The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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June 25, 2009

Private sector forecasts at variance

Economic forecasts are notoriously inaccurate. That isn't a statement about the ability of forecasters, but rather a statement about the complexity of the economy. If you're looking for a humbling experience, I recommend you give it a try.

And today's economy would seem to be an exceptionally difficult environment in which to forecast. As economists peer into the future, there seems to be an unusually wide range of opinion about what to expect. Uncertainty is running pretty high right now in the minds of the top prognosticators.

Consider the following predictions from the Blue Chip panel of economists concerning the economy's growth rate a year and a half from now (fourth quarter 2010). The average growth rate expected in that time frame from the panel is 3 percent, which isn't that different from the six-quarter-ahead forecast they have made every June during the past 10 years or so. But if you compare the difference between the economic optimists (the 10 highest growth forecasts) relative to the economic pessimists (the 10 lowest growth forecasts), the discrepancy between the two views is large relative to recent history. In short, the forecasts on the optimistic end of the spectrum are now more optimistic while the pessimistic forecasts are a little more pessimistic.


Uncertainty over the medium-term outlook is particularly large regarding the experts' views on inflation. In the latest survey of the Blue Chip panel, the difference between the 10 highest and the 10 lowest inflation predictions for the fourth quarter of 2010 was a gaping 3.7 percentage points (compared with an average of about 1.5 percentage points over the past decade and a half). This wide range of opinions about inflation prospects started to emerge last year as economic conditions deteriorated.


Disharmony in the panel's inflation outlook doesn't so much suggest that those expecting inflation now see greater inflationary risks—at 3.2 percent the medium-term inflation prediction of the highest 10 inflation forecasts isn't materially different from where it has been since the late 1990s. Instead, the larger variance in the inflation outlook is coming from those at the bottom of the panel's forecast distribution that are anticipating even more downward price pressure than in previous years.

Pinpointing the future trajectory of the economy is generally considered more difficult near turning points in the business cycle—though the current uncertainty would appear to be particularly large, recession or not. Such uncertainty about the future is surely adding to the challenges facing the business community as it strives to get back on its feet.

By Laurel Graefe, economic research analyst at the Federal Reserve Bank of Atlanta

June 25, 2009 in Forecasts, Inflation | Permalink


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"Pinpointing the future trajectory of the economy is generally considered more difficult near turning points in the business cycle—though the current uncertainty would appear to be particularly large, recession or not. Such uncertainty about the future is surely adding to the challenges facing the business community as it strives to get back on its feet."

Reading this paragraph made me sigh. I remembered a conversation with Bob Eggert Sr. back in 1988 about why I was interested in studying economics. I was grilling Bob about the lack of concensus during the mid-80s at the critical point of inflection getting us clear of the last economic crisis. He replied that the concensus works best when conditions remain stable for a period of time- long enough for enough of the participants in the study to have some *confidence* in the outlook. At that point I asked him about studying the inflection points and he said that is really the study of political economy, and not true economics.

These divergences occur when paradigms shift. Bob is gone, but I see that clearly now.

Good luck young lady, and may you find a place to use your abilities.

Someday this war's gonna end...

Posted by: AllenM | June 25, 2009 at 03:13 PM

"That isn't a statement about the ability of forecasters, but rather a statement about the complexity of the economy. If you're looking for a humbling experience, I recommend you give it a try"

Just because the rest of the world can't doesn't certify that it's hard.

I figured it out in July 79. It is mathematically impossible to miss an economic forecast (at least out to one year).

Posted by: flow5 | June 26, 2009 at 02:37 PM

In spite of all complains about the unpredictability of macroeconomic variables, they can be actually accurately predicted. Unemployment rate in Italy is predicted for the period between 1974 and 2007 with an uncertainty (RMS) of 0.5% at a nine(9!)-year horizon. Essentially, we know now what will be in 2015:

Posted by: Ivan Kitov | June 30, 2009 at 08:00 AM

Just a correction. The paper with the prediction of Italian unemployment is published by the Euro Area Business Cycle Network: http://www.eabcn.org/members-research-papers

Posted by: Ivan Kitov | June 30, 2009 at 08:22 AM

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June 18, 2009

CPI: The left and the right of it

Updated 11:30 a.m.

We got a good reading of May's inflation numbers this week. On both the producer and the consumer sides, price measures for the month came in well short of market expectations. The prospect of deflation has been getting a good deal of coverage in the blogosphere; see Andy Harless' blog, Economist's View, and Paul Krugman's column.

Greg Mankiw, however, points out that a trimmed mean estimate of the consumer price index (CPI), which removes the large relative price changes in each month, makes the deflation story seem a bit, uh, exaggerated.

"As every grade school student learns when the teacher reports results of the latest test, the average of any data set can be thrown off by a few extreme outliers; the median is a more robust statistic to estimate the central tendency in the data.

"Right now, the two measures of inflation are diverging substantially. The standard CPI shows deflation over the past year, but that average is due to a few anomalous sectors, such as energy. If you look at the median CPI, which shows what a more typical price is doing, the inflation rate does not look very unusual."

While the median is certainly a valuable way to look at inflation, there is also some interesting information that can be gleaned from breaking down the whole distribution of prices.

The chart below (hat tip to Brent Meyer at the Cleveland Fed) shows another interesting feature of yesterday's CPI release. Notice the clear downward shift in the distribution of CPI component price changes. Over half of the prices within the CPI market basket posted growth at or below 1 percent last month, up from an average of 29 percent in 2008, with a whopping one-third of the price index posting declines in May.


Of course, one month does not a trend make, but the month's price numbers were nonetheless noteworthy.

By Laurel Graefe, economic research analyst at the Atlanta Fed

June 18, 2009 in Inflation | Permalink


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The median approach would be correct and helpful only in the case when all components of the CPI were random realizations of some stochastic process. Then, for short time series, the median provides a robust estimate of the distribution parameters. In the case when all prices in the CPI are inter-related and the total (amount of money, i.e. all prices times all quantities) in constrained, the median value just suppresses valuable information about the inherent interaction. The evolution of a weighted mean value is superior in presenting real processes.

Posted by: Ivan Kitov | June 19, 2009 at 09:47 AM

Neither trimmed-mean nor median CPI statistics have any physical meaning. Energy cost is increasing now just like last summer - and that needs to be reflected substantially within the CPI, not zeroed out. The CPI must reflect everything actually spent by a citizen, including both energy cost and home mortgage price (not OER). Yes, the CPI can be thrown off by wild swings in any one component - similarly, overall consumer habits will be vastly altered by wild price increases in any one component of CPI. I don't have the capacity to whimsically choose to not spend any money tomorrow on energy - dwelling electric and car fuel bills are essentials.

The reason the US is/was the economic center of the world is the transparency and reliability of our data. It's time to return to basic principles.

Posted by: Unsympathetic | June 19, 2009 at 04:07 PM

Mankiw's test score example is inappropriate. The effect of the mean-trimmed approach described is more analagous to dropping the Math grade when calculating a student's overall GPA.

