Free Capitalist Network - Community Archive
Mises Community Archive
An online community for fans of Austrian economics and libertarianism, featuring forums, user blogs, and more.

Where is the new money?

rated by 0 users
This post has 13 Replies | 3 Followers

Not Ranked
Male
Posts 23
Points 700
Peter Cohen Posted: Fri, May 1 2009 10:36 AM

The US Federal Reserve web site shows that M2 grew by 13.9% between 2008 and 2009. Yet I've heard Austrians quote in videos that the money supply has grown by a factor of three in the last eighteen months. (!!!)

How can I find accurate information as to this growth? I'm not sure the US Federal Reserve web site is the best source, expecially since they decided that M3 was no longer important (I expect that is where most of the recent growth has been showing and that's also why they decided it was no longer important).

Finally, the quantity of goods and services has been shrinking at the same time as the money supply has been growing. By rights this should have already resulted in noticable price inflation, but I am not seeing it. So the question is simply, where is the new money? Where is it currently tied up such that it is not in the hands of we 'little people' chasing a shrinking supply of bread?

  • | Post Points: 50
Top 25 Contributor
Posts 4,532
Points 84,495
Stranger replied on Fri, May 1 2009 11:19 AM

The monetary base has grown by a factor of three because a loss of confidence in the solvency of banks forced the Fed to back bank deposits with paper currency. But if banks aren't increasing their fiat deposits by making more loans, the total money supply will not increase.

Or in other words, we are in the liquidity trap.

  • | Post Points: 5
Top 25 Contributor
Male
Posts 2,959
Points 55,095
Spideynw replied on Fri, May 1 2009 11:21 AM

Actually, the supply of money is still shrinking.  First of all, almost all of the money given to banks has just been recycled back into the government, from what I have learned.  So, really, not much of the money given to banks really expanded the supply of money.  Second, all these businesses and consumers that had interest only loans all of a sudden had to start paying the higher payments once the loans matured.  So now instead of paying $700 a month, these consumers have to pay $1500 a month, reducing the supply of money they have to spend on other things.  Also, for whatever reason, the banks have quit offering interest only loans.  Now the government just made it more risky for credit card companies to lend money, which means they will not be giving out lines of credit as easily.  So the money supply is actually contracting enormously right now.  The money supply will start expanding once the government has to start paying off its loans by printing money and cannot get new loans to pay them off.  We have not got to this point yet.  For some reason, foreigners keep giving the government loans.

At most, I think only 5% of the adult population would need to stop cooperating to have real change.

  • | Post Points: 20
Not Ranked
Male
Posts 23
Points 700

Thank you Stranger, now that I've read your reply, I am kicking myself with how ovbious that should have been to me.

I find myself rather mystified trying to understand Spideynw's response. EG: If money has gone into the coffers of government, that doesn't mean it disappears, it just means that the government is spending it rather than the people.

  • | Post Points: 35
Top 25 Contributor
Male
Posts 2,959
Points 55,095

Peter Cohen:
I find myself rather mystified trying to understand Spideynw's response. EG: If money has gone into the coffers of government, that doesn't mean it disappears, it just means that the government is spending it rather than the people.

I never said the money being loaned to the government disappeared.  I said credit has disappeared.  People who had interest only loans for five years, were in essence being extended a 6 or 7 hundred or more dollar credit line every month that has now disappeared.  The same things is about to happen to the commercial real estate market.

At most, I think only 5% of the adult population would need to stop cooperating to have real change.

  • | Post Points: 5
Not Ranked
Male
Posts 87
Points 2,025

Peter Cohen:
Finally, the quantity of goods and services has been shrinking at the same time as the money supply has been growing. By rights this should have already resulted in noticable price inflation, but I am not seeing it.

Don't forget that this money was pumped in at the same time the world's largest economic bubble has popped. One part of the bubble is that credit manipulation bid up prices too high, sending conflated messages to investors and capitalists. These prices have to come down at some point, which is the popping of the bubble. So normally at this time(when there isn't further credit manipulation) you should see considerable price deflation, as the prices of these assets come back down to a more realistic, market value. The fact that the CPI has barely dropped shows that inflation from the credit the feds pumped in has covered up a significant amount of price deflation that should have occured. in essence, the credit is already flowing through the economy and bidding prices up, relatively speaking. eventually the deflation that is being masked by inflation will stop as prices find a true market value, but we will still continue to feel the effects of inflation as the fed credit continues to circulate.

  • | Post Points: 35
Top 25 Contributor
Posts 4,532
Points 84,495

It could be that prices are falling because there is a greater demand for money as people increase their savings. That doesn't mean there is any deflation of the money supply.

