Do bankers understand money?
There’s a certain group of people who believe that if you want to know how money affects the economy, then you need to talk to bankers. I’m not one of them.
As an analogy, consider the following imaginary conversation:
Fred: I worked at BestBuy during the 1990s.
Me: Was it interesting?
Fred: Yes, it was a period of soaring demand for personal computers.
Me: Um, don’t you mean the supply of personal computers was soaring?
Fred: Well more supply too, but the market was really driven by soaring demand. Extra supply just piles up in inventory if you don’t have buyers. It’s demand that drives the market; supply is just a necessary condition. Trust me, I worked there.
If you’ve studied economics from a textbook that teaches NRFPC (in other words, mine), then you know that Fred is speaking nonsense. To establish whether supply or demand was the driving force in the 1990s, you look at the correlation between quantity and price. And given that soaring sales were associated with plunging prices, we can infer that supply was the key factor.
Fred was too close to the picture to see it clearly. To him it looked like quantity sold was fueled by demand. He overlooked how Moore’s Law was sharply boosting supply, which led to much lower prices and many more people buying PCs.
I often hear people say that bank reserves don’t drive bank lending, look into paystubs creator. That no banker looks to see if he has enough reserves before deciding whether to make a loan. That’s like saying that the BestBuy salesperson doesn’t look at Dell Computer production data before making a sale.
More reserves can lead to more loans in one of two ways. In the Keynesian model, more reserves lead to lower interest rates on loans, and this encourages more lending. In the market monetarist model (my view), more reserves leads to more NGDP via the excess cash balances effect. As NGDP rises, firms and individuals wish to borrow more money.
In the Keynesian model, real bank lending rises, and in the long run monetarist model nominal bank lending rises. In reality, you have some of each.
Here’s Paul Krugman:
Actually, Tobin-Brainard is to many of the controversies that swirl around banks and money as IS-LM is to controversies about interest-rate determination. When we ask, “Are interest rates determined by the supply and demand of loanable funds, or are they determined by the tradeoff between liquidity and return?”, the correct answer is “Yes”— it’s a simultaneous system.
Similarly, if we ask, “Is the volume of bank lending determined by the amount the public chooses to deposit in banks, or is the amount deposited in banks determined by the amount banks choose to lend?”, the answer is once again “Yes”; financial prices adjust to make those choices consistent.
Now, think about what happens when the Fed makes an open-market purchase of securities from banks. This unbalances the banks’ portfolio — they’re holding fewer securities and more reserve — and they will proceed to try to rebalance, buying more securities, and in the process will induce the public to hold both more currency and more deposits. That’s all that I mean when I say that the banks lend out the newly created reserves; you may consider this shorthand way of describing the process misleading, but I at least am not confused about the nature of the adjustment.
Yes, it’s a simultaneous system. Adding reserves (base money) has a million indirect effects on every nominal variable in the economy, and, if prices are sticky, real variables as well. If you don’t want to call that “lending out reserves” that’s fine (I don’t use that phrase either), but we understand the dynamic process.
And this Krugman comment also rang a bell with me:
I’m actually kind of reluctant to even get into this, because any discussion of these issues brings out the people who believe that they have discovered the hidden secrets of the monetary universe, somehow missed by generations of economists. But here goes anyway.
Yes, I know the feeling.
Tags:
10. December 2020 at 19:29
Scott,
this so hits a raw nerve with me. I don’t mean the post itself, but the headline. You can add finance faculty to that line. I can’t count the number of times I have heard senior finance faculty or senior bankers just mindlessly repeat that
– lower interest rates lead to inflation
– QE leads to inflation
– low interest rates mean easy money
– exchange rates are dominated by “confidence” in a country’s economic or foreign (not monetary) policy
And recently, a bit more in the political arena, that China is winning world supremacy because it dominates electronic currency development and other fintech, and the like. Another theme with CEOs and bankers is that most seem to be fine with government regulation, mandates, and government policies shaping society a social agenda, such as job creation schemes. If you’re looking for libertarians, you won’t find them amongst bankers and the C-suites of this world.
10. December 2020 at 19:40
mbka, You said:
“If you’re looking for libertarians, you won’t find them amongst bankers and the C-suites of this world.”
Indeed they are hard to find anywhere these days.
At least we got to live through the neoliberal era.
10. December 2020 at 23:26
Mahalos for laying this out in a succinct post.
I’ve worked in community banking for about a decade and have found similar sentiments among colleagues. Fortunately, when I start discussing monetary econ/Fed insights I’ve garnered from here and elsewhere, my audience has been pretty receptive. Skeptical, but at least they listen politely and seem to ingest the ideas respectfully.
11. December 2020 at 00:57
“I often hear people say that bank reserves don’t drive bank lending. That no banker looks to see if he has enough reserves before deciding whether to make a loan.”
The ‘people’ at the Bank of England seem to think differently?
“Saving does not by itself increase the deposits or ‘funds available’ for banks to lend. Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money. This article explains how, rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.”
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf
‘An empirical test is conducted, whereby money is borrowed from a cooperating bank, while its internal records are being monitored, to establish whether in the process of making the loan available to the borrower, the bank transfers these funds from other accounts within or outside the bank, or whether they are newly created. This study establishes for the first time empirically that banks individually create money out of nothing. The money supply is created as ‘fairy dust’ produced by the banks individually, “out of thin air”. . . .
Thus it can now be said with confidence for the first time – possibly in the 5000 years’ history of banking – that it has been empirically demonstrated that each individual bank creates credit and money out of nothing, when it extends what is called a ‘bank loan’. The bank does not loan any existing money, but instead creates new money. The money supply is created as ‘fairy dust’ produced by the banks out of thin air.32 The implications are far-reaching.’
https://www.sciencedirect.com/science/article/pii/S1057521914001070
Does S.B.S. ‘understand money’?
It appears not?
11. December 2020 at 02:36
“Now, think about what happens when the Fed makes an open-market purchase of securities from banks (in globalized capital markets, while other central banks might be buying or selling).”–Paul K., with minor edit.
The Fed actually buys Treasuries from the 21 primary dealers, which are not commercial banks, but global brokerage houses.
The primary dealers are:
Amherst Pierpont Securities LLC
Bank of Nova Scotia, New York Agency
BMO Capital Markets Corp.
BNP Paribas Securities Corp.
Barclays Capital Inc.
BofA Securities, Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse AG, New York Branch
Daiwa Capital Markets America Inc.
Deutsche Bank Securities Inc.
