mickanomics: z1235:Printing money (growing M1, M2, M3) doesn't merely LEAD to inflation. It IS inflation, by definition. If M1 was growing while M3 was shrinking would that be inflation or deflation?
z1235:Printing money (growing M1, M2, M3) doesn't merely LEAD to inflation. It IS inflation, by definition.
If M1 was growing while M3 was shrinking would that be inflation or deflation?
It would be deflation, as M1 is only a component of M3.
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Also,
Monetary Base
This is quite interesting. The monetary base has more than doubled in just over a year. Quite incredible really. I noticed this a few months ago, when it was at 1.6 trillion, now it's at over 2 trillion...
Fred Furash: Also, Monetary Base This is quite interesting. The monetary base has more than doubled in just over a year. Quite incredible really. I noticed this a few months ago, when it was at 1.6 trillion, now it's at over 2 trillion...
That is the result of the bank run and the central bank trying to stop it by rapidly increasing reserves through short-term loans at the discount window.
Once the banks no longer need to protect themselves from a "liquidity run", they will return the cash to the central bank and the monetary base will plummet again.
Stranger: mickanomics: If M1 was growing while M3 was shrinking would that be inflation or deflation? It would be deflation, as M1 is only a component of M3.
mickanomics: If M1 was growing while M3 was shrinking would that be inflation or deflation?
If we assume that inflation is a measure of the cost of "everything", i.e. not just the "cost of living" but also including the cost of things that banks buy, like shares and derivatives, then surely that would correlate better with M3 than M1 - so I'd have to disagree with you.
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And why would "we" assume that?
Freedom of markets is positively correlated with the degree of evolution in any society...
Fred Furash:Could you please elaborate on what changes the BLS introduced in 1982? I think the early 80's was when the residuals in my model started fluctuating more wildly.
Sure. First of all, John Williams of shadowstats.com has computed CPI according to the old methodologies. It was changed radically in 1983 (correct date?), and then changed again around 1993 (and again in '99). Here is a comparison of the data: http://www.shadowstats.com/alternate_data/inflation-charts
The major changes for the early 80's I believe were in real estate. I'm having trouble finding the exact dates, but it appears around 1983 that house prices were taken off the CPI and replaced with Owner's Equivalent Rent. Note that calculating OER is an arbitrary process. They likely take a house for rental in an area, take its square footage, and extrapolate that rental price against other houses by square footage. Of course this misses pertinent info. Rental houses are more likely to be in worse condition than homes that the owner lives in. In any case, OER is obviously not a perfect substitute for house prices. What it tries to do is eliminate house speculation (just like the CPI doesn't include stocks or other investments). Of course, houses don't fit easily into either category of investments or consumer goods. The change pushed the CPI downward significantly, likely by design. In theory, I agree with using OER for a consumer price index. Unfortunately, we can't get a CPI with OER before the 80's. Of course, a CPI is no substitute for a general price index.
The Clinton-era changes are much more questionable. They sought to include hedonic adjustments, which basically means that if the quality improves for some product, then they adjust prices to attempt to capture this gain in quality. The most basic example to illustrate how stupid this is is by seeing how the BLS would compute computer prices. In 2006, a 1 GHZ laptop costs $400. In 2007, a 2 GHZ laptop costs $400. Consumer inflation = 0%, right? WRONG. The BLS would say this is ............. NEGATIVE 100% inflation. Why? Because they calculated that a doubling of speed equals double your enjoyment. Following this dingbat logic, you could expect to find new Pentium 3 computers today for around $20. Good luck.
There is also some kind of weighting done to measure substitute goods effects. For example, let's say the price of beef doubles. Many consumers will consume less beef and more chicken. Let's say the CPI for food is composed simply of 50% chicken prices and 50% beef prices. Let's say chicken prices remain constant while beef doubles. You'd expect a CPI rate of 25%, right? WRONG. The BLS would say that more people are eating chicken now, so it deserves a larger weighting - now the index is 25% beef prices and 75% chicken prices, yielding a CPI rate of 12.5%.
