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  1. #1
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    Default Monetary base and inflation

    Why the huge growth in monetary base has not created much inflation so far.





    The excess reserves portion (the amount above what is required to be held by banks per Fed regulations) of the monetary base has been locked up via the Fed paying interest on them.

























    Similar picture on the Fed's SOMA (System Open Market Account, which is close to the total of the Fed's official entire balance sheet, and mostly contains Treasuries and MBSs).





  2. Default Re: Monetary base and inflation

    Quote Originally Posted by bart View Post
    Why the huge growth in monetary base has not created much inflation so far.
    The excess reserves portion (the amount above what is required to be held by banks per Fed regulations) of the monetary base has been locked up via the Fed paying interest on them.
    Bart, I believe we have talked here before about this wonderful contraption created by the Fed with circular money creation.

    It is not about only about the Fed paying interest on reserves at rates of only 0.25% but also by lending to the big banks money at a similar rate close to 0 (discount window is 22-25 bps).

    If you lend me $1 bil at 0.25% interest and I deposit back with you receiving the same 0.25% we have created $1bil out of nothing which has no monetary effect, as long as we can keep a gentlemen's agreement that you won't yank my credit line and I won't take the money out of your bank.

    Therefore it costs virtually nothing to maintain a huge level of excess reserves which are created out of nothing and as long as these reserves are parked with the FED they have a neutral effect on the monetary mass. What this trick does is that it hides risk from the balance sheets of banks too big to fail, creating the illusion they are awash with cash and they are stable.

    This is the same reason for which the M1 Money Multiplier as defined by the Fed has remained well below 1 since this whole thing of paying interest on reserves has been introduced. If you remember you have made for me a very nice chart for adjusting BASE to remove the smoke and mirrors of the excess reserves and also the sweeps.



    I have a simpler and less rigorous version without counting the effect of the sweeps:




    However any rate increase of the excess reserves denotes the accumulation of risk on the balance sheet of the banks holding this game therefore I believe it is a leading indicator for deflationary events generated by losses in the banking sector.

    Curiously, the FRNs which don't have to be collateralized are also going down.

    As a result we may hear again Finster saying: "3,... 2,... 1,... Deflation" (and the FDI going back towards -0.500 or even less)

    If things go on this path soon we should see, after an initial parabolic surge (which may be happening right now), the PM prices diving (especially silver), while USD taking an FX dive, especially with trade surplus currencies.

    By the way, I believe that this whole Debt Ceiling circus has a compounded deflationary effect since T-Paper is essential in storing all excess wealth extracted by all currency imbalances (not only by China's currency manipulation). Therefore no new debt ceiling --> Global Deflation.

    I would have a good laugh to see T yields hovering above 0, USD taking a big Fx dive, failure to delivers testing new heights, LIBOR taking off towards low orbit and gold leasing rates going negative.

    I would not be surprised to see that the the second part of the double dip recession has already started as it is indicated by by the new growth of the excess reserves.

    I wonder what other fiscal scam are the Fed going to push down our necks with this new financial shock which seems as well engineered as the 2008 one? Maybe a global currency inssued by a consortium of international private banks and referenced in gold? Now, that would be funny!....

  3. #3
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    Default Re: Monetary base and inflation

    Hey Symbols, good to hear from you - long time.

    I had actually forgotten that chart, it sure does show a non-trivial pattern similarity to the relatively new charts about base and excess reserves.

    Our opinions are similar too, although I'll add in a nuance - the excess reserves on which the banks receive interest I believe can be used as collateral against Treasury purchases, so the Fed is doing its job at helping to recapitalize the banks. The big banks are still quite insolvent by any sane accounting standard.

    Amen on the collateralized dollars, the ratio sure has been dropping for quite while, indicating a continuing rise in the growth rate on currency. Its growing at 9%/year.

    For what its worth, M1 is growing at about 14%/year, M2 at over 6% and M3 is catching up at about 5%. Roughly, grand total credit isn't either growing or contracting, and gov't debt is growing at about 11%/year.

    The only thing from here that has deflationary potential is velocity - it has just refused to change trend for years. Even my velocity oscillator is stuck in a trading range.


    Another for what its worth, I pay very little attention to LIBOR and believe its manipulated. I like EONIA:












    Agreed on the double dip, my adjusted work from NTRS shows it and also shows that it'll be short:








    Best guess on what the Fed will do is a combination of stealth money creation (literally non-public too), and keeping pressure on rates via the SecLend OMO -- and perhaps even an official repeat of Operation Twist from the '60s.

  4. Default Re: Monetary base and inflation

    Quote Originally Posted by bart View Post
    Hey Symbols, good to hear from you - long time.

    I had actually forgotten that chart, it sure does show a non-trivial pattern similarity to the relatively new charts about base and excess reserves.
    Yeah that is actually a nice chart and very handy.

    Quote Originally Posted by bart View Post
    Our opinions are similar too, although I'll add in a nuance - the excess reserves on which the banks receive interest I believe can be used as collateral against Treasury purchases, so the Fed is doing its job at helping to recapitalize the banks. The big banks are still quite insolvent by any sane accounting standard.
    I'll add a nuance too. In a way is indirect capitalization by creating a false image of low risk and also a life vest in case of a deflationary event. If the banks use these circular money creating the illusion of excess reserves to buy treasuries, the contraption falls apart. It's just the illusion of a collateral for what is actually a nake trade.

    Quote Originally Posted by bart View Post
    Amen on the collateralized dollars, the ratio sure has been dropping for quite while, indicating a continuing rise in the growth rate on currency. Its growing at 9%/year.
    Yeah. It is a clear indication of the rated growth in currency.

