Does inflation really help lower debt?

Discussion in 'Economics & Trade' started by kazenatsu, Jun 22, 2020.

  1. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    You can't get anything free through monetary policy (essentially just pushing around paper). Everything carries an equal and opposite cost.

    Any dummy should be able to understand that.
     
  2. Econ4Every1

    Econ4Every1 Well-Known Member

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    With respect, once again, the reason that I can't explain this to you is that you don't understand banking. In order to understand what I'm telling you, you have to understand the nature of reserves and how they are used to influence the interest rate. If you understood that, you'd quickly understand that since 2008, banks are flush with reserves. The system you are describing relies on scarcity. Scarcity does not exist in the banking system of today (at least of reserves, real scarcity is measured in qualified borrowers with a desire to borrow, but I digress). If rates go up (pre-2008 ), it's to achieve a goal (the Fed has a mandate) and that goal is achieved by manipulating the pool of reserves. The situation today is that the surplus of reserves called excess reserves (see below) is off the chart and as a result, the system can no longer rely on the same calculation to determine interest rates.

    upload_2020-7-2_22-49-48.png

    Now let's look at the system after 2008:

    upload_2020-7-2_22-51-10.png

    Remember that excess reserves are the reserves that aren't currently being held to meet the Feds reserve requirement.

    Look at the difference. Prior to 2008 ALL banks in the federal reserve system held about 2 billion in total excess reserves in 2008, since that number has averaged in the trillions. And remember that 1 trillion is a billion 1,000 times. meaning that banks have average about what? 2,000 billion in excess reserves post 2008?

    Since the Fed can't use excess reserves anymore as a system of determining interest (because if they did the rate would always be zero at this point), they have shifted to paying banks interest on the total reserves each bank holds. Yes, banks are paid just for holding reserves, what this means is that if a bank is paid 2% to hold reserves, the bank has ZERO incentive to lend those reserves for less than that amount. So in this way the Fed creates a rate floor. Now there is a "real" rate that differs somewhat from the nominal rate, but for the sake of this discussion, let's keep it simple.

    The point is, lending has NOTHING to do with the availability of funds to lend because, as I told you, banks don't lend customer deposits. I already explained exactly how borrowing works. If you really want to have an intelligent discussion, study the chart I drew and figure out why you think it's wrong.


    No there is no "natural rate" as that would require organic scarcity (like with gold). The Fed can, to an extent manipulate the market through OMO to achieve policy objectives. That doesn't mean the system can't get out of control mind you, but if it does, it won't be in scarcity it will be in surplus.


    "Lending" is misleading, they (usually) buy and sell bonds. This moves money into and out of the reserve pool.

    QE has proven this idea is 100% false. The naysayers warned us all that QE would cause inflation and yet here we are. For most of the Obama years, the Fed Struggled to reach it's 2% inflation target. Why, because there were enough people at the Fed that believed as you do. That increasing the level of excess reserves would result in more money in the system. But as I said before. BANKS DON'T LEND RESERVES. REserves do not leave the banking system. If the Fed created a quadrillion dollars in reserves, inflation would stay the same.

    Go back to the illustration I created for you and try to understand it and this question should become clearer.


    Of course, they do, but their mandate is to maintain a 2% inflation rate, so we won't see that.


    This is true, the Fed 'manipulates" the rate through OMO. Prior to 2008 the Fed would set a target rate and most banks would simply follow that rate, but today the nominal and real rates sometimes diverge and banks have taken more time to assess the real rate and make loans according to that rate. However, the Fed does have the power to manipulate the market to the point it wants, though it can take time.


    Again, I don't think you understand what causes reduced purchasing power. If you think the creation of reserves causes purchasing power to change, you need to do some more homework, I think I've already shown that's 100% false. If you think that government money creation can cause inflation, that is, more money=less purchasing power, you are wrong again. Because supply of goods and services isn't static. Supply is elastic over time, meaning it can increase without substantial increase in costs.

    At a very high level, this can be seen in the amount of productivity the nation is producing at relative to what it could produce at if all existing capital resources were being utilized This chart shows us....

    upload_2020-7-2_23-22-9.png

    Note the downward trend.

    The point here is that when you say that money creation is inflationary (Not that you said it in these words) you are ignoring the nation (and the worlds) capacity to increase supply to meet higher levels of demand. The only way you are correct is if the capacity utilization number were over 90%.

    Of course, there's no "free lunch", the problem is that people that say that don't understand what the "cost" is. They believe that the cost is in actual dollars. It's not, the real cost is in real labor and resources. As long as there aren't shortages (usually in just a handful of things people need) then inflation is kept in check and people (generally) have a higher standard of living.

    People who believe as you do, keep our standard of living down because you think that currency is the constraint and you don't understand what causes inflation. You seem to think money creation causes inflation when I think I've demonstrated that it is not the cause.