If you look at these last two policies, they are almost the inverse of each other. One says that if quality improves, it equals a decline in the measured CPI. The other says that if quality decreases, it equals a decline in the measured CPI. So if you buy a more expensive good, that price is offset by your quality increase; but if you buy a lower quality good to substitute for a preferred good that rose in price, suddenly the BLS is not worried about your personal enjoyment factor and reduces the weighting of products you demonstrably preferred.
All the adjustments pushed inflation calculation downward. Duh! That's the entire point.
Also, remember that CPI is only a fraction of prices. Producer prices and investment asset prices must also be taken into account. Also remember that M2 and M3 are inaccurate measures of money supply, containing numerous credit items like short-term time deposits and money market mutual funds. I find M Prime the best measure, which is basically M1 + sweeps. Of course, consumer credit also effects prices, as does real estate credit, etc. So prices tend to match M3 (or even broader measures) best, I find.
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mickanomics: Stranger: mickanomics: If M1 was growing while M3 was shrinking would that be inflation or deflation? It would be deflation, as M1 is only a component of M3. If we assume that inflation is a measure of the cost of "everything", i.e. not just the "cost of living" but also including the cost of things that banks buy, like shares and derivatives, then surely that would correlate better with M3 than M1 - so I'd have to disagree with you.
This last decade banks have bought mostly houses and other real estate. The price of them has tracked money supply inflation.
If we assume that inflation is a measure of the cost of "everything"...
Jon Irenicus: And why would "we" assume that?
Inflation is a measure in the rise in costs of goods and services, with weightings in proportion to how much of each of them is actually purchased. CPI is not the whole story because it only measures the things that households buy. What we should consider is goods and services that anybody can buy, and that includes governments and banks.
Stranger:This last decade banks have bought mostly houses and other real estate. The price of them has tracked money supply inflation.
Thant sounds very believable. Presumably Austrians should(do?) say that inflation IS the growth of the money supply (M3). And certainly not M1.
Again, why should "we" assume inflation is that...? How do ratios get "inflated"?
Do. They don't limit themselves to narrow money supply.
Stranger:Once the banks no longer need to protect themselves from a "liquidity run", they will return the cash to the central bank and the monetary base will plummet again.
WRONG.
Bernanke has already stated his long-term strategy to wind down the Fed's balance sheet will NOT come from the banks returning liquidity to the Fed. He said it would involve paying banks interest on reserves they choose to sit on for specified periods of time. Right now the Fed is paying banks to sit on excess reserves without a term. The new plan would simply add a term to these deals -> something like 1.5% interest for excess reserves held for 1 year, etc.
The reason is that the banks aren't simply borrowing money from the Fed. They are selling their toxic assets to the Fed, likely for well over their market value. There is not a snowball's chance in hell that the banks are willing to buy these toxic assets back from the Fed, especially not at the price the Fed bought them.
So let's say the Fed tries to sell all these toxic assets in the open market. It created $1 trillion to pay for them. Now, it can only sell them for $50 billion. Thus, the Fed created a net $950 billion increase to money supply with no further means to withdraw this money from circulation.
On the other hand, it could sell Treasuries, which have a much better market value. However, they are also likely to lose money on that deal as well, just not as much. Furthermore, this would push up the government's borrowing costs, which it will not allow.
The Fed owns the MBS's it bought from the banks at top dollar. It has no deal to return them to banks at buying price. In order to bail out the banks with money created from thin air, the Fed has been turned into a toxic asset graveyard.
mickanomics:Thant sounds very believable. Presumably Austrians should(do?) say that inflation IS the growth of the money supply (M3). And certainly not M1.
Actually, Austrians say that inflation (as defined by increase in money supply) is neither. On the other hand there is a more accurate measure: True Money Supply
I don't know why we would refer to them as toxic assets when their actual name is worthless assets, or non-assets.
Anyway I'm not sure that buying MBS explains the entire increase in the monetary base. It may be a significant part of it, but I think the Fed bought MBS in return for other bonds, not liquidity.
Jon Irenicus:How do ratios get "inflated"?
The ratios of what to what?
DD5: mickanomics:Thant sounds very believable. Presumably Austrians should(do?) say that inflation IS the growth of the money supply (M3). And certainly not M1. Actually, Austrians say that inflation (as defined by increase in money supply) is neither. On the other hand there is a more accurate measure: True Money Supply
Ok, that's fine. By "M3" I, perhaps sloppily, meant "the money supply".