Also, this problem is compounded when component values of the index are related to each other in a lagging manner. For example, a large decrease in owner equivalent rent may cause a large decrease in other price components in subsequent months; while OER may be trimmed one month, other components will be trimmed subsequently and the overall price decrease may never show up in the mean-trimmed or median index.

The mean-trimmed and median approaches are more appropriately applied to the raw data used to calculate the component values. For instance, if one family reported that the price of bread had doubled in one month, this would be a true outlier and deleting it would likely yield better reults.

Posted by: Paul | June 20, 2009 at 08:13 PM

I forgot to mention, I *do* think that the change distribution chart is a helpful way of looking at things, particularly if OER is broken up into 4 components to better even out the weightings as suggested by the Cleveland FED. Considering the large number of components declining, I suggest adding "-1 to 0", "-2 to -1", and "< -2" columns to the chart.

Posted by: Paul | June 20, 2009 at 08:22 PM

Commenter Unsympathetic argues that consumers do not have the option to cut spending on energy because they are essentials, and therefore one should not set aside energy prices when looking at the CPI. The experience in 2007 - 2008 doesn't support this view. Oil prices spiked, and consumers reduced demand, and then oil prices fell. The recent experience of Juneau Alaska a few years ago is also relevant. They lost something like 30% of their electricity supply overnight (avalanche took out a transmission line) and consumer electricity rates spiked because of the expense of providing power using standby generators. Consumers very quickly changed their habits and substantially reduced their electricity consumption (I forget the percentage but it was something like 20-40%). The point being that energy price shocks do get blunted by consumers reducing demand, and I think this effect would be magnified in our current recessionary environment, so I think it is appropriate to set aside energy prices when looking for trends in the CPI.

Posted by: AndyfromTucson | June 21, 2009 at 07:20 AM

It WOULD BE noteworthy if some Economist somewhere demonstrated enough concern for her chosen field of study to argue the societal benefits from correlating inflationary measurements to a population sampling - any sampling. Have FED Economists learned nothing from the unmasking of mpt?

Posted by: bailey | June 22, 2009 at 06:31 PM

There isn't much more room to expand the money supply without increasing inflation (for the entire year).

However c. Aug-Sept real-gdp will begin dropping again. I.e., stagflation (business stagnation accompanied by inflation) will overtake the landscape.

Posted by: flow5 | June 23, 2009 at 11:15 AM

the data for 1966 is absolutely clear proof

Posted by: flow5 | June 26, 2009 at 03:13 PM

CPI is traditionally one of the most volatile numbers to watch.

I think you need to look at other factors to see if we are in a deflationary cycle or inflationary one. CPI on a stand alone basis is not clear enough.

The savings rate of the US has gone up. This is clearly deflationary.
Home values are still declining. This is deflationary. Unemployment continues to rise, deflationary.

On the other hand, fiscal policy is certainly inflationary, and Fed policy is inflationary. Fed policy will have more to do with inflation than fiscal in the long run.

I think that velocity of money has slowed to the point where it will take significantly longer for Fed policy to make things happen. Credit markets still are not functioning at optimum.

There is a lot of fear in the marketplace, and this keeps inflation in check, for now.

Posted by: Jeff | June 27, 2009 at 10:47 AM

What I think the inflation measures should reflect:

(a) accurate calibration of sums, because effect of inflation is important in accumulation, so that change of long term measurements is the appropriate accumulation of short term measurements.

But it is also the case that certain sectors have significantly more variance month to month than others; and this difference in variance persists.

(b) So the inflation estimate ought to have lower variance, which is what the trimmed mean attempts to do in an unsatisfactory way.

To me (I'm a physicist with experience in signal processing and machine learning) the appropriate response then is to have different time-scales for averaging (slower for high variance vs faster for low variance) for the different sectors, then generate the composite statistic and report changes of this.

Also, the inflation statistic would be more publically honest if economists et al used one which does include food & energy instead of the "core inflation" BS---which induces contempt by the public.

I might suggest Kalman filters of the deflator for each sector with varying smoothing parameters. Lots of smoothing for food and energy, less smoothing for other things. But importantly there should be no long-term growing mismatch between smoothed and raw deflators for any sector. This is because food and energy are truly important components of people's expenses and accumulation of changes are critical for actual inflation and perceptions of it.

Posted by: Matthew Kennel | July 03, 2009 at 12:18 AM

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June 11, 2009

Price stability and the monetary base

Arthur Laffer, as several readers (and friends) have pointed out to me, is taking aim at the Fed:

"… as bad as the fiscal picture is, panic-driven monetary policies portend to have even more dire consequences. We can expect rapidly rising prices and much, much higher interest rates over the next four or five years, and a concomitant deleterious impact on output and employment not unlike the late 1970s.

"About eight months ago, starting in early September 2008, the Bernanke Fed did an abrupt about-face and radically increased the monetary base—which is comprised of currency in circulation, member bank reserves held at the Fed, and vault cash—by a little less than $1 trillion. The Fed controls the monetary base 100% and does so by purchasing and selling assets in the open market. By such a radical move, the Fed signaled a 180-degree shift in its focus from an anti-inflation position to an anti-deflation position."

I have a few problems with that statement. To begin with, the notion that the Federal Reserve signaled a 180-degree shift in focus to move "from an anti-inflation position to an anti-deflation position" is about equivalent to saying that the temperature control system in your house has a fundamentally different objective when the heater kicks off in June and the air conditioning kicks on. The essence of an inflation objective—even an implicit one—is that a central bank will lean against price-level changes substantially below the desired rate, as well as changes substantially above the desired rate. You can certainly argue with the policymakers' forecasts and diagnoses of risks at any given time, but it serves the debate well to not muddle tactics (focusing on inflation or deflation as the economic weather requires) and objectives (the control of the inflation rate that is Mr. Laffer's true concern).

But that point is a quibble. The increase in the U.S. monetary base has indeed been something to behold, and the Laffer article gives a good explanation about why you might be worried about that:

"Bank reserves are crucially important because they are the foundation upon which banks are able to expand their liabilities and thereby increase the quantity of money.

"Banks are required to hold a certain fraction of their liabilities—demand deposits and other checkable deposits—in reserves held at the Fed or in vault cash. Prior to the huge increase in bank reserves, banks had been constrained from expanding loans by their reserve positions. They weren't able to inject liquidity into the economy, which had been so desperately needed in response to the liquidity crisis that began in 2007 and continued into 2008. But since last September, all of that has changed. Banks now have huge amounts of excess reserves, enabling them to make lots of net new loans…

"At present, banks are doing just what we would expect them to do. They are making new loans and increasing overall bank liabilities (i.e., money). The 12-month growth rate of M1 is now in the 15% range, and close to its highest level in the past half century."

