Why does anyone pay attention to people that study "economics"?

[picolo]

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"

Upton Sinclair

"Economic history is a never-ending series of episodes based on falsehoods and lies, not truths.  It represents the path to big money.  The object is to recognize the trend whose premise is false, ride that trend and step off before it is discredited."  ~ George Soros

Two quotes I have fallen in love with

Hadn't seen the second before, anyone trading on markets and following that would have a very good chance of success.

Quick point of the ownership of money question, ultimately the populace owns the created money and that money is debt, something like a loan has a debtor but something like QE is a debt on everyone.

If you create more money, the real value of the existing money should go down. There is the question of who will enjoy this new money. In the case of QE it seems to be the governement, stocks holders, banks and maybe some people who have debt so a minority of the population.

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[General_A]

-snip-

"Economic history is a never-ending series of episodes based on falsehoods and lies, not truths.  It represents the path to big money.  The object is to recognize the trend whose premise is false, ride that trend and step off before it is discredited."  ~ George Soros

Hadn't seen the second before, anyone trading on markets and following that would have a very good chance of success.
-snip-

Its a powerful quote from a powerful man

[B.A.S.]

I thought that's what I was explaining.  Only commercial banks have a deposit account at the Fed.  No individuals so if you borrow money from JP Morgan and deposit into your Citi account.  The Fed just change their ledger to reflect this.  So the only way for the money to get into the economy is for banks to lend it out.

It's a common misunderstanding that money is not created from commercial banks.  They create it in the form of credit.  It's called endogenous money.  Most of the mainstream economists get this wrong

Here's a paper the Bank of England put out on this issue

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

Can not trust a source that comes from the bank itself, because this involves the ownership of trillions of money, they will try to hide it as much as possible and give others as much misleading info as possible

There are 2 facts that do not support the theory that commercial banks can create money:

1. Federal reserve act of 1913. It gave FED exclusive rights in creating USD. If commercial banks are doing that, they are braking the law

2. There were many bank failure in financial crisis: If commercial banks could create money by just issuing a loan, then they would just simply loan to each other and create trillions and trillions of dollar and they will never need FED. The fact that they went bankrupt is because they don't have money and they can not create it by themselves, they must turn to FED to borrow money

However, since majority of the financial activities are settlements between different bank's database with very little movement of real money. From bank's point of view those virtual money are more important for daily operation. Real money (e.g. reserve) only become a problem when there is a liquidity crisis. Just like an exchange only have problem when customer withdraw their bitcoin. And today's banks limit the withdraw strictly to prevent a bank run

Endogenous money is a heterodox view so it's a 180 that BoE would put out his view.  They have no ulterior motive to put out this paper.

Banks create credit money.  They are not minting money, like the Treasury.  Can you say where Federal reserve act says this?  Whe people say "printing money", what they mean is the Fed is increasing reserves.

The money is comes into existence when someone borrows it.  If there are no borrowers no money is created.  

Banks didn't become bankrupt.  They were at risk of insolvency.  Investors were pulling money out and the banks froze lending to each other because they didn't trust one another.  It was a liquidity crisis not a bank run

1) Fed. Reserve creates and credits its accounts with "new money"
2) Fed. buys US Treasury bonds with this new money
3) This injects new money into the system (interest rates are effected here)
4) Commercial banks lend the new money into existence based on their view of the economy at that moment
4.5) The US Government also brings new money into existence through government-sponsored programs

There will always be borrowers, whether then are individual people or other banks or other businesses.

Prior to the Fed. Reserve Act, banks and lenders were not required to be part of a centralized network or keep a set amount of non-interest bearing reserves around. The high interest rates and huge economic inflation caused the bank run. America was in dire straits before the 1930s. Lots of wars, Great Depression, famines, economic uncertainty, etc. No individual could get a loan for anything because banks refused to lend, so the people tried to get their money out. It most likely was a combo of the banks didn't have the money, people made a huge run on the bank en masse and banks refused to lend.

Prior to the FRA or the creation of the Fed, banks were not dependent on a centralized system. Without the Fed America would not be where it is today (both good and bad). Before, banks didn't create new money, it was made up of people who actually leant money they physically owned.  With the Fed, new money can be created out of thin air and used to allow the country to profit in an unlimited manner.

