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seemingly different statements about federal reserve inflation

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sthomper posted on Tue, Apr 14 2009 12:49 AM

this link

contains this statement  "The question on the table was whether the Federal Reserve caused inflation. I responded - "The Fed doesn't cause inflation or deflation, but the Fed certainly mucks up the economy from time to time; e.g., lowering Fed rates to 1% which got everyone on the borrowing bandwagon....."

this is a bit confusing but the poster was claiming to be responding to an exchange between ron paul and bernanke.
the above statement says "the fed doesnt cause inflation or defaltion" and attributes a lack of federal reserve infaltion to its interest rate manipulations.
and this somehow regulates the way banks borrow from each other
several people at the mises forums have told me that credit creation preceded interest rate changes - it is federal reserve money creation that allows purchases of bank assets (which that later result in a lowering of the interest rate .
for instance
"then the way they get the interest rate down is buy boosting supply of the funds that can be loaned. This is achieved indirectly by purchasing assets in the open market (via the OMOs). The result will be that more money will find it's way into the coffers of the commercial banks that hold balances with the Fed. To the extent that those commercial banks are not able to extend loans on the basis of this money themselves, they will (ordinarily) lend it to other commercial banks and the greater the quantity of funds there is to be loand the lower the interest rates that these will be able to attract. So the inflation is two-fold. "   

and here

 "If they target a rate that is above market rate then, quite to the contrary, they will need to destroy money (pulling it out of the system) in order to maintain their target. The later doesn't happen very often but can do, when inflation is really getting out of control... more generally, the Fed tries to inflate."

and   "The Fed controls the FFR indirectly and the Discount Rate directly. Both types of loans add new reserves to the system..."

all of thes posts indicate a federal reserve that tends to inflate and this link
contains a chart of st. louis Adjusted monetary base growth since 1978 of about 800 percent  this link
describes the monetary base as "The seasonally adjusted, break-adjusted monetary base consists of (1) seasonally adjusted, break-adjusted total reserves (line 1), plus (2) the seasonally adjusted currency component of the money stock, plus (3) (for all quarterly reporters on the "Report of Transaction Accounts, Other Deposits and Vault Cash..."
it seems odd then that the adjusted monetary base could increase nearly 800 percent in 30 years and that only be currency creation - yet posters at the mises community say the federal reserve inflates primarily by interest rate manipulaion that is the result of expanding the reserves held by commercial banks.  the above link at (if legitimate) shows total reserves holding rather steady since 2004.
could someone explain then how " "The Fed doesn't cause inflation or deflation, " meshes with "more generally, the Fed tries to inflate."  and   "So the inflation is two-fold. "   
and the linked information posted above that indicates total reserves at the federal resevel staying constant since 2004  (minus the weird activity since oct of 2008).

is someone here very wrong in their descriptions or is this information untrue?




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For 200 years before we had a central bank, being on a hard money standard,  we had prices roughly the same after the period as we did at the beginning of the period. 

In the 96 years that we've had the Federal reserve the dollar has lost 95% of its purchasing power.

The Federal Reserve is the creator of inflation. period.  Any argument that inflation comes from greedy commercial bankers and money creation by these banks is just misleading.  The existence of the Central Bank / Federal Reserve enables banks to create even more money (hold less dollars in reserve - to pyramid the expansion of credit off of) because the Fed is the lender of last resort to the banks in the event they become destabilized because of expanding too much credit.  Also, it is the Fed who determines and sets the banks credit / dollar reserve ratio requirement.  The existence of the Fed and the death of the free banking system enables banks to all expand credit far more than without the Fed.  Also, the Fed forces all banks to expand credit simultaneously and uniformly, therefore no bank is less or more guilty or stable than the other.  Banks don't call each other's credit expansionary policies into question and demand dollar redemption for checks issued by each other.  If they did that could be a run on the other bank - which could create bankrupcy.

Also, once banks have loaned out their reserves they can't expand any more credit.  You need the Fed to then create money out of thin air, buy assets form banks, to give banks more dollar reserves by which banks can pyramid / leverage / expand more credit (create money) from. Inflation is therefore created and perpetuated by the Fed.

Also, the mainstream economics don't consider an expansion of the money supply as inflation.  They think it's rising prices.  They blame greedy business men that charge high prices or lack of resources to meet demand.  They ignore the real reason for price rise, which is an increase in number of dollars chasing the same or fewer number of goods.  Or the increase in number of dollars in the system while the demand for dollars by the people in the economy has not changed / gone up.  Therefore it's easy to deflect blame from the Fed for causing rising prices, because printing money - by their theory - doesn't devalue the dollar's purchasing power.

Any talks about how the Fed is an inflation hawk to prevent inflation created by commercial banks is just a cover up.  The Fed is the problem, not the solution.


Read page 70 in this book:


This book may too have some info on the subject.  I can't remember if it does or not:


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i understand what you are saying..but i am trying to place that against economic information reported in charts and elsewhere.  to verify it iow.

i have seen charts online that show a federal funds that that fluctuates significantly , peaked in the early 80s or so and has had a general lowering trend since then.

i have seen charts that show the adjusted monetary base increasing amongst rising rates.

does the reserve portion of this monetary measure remain rather steady with most money growth in currency additions?

if the federal reserve only purchases secruites from certain banks and not all - how can the federal reserve force alll banks to expand credit simultaneously?  that would seem like bank discretion.

i have also asked in other posts if the purchases of the federal reserve 'retire'?  but havent received any reply.










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"Also, once banks have loaned out their reserves they can't expand any more credit.  You need the Fed to then create money out of thin air, buy assets form banks,...."

perhaps this is the part that i am missing, i am not sure.

firstly, wouldnt an increase in demand deposits also increase bank credit

and the assets purchased by the federal reserve......are they most often assets that arose from previous credit expansion? 

is it the pace of credit expansion that continually grows faster than the retirement of the purchased (loans?) assets that keeps credit inflation occurring ?

is 'credit inflation' a more appropriate description for what occurs today than 'monetary inflation'?



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this link

states  "Activist monetary policy is based on the assumption that there is a predictable relationship between bank reserves and bank lending. The operative notion of easy money is that the Fed creates new bank reserves, and banks lend them out. These loans get spent, and the proceeds get deposited at other banks as new checking accounts. Whatever is not required to be held as reserves is then lent out again, and through the magic of the "money multiplier", loans and bank deposits go up by many times the initial injection of reserves.

That's the theory. But a change came in the 1970s with the emergence of money market funds, which require no reserve requirements. Then in the early 1990s, reserve requirements were dropped to zero on savings deposits, CDs, and Eurocurrency deposits.At present, reserve requirements apply only to "transactions deposits" - essentially checking accounts. The vast majority of funding sources used by banks to create loans have nothing - nothing - to do with bank reserves."

this information   "the inflation is two-fold. Firstly, the Fed pushes new reserves into the system via the OMOs in order to try to bring the FFR down. Secondly the commercial banks pyramid loans on the basis of those reserves. So normally if the Fed increases the monetary base (not typically notes and coins but more commonly by increasing the total quantity of reserves in the system held on account with the Fed itself) by 100 billion you might expect an actual expansion of the overall money supply of maybe 1 trillion (in a very simple example)."

found here

seems to be at odds with the first excerpt.

can anyone here determine which of these statements is the more true or altogether wrong?




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