How much nominal overheating?

NGDP is up 12.4% over the past 9 quarters, an annual rate of 5.3%. That’s too high.

Nominal gross domestic income (NGDI) is up 16.1% over the past 9 quarters, an annual rate of 6.9%. That’s way too high.

Nominal total wages and salaries are up 17.1% over the past 9 quarters, an annual rate of 7.3%. That’s way, way too high.

Interestingly, NGDP and NGDI are exactly the same concept, measured in two different ways. The two figures would be identical if there were no measurement errors. Studies suggest that an average of the two is more accurate than either figure viewed in isolation, and future revisions of NGDP tend to move toward that average.

In this case, the average of NGDP and NGDI growth has been 6.1% over the past 9 quarters (i.e. from 2019:Q4 to 2022:Q1).

But labor compensation is probably a better indicator of macroeconomic stability than NGDP. So it’s worrisome that this figure is even higher (7.3% annual rate).

I usually focus on NGDP out of sheer laziness, and also because it is normally quite similar to NGDI. The past few years have been quite unusual, however, with a surprisingly large divergence between the two. In this environment it probably makes sense to take the average of the two, which suggests that demand overheating is even greater than I had assumed. This is especially the case given that a leading alternative (total nominal wages and salaries) shows even more overheating than NGDI.

The Eurozone is also suffering from high inflation, but their NGDP situation is quite different. Eurozone NGDP growth has averaged only 2.7% over the past 9 quarters, which is close to their trend. Of course NGDP is not a perfect indicator, and it’s possible that the Eurozone economy has also overheated slightly (unemployment recently fell to record lows), but it’s clear that the major problem in Europe is on the supply side. The Ukraine war has hit Europe much harder than the US. (Japan has not had any NGDP growth, and has relatively low inflation.)

I would add that while the ECB does not have a dual mandate, they do allow temporary deviations from 2% inflation when there are supply shocks. Here’s Philip Lane of the ECB:

[I]t should be recognised that the prevalence of downward nominal rigidities in wages and prices means that surprise relative price movements should mainly be accommodated by tolerating a temporary increase in the inflation rate, rather than by seeking to maintain a constant inflation rate that could only be achieved by a substantial reduction in overall demand and activity levels.[4] Since bottlenecks will eventually be resolved, price pressures should abate and inflation return to its trend without a need for a significant adjustment in monetary policy.

The logic underpinning a hold-steady approach to monetary policy is reinforced if the bottlenecks are primarily external in nature, caused by global disruptions in supply or a surge in global demand. Since monetary policy steers domestic demand, a tightening of monetary policy in reaction to an external supply shock would mean that the economy would be simultaneously confronted with two adverse shocks – a deterioration in the international terms of trade (generated by the increase in import prices) and a reduction in domestic demand.



45 Responses to “How much nominal overheating?”

  1. Gravatar of MSS1914 MSS1914
    23. June 2022 at 14:07

    What I find interesting is that the futures markets show the likelihood of further rate hikes lower than just a few days ago. The likelihood that the federal funds rate would be above 3.5% by January 2023 have fallen a decent amount in just a few days.

    To give just one example: Kalshi shows the likelihood down from 75% on June 21 to 59% today. Here is the link:

    Of course that is just one data point, with potential low liquidity on that website skewing the value, but still.

    Does the market or FED see something I don’t? What is causing the perceived need for tighter monetary policy to be less pressing in just the last few days?

  2. Gravatar of MSS1914 MSS1914
    23. June 2022 at 14:18


    Since it now appears that 2% annual inflation is the floor and not the average target, do you have any thoughts on what the average inflation rate going forward will be? How many and how large will the overshoots above 2% be? Or, is that simply impossible to predict – in which case the uncertainty must be bad for the market and the economy, no?

  3. Gravatar of Lizard Man Lizard Man
    23. June 2022 at 15:23

    Shouldn’t nominal wages be compared to inflation to see if real incomes are rising? A world with high inflation but also with high real income growth seems preferable to one with low inflation and low real income growth. Isn’t real productivity growth the thing that makes an economy good or bad? Why does inflation need to come down, if the inflation rate doesn’t impact the real economy? Won’t we just have lower inflation but even lower wage growth leading to the same fall in real incomes?

  4. Gravatar of Michael Sandifer Michael Sandifer
    23. June 2022 at 19:51

    If the Fed had been doing NGDP level targeting at roughly 4% using the S&P 500, they would have started tightening policy by March of 2021.

