Is Credit Card Debt an expansion of the Money Supply?

[Black Flag]

It is merely the physical manifestation of a deposit at the Federal Reserve. I mean let's go through the accounting entries when the Fed creates money on the open market.

Deposit of....what?

I do.

Treasury creates T-bill for $1 billion.
FED buys T-bill for $1 billion.

FED either prints or types on a computer $1 billion in digits for the Treasury.

The government spends it.

It is money.

Just because the FED manufactures money does not make it "not" money.

That would be like saying just because a miner mines gold does not make it gold.

[matt0611]

Exactly... Now for the most part defaults don't take down banks because they have reserves, the ability to borrow from other banks and the ability to be bailed out indirectly and directly from the Fed. As long as the bank is still standing...the defaulted loan will still cause deflation though as the bank will curb the amount of demand deposits the bank can make to rebalance their reserves and equity ratios.

There is no question that demand deposits are a different type of money than base money...but claim slips are technically money as they are stores of values accepted as a means of exchange. Certainly they can create inflation and deflation just like base money can.

Indeed it always can and always will (without government bailouts be broken). Part of the problem is the consumer. We're dumb enough to accept demand deposits as payment...so we MAKE it money. Most have no idea that demand deposits are fractionally backed so to the public's credit part of this horrible bank money mistake we find ourselves in is not entirely due to our ignorance but partly to the fraud of private banks and the federal reserve.

This is the heart of the matter IMO. People's take actions as IF the demand deposits were base money. This is the cause of the rising prices. At least in theory as I understand it.

As to studies of inflation vs demand deposits, I'm not familiar with any and haven't looked into that matter.

[Black Flag]

Those are the accounting entries for the monetary base...of which the fed notes are but a component. It is somewhat semantics...but IMO it is accurate to call greenbacks mere reminders of what the Fed holds as a record on their balance sheet if that makes sense.

Do not get hung up by the fact FRBN can be computer digits or little pieces of paper - they are both FRBN.

The measure of money is that it appears - always- as an asset on any book.

Your scenario, you have an error:
Follow the accounting:

The fed buys say 10m in t-bills from a primary dealer. They in turn credit the primary dealer's account at the Fed with 100k.

So the fed balance sheet looks like, in fact, this

liabilities: 0
assets: x + 10m in tbills

The Fed, never, never, never, has monetary liabilities. It has the power to monetize anything. It never, in its history, has had any monetary liabilities... not ... a single...one. It cannot, since it has the power to manufacture money.

[Black Flag]

This is the heart of the matter IMO. People's take actions as IF the demand deposits were base money. This is the cause of the rising prices. At least in theory as I understand it.

I agree, the People believe that is money. But believing an illusion does not make it real.

No matter what, they cannot withdraw their deposit greater then the M0. An attempt to do so creates a systemic bank run - which would be impossible if, in fact, demand deposits was money.

As to studies of inflation vs demand deposits, I'm not familiar with any and haven't looked into that matter.

There has been inflation, of course - as the M0 has steadily increased.

However, if the claim be true, that the fractional reserve system mechanics which creates a demand deposits up to 9x the M0, we should see a comparable inflation rate to that 9x the M0.

What we see is an inflation rate comparable only to the M0.

The reason I posit is that the economy transact with M0 - real money. Therefore, the maximum amount of actual transaction in play can never exceed M0 - and that is the measure of money in the economy - that is, how much concurrent transaction.

Now, because of demand deposit and computer digits - the rate of transactions is massively faster. Instead of say a day to carry cash between withdrawal, purchase and redeposit, it is now a microsecond.

Does this increase the economic capacity? Sure.

But does it decrease the demand for money? I say No.

Without a decrease in the demand for money (that is, -supply/demand law - either by an oversupply of money or reduced desire to hold money) inflation does not come to play.

[rpwi]

Deposit of....what?

Yes...the terminology the Fed uses is confusing...but they do award deposits to banks. It used to be these deposits were fractionally backed by gold but now they are mostly backed by t-bills.

Treasury creates T-bill for $1 billion.
FED buys T-bill for $1 billion.

FED either prints or types on a computer $1 billion in digits for the Treasury.

The government spends it.