    Quote Originally Posted by bart View Post
    For what its worth, M1 is growing at about 14%/year, M2 at over 6% and M3 is catching up at about 5%. Roughly, grand total credit isn't either growing or contracting, and gov't debt is growing at about 11%/year.
    I am not sure how accurate is the data for M1, but you probably have the means to take of the lies. The problem is with the government debt, which is linked through the issuance of T-paper to the USD position on the global Fx markets. We see the yuan moving slowly in the right direction, but it looks to me more like a controlled slippage to deal with internal Chinese inflation than an effort to control economic imbalances.

    Quote Originally Posted by bart View Post
    The only thing from here that has deflationary potential is velocity - it has just refused to change trend for years. Even my velocity oscillator is stuck in a trading range.


    Another for what its worth, I pay very little attention to LIBOR and believe its manipulated. I like EONIA:
    Degustibus non disputandum. I believe EONIA is also heavily manipulated as everything that comes out of ECB.



    Quote Originally Posted by bart View Post
    Agreed on the double dip, my adjusted work from NTRS shows it and also shows that it'll be short:



    Best guess on what the Fed will do is a combination of stealth money creation (literally non-public too), and keeping pressure on rates via the SecLend OMO -- and perhaps even an official repeat of Operation Twist from the '60s.
    Nice chart. I like it. I also agree the second dip of the recession will probably be short, but there are some vague indications that this second dip will hit the Fx markets and sovereign debt. Actually I believe that would be interesting to discuss the paradox of having a purely fiat currency which is only self referenced debt, such as USD, used as international reserve currency in a converted interest bearing form (US Treasury paper).

    As long as there is a high demand for this form of interest bearing currency from the rest of the world, US Gov has to continue to run deficits, (by starting useless wars and increasing wasteful spending) in order to provide the fuel for the profits of big US banks. For a while the agencies were perceived as a substitute of treasuries with more attractive interest rates (which led to the drive of packing mortgages and ultimately to the housing bubble), but that doesn't work any more.

    I believe that the Fed has now a Catch 22 problem on its hands. If the dollar soars most countries of the coalition of the zirping (including EU) will take huge losses and part of the proxy dollar empire will collapse in a huge deflationary event hitting the developed countries. If the dollar dives to fast, the resources producing countries as well as all industrial/export surplus countries will get their own deflationary events (after going to various form of national bubbles) which in the end will turn back to bite the dollar.

    In the end I believe its all about an organized competitive devaluation performed by the Fed and all it's minion central banks:



    It's about who is left holding the bag and who stashes the profits.

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    Default Re: Monetary base and inflation

    Quote Originally Posted by $#* View Post
    I am not sure how accurate is the data for M1, but you probably have the means to take of the lies. The problem is with the government debt, which is linked through the issuance of T-paper to the USD position on the global Fx markets. We see the yuan moving slowly in the right direction, but it looks to me more like a controlled slippage to deal with internal Chinese inflation than an effort to control economic imbalances.

    Quote Originally Posted by bart

    The main problem with M1 data in my opinion is the failure to add in sweeps. Overall though, M1 looks about right (M1 plus sweeps is running at about 10% annual growth since January for what its worth) but who truly knows how accurate any of the money supply measures are - I just mostly take what's published.

    At the very least and assuming that they're way off, there's still much value in them if for no other reason that they show what the Fed wants us to believe and are therefore a measurement of Fed sentiment and attempted perception management.
    Degustibus non disputandum. I believe EONIA is also heavily manipulated as everything that comes out of ECB.

    Quote Originally Posted by bart

    EONIA sure is somewhat manipulated or controlled due to various ECB activities, but its my belief that its less so than LIBOR since EONIA reflects actual data to day interbank rates, rather than a few key banks getting together and deciding what interest rates are.

    Plus, EONIA is much further off the beaten path - few people track it or are aware of it and it does have a strong tendency to foreshadow troubles in Euro land where LIBOR trails, moves little during crunches and has little use for me in trading except on silver & gold lease rate machinations.


    Nice chart. I like it. I also agree the second dip of the recession will probably be short, but there are some vague indications that this second dip will hit the Fx markets and sovereign debt. Actually I believe that would be interesting to discuss the paradox of having a purely fiat currency which is only self referenced debt, such as USD, used as international reserve currency in a converted interest bearing form (US Treasury paper).

    As long as there is a high demand for this form of interest bearing currency from the rest of the world, US Gov has to continue to run deficits, (by starting useless wars and increasing wasteful spending) in order to provide the fuel for the profits of big US banks. For a while the agencies were perceived as a substitute of treasuries with more attractive interest rates (which led to the drive of packing mortgages and ultimately to the housing bubble), but that doesn't work any more.

    Quote Originally Posted by bart

    I lost you there, I'm not at all sure what you're driving at in the two paragraphs above.

    There's little question in my mind though about the strong correlation between wars and gigantic deficit spending, and that the Fed is literally owned by the banks.


    I believe that the Fed has now a Catch 22 problem on its hands. If the dollar soars most countries of the coalition of the zirping (including EU) will take huge losses and part of the proxy dollar empire will collapse in a huge deflationary event hitting the developed countries. If the dollar dives to fast, the resources producing countries as well as all industrial/export surplus countries will get their own deflationary events (after going to various form of national bubbles) which in the end will turn back to bite the dollar.

    Quote Originally Posted by bart

    Catch 22 indeed, aka the perfect storm... and who knows how long the shock will last on a "sudden stop" or deflationary event, but I still think the most likely path is that the CBs will respond with massive printing and more rescue packages.