OK, but in my opinion it is a bit of a stretch—so far, at least—to correlate monetary base growth with bank loan growth:


Let's call that more than a bit of a stretch.

The Laffer argument is in large part about what the future will bring. But we know that the payment of interest on bank reserves—which we have discussed in this forum many times (here and here, for example)—means a higher demand for reserves in the future than in the past. This change, of course, means that levels of the monetary base that would have seemed scary in the past will become the new normal. How big can the "new normal" be? That's a good question, and one I will continue to contemplate. But the assertion in the Laffer article that "a major contraction in monetary base" is required cannot be supported by either current evidence or simple economic theory.

There is, however, more. Whatever policy choices are required to deliver a noninflationary environment going forward, Mr. Laffer seems convinced that the central bank is not up to making them:

"Alas, I doubt very much that the Fed will do what is necessary to guard against future inflation and higher interest rates. If the Fed were to reduce the monetary base by $1 trillion, it would need to sell a net $1 trillion in bonds. This would put the Fed in direct competition with Treasury's planned issuance of about $2 trillion worth of bonds over the coming 12 months. Failed auctions would become the norm and bond prices would tumble, reflecting a massive oversupply of government bonds."

On this I will just turn to my boss, Atlanta Fed President Dennis Lockhart, who addressed this very issue in a speech given today at the National Association of Securities Professionals Annual Pension and Financial Services Conference in Atlanta:

"The concerns about our economic path are crystallized in doubts expressed in some quarters about the Federal Reserve's ability to fulfill its obligation to deliver low and stable inflation in the face of very large current and prospective federal deficits. In a word, the concerns are about monetization of the resulting federal debt.

"I do not dismiss these concerns out of hand. I also recognize that the task of pursuing the Fed's dual mandate of price stability and sustainable growth will be greatly complicated should deliberate and timely action to address our fiscal imbalances fail to materialize. But I have full confidence in the Federal Reserve's ability and resolve to meet its inflation objectives in whatever environment presents itself. Of the many risks the U.S. and global economies still confront, I firmly believe the Fed losing sight of its inflation objectives is not among them."

'Nuff said, for now.

By David Altig, senior vice president and research director, at the Atlanta Fed

June 11, 2009 in Inflation, Monetary Policy | Permalink


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Laffer's right. Since Bernanke was appointed to the Chairman of the Federal Reserve, the rate-of-change in legal reserves (the proxy for inflation), dropped for 29 consecutive months (out of a possible 39, or sufficient to wring inflation out of the economy).

It’s only been in the last 10 successive months (since Aug 2008), that the FED’s “tight” monetary policy was finally reversed. An overcautious Federal Open Market Committee acted too late to prevent an extremely high transactions velocity of money from declining (such a velocity is required just to maintain prices at their current levels).

First, there is no ambiguity in forecasts: In contradistinction to Bernanke (and using his terminology), forecasts are mathematically "precise”:

(1) nominal GDP is measured by monetary flows (MVt);

2) Income velocity is a contrived figure (fabricated); it’s the transactions velocity (bank debits, demand deposit turnover) that matters;

(3) “money” is the measure of liquidity; &

(4) the rates-of-change (roc’s) used by the Fed are specious (always at an annualized rate; which never coincides with an economic lag). The Fed’s technical staff, et al., has learned their catechisms;

Friedman became famous using only half the equation (the means-of-payment money supply), leaving his believers with the labor of Sisyphus.

Contrary to all economists, the lags for monetary flows (MVt), i.e. proxies for (1) real-GDP and the (2) deflator are exact, unvarying - respectively.

Roc’s in (MVt) are always measured with the same length of time as the specific economic lag (as its influence approaches its maximum impact; as demonstrated by the clustering on a scatter plot diagram).

Not surprisingly, adjusted member commercial bank "free/gratis" legal reserves (their roc’s) corroborate/mirror, both lags for monetary flows (MVt) –-- their lengths, or frequency, are identical -- (as the weighted arithmetic average of reserve ratios remains constant)

The lags for both monetary flows (MVt) & "free/gratis" legal reserves are synchronous or indistinguishable. Consequently, economic forecast are mathematically infallable (which includes housing bubbles, commodity bubbles, etc.).

This is the “Holy Grail” & it is inviolate & sacrosanct.

The BEA uses quarterly accounting periods for real GDP and deflator. The accounting periods for GDP should correspond to the economic lag, not quarterly.

Monetary policy objectives should not be in terms of any particular rate or range of growth of any monetary aggregate. Rather, policy should be formulated in terms of desired roc’s in monetary flows (MVt) relative to roc’s in real GDP.

Note: roc’s in nominal GDP can serve as a proxy figure for roc’s in all transactions. Roc’s in real GDP have to be used, of course, as a policy standard.

Because of monopoly elements, and other structural defects, which raise costs, and prices, unnecessarily, and inhibit downward price flexibility in our markets, it is probably advisable to follow a monetary policy which will permit the r-o-c in monetary flows to exceed the r-o-c in real GDP by c. 2 – 3 percentage points.

In other words, some inflation is inevitable given our present market structure and the commitment of the federal government to hold unemployment rates at tolerable levels.

Some people prefer the devil theory of inflation: “It’s all Peak Oil's fault" or ”Peak Debt's fault". This approach ignores the fact that the evidence of inflation, is represented by "actual" prices in the marketplace.

The "administered" prices of the world's oil producing countries would not be the "asked" prices were they not “validated” by (MVt), i.e., validated by the world's Central Banks ( i.e., as Friedman maintained "inflation is always and everywhere a monetary phenomenon")

Posted by: flow5 | June 11, 2009 at 05:08 PM

Translation. If Congress does not get back to sustainable budgets, then the Fed will utilize the double dip scenario.

Posted by: Mattyoung | June 11, 2009 at 06:02 PM

An educated well explained response to an article written by a discredited imbecile economist who gets prime time coverage through the WSJ. This is the problem with the media in general. The "real" info is here but the masses are brainwashed with the crap in the WSJ.

Posted by: Amit Chokshi | June 11, 2009 at 10:39 PM


While I follow your arguments in the first part of the post, I am a little bit puzzled by its "conclusion." In his comments, Art Laffer is making a claim about the "Fed [being] in direct competition with Treasury's planned issuance of about $2 trillion worth of bonds over the over the coming 12 months." However, you "counterclaim" is nothing more than a citation from Dennis Lockhart stating his confidence in the Fed and in its ability to keep its inflation objectives in sight. This sounds more like "propaganda" than an explanation on how the Fed plans to actually achieve these goals! In other words, I (unfortunately) don't see anything in this citation that refutes Mr. Laffer's statement ... Am I missing something here?

Posted by: Sam | June 11, 2009 at 11:49 PM

The arrangement whereby banks keep reserves on deposit at the Federal Reserve is the mechanism by which it controls the level of the policy fed funds rate. This is the first time that the Fed has also wanted to use reserve deposits as a material source of funding for its own balance sheet. Which requires that it pay interest on reserves, as explained in a number of your posts.