Goldman Sachs & Co. LLC
HSBC Securities (USA) Inc.
Jefferies LLC
J.P. Morgan Securities LLC
Mizuho Securities USA LLC
Morgan Stanley & Co. LLC
NatWest Markets Securities Inc.
Nomura Securities International, Inc.
RBC Capital Markets, LLC
Societe Generale, New York Branch
TD Securities (USA) LLC
UBS Securities LLC.
Wells Fargo Securities, LLC
—30—
Seems like a clunky way to get an economy going…
11. December 2020 at 04:31
This all makes sense, but there is no reason for a Fed.
1. The greatest period of economic growth in the USA occurred BEFORE the federal reserve was implemented.
2. The Federal Reserve destroys the value of the dollar by systematically penalizing those that try to save their money. Inflation is a tax, and the value of each one of our dollars — if not invested — declines.
3. The Federal Reserve is the antithesis to a free market. It’s attempting to centrally plan the supply of money, which is no different than trying to plan the supply of rice. Gulag Archipelago anyone?
4. Because of this nonsense it creates bubbles and busts.
5. The Federal Reserve is privately owned. NOT GOOD when you give profitable companies the ability to “PRINT” money.
6. Favors the “TOO BIG TO FAIL” ideology
7. Page 131 of GAO audit. Take a look at their secret lending practices and the banks that received the loans. Is that in the best interest of Americans?
8. The track record of failure is impressive.
And the most important:
9. The American people have NO POWER over the federal reserve. When the Fed makes error after error after error, the American people “WE THE PEOPLE” can only watch in horror.
11. December 2020 at 05:13
Postkey, The fact that banks create deposits when they lend, as explained in the Bank of England article you refer to, does not disprove Scott’s claim that increased reserves (in the hands of banks) will ENCOURAGE them to engage in the the latter “create loans and deposits” activity. Put another way, if a bank is desperately short of reserves, clearly it will be reluctant to grant loans, other than loans which appear to be very profitable.
By the way, I can’t get your link to the BoE to work.
11. December 2020 at 05:21
Scott,
I am still cautiously optimistic that we are going through a repeat of the 1930s and their intellectual aftermath. The Great Depression made socialism look good, as a method of organizing society for the greater good and prevent the very visible economic collapse in the West. Similarly, this past 12 years’ 1-2 of crisis (2008, now Covid), and the outrageous stupidity of Trumpism and nationalisms everywhere, makes once again socialism look attractive.
There is no question that right now, China and the rest of East Asia, embracing meritocracy and science based approaches to society, looks very attractive as a model for the rest of the world. Most importantly perhaps, East Asia throughout sends their best people into government, while the West seems to be sending their dumbest – temporarily, one hopes. But in the long run I believe that neoliberalism will again win out as it did in the 20th Century and for the same reasons. It is the best way to produce and distribute knowledge and innovation in society through merciless competition and societal openness.
Here is an example of what I mean. China got a vaccine first but still hasn’t widely used it, maybe because it hasn’t been tested thoroughly. And centralization comes with great risks – one single approach means it either all fails or all succeeds. But it’s the West that got the most advanced vaccine technology to work, from a standing start, in 8 months or so, and using several independent companies. The success of mRNA vaccine development can’t be understated. It is practically a moonshot. This makes the West and neoliberalism actually look really good again.
Another example. The only reason Trump was able to bully China on chips, is that China even now isn’t yet the proprietor or inventor of the most advanced chip technologies. It is just its most prolific manufacturer. China has innovation, but not (yet) invention on its side. We’ll see whether that will change in fintech and societal surveillance.
It’s no accident that so far, in world history, the comparatively freer societies have won out over the comparatively more organized ones (which by definition are less free). So yes, Trump’s chaos right now is the best advertisement for socialism world wide. Witnessing Trump was a repugnant spectacle for the world. But as they say, this too shall pass and the comparatively freer society that allowed Trump to happen, also allows greater things to happen in the end.
11. December 2020 at 05:24
As someone who straddles finance and academia and deals with bankers on a daily basis, I’m sceptical about bankers’ understanding in general.
@ Ralph, Don’t try to reason with Postkey. He/it is somewhere between a troll and a bot.
11. December 2020 at 05:30
Xu,
tired old canards that have been around at least since the 60s and haven’t gotten any truer since. I should know, I used to believe some of these. But I did end up reading this blog carefully and learned a lot, I recommend you do the same.
Postkey,
not that I’m an expert in these things but your arguments seem besides the point. Or did you really expect that banks move physical or logical dollars out of one saver’s account, say, mine, and moved them into one’s borrower’s account, say, yours? In that I now see 100 dollars less in my savings account balance so that you can see 100 dollars in your loan account?
11. December 2020 at 06:05
@ mbka, both Xu and Postkey are trolls and not worth responding to.
11. December 2020 at 07:26
I agree with the rest of the article but I don’t think I get the dell analogy.
A BestBuy salesman won’t need to check Dell Computer production data before making a sale but he will need to check his own store’s inventory. If he doesn’t have a Dell in stock he can’t sell it.
A ‘loan salesman’ at a bank has no such constraint. He can sell a loan to any qualified customer and immediately credit that customer’s account with the full loan amount with no need to check inventory. The bank can empower him to do this because they know they have processes to attract whatever reserves they may need to back that loan either by borrowing from the public or on the inter-bank market.
While both BestBuy and the bank will ultimately have to match supply and demand for their products I think there is much more wiggle room for the bank to do these things asynchronously than they is for BestBuy.
This I what I assume MMTers means when they say ‘banks don’t lend reserves’. (Unfortunately then then take this defensible statement and turn it into a stick to beat up people who take the kind of position occupied by Krugman).
11. December 2020 at 09:27
Ralph, try this 🙂
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf?la=en&hash=9A8788FD44A62D8BB927123544205CE476E01654
11. December 2020 at 09:37
Hi Tacticus: The shill for the plutocrats and the M.I.C..
“As someone who straddles finance and academia and deals with bankers on a daily basis, . . . ”
Yes, don’t try to argue with Bank of England or Prof. R.A. Werner. What do they know?
11. December 2020 at 10:17
mbka, Good points.
Market Fiscalist, The Bestbuy salesperson would just tell the customer “There’s nothing in stock but we’ll get more next week, and you can reserve one today.”
Similarly, a bank may need to get an interbank loan to insure it has enough reserves after expanding loans and deposits.
11. December 2020 at 10:19
Postkey, I’m guessing that you don’t understand what Krugman means when he says “it’s a simultaneous system”.