One good exchanging against another. What a price is, essentially.
Re: "true money supply"
Ok, so M3 includes some things that aren't strictly money. But I am curious to know if banks and/or hedge funds ever use some non-money financial instruments to buy things with (directly, without ever translating them in to normal money)? If they did, then those instruments would be a kind of "money" and so could (perhaps should) be counted as part of the money supply.
mickanomics:What are you saying? Are you trying to make a virtue out of being imprecise?
I was being serious. If inflation is defined as "growing X" then "growing X" would be inflation and "declining X" would be deflation. Replacing M1, M3 or CPI with X does not change my understanding of the processes. By trying to "precisely" define inflation (which, as in the case of CPI, is constantly "updated" and re-defined) you're missing the forest for the trees, which is the main obfuscating goal of the status quo.
Z.
z1235:By trying to "precisely" define inflation (which, as in the case of CPI, is constantly "updated" and re-defined) you're missing the forest for the trees, which is the main obfuscating goal of the status quo.
My goal is not "to precisely define inflation". Its actually pretty easy to define different types of inflation, CPI,"house price",M1,M2,"money supply" etc. etc. What I am trying to do is understand the relationships between the different types, and in order to do that, you must be precise.
On the True Money Supply page, you should read the articles explaining what composes the True Money Supply. I do not find that TMS is entirely accurate, as it includes savings accounts. Savings accounts can technically be used as money and they have no fixed term, but they are generally used as a loan to the bank, not as checkbook money. At the very least they are a demand for a cash balance, which means they shouldn't effect prices.
There is one important exception to this - sweeps. For those who don't know, sweeps are bank operations done via computer which sweep demand deposits into savings deposit accounts in order to avoid reserve requirement regulations. To the bank customer, they don't appear to exist or happen at all.
...Actually, now that I think about it, sweeps seem not that much different from savings accounts - they are presently available money, but they are being held, not spent.
Anyway, there is no accurate money supply measure. Our banking system conflates money and debt. Anything the government secures against a loss and can be liquidated immediately is virtually money.
Furthermore, because debt and money are conflated, it is difficult to correlate money supply and price inflation.
That being said, M1, M1 + sweeps, and M2 minus small time deposits seem to most accurately measure money supply. (M1 has some non-money items but they are almost insignificantly small). MZM, M2, and M3 likely track prices better.
Looking at any one measure shows you the distortions I mentioned above. You'll notice, such as around 1983, a surge in savings accounts, matched by a decline in small time deposits. This makes M2 minus and MZM appear to skyrocket, but really very little happened. M3 is nice because it is so broad - you don't have distortions based upon individuals shifting from one form of money to another.
mickanomics:Ok, so M3 includes some things that aren't strictly money. But I am curious to know if banks and/or hedge funds ever use some non-money financial instruments to buy things with (directly, without ever translating them in to normal money)? If they did, then those instruments would be a kind of "money" and so could (perhaps should) be counted as part of the money supply.
Correct - M2 includes retail money market funds, which technically aren't money. M3 includes institutional money market funds, as well as large-time deposits. I don't believe the time deposits trade like money, but I believe the money market funds do. For retail funds, I believe there are limits on how many transactions you can make per month with them, and I don't think they are usually traded directly, but rather converted to money. Institutional funds I believe are directly traded more often.
Stranger:Anyway I'm not sure that buying MBS explains the entire increase in the monetary base. It may be a significant part of it, but I think the Fed bought MBS in return for other bonds, not liquidity.
From the end of '07 to mid '08, the Fed sold Treasuries and loaned some of the cash to banks via the Term Auction Credit facility. The rest pumped up the "other assets" and "other loans" categories which could be anything. These actions were balance sheet neutral.
After Lehman fell, the Fed went into panic mode, greatly expanding its "other assets", "other loans", and Term Auction Credit. Additionally, it created a sizeable commercial paper funding facility. This expansion would double its balance sheet. All of the funding was created from thin air.