  5. Gravatar of Bob Bob
    23. June 2022 at 21:23

    We live in a world where people want wage increases, as they think too many things are unaffordable, yet they get mad when inflation is high, as if salary increases came from nowhere. The precursor to all this inflation was a major decrease in child poverty, but many would care little about the kids given the increase in prices.

    Either way, we should all be happy we are not in the executive right now. Governments of all stripes are now taking the blame for economic outcomes that they have little control over.

  6. Gravatar of Jeff Jeff
    23. June 2022 at 22:26

    > a world where people want wage increases

    Do people want wage increases or do they want *real* wage increases? Is that not related to the very title of this blog (“money illusion”)? This topic is the source of so much armchair psychologizing, endless non-sequiturs, and other assorted weak argumentation by economists. In any case, blaming the present situation on workers wanting wage increases seems absurd given that the original reason for the monetary expansion since 2008 was to bailout bad banks and buoy risk assets.

  7. Gravatar of Julius Probst Julius Probst
    23. June 2022 at 23:39

    Hi Scott,

    great post as usual.
    Chart 3 in our weekly newsletter shows that the divergence between GDP and GDI in constant prices is also at a record high

  8. Gravatar of Effem Effem
    24. June 2022 at 02:58

    The assumption that if NGDP is on-target any resulting inflation is the result of supply-side issues is suspect.

    Let’s assume there are no supply disruptions. Now lets assume the USA overstimulates but Europe remains on its NGDP path. The US will cause demand-side inflation, but Europe will (incorrectly) interpret its inflation as supply-side. How to reconcile global effects with domestic monetary policy?

  9. Gravatar of Matthias Matthias
    24. June 2022 at 03:47

    Effem, why would there be any global effects? Where there any global effects form Zimbabwean inflation?

    Japan seems to be having low or negative inflation just fine, even when other countries are having high inflation.

  10. Gravatar of Effem Effem
    24. June 2022 at 06:14

    Matthias, yes i think that’s the key question…curious what Scott thinks. I could argue if a country over-stimulates their currency simply weakens to negate any global effects.

    However is it possible that the scale and reserve-currency status of the US makes this a unique situation. It would seem odd that the US overstimulated AND experienced a rising USD, no? In that case, US excess stimulus does spill beyond its borders.

  11. Gravatar of sd0000 sd0000
    24. June 2022 at 07:06

    5-year 5-year is down to ~2.3, almost where it was in 2018.

    10 year breakeven is down to 2.5.

    These figures are back down to where they were before Russia invaded Ukraine.

    Virtually the entirety of the increase in rates in the past few months has been due to real rates increasing.

    Are we being too hard on the Fed?

  12. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    24. June 2022 at 07:49

    re: “Are we being too hard on the Fed?” Powell has had the luxury of history to “navigate by the stars”. The damage has already been done, just like when Volcker tightened during the Jan 1980–July 1980 recession. Powell tightened during a concurrent downswing.

    Powell: “With inflation at 40-year highs, we think that policy is going to need to be restrictive, and we don’t know how restrictive,”

    Powell drove inflation to 40-year highs. Powell also created the Sept. 2019 liquidity crisis.

    Economists don’t know a debit from a credit or money from mud pie.

  13. Gravatar of Michael Sandifer Michael Sandifer
    24. June 2022 at 09:42


    Yes, according to my model, the mean expected NGDP growth path is at 4.17% at the moment, which is very close to the multi-year pre-pandemic trend. Some market monetarists on Twitter agree with Scott though that we should run NGDP below that trend for a bit to offset the overshoot.

  14. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    24. June 2022 at 09:57

    Every recession since WWII, with the exception of Covid-19 downswing, has been due to large mistakes by the Federal Reserve. All of these recessions were predictable and preventable.

    Going forward it will become harder to escape making mistakes. Interest, the FED’s monetary transmission mechanism, is the price of credit. The price of money is the reciprocal of the price level.

  15. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    24. June 2022 at 14:39

    re: “the mean expected NGDP growth path is at 4.17% at the moment,”

    Then the FED doesn’t have to raise rates again.

    Contrary to Bankrupt-u-Bernanke: “Money is fungible”…“One dollar is like any other”, pg. 357 in “The Courage to Act”.

