You are correct in your characterization of the derivation of that particular money multiplier. And my 'spurious' response is driven by the fact that Denninger then uses that derived number to construct an argument with faulty logic. And yes, Denninger seems to me a bit of a nut pot, without a doubt (take a look at the video he regularly posts.). As if a MM <1 implies any extra funds printed are creating a vortex of money destruction, which is a misinterpration of both the derived figure, misattribution of causation, and general fear-mongering by association. His tone in particular is quite annoying... I guess a personality incompatibility. That said, you -can- solve debt problems with the creation of more money (yes, perpetual zero rate note issuance). It dilutes existing dollar holders, yes, but it can change the balance of things. While created money is a liability on the Fed's balance sheet, it is irrelevant because the Fed has the power to arbitrarily reconstruct its balance sheet as it wishes. I like to think of money supply as divisible equity stock in the US, instead. The more the Fed creates, the more diluted the rest becomes. In an extreme example (to make the point), add a few zeros onto all asset sides of balance sheets and keep liabilities constant. Suddenly debt is not a burden in the economy. Yes, we have other problems (inflation), but in time we all adjust to the new price level. The problem with the system we have today is that we are not capable of running on maximum leverage (implied by money creation possibilities from current reserve requirements) and not blowing up every once in a while at the same time. The alternative is a less levered (or zero leverage) reserve or 100% reserve banking system, but then you have opportunity cost associated with underutilized capital. It's just not that efficient. In the end, I guess it all balances out.
Didn't mean to offend with that 'spurious' comment. We have no history together and I don't know anything about 'denninger.' Your comment was 'spurious' on its face but your response here is thoughtful and intelligent. I don't agree with your apparent soft appreciation and tolarance of inflation in a balancing out sense as it is really more complicated than you present. Inflation quickly interacts with taxes to discourage production (by increasing real cost of capital and reducing profit) while increasing demand (as economic actors seek to reduce depreciating 'savings.')...which creates high prices with high unemployment...in a fixed system, and in a globalized system will drive dramatic and acceleration capital flight....so I don't think it balances out as notions of inflation begin to merge with taxation in our progressive tax system...and where digital capital can no longer be confined domestically. So, I don't agree that more non-interest bearing demand treasrury notes (Cash Money) will solve the problem. Its more like taking a mego dose of motrin with a beer for body aches, when you really have meningitis. A change in fiscal context is required to increase demand for debt and expectation of profit. I agree with your comment about leverage. There is an optimum financial structure that balances risk concerns with sustainable value. Milken, has written about this in WSJ op-eds...and his career reflected it. This is also where economics and finance have unfortunately lost touch with each other. Just as the financial structure of an enterprise does really contribute to its value, so does the fianancial structure of an economy. This is after all why Wall Street makes money and contributes to the wealth of the nation...even when its much maligned and hard to see.
Good post. At this moment I need to hash out your 2nd paragraph ideas a little more... I'll get back if I have anything to add.
I am amazed that this thread just ... puff ... seemed to die. It is the only one I have subscribed to. I believe the articles basic premise of danger is excellent. I really appreciate the thoughtful and differing views as well. My concern is not that we are below 1 ... but rather "IF" this is being allowed knowingly and there is method in the works to bring us back above one with momentum and acceleration. Please ... educate me what the proper scenario would look like working as to why the FED has allowed this level of danger. And perhaps what their intention is or might be to bring us above 1 again. TIA
The Money Multiplier Chart is a dramatic picture of the collapse of monetary velocity in the economy. The graph is a ratio, as I explained earlier in this thread, of M1 (basically money in circulation) and M1 plus reserves. Essentially it measures the growth of excess reserves on the Fed balance sheet. You can see the same thing in a Fed balance sheet graph. What is important about this is that it is a symptom and not a cause. It is a symptom of deflation. It is a symptom of deleveraging. It is an indication that the expansion of the money supply has not been transferred to the economy. It is a picture of what happened when the Treasury loaned the Fed money and treasury instruments and the Fed inturned used that expansion of its balance sheet to purchase illiquid bank securities and government enterprise securities (FNMA and FDMC). By doing this (it was called TARP et.seq.) the Fed improved the liquidity of the banking system by taking illiquid assets onto its balance sheet and pushing cash and liquid assets into the banking system. The surprise (if you think inflation is caused simply by expanding the money supply) was that the banks returned the liquidity back to the Fed in the form of excess deposits. To address your question in your post; I do not think this is what the Fed expected...because it is not consistent with thier paradigm which includes the monatarist beleif that inflation is the result of an increase in the money supply. So, I think the Fed was surprised when thier attempt at shock and awe reflation did not result in such inflation. I think the arguement at the Fed is over notions of what sort of lag must take place between the increase in the money supply and the infaltion...that is to say they are still arguing that inflaiton is emerging...they just keep expanding the notion of lag. What is not in the Fed paradigm is that inflation is not caused by a simple expansion of the money supply...it requires a transmission mechanism fiscally in order to drive inflation...whithout the fiscal transmission mechanism the increased money supply simply sits as excess reserves in the banking system and it does not enter the economy. So, we see here a major new discovery in monetary theory! Somebody tell the Fed. The transmission mechanism is leverage, demand for debt. Demand for debt is not a function of supply of debt and it cannot be started by modulaton of interest rates...a fact that is also at odds with the Fed Paradigm that you can mondulate demand for debt with interest rate targeting...an essential precept of the Phillips Curve Paradigm (Which should have been dead when it was disproven thirty years ago). You cannot modulate the demand for debt with interest rate targeting (appologies to Jim Morrison). Debt demand is a fiscal issue. It requires an expectation of growth and an entrepreneural judgement that after tax profits will be sufficiently greater on a risk adjusted basis than the average wieghted cost of capital. Stated