Comments on: True Money Supply http://www.economicsjunkie.com/true-money-supply/ True Economics Applied in the Real World Sun, 21 Mar 2010 03:34:15 -0700 http://wordpress.org/?v=2.8.6 hourly 1 By: Rob http://www.economicsjunkie.com/true-money-supply/comment-page-1/#comment-2950 Rob Sun, 26 Jul 2009 02:13:50 +0000 http://www.economicsjunkie.com/?p=423#comment-2950 This report is a survey of approximately sixty large domestic banks and twenty-four U.S. branches and agencies of foreign banks. So, if they say 80% of the respondents are tightening standards for loans, it simply means they are making it tougher to get loans. I couldn't agree more that banks are not going to take risks unless they see they can make money, that is why the spread chart of loan rates vs costs of funds is so important. This highlights the ability for a bank to make money. I fully understand the Jaguar analogy, however this doesn't account for adding productivity to the economy. Like when you analyze a company, you need to look at both ROE and ROA then ROA vs Cost of Capital. Does a company produce more when they have leverage? Is there a growth of debt that would hamper a companies ability to grow? What if banks loosen the standards to make loans at the same time they are getting a bigger spread to take a risk. Entrepreneurs will have a price at which they will want to take a risk and incur debt to start or grow businesses again. We need to separate consumers from businesses in this debate as well. I agree consumers appetite is going to be very limited, but business? Corporate profits always turn up before we leave a recession. http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=CP&s[1][transformation]=pc1 then, businesses start investing http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=GPDIC1&s[1][transformation]=pc1 then consumers will eventually gain their footing. However, none of that can start unless banks have a healthy spread and they start to lower standards. Lastly, part of the reason banks lower rates is that they see corporations firming up their balance sheets, then banks pick the strongest corporations to start loaning to, which gives us the footing for a recovery. Not sure we are there yet and still may have a ton of unwinding to do, but this is perfectly in line with your description of the business cycle. This report is a survey of approximately sixty large domestic banks and twenty-four U.S. branches and agencies of foreign banks. So, if they say 80% of the respondents are tightening standards for loans, it simply means they are making it tougher to get loans. I couldn’t agree more that banks are not going to take risks unless they see they can make money, that is why the spread chart of loan rates vs costs of funds is so important. This highlights the ability for a bank to make money. I fully understand the Jaguar analogy, however this doesn’t account for adding productivity to the economy. Like when you analyze a company, you need to look at both ROE and ROA then ROA vs Cost of Capital. Does a company produce more when they have leverage? Is there a growth of debt that would hamper a companies ability to grow? What if banks loosen the standards to make loans at the same time they are getting a bigger spread to take a risk. Entrepreneurs will have a price at which they will want to take a risk and incur debt to start or grow businesses again. We need to separate consumers from businesses in this debate as well. I agree consumers appetite is going to be very limited, but business? Corporate profits always turn up before we leave a recession.
http://research.stlouisfed.org/fred2/graph/?chart_type=line&s1id=CP&s1transformation=pc1
then, businesses start investing
http://research.stlouisfed.org/fred2/graph/?chart_type=line&s1id=GPDIC1&s1transformation=pc1
then consumers will eventually gain their footing. However, none of that can start unless banks have a healthy spread and they start to lower standards. Lastly, part of the reason banks lower rates is that they see corporations firming up their balance sheets, then banks pick the strongest corporations to start loaning to, which gives us the footing for a recovery. Not sure we are there yet and still may have a ton of unwinding to do, but this is perfectly in line with your description of the business cycle.

]]> By: Nima http://www.economicsjunkie.com/true-money-supply/comment-page-1/#comment-2944 Nima Sat, 25 Jul 2009 02:45:46 +0000 http://www.economicsjunkie.com/?p=423#comment-2944 It is interesting to have such a report that shows you the demand for loans. I am not quite sure I get the titles 100%. What does "Net Percentage of Domestic Respondents Tightening Standards for ..." mean? Yes, if there is no demand for loans the banks could have hundreds of trillion dollars in excess reserves and it wouldn't do anything at all. All they would do is to try and repay loans that generated the excess reserves to get them off their balance sheet. For example right now you can see that banks are scrambling to repay TARP money. The demand for loans, the willingness of people to incur more debt, their belief that they will be able to earn enough money in the future to pay it off, this is what ultimately determines the banks' potential to lend, not how much they have in excess reserves. When people have had enough Jaguars and are sick and tired of them, then there is no more potential for sellers to sell any more Jaguars. And when people have taken on enough debt and are sick and tired of it, then there is no more potential for banks to lend any more money. If other means existed for the banks to inject money, like having them buy anything they desire with it, not just debt instruments, then you would most definitely get a hyperinflation, but not in an environment where their only means of injecting money is by buying up debt... It is interesting to have such a report that shows you the demand for loans. I am not quite sure I get the titles 100%. What does “Net Percentage of Domestic Respondents Tightening Standards for …” mean?

Yes, if there is no demand for loans the banks could have hundreds of trillion dollars in excess reserves and it wouldn’t do anything at all. All they would do is to try and repay loans that generated the excess reserves to get them off their balance sheet. For example right now you can see that banks are scrambling to repay TARP money.

The demand for loans, the willingness of people to incur more debt, their belief that they will be able to earn enough money in the future to pay it off, this is what ultimately determines the banks’ potential to lend, not how much they have in excess reserves.

When people have had enough Jaguars and are sick and tired of them, then there is no more potential for sellers to sell any more Jaguars.

