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Posts Tagged ‘monetary policy

“He who controls the money supply of a nation controls the nation”*…

 

yuan1

 

In all economies, neither the amount of deposits nor the money supply hinge on national or household savings. When households and companies save, they do not alter the money supply. Banks also create deposits/money out of thin air when they buy securities from non-banks. As banks in China buy more than 80 per cent of government bonds, fiscal stimulus also leads to substantial money creation. In short, when banks engage in too much credit origination — as they have done in China — they generate a money bubble.

Over the past 10 years, Chinese banks have been on a credit and money creation binge. They have created Rmb144tn ($21tn) of new money since 2009, more than twice the amount of money supply created in the US, the eurozone and Japan combined over the same period. In total, China’s money supply stands at Rmb192tn, equivalent to $28tn. It equals the size of broad money supply in the US and the eurozone put together, yet China’s nominal GDP is only two-thirds that of the US. In a market-based economy constraints are in place, such as the scrutiny of bank shareholders and regulators, which prevent this sort of excess. In a socialist system, such constraints do not exist. Apparently, the Chinese banking system still operates in the latter.

[Emphasis added]

[image above: source]

* James A, Garfield

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As we practice parsimony, we might recall that it was on this date in 1972 that the longest running game show on American television, The Price is Right, hosted by Bob Barker, premiered on CBS.  Originally called The New Price Is Right to distinguish it from the earlier/original version (1956–65) hosted by Bill Cullen, it proved so popular in its own right that, in June 1973, the producers decided to drop the word “New” from its title.  In 2007, Drew Carey took over from barker as host.  Now in its 47th season, The Price Is Right has aired over 8,000 episodes since its debut and is one of the longest-running network series of any sort in United States television history.

BARKER source

 

“It’s All About The Benjamins”*…

 

Hundred-Dollar-Bill

A funny thing happened on the way to a world of cryptocurrencies and mobile payments. Cash became more popular than ever. The main reason? The one hundred dollar bill.

In 2017, for the first time ever, the one hundred dollar bill became the most popular US bill in circulation, beating out the one dollar bill. It is quite the turn of events for Benjamin Franklin-faced banknote. Just 10 years ago, it was less common than both the $20 and the $1.

The share of US dollars in circulation as a share of GDP rose from about 6% in 2010 to 9% in 2018, according to the Federal Reserve. Increased use of $100 bills has been the primary driver…

Why cash is king: “There are now more $100 bills than $1 bills in the world.”

* Puff Daddy

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As we contemplate currency, we might spare a thought for Franco Modigliani; he died on this date in 2003.  An economist, he originated the life-cycle hypothesis, which attempts to explain the level of saving in the economy, suggesting that consumers aim for a stable level of consumption throughout their  lifetime (for example by saving during their working years and then spending during their retirement)– for which he was awarded the Nobel Prize in Economics in 1985.

Among his other accomplishments, he initiated the Monetary/Fiscal Debate when he (and co-author Albert Ando) wrote a scathing critique of an early 1960s paper by Milton Friedman and David Meiselman.  Freidman and Meiselman had argued (in effect) that monetary policy was the only effective tool in managing an economy; Modigliani and Ando pointed out flaws in their analysis and made the case for fiscal measures (effectively, government spending) as equally-effective tools.  The debate– known by the antagonists’ initials as the AM/FM Debate– rages to this day.

 source

 

“I’m living so far beyond my income that we may almost be said to be living apart”*…

 

The U.S. national debt is once again raising alarm bells. Federal borrowing from outside investors expanded rapidly over the past decade, totaling more than $15 trillion in 2018, and it is projected to grow even faster over the next ten years under current law. Major budget legislation signed by President Donald J. Trump, along with continued growth in entitlements and higher interest rates, will see the debt nearly double by 2028 [PDF], coming close to the size of the entire U.S. economy.

If the debt continues to grow at an unsustainable level, it could expose the country to a number of dangers, economists say. In the extreme, the risk rises that Washington’s lenders, many of whom are foreign, could suddenly lose confidence, demand higher interest rates, and potentially trigger a fiscal crisis. Short of that, the rising debt could gradually squeeze discretionary spending and deny the country tools it needs for security and economic stability. Bringing the debt into check, experts say, will likely require politically difficult decisions to either curb entitlement spending, significantly raise taxes, or both…

A backgrounder from the Council on Foreign Relations: “The National Debt Dilemma.”

It should be noted that there are those who disagree with CFR (and the many others) who see the need to bring the deficit into balance via reduced spending and/or higher taxes: “The Radical Theory That the Government Has Unlimited Money.”

* e e cummings

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As we parse “prudence,” we might send carefully-calculated birthday greetings to Franco Modigliani; he was born on this date in 1918.  An economist, he originated the life-cycle hypothesis, which attempts to explain the level of saving in the economy, suggesting that consumers aim for a stable level of consumption throughout their  lifetime (for example by saving during their working years and then spending during their retirement)– for which he was awarded the Nobel Prize in Economics in 1985.