11. December 2020 at 10:59
Guess away. 🙂
11. December 2020 at 11:50
Postkey, I gave you the benefit of the doubt. It would be far worse if you did understand and chose not to respond to the argument.
11. December 2020 at 12:00
[…] I explain in this post, the injection of new base money by the Fed (initially as bank reserves) sets in motion a series of […]
11. December 2020 at 12:15
[…] I explain in this post, the injection of new base money by the Fed (initially as bank reserves) sets in motion a series of […]
11. December 2020 at 12:18
Scott said: ‘The Bestbuy salesperson would just tell the customer “There’s nothing in stock but we’ll get more next week, and you can reserve one today.”
Similarly, a bank may need to get an interbank loan to insure it has enough reserves after expanding loans and deposits.’
But isn’t that the significant difference ? The Bestbuy salesperson can only sell stock he current has otherwise he has to tell the potential customer to come back later, while the loan salesman can sell a loan without ever needing to even check stock?
On that basis one could justify the statement ‘Banks don’t lend out reserves’ but not the statement ‘Electrical good stores don’t sell from computer stock’ .
11. December 2020 at 12:52
It matters not what Krugman says. If you had seen the exchange with S. Keen you would know that.
I’ll give you the benefit of the doubt that you have not seen that exchange?
11. December 2020 at 12:54
“The Bestbuy salesperson can only sell stock he current has otherwise he has to tell the potential customer to come back later, while the loan salesman can sell a loan without ever needing to even check stock?”
Good point. I think that that ‘hits the nail on the head’.
11. December 2020 at 14:50
‘More reserves can lead to more loans in one of two ways. In the Keynesian model, more reserves lead to lower interest rates on loans, and this encourages more lending. In the market monetarist model (my view), more reserves leads to more NGDP via the excess cash balances effect. As NGDP rises, firms and individuals wish to borrow more money.’
Would it be accurate to say what actually happens is that the fed indicates it will target a lower interest rate at which banks will lend to each other. Banks then tell their lending guys that they can start to offer loans at a lower rate of interest (and maybe they will also buy other financial assets that they would not have previously wanted to buy) and that as this plays out the fed will use OMO to buy bonds from banks to ensure there are the right quantity of reserves in the system to backup all this additional lending and other bank activity ?
If so, then this would be consistent with the ‘banks don’t lend reserves’ meme and make the Keynesian model look more accurate as a description of reality. However if the CB did things differently and just went out and bought and sold bonds in order to hit an NGDP target and didn’t care about an interest rate target things would look more like the market monetarist model.
In both modes of possible fed operation the same underlying monetary processes would be at work and these are those processes that underlie MM theory.
11. December 2020 at 15:22
[…] I explain in this post, the injection of new base money by the Fed (initially as bank reserves) sets in motion a series of […]
11. December 2020 at 18:15
Scott,
I don’t get your Dell PC example.
I don’t understand how you can distinguish so rigorously between “driven by supply” and “driven by demand”.
You look at the “correlation” between quantity and price. Really? And then what. I don’t get how you can conclude from this that it *must* be driven by demand.
It sounds more like an artificial separation to me.
It also sounds a bit like the chicken-and-egg dilemma in my ears. Are you trying to separate something that in reality cannot really be separated that rigorously?
He seems to mean that it’s a two-way system going a million times back and forth, while you seem to say that it’s a system with a million effects but that the (original) cause is basically one-way. No?
This must be the first time in a long time that I have to agree a bit more with Krugman.
11. December 2020 at 18:16
Edit: “that it must be driven by supply“
11. December 2020 at 19:46
Christian,
things can both be simultaneously interacting and one-way in causality. A wildly interesting demonstration of that is the hydraulic model of the economy https://en.wikipedia.org/wiki/Hydraulic_macroeconomics . Hydraulics is nice because it is intuitively clear that adding water on top of some water supply system raises pressure near-instantly everywhere. That is the reasoning, both for money reserves and the Dell example. Neither banks nor computer salespeople check the supply constantly. But they may very well be driven by its immediate effects.
The point is that no one in the whole system needs to know how it works in order to live in it, work with it, succeed in it. And that’s a point made in various form by Adam Smith, Friedrich Hayek, Ludwig von Mises, Bastiat, etc. That is your invisible hand right there. And because it’s driven by the unseen, we get bankers that don’t understand monetary policy and business people that don’t have a clue how the economy works, or even how competition works. The general public, don’t even get me started.
11. December 2020 at 19:51
Christian List notices that Sumner wears no clothes. It’s blindingly obvious that Sumner makes up definitions as he goes. Indeed Leon Walras (the economist, not the mammal) proved that supply and demand are flip sides of the same scissors, they both work in tandem, and to try and say “falling prices must mean rising supply” is an absurd form of Say’s Law. It doesn’t matter how much prices fall if there’s no demand. People won’t even use PCs as doorstops (they are too bulky) if prices fall to almost zero; to scrap them for the metal is also impractical as they are classified as hazardous waste. Without demand, there’s no supply for many specialized non-commodity goods. Keynes proved one thing however: nothing in modern economies is really needed, hence you can stoke demand to produce supply artificially, something Sumner still hasn’t lerned.
Sumner is similar to those stock market TV pundits who say: “stocks are rising (falling) due to too many buyers (sellers)” another logical absurdity.
11. December 2020 at 22:02
That PDF referred to above has this nugget of wisdom in there
“Whenever a bank makes a loan, it
simultaneously creates a matching deposit in the
borrower’s bank account, thereby creating new money”.
But is that a handwave, the size of a elephant in a tiny alcover everyone pretends to be not there?
“creating new money?” – how? I had 10. I loaned Scott 5. So Scott has 5 but I have 5 only now. Where in this “new money”?
Or am I supposed to understand that I had zilch. I have credited Scott 5 and I still have zilch? So this 5 is the new money that came out of nowhere?
12. December 2020 at 02:09
Yes, Anon, the new money comes from nowhere. It is created.
12. December 2020 at 06:25
People are asking, “What is money?”
I will tell you.
Something that can give you an immediate claim on output or assets.
A dollar bill means you can buy a Baby Ruth bar.
Money (electronic blips on a chip) in a bank account means you can buy a car.
A large enough chunk of money means you can buy a warehouse.
Interesting question: Why are people worried that too much government debt means we will have inflation? It means there is a large of amount buying power that is being held in abeyance. It cannot be spent. It is buying power that is locked up.
