https://asiatimes.com/2023/03/feds-try-to-stop-bank-crisis-of-their-own-making/
Thanks!
dk
On 3/17/2023 9:21 AM, Dan Koren wrote:
https://asiatimes.com/2023/03/feds-try-to-stop-bank-crisis-of-their-own-making/
Well, I've posted before that Milton Friedman over 60 years ago suggested the
the Fed should target credit growth around 3% (or so) and not micro manage the money supply based on observation of inflation or employment. The idea is based on the fact that the economy could take up to 2 years or so to respond
to changes in monetary policy. If the Fed were to reduce money growth (raise interest rates) in response to seeing inflation and continued until the data show
inflation adequately reduced, they would have raised rates to long and too much
and likely cause a recession. Conversely if the Fed reduced rates (pumped the
money supply) in order to combat a slow economy, they would likely do so for too long and too much and end up with inflation.
This is the pattern that the Fed has in fact followed. I think there has only ever
been one "soft landing." I seem to recall it was accidental, but I don't remember
right now. Friedman claimed his way would result in much smaller business cycles. It has never been tried in the U.S., I don't know about other countries.
Note I haven't mentioned government spending. You will see every day common folk and pundits alike saying that excessive government spending is inflationary.
It is not. Quoting Friedman again, Inflation is always and everywhere a monetary
phenomenon. Government spending is directly financed only by taxation (obvious
to the voters) and/or borrowing (less obvious, but affecting the real economy, by
raising interest rates (in order to get the public to by more bonds, you have offer
higher rates than before).
If the Federal Reserve purchases large amounts of Treasury securities (called
monetizing the debt), they do so by creating money out of thin air, which in large
quantities IS inflationary. By law, the Fed doesn't have to do this, but often does,
whether under pressure from the executive branch, or because they think they need to manage the economy properly, I don't know. Probably both.
The forgoing is the monetarist view. Not sure to what extent "Keynesians" would
disagree. In graduate school in the 1970s, we studied a book written by one of our
professors (of course), called "On Keynesian Economics and Economics of Keynes,"
which obvious from the title, proposed that a lot of what became known as Keynsian
Economic (summarized by me as micro managing the economy) was not what Keynes
himself said or believed.
To end up closer to being on-topic, according to Wikipedia, John Maynard Keynes
was a supporter of the Royal Opera House at Covent Garden and the Ballet Company
at Sadler Wells.
I don't know what kind of music Milton and Rose Friedman liked, but I read an article
once that likened his free-market ideas spreading world-wide from Chicago (contributing
to the decline of central planning, reduction in runaway inflation, economic growth and a
rise in living standards) and the spread of jazz and blues also from Chicago.
Before someone says that free-market ideas produced widening wealth disparity
and a global environmental disaster, go right ahead. I warn you, though, I may reply.
Before someone says that free-market
ideas produced widening wealth disparity
and a global environmental disaster, go
right ahead. I warn you, though, I may reply.
On Friday, March 17, 2023 at 11:48:43 AM UTC-7, Frank Berger wrote:
Before someone says that free-market"Ideas" don't produce anything by themselves
ideas produced widening wealth disparity
and a global environmental disaster, go
right ahead. I warn you, though, I may reply.
(sorry Marc). People's actions and behaviors
result in social, economic and environmental
changes. The effects oftentimes differ from
the "ideas" and expectations of the ideas of
the people promoting the changes.
Looking at the Fed's performance over the
past 110 years, it does not seem to work
particularly well. This leads to the question:
Is Jerome Powell a brainfucked imbecile? ;-)
dk
Many thanks! Great review. It helped me understand tha article better.
If I understand your points correctly:
1) Systems that have in herently large hysteresis and change relatively
slowly do not respond "instantly" to inputs and cannot and should
not be micro-managed to cause quick corrections.
