I finally figured out why there's not lots of inflation

[theonewhowaskazu]

Edit: wrote this whole thing from a phone. Bear with the mobile fed links.

It's kind of obvious in a sneaky way.

You see when you look up us money supply you typically get this, the monetary base:
http://m.research.stlouisfed.org/fred/series.php?sid=BASE&show=chart&range=max&units=lin

But, this is actually more important for determining inflation in the short term:
http://m.research.stlouisfed.org/fred/series.php?sid=WCURCIR&show=chart&range=max&units=lin

Check it out. Whas the difference between currency in circulation and monetary base? Monetary base also includes demand deposits in the federal reserve. Demand deposits in the fed still bear interest. But unlike a normal demand deposit, the money is not invested or relent. Instead, its effectively destroyed. Until the depositor demands it back that is.

But, how can it pay a rate then? The answer is, it doesnt, not really. That rate is effectively a bribe to banks to give the fed permission to destroy that chunk of the money supply for a while. And currently it accounts for a huge portion of the monetary base. In fact, it accounts for nearly the ENTIRETY OF QE.

To me, that's a mixed message. Why bribe banks to destroy money when supposedly the entire point of QE is as so many people like to put it, "print money", or as the feds like to call it, "stimulate the economy."

In actuality it neither , nor was likely intended to achieve, either end. We've got it wrong, at least on the surface. The real purpose of QE was to decrease real reserve ratios. I'll get to why in a second.

Here's how people think the QE story works:
Government sells bonds. Banks buy bonds. Banks resell those bonds. Fed buys bonds sending newly printed money to banks. Bank lends money, government spends money. Money was just printed.

Here's how it really works:
Government sells bonds. Banks buy bonds. Bank knows that bonds don't count as a reserve asset, and knows that interest rates will rise because the fed said they would. Bank sells bonds. Fed buys bonds. Bank DOESN'T lend the money, it deposits it right back into the fed. Why? Because like bonds, loans to business and consumers typically depreciate as rates rise. Also like bonds they don't count as reserves. Not to mention the risk. So bank deposits money into fed who then bribes the bank to keep it there with their low demand deposit interest rate.

See how that works? No money is actually created. The government can spend the money it got from banks. The banks can't because it's locked in the fed demand deposit account that serves as a reserve so they have no incentive to ever lend to anyone else, or so anything else but repeat this process as often as possible (since they get a markup when they resell the bonds).

Actually, this whole QE thing is basically a clever marketing trick. To sell what? Government debt.

By switching the bond for cash it won't lend or spend, the bank still effectively has it lent to the government. Only, instead of having to lock it in for 10 years, it's entirely liquid. Moreover, there would be no one In his right mind to buy bonds when rates are artificialy low. But the demand deposit account has a variable rate!

All's dandy till th banks demand their deposit. Naturally they can only demand a portion - laws mandate they have to have some in there - but even if a mere 1 trillion were suddenly withdrawn and lent the currency in circulation - what actually affects prices - would basically double.

Now check this out. http://www.federalreserve.gov/releases/h3/current/h3.htm

Last week, there was a net outflow for the first time I can see.

So? What happens? "We're raising rates soon! So don't lend because we're about to devalue that loan! Also we're going to bribe you more to keep your money out of the economy!"
http://m.us.wsj.com/articles/fed-officials-see-role-for-interest-on-reserves-1404929744?mobile=y

The thing is, the bigger bribes they pay the more there will eventually be to withdraw. Hmmm....

[Pente]

I think the FED uses the term "sequestered". They are expanding the money supply, but basically only banks get access to it.

Another reason that QE has resulted in as much inflation as would be expected is that a lot of money is used overseas. As more people around the world started using the dollar, the demand for it kept price inflation in check.

Also price inflation is much higher than stated. Shadowstats.com has a much closer chart to the real rate of inflation. Money magazine did a survey to find their reader's personal rate of inflation (how much did their living expenses go up). Both sources show closer to a price inflation rate around 12% compared to the supposed rate of 2% if you listened to our government. Looking at the most of my expenses, I would put inflation around that rate too.

