the form of bank loans and increased bank deposits. Fortunately, this loan creation by private banks hasn't really happened, despite Fed policy to encourage it.

You're only referring to one of the Fed's tools. When they buy assets like mortgage backed securities that is a direct injection of cash into the financial markets.

yes and so is making loans at the discount window or doing absolutely anything the want under their emergency powers detailed in section 13 (3) of the Federal Reserve Act.

 

[JimmieD]

You're only referring to one of the Fed's tools. When they buy assets like mortgage backed securities that is a direct injection of cash into the financial markets.

It's only creating new money if the Fed marks up someone's deposit account when buying those MBS'. But I'm pretty sure the Fed's market operations are limited to working with primary dealers and that nobody's deposit accounts are being added to in this process.

 

[EdwardBaiamonte]

Fed's market operations are limited to working with primary dealers and that nobody's deposit accounts are being added to in this process.

so what??? who do the primary dealers work with????

 

[JimmieD]

Fed's market operations are limited to working with primary dealers and that nobody's deposit accounts are being added to in this process.

so what??? who do the primary dealers work with????

What do you mean who do they work with? They work with all sorts of people. They are the big banks.

 

[boedicca]

You're only referring to one of the Fed's tools. When they buy assets like mortgage backed securities that is a direct injection of cash into the financial markets.

It's only creating new money if the Fed marks up someone's deposit account when buying those MBS'. But I'm pretty sure the Fed's market operations are limited to working with primary dealers and that nobody's deposit accounts are being added to in this process.

Come again? That's not how it works. When the Fed buys assets, they are creating money.

 

[EdwardBaiamonte]

Fed's market operations are limited to working with primary dealers and that nobody's deposit accounts are being added to in this process.

so what??? who do the primary dealers work with????

What do you mean who do they work with? They work with all sorts of people. They are the big banks.

right!! so the Fed has numerous ways to inflate the currency even when some of its activities are limited to primary dealers

 

[JimmieD]

Come again? That's not how it works. When the Fed buys assets, they are creating money.

They create bank reserves. Those reserves never leave the accounts at the Fed.

Just as you have a checking account with your bank, so too do banks have reserve accounts at the Fed. Those reserves get counted as part of a bank's capital. When the Fed trades with a primary dealer, new reserves get created which has the effect of increasing bank's capital. However, those reserves never leave the Fed. They are always on reserve accounts at the Fed. What it does do is create a bigger capital/loan ratio which theoretically would encourage banks to create loans to make a profit. It's the loan creation that creates the money that hits the economy.

 

[EdwardBaiamonte]

It's the loan creation that creates the money that hits the economy.

yes this is exactly what everyone means when they say the Fed, in effect, prints money.

 

[JimmieD]

It's the loan creation that creates the money that hits the economy.

yes this is exactly what everyone means when they say the Fed, in effect, prints money.

Not from what I've seen. From what I see, many people tend think the Fed just puts cash into the economy - it does not. People tend not to distinguish reserves from cash from bank liabilities from collateral.

Money is created when money/money-like financial assets are added to the total pool of assets in the economy without the same number of assets being removed. The Fed's operations involve an exchange. A private bank, however, creates a new deposits without exchanging anything in return every time it makes a loan. If I go to Bank of America and take out a loan, Bank of America just changes the number in my deposit account with them; it doesn't subtract anything from anyone; the bank creates an asset (my future cash flow to the bank), a liability on me (my promise to make good on my debt), and another liability on the bank (the deposit account). The actual money creation is done by private banks, not the Fed.

 

[EdwardBaiamonte]

It's the loan creation that creates the money that hits the economy.

yes this is exactly what everyone means when they say the Fed, in effect, prints money.

Not from what I've seen. From what I see, many people tend think the Fed just puts cash into the economy - it does not. People tend not to distinguish reserves from cash from bank liabilities from collateral.

Money is created when money/money-like financial assets are added to the total pool of assets in the economy without the same number of assets being removed. The Fed's operations involve an exchange. A private bank, however, creates a new deposits without exchanging anything in return every time it makes a loan. If I go to Bank of America and take out a loan, Bank of America just changes the number in my deposit account with them; it doesn't subtract anything from anyone; the bank creates an asset (my future cash flow to the bank), a liability on me (my promise to make good on my debt), and another liability on the bank (the deposit account). The actual money creation is done by private banks, not the Fed.

dear, we're talking about economics here, not the fine points of banking!! The issue always is, what monetary policy is the right one.

 

[oldfart]

Come again? That's not how it works. When the Fed buys assets, they are creating money.

They create bank reserves. Those reserves never leave the accounts at the Fed.

Just as you have a checking account with your bank, so too do banks have reserve accounts at the Fed. Those reserves get counted as part of a bank's capital. When the Fed trades with a primary dealer, new reserves get created which has the effect of increasing bank's capital. However, those reserves never leave the Fed. They are always on reserve accounts at the Fed. What it does do is create a bigger capital/loan ratio which theoretically would encourage banks to create loans to make a profit. It's the loan creation that creates the money that hits the economy.

This was true for a very long time. There has always been a little leakage, as reserves for the reserve requirements consists of the sum of deposits at the Fed and vault cash. The Fed facilitates the supply of vault cash (Federal Reserve notes) as the public needs for currency dictate. If people start hoarding money or buy enough drugs to support a few extra billions of currency leaving the country, vault cash gets depleted and banks either borrow at the discount window, borrow overnight on the fed funds network, or sell securities to the Fed. Since late 2008, the Fed has begun accepting a broader range of assets, including commercial paper, state and local securities, and mortgage backed securities, which it had not accepted before. This lending was also made available to a wider range of banks. The overall effect is to reduce the previous high correlations between the money supply and Treasury securities.