What's goin on?

[Jean Erick]

 

          The attachment is a three line graph made from FRED graphs by simply printing over one paper with the three different

Graphs.

 

1. Long line, starting high and ending low is the multiplier
2. Long line, starting low and ending high is M1.
3. Shorter line, with abrupt changes up/down is base money.

 

SO.  ?

 

Question:  When the Fed (not Treasury) sells treasuries, do they record the money received on their books or write it off (reverse of creating it).

 

     If less base money is being created, does the law of supply and demand cause the price (value) of the dollar to rise?

I think the dollar value is rising.

Is base money now an investment, people (banks) holding it because it is increasing in value?

Could this be the base cause for the repo issue of late?

As the only way base money can be off our books is for it to be used to pay down foreign debt, we have that

and the double affect of a rising dollar favoring imports.??

 

 

[Joe Leote]

James,

I can't make much sense of your chart as printed or described. Do you have the FRED series names so I can make a chart online for analysis?

Question:  When the Fed (not Treasury) sells treasuries, do they record the money received on their books or write it off (reverse of creating it).

Answer: When the Fed sells treasury securities the money received would be a payment of reserve balances. To receive a payment of reserve balances Fed makes a debit entry which decreases the reserve balances in the name of the payor bank or the name of the clearing bank for the nonbank payor. This is what you describe as the "write it off" (reverse of creating the reserve balances).

Regarding your questions about the float or stock of base money this term is defined as the sum of reserve balances and currency in circulation. Fed would not normally sell Treasury securities in the open market unless it wants to reduce the level or float of reserve balances owned by the aggregate bank sector as a matter of monetary policy implementation. Fed would purchase Treasury securities from nonbanks to add reserve balances to the aggregate bank sector balance sheets. This could be for the purpose of quantitative easing, or ordinary monetary policy, or to offset the net withdrawal of currency in a more traditional policy regime where the Fed is forcing banks to hold a minimum level of excess reserves.

I don't know an answer to your other questions as posed. The value of money is its purchasing power in terms of a basket of goods. So your question seems to be about the link between base money and inflation or deflation of the price of the basket of goods. There are a number of theoretical and practical problems with efforts to calculate or measure the price of a basket of goods over time. The level of inflation in the whole economy should go up when there is a shortage of resources available, and expansion of credit in the bank and nonbank dealer networks, and a significant level of deficit spending by governments. The Fed can kill a rampant inflation, in my opinion, only by a sharp shock to the bank reserve payment system, causing some banks and nonbank credit firms to be unable to rollover their liabilities and continue to expand credit. Otherwise small adjustments in the level of base money might not have much impact on the credit markets because they can compensate when Fed does not put the weaker dealers into some sort of liquidity constraint. The market can put itself into a liquidity constraint during a credit market crisis. This is when Fed is supposed to act like lender or dealer of last resort to prevent rapid deflation of prices to possibly avoid a deep economic depression.

Perhaps we can discuss your other questions more since the context for clarification is not clear to me now. I think this article is from September discussing the repo problem:

https://www.nasdaq.com/articles/explainer-the-fed-has-a-repo-problem.-whats-that-2019-09-18-1

The problem as described there seems to be a spike in short term borrowing in the repo markets which means Fed would respond by providing liquidity to quiet the disruption in the otherwise "smooth functioning" of markets. The open market desk at Fed must execute deals to provide or withdraw some liquidity when necessary under prevailing market conditions.

Joe

--
You received this message because you are subscribed to the Google Groups "Understanding Money" group.
To unsubscribe from this group and stop receiving emails from it, send an email to understandingmo...@googlegroups.com.
To view this discussion on the web visit https://groups.google.com/d/msgid/understandingmoney/5dc86d18.1c69fb81.1f22c.975aSMTPIN_ADDED_MISSING%40gmr-mx.google.com.

[Jean Erick]

 

    Attachments are the FRED pdf’s I used.

 

     The drop in base money is about %20 since the start of QE, etc.  I think that is substantial relative to its abruptness.

