Sincere Economic Question Regarding Expansion of the Monetary Base

Discussion in 'Economics' started by ByLoSellHi, Sep 19, 2009.

  1. I will find the link (I can't seem to find it now), but between August of last year and August of this year, data shows that Federal Reserve policy nearly doubled the monetary base from about 860 billion to almost 1.56 trillion in the United States.

    Now, I know it's intuitive to assume this will inevitably lead to inflation, and a lot of people are in fact assuming this, but if you drill down deeper, isn't how the monetary base was expanded, where the additional supply went, and how it's now being treated at least important, if not equally (or more) so, than just the mere fact that the monetary supply has been expanded?

    Example: Shittygroup (a giant, national, hypothetical bank, with a hypothetically quite sickly balance sheet in this hypothetical scenario) receives 45 billion of the additional dollars that Fed Reserve policy has created, in an attempt to prevent the implosion of this bank.

    This 45 billion received by Shittygroup alone (just one financial institution represents about one out of every 15 dollars that Fed Reserve policy has injected into the system. And this is just one bank (in the real world, AIG received 172 billion dollars, and Citigroup received 45 billion).

    Shittygroup uses the 45 billion in taxpayer money to recapitalize its capital base, to write off bad loans and derivative losses (an ongoing process to this day), and to essentially avoid insolvency (for now).

    A few questions now follow:

    Has this Federal Reserve created money, compliments of U.S. taxpayers, gone into the "real U.S. economy," in a way that is likely to spur inflation, or it is pretty much contained to allowing Shittygroup to deal with its losses, which destroys a great deal of the 45 billion lent by the government.

    Also, to the extent there is anything of the original 45 billion left over, after Shittygroup deals with its toxic losses and recapitalizes itself, where does this excess "go?" Does the Federal Reserve recapture it? Does it get loaned out to businesses and consumers? Again, this is assuming anything remains at the end of the day.

    Now, take all of the monetary base expansion created by the Fed Reserve, and assume at least 70% if not more of this fiat was dealt with the same way, with different recipients. Where is the risk of inflation?

    In fact, can't one argue that given that loan losses are ongoing, still, despite some actors paying their bailout loans back, deflation is the predominant force versus inflation, as these monies aren't really making it into the pockets of consumers or small businesses, as credit contraction continues and loans are even harder to come by (after all, what good would giving money to sickly financial institutions do if they, in turn, made more bad loans in a precarious economy, and didn't use the money to deal with their current balance sheet losses, which effectively destroys that money)?
  2. I think the whole thing is a bit of a disaster. One thing you have to note about money supply is what is the definition of money supply. This is overlooked and people don't really appreciate what makes it up. They use a system M0, M1 etc to show different areas where the money supply is contained. However who determines what the actual gauge of money supply should be and what should be included. Should it just be the cash (paper money) or should it bonds or even derivatives what should be considered the 'Money Supply'. You and I am sure other people here will say that the current way is the correct way, it is in fact only one option originally set by the classical economic model and has evolved.

    So this is the problem the actual understanding of the money supply or monetary base in itself is arguable so how do you determine what will happen in various scenarios if one part of the it increases or decrease when some macro economist wouldn't include that part in the money supply at all. The understanding of what fiat money or money supply itself is not a certainty so application of treatment is unclear.

    In short I do not think anybody really knows what is going on. Also try and look at it in another way economics is the distribution of scarce resources or at least that is one understanding. So is the economic system failing by not distributing fairly or conserving.

    I don't think there is an answer to your question because like money supply inflation is another argument. The money supply might get smaller assuming what is classified as the money supply. Which in your opinion of inflation will not create inflation because there is less money in circulation. However I am sure the price of goods will rise which is another view of inflation. Either way it will become more expensive to buy things.