And when people have taken on enough debt and are sick and tired of it, then there is no more potential for banks to lend any more money.

If other means existed for the banks to inject money, like having them buy anything they desire with it, not just debt instruments, then you would most definitely get a hyperinflation, but not in an environment where their only means of injecting money is by buying up debt…

]]> By: Rob http://www.economicsjunkie.com/true-money-supply/comment-page-1/#comment-2940 Rob Fri, 24 Jul 2009 19:37:46 +0000 http://www.economicsjunkie.com/?p=423#comment-2940 Thank you for pointing that entry out to me and Prechter's PDF. I enjoyed both. I see why you wouldn't put it in the money supply. I was thinking about the potential for banks to lend and wanting to handicap an indicator, but after reading what I wrote it seems I was trying to make the case for it to be included in the true money supply. Didn't mean for it to come out that way. I keep a close eye on this report: http://www.federalreserve.gov/boarddocs/SnloanSurvey/200905/charts.pdf Mainly, to get an idea of supply and demand in the loan market and was thinking with all the excess reserves(assuming they are truly available to be lent out) if we saw the loosening of credit standards and a widening of the spread that banks receive, that it would setup an opportunity for a lot of activity. Which could lead to re-inflating and inflation quickly. But, the demand numbers for loans don't even look like it bottomed yet, so ties right back into what you said in the revisited post. Thanks again. Thank you for pointing that entry out to me and Prechter’s PDF. I enjoyed both. I see why you wouldn’t put it in the money supply. I was thinking about the potential for banks to lend and wanting to handicap an indicator, but after reading what I wrote it seems I was trying to make the case for it to be included in the true money supply. Didn’t mean for it to come out that way. I keep a close eye on this report:
http://www.federalreserve.gov/boarddocs/SnloanSurvey/200905/charts.pdf
Mainly, to get an idea of supply and demand in the loan market and was thinking with all the excess reserves(assuming they are truly available to be lent out) if we saw the loosening of credit standards and a widening of the spread that banks receive, that it would setup an opportunity for a lot of activity. Which could lead to re-inflating and inflation quickly. But, the demand numbers for loans don’t even look like it bottomed yet, so ties right back into what you said in the revisited post. Thanks again.

]]> By: Nima http://www.economicsjunkie.com/true-money-supply/comment-page-1/#comment-2912 Nima Tue, 21 Jul 2009 19:27:11 +0000 http://www.economicsjunkie.com/?p=423#comment-2912 No, I am not factoring this in, precisely because it is not in circulation. Imagine a bank had excess reserves buried in its backyard, never to be taken out, ever. Would you count that in as part of the money supply? To be sure, once they do lend it out, it goes into demand deposits and it will be accounted for. The main divide in the inflation/deflation debate is not so much what is and what is not to be included. It really is the idea that credit claims have to be included when determining whether we are in an inflation or deflation. Did you read my post http://www.economicsjunkie.com/inflation-deflation-revisited/ ? It is of crucial importance when it comes to the inflation/deflation debate. No, I am not factoring this in, precisely because it is not in circulation. Imagine a bank had excess reserves buried in its backyard, never to be taken out, ever. Would you count that in as part of the money supply?

To be sure, once they do lend it out, it goes into demand deposits and it will be accounted for.

The main divide in the inflation/deflation debate is not so much what is and what is not to be included. It really is the idea that credit claims have to be included when determining whether we are in an inflation or deflation.

Did you read my post http://www.economicsjunkie.com/inflation-deflation-revisited/ ? It is of crucial importance when it comes to the inflation/deflation debate.

]]> By: Rob http://www.economicsjunkie.com/true-money-supply/comment-page-1/#comment-2911 Rob Tue, 21 Jul 2009 18:42:47 +0000 http://www.economicsjunkie.com/?p=423#comment-2911 Nima, I have been thinking about this a lot. Excellent as usually. My mind always goes directly to how can I place a trade based on this information. Which lead me to something that might add additional insight into this. But, not exactly sure if it isn't already accounted for. Excess reserves held at the Fed. Don't you need this factored into the money supply figure in order get a true figure? This would be an excellent indicator of a switch from the inflation/deflation debate since this is really the only thing dividing the debate, in my opinion. Am I off base or did you already take that in to consideration and i don't understand? Rob Nima,

I have been thinking about this a lot. Excellent as usually. My mind always goes directly to how can I place a trade based on this information. Which lead me to something that might add additional insight into this. But, not exactly sure if it isn’t already accounted for. Excess reserves held at the Fed. Don’t you need this factored into the money supply figure in order get a true figure? This would be an excellent indicator of a switch from the inflation/deflation debate since this is really the only thing dividing the debate, in my opinion. Am I off base or did you already take that in to consideration and i don’t understand?

Rob

]]> By: 100% Reserve vs. Fractional Reserve Banking | EconomicsJunkie.com http://www.economicsjunkie.com/true-money-supply/comment-page-1/#comment-2885 100% Reserve vs. Fractional Reserve Banking | EconomicsJunkie.com Sun, 19 Jul 2009 23:30:30 +0000 http://www.economicsjunkie.com/?p=423#comment-2885 [...] Posts:True Money SupplyMoney vs. CreditInflation & DeflationHistory of MoneyFractional Reserve BankRetail Sweeps Fall [...] [...] Posts:True Money SupplyMoney vs. CreditInflation & DeflationHistory of MoneyFractional Reserve BankRetail Sweeps Fall [...]

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