tag:blogger.com,1999:blog-8897997766931633186.post3352040793490153287..comments2024-02-14T03:21:37.506-05:00Comments on Monetary Freedom: "Tight Money" and Real IncomeBill Woolseyhttp://www.blogger.com/profile/06330232724290161369noreply@blogger.comBlogger12125tag:blogger.com,1999:blog-8897997766931633186.post-42564181849371280702016-01-23T05:59:28.866-05:002016-01-23T05:59:28.866-05:00It obviously impact the whole setup, I just believ...It obviously impact the whole setup, I just believe we need to set things that help us to perform better. I only prefer learning regularly and that is something which is almost guaranteed to success for me. I usually learn from Baby Pips, but now I am trying OctaFX, it is absolutely ideal educational guide providing company and more so is their wide range of demo contests especially my favorite Southampton Supreme, it all makes learning exciting to do especially for new comers.Pandaynoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-85058340784107361612009-12-12T06:45:39.639-05:002009-12-12T06:45:39.639-05:00Doc:
If all loans are bank loans, then deleveragi...Doc:<br /><br />If all loans are bank loans, then deleveraging must decrease outstanding bank loans. But total lending is much larger than bank lending, so people can reduce their borrowing on the whole, and total lending fall, while bank lending expands. A larger proportion of lending can come from banks.<br /><br />If all bank credit is funded by monetary liabilities (like checkable deposits) then if banks lend less, checkable deposits will shrink. But not all bank lending is funded by monetary liabilities. A substantial part is funded by CDs and a little by bonds. Savings accounts are intermediate. Checkable deposits are a small source of founds. So, banks can lend less (and hold fewer securities,) while expanding checkable deposits. It just requires that banks fund a larger proportion of their earning assets with monetary liabilities.<br /><br />And, of course, banks can match checkable deposits with reserves too. With a monetary authority organized on banking principles, like most of them, including the Fed, then an expansion of reserves means the central bank lends more, perhaps to the government.<br /><br />It is important to understand that there is not a one-to-one correspondance between the quantity of money created by banks (or central banks) and the total amount of loans made by the central bank, the banks, and nonbank lenders.Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-19887308493573320052009-12-12T06:32:07.189-05:002009-12-12T06:32:07.189-05:00Lee:
In my view, changing interest rates is a muc...Lee:<br /><br />In my view, changing interest rates is a much better signal of the need to make adjustments in the allocation of resources beween the production of consumer and capital goods than changes in the price level. However, a lower interest rate not only signals a need to expand the producction of capital goods, it also signals a need to expand consumption expenditure. (There is a quantity supplied and a quantity demanded respose.)<br /><br />When the price level falls, and the real quantity of bank money rises, there is a matching increase in the real quantity of credit supplied by banks. More capital goods can be purchased with a given nominal quantity of loans.<br /><br />Now, with the 100% gold standard scheme, nothing that counts as money is matched by any kind of credit. And so that doesn't happen. More wealth is held in the form of gold. I think what is called the "pigou effect" will be very important. The lower price level results in more consumption spneding after all. Still, as real money balances rise, people can expand expenditures on capital goods. <br /><br />So, it is complicated. It depends on the exact nature of the monetary istitutions. The current system of mostly bank money in the form of deposits and a significan amount of Fed money usually financing govenrment bonds, it different again. A lower price level makes all government bond holders better off and increases the real burden on taxpayers.<br /><br />Complicated, no?<br /><br />I plan to write more about the price level and inflation.Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-87031641945622160902009-12-10T13:32:59.947-05:002009-12-10T13:32:59.947-05:00Bill,
I merely mentioned currency because it is o...Bill,<br /><br />I merely mentioned currency because it is one way people can increase their money balances.<br /><br />Your point about the shifting of resources "away from the production of consumer goods to the producution of capital goods" is spot on, in my opinion.<br /><br />Here is a question: tight money can be corrected by an increasing quantity of money or decreasing price level, but (even assuming that prices are immediately correcting) is one just as good as the other?<br /><br />Many Austrians claim that tight money should only be solved by an adjusting price level, and that any monetary expansion will create price distortions. However, it seems to me that by shifting spending away from consumer goods to capital goods, these are just the kind of "distortions" that we want. Will allowing the price level to fall have these same reallocating effects? I am inclined to say not.Lee Kellynoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-31275816359301891952009-12-10T11:18:25.591-05:002009-12-10T11:18:25.591-05:00Bill, during modern recessions don't people of...Bill, during modern recessions don't people often "save" by de-leveraging. And doesn't that, in the short term, reduce bank lending?<br /><br />Maybe I am misunderstanding what you said.Doc Merlinhttps://www.blogger.com/profile/13615897698740661539noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-13966149173274327562009-12-09T17:36:15.015-05:002009-12-09T17:36:15.015-05:00Lee:
I agree.