During 2009, it wound down the above programs, but replaced them on their balance sheet with $300 billion in Treasuries and $960 billion in mortgage backed securities. I am guessing that the prior operations were mostly loans of some form that were repaid, and the Fed used the money to more directly bail out the banks and government. The Fed's balance sheet is still double it's 2007 size, and it will likely never shrink more than $100 billion...if at all. Remember that the Fed doesn't really have liabilities. Its bank notes and account credit are listed as liabilities, but no one can legally force them to redeem them for any of their assets. Other liabilities can be repaid with money created from thin air.
See here:
http://www.federalreserve.gov/releases/h41/Current/
Also, here, even though this is not current:
http://en.wikipedia.org/wiki/File:Consolidated_Statement_of_Condition_of_all_Federal_Reserve_Banks-ASSETS.gif
M3 includes institutional money market funds, as well as large-time deposits.
do the money market funds and large time deposits mostly get opened or filled with bank credit or fiduciary media?
by not including them, do money supply figures leave off a vast amount of fractional credit creation....credit that is serving some purpose but not entirely as liquid as a checking account?
Global supply rose 270 kb/d in December to 86.2 mb/d, on both higher OPEC and non-OPEC output.
Forecast global oil demand remains virtually unchanged at 84.9 mb/d in 2009 (-1.5% or -1.3 mb/d year-on-year) and 86.3 mb/d in 2010 (+1.7% or +1.4 mb/d versus the previous year)
http://omrpublic.iea.org/
if global oil demand has stayed flat and the supply has risen...why are there spikes in commodity prices - as claimed by peesuric? if massive amounts of central bank pumpign was going into projects it woud seem that global oil demand would be pushing upward to. but accordign to the above info (if true) it hasnt. all the while supply increased.
33n119w:do the money market funds and large time deposits mostly get opened or filled with bank credit or fiduciary media?
Bank loans have two sides. The banks get a contract for repayment plus interest, and seizes some collateral upon failure. The borrower gets MONEY. In our fiat system, it's all fiduciary media really...
The bank might be able to sell the loan contract legally, but it's not money. The bank would likely sell it for money. Additionally, few would accept it in exchange for another good, particularly a non-financial good. This is the difference between credit and money. Of course, our system tries to conflate the two.
The borrower can of course spend the money. Whoever receives that money might deposit in a bank as a time deposit. This is the opposite - the depositor holds the credit contract, and the bank can spend the money. They will likely loan it, but conversely they could use it to partially fund their daily operations.
The depositor can try to spend his time deposit, but it would be difficult. More likely, he would trade it for cash. Banks often have the most favorable terms to do so. Small time deposits can be withdrawn without penalty I believe. Large ones might be more difficult, but like the small ones, I believe they are insured by the FDIC.
One of the main differences between credit and money is that credit carries some risk. The main difference is that credit is entitlement to a future good, whereas money is a present good. Insurance and regulations basically remove these elements from certain forms of credit, which makes them more liquid and in some instances useful for indirect exchange.
Market funds are not money, nor are they credit. They are current ownership of a large group of corporate stocks and bonds, managed by a third party. When you buy a fund, you are giving money to the fund managers, who use the money to buy stocks and bonds on the market. No money is created or removed from circulation.
Market funds are designed to constantly yield a positive return, while being liquid. The thing is the funds are not equal. They are not commodities. Individuals will necessarily prefer some funds over others - from a standpoint of risk vs. reward. Thus, there is no common unit of account and using them as common money would prove very difficult.
Yet, since there is an external unit of account, and the funds are quite liquid, they are somewhat suitable for exchange among larger, more financial-savvy institutions.
However, again, government has interfered and backed many such funds in the recent crisis. We should expect to see moral hazard from this. I would expect funds to start taking more risk and offering greater rewards, and more people will start using them like checking accounts, given that there is little risk of loss. Still, I could not see funds start simply transferring ownership of portfolios as payments. More likely they would liquidate some of one portfolio and spend the money on the preferred portfolio of the client - this retains demand for money and does not distort economic calculation.
33n119w:by not including them, do money supply figures leave off a vast amount of fractional credit creation....credit that is serving some purpose but not entirely as liquid as a checking account?
Well, that's the debate, right? That's why we have M1, M2, M3, MZM, TMS, AMS, M', etc. The Fed also reports on the amounts of consumer, real estate, commercial credit, etc. How much of deposits or other accounts could be considered loans to the bank? If I keep at least $100 in my checking account for a year, is this a loan to the bank?