2) The Fed buying Treasuries is effectively like someone loaning
money to oneself.
dk
On Friday, March 17, 2023 at 11:48:43 AM UTC-7, Frank Berger wrote:
On 3/17/2023 9:21 AM, Dan Koren wrote:
https://asiatimes.com/2023/03/feds-try-to-stop-bank-crisis-of-their-own-making/
Well, I've posted before that Milton Friedman over 60 years ago suggested the
the Fed should target credit growth around 3% (or so) and not micro manage >> the money supply based on observation of inflation or employment. The idea >> is based on the fact that the economy could take up to 2 years or so to respond
to changes in monetary policy. If the Fed were to reduce money growth (raise >> interest rates) in response to seeing inflation and continued until the data show
inflation adequately reduced, they would have raised rates to long and too much
and likely cause a recession. Conversely if the Fed reduced rates (pumped the
money supply) in order to combat a slow economy, they would likely do so for >> too long and too much and end up with inflation.
This is the pattern that the Fed has in fact followed. I think there has only ever
been one "soft landing." I seem to recall it was accidental, but I don't remember
right now. Friedman claimed his way would result in much smaller business
cycles. It has never been tried in the U.S., I don't know about other countries.
Note I haven't mentioned government spending. You will see every day common >> folk and pundits alike saying that excessive government spending is inflationary.
It is not. Quoting Friedman again, Inflation is always and everywhere a monetary
phenomenon. Government spending is directly financed only by taxation (obvious
to the voters) and/or borrowing (less obvious, but affecting the real economy, by
raising interest rates (in order to get the public to by more bonds, you have offer
higher rates than before).
If the Federal Reserve purchases large amounts of Treasury securities (called
monetizing the debt), they do so by creating money out of thin air, which in large
quantities IS inflationary. By law, the Fed doesn't have to do this, but often does,
whether under pressure from the executive branch, or because they think they >> need to manage the economy properly, I don't know. Probably both.
The forgoing is the monetarist view. Not sure to what extent "Keynesians" would
disagree. In graduate school in the 1970s, we studied a book written by one of our
professors (of course), called "On Keynesian Economics and Economics of Keynes,"
which obvious from the title, proposed that a lot of what became known as Keynsian
Economic (summarized by me as micro managing the economy) was not what Keynes
himself said or believed.
To end up closer to being on-topic, according to Wikipedia, John Maynard Keynes
was a supporter of the Royal Opera House at Covent Garden and the Ballet Company
at Sadler Wells.
I don't know what kind of music Milton and Rose Friedman liked, but I read an article
once that likened his free-market ideas spreading world-wide from Chicago (contributing
to the decline of central planning, reduction in runaway inflation, economic growth and a
rise in living standards) and the spread of jazz and blues also from Chicago.
Before someone says that free-market ideas produced widening wealth disparity
and a global environmental disaster, go right ahead. I warn you, though, I may reply.
On 3/17/2023 9:33 PM, Dan Koren wrote:
2) The Fed buying Treasuries is effectively
like someone loaning money to oneself.
Not sure what you mean. When the Fed
buys treasuries they pay with money
created out of thin air.
On Friday, March 17, 2023 at 11:48:43 AM UTC-7, Frank Berger wrote:
Before someone says that free-market
ideas produced widening wealth disparity
and a global environmental disaster, go
right ahead. I warn you, though, I may reply.
"Ideas" don't produce anything by themselves
(sorry Marc). People's actions and behaviors
result in social, economic and environmental
changes. The effects oftentimes differ from
the "ideas" and expectations of the ideas of
the people promoting the changes.
Looking at the Fed's performance over the
past 110 years, it does not seem to work
particularly well. This leads to the question:
Is Jerome Powell a brainfucked imbecile? ;-)
dk
On Saturday, March 18, 2023 at 6:33:04 PM UTC-7, Frank Berger wrote:
On 3/17/2023 9:33 PM, Dan Koren wrote:
2) The Fed buying Treasuries is effectively
like someone loaning money to oneself.
Not sure what you mean. When the FedThis is exactly what I meant! "Thin air" is
buys treasuries they pay with money
created out of thin air.
not legit currency, except when inhaled
and exhaled by national banks. Thanks
for the confirmation.
On Saturday, March 18, 2023 at 6:38:22 PM UTC-7, Dan Koren wrote:
On Saturday, March 18, 2023 at 6:33:04 PM UTC-7, Frank Berger wrote:
On 3/17/2023 9:33 PM, Dan Koren wrote:
2) The Fed buying Treasuries is effectively
like someone loaning money to oneself.