    Is that helpful.
  3. incidentally they revise the money supply aggregates to determine what should be included in the monetary base, as far as i can see the last time they did it was back in 1983. is that something suspect in it self.
  4. final comment. you also state will there be inflation in the future. my assumption is yes and hyperinflation. my reason. in 2004 in uk the accounting stand board introduced regulation for hyperinflation. why would they do that unless they suspected there would be hyperinflation in the future. it might be different in the states but in england and the eu it is expected it will be that way otherwise they would not have introduced that.

    you will also find that it will be the same in the states. the reason for that is this. in accounting there is this thing called harmonisation. effectively the moving together of the standards. for example we might have frs financial reporting standard then there will be a and ias international accounting standard. in the case of the hyperinflation regulation frs 24 there is ias 29 the international version.

    effectively they are preparing for hyperinflation and have done since december 2004. i rest my case if you are interested in looking at this regulation look up the asb or google frs 24 or ias 29.

    i also suspect people do not know what will happen in regards to the money they gave the banks. if you are asking that question and are unsure of the outcome so are they. it is like predicting which card is selected. it is not something you can tell with certainty. i think it will go horribly wrong as i am sure you do too.

    was that helpful or at least of any interest.
  5. Monetary base was pretty flat right into the week of Sept. 24/08, then ramped extremely fast from the $800B range to the $1.7B range in the space of 3 months. It has been essentially flat since January.

    Viewed that way, it is (at a minimum!) a reasonable argument that the massive growth was a giant one-shot dumped into an economic black hole and never made it into the "real" economy.
  6. UK has always had hyperinflation accounting standards. What happened in 2004 was nothing more than their domestic standards being harmonized with the international standards.
  7. In a hyperinflationary economy, reporting of operating results and financial position in the local currency without restatement is not useful. Money loses purchasing power at such a rate that comparison of amounts from transactions and other events that have occurred at different times, even within the same accounting period, is misleading. FRS 24 prescribes how an entity whose functional currency is the currency of a hyperinflationary economy should report its operating results and financial position. It also provides guidance on determining whether an economy is a hyperinflationary economy.

    This publication can be ordered This publication can be ordered

    To find out how to obtain a copy of this FRS, go to Publications.

    * © Financial Reporting Council 2005. All Rights Reserved
  8. IAS 29 was introduced over 20 years ago.
  9. TGregg


    Man, the latest version of the Federal Reserve site #@*&* greasy camel #@*&*! Never the less, I preserved and obtained the data.

    824414 2008-01-31
    822407 2008-02-29
    825904 2008-03-31
    823493 2008-04-30
    827142 2008-05-31
    831994 2008-06-30
    839507 2008-07-31
    840331 2008-08-31
    900639 2008-09-30
    1125955 2008-10-31
    1435235 2008-11-30
    1659319 2008-12-31
    1707648 2009-01-31
    1557795 2009-02-28
    1642476 2009-03-31
    1748345 2009-04-30
    1770566 2009-05-31
    1679805 2009-06-30
    1668384 2009-07-31
    1701431 2009-08-31

    Data is not seasonally adjusted, but is break adjusted. Not that it really matters for this discussion.

    Lots of data available from . Used to be that you could view the data OL, but now you have to DL it into a viewer. :p

    And here are the familiar M1 and M2 (M3 having grown too large to calculate :) ). This page is formatted much better than it used to be, BTW.
  10. I prefer to think of credit as the force behind all inflation. The banks can loan out the new money 10 to 1. Then, you have leveraged derivatives that give banks additional power to inflate financial asset prices.

    So, if the monetary base increased by a trillion, the real inflationary impact could be 10's of trillions.

    Finally, you have not just the one-time injection of over 1 trillion from the fed, you have all the facilities that are in place that have essentially allowed banks to take more risks. Bloomberg released an estimate that the true financial bailout scheme was more around 12 trillion. So, 12 trillion leveraged by 10, would equal somewhere around 120 trillion in credit that could be created.
    #10     Sep 20, 2009