Even when government debt is liberated (though QE) it tends to bleed off into other investments globally, although no one really knows this for sure. People might sell their bonds to the Fed (through a primary dealer) as they plan to spend the money. That is, put an immediate claim on output.
Indeed if the world is glutted with capital, then QE might just “crowd out” other capital from the capital markets, and the owners of “crowded out” capital just spent the loot.
That puts a whole new light on QE.
12. December 2020 at 06:29
Anon
A bank simply credits a borrower’s account with the money when they make a loan. Banks have ability to create deposit money. A bank only needs to make sure that it has enough cash (if the borrower withdraws the money from his account in the form of cash) and enough reserves (if the borrowers transfers the money to the bank account of someone else with an account in a different bank), which is fairly easy in practice as it can always borrow reserves from other banks or from the central bank if it is short.
12. December 2020 at 07:56
re: “it’s a simultaneous system”
Take the “Marshmallow Test”: (1) banks create new money (macro-economics), and incongruously (2) banks loan out the savings that are placed with them (micro-economics).
Open market operations should be divided into 2 separate classes:
(#1) purchases from, and sales to: member commercial banks;
(#2) purchases from, and sales to: “other non-bank entities”:
(#1) OMO transactions of the buying type between the FRB-NY’s “trading desk” (the Central bank) and the member commercial banks directly affect the interbank demand deposit volumes in one of the 12 District Reserve banks without bringing about any change in the money stock.
The “trading desk” credits the master account of the clearing bank used by the primary dealer from whom the security is purchased. This alteration in the assets of the commercial banks (the banks’ IBDDs), increases – by exactly the amount the PD’s portfolios (or acting as dealer agents, NB’s portfolios), of Treasury and coupon securities was decreased.
(#2) Purchases and sales between the Reserve banks and non-bank investors directly affect both bank reserves (inside money) and the money stock (outside money).
Unlike Treasury issuance, because the belligerent bifurcation (the mis-aligned distribution of sales and purchases of debt by the FRB-NY’s trading desk and its customers/counter-parties is largely unpredictable, so too now is the volume and rate of expansion in the money stock. FOMC policy has now been capriciously undermined – by turning nonearning excess reserves into bank earning assets.
Interbank demand deposits were non-earning assets prior to October 2008 (when the banks minimized their non-earning assets between 1942 and 2008). So, the FED has emasculated its “open market power”, the power to create new money and credit.
This is in direct contrast to targeting: *RPDs* (reserves for private nonbank deposits), and by using non-borrowed reserves as its operating method (predating Paul Volcker’s October 6, 1979 pronouncement on the *Saturday before Columbus Day*), as Paul Meek’s (FRB-NY assistant V.P. of OMOs and Treasury issues), described in his 3rd edition of “Open Market Operations” published in 1974.
This adds up to an obdurate apparatus that the Fed cannot monitor, much less control, even on a month-to-month basis.
What the net expansion of the money stock will be, as a consequence of any given addition or subtraction in Federal Reserve Bank credit, nobody can forecast until long after the fact.
The capacity to lend does not equate to the opportunity to lend.
12. December 2020 at 08:11
It’s not just the bankers who don’t understand. And I asked Jeremy Blum if banks loan out deposits (liquidity risk and maturity transformation), then how does the money stock increase? He said through their undivided profits accounts. Jeremy Blum’s SA article “How Accurate Is Bernie Sanders’ Diatribe Against Big Banks?
Nobel Laureate Dr. Milton Friedman was also one-dimensionally confused. Couldn’t distinguish stock from flow.
See the Fed’s propaganda in their own “Bible”: by R. Alton Gilbert (retired senior economist and V.P. at FRB-STL) – who wrote: “Requiem for Regulation Q: what it did and why it passed away”, 2/1986 Review.
In his letter back to me on December 11, 1978 Gilbert wrote:
“Such savings are invested in many ways, including deposits at commercial banks.”
Never are the commercial banks intermediaries (conduits between savers and borrowers) in the savings-investment process.
Dr. Gilbert asked the wrong question. His implicit and false premise was that savings are a source of loan-funds to the banking system. Gilbert assumed that any potential primary deposit for the individual bank (actually derivative deposits, funds acquired from other DFIs within the system), were newfound funds to the banking system as a whole.
Thereby in his analysis, Gilbert also assumes that every dollar placed with a non-bank deprives some member bank of a corresponding volume of loanable funds.
Gilbert asked: Was the net interest income on loans/investments derived from “attracting” these savings deposits (viz., outbidding other member banks) greater than the interest attributable to the direct and indirect operating expenses of retail and this wholesale “funding”?
I.e., Gilbert assumed the DFIs were intermediary financial institutions, which matched savings with investments. Never are the DFIs middlemen in the lending process for either depositors or stockholders.
The confusion arises from a unique feature of the payment’s system; the whole (the forest) is not the sum of the parts (the trees) in the money creating process.
The question is not whether net earnings on CD assets are greater than the cost of the CDs to the bank; the question is the effect on the total profitability of the commercial banking system. This is not a zero-sum game. One bank’s gain is less than the losses sustained by the other banks in the System.
12. December 2020 at 08:24
Changes in total bank credit are almost exclusively reflected in changes in non-interest bearing and interest bearing deposits. The connection can be explained as follows: Gated deposits, rather than being a source of loan funds, are the indirect consequence of prior bank credit creation.
In our money and banking system time deposits are derived exclusively from demand deposits, either directly, or indirectly, via the currency route or through the DFI’s undivided profits accounts. With immaterial exceptions it may be said that as time deposits grow the primary money supply shrinks pari passu—unless offset by an expansion of Reserve Bank credit.
The source of time deposits is almost exclusively demand deposits, and the growth of demand deposits can be largely accounted for by the expansion of bank credit. That there is a close connection between aggregate bank credit and the aggregate volume of demand and time deposits can be verified by comparing the net changes in bank credit to the net changes in total demand and time deposits for any given period. Loans + investments = bank deposits and not the other way around.
In other words, the BOE’s explanation isn’t so elegant.
12. December 2020 at 08:29
What is money?
“Money” is the measure of liquidity; the yardstick by which the liquidity of all other assets is measured.