differently, wedges between investment and profit, dampen the demand for debt. Such wedges are the expectation of future tax increases, future regulation, increased operating costs, increased employment costs, falling future demand, etc. The greater the uncertainties or the greater the expectation that such wedges will increase, then the grater the spread must be to justify investment and increased debt. Right now the expectation is that debt reduction is a better investment than debt creation for gowth. This is a definition of deleveraging. We see it every month in aggregate debt number which has been decling all year at the highest rate since the statistic has been kept. This phenomenon, the aggregate economic reduction of outstanding debt at a rate higher than new debt creation, itself causes an increase in the excess reserve account of the Fed balance sheet as net debt is being retired and cash is flowing back to banks who face insufficient demand for underwritable loans. In a nut shell the Fed has been fighting a credit collapse that could lead to a collateral asset devaluation spiral as theorized by Irving Fisher. The Fed has been successful at returning liquidity to the banking system and slowing the decline of collateral asset values...but this has been done at the great cost of dramatically increasing our national debt...at a time when we already has excess debt...and this is just not our problem but it is the problem of the whole Western World and Japan. Just to review, (that is a professor Obamaism)...The Fed has been fighting a credit collapse and has succeeded in slowing the decline of collateral asset prices but this has been accomplished by dramatically increasing debt loads that were already excessive. On top of this the President and Congress doubled up on the implied debt with a phoney stimulus plan that is unsustainable and wasteful, and that discourages private growth. Now, to get to your request for an economic theory of everything that includes what to do....Understand that we are not out of woods on the deflaiton thing as asset prices have not begun to rise and there is no velocity (leverage) that can sustain the reflation effort and now we have approached, maybe passed, a tipping point on Excess Debt creation. Excess debt is debt that an individual, an enterprise or a soveriegn cannot afford to maintain or reduce at a threshold level of interest rate. There are only three solutions to resolve an excess debt problem: One is to grow so that the debt can be afforded and retired, Two is to inflate so that the cost of debt declines and can be retired (There are terrible anciallary costs to this 'solution' and note above they have been trying to do it but they have not succeeded yet), and Three, there is bankruptcy...in a Sovereign, bankruptcy is the same as an enforced austerity program...for a picture of this see Iceland today...Greece tomorrow...thereafter.... This is what is happening....what do you think the Fed should do? Do you think the Fed can really create a context for Growth by iteslf? What do you think will happen to the excess debt situation if the Fed allows interest rates to rise?
Thank you Ed ... excellent response. I really appreciate it. I understand economic theory pretty well but have large holes in my education on some of these foundational issues. What and where can I find charts or indicators that best reflect aggregate demand? Which do you suggest? (I am subscribed to the Fed Site.) It appears that the FED has made rash efforts with little effect to boost aggregate demand that is self perpetuating. More like using the starter to get the car moving ... but no ignition ... just a pop, puff of smoke and Fizzle. What things, sectors or activities should I look for that have historical affect to get a closer look at and that might make the current FED efforts successful in boosting aggregate demand? I really appreciate the dialog here and am digging for better early indicator understanding. I have an early indicator macro using 3 indexes that shows market trend on a daily chart from 1 week to 1 month early ... But I just don't quite have a handle on "WHY" ... regarding these issues we are talking about. Indicators and there Effects???? MZM - to determine the level of the broad US money supply? PPI - a reliable published measure of prices -- taking into acct energy price weightedness? FYFSD ??? Others Please ??? I really agree with this Guy as far as where things should settle out. http://homepage.mac.com/ttsmyf/ I also like Eric Jensens materials ... yet see numbers of holes in them that miss Agenda Driven Power Brokering machinations utilized in Economic Bubble creation and management and the commensurate evolution of Keynesian controls, by the FED, power elite and Global Banking monopolies.
The FED needs an unpartisan view of what will boost aggregate demand that is substantiated to be self-perpetuating. (Other than feeding the DC beast.) They need to re-figure an aggregate demand that is weighted with production as well. Any further stimulus needs be better planned to produce this boost. No more monkey wrench bandaid fixes and pissing in the wind kneejerk dumbass solutions. The FED needs to coordinate with DC and money re-allocations and further TAX incentives that make DC decrease in size and employment and increase in efficiency and allow small businesses to thrive. The FED and DC need a real plan for correction versus responding in fear of it. My Biggest concern is that this "IS" part of a master plan for correction with the agenda to force a marrying of the major world economies under one head. Evidence indicates the latter sooner or later.
Part of the problem is the focus on a notion of broad aggegate demand. Aggregate demand, such as GDP, is a result, again a symptom, not a cause. The focus must be on production and the measures you should look at should be measures of production, productivity and 'work' not consumption. Aggretate debt is published each month...I think its bls.gov or bea.gov...St. Louis Fed is good source for graphs, that is where the Money Multiplier Graph comes from. Other stats of production and work are, the hours worked part of the Jobs report, new business formations, new job formations...apart from job losses...the aggregate report trend is misleading as the early indicator is the pick up in job formation without regard for the rate of layoffs, new index for truck driver credit cards is interesting. I don't pay any attention to PPI, it is no longer an indicator of future inflation...better to watch the movement of excess reserves on the Fed balance sheet with relation of changes in aggregate debt. PCE is the price change index that the Fed pays attention to...its more accurate than CPI in that it includes behavioral responses and substutions...look at the Core PCE yoy change as the inflation indicator that the Fed pays most attention to. Also, you have to think internationally if you are going to translate this information into some equity strategy. I don't have time to explain but a lot of monetary policy imbalances domestically may show up elsewhere in the world because we are the reserve currency....most dollars in circulation are abroad. See John Rutledge to track captial flow changes between tangible and financial assets...better to understand that thermodynamic rather than ponder illusion of aggregate demand.