    In the end I believe its all about an organized competitive devaluation performed by the Fed and all it's minion central banks:

    [trade weight dollar index etc. chart]


    Quote Originally Posted by bart

    As it has for many decades:



    It's about who is left holding the bag and who stashes the profits.

    Very much so - including us hoi polloi and our profits.

  6. Default Re: Monetary base and inflation

    Well Bart,.... it's really sad when we try to argue with each other and we are not able to do it since we see many things in the same way even if we have quite different point of views. At least I am trying....



    Quote Originally Posted by bart View Post
    I lost you there, I'm not at all sure what you're driving at in the two paragraphs above.

    There's little question in my mind though about the strong correlation between wars and gigantic deficit spending, and that the Fed is literally owned by the banks.

    I was splitting monetarist hairs in 4 then in 16, 64, and so on. My point is that since US Gov debt is the interest bearing form of USD which is fed to the international financial system, as preferred reserve currency, the Fed-Treasury contraption actually has a problem that they can't produce enough of it fast enough. For a while things were good since agencies were presented and sold as a substitute of treasuries and the suckers were gobbling them all in raw form or packaged and tranched by Wall Street.

    Alan Greenscam, is not an idiot. He knew very well he was pushing US into a housing bubble. This was no mistake or irrational exuberance. Exactly as Nixon needed the whole Vietnam War and the spending brought by LBJ's Great Society program in order to create enough US Gov debt to allow for the Nixon Shock, and the total separation of the USD from gold, today's Fed needs just a little bit more unsustainable debt, in order to push it down the throats of the global sucker.

    I am surprised that nobody in the media doesn't ask the question, how would be the USD the international reserve currency if US Gov adopts a balanced budged and pays off its debt. Without (unsustainable) US Gov debt there would be no international USD reserve (among many other things).

    My point was that contrary to our position the Bernank and other scammers at the Treasury-Fed contraption are panicking because they don't know how to convince us to let them issue more treasuries and any excuse they can find (Great War on Terror, Obama Care, useless pork barrel spending, etc) in order to produce more of this much needed fuel for the global scam.

    Maybe they will start bailing out munis and other failed crappy paper if the Treasury cannot be convinced to spend enough money with the pretext of bailing our on PIIGs. I dunno.... The point is that they really need to see the US Gov debt ballooning ASAP. That is Fed's first priority.

    Once one understands this mindset of the Fed, it is easy to understand the true irony of Ron Paul's proposal of selling T paper for Fed balance sheet in order to make some payments for the Treasury. I hope the board of governors had the sense of humour to laugh their bellies off hearing that.
    Last edited by Supercilious; 07-17-11 at 06:17 PM. Reason: many typos

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    Default Re: Monetary base and inflation

    Quote Originally Posted by $#* View Post
    Well Bart,.... it's really sad when we try to argue with each other and we are not able to do it since we see many things in the same way even if we have quite different point of views.
    Bart, Finster and Symbols all getting along and essentially agreeing.

    The end is truly nigh..... ;-)

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    Default Re: Monetary base and inflation

    Quote Originally Posted by jpatter666 View Post
    Bart, Finster and Symbols all getting along and essentially agreeing.

    The end is truly nigh..... ;-)
    I think I must have left my high horse in my other pants... ;-)

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    Default Re: Monetary base and inflation

    Quote Originally Posted by $#* View Post
    Well Bart,.... it's really sad when we try to argue with each other and we are not able to do it since we see many things in the same way even if we have quite different point of views. At least I am trying....

    Quote Originally Posted by bart

    Yes indeed - you're very trying...



    I was splitting monetarist hairs in 4 then in 16, 64, and so on. My point is that since US Gov debt is the interest bearing form of USD which is fed to the international financial system, as preferred reserve currency, the Fed-Treasury contraption actually has a problem that they can't produce enough of it fast enough. For a while things were good since agencies were presented and sold as a substitute of treasuries and the suckers were gobbling them all in raw form or packaged and tranched by Wall Street.

    Alan Greenscam, is not an idiot. He knew very well he was pushing US into a housing bubble. This was no mistake or irrational exuberance. Exactly as Nixon needed the whole Vietnam War and the spending brought by LBJ's Great Society program in order to create enough US Gov debt to allow for the Nixon Shock, and the total separation of the USD from gold, today's Fed needs just a little bit more unsustainable debt, in order to push it down the throats of the global sucker.

    I am surprised that nobody in the media doesn't ask the question, how would be the USD the international reserve currency if US Gov adopts a balanced budged and pays off its debt. Without (unsustainable) US Gov debt there would be no international USD reserve (among many other things).

    My point was that contrary to our position the Bernank and other scammers at the Treasury-Fed contraption are panicking because they don't know how to convince us to let them issue more treasuries and any excuse they can find (Great War on Terror, Obama Care, useless pork barrel spending, etc) in order to produce more of this much needed fuel for the global scam.

    Maybe they will start bailing out munis and other failed crappy paper if the Treasury cannot be convinced to spend enough money with the pretext of bailing our on PIIGs. I dunno.... The point is that they really need to see the US Gov debt ballooning ASAP. That is Fed's first priority.

    Once one understands this mindset of the Fed, it is easy to understand the true irony of Ron Paul's proposal of selling T paper for Fed balance sheet in order to make some payments for the Treasury. I hope the board of governors had the sense of humour to laugh their bellies off hearing that.

    Cool - got it now.

    I'm probably less on the "conspiracy" side than you in that I don't ascribe as much of the results from Greenspan, the Fed, the banksters etc. to actual planning.

    Lack of real education including "street smarts", inability to see consequences, raw shorter term greed, desire to kick the can down the road and many other faults are bigger factors I believe. I just don't think any of them were that smart and cunning - to that level of detail.