Now banks are required to purchase non-transferrable stock in their reserve bank forcing banks to abide by a centralized money making unit (the Fed). This ensures the system will only break if all the pieces crumble. Makes it very difficult if everyone (all banks and lenders) must abide by rules that keep them vested in the money maker (the Fed). This centralized system made banks of yesteryear less powerful (controlling the economy totally), more corruptible and more controllable.

[B.A.S.]

If you create more money, the real value of the existing money should go down. There is the question of who will enjoy this new money. In the case of QE it seems to be the governement, stocks holders, banks and maybe some people who have debt so a minority of the population.

I think you mean most of America. The poor enjoy QE as well as banks. By the poor, I mean people obsessed with buying shit they don't need with money they don't have.

Banks enjoy it because they can now lend money at better rates to people who don't need that money in the first place. Lower interest rates allow the poor to stay poor (by buying extra shit) and the rich to get richer (taking enormous loans at low rates to facilitate greater business opportunities cheap credit allows). It hurts everyone depending on the way you look at it.

[twiifm]

I thought that's what I was explaining.  Only commercial banks have a deposit account at the Fed.  No individuals so if you borrow money from JP Morgan and deposit into your Citi account.  The Fed just change their ledger to reflect this.  So the only way for the money to get into the economy is for banks to lend it out.

It's a common misunderstanding that money is not created from commercial banks.  They create it in the form of credit.  It's called endogenous money.  Most of the mainstream economists get this wrong

Here's a paper the Bank of England put out on this issue

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

Can not trust a source that comes from the bank itself, because this involves the ownership of trillions of money, they will try to hide it as much as possible and give others as much misleading info as possible

There are 2 facts that do not support the theory that commercial banks can create money:

1. Federal reserve act of 1913. It gave FED exclusive rights in creating USD. If commercial banks are doing that, they are braking the law

2. There were many bank failure in financial crisis: If commercial banks could create money by just issuing a loan, then they would just simply loan to each other and create trillions and trillions of dollar and they will never need FED. The fact that they went bankrupt is because they don't have money and they can not create it by themselves, they must turn to FED to borrow money

However, since majority of the financial activities are settlements between different bank's database with very little movement of real money. From bank's point of view those virtual money are more important for daily operation. Real money (e.g. reserve) only become a problem when there is a liquidity crisis. Just like an exchange only have problem when customer withdraw their bitcoin. And today's banks limit the withdraw strictly to prevent a bank run

Endogenous money is a heterodox view so it's a 180 that BoE would put out his view.  They have no ulterior motive to put out this paper.

Banks create credit money.  They are not minting money, like the Treasury.  Can you say where Federal reserve act says this?  Whe people say "printing money", what they mean is the Fed is increasing reserves.

The money is comes into existence when someone borrows it.  If there are no borrowers no money is created.  

Banks didn't become bankrupt.  They were at risk of insolvency.  Investors were pulling money out and the banks froze lending to each other because they didn't trust one another.  It was a liquidity crisis not a bank run

1) Fed. Reserve creates and credits its accounts with "new money"
2) Fed. buys US Treasury bonds with this new money
3) This injects new money into the system (interest rates are effected here)
4) Commercial banks lend the new money into existence based on their view of the economy at that moment
4.5) The US Government also brings new money into existence through government-sponsored programs

There will always be borrowers, whether then are individual people or other banks or other businesses.

Prior to the Fed. Reserve Act, banks and lenders were not required to be part of a centralized network or keep a set amount of non-interest bearing reserves around. The high interest rates and huge economic inflation caused the bank run. America was in dire straits before the 1930s. Lots of wars, Great Depression, famines, economic uncertainty, etc. No individual could get a loan for anything because banks refused to lend, so the people tried to get their money out. It most likely was a combo of the banks didn't have the money, people made a huge run on the bank en masse and banks refused to lend.

Prior to the FRA or the creation of the Fed, banks were not dependent on a centralized system. Without the Fed America would not be where it is today (both good and bad). Before, banks didn't create new money, it was made up of people who actually leant money they physically owned.  With the Fed, new money can be created out of thin air and used to allow the country to profit in an unlimited manner.