See: TOWARD A MORE MEANINGFUL STATISTICAL CONCEPT OF THE MONEY SUPPLY
Leland J. Pritchard First published: March 1954
https://onlinelibrary.wiley.com/doi/full/10.1111/j.1540-6261.1954.tb01204.x
12. December 2020 at 08:49
This error is universal. See e-mail:
Re: My comment: Savings are not a source of “financing” for the commercial bankers
Dan Thornton
Thu 3/9, 2:47 PMYou
See the graph below.
http://bit.ly/2n03HJ8
Daniel L. Thornton
D.L. Thornton Economics LLC
And large CDs aren’t even included in M2 (as in FOMC’s proviso “bank credit proxy” which used to be included in the FOMC’s directive during the period Sept 66 – Sept 69).
12. December 2020 at 11:15
Market Fiscalist, I’ve bought TVs that were currently out of stock and picked them up later.
(Of course nothing hangs on you agreeing with this analogy. The Bestbuy salesperson is confusing supply and demand shifts in either case.)
Christian, Very odd comments. You said:
“You look at the “correlation” between quantity and price. Really?”
Yes, really. This is EC101 as its been taught for the past 150 years.
You said:
“This must be the first time in a long time that I have to agree a bit more with Krugman.”
I thought I made it clear that I also agree with Krugman.
You seem . . . confused.
Anon, There’s no more base money but there’s more M1 and M2 money.
12. December 2020 at 12:21
At the risk of flogging a dead horse: Scott says ‘Of course nothing hangs on you agreeing with this analogy. The Bestbuy salesperson is confusing supply and demand shifts in either case.’.
Well, I am sure the advent of the WWW in the 1990’s did lead to a large shift in the demand curve for computers so Fred is actually right ! He is wrong to ignore that the supply curve has also shifted as indicated by falling prices but its not clear to me why this would be a systematic mistake made by a Bestbuy salesperson rather than just economic illiteracy on the part of Fred.
12. December 2020 at 12:23
It will be Nov. 2021 before prices return to anything like pre-covid-19 levels.
12. December 2020 at 14:19
–“More reserves can lead to more loans in one of two ways. In the Keynesian model, more reserves lead to lower interest rates on loans, and this encourages more lending. In the market monetarist model (my view), more reserves leads to more NGDP via the excess cash balances effect. As NGDP rises, firms and individuals wish to borrow more money.”–
How exactly do more reserves would lead to lower interest rates on loans? The lending process seems largely disconnected from reserves.
A bank will extend a loan to any creditworthy borrower so long as its capital levels are sufficient. It will do so whether it has $5 billion or $500 billion in reserves. More reserves are ultimately a slight negative for banks at current rate levels, as they lose money on them and the banking system as a whole can’t invest away their collective reserves. Bank A can use $1 billion of reserves to buy securities from Bank B, but Bank B will then see their reserves increase $1 billion (and Bank B will probably not want to sell as Bank B has a lot of excess reserves already).
To use the Best Buy analogy, it would be as if the Best Buy employees had a magic box that would just create a new computer on demand, whereas the normal manufacturing process just sent more computers into the warehouse for storage. Producing more computers in the traditional way wouldn’t generate any additional sales for Best Buy, as their process for customers is to pull one out of the magic box for every customer who walks through the doors and has enough cash. The computers would just add to inventory costs and make Best Buy a little less profitable. A manager at one Best Buy store might try to offset this by selling its inventory to another Best Buy, but Best Buy as a firm is going to be stuck with the same inventory and it seems unclear why the other Best Buy manager would want to increase his own inventory costs.
It’s possible that some banks will consider lowering the rates they charge or their credit standards in order to increase their loan balances to help offset the hit to net income from all of the reserves, but that isn’t the only lever they could use. Raising credit spreads or adding new fees would also be options, as would slowing employee compensation growth or paying out less to investors.
What am I missing?
I can see other effects from QE (e.g. The Fed buys a $5 million in treasuries and the seller will likely do something with the $5 million now in a deposit account, which down the line should increase both asset prices and good/service sales), but not via the bank reserve channel.
12. December 2020 at 16:11
“Now, think about what happens when the Fed makes an open-market purchase of securities from banks. This unbalances the banks’ portfolio — they’re holding fewer securities and more reserve ”
So, the banks choose to unbalance their portfolios? {their securities have risen in price?}
Then,
” and they will proceed to try to ‘rebalance’, buying more securities, . . . ”
At a higher price {there are fewer securities?}?
12. December 2020 at 18:29
Market, The price of PCs fell very sharply. That indicates that the supply increase was much greater than the demand increase. Read the post again, I never said demand did not increase at all, just that supply was the bigger factor.
Justin, You asked:
“How exactly do more reserves would lead to lower interest rates on loans?”
In the Keynesian model, more reserves reduce market interest rates via the “liquidity effect”. It’s possible that rates might rise due to the Fisher effect, but of course MMTers reject that mechanism.
You said:
“I can see other effects from QE (e.g. The Fed buys a $5 million in treasuries and the seller will likely do something with the $5 million now in a deposit account, which down the line should increase both asset prices and good/service sales), but not via the bank reserve channel.”
That’s actually closer to my (monetarist) view than it is to the Keynesian view. But keep in mind that if this happens it will boost NGDP, which will boost bank lending.
12. December 2020 at 19:41
Scott,
Thank you for clearing that up.
@mbka
Thank you for your comment. Money is not the problem. I agree with you on the money part. Money is quite simple in my opinion.
I was just baffled that Scott transfers his money observations on something as complex as PCs and then just by looking at quantity and prices.
I am still a bit baffled to be honest. I didn’t think so far that it could be as simple as Scott implies but I certainly hope that he is right, because that would be pretty cool. He certainly convinced me that I have underestimated the supply factor by a lot so far.
13. December 2020 at 01:08
” . . . which will boost bank lending.”
Good, as long as it’s the ‘right type’ of lending?
“ . . . the
35:26 true approach it is credit guidance
35:30 direct guidance of bank credit window
35:33 guidance also known as credit controls
35:35 sounds a bit harsher but it’s got credit
35:38 guidance is more in line and that’s
35:40 being the key tool used in Japan in
35:42 Korea and Taiwan and then adopted by
35:44 banks yelping in China to create the
35:47 Chinese economic miracle of high growth
35:49 and if you do that you will get your
35:53 high growth but if banks create credit
35:56 for asset transactions you will just
35:58 create these asset bubbles and banking
36:00 crises and higher inequality and all
36:03 these problems and that’s of course
36:04 what’s happening in most other countries
36:07 because the bank regulators have not
36:10 asked the banks to create credit for
36:15 productive purposes it’s quite
36:16 extraordinary you know the banks make
36:18 these key decisions but nobody’s told
36:20 them oh be careful when you make this
36:22 decision you should create credit and
36:24 lend mainly for productive purposes for
36:26 business investment for implementing new
36:28 technologies for increasing productivity
36:30 which creates jobs is non-inflationary
36:33 even at full employment you can have
36:35 more growth if you have productive
36:36 credit creation . . . “
https://www.youtube.com/watch?v=8FT-zyTX2nE&lc=z23dxvchbqzixx0rh04t1aokg5flnl0yyhzfwwshwgkubk0h00410.1540380500211044&feature=em-comments
13. December 2020 at 07:19
‘The price of PCs fell very sharply. That indicates that the supply increase was much greater than the demand increase.’