There is a difference between creating supersized excess reserves for the purpose of satisfying reserve demand from depository institutions, and creating them as a funding mechanism for the Federal Reserve balance sheet. The second purpose is more relevant for monetary policy in this case. Balance sheet expansion requires funding expansion of some sort. The use of reserves for this purpose is evident in the fact that the Fed has chosen to calibrate reserve demand by paying interest on supersized reserve balances almost from the outset. This reinforces the central function of reserve policy as the control over the level of the fed funds rate – including structural preparedness for an “exit strategy” from extraordinary balance sheet expansion.

The Fed web-site requires updating on the mechanisms of reserve management. In this regard, it would be helpful to discard the silly textbook “reserve multiplier” model, which countless economists still cling to, probably including your critic in this case. The “multiplier” idea has had virtually nothing to do with the way in which the Federal Reserve has actually operated for decades. The payment of interest on supersized reserves is a well deserved smack in the face for this obsolete notion.

Posted by: JKH | June 12, 2009 at 06:11 AM

Internationally traded commodity prices are shooting up. The dollar is falling. The stock market has quickly become overpriced based on fundamentals. Huge deficits will either be monetized causing inflation or they will crowd out private investment delaying economic recovery. The data suggests we are in the early phases of a severe inflation.

People do not understand that stagflation is a very real danger. The reason is that the path of recovery does not take us back to where we were in 2006. There are huge bottlenecks in the economy that will delay a healthy expansion for 2-3 years. Recovery will have to occur without an expansion of investment in housing and without consumer spending returning to unsustainable levels.

The fed did the right thing in flooding the financial markets with liquidity late in 2008. But the massive and unnecessary bailouts combined with a permanent expansion in federal government spending will make it very difficult for the fed to drain this liquidity from the system.

We may quibble about technical details of Laffer's article but the fundamentals point strongly in the direction of stagflation. All it will take is the slightest reluctance of the fed to raise interest rates rapidly in the next few months.

Posted by: Charles R. Williams | June 12, 2009 at 09:52 AM

You have to ask yourself a few questions:

Do Obama and the Fed have the political will to reign in this monetary expansion when inflation takes hold?

Does anyone see the Fed increasing interest rates next year during an election year?

What will happen to inflation if the answers to the above 2 questions are “NO”?

Posted by: Austrian School | June 12, 2009 at 01:54 PM

I cannot see how the Fed will manage to drain liquidity by selling those debt papers it bought at mark-to-model prices. Which rational investor will buy these assets - "toxic" or not - at roughly the same prices the Fed paid for them? If there'd been a market the Fed would not have needed to buy what nobody else wanted.
The Fed's intervention simply has to backfire as it is the only player in the market with pockets that can never be empty.
Alas, they are not the only ones with said problem as a look at the belance sheets of other major central banks clearly shows. This simply has to result in sustained money supply growth equals monetary inflation.
We are in uncharted territory - or at least I am - as the only case where fast money supply growth did not result in higher inflation was in Germany in the years after reunification. Rich Germany could afford it, not least to the conservative/tight monetary policy of Karl Otto Pöhl who disillusioned euphoric bankers by raising the key rate a full point to 7% when markets were expecting a step down. Had he not demonstrated that the Bundesbank would never leave the path of fighting inflation, Germany might have taken the disastrous course the USA has followed in this millennium.

Posted by: The Prudent Investor | June 12, 2009 at 06:54 PM

"But we know that the payment of interest on bank reserves—which we have discussed in this forum many time...This change, of course, means that levels of the monetary base that would have seemed scary in the past will become the new NORMAL".

Friedman's "monetary base" was never a base for the expansion of new money & credit:
Flawed as the AMBLR figure is (Adjusted Member Bank Legal Reserves), it is still far superior to the Domestic Adjusted Monetary Base (DAMB) figure, which is generally cited. The DAMB figure includes AMBLR plus the volume of currency held by the nonblank public (Milton Friedman’s “high powered money”).

Since the public determines its holdings of currency an expansion or contraction of DAMB is neither proof that the Fed intends to follow an expansive, nor a contractive monetary policy. Furthermore any expansion of the non-bank public’s holdings of currency merely changes the composition (but not the total volume) of the money supply. There is a shift out of demand deposits, NOW or ATS accounts into currency. But this shift does reduce Member Bank Legal Reserves by an equal or approximately equal amount.

Since the member commercial banks operate with no excess legal reserves of consequence since 1942, any expansion of the publics holdings of currency will cause a multiple contraction of bank credit and checking accounts (relative to the increase in currency outflows from the banks) ceteris paribus. To avoid such a contraction the Fed offsets currency withdrawals by open market operations of the buying type. The reverse is true if there is a return flow of currency to the banks.

Since the trend of the non-bank public’s holdings of currency is up (ever since the 1920’s), return flows are purely seasonal and cannot therefore provide a permanent basis for bank credit and money expansion.

In our Federal Reserve System, 90 percent of MO (domestic adjusted monetary base) is currency. There is no expansion coefficient for currency. And the currency component of MO is so prominent, and the proportion of legal reserves so negligible (and declining); that to measure the rate-of-change in currency held by the non-bank public, to the rate-of-change in M1 (where 54% is currency), is, yes, to measure currency vs. currency (hoc ergo propter hoc); in probability theory and statistics, not a cause and effect relationship.

Complicating the measurement of the monetary base is the fluctuation in the percentage of foreign currency circulation to domestic currency circulation (estimated at ½ to 2/3 of all U.S. currency).

I.e., the domestic monetary source base equals the monetary source base minus the estimated amount of foreign-held U.S. currency. Inflows and outflows of foreign-held U.S. currency (seldom repatriated) are related to political and price instability, as well as seasonal flows; (though arguably, it is till money for the prudential reserve “Euro-dollar Market”), and all are immeasurable in the short run...

The “shipments proxy” estimate of foreign-held U.S. currency uses data on the receipts and shipments of currency, by denomination, at the Federal Reserve’s 37 cash offices nationwide (note: > 80 percent of foreign-held U.S. currency are $100.00 bills). Because of its influence on the DAMB, quarterly estimates of foreign-held U.S. currency are reported in the Feds “Flow of Funds Accounts of the United States” & in the BEAs estimates of the net international investment position of the United States.

The volatility of the K-ratio (publics desired ratio of currency to transactions deposits, currency-deposit-ratio), and the volatility in the ratio of foreign-held to domestic U.S. currency, both influence the forecast of the (1) cash drain factor, and (2) the movement of the domestic currency component of the DAMB. This causes unpredictable shifts in the money multiplier (MULT – St. Louis), [sic], for M1 and thus M2.