Now banks are required to purchase non-transferrable stock in their reserve bank forcing banks to abide by a centralized money making unit (the Fed). This ensures the system will only break if all the pieces crumble. Makes it very difficult if everyone (all banks and lenders) must abide by rules that keep them vested in the money maker (the Fed). This centralized system made banks of yesteryear less powerful (controlling the economy totally), more corruptible and more controllable.

Not quite. 

1.  The money the Fed creates are reserves.  It still need to be lent into economy.
2.  True sometimes.  But could be other types of assets.  And should be noted they buy from primary dealers.
3.  True sometimes but its not their primary mechanism for affecting interest.
4.  True
5.  This is called deficit spending

The number of borrowers depend on different variables.  There was much less borrowers after 08

Prior to FRA the major banks did use a clearinghouse that had lender of last resort function similar to the Fed.  But it was private not open to every bank

[dinofelis]

There are 2 facts that do not support the theory that commercial banks can create money:

1. Federal reserve act of 1913. It gave FED exclusive rights in creating USD. If commercial banks are doing that, they are braking the law

2. There were many bank failure in financial crisis: If commercial banks could create money by just issuing a loan, then they would just simply loan to each other and create trillions and trillions of dollar and they will never need FED. The fact that they went bankrupt is because they don't have money and they can not create it by themselves, they must turn to FED to borrow money

Maybe you should read Keynes' "Theory of money".  It is very well explained in the first few chapters, how Deposits are money.  It is what Keynes calls "Bank Money" (in contrast to State money).  He shows that in the 20ies already essentially all money is Bank Money.

In fact, the instability you point to is discussed, and it is why there is the minimum fractional reserve imposed. 

However, that minimum fractional reserve only limits the amount of money on the upper side.  It doesn't on the lower side.  What we are starting to observe now is exactly that: the impossibility to force the creation of bank money, no matter how much state money one issues.

[dinofelis]

The poor enjoy QE as well as banks. By the poor, I mean people obsessed with buying shit they don't need with money they don't have.

Banks enjoy it because they can now lend money at better rates to people who don't need that money in the first place. Lower interest rates allow the poor to stay poor (by buying extra shit) and the rich to get richer (taking enormous loans at low rates to facilitate greater business opportunities cheap credit allows). It hurts everyone depending on the way you look at it.

 

In fact, the QE programme will not cause direct inflation because:

- the interest rates are already near zero.  What you say about making lending easier is when the FED could still lower interest rates, but that's already near zero, so that trick doesn't work anymore.  That's why they resorted to QE in the first place:  QE is something you do when the "normal" Keynesian lever arm of interest rates is already near zero.  Also called a liquidity trap.  Usually, lowering interest rates makes people lend more (and spend more according to Keynes).  But when the rates are near-zero, that lever is pushed to its maximum.

QE is buying up stuff from financial markets against freshy issued base money.

The only thing it does in the first place, is to pump up the prices of the things that are bought by the fed (by increasing the demand for it, whatever type of securities it are).  If you hold these things, you get the seigniorage of that printing.  Usually banks and rich people. 

However, the last few years, QE has been going together with a requirement for higher fractional reserves (Baal III act).  Higher fractional reserves lowers the amount of Bank money.  As such, most of this QE money will never really "hit the market" but remain as reserves at the FED.  As such, what the FED *actually* does is to accept certain securities from banks as "bank reserves" and converts them into dollars kept at the FED.  So what happens NET is that certain securities have been taken out by the FED, increasing their market price and making rich the people who owned them before the QE (because their market price increased).

The printing of base money has largely been offset by the increasing requirement for fractional reserves.

I wouldn't even been surprised if this was not a way for the FED to have certain banks with bad paper to let them get rid of that paper by selling it to the FED, but I have to say that I don't know this.

[johnyj]

There are 2 facts that do not support the theory that commercial banks can create money:

1. Federal reserve act of 1913. It gave FED exclusive rights in creating USD. If commercial banks are doing that, they are braking the law

2. There were many bank failure in financial crisis: If commercial banks could create money by just issuing a loan, then they would just simply loan to each other and create trillions and trillions of dollar and they will never need FED. The fact that they went bankrupt is because they don't have money and they can not create it by themselves, they must turn to FED to borrow money

Maybe you should read Keynes' "Theory of money".  It is very well explained in the first few chapters, how Deposits are money.  It is what Keynes calls "Bank Money" (in contrast to State money).  He shows that in the 20ies already essentially all money is Bank Money.

