tag:blogger.com,1999:blog-3210378500200629631.post8024656819026212329..comments2023-11-06T00:09:38.672-08:00Comments on Mase: Economics and Finance: "We don't know what we are doing"--the FedMase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.comBlogger6125tag:blogger.com,1999:blog-3210378500200629631.post-48375736874193207092010-08-13T10:49:41.878-07:002010-08-13T10:49:41.878-07:00(6) Consumers have been tapping their savings (now...(6) Consumers have been tapping their savings (now their largely tapped out). In the process, bank customers have been shifting their balances from interest bearing savings accounts into primarily -demand deposits. This represents, for the most part, a one-time transaction, from non-m1, into m1 deposit classifications. <br /> <br />The Great Recession’s dis-savings is analogous to the "time bomb" that took place in the 1st qtr of 1981 (with the widespread introduction of ATS, NOW, & MMMF accounts which produced 19.2% increase in gNp in the 1st qtr). It is a velocity relationship. <br /> <br />After people have initially dipped into their accumulated savings, and after a time lag, the effect of this liquidation and their spending behavior, eventually has to die out. <br /> <br />Because of the magnitude of the previous dis-savings (and nothing to replace it), and for this reason standing alone, we can expect another downswing.<br /> <br />I.e., this "dis-savings" proportionately, is akin to monster QE stimulus - that is now expiring. That is from a monetarist point of view, aggregate monetary demand is completely collapsingSalmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-3210378500200629631.post-82303485029286057082010-08-13T10:46:57.994-07:002010-08-13T10:46:57.994-07:00(5)THIS IS WHAT THE FED WANTS TO DO:
Under Public...(5)THIS IS WHAT THE FED WANTS TO DO:<br /><br />Under Public Law 109-351-OCT. 13, 2006<br /> <br />On October 1, 2011 the Financial Services Regulatory Relief Act of 2006<br /> <br />(under the "increased flexibility for the Federal Reserve Board to Establish Reserve Requirements) states in Section 19(b)(2)(A) of the Federal Reserve Act (12 U.S.C) 461(b)(2)(A) is amended:<br /> <br />(2) in clause (ii), by striking "and not less than 8 per centum," AND INSERTING "(and which may be ZERO)". <br /> <br />The FED has been trying to eliminate this tax [sic] for the last 31 years. But on the basis of any given increase in excess reserves (when reserves were binding), the member banks created a multiple volume of new money and credit and in the process acquired a multiple expansion of new bank earning assets (what a racket).Salmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-3210378500200629631.post-24723022375010405032010-08-13T10:45:43.107-07:002010-08-13T10:45:43.107-07:00(4) Duiring Dec 1990, the reserve ratio for non-tr...(4) Duiring Dec 1990, the reserve ratio for non-transaction (non-personal and time and savings deposits), was reduced from 3 percent to 0 percent. The reserve ratio on net euro-currency liabilities was also eliminated (reduced from 3 percent to 0 percent). <br /><br />Then, in April 1992, the reserve ratio on transaction accounts was reduced from 12 percent to 10 percent. <br /> <br />These legal reserve requirements were reduced or eliminated because "LENDERS HAD ADOPTED A MORE CAUTIOUS APPROACH TO EXTENDING CREDIT". This caution was exerting a restraining effect on the cost and availability of credit. To some types of borrowers. By reducing depository funding costs and thus providing borrowers with easier access to capital markets, the cuts in reserve requirements were designed to put the banks in a better position to extend credit. <br /><br />In particular the cut to the requirement on non-personal time deposits was aimed directly at spurring bank lending because these accounts are often used as a marginal funding source. Of course it was recognized that some, but not all, of the benefits stemming from reserve requirement cuts would likely be passed, over time, to borrowers and lenders.Salmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-3210378500200629631.post-36846062408460109142010-08-13T10:43:58.958-07:002010-08-13T10:43:58.958-07:00(3) Another overlooked deflationary development is...(3) Another overlooked deflationary development is that: when the dis-savers tap into their accumulated savings, and in the process, shift their prior balances, from interest-bearing deposits, into transaction deposits, the FED automatically applies a higher level of required reserves to these residual liabilities. <br /> <br />Given $10,000 of beginning (total), deposits (including all savings), and the transfer of $500 dollars into, at once, reservable liabilities (from prior savings accounts), the FED has unwittingly tightened credit conditions. <br /> <br />There are still $10,000 of total system deposists, however, now an additional $500 has been lumped with whatever transaction deposits there were in the beginning (before tapping into their savings), but then the member banks now must hold aside new idel required reserves deposits. <br /> <br />And the money supply is likely further reduced as a result (if this contraction is not offset with added Federal Reserve Bank Credit). See H.4.1 Factors Affecting Reserve BalancesSalmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-3210378500200629631.post-72103935984902689442010-08-13T10:41:38.681-07:002010-08-13T10:41:38.681-07:00(2) Consumer credit (revolving & non-revolving...(2) Consumer credit (revolving & non-revolving) has teadily declined from Dec. 2008 ($2,594,109T) to Jun. 2010 ($2,400,973T), or by ($193,131b), at the same time currency and demand deposits have steadily grown. <br /><br />So how does the volume of consumer credit decrease, while the M1 money stock increases? (every time a commercial bank makes a loan to, or buys securities from, the non-bank public, it creates initially, an equal volume of new money). Part of the answer must be dis-savings.Salmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-3210378500200629631.post-77883139860557924962010-08-13T10:39:53.276-07:002010-08-13T10:39:53.276-07:00(1)The BOG's remuneration rate @ .25% on exces...(1)The BOG's remuneration rate @ .25% on excess reserves (interbank demand deposits - IBDDs), held at the District Reserve Banks, owned by the member banks, now exceeds the Daily Treasury Yield Curve (from 6 months), to now all the way out to 1 full year. <br /><br />In effect, the FED has tightened monetary policy as IORs (interest on reserves), are the functional equivalent of required reserves. <br /><br />I.e., an increase in the volume of outstanding un-used IBDDs (other things being equal), acts just like an increase in the volume of required reserves would; both types of reserve balances decrease the legal lending capacity of the member commercial banks (by siphoning the funds out of the commercial banking system).<br /><br />Note: the Board of Governors of the Federal Reserve System (BOG) defines legal reserve requirements as: "the amount of funds that a depository institution must hold in reserve against specified deposit liabilities". Bank reserves are held as vault cash & as District Reserve Bank deposits.<br /><br />I.e., the FED has doubled the maturity distribution (based on Treasury securities), now covered under the level of the remuneration rate (in just the last couple of months).<br />By increasing the variety, and thus the volume, of competitive instruments and yields (vis a' vis IORs), the FED makes it less and less likely that the member banks will want to make new loans or purchase new investments (i.e., it is less and less likely that the money supply will grow). <br /><br />Note: every time a commercial bank makes a loan to, or buys securities from, the non-bank public, it initially creates an equal volume of new money.<br />This senario is contractionary. <br /><br />It belies a downward contraction, and a cumulative and reinforcing, deflationary spiral, i.e., credit destruction. It belies a full scale induced depression.Salmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.com