    Now let's discuss cause here for just a sec so we're clear on what I mean.

    Consider the following.

    Does motion cause car accidents?

    No of course not, but you can't cause an accident without motion, right?

    Motion isn't a sufficient cause, but it is a necessary cause. Similarly, the creation of money is not a sufficient cause, but it is necessary. Just as you can have cars in motion that don't crash, you can have money creation without inflation.

    The cost is in real terms, not monetary terms.
     
    Last edited: Jul 2, 2020
  3. Econ4Every1

    Econ4Every1 Well-Known Member

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    EDIT:

    Right after the second chart on reserves, I said:

    Remember that excess reserves are the reserves that aren't currently being held to meet the Feds reserve requirement.

    That should be:

    Remember that excess reserves are the reserves that aren't currently being held to meet the reserve requirements of the nations banks (not the Fed)..
     
  4. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    I'm going to move this side discussion we are having over into this thread, since that is where it better fits:
    Can government print more money without causing inflation?

    That way we can avoid derailing the topic of this thread.
     
  5. Quadhole

    Quadhole Well-Known Member

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    Obviously you know the 2% GOAL, CPI, what have you is a ghost figure. Just like most everything coming out of the FED, JP Morgan and their short positions in metals. and everything coming out of Mnuchins mouth.
    Gordon Longs site Matasii puts it out there in real world. SO does his guest or buddy.

    Also Bob Prince here lays out where we are in MP3... "Monetary Policy 3" https://www.bloomberg.com/news/vide...co-cio-prince-on-global-markets-outlook-video

    You sound or read like a Mid level Banker, or economist, teacher, etc. and we need that here... to FIX lots of what we dont know.
    I like your comment of a problem, but not with a lack of money. Very Correct.... They can print causing or creating us where we are with Inflation (for a while)... But 0% rates, printing, and a failed economy leads to more printing and so on.
    MP1 - Interest rates to 0
    MP2 - QE
    MP# - Both and trying to balance the world on the tip of a needle.

    AMerica is in big big trouble with either election POTUS... One prints for one side, the other prints for its side. None reaches the people. With that GDP will be down, real Estate will fall which lowers incoming tax base and so on. There is no way out of this and the Virus moved the Dollar collapse forward 10 years. (an Opinion). They (FED, and Govt) had better Pray for a shot or vaccine by mid summer 2021 or China blows right past us.
    This admin. without a doubt blew the beginning of this Virus arrival and there is now no going back. Thanks for all the comments.
    If only we had not cuts rate back in 2001 to 0%... The Mestro made a HUGE Mistake... You need the cycles... 6% interest, down to 3%, back up to 6 and bankrupt the bad actors... When you bail out every bad business you are doomed as well. We are making huge mistakes
     
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  6. Quadhole

    Quadhole Well-Known Member

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    And besides... Even if the system collapses as IT WILL... Bail in rule is sitting their fat and Happy waiting to take the peoples money. They didn't change that rule in 2012 just to be funny. They plan on one day taking all americans money at some %.
    That is why I moved to PM's....
     
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  7. bringiton

    bringiton Well-Known Member

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    Any dummy should be able to understand that the economy is not a conservative system like mechanics or thermodynamics. It is based on the goal of increasing total consumption by relieving scarcity. If monetary policy can stimulate more production of goods and services for people to consume through improved allocation, incentives, etc., how is that not a free gain? Where is the cost in activating idle production capacity? Productive labor not performed because deflation caused someone to refrain from spending their money on things they wanted is an opportunity gone forever.
     
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  8. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    I just severely question whether increasing the money supply can do that.

    Well, to address that, we have to look at how the monetary policies of a Central Bank can be beneficial to an economy, a bit of a complicated topic I'm sure you will admit.
    So yes I concede that monetary policies could theoretically help the economy a little bit. But that is still a far cry away from what you are talking about.
    What I mean is that your comparison here only has a limited degree of worthiness.
    I mean, that statement is a very broad and general one, whereas you are trying to refer to something much more specific.

    In general, the benefits from intentional monetary policies come from stability. (More complicated than that of course, which I'm sure we will both agree, but that's the main one)
     
    Last edited: Jul 12, 2020
  9. bringiton

    bringiton Well-Known Member

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    The historical data are crystal clear: it does.
    Yes, and we have been discussing it.
    I doubt that you can accurately state what I am talking about.
    And I have explained why the positive feedback effects inherent in our current debt money system are destabilizing.
     
  10. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    I tried to, in the opening post of that other thread. Which reminds me, I told you a few posts back that I didn't want to have this discussion in this thread, and to take it to that other thread.

    We have a thread specifically about that topic, so why get off-topic here?
     

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