n. uk and irenicus please refrain from posting
from http://mises.org/daily/3556
"The overwhelmingly greater part of our money supply today consists of fiduciary media in the form of checking deposits of one kind or another. For example, as of December 2007, the total money supply of the United States, i.e., currency plus bank deposits of all kinds that are subject t_o the writing of checks, including the making of payments by debit card, was $6901.9 billion;[3] at the same time, the monetary base was $836.4 billion."_
additionally, " currency plus checking deposit liabilities of the central bank, when taken together, are known as the “monetary base.”
“there was full, 100 percent standard-money backing for $42.7 billion of deposits, and no standard-money backing whatever for $6065.5 billion of deposits…”
my first question is what kind of money constitutes the 836 billion dollar monetary base MINUS the 42 billion dollar standard money deposits (which i assume are "A portion of the currency outstanding and a portion of the checking deposit liabilities of the Federal Reserve constitute the reserves of the banking system. These reserves are the standard money…in December of 2007, they were $42.7 billion.)??
is that just currency that people just have on hand?
secondly, is the 42 billion spoken of above 'held with the federal reserve"? is the 42 billion somehow different than the ‘reserve ratio’ cash that i have read that banks keep on hand? or is it the same thing?
the mises article goes on to say…“The new and additional money created by the banking system on the foundation of these new and additional reserves appeared in the loan market as a new and additional supply of loanable funds.”
and
“Thus for each dollar of additional excess reserves created, a credit expansion was made possible on the order of a vast multiple. The new and additional fiduciary media corresponding to the credit expansion were the source of the funds for stock purchases in the stock market bubble and for housing and commercial real estate purchases in the housing bubble.”
and
“Unless the Federal Reserve intervened to provide new and additional reserves equal to the increase in the need for reserves, the effect would be not only a rise in interest rates but a general tendency toward a contraction of credit. This last would result from the loss of reserves by banks whose reserves were already at the bare minimum necessary to conduct operations.”
in seeming contrast this link http://www.hussmanfunds.com/html/fedirrel.htm contains the following excerpts…
"The Federal Reserve is irrelevant. We don’t just mean ineffective, though that is certainly likely to be true here. Rather, b_ecause of a change in the application of reserve requirements over the past decade, Fed actions have virtually zero impact on lending activity in the U.S. banking system."_
when they say virtually do they mean falsely?
also…
"what the Fed does, let’s take a look at why it is irrelevant…
Activist monetary policy is based on the assumption that there is a predictable relationship between bank reserves and bank lending. The operative notion of easy money is that the Fed creates new bank reserves, and banks lend them out. These loans get spent, and the proceeds get deposited at other banks as new checking accounts. Whatever is not required to be held as reserves is then lent out again, and through the magic of the “money multiplier”, loans and bank deposits go up by many times the initial injection of reserves.
That’s the theory. But a change came in the 1970s with the emergence of money market funds, which require no reserve requirements. Then in the early 1990s, reserve requirements were dropped to zero on savings deposits, CDs, and Eurocurrency deposits.At present, reserve requirements apply only to “transactions deposits” - essentially checking accounts. The vast majority of funding sources used by banks to create loans have nothing - nothing - to do with bank reserves."
bank reserves with the federal reserve or with themselves?
“These days, commercial and industrial loans are financed by issuing large denomination CDs. Money market deposits are largely used to lend to corporations who issue short term commercial paper. Consumer loans are also made using savings deposits which are not subject to reserve requirements.”
odd chart at link
“The point is simple. Commercial, industrial and consumer loans no longer have any link to bank reserves. Since 1995, the volume of such loans has exploded, while bank reserves have actually declined . Look at the one monetary aggregate that the Fed can directly control - the monetary base. Every bit of increase since January 1994 is accounted for by currency in circulation, not bank reserves.”
mises article says ""The new and additional money created by the banking system on the foundation of these new and additional reserves appeared in the loan market as a new and additional supply of loanable funds."
other posted link says “The point is simple. Commercial, industrial and consumer loans no longer have any link to bank reserves. Since 1995, the volume of such loans has exploded, while bank reserves have actually declined .”
can anyone at mises sites clarify what seems to me to be opposite things being said about economic phenomena occuring in the us economy?
is someone leaving out some important piece of analysis in one or both of these articles?
thanks