  • | Post Points: 20
Top 25 Contributor
Posts 4,532
Points 84,495

Peter Cohen:

Thank you Stranger, now that I've read your reply, I am kicking myself with how ovbious that should have been to me.

I find myself rather mystified trying to understand Spideynw's response. EG: If money has gone into the coffers of government, that doesn't mean it disappears, it just means that the government is spending it rather than the people.

My monetary economics professor in university was totally incoherent and never said anything that anyone made sense of. Once I asked him after class if the United States economy was going to collapse from sustained trade deficits. His reply was that it was impossible because the United States had the most flexible economy in the world.

It was at that time that I realized that most economists were not employed to know and explain economics, but to make it obfuscated and incomprehensible in order to conceal a crime. Then I started studying the Austrian school.

  • | Post Points: 20
Not Ranked
Male
Posts 23
Points 700


It was at that time that I realized that most economists were not employed to know and explain economics, but to make it obfuscated and incomprehensible in order to conceal a crime.

LOL!

I wrote something very similar to that fifteen years back, but mine had more words and was not as funny. Well said Sir.  :-)

  • | Post Points: 5
Top 25 Contributor
Male
Posts 4,914
Points 70,630

Scott Jefferies:

Peter Cohen:
Finally, the quantity of goods and services has been shrinking at the same time as the money supply has been growing. By rights this should have already resulted in noticable price inflation, but I am not seeing it.

Don't forget that this money was pumped in at the same time the world's largest economic bubble has popped. One part of the bubble is that credit manipulation bid up prices too high, sending conflated messages to investors and capitalists. These prices have to come down at some point, which is the popping of the bubble. So normally at this time(when there isn't further credit manipulation) you should see considerable price deflation, as the prices of these assets come back down to a more realistic, market value. The fact that the CPI has barely dropped shows that inflation from the credit the feds pumped in has covered up a significant amount of price deflation that should have occured. in essence, the credit is already flowing through the economy and bidding prices up, relatively speaking. eventually the deflation that is being masked by inflation will stop as prices find a true market value, but we will still continue to feel the effects of inflation as the fed credit continues to circulate.

    Interesting.  Yes, that's how bubble's are propped up and that's why standard of living costs have risen for decades and not fallen for the most part, in other words, the U.S. dollar is worth .03 currently to the 1913 $1.00.  It's value has dropped and prices slowly climb and barely fall.  And we keep having to have more of this money in our pockets to go to the store and buy something.  A loaf of bread in 1913 was around .05 and today it is around $2.60.  Other sectors of the society have seen much larger increases in dollar amount value for a good.  Houses for instance.  

    Also as a side note Bernanke said about three weeks ago that 50% of U.S. dollars are overseas.  Geography and spread of use of dollars also is part of this as well.

 

"Do not put out the fire of the spirit." 1The 5:19
  • | Post Points: 5
Top 25 Contributor
Male
Posts 2,959
Points 55,095

Stranger:
It could be that prices are falling because there is a greater demand for money as people increase their savings. That doesn't mean there is any deflation of the money supply.

Increased savings would actually reduce the demand for money, for investment, as would be reflected in a lower interest rate.

At most, I think only 5% of the adult population would need to stop cooperating to have real change.

  • | Post Points: 20
Top 25 Contributor
Posts 4,532
Points 84,495

Spideynw:

Stranger:
It could be that prices are falling because there is a greater demand for money as people increase their savings. That doesn't mean there is any deflation of the money supply.

Increased savings would actually reduce the demand for money, for investment, as would be reflected in a lower interest rate.

Not if people want to keep their savings in money.

  • | Post Points: 20
Top 25 Contributor
Male
Posts 2,959
Points 55,095

Stranger:

Spideynw:

Stranger:
It could be that prices are falling because there is a greater demand for money as people increase their savings. That doesn't mean there is any deflation of the money supply.

Increased savings would actually reduce the demand for money, for investment, as would be reflected in a lower interest rate.

Not if people want to keep their savings in money.

And they would not want to keep their savings in money since the demand would be going down.  Again, as savings increases, interest rates go down, and people's preferences switch to spending their savings.  http://www.mises.org/story/2628

At most, I think only 5% of the adult population would need to stop cooperating to have real change.

  • | Post Points: 20
Top 25 Contributor
Posts 4,532
Points 84,495

Spideynw:

And they would not want to keep their savings in money since the demand would be going down.  Again, as savings increases, interest rates go down, and people's preferences switch to spending their savings.  http://www.mises.org/story/2628

That makes no sense.

  • | Post Points: 5
Page 1 of 1 (14 items) | RSS