  I agree that it can become very complicated and maybe my suggestions are just another view but I am going, as always, from

A basic standpoint and the strength or weakness of the dollar is pretty basic.  So whose the dog and whose the tail?  (Menger’s cause and

Effect)

     The cause here seems to be the Fed stepping big into the attempt to start bringing  the reserves back to “normal”.  I won’t go into their

Reasoning because they don’t seem to have any except maintaining their position with the ruling cohort.

But, less money means less supply = higher price.  Also, leverage in immediately increased as demonstrated by the increasing

multiplier.  A stronger dollar is good for domestic  importers (Walmart) and the exporter (China) they import from, complicated

by the US corporations getting the profits from their manufacturing in China, etc.

 

   It looks like my possibility was the 3^rd one mentioned in the article.  The Fed shot itself in the foot again.

Question:  Is that $125 million in loans?  I would assume so because reserve base money would be created otherwise.

 

  Thanks for the explain on the disappearing reserves.  That little detail is the difference between money not being destroyed

And being destroyed, something I tend to get confused about without that little detail in strong mind.

 

James

To view this discussion on the web visit https://groups.google.com/d/msgid/understandingmoney/CAMpwg50GNgChU3RkvouYn1yhgScgWM%2BFNhtGLnCdWzr24CgzVQ%40mail.gmail.com.

 

[Joe Leote]

Monetary Base = Currency Outside Banks plus Bank Reserve Balances

M1 Money Supply = Currency Outside Banks plus Nonbank Transaction Deposits

Multiplier = M1/MB

Do you agree with this basic simplified scheme for the purpose of discussion? If so my comments are below.

1. When Fed buys a security from a bank it increases MB via a credit to reserve balances. When Fed sells a security to a bank then it decreases MB via a debit to reserve balances. Thus MB goes up or down via transaction records on the books of Fed which impacts the corresponding level of bank reserve balances.

2. When Fed buys a security from a nonbank it increases MB by a credit to reserve balances in the name of the payment clearing bank. The payment clearing bank increases M1 by a credit to nonbank transaction deposits in the name of the nonbank seller. When Fed sells a security to a nonbank this decreases MB and M1 via the reverse accounting logic.

3. The multiplier is a residual of Fed actions and actions of the aggregate bank when dealing with nonbanks to keep reserve payments flowing in the bank payment clearing system. For example say Fed injects some MB/M1 via what we call large scale asset purchases or quantitative easing by buying securities mostly from nonbank sellers. Then the aggregate bank would be stuffed with more MB as assets and more M1 as liabilities on its balance sheets. But then if some banks need to free up reserves for making interbank payments they offer to pay interest on deposits or on other short term borrowings which include repurchase agreement liabilities of banks. This reduces M1 by converting some bank transaction deposits to other liabilities on the books of the aggregate bank and therefore changes M1/MB multiplier.

4. When nonbanks withdraw currency from banks this increases currency outside banks in the formal definitions of both MB and M1. However it also decreases nonbank transaction deposits in M1 and decreases bank reserve balances in MB by the net amount of currency withdrawal over some period. In the long run currency outside banks goes up with the growth of the economy etc. Fed can service the currency drain, putting both MB and M1 back into the aggregate bank balance sheet, by making purchases of securities from nonbanks as described in item 1 above.

The multiplier ratio is a residual of several processes which does not seem to indicate any useful analytical indication. If there is a rapid spike in the repo market interest rates then it does indicate some sort of shortage of liquidity in the financial dealer markets which could be caused by Fed reducing MB rapidly per your theory. The other side of the supply of MB is the demand for MB which the articles say might be triggered by Primary Dealers clearing large tax payments and by Primary Dealers seeking finance to purchase a large auction of Treasuries at the same time. The discussion above does not discuss the discount window lending to banks or the credit facilities for nonbanks which may also be used to implement Fed's policy and mission in any situation.

Joe

To view this discussion on the web visit https://groups.google.com/d/msgid/understandingmoney/5dc8fe16.1c69fb81.e61e0.bfb6SMTPIN_ADDED_MISSING%40gmr-mx.google.com.

