Thursday, May 9, 2013

Inside and Outside


From Mark Dow and Michael Sedacca at Behavioral Macro:

The Fed does not control the money supply; they control base money (or outside money), which is a small fraction of the broader money supply. In our fractional reserve system, the banks (loosely defined) control the other 90% or so of the money supply (a.k.a. inside money). And the banks have not been lending...

Pretty clear, about inside and outside money, and who controls what.

3 comments:

paul said...

"In our fractional reserve system, the banks (loosely defined) control the other 90% or so of the money supply (a.k.a. inside money). And the banks have not been lending..."

Yes but at least 90% of the money supply is saved in one way or the other...so what does that do to the definition of "money supply"?

Over the past 5 years or so credit expansion has been nearly non-existent...negligible.

This leaves expansion of the "money supply" to net government spending.

Net government spending is the "collateral" that supports the credit system. The credit system isn't the true driver...it's an amplifier.

Amplifiers only work if they're "plugged in".

The Arthurian said...

Paul: "at least 90% of the money supply is saved in one way or the other..."

Yes, that is THE problem, or one way to describe it anyhow. Money *not* saved is "in circulation"... Circulating money is the money we use for transactions... And transactions *are* the economy. Excessively limit the quantity of circulating money and you excessively limit economic activity and growth.

Savings can return to circulation via lending, or replacement money can be newly created by lending. But either way, the carrying cost of money is increased for the economy as a whole.

This growing carrying cost creates cost-push pressures; it becomes necessary to let prices rise in order to combat the listlessness created by rising costs. (The Phillips curve shifts.)

But if the inflation is mistaken for demand-pull, the quantity of circulating money is restricted *more*, which only makes the problem worse.

In a nutshell.

//

I like that "amplifier" metaphor.

paul said...

" Circulating money is the money we use for transactions"

Yes, and most of that is held by the top 1%...the transactions attributed to them account for a subset of the economy...the health of an economy is measured by how well the bulk of the population is doing.

The economy isn't based on "circulating" money...it's mostly a function of government spending. Existing money circulating is an add-to not a main contributor.

Businesses are competing for deficits (adds) to the money supply...we all are...it's like a big poker game.

We just rarely win.