    Keynesian economists have achieved their objective, that there is no difference between money and liquid assets. Take the MSB balances (a nonbank), in member commercial banks since the inception of the FED up until March 31st 1980. They were not included in M1 up until that point.

    Take Savings and Loan & Credit Union deposits in member commercial banks as of March 31st 1980. They are included in M1, overstating the money stock.

    The FED’s Ph.Ds. don’t know the difference between banks and nonbanks.

  16. Gravatar of agrippa postumus agrippa postumus
    24. June 2022 at 16:13

    breakevens are perversely counter-indicative when fear of inflation is high: greater premiums drive down the supposed break even. beware what you observe as informative in interesting times.

  17. Gravatar of David S David S
    25. June 2022 at 02:49

    Based on some of the projections Scott lays out for NGDP I should really amend my Hypermind bet downward. I think I’ll wait a month before I do that.

    A side benefit of the recent market turmoil is that the crypto bros have been really quiet. I still think the Fed should continue researching a CBDC.

  18. Gravatar of Marmot Marmot
    25. June 2022 at 04:56

    “given that the original reason for the monetary expansion since 2008 was to bailout bad banks and buoy risk assets.”

    When people say this it always cracks me up.

    No, it wasn’t to bail out the banks, it was to bail out the people on main street whose money was in the banks and who were holding the assets directly or indirectly, just as the bail out of GM wasn’t to bail out GM’s management, who was fired, but to bail out the workers at GM and dozens or hundreds of suppliers.

    Are Amazon warehouse workers really calculating their real wage increases?

  19. Gravatar of ssumner ssumner
    25. June 2022 at 07:38

    MSS1914, Hard to say—it depends how many mistakes they make in the future. Certainly more than 2%.

    Lizard, You said:

    “Shouldn’t nominal wages be compared to inflation to see if real incomes are rising?”

    That might be interesting, but it has no bearing on monetary policy—the subject of this post.

    Julius, Great post.

    Effem, I define “supply side effects” as any increase that occurs when NGDP is on target. Others may have different definitions.

    sd0000, “Are we being too hard on the Fed?”

    No. The Fed is supposed to be targeting the average inflation rate (albeit allowing supply-side inflation). If they had done so, we would not be worried about the prospects for a recession right now.

    Agrippa, I agree with that, but we have to do the best we can with the data we have. The nice thing about average inflation targeting is that actual inflation is also useful in evaluating whether policy is too expansionary.

    Marmot, Yes, and money was not even expansionary after 2008.

  20. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    25. June 2022 at 09:21

    Back in the 70’s and 80’s a deluge of new money sent the markets reeling (like the money supply errors in Oct. 1979). A surge in new money was followed by a rise in the transaction’s velocity which ratcheted up AD. Jerome Powell is old enough to know better.

    NGDI and NGDP are subsets of money flows. Long-term money flows have never been this high. In fact, they will only touch the old historic highs by the 4th qtr. of 2022. Powell is tightening into a deceleration in money flows.

    People clearly don’t recognize the disastrous monetary reforms perpetrated by Powell. Countries that removed legal reserves then added higher capital requirements.

    The Repo fails “to deliver” and “to receive”, are evidence of a collateral shortage – which is explained by the remuneration of IBDDs. Who do you think is selling their T-Bills to the FED? And I’ve never seen anyone explain it that way.

  21. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    25. June 2022 at 12:08

    Powell has hidden the fact that $2,473,338 O/N RRPs reduce the assets on the FED’s balance sheet.

    “The bond underlying the repo transaction is still recorded on the Fed balance sheet”

    “Of course, if the buyer of a reverse repo or a security sold by the Fed is a nonbank and pays for the purchase using its bank account, the money supply is directly affected.” And 90% are purchased by nonbanks.

  22. Gravatar of agrippa postumus agrippa postumus
    25. June 2022 at 16:33

    “inflation expectations” is junk economic science, like bite mark analysis or shoe print analysis. economic decisions are made on what inflation is now; leave the “expectations” gamble to the punters.

  23. Gravatar of ssumner ssumner
    25. June 2022 at 17:43

    Agrippa, “economic decisions are made on what inflation is now; leave the “expectations” gamble to the punters”

    So people buying 30-year bonds with 3% yields are basing their decision on the current 8% inflation rate, not what they think inflation will be over the next 30 years? Whatever you say.