    Love that bit from Ron Paul.

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    Default Re: Monetary base and inflation

    Great to see you back, $#*.

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    Default Re: Monetary base and inflation

    Quote Originally Posted by Chomsky View Post
    Great to see you back, $#*.
    +1. Been more than a year.

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    Default Re: Monetary base and inflation

    Quote Originally Posted by Chomsky View Post
    Great to see you back, $#*.
    Yes, we have missed you.

  13. Default Re: Monetary base and inflation

    Quote Originally Posted by jpatter666 View Post
    Bart, Finster and Symbols all getting along and essentially agreeing.

    The end is truly nigh..... ;-)
    jpater666, putting me in the same category with Bart and Finster made my day. You know... It made me feel important.

    Guys, I've missed you too and I am happy to see you are still around here on iTulip.

    Now since we've talked a little bit about the Fed which is not exactly the typical central bank since is a siameze twin with the US Treasury in order to create the most efficient debt pump in history let's talk about another strange monetary experiment: the ECB.

    Here I would really appreciate some feedback from Bart or Finster ( if he is still around) to correct my errors.

    The way I see things, the Euro is just another game of smoke and mirror. One of the most common misconceptions, and a lie which is repeated time and time again all over the media is that most of the EU countries are in a monetary union and because of the size of the EU the Euro is an alternative for USD.

    I see things a little bit different. One cannot have a real monetary union without a fiscal union. Period. The issue of a currency, has to be tied to a fiscal authority otherwise we are talking about a commodity or a derivative not of a real currency.

    The Euro monetary construct is a tricky beast to analyse though and I believe that many are fooled by the false image of stability and solidity with which the Euro has been sold. Euro is nothing else than a giant, artificial and cumbersome Bretton Woods type agreement focused on a set of 17 different fiat national currencies. The great trick and slight of hand which fools almost everybody is that all these 17 currencies are made to look roughly the same, have the same name and have been engineered from the beginning to trade on a perpetual 1:1 ratio. As a result the vast majority of uniformed treat it like a single currency for most of EU space.

    Like in any rigid fixed exchange regime between two or more currencies, there are inevitable stresses. A lot of people knew from the beginning that the Bretton Woods Agreement cannot last for ever and will end in a de facto convertibility default of the the Dollar. The same applied at the time when the Euro construct has been devised, but in this case an interesting artificial mechanism has been imagine to increase the stability and life expectancy of the new European currency. At the time it was very strange to see how supporting was the Fed of the whole scheme.

    In my humble opinion the illusion of a single European currency is maintained by:
    1) A fixed 1:1 ratio between the participating national currencies.
    2) Elimination of internal capital and trade barriers between the member countries. (This part is not exactly correct since trade and capital flow barriers still exist in fact between Euro space countries, but this is a subject for another legthy debate)_
    3) A strict clause for reigning in the growth of budged deficits of member countries. This clause obviously has become a joke and we have the PIIGS cheating directly or indirectly and threatening to blow up the whole thing.
    4) A handicapped substitute of a central bank or better said a severely emasculated version of central bank.

    This four aspect is the most interesting one, because ECB acts more as a custodian of a ETF/ETN structure referenced in USD than a real central bank, which ties the while Eurozone to USD by proxy. ECB is not allowed to fund government deficits. Only private banks can do that. As a result ECB has absolutely no direct means to deal on its own with a deflationary event generated in the Eurozone, has little means without active support from the Fed to devalue the Euro or to intervene in member country crisis.

    As a result, the whole Eurozone is kept hostage now to the bondholders. If Greece or any of the other PIIGS defaults, due to the leverage of the Euro banks will will see a domino of bank failures spreading like a wild fire through the whole EU by cross exposure. Greece can be just another Creditanstalt, a spark generating another Great Depression in the whole Europe. To make the things worse many EU banks have a serious problem of currency asset liability mismatch with a huge share of USD liabilities on their balance sheet. If EU plunges we have a generalized Iceland situation in the whole Eurozone and there is nothing ECB can do alone.

    That is why the EUR/USD has to be carefully managed in order not to transform the whole Eurozone in a collection of financial zombies and produce unsustainable losses for US bondholders. In a way the owners of the Fed are kept hostage to the Euro and determining the optimum Fx regime which conserves and secures the profit is a matter of carefully guessing of the dark art of partial differential equations.

    This is one of the reasons I believe that most of central banks ( and especially the Fed and ECB) are so paranoid in controlling the price of PM because the institutional PM trade can derail the efforts of controlling the USD/EUR and keeping it in the sweet spot. Naturally some degree of volatility, which allows the established financial heavy weight players on Comex to reap obscene profits are welcome, but at the moment when the PM prices become a threat for the stability of the USD leveraged ETF also known as the Euro, there is always a beneficial intervention which can be as direct as brutal as a sudden modification of margin requirements.

    I believe that things are no so bad in the PM market that one can guess the evolution of gold and silver prices based on the optimum fluctuation of USD/EUR ratio and of the devaluation requirements of the Fed. This is why I've said a while ago that once we see the the yuan appreciating with respect to the dollar we may see the gold price jumping above $1500. I was wrong juding the timing and the magnitude of yuan appreciation, because I simply cannot immagine any more what is the endgame plan adopted by the Chinese leadership. (Recently I have started to believe there is no endgame plan, just a complacent attitude of kicking the can down the road in the most typical American style. For Chinese leaders this is very,... uncharacteristic.)

