Econ 101 is killing America

[pie_row]

When the fed announced they were goingto do QE III They said that They were going to buy Mortgage Backed Securities at $85 billion a month until unemployment went down. If you buy a class of paper with newly printed money that money tends to flow back into that class of paper. By buying MBS paper at par the Fed was putting new money into the housing market. The price of houses has gone up.




If a foreign Central Bank prints money and buys MBS paper in the US with it the effect will be the same.




Several years ago I read a paper that said the world's monetary base went from $3 trillion to $10 trillion over the ten prior years.




When the housing bubble popped the loss in equity was $7 trillion.




This is what I was looking at when Isaid “if you want to export to another country you need to financethe trade deficit.”




If a country runs a net trade deficit,they first go through their savings then they barrow the money to pay for the net deficit. There are a lot of conventions that cover this but they simplify to this.

[oaktonite]

Originally Posted by pie_row

When the fed announced they were goingto do QE III They said that They were going to buy Mortgage Backed Securities at $85 billion a month until unemployment went down. If you buy a class of paper with newly printed money that money tends to flow back into that class of paper. By buying MBS paper at par the Fed was putting new money into the housing market. The price of houses has gone up.

How It Works: The Fed invites banks to sell notes that they hold. Those that agree are not paid in "newly printed" or any other kind of money. A credit is posted to the selling bank's account at the Fed. This expands the monetary base. It does not affect the money supply at all. There is nothing to "flow back" into anything.

Originally Posted by pie_row

This is what I was looking at when Isaid “if you want to export to another country you need to finance the trade deficit.”

How It Works: Exporting does not create a trade deficit. That requires imports. If you are the US, imports mean a lot of dollars leaving the US eocnomy. The only thing those dollars can do next is return. They will either be used to purchase US exports, or they will be invested in dollar-denominated assets. Such as US Treasury securities.

[pie_row]

Originally Posted by oaktonite

How It Works: The Fed invites banks to sell notes that they hold. Those that agree are not paid in "newly printed" or any other kind of money.

This is where a technical and a lay description of the same thing differ.

Originally Posted by oaktonite

A credit is posted to the sellingbank's account at the Fed. This expands the monetary base.

This is commonly called printing money.

Originally Posted by oaktonite

It does not affect the money supply atall. There is nothing to "flow back" into anything.

The bank was holding assets on its balance sheet as part of abalanced portfolio. The sale of those assets creates a hole in their portfolio. That hole needs to be filled. Also at the same time the monetary base was expanded. The banks can use the Stuff in their account with the Fed to loan against or do what ever they want with it. But that the Fed offered to buy MBS means that The banks portfolio is short in that area. (The Fed was buying the MBS with stuff made up out of thin air) So the new money “printed up” to buy the MBS will tend to be used to fill the hole in the banks balance sheet.





I really do not see how you can say that expanding the monetary base does not affect the money supply.

Originally Posted by oaktonite

How It Works: Exporting does not create a trade deficit.

If I export to you I have a trade surplus and you have a trade deficit. I can't export more to you than you do to me unless I loan you the money to buy what I'm selling. Buying T-Bills is one way to do this.

Originally Posted by oaktonite

That requires imports. If you are the US, imports mean a lot of dollars leaving the US eocnomy. The only thing those dollars can do next is return. They will either be used to purchase US exports, or they will be invested in dollar-denominated assets. Such as US Treasury securities.

Or MBS. T-Bills are preferred as they are perceived to be the highest quality asset around as far as paper goes.

[oaktonite]

Originally Posted by pie_row

This is where a technical and a lay description of the same thing differ.

As in one is clear and the other is confused. One is correct and the other isn't.

Originally Posted by pie_row

This is commonly called printing money.

By whom? There is no printing involved and no new money results.

Originally Posted by pie_row

The bank was holding assets on its balance sheet as part of abalanced portfolio. The sale of those assets creates a hole in their portfolio. That hole needs to be filled.

It was already filled. By credits at the Fed. QE is simply a big bunch of asset-swaps.

Originally Posted by pie_row

Also at the same time the monetary base was expanded. The banks can use the Stuff in their account with the Fed to loan against or do what ever they want with it.

That would be a good thing. But while the monetary base has been well more than tripled, the money supply has not come close even to doubling. Obviously there is a bit of a disconnect here that needs to be explained.

Originally Posted by pie_row

But that the Fed offered to buy MBS means that The banks portfolio is short in that area. (The Fed was buying the MBS with stuff made up out of thin air) So the new money “printed up” to buy the MBS will tend to be used to fill the hole in the banks balance sheet.

Again. QE is a program of asset swaps. Notes for credits. Each such swap is instantaneous. No holes appear in anybody's balance sheet.

Originally Posted by pie_row

I really do not see how you can say that expanding the monetary base does not affect the money supply.

They are two different things. Just as the financial system and the economy at large are two different things.

Originally Posted by pie_row

If I export to you I have a trade surplus and you have a trade deficit. I can't export more to you than you do to me unless I loan you the money to buy what I'm selling. Buying T-Bills is one way to do this.