  24. Gravatar of dtoh dtoh
    25. June 2022 at 22:05

    What I don’t get is a) LFRP is still a full point below the pre-Covid level, and b) it’s nearly impossible to hire low skill/low wage workers.

    To me that screams structural/supply-side inflation.

  25. Gravatar of Rodrigo Rodrigo
    26. June 2022 at 06:57

    Krugman has an interesting tweet on inflation expectations. He claims things might not be as bad as most people now believe they are.

    Do you still see a path to pre pandemic type nominal growth without the pain of a prolonged recession or period of higher than average unemployment? Seems the consensus has now shifted to a hardish landing rather than softish landing.

  26. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    26. June 2022 at 07:16

    re: “Whatever you say” agrippa postumus is right.

    Inflation expectations “is the simple difference between yields on nominal Treasury securities and yields on inflation-adjusted Treasury securities”. 2021’s expectations did not accurately predict the change that occurred in 2022.

    Using interest rates as the monetary transmission mechanism is antithetical to the management of the money stock (as 2021’s disconnect demonstrates).

    It would be more accurate to measure the transaction’s velocity of money or bank debits to deposit accounts (the truistic measure of expectations).

  27. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    26. June 2022 at 08:01

    re: “No, it wasn’t to bail out the banks”

    It was more than just the depositors. Bank credit shrank for the 1st time since the GD, from 9245.5762 on 10/22/2008 to 8602.7394 on 3/24/2010.

  28. Gravatar of Kevin Kevin
    26. June 2022 at 08:36

    Hey Scott! I’m sorry if this isn’t the right place for this question, or if you’ve addressed it elsewhere. My question is: I’ve seen you suggesting that, for example, the NGDP growth target should be reduced when underlying real growth is expected to be lower. E.g you’ve said that maybe NGDP growth should be targeted at 4 or 4.5 percent. In this post you mention an alternative to NGDP for a measurement of nominal overheating, and I know you’ve mentioned, as you do hear, total nominal wages, or nominal wages per capita.

    However, to me one of the benefits of NGDPLT is the rock solid predictability of the nominal size of the economy over time. I know you don’t have all the answers, but if you were writing a Fed regime, how often would you want them to adjust the future path of NGDP, and in what circumstances? How big of change in expected RGDP growth? How big of a divergence from nominal wages/capita? Are there market indicators they could use to make these determinations?

    I don’t ask as a gotcha, it just worries me to think that there would be good reasons to introduce more discretion into what is otherwise an almost entirely deterministic policy in NGDP, which is to my mind one of, if not its foremost, benefits.

    Thanks for your thoughts as always. I continue to love this blog and have been reading continuously since the beginning.

  29. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    26. June 2022 at 09:23

    Virtually every reform since the FED was established in Dec. 1913 was for the bankers, not the depositors, not the public.

    If Powell wanted to stop inflation, he would re-institute reserve requirements against his new definition of transaction accounts (Regulation D), or what Nobel Laureate Dr. Milton Friedman advocated, December 16, 1959. Powell doesn’t give a damn about inflation.

  30. Gravatar of ssumner ssumner
    26. June 2022 at 10:32

    dtoh, Yes, there’s lots of supply side inflation and lots of demand side inflation. No doubt about that.

    Rodrigo, I’ll do a post on that later today.

    Kevin, I’d actually prefer a NGDP target that did not change over time. My previous comments about adjusting for changes in trend growth reflected the fact that the Fed has decided on a 2% inflation target. Given that decision (unwise in my view) NGDPLT would have to be occasionally adjusted to reflect changes in trend growth.

    I’d be thrilled with either approach, but prefer not adjusting NGDP growth targets.

  31. Gravatar of agrippa postumus agrippa postumus
    26. June 2022 at 15:50

    that is exactly the punter. for the consumption/labor side, its the inflation now, not the punters “expectations”.

  32. Gravatar of foosion foosion
    27. June 2022 at 10:11

    Scott, what do you think of Cochrane’s latest,, in which he says the Fed can’t cure inflation on its own.

    It’s a current editorial in the WSJ in case the link doesn’t work.

  33. Gravatar of ssumner ssumner
    27. June 2022 at 12:40

    foosion, I don’t agree. The Fed is always 100% to blame for any excess inflation. Fiscal policy has been reckless, but it didn’t cause this inflation.