    As I've told many times, IMHO, the PM market is so shamelessly and obscenely manipulated that I prefer to stay completely out of it, however I smell the shorting opportunity of the century in Silver, especially if we see Silver going again parabolic, in an initial flight to safety, and if China keeps being stubborn and holds the yuan down on the background of this move. If China cracks at that moment, and the yuan soars out of control, all those who shorted the parabolic move on the silver will take huge losses waiting for a whipsaw that will never come. I am still thinking if I should get in this risky trade.

    Well enough with my ramblings. I do expect Bart to be gracious enough and dismantle my flawed logic.

    (Sorry for typos and poor grammar but I've written this rambling in a hurry without time for due editing).

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    Default Re: Monetary base and inflation

    Quote Originally Posted by jpatter666 View Post
    Bart, Finster and Symbols all getting along and essentially agreeing.

    The end is truly nigh..... ;-)
    No guarantees, but I'll try and see if we can gin up at least a little disagreement ... my record of goofs is scary enough without adding ending the world ...
    Finster
    ...

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    Default Re: Monetary base and inflation

    Quote Originally Posted by bart View Post
    Why the huge growth in monetary base has not created much inflation so far.
    Not much inflation???

    Don't tell us you've gone over to the dark side of CPI with lies!

    Quote Originally Posted by $#* View Post
    ... Here I would really appreciate some feedback from Bart or Finster ( if he is still around) to correct my errors.

    The way I see things, the Euro is just another game of smoke and mirror. One of the most common misconceptions, and a lie which is repeated time and time again all over the media is that most of the EU countries are in a monetary union and because of the size of the EU the Euro is an alternative for USD.

    I see things a little bit different. One cannot have a real monetary union without a fiscal union. Period. The issue of a currency, has to be tied to a fiscal authority otherwise we are talking about a commodity or a derivative not of a real currency...
    Here's hoping you won't be sorry you asked!

    Certainly not in the traditional mode. It's long been just tacitly agreed that there are two kinds of debt default: The non-sovereign kind, in which the default takes the form of frank non-payment, and the sovereign kind, in which the default takes the form of repayment in depreciated currency.

    The EU is the sort of compromise in which you end up with the worst of each side. One side wants to integrate, the other doesn't, so you just sort of do it half-assed and wind up with ... well ... the worst features of both sides. At least if you wanted the fiscal privileges of sovereigns. The national governments are fiscal sovereigns but not monetary ones. A true sovereign has the ability to inflate away its debts, because it or a closely associated entity (like a central bank) can produce currency in any amount desired to inflate away its debt. The EU's central bank (ECB) isn't beholden to any one nation ... no nation has the ability to inflate away its debts. Sort of missing the whole point of having a central bank!

    Looked at this way, the "cure" would be to either finish the uniting job or abandon it altogether. This sort of quantum-like you're in a state of half united half not-united just needs to be resolved one way or the other. It may make sense in the world of politics, but in the real world of economics its an invitation to disaster.

    Not that you couldn't look at it another way. It could work, provided everybody understands that any default will be of the non-sovereign kind. Or it could, provided the fiscal sovereigns run honest operations and simply do not run up such debt that they need to consider any kind of default at all. The first seems to have been buried under a mountain of wishful thinking. The second seems to have been buried under a mountain of democratic politics. The original intention may have been some sort of idealistic we're-gonna-run-a-tight-ship fiscal theory ... there was a maximum government deficit limit (I think 3% of GDP). If all the EU members actually hewed to this and ran limited and roughly equal deficits, they could effectively be jointly sovereign with the ECB as the central inflator. But such a dream could be realized only by omitting human beings from it. The marginal excess of any one national deficit would be effectively free as far as the exceeding culprit was concerned ... and so the apparent free lunch would practically guarantee nations had an incentive to push the limit. But when you set out the trough, you shouldn't be surprised when the PIIGS show up.


    ...
    Last edited by Finster; 07-19-11 at 09:10 PM.
    Finster
    ...

  16. Default Re: Monetary base and inflation

    Quote Originally Posted by Finster View Post
    Not much inflation???

    Don't tell us you've gone over to the dark side of CPI with lies!
    I think that bart was talking about the dramatic increase in BASE, which would have warranted a huge inflation. However BASE as defined by the Fed has become irrelevant. Only after subtracting the illusion of excess reserves created by the that little gimmick of paying interest on excess reserves we can get a a better picture.



    Quote Originally Posted by Finster View Post
    Here's hoping you won't be sorry you asked!

    Certainly not in the traditional mode. It's long been just tacitly agreed that there are two kinds of debt default: The non-sovereign kind, in which the default takes the form of frank non-payment, and the sovereign kind, in which the default takes the form of repayment in depreciated currency.

    The EU is the sort of compromise in which you end up with the worst of each side. One side wants to integrate, the other doesn't, so you just sort of do it half-assed and wind up with ... well ... the worst features of both sides. At least if you wanted the fiscal privileges of sovereigns. The national governments are fiscal sovereigns but not monetary ones. A true sovereign has the ability to inflate away its debts, because it or a closely associated entity (like a central bank) can produce currency in any amount desired to inflate away its debt. The EU's central bank (ECB) isn't beholden to any one nation ... no nation has the ability to inflate away its debts. Sort of missing the whole point of having a central bank!
    I think this is the crux of the problem and I agree with you. Actually the situation may be even worse since a lot of national governement debt, (including PIIGS debt) is held by Eurozone banks, respectively private players (the rest by non Eurozone entities as currency reserves)

    There is a very interesting blog entry written today by M Pettis which touches the intra EUR imbalances which is worth reading IMHO.

    The Eurozone problem is further compounded by cross capital flows since all sovereign debt is held internally by private banks (ECB is not allowed to finance individual national deficits).