[Jean Erick]

 

 

From: Joe Leote
Sent: Monday, November 11, 2019 7:59 AM
To: Money Group
Subject: Re: What's goin on?

 

Monetary Base = Currency Outside Banks plus Bank Reserve Balances

M1 Money Supply = Currency Outside Banks plus Nonbank Transaction Deposits

Multiplier = M1/MB

 

Do you agree with this basic simplified scheme for the purpose of discussion? If so my comments are below.

 

  Using underline to distinguish posters

Agree so far.

 

1. When Fed buys a security from a bank it increases MB via a credit to reserve balances. When Fed sells a security to a bank then it decreases MB via a debit to reserve balances. Thus MB goes up or down via transaction records on the books of Fed which impacts the corresponding level of bank reserve balances.

 

2. When Fed buys a security from a nonbank it increases MB by a credit to reserve balances in the name of the payment clearing bank. The payment clearing bank increases M1 by a credit to nonbank transaction deposits in the name of the nonbank seller. When Fed sells a security to a nonbank this decreases MB and M1 via the reverse accounting logic.

 

3. The multiplier is a residual of Fed actions and actions of the aggregate bank when dealing with nonbanks to keep reserve payments flowing in the bank payment clearing system. For example say Fed injects some MB/M1 via what we call large scale asset purchases or quantitative easing by buying securities mostly from nonbank sellers. Then the aggregate bank would be stuffed with more MB as assets and more M1 as liabilities on its balance sheets. But then if some banks need to free up reserves for making interbank payments they offer to pay interest on deposits or on other short term borrowings which include repurchase agreement liabilities of banks. This reduces M1 by converting some bank transaction deposits to other liabilities on the books of the aggregate bank and therefore changes M1/MB multiplier.

 

4. When nonbanks withdraw currency from banks this increases currency outside banks in the formal definitions of both MB and M1. However it also decreases nonbank transaction deposits in M1 and decreases bank reserve balances in MB by the net amount of currency withdrawal over some period. In the long run currency outside banks goes up with the growth of the economy etc. Fed can service the currency drain, putting both MB and M1 back into the aggregate bank balance sheet, by making purchases of securities from nonbanks as described in item 1 above.

 

The multiplier ratio is a residual of several processes which does not seem to indicate any useful analytical indication. If there is a rapid spike in the repo market interest rates then it does indicate some sort of shortage of liquidity in the financial dealer markets which could be caused by Fed reducing MB rapidly per your theory. The other side of the supply of MB is the demand for MB which the articles say might be triggered by Primary Dealers clearing large tax payments and by Primary Dealers seeking finance to purchase a large auction of Treasuries at the same time. The discussion above does not discuss the discount window lending to banks or the credit facilities for nonbanks which may also be used to implement Fed's policy and mission in any situation.

 

Joe

 

    Very good description.

 

James

To view this discussion on the web visit https://groups.google.com/d/msgid/understandingmoney/CAMpwg536odBNd%2BJh7oMe1CqWJmTPeb7%2BCgAhPH7K2nM1S8eH_A%40mail.gmail.com.

 

[Jose Carneiro]

Monetary Base= Currency extant (outside and inside banks/Fed) plus Bank Reserve Balances ?

M1= Currency extant (outside and inside banks/Fed) plus Transaction Deposits at commercial Banks

         (nonbank or bank) ?               ??? Jose

To view this discussion on the web visit https://groups.google.com/d/msgid/understandingmoney/CAMpwg536odBNd%2BJh7oMe1CqWJmTPeb7%2BCgAhPH7K2nM1S8eH_A%40mail.gmail.com.

[Joe Leote]

Definition of the adjusted monetary base is under the graph in this link:

https://fred.stlouisfed.org/series/BASE

Definition given: "The Adjusted Monetary Base is the sum of currency (including coin) in circulation outside Federal Reserve Banks and the U.S. Treasury, plus deposits held by depository institutions at Federal Reserve Banks. These data are adjusted for the effects of changes in statutory reserve requirements on the quantity of base money held by depositories."