In fact, the instability you point to is discussed, and it is why there is the minimum fractional reserve imposed.  

However, that minimum fractional reserve only limits the amount of money on the upper side.  It doesn't on the lower side.  What we are starting to observe now is exactly that: the impossibility to force the creation of bank money, no matter how much state money one issues.

Good point. In fact there are many types of "money" and most of them are not real, but now most of the people have no idea what is real money, and they usually talk about some money that is not real

Just like a user's bitcoin in an exchange, he would also call them bitcoin and he can exchange them with others on exchange, so for him and for exchange, those numbers in his account indeed represent bitcoin. And the exchange can even do some statistics about their bitcoin transaction volume in their database and make a M1 supply analysis of bitcoin ecosystem. However, they are just numbers in exchange's database, they are not on blockchain. The exchange might have already lost those bitcoins long time ago before the client experience a withdraw problem, since the coins in their hot wallet might be able to deal with any kind of withdraw for years unless a crisis hit (MTGOX)

The bank settlement network can be regarded as a giant exchange that almost everything is exchanged on this platform. People trade against each other with their money and cause the numbers in their account increase or decrease. Exactly the same way bitcoin traders doing in an exchange. So anything happened on this giant exchange has nothing to do with real money

To see the real money, people must get out of this giant exchange, as long as they stay in this exchange and keep trading, they will always be playing with numbers, not real money. And those numbers can not exist without real money

When MTGOX lost all of the customer coins in cold storage, all the accounts were wiped out, although the numbers in those accounts are still intact, the value behind them is gone. This is similar to many bank failure that when their last piece of real money has been exhausted, all the other numbers in their database are useless


In my opinion, real money only comes from FED (and notes and coins made by treasury). But the ownership of those real money is little bit confusing: In a traditoinal RBD model, if I have some valuable asset, I can issue money of same value, backed by this asset. But the ownership is: I have ownership of the money and I also have the ownership of the asset

Then I start to spend money, giving up the ownership of those money and get some valuable things in return. Notice that I still have the ownership of my asset, as long as no one come back to me to redeem the money

Government have the ownership of some asset, then they issue some money based on this asset. From a similar reasoning, the asset ownership and money ownership will all belong to government, as long as no one come to government to redeem the money. However, the reality is: Newly issued money belongs to government, but their asset now belongs to FED, which is not owned by government

I have never been able to understand how this kind of ownership shift can happen without any resistance from mainstream economists, have they been playing on exchanges for too long and forget about the real world totally  

Of course, if everyone from birth to death are playing on this exchange forever, then the numbers on exchanges will be more important than reality, but that is a kind of abstraction I still can not command now, maybe just like Keynes said, we are all dead long term wise

[picolo]

If you create more money, the real value of the existing money should go down. There is the question of who will enjoy this new money. In the case of QE it seems to be the governement, stocks holders, banks and maybe some people who have debt so a minority of the population.

I think you mean most of America. The poor enjoy QE as well as banks. By the poor, I mean people obsessed with buying shit they don't need with money they don't have.

Banks enjoy it because they can now lend money at better rates to people who don't need that money in the first place. Lower interest rates allow the poor to stay poor (by buying extra shit) and the rich to get richer (taking enormous loans at low rates to facilitate greater business opportunities cheap credit allows). It hurts everyone depending on the way you look at it.

The American Economy is based on debt and the federal budget and the commercial balance are in deficit every year which will end in tears.

[Mike Christ]

For most people, it's a hobby; I can think of nothing more useless to understand than economics, it's on the same level as the Myers-Briggs Personality Indicator in its potential for being any kind of good force in the world.  At best it can shape one's world view, and at worst it can shape one's world view--I'm sure you know what I'm referring to.  I've had friends who decided to major in economics in college; they all seem to regret it, esp. when I ask them why they learned it.  The answer is always, "I thought it was interesting."  Tsk, tsk; an investment like college necessitates a return, i.e. to pursue a field which is profitable, but apparently colleges will just teach you anything your heart desires.

Still, it's fun to think about and argue--we all have our pet interests.  But I'm just as baffled as you are as to why anyone disinterested in economics would listen to an economist, like he's a real Nostradamus or something.  Esp. the Keynesian school, it's horrendously abstract and disconnected from reality, takes a special sort of person; only thing that keeps it going is "only leftists have empathy and leftists like Keynes" a la Krugman; without such persuasive tactics there'd be nothing going for it.