    As a result if Grece for example attempts a sovereign default she must exit the Eurozone and return to Drachma. Such an exit of a severely indebted country would blow up the stability of the whole construct. Definitely France and especially Germany don't want that.

    If they attempt some sort of non-sovereign default, (as Angela Merkel pushes for and it seems she is determined to make a stand on this issue) the problem becomes suddenly more complicated and we enter into uncharted territory. Bondholders will take a haircut and a deflationary event will spread through the whole EU space. The problem is that there are no central national banks to deal with this issue unless suddenly there is a reversal in the statutes and policies governing ECB.

    There are rumours that Angela is pushing for an interesting solution of using the whole ECB in order to create a very soft Eurozone sovereign default. Understandably this measure will be the best solution for Germany, France and Netherlands, because it will push the EUR lower with beneficial effects for exports of the rich North.

    Let's not forget that China is now buying Hungarian debt since someone clever at PBoC has decided to take advantage of the rigidity of the EURO construct. The currency manipulation is done now through the EU proxy and buying Hungarian debt denominated in EUR for yuan sterilization, is like buying EUR and is the next best thing to buying dollars.

    Quote Originally Posted by Finster View Post
    Looked at this way, the "cure" would be to either finish the uniting job or abandon it altogether. This sort of quantum-like you're in a state of half united half not-united just needs to be resolved one way or the other. It may make sense in the world of politics, but in the real world of economics its an invitation to disaster.
    I think there is no secret that Berlin and Paris are pushing for complete monetary integration as long as the monetary authority will be based on a GDP share vote. This type of representation proportional to the size of the economy would put the new monetary authority of the Eurozone in the hands of only three countries: Germany, France and Netherlands. One may think Hitler was an idiot when he tried to conquer the whole Europe with Panzers, Stukas and so on.


    Quote Originally Posted by Finster View Post
    Not that you couldn't look at it another way. It could work, provided everybody understands that any default will be of the non-sovereign kind.
    Honestly I believe this solution will be difficult to stomach for the rest of the Eurozone countries. Maybe Angela can use such a "good crisis" to push for her monetary union, but I believe for most of the PIIGS (maybe Italy is an exception here) at this moment an exit from the Euro would seem more attractive.

    However, there is another aspect we should talk here. If EU has to become the new consumer of last resort replacing USA, and EUR to grow it's share in international currency reserves, that means EU countries have to run deficits. With real limit of 3% deficit, and no PIIGS cheating, it would have been impossible to have enough sovereign debt to satisfy the appetite of the countries wanting to diversify their currency reserves into EUR. As a result EUR would have been pushed upwards hurting the Euro exporters (including Germany).

    How should I say?... It may be very difficult to believe that nobody had figured out the PIIGS were cheating, but it was very convenient for the Euro heavy weights to let this cheating going. Germany's economy had benefited a lot from the cheaters.

    But going back to correlation between the fudged BASE and inflation ( bart a historical chart of inflation as function of BASE in fudged and unfudged form would be very useful,... this is a hint )

    I think bart has a good point. By having the Fed paying interest on reserves at the same rate at which money is pumped into big zombie banks, a monetary singularity regime is created, which allows the Fed to decrease the risk on the ballance sheet of certain preferred banks without having to deal with any substantial inflationary effect.

    By the way bart how would one define risk on the balance sheet sheet of the Fed when they have the whole asset-liability inversion compared to normal banks ?

    Can we say that the Fed is the ultimately bank risk eraser or black whole?

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    Default Re: Monetary base and inflation

    Just a couple further observations ... no one should be under the false impression that the bigger EU powers are motivated to help their sister Greece out of charitable feelings. Much of that Greek debt is owed to their own banks. This is and always has been about the banks.

    When ordinary folks like us buy risky bonds we take the risk of non-repayment in exchange for the higher yields we recieve. When the politically well connected do it, they get the high yields ... but not the risk ... if loss threatens, the goverments step in and make sure the loans are repaid anyway. At the expense of ... well ... ordinary folks like us.

    This ... is what's really rotten in Denmark ... and Germany, and France ... and not least ... right here in the USA.
    Finster
    ...

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    Default Re: Monetary base and inflation

    Originally Posted by bart
    Why the huge growth in monetary base has not created much inflation so far.


    Quote Originally Posted by Finster View Post
    Not much inflation???

    Don't tell us you've gone over to the dark side of CPI with lies!

    Naaah... just wondering and worried about the inflated pink tutu conditions of the beasties in the Manor Dungeon, and Fed correlations... ;-)

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    Default Re: Monetary base and inflation

    Quote Originally Posted by $#* View Post
    ...
    I see things a little bit different. One cannot have a real monetary union without a fiscal union. Period. The issue of a currency, has to be tied to a fiscal authority otherwise we are talking about a commodity or a derivative not of a real currency.

    Quote Originally Posted by bart

    Indeed - that has been the primary fault in the EU since its birth... although the ECB actually has been the fiscal authority, by default.
    Like in any rigid fixed exchange regime between two or more currencies, there are inevitable stresses. A lot of people knew from the beginning that the Bretton Woods Agreement cannot last for ever and will end in a de facto convertibility default of the the Dollar. The same applied at the time when the Euro construct has been devised, but in this case an interesting artificial mechanism has been imagine to increase the stability and life expectancy of the new European currency. At the time it was very strange to see how supporting was the Fed of the whole scheme.

