FRED if the Banks bad loans are the Fed's Assets?

[BillBoard]

What does that mean in regards the money supply?

At what rate does the Fed have to keep money creation to keep a steady level of money supply?

[aaron]

Re: FRED if the Banks bad loans are the Fed's Assets?

At what rate does the Fed have to keep money creation to keep a steady level of money supply?

Just a little bit more.

[BillBoard]

Re: FRED if the Banks bad loans are the Fed's Assets?

Just a little bit more.

Care to share an approximate %?

[ASH]

Re: FRED if the Banks bad loans are the Fed's Assets?

What does that mean in regards the money supply?

Mostly, it means that the Fed is supporting the money supply by preventing banks from becoming insolvent due to recognition of losses on those assets that would subtract from their capital.

In the long run, it means that the Fed may have difficulty withdrawing excess banking reserves from the system, if it is unable to sell these bad assets back to banks for what it paid.

At what rate does the Fed have to keep money creation to keep a steady level of money supply?

I suppose the question is 'which money supply?'. In order to stabilize bank capitalization, the Fed needs to create money fast enough to offset the losses realized by banks on bad assets. However, it's difficult for the Fed to stabilize the broader money supply simply by creating money -- it could in theory, but things don't work that way right now. Instead, it must induce banks to lend.

The other point is that TPTB probably don't want a steady money supply so much as a steady rate of growth.

[BillBoard]

Re: FRED if the Banks bad loans are the Fed's Assets?

Mostly, it means that the Fed is supporting the money supply by preventing banks from becoming insolvent due to recognition of losses on those assets that would subtract from their capital.

In the long run, it means that the Fed may have difficulty withdrawing excess banking reserves from the system, if it is unable to sell these bad assets back to banks for what it paid.



I suppose the question is 'which money supply?'. In order to stabilize bank capitalization, the Fed needs to create money fast enough to offset the losses realized by banks on bad assets. However, it's difficult for the Fed to stabilize the broader money supply simply by creating money -- it could in theory, but things don't work that way right now. Instead, it must induce banks to lend.

The other point is that TPTB probably don't want a steady money supply so much as a steady rate of growth.

Hi Ash. You got to the point of my question, the banks must lend, otherwise a steady money supply would keep things stagnant? Or produce a steady drop in the standard of living? What I am trying to find out is if it is possible to measure or quantify the drop of living standard by correlating the money supply movement. There has to be new goods and services injected into the economy, how can they do that with no monetary growth?

[GRG55]

Re: FRED if the Banks bad loans are the Fed's Assets?

Mostly, it means that the Fed is supporting the money supply by preventing banks from becoming insolvent due to recognition of losses on those assets that would subtract from their capital.

In the long run, it means that the Fed may have difficulty withdrawing excess banking reserves from the system, if it is unable to sell these bad assets back to banks for what it paid...

Fed Officials Signal Asset Sales Will Play Bigger Role in Exit

March 26 (Bloomberg) -- Federal Reserve officials are moving toward a consensus that asset sales will play a more prominent role in their exit from the most expansive monetary policy in the central bank’s history.

Chairman Ben S. Bernanke told legislators yesterday that “restoring the size and composition” of the Fed’s record $2.32 trillion balance sheet to a “more normal configuration” is a long-term policy goal. St. Louis Fed President James Bullard said in an interview the central bank must start making plans now for future asset sales.

“There does seem to be agreement that you want to get back to a normal-looking balance sheet at some point in the future,” Bullard said. “We want to someday get back to a pre-crisis balance sheet -- both the size of it and the fact that it would be an all-Treasuries balance sheet.”...

Ya think...:rolleyes:

[lsa420]

Re: FRED if the Banks bad loans are the Fed's Assets?

Hi Ash. You got to the point of my question, the banks must lend, otherwise a steady money supply would keep things stagnant? Or produce a steady drop in the standard of living? What I am trying to find out is if it is possible to measure or quantify the drop of living standard by correlating the money supply movement. There has to be new goods and services injected into the economy, how can they do that with no monetary growth?

How does monetary growth equate to productivity? I assume you mean that as an economy, we need to increase our productivity (real wealth) to get out of this mess? I would agree with that.

Does productivity increase simply by printing money? If so, then we'll be in good shape in short order.

I would argue just the opposite is the case. One of the problems we created is that we had massive monetary growth with no corresponding growth in productivity.

[BillBoard]

Re: FRED if the Banks bad loans are the Fed's Assets?

How does monetary growth equate to productivity? I assume you mean that as an economy, we need to increase our productivity (real wealth) to get out of this mess? I would agree with that.

Does productivity increase simply by printing money? If so, then we'll be in good shape in short order.

I would argue just the opposite is the case. One of the problems we created is that we had massive monetary growth with no corresponding growth in productivity.

Well, my thinking is that with lending, demand for goods and services would increase, unless the new money created would be used to service current debts.

[lsa420]

Re: FRED if the Banks bad loans are the Fed's Assets?

Well, my thinking is that with lending, demand for goods and services would increase, unless the new money created would be used to service current debts.

Sorry, BB. I don't follow your line of thinking. How does lending (creating credit through fractional reserve banking) increase demand for goods and services?

From my perspective (perhaps naive?) lack of demand is not the problem. The problem is that we are broke.

[ASH]

Re: FRED if the Banks bad loans are the Fed's Assets?

