deflation; where did the money go?

If you buy a T-Bill you are putting money out of the reach of the normal economy. That would be hoarding money. If you put it in a savings account at the bank, that would be hoarding.

Reply to
Michael Coburn
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Say: "velocity"

The economy is an ongoing process, so what matters is not the quantity of money but that quantity multiplied by the number of times it turns over in a given time period -- its velocity.

As the classic equation puts it, MV=PQ: M (the quantity of money) times V (velocity, the number of times it turns over) = P (price of goods) times Q (quantity of goods produced)

Thus, it is easy to see that when M stays even if V plunges then either prices must fall (deflation) or the quantity of goods produced must fall (recession) or both.

V will fall if people, banks and businesses get scared of lending money (the bank or other borrower may fail) and/or think they have to pile up cash holdings rather than spend them to get through hard times.

Then they proverbially put their money in their mattresses, so it stops changing hands, so V falls.

If you want to see a picture of V plunging, take a look:

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That's what produced the Great Depression with its 25% deflation, and

25% unemployment, because the Fed didn't counter it by increasing M.

If you want to see a picture of the Fed, after having learned that lesson, increasing M to counter such a decline in V, take a look:

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4 The Fed is *literally* rolling out the printing presses right now-- it just imported new currency printing presses from Switzerland to boost its money-printing capacity and tie M to an upward rocket.

Reply to
RogerDodger

Wrong when you consider what the govt does with that money.

Wrong, as always.

Wrong, as always.

Reply to
Rod Speed

Most of the money in the economy isn't created by the Fed but by banks.Money is created when a bank makes a loan, and it disappears when a loan is repaid.

If the banks stop making loans, but people keep on paying their loans off, then this could cause the money supply to contract.

Reply to
Andy F.

Sir, I beg to differ.

Money in the form of Dollars is issued by the Fed either in the form of Dollar notes and coins, or in the form of credit amounts (presumably stored as lots of numeric digits in thememory of a computer somewhere) payable to banks. According to people who know better, adding more zeroes to those amounts can be called 'The Fed is printing money'.

Suppose for simplicity sake there is only one bank in town.

This bank has one trillion Dollars deposited by its first depositing customer. At this stage, the bank's book-keeping records show $1 trillion of money as assets, with a corresponding $1 trillion in deposits owing to depositor/s. That's all.

Next, the bank gives a loans customer a line of credit of $1 trillion, which that loan customer utilise immediately by drawing up a $1 trillion check that he uses to that amount for some business purpose. When the payee presents the check to the bank, he is paid by the bank from the money deposited by the depositor/s. Because the line of credit has been used, the bank considers that it has given a loan of $1 trillion to the loan customer. So in the books, the bank would only a deposit of the original $1 trillion owing to the depositing customer, with a corresponding balance of $1 trillion owed to the bank by the loans customer. Now the bank has no money left.

Now, the bank is the only one in town. The payee deposits the $1 trillion back into the bank. Now the books of the bank shows $1 trillion of money together with $1 trillion owed to the bank by the loans customer, making a total of $2 trillion as assets; on the liabilities side, the bank acknowledges the total amount owing to depositors is now $2 trillion.

Suppose the bank repeats the same kind of loan transaction another 8 times with different loan customers who all deposited the money back into the bank. The books will show there is $1 trillion of money together with $9 trillion owed to the bank by the loans customers, making a total of $10 trillion as assets; on the liabilities side, the bank acknowledges the total amount owing to depositors is now $10 trillion.

In other words, $9 trillion worth of credit loans were created; the same amount of money changed hands 9 times. Just don't confuse credit with money.

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Reply to
Rich Uncle

Well, though this is often stated actually loans aren't counted in money, deposits are counted as money. There is a difference.

M1= currency, travelers checks, demand deposits, checkable deposits. M2= M1 + savings account deposits, time deposits, money funds.

No "loans" in there.

Now, if a loan amount is made in the form a check that is deposited, then that deposit counts as money, but it's not the loan, it is the deposit that counts.

Of course it's easy to make a loan that isn't deposited and doesn't count as money: the bank just loans out cash that the recipient holds or spends without depositing it, there is a loan but no money is created.

Eg:

Mr. A has $10 in cash. That is $10 in the money supply.

Mr A then deposits that cash in bank. A then has a deposit of $10, which is money, and the bank has $10 in cash, which is money. Thus the money supply has grown to $20, due to the deposit, with no loan.

Now the bank loans $8 of its cash to Mr B.

The money supply remains unchanged at $20: A's deposit of $10, +$2 cash held by the bank, plus $8 cash held by B.

A loan has been made but the money supply has not been increased.

Now say B decides to deposit $5 of his cash in the bank, the money supply then grows to $25: A's deposit of $10, $2 cash held by A's bank, $3 cash held by B, B's deposit of $5 at his bank, and the $5 cash held by B's bank ... the original $10 of cash plus $15 of deposits.

No loan created any new money, the deposits created the new money.

The $8 loan to B did not itself create any money, but did facilitate the creation of $5 of new money when B deposited that much of it in his bank.

Of course it is true in the real world that if lending plunges deposits will fall so the money supply will fall -- but it's not the lending that creates the money, it the deposits, and there's not a 1-1 relation between them.

Not necessarily so.

In the situation above with $25 of money, $10 cash and $15 deposits, say B's bank loans $4 cash to Mr C.

No new money is created, $4 cash just shifts from the bank's vault to C's pocket.

A little while later C repays the loan to the bank, giving it $4 cash.

The loan is repaid -- no money disappears, deposits are unchanged, cash is unchanged, the money supply is unchanged.

Loans are not money. Deposits are money.

In the real practical world, yes, because a lot of loans will be repaid by reducing deposit balances -- such as by reducing the balance in your checking account.