[twiifm]

Edit: wrote this whole thing from a phone. Bear with the mobile fed links.

It's kind of obvious in a sneaky way.

You see when you look up us money supply you typically get this, the monetary base:
http://m.research.stlouisfed.org/fred/series.php?sid=BASE&show=chart&range=max&units=lin

But, this is actually more important for determining inflation in the short term:
http://m.research.stlouisfed.org/fred/series.php?sid=WCURCIR&show=chart&range=max&units=lin

Check it out. Whas the difference between currency in circulation and monetary base? Monetary base also includes demand deposits in the federal reserve. Demand deposits in the fed still bear interest. But unlike a normal demand deposit, the money is not invested or relent. Instead, its effectively destroyed. Until the depositor demands it back that is.

But, how can it pay a rate then? The answer is, it doesnt, not really. That rate is effectively a bribe to banks to give the fed permission to destroy that chunk of the money supply for a while. And currently it accounts for a huge portion of the monetary base. In fact, it accounts for nearly the ENTIRETY OF QE.

To me, that's a mixed message. Why bribe banks to destroy money when supposedly the entire point of QE is as so many people like to put it, "print money", or as the feds like to call it, "stimulate the economy."

In actuality it neither , nor was likely intended to achieve, either end. We've got it wrong, at least on the surface. The real purpose of QE was to decrease real reserve ratios. I'll get to why in a second.

Here's how people think the QE story works:
Government sells bonds. Banks buy bonds. Banks resell those bonds. Fed buys bonds sending newly printed money to banks. Bank lends money, government spends money. Money was just printed.

Here's how it really works:
Government sells bonds. Banks buy bonds. Bank knows that bonds don't count as a reserve asset, and knows that interest rates will rise because the fed said they would. Bank sells bonds. Fed buys bonds. Bank DOESN'T lend the money, it deposits it right back into the fed. Why? Because like bonds, loans to business and consumers typically depreciate as rates rise. Also like bonds they don't count as reserves. Not to mention the risk. So bank deposits money into fed who then bribes the bank to keep it there with their low demand deposit interest rate.

See how that works? No money is actually created. The government can spend the money it got from banks. The banks can't because it's locked in the fed demand deposit account that serves as a reserve so they have no incentive to ever lend to anyone else, or so anything else but repeat this process as often as possible (since they get a markup when they resell the bonds).

Actually, this whole QE thing is basically a clever marketing trick. To sell what? Government debt.

By switching the bond for cash it won't lend or spend, the bank still effectively has it lent to the government. Only, instead of having to lock it in for 10 years, it's entirely liquid. Moreover, there would be no one In his right mind to buy bonds when rates are artificialy low. But the demand deposit account has a variable rate!

All's dandy till th banks demand their deposit. Naturally they can only demand a portion - laws mandate they have to have some in there - but even if a mere 1 trillion were suddenly withdrawn and lent the currency in circulation - what actually affects prices - would basically double.

Now check this out. http://www.federalreserve.gov/releases/h3/current/h3.htm

Last week, there was a net outflow for the first time I can see.

So? What happens? "We're raising rates soon! So don't lend because we're about to devalue that loan! Also we're going to bribe you more to keep your money out of the economy!"
http://m.us.wsj.com/articles/fed-officials-see-role-for-interest-on-reserves-1404929744?mobile=y

The thing is, the bigger bribes they pay the more there will eventually be to withdraw. Hmmm....

Yeah good post.  The MMT crowd like Richard Koo or Steve Keen doesn't think QE can stimulate the economy either.

You might wanna check out what Richard Koo calls "QE Trap"

http://www.businessinsider.com/koo-says-no-one-can-refute-the-qe-trap-2013-10

[DannyElfman]

I think the FED uses the term "sequestered". They are expanding the money supply, but basically only banks get access to it.