As De Soto says, loans typically earn interest, have a term, and bear some risk. In real terms, bank deposits do not earn interest, and they have no term, and the government insures them against risk. So are they money? Only if they can be used for common indirect exchange. Now we have to define "common" and "indirect"...
First of all, there is lag between money supply growth and CPI.
Secondly, the definition of CPI has changed multiple times over the years to include goods that haven't been included before, exclude goods that were included before, and change the measurement of price changed of other goods, whereas the definition of M3 has always remained the same.
Lastly, it simply isn't possible to accurately measure price changes, due to a dynamic market. How will you measure the price changes for computers, for example? My laptop has more computing power than some supercomputers did in the 1980s. How would you measure that? You would have to measure the increased utility (itself an impossibility to measure) from smaller computers and the fall in prices simultaneously.
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The problem with the CPI is that what gets measured and how it is measured are changed *ALL THE TIME.* When my mom was raising my sister housing prices were strictly measured in the CPI and thus inflation was noticed, yet now after the Housing Bubble no one that took care of the CPI ever remarked at the inflation of credit which lead to said bubble. Fancy that...
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There is also a counterfactual problem. If the money supply were to increase by 10% in one year, while the CPI remained at 0% the same time period, this does not necessarily mean a lack of correlation. For all we know, in an alternate history, if the money supply remained unchanged at 0%, the CPI would had dropped -10%.
In this time line, the money supply and the CPI variables would be observable, while the alternate condition for the same two variables would not be observable.
Because there is no increase in the price level, does not necessarily mean a lack of inflation.
Of course, our system...
you mean the united states and the federal reserve and commcercial bank bank system??
in our fiat system, it's all fiduciary media really...
do you make a distinction between a physical dollar bill/coins and the fractional reserve 'dollar'?
i mean by frb dollar.....the claimed ~10 percent cash reserve on accounts and what makes up the rest?
does the time deposit that exists now contain money not accounted for in m1?
again, if i write a check from m1 checking account into an m2 CD is m1 affected?
ie....100 dollars in m1 check account - 50 dollar check written to create CD account - checking account reduced by 50 dollars (m1 is changed here how?) - now there is a 50 dollar CD in existence - 50 dollars in CD is lent in the form of a check - 50 dollar check goes into some other m1 checking account.
i make early withdraw and get penalized 10 percent and get CD check for 40 dollars....from where?
in what way does the CD included in the m2 money measure get counted as beyond m1? is it the fact that contractually the CD 'funds" can be claimed or demanded - though wth penalty or at a discount of sorts?? is this what makes the m2 classification valid?
as for savings accounts...every one i have ever had let me pretty much withdraw when i wanted...a monthly charge and a small penalty beyond 5 or 8 withdraws - or so.
so to say that they shouldnt be included as money seems wrong.
i used to specifically use my savings account as a money source.
i dont know exactly what money measure most directly affect prices.
on would almost think that m3 or the largest measure available would be the one to use.
if the distant money measures are the ones that basically support institutions that have the greatest effect on commodites, transport networks and vital goods and somehow count as assets or as a method of determing financial 'soundness' or investability , while the correlation between the cpi and money supply probably does not exist in any meaningful form....the broad money measure could likely have the greatest effect on prices.
there is 925 billion of currency in circulation and ten times that in other money measures (if correct).
www.economagic.com
There is also a counterfactual problem.
usually in the form of people lying.
"You can't accurately measure inflation in a meaningful way. "
if you mean inflation as the increase of govt forms of currency....i expect it can be measured pretty close.
many at mises/lrc have called this type of inflation harmful. i assume they arent lying..but i check into it.
you can measure the amount of air that goes into balloon or tire and that seems meaningful.
did you have another meaning for inflation in mind?
The money supply exceeding the demand for it is the usual definition.
bandodger: <comment by bandodger>
<comment by bandodger>
Heh. I doubt you're even aware what a counterfactual is, but I'm going to help you out here:
http://en.wikipedia.org/wiki/Counterfactual_history
Uhm, you still don't understand the concept, do you. By the way drsteelwood, are you also user 33n119w? <Mod Edit: yes he is the ban-dodger>
Even if you don't accept the concept, how exactly is using a "what-if" scenario considered lying?