What choice do you think you have with your trade surplus. What alternatives do you think you are foregoing here? You have lots of my currency. What else can you do with it but invest it back into my economy?

Originally Posted by pie_row

Or MBS. T-Bills are preferred as they are perceived to be the highest quality asset around as far as paper goes.

Well, there's always US real estate and corporate debt and equities, and the Chinese et al. purchase a good amount of those also. But for safety and security, you're right -- nothing beats US Treasury securities. (Kind of why the Social Security Trust Fund is invested in them as well.)

[psikeyhackr]

No mention of game theory so far. But that is not usually In Econ 101.

The Screwing of the Average Man by David Hapgood covered the real world of it best.

Funny how our educational systen can't make accounting mandatory.

[oaktonite]

Originally Posted by psikeyhackr

No mention of game theory so far. But that is not usually In Econ 101.

Right...that's examined much later.

Originally Posted by psikeyhackr

The Screwing of the Average Man by David Hapgood covered the real world of it best.

The book is 40 years old. The shysters have thought up a lot of new tricks since then

Originally Posted by psikeyhackr

Funny how our educational systen can't make accounting mandatory.

At what age do you think kids should graduate from high school? If everything relevant becomes mandatory, it's going to be 35 or 40. We live in an age of specialization. We skip over a lot of stuff and then call in the experts when we need them.

[pie_row]

Originally Posted by oaktonite

As in one is clear and the other is confused. One is correct and the other isn't.

Originally Posted by oaktonite

By whom? There is no printing involved and no new money results.

Monetary base - Wikipedia, the free encyclopedia

In economics, the monetary base (also base money, money base, high-powered money, reserve money, or, in the UK, narrow money) in a country is defined as the portion of the commercial banks' reserves that are maintained in accounts with their central bank plus the total currency circulating in the public (which includes the currency, also known as vault cash, that is physically held in the banks' vault).

The credit in their account with the Fed is part of the monetary base ans is what is commonalty called money. The banks are free to do what they want with the credit. As the new credit is unencumbered by existing reserve obligations.

Originally Posted by oaktonite

How It Works: The Fed invites banks to sell notes that they hold. Those that agree are not paid in "newly printed" or any other kind of money.

You are technically incorrect. They are paid in dollars that are part of the monetary base. Those dollars did not exist before the sale. Upon resale of those assets the new money is retired.

Originally Posted by oaktonite

It was already filled. By credits at the Fed. QE is simply a big bunch of asset-swaps.

But those asset swaps expand the monetary base and with that M1, M2, and M3. But the assets the Fed is swapping for the bank's assets didn't exist before the swap. I said hole in the portfolio not hole in the balance sheet.

Originally Posted by oaktonite

That would be a good thing. But while the monetary base has been well more than tripled, the money supply has not come close even to doubling. Obviously there is a bit of a disconnect here that needs to be explained.

M3 is M2 plus some less liquid assets. M2 is M1 plus some less liquid assets. M1 is the monetary base plus some other very liquid asset. M1 is all of the most liquid assets. M2 is that plus all of the somewhat less liquid assets. M3 is that plus all of the even less liquid assets up to a certain class. Adding to the monetary base expands it directly in proportion to the relative value.


If the monetary base was $1 and you print up a new dollar then you have a 100% expansion of the monetary base. Now that new money will be loaned, deposited and re-loaned until you have ten more dollars. Or it should. Bad loans eat the new money. They stop the re-loaning process.


(Back in 2009 M2 swung negative. We were in very bad shape economically. In my opinion we have over-levered our productive base. We need the debt to come down or the wages to come up.)


The bad debts out there are a big drag on the economy. In a healthy economy tripling the monetary base should triple M1 first then with some lag M2 and M3.


I am an advocate of a very unconventional policy of radically raising the minimum wage. This should increase the ability of the money supply to track the monetary base.

Originally Posted by oaktonite

Again. QE is a program of asset swaps. Notes for credits. Each such swap is instantaneous. No holes appear in anybody's balance sheet.

Not in the balance sheet I didn't say this. Holes in their portfolio.

Originally Posted by oaktonite

They are two different things. Just as the financial system and the economy at large are two different things.

One is part of the other. Expanding one also expands the other.


I have looked for a clear and concise explanation of monetary theory. Here it is as best as I understand it. The Fed holds assets on its books. Those assets are the monetary base. For each of those dollar denominated assets there is a dollar in circulation or in a banks reserves held at the Fed. When the Fed buys more assets it makes up new money to buy those assets with. When it sells those assets it retires those dollars from existence. Under normal conditions those assets are exclusively T-bills.

Originally Posted by oaktonite

What choice do you think you have with your trade surplus. What alternatives do you think you are foregoing here? You have lots of my currency. What else can you do with it but invest it back into my economy?

The laws governing international trade limit what you can do with money. If all the money leaves a country that country dies. So largely dollars stay in the US.

Originally Posted by oaktonite

Well, there's always US real estate and corporate debt and equities, and the Chinese et al. purchase a good amount of those also. But for safety and security, you're right -- nothing beats US Treasury securities. (Kind of why the Social Security Trust Fund is invested in them as well.)

Ya well The trust fusd wasn't that good of an idea.