Not sure what you mean. When the FedThis is exactly what I meant! "Thin air" is
buys treasuries they pay with money
created out of thin air.
not legit currency, except when inhaled
and exhaled by national banks. Thanks
for the confirmation.
https://www.linkedin.com/posts/prof-alexander-lipton-aa2256bb_economy-money-banking-activity-7042785589615575040-CgpS
On 3/18/2023 9:38 PM, Dan Koren wrote:
On Saturday, March 18, 2023 at 6:33:04 PM UTC-7, Frank Berger wrote:
On 3/17/2023 9:33 PM, Dan Koren wrote:
2) The Fed buying Treasuries is effectively
like someone loaning money to oneself.
Not sure what you mean. When the Fed
buys treasuries they pay with money
created out of thin air.
This is exactly what I meant! "Thin air" is
not legit currency, except when inhaled
and exhaled by national banks. Thanks
for the confirmation.
Currency accounts for a small percentage of
what is money. The vast majority is checking
accounts. When the Fed buys securities from
a broker they simply create a deposit in the
broker's account. Presto.
The money supply has increased.
It is perfectly legitimate, in the sense of legality
and a cornerstone of monetary policy.
I don't know if Friedman was so libertarian that he
thought there shouldn't even be a central bank, but
certainly some people (not necessarily conspiracy
theorists) do.
Private banks would be able to create their own
money. Competition would keep them from creating
too much and thereby depreciating there own currency
relative to other banks. Bank America money might trade
at .995 Citibank money, or something like that. The
conversion from one Bank's money to another's could
easily be conducted at the cash register (literally and
figuratively), much as foreign transactions on your
credit card are done. If it sounds extreme, I suppose,
but it sounds extremely beautiful to my ears. What an
experiment it would be!
On Saturday, March 18, 2023 at 6:33:04 PM UTC-7, Frank Berger wrote:
On 3/17/2023 9:33 PM, Dan Koren wrote:
2) The Fed buying Treasuries is effectively
like someone loaning money to oneself.
Not sure what you mean. When the Fed
buys treasuries they pay with money
created out of thin air.
This is exactly what I meant! "Thin air" is
not legit currency, except when inhaled
and exhaled by national banks. Thanks
for the confirmation.
dk
On Saturday, March 18, 2023 at 8:26:17 PM UTC-7, Frank Berger wrote:
On 3/18/2023 9:38 PM, Dan Koren wrote:
On Saturday, March 18, 2023 at 6:33:04 PM UTC-7, Frank Berger wrote:
On 3/17/2023 9:33 PM, Dan Koren wrote:
2) The Fed buying Treasuries is effectively
like someone loaning money to oneself.
Not sure what you mean. When the Fed
buys treasuries they pay with money
created out of thin air.
This is exactly what I meant! "Thin air" is
not legit currency, except when inhaled
and exhaled by national banks. Thanks
for the confirmation.
Currency accounts for a small percentage of
what is money. The vast majority is checking
accounts. When the Fed buys securities from
a broker they simply create a deposit in the
broker's account. Presto.
Understood. I used "currency" in the broader
sense of "money" or "legal tender".
The money supply has increased.
This seems counter-intuitive.
It is perfectly legitimate, in the sense of legality
and a cornerstone of monetary policy.
Legal legitimacy does not imply fiscal or moral or
any other flavor of legitimacy. 200 years ago it was
legally legitimate for one person to own another
person -- at least in some parts of the world that
cannot be named! ;-)
I don't know if Friedman was so libertarian that he
thought there shouldn't even be a central bank, but
certainly some people (not necessarily conspiracy
theorists) do.
How would then sovereign nations control their
money supply, conversion abilities/prohibitions,
exchange rates, etc?
Private banks would be able to create their own
money. Competition would keep them from creating
too much and thereby depreciating there own currency
relative to other banks. Bank America money might trade
at .995 Citibank money, or something like that. The
conversion from one Bank's money to another's could
easily be conducted at the cash register (literally and
figuratively), much as foreign transactions on your
credit card are done. If it sounds extreme, I suppose,
but it sounds extremely beautiful to my ears. What an
experiment it would be!
This experiment has been going on at least since
crypto currencies became available in 2009. So
far the results have been less than encouraging,
though some might claim the jury is still out.
dk
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