Total monetary base is shown in the graph under this link:

https://fred.stlouisfed.org/series/BOGMBASE

Definition given: "The series equals total balances maintained plus currency in circulation."

So the currency in circulation would appear to include what I vault cash or currency held by banks.

Reserve balances are a liability of Fed and a financial asset of banks. The reserve balance financial assets of all banks equal the reserve balance liabilities of Fed.

Currency in circulation is a liability of Fed and a financial asset of banks and nonbanks. The currency or coin held by the Fed and Treasury are not in circulation.

Transaction accounts, which are ordinary checking deposits plus other similar means of making customary payment, are liabilities of banks and financial assets of nonbanks. The TT&L accounts of Treasury are similar to deposits in the bank but are not considered as part of M1 money supply.

Taxes, fees, and other payments to the federal government paid by nonbanks reduce reserve balances in MB and transaction accounts in M1 on the aggregate bank balance sheet although only M1 goes down at first when funds are temporarily stored in TT&L for subsequent transfer to Treasury General Account TGA at Fed. This drains money.

Federal government spending under prevailing customs in the United States only creates net Treasury securities when the Treasury applies debt management, or the issue of Treasuries, to cover the excess of spending over receipts for a period. No net monetary base or M1 money is created provided Treasury matches spending with taxes and issue of Treasuries on average over a period.

Joe

To view this discussion on the web visit https://groups.google.com/d/msgid/understandingmoney/1831744646.2522953.1573503039719%40mail.yahoo.com.

[Jean Erick]

 

 

From: Joe Leote
Sent: Monday, November 11, 2019 12:54 PM
To: Money Group
Subject: Re: What's goin on?

 

Much agreed to and deleted for clarity.

 

Taxes, fees, and other payments to the federal government paid by nonbanks reduce reserve balances in MB and transaction accounts in M1 on the aggregate bank balance sheet although only M1 goes down at first when funds are temporarily stored in TT&L for subsequent transfer to Treasury General Account TGA at Fed. This drains money.   This drains M1 money, not MB money.

 

James

Joe

To view this discussion on the web visit https://groups.google.com/d/msgid/understandingmoney/CAMpwg53jb5Suj6E69gzTu3TdzXNt4WSJTpVg%3DbLbcSjoXih4ug%40mail.gmail.com.

 

[Joe Leote]

When a nonbank pays taxes, fees, or other payments to the federal government the banks and Fed clear payments. There are four sets of books involved. So for simplicity if TT&L accounts do not exist then the bank cancels reserve balances and deposits equal to the payment amount. The Fed cancels reserve balances and puts funds in TGA equal to the payment amount. The nonbank cancels deposits equal to the payment amount and cancels a tax liability or increases an expense paid account. If the TT&L exist then Treasury can delay the call for a decrease in reserve balances until it is ready to spend those reserve balances back to the aggregate bank balance sheet. In some circumstances this delayed call feature helps Fed manage levels of reserve balances.

Joe

To view this discussion on the web visit https://groups.google.com/d/msgid/understandingmoney/5dc9fce3.1c69fb81.eb325.c735SMTPIN_ADDED_MISSING%40gmr-mx.google.com.

[Jean Erick]

   Your “explanations” is one of the most confusing posts I have seen you make.

The issue is simple.  TT&L accounts are reserve accounts or not.  If they are reserves then MB is not decreased.

I think they are reserves.  Do you think they are not?

To view this discussion on the web visit https://groups.google.com/d/msgid/understandingmoney/CAMpwg520q6Zmbj3P%2Bw-GhSj9uB975bSpZU6%3DutZhdCpq0js2zg%40mail.gmail.com.

 

[Joe Leote]

TT&L are not reserves.

Reserves are assets of banks.

TT&L are liabilities of banks.

Joe

To view this discussion on the web visit https://groups.google.com/d/msgid/understandingmoney/5dcaddd1.1c69fb81.41d8e.c727SMTPIN_ADDED_MISSING%40gmr-mx.google.com.