    Quote Originally Posted by bart

    Central Banks in the West, in my opinion, are cooperating partnerships.
    ...
    As a result, the whole Eurozone is kept hostage now to the bondholders. If Greece or any of the other PIIGS defaults, due to the leverage of the Euro banks will will see a domino of bank failures spreading like a wild fire through the whole EU by cross exposure. Greece can be just another Creditanstalt, a spark generating another Great Depression in the whole Europe. To make the things worse many EU banks have a serious problem of currency asset liability mismatch with a huge share of USD liabilities on their balance sheet. If EU plunges we have a generalized Iceland situation in the whole Eurozone and there is nothing ECB can do alone.

    Quote Originally Posted by bart

    This is one area where I foresee "help" from the IMF coming in as the months and years go by, in "adjusted Ponzi mode" and as a response to a "Help me, Obi-Wan" cry.

    This is one of the reasons I believe that most of central banks ( and especially the Fed and ECB) are so paranoid in controlling the price of PM because the institutional PM trade can derail the efforts of controlling the USD/EUR and keeping it in the sweet spot. ...

    Quote Originally Posted by bart

    As long as you bring up gold and various currencies, here's an applicable chart (that also corrects a big goof in yen gold prices). It paints quite the picture of which countries or areas are perceived as safer...




    I believe that things are no so bad in the PM market that one can guess the evolution of gold and silver prices based on the optimum fluctuation of USD/EUR ratio and of the devaluation requirements of the Fed. This is why I've said a while ago that once we see the the yuan appreciating with respect to the dollar we may see the gold price jumping above $1500. I was wrong juding the timing and the magnitude of yuan appreciation, because I simply cannot immagine any more what is the endgame plan adopted by the Chinese leadership. (Recently I have started to believe there is no endgame plan, just a complacent attitude of kicking the can down the road in the most typical American style. For Chinese leaders this is very,... uncharacteristic.)

    Quote Originally Posted by bart

    I urge some caution is judging or forecasting gold prices from currency relationships alone. As you probably see in the chart above, they're far from static on the short or intermediate term.
    ...

    Finster sure did note some good points, especially the one about the Maastricht treaty that was supposed to limit debt to 3% of GDP. Not one country honored it, and that gets back to the EU being a fake fiscal union - it has no teeth like a real one would, and of course human foibles like greed run wild with zero or minimal control.

    "They" have papered it over and kicked the can down the road with the recent bailout of Greece and the increased EFSF temporary program (a bit reminiscent of the US TARP program) - which will also inevitably blow up since the odd EU structure has only partial sovereigns. Even the ECB itself is only a partial sovereign, and has been pushed into badly substituting for one via political pressures and "necessities".



    Quote Originally Posted by Finster
    But when you set out the trough, you shouldn't be surprised when the PIIGS show up.

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    Default Re: Monetary base and inflation

    Quote Originally Posted by $#* View Post
    ...
    Actually the situation may be even worse since a lot of national governement debt, (including PIIGS debt) is held by Eurozone banks, respectively private players (the rest by non Eurozone entities as currency reserves)

    Quote Originally Posted by bart

    No "may" about it in my opinion - the vested interests are there, and in a sense you can't blame them much. They're also trying to avoid a massive financial crash - not a bad thing.

    If they attempt some sort of non-sovereign default, (as Angela Merkel pushes for and it seems she is determined to make a stand on this issue) the problem becomes suddenly more complicated and we enter into uncharted territory. Bondholders will take a haircut and a deflationary event will spread through the whole EU space. The problem is that there are no central national banks to deal with this issue unless suddenly there is a reversal in the statutes and policies governing ECB.

    Quote Originally Posted by bart

    I again note the existence of the IMF and its Central Bank of Central Banks function, plus S.D.R. aspects.

    Note also the "peculiar" way that the SDR has been tracking the dollar since about 2000.... and who knows what the future will actually bring.



    ...


    However, there is another aspect we should talk here. If EU has to become the new consumer of last resort replacing USA, and EUR to grow it's share in international currency reserves, that means EU countries have to run deficits.

    Quote Originally Posted by bart

    And speaking of international currency reserves - the most recent pictures:












    But going back to correlation between the fudged BASE and inflation ( bart a historical chart of inflation as function of BASE in fudged and unfudged form would be very useful,... this is a hint )


    I think bart has a good point. By having the Fed paying interest on reserves at the same rate at which money is pumped into big zombie banks, a monetary singularity regime is created, which allows the Fed to decrease the risk on the balance sheet of certain preferred banks without having to deal with any substantial inflationary effect.

    By the way bart how would one define risk on the balance sheet sheet of the Fed when they have the whole asset-liability inversion compared to normal banks ?

    Can we say that the Fed is the ultimately bank risk eraser or black whole?
    Here's the closest I have on long term base, but the recent data needs to be taken with a vat of salt due to frozen reserves.







    You have it on how paying interest on reserves helps the Fed control various inflationary effects, while shoring up bank's actual insolvency. Pretty clever.

    As far as Fed balance sheet risk, their leverage currently is well over 50:1... but they're also a central bank and not limited to normal rules since in a broad generality they can print whatever they need.
    CB's are really odd ducks - far odder than my favorite duck:




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    Default Re: Monetary base and inflation

    Quote Originally Posted by Finster View Post
    Just a couple further observations ... no one should be under the false impression that the bigger EU powers are motivated to help their sister Greece out of charitable feelings. Much of that Greek debt is owed to their own banks. This is and always has been about the banks.

    When ordinary folks like us buy risky bonds we take the risk of non-repayment in exchange for the higher yields we recieve. When the politically well connected do it, they get the high yields ... but not the risk ... if loss threatens, the goverments step in and make sure the loans are repaid anyway. At the expense of ... well ... ordinary folks like us.

    This ... is what's really rotten in Denmark ... and Germany, and France ... and not least ... right here in the USA.