The banks get the expanded money supply that is supplied by the Fed. The hope is that banks will increase lending so that more people will borrow money, stimulating the economy.

[twiifm]

I think the FED uses the term "sequestered". They are expanding the money supply, but basically only banks get access to it.

The banks get the expanded money supply that is supplied by the Fed. The hope is that banks will increase lending so that more people will borrow money, stimulating the economy.

Sounds good in theory but nobody wants to borrow in a recession

[DannyElfman]

I think the FED uses the term "sequestered". They are expanding the money supply, but basically only banks get access to it.

The banks get the expanded money supply that is supplied by the Fed. The hope is that banks will increase lending so that more people will borrow money, stimulating the economy.

Sounds good in theory but nobody wants to borrow in a recession

There is often a elevated demand for borrowing in a recession as people lose their jobs and need to continue to pay their living expenses. The problem with this borrowing is that these borrowers are way more risky then what banks typically lend to

[theonewhowaskazu]

I think the FED uses the term "sequestered". They are expanding the money supply, but basically only banks get access to it.

The banks get the expanded money supply that is supplied by the Fed. The hope is that banks will increase lending so that more people will borrow money, stimulating the economy.

Then why in the name of Timothy Geithner do they bribe the banks to deposit the funds in the Fed rather than releasing them out into the economy

[twiifm]

I think the FED uses the term "sequestered". They are expanding the money supply, but basically only banks get access to it.

The banks get the expanded money supply that is supplied by the Fed. The hope is that banks will increase lending so that more people will borrow money, stimulating the economy.

Then why in the name of Timothy Geithner do they bribe the banks to deposit the funds in the Fed rather than releasing them out into the economy

If you are asking about Geithner.   What he did was use the Fed to finance JP Morgans acquisition of Bear Stearns,  AIG bailout,  and TARP.   He wanted to avoid a stock market crash

I thought you were talking about QE in the op

[twiifm]

I think the FED uses the term "sequestered". They are expanding the money supply, but basically only banks get access to it.

The banks get the expanded money supply that is supplied by the Fed. The hope is that banks will increase lending so that more people will borrow money, stimulating the economy.

Sounds good in theory but nobody wants to borrow in a recession

There is often a elevated demand for borrowing in a recession as people lose their jobs and need to continue to pay their living expenses. The problem with this borrowing is that these borrowers are way more risky then what banks typically lend to

But this demand would evidently be short-lived, even if you manage to get a loan from a bank. And I'm dubious that people losing their jobs would go borrowing. They would rather shrink their expenses and lower their level of living.

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If its an emergency they might use short term credit.   Like credit cards or helocs.   This wouldn't boost the economy though because they are unlikely to make additional purchases.   

[tee-rex]

I think the FED uses the term "sequestered". They are expanding the money supply, but basically only banks get access to it.

The banks get the expanded money supply that is supplied by the Fed. The hope is that banks will increase lending so that more people will borrow money, stimulating the economy.

Sounds good in theory but nobody wants to borrow in a recession

There is often a elevated demand for borrowing in a recession as people lose their jobs and need to continue to pay their living expenses. The problem with this borrowing is that these borrowers are way more risky then what banks typically lend to

But this demand would evidently be short-lived, even if you manage to get a loan from a bank. And I'm dubious that people losing their jobs would go borrowing. They would rather shrink their expenses and lower their level of living.

If its an emergency they might use short term credit.   Like credit cards or helocs.   This wouldn't boost the economy though because they are unlikely to make additional purchases.   

Yes, but such cases may happen and actually happen not only in recession, so we may well omit them and don't consider (as if they didn't happen at all).

[twiifm]

Credit has limits so once thats exhausted nothing you can do.  At some point you have to cut back expenses and pay down debt

[fdiini]

Credit has limits so once thats exhausted nothing you can do.  At some point you have to cut back expenses and pay down debt

Credit needs to be backed by either service or good. If not, it is just stealing from the population.