Among his other accomplishments, he initiated the Monetary/Fiscal Debate when he (and co-author Albert Ando) wrote a scathing critique of an early 1960s paper by Milton Friedman and David Meiselman.  Freidman and Meiselman had argued (in effect) that monetary policy was the only effective tool in managing an economy; Modigliani and Ando pointed out flaws in their analysis and made the case for fiscal measures (effectively, government spending) as equally-effective tools.  The debate– known by the antagonists’ initials as the AM/FM Debate– rages to this day.

 source

 

Written by LW

June 18, 2018 at 1:01 am

“Anyone who lives within their means suffers from a lack of imagination”*…

 

Modern Monetary Theory’s basic principle seems blindingly obvious: Under a fiat currency system, a government can print as much money as it likes. As long as country can mobilize the necessary real resources of labor, machinery, and raw materials, it can provide public services. Our fear of deficits, according to MMT, comes from a profound misunderstanding of the nature of money.

Every five-year-old understands money. It’s what you give the nice lady before she hands you the ice cream cone—an object with intrinsic value that can be redeemed for goods or services. Through the lens of Modern Monetary Theory, however, a dollar is nothing but a liability issued by the US government, which promises to accept it back in payment of taxes. The dollar in your pocket represents a debt owed you by the federal government. Money isn’t a lump of gold but rather an IOU.

This mildly metaphysical distinction ends up having huge practical consequences. It means the federal government, unlike you and me, can’t run out of cash. It can run out of things money can buy—which will drive up their price and be manifest in inflation—but it can’t run out of money. As Sam Levey, a graduate student in economics who tweets under the name Deficit Owls told me, “Macy’s can’t run out of Macy’s gift certificates.”

Especially for those who want the government to provide more services to citizens, this is a convincing argument, and one that can be understood by non-economists…

Everyone knows governments need to tax before they can spend. What Modern Monetary Theory presupposes is, maybe they don’t.  Offered for interest (and with no endorsement): “The Radical Theory That the Government Has Unlimited Money.”

* Oscar Wilde

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As we crank up the printing press, we might recall that it was on this date in 2009, several months into the Great Recession, President Barack Obama met with the CEOs of America’s 13 largest financial institutions to discuss a path out of the economic trough onto which the U.S. had descended.  Finding them suspicious of his new (Democratic) administration and worried that he would be less generous to their companies than President Bush and his administration had been, Obama opened by suggesting…

My administration is the only thing between you and the pitchforks… But you need to show that you get that this is a crisis and that everyone has to make some sacrifices…I’m not out there to go after you. I’m protecting you. But if I’m going to shield you from public and congressional anger, you have to give me something to work with on these issues of compensation. Help me help you Everybody has to pitch in. We’re all in this together.

The result was a series of compromises that survived the Obama Administration, but that are now being systematically undone under the Trump Administration.

See also “13 Bankers.”

Kenneth D. Lewis, the chief executive of Bank of America, with other bank executives outside the White House after the meeting with President Obama

source

 

Written by LW

March 27, 2018 at 1:01 am

America’s most popular export…

 

It’s all about the Benjamins…  The story of the $100 bill is the story of U.S. money itself, and that story is opening a new chapter:

The hundred is the ultimate icon of American monetary strength. “It’s the closest thing to a global currency,” Chris Jones writes, “with about 60 percent of them somewhere other than here, making the Benjamin the most legal and threatened of tenders.” It’s getting a makeover…

Read a feature-by-feature rundown of the upgrade at “The New Hundy: A Study Guide.”

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As we button our wallet pockets, we might recall that it was on this date in 1971 that then-President Richard Nixon declared that the official U.S. price of gold would be raised from $35 to $38 per ounce, devaluing the dollar, and effectively ending the Bretton Woods system of international financial exchange.  Earlier, in August of that year, Nixon had suspended the convertibility of the dollar into gold; still, the dollar was pegged at the $35 value stipulated by Bretton Woods.  In changing that value, Nixon ushered in the era of freely-floating currencies that remains to this day.

What has become known as “the Nixon shock” was a response to an overvalued dollar (a result of national debt incurred in the Vietnam War and the Great Society programs), and a subsequent move by nations (first West Germany, then Switzerland and France) to redeem their dollars for gold.  U.S. gold reserves fell by half from their level a decade earlier, to $10 Billion, and the U.S. feared a “run” on that remainder.  The suspension of convertibility addressed that danger, and (along with the price freeze, minimum wage guarantee, and import tariffs that accompanied it) helped both to stabilize the U.S. economy (temporarily- the period of “stagflation” was relatively soon to follow) and to bring the other developed economies to the negotiating table.  The results of that parlay, The Smithsonian Agreement, raised the “value” of the gold to $38 per ounce, eliminated convertibility as feature of the international currency regime, appreciated other currencies against the dollar, and focused efforts to balance the world financial system on special drawing rights alone.

 source

 

 

 

Written by LW

December 18, 2013 at 1:01 am

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