    Damn soothsayer... ;-)



    "The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks."
    -- Lord Acton


    "A tyrant... is always stirring up some war or other, in order that the people may require a leader."
    -- Plato, The Republic (circa 380 B.C.)





    "Always do right. This will gratify some people and astonish the rest."
    -- Mark Twain

  22. Default Re: Monetary base and inflation

    Milton Friedman's "monetary base" (see: WSJ, Sept. 1, 1983), is not now, nor has even ever been, a "base" which can be somehow related to the expansion of new money & credit. Thus the banking system's expansion coefficient as published by the St. Louis FED (see M1 MONEY MULTIPLIER), is fictional. (1) Increases in currency held by the non-bank public are contractional -- unless, for example, are offset by open market operations of the buying type & (2) increases in the volume of IOeRs are also contractional. IOeRs are a credit control device. IOeRs are used to offset the expansion of the FED's balance sheet on its asset side.

    IOeRs alter the construction of a normal yield curve, they INVERT the short-end segment of the YIELD CURVE – known as the money market.

    As an example, the 5 1/2 percent increase in REG Q ceilings on December 6, 1965 (applicable only to the commercial banking system), is analogous (in this period of historically low interest rates), to the .25% remuneration rate on excess reserves today (i.e., the remuneration rate @ .25% is higher than the daily Treasury yield curve 2 years out - .24% on 12/19/11).

    The increase in REG Q ceilings in 1965 created a lack of mortgage funds in the housing industry. Similarily, the introduction of IOeRs today induced dis-intermediation (an outflow of funds), among the non-banks. Disintermediation is where the financial intermediaries (non-banks), shrink in size, but the size of the commercial banking system remains the same.

    Professional economists have no excuse for misinterpreting the savings investment process. They are paid to understand and interpret what is happening in the whole economy at any one time. For the commercial banking system, this requires constructing a balance sheet for the System, an income and expense statement for the System, and a simultaneous analysis of the flow of funds in the entire
    economy.

    See: http://bit.ly/yUdRIZ

    Quantitative Easing and Money Growth:
    Potential for Higher Inflation?
    Daniel L. Thornton



  23. #23

    Default Re: Monetary base and inflation

    Quote Originally Posted by flow5
    Professional economists have no excuse for misinterpreting the savings investment process.
    They have no excuse from a professional integrity standpoint, but there are plenty of excuses from a financial success standpoint.

  24. Default Re: Monetary base and inflation

    It's simply accounting.

  25. Default Re: Monetary base and inflation

    Milton Friedman's "monetary base" (or "high powered money") is not now, nor has ever been, a base for the expansion of new money & credit. An increase in excess reserves (remunerated at .25%) is contractionary just as is an increase in currency held by the non-bank public is contractionary (unless offset by open market operations of the buying type).

    CURRENCY IS CONTRACTIONARY:

    Any expansion or contraction of DAMB is neither proof that the Fed intends to follow an expansive, nor a contractive monetary policy. Furthermore any expansion of the non-bank public’s holdings of currency merely changes the composition (but not the total volume) of the money supply. There is a shift out of demand deposits, NOW or ATS accounts, into currency. But this shift does reduce member bank legal reserves by an equal, or approximately equal, amount.

    An expansion of the public’s holdings of currency will cause a multiple contraction of bank credit and checking accounts (relative to the increase in currency outflows from the banks) ceteris paribus. To avoid such a contraction the Fed offsets currency withdrawals by open market operations of the buying type. The reverse is true if there is a return flow of currency to the banks. Since the trend of the non-bank public’s holdings of currency is up (ever since 1930), return flows are purely seasonal and cannot therefore provide a permanent basis for bank credit and money expansion.

    EXCESS RESERVE BALANCES ARE CONTRACTIONARY.

    IOeR’s (remunerated inter-bank reserve balances), are a credit control device. As of Oct 9, 2008 IOeR’s are the functional equivalent of required reserves (by increasing the existing volume of un-used excess reserves outstanding [the ratio of reserves to deposits], the BOG reduces the CB system’s lending capacity).

    IOeR’s absorb bank deposits (which offset the expansion of the FED’s liquidity funding facilities on the asset side of its balance sheet, as well as QE1’s & QE2’s MBS, & Treasury purchases). Or in effect, IOeR’s sterilize, for example, open market operations of the buying type.

    IOeR’s also induce dis-intermediation within the non-banks (where the shadow banks & broad credit shrink in size, but the size of the commercial banking system remains the same):

    (1) ABSORB both existing bank deposits within the CB system (taking Treasuries, or safe assets, off the market), as well as;

    (2) ATTRACT monetary savings from the non-banks (shadow banks).

    http://www.chicagofed.org/digital_assets/others/events/2012/day_ahead/ennis_wolman.pdf

    The non-banks are the most important lending sector in our economy (or pre-Great Recession), represented 82% of the pooling & lending markets (see: Z.1 release, sectors, e.g., MMMFs, commercial paper, GSEs, etc.).

    I.e., IOeR's impound monetary savings within the CB system. IOeR's result in a cessation of circuit income, & the transactions velocity of funds.
    IOeR's stop (or retard), the flow of savings into real-investment. IOeR's reduce real-output. IOeR's require large doses of new money to counteract. IOeR's propagate stagflation. IOeR's impeded recovery from the Great Recession.

    According to FRBNY's William Dudley, monetary policy seeks “an IOeR rate consistent with the amount of required reserves, money supply (bank credit proxy), and commercial bank credit outstanding".

    See: http://bit.ly/yUdRIZ

    Quantitative Easing and Money Growth:
    Potential for Higher Inflation?
    Daniel L. Thornton
    Last edited by flow5; 07-01-12 at 08:21 PM. Reason: er

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