  34. Gravatar of foosion foosion
    27. June 2022 at 16:31

    Scott, the real problem with the article is that it’s widely believed.

    Cochrane’s views on macro tend to be right wing talking points rather than solid economics, so far as I can tell.


  35. Gravatar of John Papola John Papola
    27. June 2022 at 17:29


    A few questions.

    First, doesn’t the discrepancy between these nominal aggregates create some problems for nominal income-based policy targeting? I suppose the answer is: yes, but they’re still better than inflation as a target and WAY better than interest rates.

    Second, am I missing something, because Cochrane’s theory seems like bullshit to me. The collapse of inflation in the 1980s was accompanied by substantially larger deficits than were being run during the great inflation of the 1970s. Cochrane would have us believe the opposite is true. I bet there’s plenty of examples just like that.

    The only “fiscal theory of the price level” that makes any sense to me is not actually fiscal economically, but POLITICALLY: crazy deficits prompt money printing in an effort to inflate them away. But it’s still the money printing that causes the inflation, not the deficits, right?

    For every debtor, there’s a creditor, right? Isn’t debt generally neutral in terms of inflation and aggregate nominal spending? Maybe re-patriation of foreign dollar reserves through debt issuance could work like the specie flow mechanism under a gold standard? What am I missing here?

    I don’t see why we need to look any further than the size of the Fed’s balance sheet to understand what’s going on right now.

    Federal deficits:

    Fed Balance sheet:

  36. Gravatar of Nick S Nick S
    27. June 2022 at 21:23

    Scott – The only part of that monetary base that the Fed can control are the amount of reserves that banks hold with them. If the Fed buys bonds via crediting banks with fresh reserves, the monetary base increases, however, this is not inflationary. What is inflationary, is when banks transform those reserves into deposits via lending. As seen in the graph in the link below, money getting “into the system” post pandemic, was not a function of deposit creation from bank lending, but rather from government spending (PPP stimulus, etc). As seen in the graph, “currency in circulation” and “consumer bank loans” have pretty much been on top of each other ever since they have been measured. However, you see a large divergence post pandemic , where “consumer bank loans” decrease and “currency in circulation” increases. The difference can be attributed almost entirely to the fiscal PPP program (also seen in the graph). Therefore, the fiscal authorities created this inflation, not the Fed. And I use the term “inflation” loosely, as what we are experiencing is not true inflation caused by pure monetary phenomenon, but rather temporary price shocks driven by supply disruptions and aforementioned govt stimmy.

  37. Gravatar of Jeff Jeff
    27. June 2022 at 23:03

    Sure, inflation expectations matter for bond prices, but does anyone really know what happens when inflation expectations consistently underestimate actual inflation by a substantial amount? Is there a “clapback” phenomenon when the market finally awakes to reality?

    For most of the past year, the Fed seemed to have adopted the attitude of a philandering husband who thinks that any amount of cheating is fine as long as “cheating expectations remain anchored”.

    I doubt that is a game that can be successfully played for very long. I’d wager that said husband’s only notification that “cheating expectations” have become “unanchored” will arrive in the form of an especially acrimonious divorce.

    Whether the Fed can yet be sufficiently and sincerely contrite to avoid such a fate seems highly questionable.

  38. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    28. June 2022 at 07:22

    re: “If the Fed buys bonds via crediting banks with fresh reserves, the monetary base increases, however, this is not inflationary”

    That’s false. The money multiplier is determined by bank vs. nonbank participation. 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).

  39. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    28. June 2022 at 07:52

    re: “was not a function of deposit creation from bank lending, but rather from government spending (PPP stimulus, etc)”

    A new financing operation where the funds are borrowed from the nonbank public results in an outlet for savings, and no change in the money supply and in the volume of bank reserves. But it does affect the velocity of money.

    But since the FED pegs interest rates, it must monetize a large volume of these fiscal helicopter drops. The problem was that Powell did not sterilize his purchases. In fact, Powell did the opposite, he eliminated required reserves.

  40. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    28. June 2022 at 08:30

    Other than OMOs, whenever the banks buy Treasury and MBS securities from the nonbank public, they also create new money:

    Given the early jump in Reserve Bank Credit, from 4449.834 on 2020-03-01 to 6846.866 on 2020-05-01 the banks had a lot of extra lending capacity:

    Given the deterioration in credit worthy borrowing during Covid-19, the banks redirected their lending to safer assets. And the FED promoted treasuries by removing the SLR May 15, 2020 through March 31, 2021

  41. Gravatar of ssumner ssumner
    28. June 2022 at 08:31

    foosion, Plenty of economists on the left also believe that fiscal stimulus can be inflationary. Indeed, if anything they are more likely than monetarists to believe that.