The Federal Reserve Bank of Chicago uses legal reserves (“t”-accounts), exclusively, to explain the creation of new money in the booklet “Modern Money Mechanics”. The booklet is a workbook on bank reserves and deposit expansion (changes in bank balance sheets that occur when deposits in banks change as a result of monetary action by the Federal Reserve System – the central bank of the United States). The stated purpose of the booklet is to “describe the basic process of money creation in a "fractional reserve" banking system” - the monetary base has no role in this analysis.

It is therefore both incorrect in theory and thus inaccurate in practice, to refer the DAMB figure as a monetary base [sic]. The only base for an expansion of total bank credit and the money supply is the volume of legal reserves supplied to the member banks by the Fed in excess of the volume necessary to offset currency outflows from the banking system. The adjusted member bank legal reserve figure is that base.

Posted by: flow5 | June 13, 2009 at 01:06 PM

What is the proper volume of legal reserves? This depends on the “multiplier”, the transactions velocity of money, and the rate-of-change in real-GDP.

All of these variables can be estimated with a high degree of accuracy, and the rate-of-change in real-GDP serves as a close proxy to rates-of- change in total physical transactions, in both goods and services.

Since 1942, the “money multiplier” has been a comparatively constant measure using either:

(A) commercial bank credit (St. Louis FED), or

(B) the 60 largest CBs on the Board’s H.8 release,

[divided (by) legal reserves - my definition]

From 1947-1977 the multiplier doubled in 30 years; from 1977-2005 the multiplier doubled again in 35 years. At its current pace the multiplier will double in 6 years.

At the beginning of the “monetarist experiment” (see Paul Volcker Oct 6th 1979 pronouncement that the FED would henceforth de-emphasize the control of the federal funds rate and concentrate on holding the monetary aggregates in check. We were advised to “watch the money supply”),

Back then Money Market Services, Inc, was surveying sixty individuals for their weekly predictions on the expected volume of M-1. It happened that for the week ending Oct 10, the Board of Governors reported that M1 had increased $2.8b.

But on the subsequent week’s revision Manufacturers Hanover was found to have overstated its customer’s deposits (and the FED’s money supply figure), by $3.0b.

A simple but correct (not textbook), money multiplier is equal to commercial bank credit divided by applied vault cash + inter-bank demand deposits held at the District Federal Reserve Banks.

I.e., commercial bank credit divided by the system’s legal reserves equals the money multiplier. Using the correct multiplier in 1979 would have given speculators in CBOT Treasury Bond futures the necessary information to make a quick trading profit.

Until this recession/depression, monetary expansion responded immediately to an injection of reserves into the system. The FED could project with a high degree of reliability, the probable rate-of-increase in monetary flows (MVt), relative to the probable increase in real-GDP.

Because of our “market structure”, the first rate (monetary flows) should exceed the latter. How much? That is a policy judgment involving trade-offs, but perhaps by no more than 2-3%

Posted by: flow5 | June 13, 2009 at 01:13 PM

Bernanke’s strategy is perfectly obvious and his target strangely elliptical. Reserve requirements are applied to the bank’s liabilities after a 30 day lag.

The sum of the bank’s (1) required reserves, and (2) required clearing balances, equals the correct (most accurate) “source-base” (note past reductions in required reserves have been accompanied by offsetting increases in the member bank’s clearing balances).

Note that Milton Friedman’s “high powered money” and legal reserves are not the same thing. Friedman wrongly adds currency held by the non-bank public to his “base”. Friedman, et al, are wrong because an increase in currency is deflationary (unless offset by the expansion of reserve bank credit).

Required balances combined with the reserve ratios applicable to 3 subdivisions of bank deposits (only net transaction accounts), determine the limits and, since 1942, the amounts of bank credit creation.

Until very recently, member commercial banks have held an insignificant volume of (1) free reserves (excess minus borrowed), and (2) excess reserves (total minus required). Note: (3) borrowed reserves are those obtained through the FED’s “liquidity funding facilities” (discounts & advances).

The monetary authorities have to have complete discretion over changes in reserve ratios. This is essential since under fractional reserve banking (the essence of commercial banking) these ratios determine the minimum volume of legal reserves a bank must hold against a specific volume and type of deposit liability.

Bank credit creation is a “system” process. No bank or minority group (from an asset standpoint) can expand credit (and the money supply) significantly faster than the majority group (or the “legally bound” banks), are expanding.

Legally bound banks have required reserves. Prior to the DIDMCA of 1980 “legally bound” banks were demarcated as “membership” banks (in 1980 the member banks held only 65% of all the banking system’s assets).

Under current regulations, the “non-bound” (formally non-member) banks have no reserve requirements (pre DIDMCA some state legislators allowed earning assets to be counted as legal reserves or allowed for the “pyramiding” of reserves (i.e., when the non-member banks purchased earning assets, the banks also increased their legal reserves).

In other words, if the “legally bound” banks hold a substantial majority (70-80%) of the assets of the entire system, the FED, through controlling the legal reserves of the “legally bound” banks can control the expansion of total bank credit, for both “bound banks” and “not bound banks”.
Legal or required reserves are determined by a “legally bound” bank’s “net transaction accounts”:

(1) Beginning at the regulation’s bottom tier there is an “exemption amount”, or, a lower level deposit exclusion (with no reserve ratio requirement).

(2) Above the exemption level is the bank’s “low-reserve tranche” (a 3% reserve ratio is applied to these liabilities).

(3) At the “top bracket” (above the low-level tranche), all net transaction accounts require a 10% reserve ratio.

Even so, according the FED’s technical staff, reserve requirements for the system as a whole, are no longer binding. In other words, the system’s “expansion coefficient” is a progressively elastic variable.

The current enormous volume of “excess” reserves (see H.3 release), restricts or constricts the system’s “money multiplier”. Contrary to the pundits, increases in “excess” reserves (which represent idle & unused lending capacity), offset or absorb increases in the FED’s balance sheet (or increases in Reserve Bank Credit).

When the Federal Reserve Banks expand credit, for example, by buying U.S. obligations, the balance sheets of the District Banks reflect an increase in earning assets (in the System Open Market Account - SOMA), and an equal increase in IBDD liabilities, i.e., "free/gratis" legal reserves (contrary to the bankers, legal reserves from a system’s standpoint are not a tax).

Or, increases in these “excess” reserves function like open market operations of the selling type (but with their enormous volume, $877b on May 20, 2009, excess reserves function exactly like raising reserve ratios would have).

Don’t be mislead, the member bank’s “tax” [sic] is equal to the “money multiplier” times the volume of its “source base”, or instead of an accounting expense, it is the equivalent to an astronomical profit shared among (1) the commercial banks, (2) the Federal Reserve District Banks, and the 97% rebate transferred from (SOMA) to (3) the U.S. Treasury.

If the FED really desired to increase securities, loans, & investments (bank credit), it would lower the remuneration rate on “excess” reserves (the interest rate of return on reserves (IORs) is now .25% higher than the benchmark FFR).

Since 1942 banks always remained fully “lent-up”, they held no excessive amount of excess legal lending capacity to finance business (or consumers), they have used excess reserves to acquire a piece of the national debt or other creditorship obligations that are eligible for bank investment.