[dinofelis]

Good point. In fact there are many types of "money" and most of them are not real, but now most of the people have no idea what is real money, and they usually talk about some money that is not real

The thing is, that as long as enough people consider "not real" money as real, it is in fact real !
Because that's the essence of money: people think it is money !
Something is money if people think it is money. 

We're back to my next (or better: same) fool theory :-)

[picolo]

For most people, it's a hobby; I can think of nothing more useless to understand than economics, it's on the same level as the Myers-Briggs Personality Indicator in its potential for being any kind of good force in the world.  At best it can shape one's world view, and at worst it can shape one's world view--I'm sure you know what I'm referring to.  I've had friends who decided to major in economics in college; they all seem to regret it, esp. when I ask them why they learned it.  The answer is always, "I thought it was interesting."  Tsk, tsk; an investment like college necessitates a return, i.e. to pursue a field which is profitable, but apparently colleges will just teach you anything your heart desires.

Still, it's fun to think about and argue--we all have our pet interests.  But I'm just as baffled as you are as to why anyone disinterested in economics would listen to an economist, like he's a real Nostradamus or something.  Esp. the Keynesian school, it's horrendously abstract and disconnected from reality, takes a special sort of person; only thing that keeps it going is "only leftists have empathy and leftists like Keynes" a la Krugman; without such persuasive tactics there'd be nothing going for it.

Keynes theories are taken as actual theories because they are taught in schools when history proved him wrong.

[coinsentry]

I see Keynesian economics in the same light as the psychology establishment sees Freudian Psychology today. Its an outdated way of thinking about how things are. Maybe Freud was right back in the 1880, but he's not right anymore. Keyes may have been right in the 1920s, but he isn't right anymore. Infinite expansion may have seemed like the inevitable outcome of mankind back in 1929, but it doesn't any more. Everyone is saying the world's population is on track to stop expanding in the next 100 years. Current generation are more about saving the environment and reducing man's footprint rather than "owning it all". Even after hyperbitcoinization, whatever economical model people adopt (Satoshian economics?) will  eventually be replaced with something else within 100 years or so. One constant truth about mankind is that each generation thinks differently than the generations before them. Ok now i'm just blabbin', peace out.

[picolo]

I see Keynesian economics in the same light as the psychology establishment sees Freudian Psychology today. Its an outdated way of thinking about how things are. Maybe Freud was right back in the 1880, but he's not right anymore. Keyes may have been right in the 1920s, but he isn't right anymore. Infinite expansion may have seemed like the inevitable outcome of mankind back in 1929, but it doesn't any more. Everyone is saying the world's population is on track to stop expanding in the next 100 years. Current generation are more about saving the environment and reducing man's footprint rather than "owning it all". Even after hyperbitcoinization, whatever economical model people adopt (Satoshian economics?) will  eventually be replaced with something else within 100 years or so. One constant truth about mankind is that each generation thinks differently than the generations before them. Ok now i'm just blabbin', peace out.

And people make Keynes say things he didn't say. For example, he never say increasing taxes where a good idea if a state was in debt

[B.A.S.]

Instead of paying attention to economics, people should start paying attention to those who define what economics is and study them. This is where you will learn what "real" economics is and how it's implemented.

[twiifm]

I see Keynesian economics in the same light as the psychology establishment sees Freudian Psychology today. Its an outdated way of thinking about how things are. Maybe Freud was right back in the 1880, but he's not right anymore. Keyes may have been right in the 1920s, but he isn't right anymore. Infinite expansion may have seemed like the inevitable outcome of mankind back in 1929, but it doesn't any more. Everyone is saying the world's population is on track to stop expanding in the next 100 years. Current generation are more about saving the environment and reducing man's footprint rather than "owning it all". Even after hyperbitcoinization, whatever economical model people adopt (Satoshian economics?) will  eventually be replaced with something else within 100 years or so. One constant truth about mankind is that each generation thinks differently than the generations before them. Ok now i'm just blabbin', peace out.

Satoshian economics?  Bwahaha.  You know Satohsi is just influence by Rothbard, who nobody in economic takes seriously