Hi Ash. You got to the point of my question, the banks must lend, otherwise a steady money supply would keep things stagnant? Or produce a steady drop in the standard of living? What I am trying to find out is if it is possible to measure or quantify the drop of living standard by correlating the money supply movement. There has to be new goods and services injected into the economy, how can they do that with no monetary growth?

Given the way our economy works (not the way it should work in a perfect world, but the way it actually has worked, recently), a steady money supply tends to result in stagnation. We're on a debt treadmill, and if the money supply is constant, we run into a cash flow problem. At one level, we're taking out new loans to pay the interest on old loans, and since money is primarily created as debt, a steady money supply means that debt isn't growing.

Under the current system, stable money supply ought not to result in a steady drop in the standard of living, ad infinitum, but rather a drop to a lower base level and a steady rate of loan defaults. Paying for a good or service doesn't destroy the money used to make the payment, so you don't technically need steady growth of the money supply in order to continually pay for new goods and services. It's just that the available money has to be divided between debt service and new consumption. Interestingly, paying off loans, or defaulting on a loan, does remove money from the total supply, so even a stable money supply implies some rate of new credit issuance... just not enough to provide the same margin for new consumption over and above that needed for debt service. The reason a stable money supply -- under the current system -- implies a steady rate of loan defaults is that unless borrowers manage to pay off the interest on their loans before they pay off the principal, the debt compounds but the money supply does not.

Things don't have to be run this way, but given a debt-based money system, you are essentially correct that continuous growth of the money supply is necessary to sustain "normal" levels of economic activity.

[ASH]

Re: FRED if the Banks bad loans are the Fed's Assets?

Well, my thinking is that with lending, demand for goods and services would increase, unless the new money created would be used to service current debts.

Sorry, BB. I don't follow your line of thinking. How does lending (creating credit through fractional reserve banking) increase demand for goods and services?

From my perspective (perhaps naive?) lack of demand is not the problem. The problem is that we are broke.

I think this is a semantic issue. There is this concept of "effective" demand, which is to say, the combination of the desire for something with the means to pay for it. I think BillBoard is talking about effective demand (desire+credit) and LSA is talking about desire only.

[lsa420]

Re: FRED if the Banks bad loans are the Fed's Assets?

Given the way our economy works (not the way it should work in a perfect world, but the way it actually has worked, recently), a steady money supply tends to result in stagnation. We're on a debt treadmill, and if the money supply is constant, we run into a cash flow problem. At one level, we're taking out new loans to pay the interest on old loans, and since money is primarily created as debt, a steady money supply means that debt isn't growing.

Under the current system, stable money supply ought not to result in a steady drop in the standard of living, ad infinitum, but rather a drop to a lower base level and a steady rate of loan defaults. Paying for a good or service doesn't destroy the money used to make the payment, so you don't technically need steady growth of the money supply in order to continually pay for new goods and services. It's just that the available money has to be divided between debt service and new consumption. Interestingly, paying off loans, or defaulting on a loan, does remove money from the total supply, so even a stable money supply implies some rate of new credit issuance... just not enough to provide the same margin for new consumption over and above that needed for debt service. The reason a stable money supply -- under the current system -- implies a steady rate of loan defaults is that unless borrowers manage to pay off the interest on their loans before they pay off the principal, the debt compounds but the money supply does not.

Things don't have to be run this way, but given a debt-based money system, you are essentially correct that continuous growth of the money supply is necessary to sustain "normal" levels of economic activity.

Now that's what I call continuous.

http://research.stlouisfed.org/fred2/data/BOGUMBNS.txt

[ASH]

Re: FRED if the Banks bad loans are the Fed's Assets?

Well, my thinking is that with lending, demand for goods and services would increase, unless the new money created would be used to service current debts.

With lending, the ability to pay for goods and services -- and to service existing debt -- would increase. The price for this increase in economic activity is an even larger overhang of accumulated debt (and associated debt service payments), and steady loss of purchasing power for the currency unit. It's back onto the debt treadmill, storing up more whammies down the line.

Up to a limited point, the availability of credit can increase productivity by funding investment in productive enterprises. Its best use is as a time-sequencing tool. However, when credit is used to inflate asset prices, consume, and service existing debt, it has no bearing upon productivity and the creation of real wealth.

[lsa420]

Re: FRED if the Banks bad loans are the Fed's Assets?

I think this is a semantic issue. There is this concept of "effective" demand, which is to say, the combination of the desire for something with the means to pay for it. I think BillBoard is talking about effective demand (desire+credit) and LSA is talking about desire only.

Right.

And the reason we have no credit is because we accumulated too much of it and now we can't pay the interest. Also we have no savings (as EJ points out in the recent piece in the HBR), which is where credit comes from. That and the government is running $1.5T deficits, and is sucking all the available credit away from the private sector.

[lsa420]

Re: FRED if the Banks bad loans are the Fed's Assets?

With lending, the ability to pay for goods and services -- and to service existing debt -- would increase. The price for this increase in economic activity is an even larger overhang of accumulated debt (and associated debt service payments), and steady loss of purchasing power for the currency unit. It's back onto the debt treadmill, storing up more whammies down the line.

Up to a limited point, the availability of credit can increase productivity by funding investment in productive enterprises. Its best use is as a time-sequencing tool. However, when credit is used to inflate asset prices, consume, and service existing debt, it has no bearing upon productivity and the creation of real wealth.

Ok. We're on the same page ASH. You're just obviously a lot smarter than I am. Thanks for your comments, I have enjoyed reading.