But with IORs equal to the Federal Funds Rate (FFR) [or higher], the exercise of FED policy is often likened either to “pushing on a string” (when it attempts to execute an expansionary monetary policy).

Posted by: flow5 | June 13, 2009 at 01:15 PM

As long as the “legally bound” banks hold a significant majority of the total assets of the banking system (all money creating institutions), and operate with no significant volume of excess legal reserves, the FED can control the money supply, that is providing they have the commitment to do so. Both of these conditions have prevailed since 1942—but not the commitment.

The only tool at the disposal of the monetary authorities in a free capitalistic system through which the volume of money can be controlled is legal reserves. The sine qua non of monetary management is total current control by a central monetary authority over the volume of legal reserves held by all money creating institutions, and over the reserve ratios applicable to their deposits.

The first rule of reserves and reserve ratios should be to require that all money creating depository institutions have the same legal reserve requirements, both as to types of assets eligible for reserves, as well as the level of reserve ratios. To be successful, monetary policy should limit all reserves to balances in the District Federal Reserve banks (IBDDs), and have UNIFORM reserve ratios, for ALL deposits, in ALL banks, irrespective of size (see: Member Bank Reserve Requirements -- Analysis of Committee Proposal, February 27, 1940…the study conclusions were declassified (the conclusions were once top secret!) on March 23, 1983).

Monetarism involves controlling the volume of TOTAL reserves, not the volume of non-borrowed reserves as administered by Paul Volcker. I.e., one dollar of borrowed reserves provides the same legal-economic base for the expansion of money as one dollar of non-borrowed reserves. The fact that advances had to be repaid in (x) number of days is immaterial. A new advance can be obtained, or the borrowing bank replaced by other borrowing banks.

Federal Reserve Chairman Paul Volcker was directly responsible for the exemption and elimination of usury rates of interest on consumer debt in 1980 (usury is lending money at high interest rates, ones that make repayment very difficult, or sometimes impossible - even for creditworthy borrowers). This is also called "loan sharking" or "predatory lending” (or in today’s tongue, credit card, sub-prime, & payday loans).

The importance of controlling borrowed reserves was indicated by the fact that -- at times during 1980 nearly 10% of all legal reserves were borrowed. Even more unmistakable, beginning in January 2008 the FOMC operated at all times, entirely with (net) borrowed reserves (i.e., (NON)-BORROWED reserves have been NEGATIVE ). As any monetarist should know, if the money supply is controlled properly, the determination of interest rates can be left to market forces.

These are the pertinent parts regarding the MCA of 1980 published in the Federal Reserve Bulletin June 1993: “After years of debate, the Congress finally adopted legislation to reform reserve requirement rules: “the success of this procedure (adopting a reserves-based operating procedure designed to maintain a close, short-run, control of M1), depended on how tight the link was between reserves…and the level of M1 deposits in the entire banking system” (how efficiently the Federal Funds Market circulates, redistributes, and links member bank’s excess reserves).

But with the DIDMCA the Board of Governors legally commingled, and consequently blurred, the inter-relationships between 2 distinct types of bank lending operations. In effect Congress merged the banks into a single organization, with few, or virtually unrestricted lending regulations:
(1) no interest rate ceilings,
(2) minimal or no legal reserves,
(3) as well as increasingly insignificant reserve ratios,
(4) i.e., smaller & smaller fractions were required against new & existing bank deposits.
(5) and smaller reserve ratios are applied to a declining proportion, & a reduced number of deposit classifications.

Thus by edict, the principle financial intermediaries were destroyed, and a money creating System was fostered, which the Fed cannot now monitor, and has yet to bring under control.

Thus it is observed that the tenants of monetarism have never been tried.

Posted by: flow5 | June 13, 2009 at 01:17 PM

I had the exact same reading as Sam: the article made solid arguments, but then just lost wind in the end. If Lockhart's quote is meant to refute Laffer, this leads the reader to conclude that the FED *will* sell bonds to combat inflation, regardless of the upward effect this will have on Treasury bond rates.

Posted by: Paul | June 13, 2009 at 07:34 PM

They need to pick it up. We are going into the hole.

Posted by: Narconon Arrowhead | June 16, 2009 at 12:11 PM

Flow5 -

Your analysis is fundamentally flawed. Banks are never reserve constrained (they can always obtain reserves in the open market, and the Fed has no discretion in providing them if it wants to maintain it's target interest rate). Canada gets along quite well with no reserve requirements.

Posted by: Jim Baird | June 18, 2009 at 03:07 PM

Your right that the member banks are not constrained in their lending. But the FED does have discretion to prevent them from obtaining additional reserves. The problem is that the FED always accommodates the bankers.

It is just the "trading desks" technique that is wrong. The money supply can never be managed by any attempt to control the cost of credit.

Posted by: flow5 | June 23, 2009 at 11:22 AM

The buying and selling of Treasury bills, etc., under the auspices of the Manager of the Open Market Account through the New York Federal Reserve Bank for the accounts of all Federal Reserve Banks are tied to the benchmark federal funds target. As a guide to open market operations the targets are used as follows: a rise in the federal funds rate above the target rate, triggers open market purchases; a fall below the target rate, selling operations. Open market operations of the buying type add legal reserves to the banking system; selling operations reduce reserves.

To increase the volume of legal reserves in the member banks, the Fed buys governments, (usually T-Bills) in the open market in sufficient quantity to more than offset all legal reserve consuming factors (e.g., the withdrawals of currency from the banks by the non-bank public). These purchases tend to increase the price of bills, thus reducing their discounts (interest rates). The incremental reserves also add to excess reserves thus enlarging the supply of “federal funds”. Federal funds rates are thus held down, or are prevented from rising.

The technicians in charge of the hour-to-hour administration of open market operations apparently believe that there is, at any given time, a federal funds rate that is consonant with a proper rate of change in the money supply. They have in fact plugged this concept into a computer model. What they have in fact "plugged in" is an open ended device through which the commercial banks can decide whether or not there should be an expansion in the legal lending capacity of the banking system - the capacity to create credit ( money ) and to acquire additional earning assets. This power should reside exclusively in the central monetary authorities.

That this expansion in money and credit will always take place is attested to by the banks opportunity to arbitrage between their cost to borrow short, and lend long. As long as it is profitable for borrowers to borrow, and commercial banks to lend, money creation is not self regulatory.

Since the member banks are remunerated @ .25 IOR%, the bankers are currently unwilling to acquire additional reserves, to support the expansion of deposits, resulting from their loan expansion (at rates much greater than what they already receive for highly liquid, risk free excess reserves @.25 IOR%). The stop-out rate has recently hit this percentage for 2 days in a row.