Does it always mean that? If the supply curve for computers was relatively horizontal and moved downwards while the demand curve moves rightwards and to a greater extent then you could still get falling prices even though demand has moved more than supply.
(Ok, the horse is not only dead but hamburger meat by now)
13. December 2020 at 09:20
Market, It’s the horizontal shifts that you want to compare, and the supply shifted much more to the right than demand.
And yes, the horse is almost dead now. 🙂
13. December 2020 at 09:24
@Scott
Scott said “mbka, good points”.
Here is what I believe mbka stated. He was making an analogy between the 1930s and now. First he said, “the Great Depression made socialism look good”—agree—He then says the last 12 years make Socialism look good. Maybe it does for some people——-but the last 12 years have done well—-at least compared to the 30s—-so I miss why the analogy works—a better analogy would have been the for 78-90 but Socialism was not high on the list.
He then adds a comment which presumably was meant to continue the point —-“the outrageous stupidity of Trumpism (which apparently is “nationalism”—as if “nationalism” were a well defined term—-I.e. as if it is a word without a large “continuum of meaning”)
Without arguing that Trump is not stupid——-the analogy is weak. What about 1968-1972? Was McGovern et al not a socialist style movement? As far as employment is concerned late 70s and 1980s is far better analogy than the 30s. Unemployment peaked in 82 and declined annually just as it peaked in 2009 (at same rate) and declined annually——don’t recall a socialist movement then
And we really did have an 11 year all time record in unemployment decline and we really did have an all time high increase in median household income in 2019 despite the stupid man
Did Trump screw up Covid? No idea. He was more right than Fauci on Vaccine timing. So we popped to 15% then popped down to 6.7% due to Covid. Whose philosophy was worse for economy? Newsome, Cuomo, Murphy or Trump? As we reach peak deaths season of course “Covid deaths” have rose.
How are their methods doing?
13. December 2020 at 10:03
I have no,idea why there is a strong minority who favor socialist style movement. We have periodically had these since at least the 30’s——unless one wants to count he “populist” Williams Jennings Bryan” who I don’t believe defined himself socialist—-but his silver movement was a debt forgiveness movement. In Europe of course such movements began in 1850.
The young tend to be more left wing—-perhaps the percentage of the young is higher than normal. While high school education appears more left than when I grew up—-it was clearly there. And I went to Catholic non-Jesuit HS.
Certainly college was not much different than today. While we did not have cancel culture in the sense of formal indictments by the official administration, a college Republican in late 60s and early 70s was clearly considered a weirdo. Therefore they kept silent—even to themselves. One certainly could not have an open conversation.
I did not identify with any political view per se—-was more of a “politics don’t matter”kind of guy—-although the left was appealing. Republicans—-I cannot remember any. I recall one student was going to Harvard Business School. I honestly thought that was really strange—-like he was strange. But if someone was going for a PHD in economics that was perfectly acceptable.
No—-the 30s are not in any way shape or form a good analogy to today. Maybe at the highest level of generality. But it is not good at all. Dust bowl, pro-Stalinism, pro—Fascism (before they became war machines) —-Nazis had themOlympics in 1936.
One thing was similar —-the Fed existed—-and it did not have a clue—-I like to believe the Powell years in real time (not like Bernanke after the fact) has made some improvement—but he is gone soon —-Yellen will chose his successor—-could be worse—-but it could be better—-but there will be a move toward getting some MMTers on the Fed.
13. December 2020 at 10:07
I have no idea why there is a strong minority who favor our socialist style movement. We have periodically had these since at least the 30’s——unless one wants to count the “populist” Williams Jennings Bryan who I don’t believe defined himself socialist—-but his silver movement was a debt forgiveness movement. In Europe of course such movements began in 1850.
The young tend to be more left wing—-perhaps the percentage of the young is higher than normal. While high school education appears more left than when I grew up—-it was clearly there. And I went to Catholic non-Jesuit HS.
Certainly college was not much different than today. While we did not have cancel culture in the sense of formal indictments by the official administration, a college Republican in late 60s and early 70s was clearly considered a weirdo. Therefore they kept silent—even to themselves. One certainly could not have an open conversation.
I did not identify with any political view per se—-was more of a “politics don’t matter”kind of guy—-although the left was appealing. Republicans—-I cannot remember any. I recall one student was going to Harvard Business School. I honestly thought that was really strange—-like he was strange. But if someone was going for a PHD in economics that was perfectly acceptable.
No—-the 30s are not in any way shape or form a good analogy to today. Maybe at the highest level of generality. But it is not good at all. Dust bowl, pro-Stalinism, pro—Fascism (before they became war machines) —-Nazis had the Olympics in 1936.
One thing was similar —-the Fed existed—-and it did not have a clue—-I like to believe the Powell years in real time (not like Bernanke after the fact) has made some improvement—but he is gone soon —-Yellen will chose his successor—-could be worse—-but it could be better—-but there will be a move toward getting some MMTers on the Fed.
13. December 2020 at 14:14
Another way to explain what happens when a bank makes a loan is to describe it in accounting terms. A bank loan is an asset to the bank, while deposits in the bank are bank liabilities. When a bank makes a loan, it does so by recording the loan as an asset and crediting the borrower’s bank account by the amount of the loan. There is no effect on shareholder equity for the bank.
Where the Fed comes in is that banks are required to hold reserves at a Federal Reserve Bank equal to at least ten percent of their demand deposits, and since the borrower bank account that received the funds is likely a demand deposit, the bank may have to come up with more reserves. Since 2008, however, the system has been awash with excess reserves, so this has not really been a constraint on bank lending for the last 12 years.
13. December 2020 at 20:36
Jeff, Whether something is a “constraint” is very different from whether something affects another variable. Reserves may not be a constraint on lending, but more reserves can lead to more lending, by boosting NGDP.