[IIOII]

Nice writeup on the current situation. US and many European states getting more and more difficulties to sell their debt to the market. They are forced to use extraordinary mechanisms to keep the system alive for a little longer.

It's just a question of time when this construct will collapse.

[Leina]

It's just a question of time when this construct will collapse.

The sooner the better.

[theonewhowaskazu]

I think the FED uses the term "sequestered". They are expanding the money supply, but basically only banks get access to it.

The banks get the expanded money supply that is supplied by the Fed. The hope is that banks will increase lending so that more people will borrow money, stimulating the economy.

Then why in the name of Timothy Geithner do they bribe the banks to deposit the funds in the Fed rather than releasing them out into the economy

If you are asking about Geithner.   What he did was use the Fed to finance JP Morgans acquisition of Bear Stearns,  AIG bailout,  and TARP.   He wanted to avoid a stock market crash

I thought you were talking about QE in the op

The name Timmothy Geithner was merely placed there for emphasis.

My question, without the unnecessary exclamation, was

"Then why do they bribe the banks to deposit the funds in the Fed rather than releasing them out into the economy."

[twiifm]

I think the FED uses the term "sequestered". They are expanding the money supply, but basically only banks get access to it.

The banks get the expanded money supply that is supplied by the Fed. The hope is that banks will increase lending so that more people will borrow money, stimulating the economy.

Then why in the name of Timothy Geithner do they bribe the banks to deposit the funds in the Fed rather than releasing them out into the economy

If you are asking about Geithner.   What he did was use the Fed to finance JP Morgans acquisition of Bear Stearns,  AIG bailout,  and TARP.   He wanted to avoid a stock market crash

I thought you were talking about QE in the op

The name Timmothy Geithner was merely placed there for emphasis.

My question, without the unnecessary exclamation, was

"Then why do they bribe the banks to deposit the funds in the Fed rather than releasing them out into the economy."

The simple answer is they're not allowed to.  Congress has to do that via deficit spending

[Este Nuno]

Nice writeup on the current situation. US and many European states getting more and more difficulties to sell their debt to the market. They are forced to use extraordinary mechanisms to keep the system alive for a little longer.

It's just a question of time when this construct will collapse.

What would such a collapse look like at the start? And wouldn't there be measures that could be taken to prevent a collapse? That is assuming they saw it before it was too late.

[twiifm]

Nice writeup on the current situation. US and many European states getting more and more difficulties to sell their debt to the market. They are forced to use extraordinary mechanisms to keep the system alive for a little longer.

It's just a question of time when this construct will collapse.

What would such a collapse look like at the start? And wouldn't there be measures that could be taken to prevent a collapse? That is assuming they saw it before it was too late.

Crisis already occurred in 2008.  But it wasn't a collapse of money.  It was a collapse of credit (which is money). 

You have to consider half of the USD is created outside of Federal Reserve System in the shadow banking industry.  When credit is securitized w leveraged w derivatives, when those derivatives take a nosedive due to asset deflation you have something similar to a bank run.  Except its not depositors demanding deposits back.  Its investors dumping their investments.  The banks that wrote these derivatives are stuck w toxic assets.  So what follows is a credit collapse.  Meaning they can't de-leverage these assets and they freeze credit

It all happens within the financial sector so its hard for people in the "real economy" to understand

[SunBin]

Inflation is a process and not an event. And it does occur on the export countries.

Housing is actually cheaper in the US than it is in the exporting countries, the reason why you see so many Chinese buying out unsold home in the US and Europe.

[tee-rex]

Inflation is a process and not an event. And it does occur on the export countries.

Housing is actually cheaper in the US than it is in the exporting countries, the reason why you see so many Chinese buying out unsold home in the US and Europe.

How come that inflation can't occur in the exporting countries (there are no strict exporters and importers, by the way)? Would you care to explain?