Otherwise if they use the federal funds market, which is typical, they know that if the aggregate of their bids for federal funds pushes the rate above the target rate set by the “trading desk”, this would automatically trigger buy orders; thus expanding Reserve Bank credit, and bank legal, and excess reserves, and soon a multiple volume of money is created on the basis of any given increase in legal reserves. THIS IS THE PROCESS BY WHICH THE FED HAS AGAIN, FINANCED THE RAMPANT REAL-ESTATE SPECULATION IN THIS COUNTRY.

Posted by: flow5 | June 23, 2009 at 05:56 PM

Jim Baird – you didn’t read what I wrote:
The powers of the FED are truly awesome. two spectacular examples:

(1) in the context of the Continental Illinois Bank rescue (where it was advanced 11% of the banking system’s legal reserves) &

(2) in the context of the phenomenal expansion in the FEDs balance sheet.

While it is true that most people attribute powers to the FED that it doesn’t have, the FED can directly control the rate-of-change in bank reserves-regardless. The fact that reserves are no longer binding hasn't yet changed that power.

“Since no one in the Fed tracks reserves, such a coincidence in the data perhaps confirms that the Fed funds rate settings have been correct...most banks no longer face binding statutory reserve requirements -- increasing amounts of vault cash (including ATM networks) plus retail deposit sweep programs have wiped aside such binding requirement...Banks need central bank deposits for clearing checks and making other interbank payments, which gives the central bank leverage over money and bond markets…Today, with bank reserves largely driven by bank payments (debits), your views on bank debits and legal reserves sound right!”

Bernanke is a treasure

Posted by: flow5 | June 24, 2009 at 03:55 PM

The FED could conceivably increase its balance sheet to $100 trillion over the next 10 years to combat US and World deflationary pressures. You may say that the dollar would lose its value, but as long as the rest of the World is in slightly worse shape then the US, that may not be an issue.

Posted by: jsc | June 25, 2009 at 08:05 PM

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June 08, 2009

Are there green shoots in the labor market?

In the first part of 2009, the labor market continued its general weakness, which carried over from 2008. However, the April and May employment data introduced some movements in a seemingly positive direction—green shoots, perhaps?

The first bit of relatively good news is that the decline in May payroll numbers of 345,000 is the lowest level of decline since September 2008 and about half of the average monthly job losses over the last six months. In addition, job losses were revised downward for both March (–699,000 to –652,000) and April (–539,000 to –504,000).

For the most part, the moderation was widespread across industries, as shown in the employment diffusion index, which increased from 25.8 percent in April to 32.7 percent in May. In addition, temporary help services, which has historically been thought of as a leading labor market indicator, experienced a relatively small number of job losses (–7,000) compared to the average of 73,000 losses per month over the last six months. Construction employment losses also moderated in May while manufacturing losses held steady at just over 150,000.


Another piece of somewhat encouraging news came from the initial claims data. Initial claims (four-week moving average) began a downward trend on April 11. The number of initial claims has declined for three consecutive weeks since the week ending May 9, although the levels are still slightly up compared to the May 2 levels.

A decline in initial claims has occurred at the end of the last five recessions so it would seem that this development is a positive signal. Historically, declines in initial claims at the end of prior recessions have also been accompanied by declines in continuing claims, which we saw for the first time in the week of May 23, when the number of continuing claims decreased by 15,000 relative to the preceding week. The four-week moving average for continuing claims continued to increase as the level for the week ending May 23 is still the second-highest level ever reported.


The unemployment rate, however, is still on the rise, increasing from 8.9 percent in April to 9.4 percent in May. This uptick is primarily related to an increase in the number of people losing jobs and persons who completed temporary jobs. Also, labor force participation increased, which works to drive up the unemployment rate, though the increase was slight, from 65.8 percent to 65.9 percent. In addition, after a dip in April, the number of workers that are part-time for economic reasons increased slightly in May.


The slight gain seen in April in average weekly hours for manufacturing workers was erased this month, although hours of overtime maintained April's slight increase.


We also have seen some better news in the Atlanta Fed's Sixth Federal Reserve District. Initial claims have decelerated at a faster rate in the Sixth District than in the nation, most notably in Georgia, Alabama, and Florida. Additionally, in contrast with the national level, where continuing claims have had a persistent rise until this past release, the rate of increase has slowed down in District states.



Also, Florida, which was one of the first states to suffer in the current recession and one of the hardest hit by the housing downturn, posted job gains in April for the first time in more than two years. A large share of these gains came from the employment services industry, which includes the temporary employment sector. Florida's numbers are slightly more positive than the industry's national data.

So are these recent improvements in some of the employment data really green shoots, or are they just weeds? Only time will tell, but it is promising that the labor market is at least producing some variation from the negative trends.

By Melinda Pitts, research economist and associate policy adviser, and Menbere Shiferaw, senior economic research analyst, at the Atlanta Fed

June 8, 2009 in Labor Markets | Permalink


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June 03, 2009

Debt and money

If you are hunkered down on inflation watch, yesterday's news offered some soothing words. From Reuters:

"Chinese officials have expressed concern that heavy deficit spending and an ultra-loose monetary policy could spark inflation, eroding the value of China's U.S. bond holdings.

"But [U.S. Treasury Secretary Timothy] Geithner said: 'We have a strong, independent Fed and I am completely confident they have the ability to do their job under the law, which is to keep inflation stable and low over time, and that they will be able to—and certainly intend to—unwind these exceptional measures as soon as they have served their purpose.' "

And from Bloomberg:

"He said that there was 'no risk' of the U.S. monetizing its debt, a response to a question about whether the government would seek to finance the national debt by expanding the money supply and thus trigger a rise in inflation."

Concerns about such monetization arose in the wake of the FOMC's decision at its March meeting to purchase up to $300 billion of longer-term Treasury securities and that decision's coincidence with the very large fiscal deficits contemplated in President Obama's budget proposals. Those concerns have accelerated as longer-term Treasury yields have moved higher since.

There will, I trust, be plenty of opportunity to expand on these concerns as things develop, but for now I will offer just a little perspective in the form of the chart below, which shows the recent and (near-term) prospective shares of federal debt held by the Federal Reserve. The red line represents the share of debt that will be held by the Fed at the end of fiscal year 2009 if the $300 billion Treasury purchase program is completed and the federal deficit emerges as currently predicted by the Congressional Budget Office.


The financial crisis has, of course, borne witness to the shift in the Fed's balance sheet from Treasuries (which have been much in demand by the private sector) to a variety of loans and mortgage-backed securities. The consequence has been a sharp fall in the fraction of government debt held by the central bank, a fact that will be little changed under the current trajectory of Fed purchases and projected deficit spending.