13. December 2020 at 22:32
Why is creating more reserves by purchasing treasury bonds from banks in the hope it leads to more lending a sensible policy? Why not purchase IOUs from the people begging at traffic lights in my city? They would almost certainly spend that immediately and they obviously could use the cash.
Serious question- why is it ok for the Fed to buy things from those who already have more money than they want to spend but it is not ok for the Fed to help out the people who really need the most help? Sometimes it doesn’t make sense to me.
13. December 2020 at 23:02
[…] I explain in this post, the injection of new base money by the Fed (initially as bank reserves) sets in motion a series of […]
14. December 2020 at 04:21
And how exactly do more reserves lead to higher NGDP?
14. December 2020 at 06:08
–“Why not purchase IOUs from the people begging at traffic lights in my city? They would almost certainly spend that immediately and they obviously could use the cash.”–
The Fed doesn’t give money to acquire financial liabilities, but financial assets. People begging generally don’t have any financial assets to purchase.
–“Serious question- why is it ok for the Fed to buy things from those who already have more money than they want to spend but it is not ok for the Fed to help out the people who really need the most help? Sometimes it doesn’t make sense to me.”–
Because the Fed isn’t giving anyone a gift. It is trading one asset for another of equal value. A $1 million bond position is replaced by $1 million in bank deposits, leaving the institution which sold the bond to the Fed no better off than before. The hope is that this transaction leads to future transactions (e.g. the institution with the $1 million in deposits uses it to pay employees, buy additional assets, make a new investment) which help boost economic activity, ultimately benefitting everyone.
14. December 2020 at 10:07
Thanks Justin. An IOU actually is a financial asset- just typically not a very highly rated asset. Lot of credit risk there. But the Fed wouldn’t necessarily care about getting paid back, well, except for the laws that say they have to. And I assume it is more likely the poor beggar at the corner is going to immediately spend the cash into the economy than the rich guy with a million dollar bond portfolio. And it is pretty clear who needs the cash more…so why not do some good deeds while you are going about implementing your monetary policies?
14. December 2020 at 15:55
Arilando, The idea that more reserves lead to higher NGDP is not controversial among economists, at least when interest rates are positive.
In the right margin of the blog I have a short course on money, if you want a more detailed explanation of the hot potato effect.
Jerry, Fed FOMC members are not necessarily even public officials. Do you want private sector bankers deciding how trillions of dollars in public funds should be allocated?
14. December 2020 at 16:35
No Scott. But I would not mind if you were part of that committee- I have a lot of respect for you even when I disagree. Why should we have private bankers not necessarily obligated to anything besides the interests of their firms deciding anything for whatever the public interest is?
But my question is a little deeper than that. Even if most would say it is naive. I know the world doesn’t work that way- but why not try sometimes to imagine a better world? Is buying financial assets from people and institutions who already have more money than they want to spend really the best way to adjust the economy?
14. December 2020 at 17:10
By the way, Brian Romanchuk has another response to some of your MMT posts here
http://www.bondeconomics.com/2020/12/sumner-and-endogenous-interest-rates.html
And then a brief response to my comment about your econlib post here
http://www.bondeconomics.com/2020/12/yes-mmt-is-not-monetarist.html
15. December 2020 at 00:01
Yes, thats right. Covid vacine is driven by supply. You are totaly right in your monetarist model. How about the real world?
15. December 2020 at 00:11
But, you can say that supply drives a demand but only in money, abstract values, not in real values. Supply of money drives demand for money. Supply of products is never driving demand for products.
Investment to produce is driving income that enables demand to be realized. It also drives demand for more loans, consumer loans.
Thus, loans for investment enables more consumer loans due to more wages/ income making them eligible for more loans. Thus supply of money in economy drives demand for money. Never does supply of products drive demand for it.
15. December 2020 at 00:15
Such theories where supply drives demand are very connected to suxh conspiracies as Covid is man made, fake, and as produced by farmaceuticals to create demand for vacine. Your theories peoffessor, drives trumpists. Are you proud of it?
15. December 2020 at 00:33
“monetary universe, somehow missed by generations of economists.”
I know that you do not want, under any circumstance, to see the proof of how economists missed such important part of economics but i am going to offer it for you. Just look at your textbooks, any show of government accounting? Any courses on gov accounting? The prevalence of Austrian school thinking on public debt shows what has filled the huge hole in economists thinking. Public discourse on gov debt tells you that you have missed any knowledge on gov accounting but you still feel entitled to teach those that have spent years to learn it on their own.
15. December 2020 at 09:36
Jerry, Thanks, I’ll take a look.
Jure, For both money and other goods, an increase in supply drives an increase in quantity demanded.
15. December 2020 at 14:28
ssumner
Your posts in “A short intro course on money” don’t seem to concern themselves at all with reserves vs other types of money, but simply simplifies it all to money.
16. December 2020 at 20:22
Arilando, In those posts I’m referring to the monetary base.
17. December 2020 at 08:57
DXY = 89.85 down -0.60 or -0.67%
That’s another problem with using money products as a monetary offset, they (1) decrease the real rate of interest, (2) have a negative economic multiplier, and (3) decrease the exchange value of the U.S. $. I.e., just the opposite of driving the banks out of the savings business.
17. December 2020 at 09:14
The evidence of inflation, contrary to the conventional wisdom, cannot be conclusively deduced from the monthly changes in the various specialized price indices. The price indices are passive indicators: for the average change; of a group of prices. They do not reveal why prices rise or fall.
Only price increases generated by demand, irrespective of changes in supply, provide evidence of inflation. There must be an increase in aggregate monetary purchasing power which can come about only as a consequence of an increase in the volume and/or transactions velocity of money.
The volume of domestic money flows must expand sufficiently to push prices up, irrespective of the volume of financial transactions consummated, the exchange value of the U.S. dollar (reflected in FX indexes and currency pairs), and the flow of goods and services into the market economy.
Monetary flows, volume times transactions velocity (proxy for inflation for > 100 years) shows an upcoming marked acceleration in prices:
6/1/2020 ,,,,, 0.61
7/1/2020 ,,,,, 0.65
8/1/2020 ,,,,, 0.68
9/1/2020 ,,,,, 0.68
10/1/2020 ,,,,, 0.76
11/1/2020 ,,,,, 0.87
12/1/2020 ,,,,, 0.91
1/1/2021 ,,,,, 0.95
2/1/2021 ,,,,, 0.92
17. December 2020 at 11:00
Neither economists nor bankers understand money. All monetary savings, income not spent, originate within the payment’s system. The source of interest bearing deposits is non-interest bearing deposits. There is a one-to-one relationship between time and demand deposits. An increase in TDs depletes DDs by an equivalent amount.