    John, I agree that the FTPL is inconsistent with the data.

    Yes, NGDP data does need to be improved. It’s less a problem than it seems due to the fact that any NGDP targeting regime would target future expected NGDP. Future revisions tend to eliminate much of the discrepancy. The government should probably report official NGDP as an average of the two approaches.

    Nick, You said:

    “The only part of that monetary base that the Fed can control are the amount of reserves that banks hold with them.”

    Just the opposite. The Fed controls the total base, and the public determines the split between currency and reserves. Your other comments have no bearing on whether the inflation was caused by fiscal or monetary factors.

    Jeff, You said:

    “Sure, inflation expectations matter for bond prices, but does anyone really know what happens when inflation expectations consistently underestimate actual inflation by a substantial amount? Is there a “clapback” phenomenon when the market finally awakes to reality?”

    Odd question. Of course we know! Some of us actually lived through the 1970s.

  42. Gravatar of Nick S Nick S
    28. June 2022 at 21:59

    Spencer – yes I agree with your plumbing analysis, but this is still not inflationary. Like you said, reserve bank credit expanded and was put into safe assets (ie tsy and MBS, and plain old bank reserves). Additional credit was not extended. In fact, if you look the the below graph, the increase in commercial bank TSYs, MBS, etc, an increase of ~900bn to 1 trillion bucks, is all explained by the PPP program receivables from the govt. At that point, not coincidentally, did the feds RRP balance explode, almost exactly offsetting the 1.8-2.2ish trillion in these tsy, MBS, commercial bank holdings. Point being, all of the “money” that was created was either housed on bank balance sheets, or pushed to money mkt funds, which just invested the cash with the Fed in RRP. No traditional bank credit in the form of consumer loans were substantially made.

    Scott- how many times can I make the point that the Fed can ONLY control bank reserves, without you countering with a rational argument? Banks create money via lending. The Fed cannot lend to non fed bank members directly, hence it cannot control anything besides bank reserve money, which is not real money. The public can only take part in money creation when they take out loans, and banks need to be willing to make said loans, which they have not been doing post GFC.

  43. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    29. June 2022 at 06:58

    Nick: The increase in the narrow money stock, demand deposits, looks like hyperinflation as compared to the historical gains. It is the FED’s job to control the volume and growth of the money stock.

    Covid-19 inflation is similar to the Vietnam conflict. The higher fiscal deficits were validated / monetized by the FED. This resulted in lower real rates of interest driven by an excessive expansion of Reserve Bank credit. If savings were utilized, then there would have been higher real rates of interest.

    The primary broker-dealers are the counterparties #1: “who can make a bid for newly-issued government securities” and #2: “trading counterparties of the New York Fed in its implementation of monetary policy”.

    Thus, the primary dealers act as agents for nonbank entities / 3rd parties (creating new money + reserves). The primary dealers not only sell to the trading desk (creating reserves) but buy securities from 3rd parties (creating new money + reserves).

  44. Gravatar of Nick S Nick S
    29. June 2022 at 21:17

    Spencer- I understand the mechanics between primary dealers, the Fed and 3rd parties. As seen in the below graph, almost all of the demand deposit creation was offset by the Feds reverse repo program, who’s participants are mainly money market funds. So the 3rd party non-banks you are referring to, are not private, shadow money creating entities, but merely money mkt funds who are parking cash right back with the Fed (Money Mkt Fund sells TSYs to dealer —> dealer sells to Fed—> money mkt fund credited with demand deposit—-> money mkt fund needs to repurpose cash/demand deposits, so it invests in reverse repo with the fed (ie. makes the Fed an overnight loan collateralized by Tsys). If the feds RRP facility didn’t exist money mkt funds would have pushed rates negative.

    So most of the “money” that was created, never made it into the private banking system and was allowed to multiply via the traditional credit extension/loan expansion.

  45. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    30. June 2022 at 08:51

    Thanks. I see why you point out the offsetting balances. The decline in a large number of stocks, March 2021, started with the uptake in the O/N RRP facility.

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