A large decline in Fed holdings of Treasury bills—securities that mature in one year or less—drives much of the pattern seen in the chart above. The drop-off in share is not as large for Treasury notes—securities in the two- to ten-year maturity range, and some assumptions have to be made to get a picture of how the Fed's share might evolve over the near term. Without knowing how this evolution will occur, I developed two general assumptions for argument sake. If net new issues of Treasury debt follow historical averages, meaning just over half of net new debt is in the form of notes, and if the central bank applies the remainder of the $300 billion of longer-term Treasury purchases (about $170 billion at the end May) to notes, then the Fed would hold roughly 13 percent of the outstanding stock by the end of the year. If the Treasury were to issue nothing but bills or bonds, a $170 billion purchase of notes by the Fed would bring its share up to the neighborhood of 17 percent. Though these numbers are not as unusually low in historical context as is the case for total outstanding debt, neither would they jump off the page as an extreme aberration in the other direction.


Some might argue that "monetization" these days involves a whole lot more than government debt, but Chairman Bernanke has been pretty clear about his intentions regarding the overall size of the Fed's balance sheet. And, as I see it, so far allegations that extraordinary steps are being taken specifically to accommodate fiscal deficits are properly characterized as risk rather than fact.

By David Altig, senior vice president and research director at the Atlanta Fed

June 3, 2009 in Federal Debt and Deficits, Federal Reserve and Monetary Policy, Inflation | Permalink


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I think this is an oversimplification. large number of Treasuries in the past were being held as assets from banks not the result of Quantative Easing.

If you look at the fact the fed has been trading sercure T-bills for dubious assests and printing money to acquire treasuries.

I think their is a strong possibility that the Fed ia allowing positioning itself to absorb billions in write downs on the non-Treasury assets.

The end result will be another laundering of Toxic Assets for the banks. The Fed will have basically monetized the Bank Losses onto the American Taxpayer who will be stuck paying the Fed to moentize banks bad lending.

Posted by: Kevin | June 04, 2009 at 10:25 AM

I found this blog really good, this is a best way to share information to increase knowledge and learning capabilities. good work

Posted by: Research Paper Writing | June 05, 2009 at 02:46 AM

David - thanks. You "wouldn't believe" how widespread, prevalent, virulent and heartfelt this meme is; nor what damage it's doing about the finance/invest/econ/bizz communities AND the normal folk who don't walk like that. Here and in your day job it would be in your and your organization's interest to continue to pursue and explain the situation, mechanisms and ramifications.

The sound and fury signifying nothing is about 99% of the discussion; other than one Krugman column and this I can find little or nothing sensible.

Posted by: dblwyo | June 05, 2009 at 09:01 PM

Now all that said two strictly bloggish comments or questions that build on the concerns:
1) in charting TNX for the last several charts I see nothing aberrational about current rates; instead there's an aberrational price jump beginning around Sep08 or so. Gee, I wonder why that is ?

2) how do you guys estimate Velocity ? I tried a poor man's version using FRED II data on GDP (real,nominal), M2 (M3 and MZM were similar)and the GDP Deflator for MV=PQ by V = GDP/MZM. On that basis V has fallen ~21% since Q406 having risen ~9.2% from Q303 to Q306. That rise would seem reasonable for a slow recovery but that seems like a significant fall in a shorter timeframe ?

Posted by: dblwyo | June 05, 2009 at 09:20 PM

People who are concerned about "monetization" simply don't understand how our monetary system works. Reserves are one kind of deposit at the Fed; Treasuries are another kind of deposit. Other than interest rates (and with the Fed paying interest on reserves now, even that is a wash), there is no difference between them - they are both financial liabilities of the Federal government, not convertible into anything else. If the Treasury ceased to issue securities, all that would happen is that interest rates would drop to zero.

The monetization-phobes are stuck in a gold-standard way of thinking that is totally inapplicable to current floating exchange rate fiat money regimes.

Posted by: Jim Baird | June 08, 2009 at 09:02 AM

Great article thanks very much for sharing. thanks.

Posted by: wii24 | July 17, 2009 at 06:36 PM

Wonderfully informative blog. Great article-thanks for helping keep the masses informed!

Posted by: Grace | July 29, 2009 at 11:51 AM

Great post, i've already subscribed to your feed. thanks

Posted by: renda extra | August 01, 2009 at 08:44 AM

Thanks for the post. It's good to see that someone remembers how and why the "idea" of money works.

Posted by: Jons Debt News | August 05, 2009 at 10:14 PM

Great article. I just wish the sound bite news media would publish detailed facts like you. Keep up the good work.

Posted by: Ron Stone | August 12, 2009 at 04:07 PM

Great post. Your blog has become one of my regular reads. Thanks.

Posted by: Make Money Online | August 19, 2009 at 12:24 AM

Thanks for the article on debt and money. Some very good points and interesting information. I have bookmarked your site and will be back to learn more! Thanks again,

Posted by: Rod Bird | September 13, 2009 at 08:25 PM

If we aren't loading up on one thing then it's another.

Personally I don't really care what value China has in the USA. If China isn't ready to roll with the bad and the good they shouldn't be handing us money over and over again.

Posted by: Penny Stocks to Buy | October 12, 2009 at 11:37 AM

China really should have expected this would happen. We're still the bullies out there and can get away with things like this!

Posted by: Fast Cash Lydia | October 17, 2009 at 11:38 PM

chinise money policy is always flawed...they has no farsight at all, all small talks kept aside (includng projections) look at their market so volatile...and look at at the Heterogeneous distributon of wealth..!!

Posted by: Riju@Insure-Investment | October 26, 2009 at 12:18 PM

Great post! It is very interesting!

Posted by: Ganhar Dinheiro | November 18, 2009 at 10:05 AM

It's a good thing the Chinese need us as much as we need them, otherwise we would be in some deep you know what. If this recession gets worse (I believe the previous quarter's numbers were seriously inflated by the Auto and Housing incentives), that could change. But no matter what the Fed does, the way our Congress and the President are tax and spending, it won't matter. Our own government will finish off this economy.

Posted by: Ron Stone | November 28, 2009 at 05:22 PM

The amount of debt our government is accumilating trying to assist the big corporations is outrageous.

Posted by: Debt Assistance Program | February 18, 2010 at 09:31 AM

Good post. Hopefully something is done with the current debt problems we are currently facing.

Posted by: Clear Credit Card Debt | February 18, 2010 at 05:45 PM

The fed has been printing money to acquire treasuries for many many years.

The Fed is positioning itself to absorb billions in write downs on the non-Treasury assets.

The Fed will take the bad Assets from the banks and will have basically monetized the Bank's Losses onto the American Taxpayer.

Posted by: Settlement | March 07, 2010 at 10:10 PM

They need to cut all of the entitlement programs and stop mortgaging our childrens futures…

Posted by: Debt Relief | March 26, 2010 at 10:59 PM

I think this is an oversimplification. large number of Treasuries in the past were being held as assets from banks not the result of Quantative Easing.

If you look at the fact the fed has been trading sercure T-bills for dubious assests and printing money to acquire treasuries.

I think their is a strong possibility that the Fed ia allowing positioning itself to absorb billions in write downs on the non-Treasury assets.

Posted by: Moisés Oliveira | May 27, 2012 at 12:33 PM

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