And the source of bank deposits (loans=deposits, not the other way around), can be largely accounted for by the expansion of Reserve bank credit.
That there is a close connection between aggregate bank credit and the aggregate volume of bank deposits can be verified by comparing the net changes in commercial bank credit to the net changes in total deposits for any given time period (which the MMT Bowery Boys can’t do).
In other words, the commercial banks cannot expand their earning assets by attracting something (derivative deposits) that they collectively already own. Since time deposits originate within the banking system, there cannot be an “inflow” of time deposits and the growth of time deposits cannot, per se, increase the size of the banking system.
But because of the economies of scale, the largest banks can outbid / redistribute the smaller banks’ deposits.
Leonardo Da Vinci said it best: “Before you make a general rule of this case, test it two or three times and observe whether the tests produce the same effects”.
“The only relevant test of the validity of a hypothesis is comparison of prediction with experience.” – Milton Friedman
Prima facie evidence:
(1) The 1966 Interest Rate Adjustment Act is prima facie evidence (lowered Reg. Q ceilings for just the commercial banks reversing the “credit crunch”).
(2) The DIDMCA of March 31st is prima facie evidence (caused the 1985-1996 Savings and Loan Association Crisis)
(3) The 1981 “time bomb” is prima facie evidence (produced 19.1% N-gNp in the 1st qtr. 1981)
(4) The 2012 expiration of the FDIC’s unlimited transactions’ deposit insurance is prima facie evidence (responsible for the “taper tantrum”)
(5) The introduction of the payment of interest on interbank demand deposits is prima facie evidence (resulted in the nonbanks shrinking by $6.2 trillion while the banks grew by $3.6 trillion, i.e., it destroyed the nonbanks who were rolling over short term repos to fund their earning assets)
(6) The September 2019 Repo Crisis is prima facie evidence.
17. December 2020 at 11:48
If the commercial banks were driven out of the savings business), their reduced loan volume and reduced bank earnings (because the FED would subsequently tighten monetary policy), if accomplished by an even greater reduction in bank expenses, will result in increased bank profits. And it is profits, not size, that is presumably the primary objective of bank management.
Data compiled by Joseph Aschheim for member banks, by size of bank, and by ratio of time to total deposits, revealed that: as the ratio of time deposits to total deposits rises:
(1) the ratio of total expenses to total earnings is higher;
(2) the ratio of net profits to capital accounts is lower;
(3) the ratio of net profits to total assets is lower;
(4) the ratio of dividends to capital accounts is lower; and
(5) the ratio of capital accounts to total assets is lower.
All these relationships ad up to one conclusion: “the higher the ratio of time to total deposits, the less profitable are banks of a given size group”.
But exactly the opposite policy was pursued. The increased loan volume and increased bank earnings were not offset by profits. The banks were allowed to grow faster. And their profits were reduced by a higher ratio of interest expense and consequently the accompaniment additional bad debt.
17. December 2020 at 12:10
The error is that economists can’t distinguish between money and liquid assets. The banks are credit creators, whereas the nonbanks are credit transmitters.
Savers never transfer their funds out of the payment’s system unless they hoard currency or convert to other National currencies. The typical ways to reduce the volume of bank deposits is for the saver-holder to use his funds for the payment of a bank loan, interest on a bank loan for the payment of a banks service, or for the purchase from their banks of any type of commercial bank security obligation, e.g., bank stocks, debentures, etc.
Bank-held savings are never transferred to the nonbanks; rather monetary savings are always transferred through the nonbanks. Indeed, as evidenced by the existence of “float”, reserve credits tend, on the average, to precede reserve debits. Therefore, it is a delusion to assume that the nonbanks can “attract” savings from the DFIs, for the funds never leave the payment’s system.
Savings flowing through the nonbanks increases the supply of credit, the supply of loanable funds, but not the volume of the money stock (a non-inflationary relationship). There is just an exchange in the ownership of pre-existing deposit liabilities in the payment’s System – a transaction’s velocity relationship.
There is one and only one way to activate monetary savings (and all monetary savings originate within the payment’s system), and that is for saver-holders, to spend/invest either directly or indirectly outside of the banks.
If savings are “lent” (shifted from other derivative deposits), to the commercial banks there is no change in the volume of deposits, no change in the volume of assets, nor any change in the volume of excess reserves. The only thing that has taken place is the passive or negative change of total inactivity of the deposits.
Savings transferred through the nonbanks (financial intermediaries), activate monetary savings.
Velocity has declined since 1981 (the culmination of the “monetization” of time/savings deposits, e.g., the daily compounding of interest). This is because an increasing percentage and an increasing volume of savings have been impounded in the payment’s System.
Unless savings are activated, put back to work, completing the circuit income and transaction’s velocity of funds, a dampening economic impact, a deceleration in money velocity, is engendered and metastases, resulting in secular strangulation since 1981 (not because of robotics, not because of demographics, not because of globalization, not because of monopolization).
As the 1959 economic syllogism posits:
#1) “Savings require prompt utilization if the circuit flow of funds is to be maintained and deflationary effects avoided”…
#2) ”The growth of commercial bank-held time “savings” deposits shrinks aggregate demand and therefore produces adverse effects on gDp”…
#3) ”The stoppage in the flow of funds, which is an inexorable part of time-deposit banking, would tend to have a longer-term debilitating effect on demands, particularly the demands for capital goods” (CAPEX)
17. December 2020 at 14:30
Jerry, That post by Brian Romanchuk doesn’t really address the issues I raised.
17. December 2020 at 15:15
re: “The Natural Rate of Interest is Zero”. MWW have a lot to learn.
And there is no such animal as “Rstar”— Wicksell’s neutral or natural interest rate at which investment fully absorbs saving at full employment”.
Frictionless financial perpetual motion requires that, income not spent (monetary savings, commercial bank-held savings, the upper income quintiles’ savings) is quickly reintroduced into the economy, completing the circuit income and transactions’ velocity of funds (*circular flow*), thereby sustaining and promoting economic momentum.
As @Danielle Dimartino Booth, in her book, gets backwards: “Fed Up”, pg. 218
“Before the financial crisis, accounts were insured up to the first $100,000 by the FDIC. That limit kept enormous sums *in the shadow banking system* (which was a good thing)