But it is the reduction of the deposit balance that reduces the money supply, not the disappearance of the loan.

There's is not a 1-1 correlation here either. If you pay off your bank loan by giving the bank cash, the loan disappears but there is no reduction in the money supply because your deposit balance is unchanged and the amount of cash existent is unchanged as well.

Loans are not money.

Reply to
RogerDodger

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Reply to
Rich Uncle

technically it's only disinflation as yet. However there are debt-deflationary dynamics already operating in credit markets.

It's not cash that vanishes, it's credit. Think of it as 60 trillion of credit having to be squeezed into 6 trillion of cash as people sell in sundry markets to get out into cash. All that credit gradually vanishes to the ether from whence it cam in the bubble, and it gets harder and harder to get a loan, thus driving prices down further.

FoFP

Reply to
M Holmes

I'm hoarding gold. It's in a vault in Canada somewhere.

FoFP

Reply to
M Holmes

te:

then you spent your money and it is circulating in the economy. good point though, with commodity money hoarding is possible!

Reply to
orangatang1

buying a tbill is financing government debt. if you buy a long term treasury close to maturity you must buy it off someone, who then gets your money. if you put the money in a bank it gets lent. in our system savings and investment are the same thing.

Reply to
orangatang1

ok,. so the amount of money (M3 or whatever) hasn't changed, but no one wants to spend it..

But eventually, happy days will return, and we'll all go on a shopping spree, as those zillions pour out of the mattresses, right?

So is there any protection, at the macro level or individual level, against the post-bust inflation? Will the dollar ineluctably go down the toilet?

Reply to
RichD

A speculative boom driven by central bank monetary policy.

That's a corollary of the monetary phenomenon.

No. If there is true, i.e. wealth creation, economic development worldwide, the goods and services produced expand supply, at least equivalent to the monetary expansion; hence no price inflation.

This is the rationale behind the dictum "inflation is always a monetary phenomenon".

Reply to
RichD

Bank credit _is_ money, at least according to some common definitions of the term.In your example, the M2 money supply would be $10 trillion.

Bank balances are counted as 'money' because people can go out and spend them just like they were cash.If there's too much bank credit chasing too few goods, you can get inflation. Conversely, if there isn't enough bank credit, the result can be deflation.

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Money in the form of Dollars is issued by the Fed either in the form of Dollar notes and coins, or in the form of credit amounts (presumably stored as lots of numeric digits in thememory of a computer somewhere) payable to banks. According to people who know better, adding more zeroes to those amounts can be called 'The Fed is printing money'.

Suppose for simplicity sake there is only one bank in town.

This bank has one trillion Dollars deposited by its first depositing customer. At this stage, the bank's book-keeping records show $1 trillion of money as assets, with a corresponding $1 trillion in deposits owing to depositor/s. That's all.

Next, the bank gives a loans customer a line of credit of $1 trillion, which that loan customer utilise immediately by drawing up a $1 trillion check that he uses to that amount for some business purpose. When the payee presents the check to the bank, he is paid by the bank from the money deposited by the depositor/s. Because the line of credit has been used, the bank considers that it has given a loan of $1 trillion to the loan customer. So in the books, the bank would only a deposit of the original $1 trillion owing to the depositing customer, with a corresponding balance of $1 trillion owed to the bank by the loans customer. Now the bank has no money left.

Now, the bank is the only one in town. The payee deposits the $1 trillion back into the bank. Now the books of the bank shows $1 trillion of money together with $1 trillion owed to the bank by the loans customer, making a total of $2 trillion as assets; on the liabilities side, the bank acknowledges the total amount owing to depositors is now $2 trillion.

Suppose the bank repeats the same kind of loan transaction another 8 times with different loan customers who all deposited the money back into the bank. The books will show there is $1 trillion of money together with $9 trillion owed to the bank by the loans customers, making a total of $10 trillion as assets; on the liabilities side, the bank acknowledges the total amount owing to depositors is now $10 trillion.

Reply to
Andy F.

RichD wrote

Plenty do, but dont have it to spend.

Yep, they always do.

There's f*ck all in mattresses.

Yep, you can put your money in inflation proof stuff.

Nope, its actually increased substantially recently.

Reply to
Rod Speed

True. I should have said "usually."

Reply to
Andy F.

====================================> >

=============================================> > > Supposedly, we are now descending experiencing deflation,.

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Reply to
Rich Uncle

Hmm ... , there seems to be a slight discrepancy between your M1 and M2 definitions and those of RogerDodger who posted the following:-

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By his definition, M1 should be $11 trillion because his definition does not exclude currency holdings held by banks.

The modern definition as used by the Fed would exclude currency holdings held by banks, i.e., the same amount of $10 trillion as you have mentioned.

Could you also c> Bank credit _is_ money, at least according to some common definitions of the

.
Reply to
Rich Uncle

.

there are several definitions of m1 and m2.

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'Money creation

The process of fractional-reserve banking has a cumulative effect of money creation by banks.[4] In short, there are two types of money in a fractional-reserve banking system:[6][7][8]

central bank money (money created by the central bank regardless of its form (banknotes, coins and electronic money loaned to commercial banks)) commercial bank money (money created through loans in the banking system) - sometimes referred to as chequebook money[9] When a loan is funded with central bank money, new commercial bank money is created. As a loan is paid back, the commercial bank money disappears from existence.'

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Reply to
orangatang1

Yes and no. What follows deflationary busts are periods of slow but steady growth and slow inflation. People generally eschew debt and save for what they want, having been burned in the bust.

The return to the sort of period we had in the bubble won't happen for a couple of generations. So shopping yes, spree, probably not.

FoFP

Reply to
M Holmes

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