But it isn't necessarily about...Lee:<br /><br />I agree.<br /><br />But it isn't necessarily about increasing currency. If there is an increase in saving, and people save by holding more money (currency or deposits,) then an increase in the nominal quantity of money matched by increased bank lending will not only avoid the paradox of thrift, but also do an effective job in shifting the allocation of resources away from the production of consumer goods to the producution of capital goods.Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-24210636060517688002009-12-09T17:16:30.337-05:002009-12-09T17:16:30.337-05:00James:
In an earlier post regarding interst rates...James:<br /><br />In an earlier post regarding interst rates and "tight money" I went into more detail regarding the natural interest rate, saving and investment. What "should" happen with increased saving is a shift in the allocation of resources away from the production of consumer goods towards the production of capital goods, which in increase future productivity and the ability to produce consumer goods in the future. This is true regardless of whether the saving occurs by purchases of assets, repayments of debts, or the accumulation of money.<br /><br />As I mentioned at the end of this post, changes in the price level must be considered. Yes, "tight money" can be solved by a lower price level. This reduces the nominal demand for money to the existing quantity. <br /><br />At first pass, I don't think the price level has any other "job" to do but to adjust the nominal demand for money to is supply. (You can also say, adjust the real quantity of money to real demand.) <br /><br />But, it really all depends on the best nominal anchor for the monetary order. And given a choice of nominal anchor, that will have implications for the price level. For example, the price level has to clear the gold market for a gold standard.Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-34403277819783737952009-12-09T14:55:37.812-05:002009-12-09T14:55:37.812-05:00I had never before encountered this idea: when ne...I had never before encountered this idea: when newly expected deflation causes a *depression*, people's real wealth will be reduced, which will reduce their demand to hold money (since poorer people demand smaller money-holdings than rich people, *ceteris paribus*). That is, their real demand will be reduced and, if actual deflation (as opposed to merely *reduced inflation*) is occurring, their nominal demand will be reduced even more. This should mitigate the deflation, at least slightly.<br /><br />Monetary Freedom correctly points out that increasing demand for money has nothing to do with the Paradox of Thrift unless the people in the Paradox scenario are trying to increase their saving *by hoarding money*. But that is a plausible means of saving only when deflation is expected (a "liquidity trap"), or when there is widespread pessimism about the future of the economy and about the safety of financial institutions such as banks. Thrift in the form of investing rather than hoarding money presents no "paradox." It is not true that "when everyone tries to save by reducing consumption expenditures, firms sell less and produce less." Consumer-goods firms produce and sell less, but, if the savings are invested, *capital-goods firms* take up the slack.<br /><br />Even increased hoarding against the background of an inflexible nominal money supply would present no problem if the price system were perfectly flexible. Nominal expenditure would fall, but smooth deflation would keep real expenditure at its accustomed level. The main real effect would be a mere *transfer* of wealth from creditors to debtors.<br /><br />Monetary Freedom's proposal is, roughly, for the monetary authority to adjust the nominal money supply to prevent deflation. Another approach would be to make the price system more flexible, so deflation would not cause a depression. Is there any way to accomplish that? Why does the inevitable "stickiness" of prices (wages, etc.) cause devastating real effects?Unknownhttps://www.blogger.com/profile/03163081442259712010noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-51758113447573953712009-12-09T12:47:49.390-05:002009-12-09T12:47:49.390-05:00Well, it seems to me that the paradox of thrift on...Well, it seems to me that the paradox of thrift only holds when: 1) people save by increasing their money balances (i.e. bank deposits and/or currency), and 2) financial institutions are unable to offset this decline in spending by issuing currency or creating loans.<br /><br />In other words, the paradox of thrift only holds when monetary monopolies "do nothing" in the face of a particular kind of saving. In the absence of a monetary monopoly, with flexible reserve ratios, private currency, etc., the paradox of thrift would not hold, would it?<br /><br />In my opinion, a free banking system would have a propensity to reflexively offset fluctuations in money demand, but it seems as though many economists assume that when a central bank (like the Fed) does nothing, we get a glimpse of what a free banking system would be like. Perhaps this assumption (if it is indeed held as suggested) should be vigorously challenged by proponents of monetary freedom.Lee Kellynoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-33760628716103536482009-12-09T09:12:17.298-05:002009-12-09T09:12:17.298-05:00Thanks.
I am thinking of working on the deposit i...Thanks.<br /><br />I am thinking of working on the deposit interest rate issue first, because it is easy. (Nick: as I said on your blog, changes in the interest rates on money could correct monetary disequilibrium, but are unlikely to work that way.) <br /><br />Then the price level when the regime is a given nominal quantity of money. Which is relatively easy.<br /><br />But then the hard part--what if the nominal anchor is something else? Of course, a growth path for nominal expenditure is my particular interest. (P = Y*/yp) But a fixed price level, growth path of prices, or even inflation rate are possible. A fixed price of gold would be another alternative.<br /><br />Given expectations, I think it is right to include the nominal anchor into the definition of monetary disqeuilibrium.<br /><br />I have said this before, but I think it needs more thought. For example, under my preferend regime, tight money is when the quantity of money is less than the demand to hold money when the interest rate equals the natural interest rate, real income equals potential income, and the price level is consistent with nominal income being on target. And, of course, the expected inflation rate is whay? consistent with the price level remaining on target?<br /><br />Base money needs to rise today (I think.) To where? It where the quantity of money equals to the demand to hold base money. But not what the demand to hold base money is with real income way below capacity. It is rather what the demand for base money would be if nominal expenditure is where is should be. <br /><br />But the easy, price level adjusts to get the real quantity of money equal to the real demand first, before adding in claims that no, the price level needs to be at the right place.<br /><br />So, I am going from teaching the abcs of neoYeagerism, to something a bit more ambiguous and I suspect controversial.Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-68336506531137738322009-12-08T21:08:08.922-05:002009-12-08T21:08:08.922-05:00Bingo! Yes!
(Bill's getting very good at expl...Bingo! Yes!<br /><br />(Bill's getting very good at explaining this stuff, Lee).<br /><br />You ran out of steam right at the very end, understandably. A follow-up post is coming, I hope?Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-52516090644149851522009-12-08T20:56:34.824-05:002009-12-08T20:56:34.824-05:00Great post!
You're getting so much better at ...Great post!<br /><br />You're getting so much better at explaining this stuff, or perhaps I am just getting better at understanding it. In any case, there are some great insights here.Lee Kellynoreply@blogger.com