It should be noted that it would be quite rare for the Fed to directly purchase t-bills from the Fed. If they did they would cut out the middleman in the primary dealers and they wouldn't get as many profits. And since bank profits are paramount, the Fed will probably never deal directly with the treasury regarding t-bills because it is too efficient. Now the treasury department is like a bank in that it has a large 'deposit' at the Fed...which is a 'liability' to the Fed. But the primary way they get the account credited is through bond sales and tax receipts.

It is money.

Just because the FED manufactures money does not make it "not" money.

That would be like saying just because a miner mines gold does not make it gold.

We agree...the monetary base created by government is money. My point is just that M1 or bank money or checking accounts...is also money. You seemed to disagree because you said this was merely accounting entrees...which in a sense was quite correct. But then I countered that the MB can be just accounting entries as well. We can quibble semantics I suppose...

[rpwi]

This is the heart of the matter IMO. People's take actions as IF the demand deposits were base money. This is the cause of the rising prices. At least in theory as I understand it.

I think it is more than that. Demand deposits are money through our perception. They are a store of our value. If all our demand deposits were to vanish and only the reserves backing them remained...we would have lost a 'lot of money'.

As to studies of inflation vs demand deposits, I'm not familiar with any and haven't looked into that matter.

The creation of checking accounts absolutely and without a doubt causes inflation. Some argue this is not the case because a bank only uses bank money to buy loans...and therefore they cancel each other. Many also make the same argument that the Fed because it buys t-bills off of the open market when it creates MB...that it doesn't create inflation. Both arguments are false. Whenever you create short term debt to backup long term debt, you are creating money and inflation. Be it at the Fed in the open market or at a private bank when they're financing a mortgage (or nowadays a private equity takeover which will be the new bubble).

The other quirk to to think about is that M1 is somewhat antiquated. You also have to consider 'near' demand deposits. eg Demand deposits that bear interest and have short maturities. If you view a checking account as merely a deposit that yields a microscopic amount of interest and has a microscopic maturity and that it constantly rolls over...you appreciate that there is little difference between demand deposits and their close cousins. This is why the Feds and the financial markets keep track of higher aggregates like M2 and M3 besides just M1 and MB. Because M1 is much more regulated by the Feds...banks have shifted a lot of money from M1 into M2 and M3 which explains why as M1 has recently crashed...we haven't had deflation (M2 and M3 have been still growing sharply).

[rpwi]

Do not get hung up by the fact FRBN can be computer digits or little pieces of paper - they are both FRBN.

In all my reading I've never heard of the MB be referred to as FRBN. Correct term should be 'monetary base' and not Federal Reserve Bank Notes...as they are different...but I won't push the issue after this.

The fed buys say 10m in t-bills from a primary dealer. They in turn credit the primary dealer's account at the Fed with 100k.

So the fed balance sheet looks like, in fact, this

liabilities: 0
assets: x + 10m in tbills

I did make an error with 100k...should have been 10k. Was late and I was tired :P . However, your accounting is incorrect. The Fed absolutely increases their liability (specifically deposit liability from citigroup) when they purchase a t-bill. This is also basic accounting. You can not increase an asset without increasing either a corresponding liability or equity.

The Fed, never, never, never, has monetary liabilities. It has the power to monetize anything. It never, in its history, has had any monetary liabilities... not ... a single...one. It cannot, since it has the power to manufacture money.

This is quite untrue. In fact the Fed publishes their balance sheet and you can check this out for yourself. Go to:

http://www.federalreserve.gov/releases/h41/current/

And scroll down to ''8. Consolidated Statement of Condition of All Federal Reserve Banks". That's the Fed's balance sheet. On here you can clearly see that federal reserve bank notes are about a trillion dollar liability and deposits at the Fed are about a 1.6 trillion dollar liability. You can also see there is about a 11 billion in gold a holdover from when the dollar was backed by gold. The gold was the asset to the fed (as well as t-bills). Then the gold and the t-bills backed up their deposit liabilities. Now since we are off of the gold standard...really it is mostly t-bills that backs deposits at the Fed.

[rpwi]

There has been inflation, of course - as the M0 has steadily increased.

However, if the claim be true, that the fractional reserve system mechanics which creates a demand deposits up to 9x the M0, we should see a comparable inflation rate to that 9x the M0.

What we see is an inflation rate comparable only to the M0.

Couple of points to make.

M0 is not an accurate measure of money...it is a subset of MB or the monetary base. It would have been more logical for the US government to equate M0 with MB but unfortunately this is not the case.

You can see the history of MB at shadow stats (along with other aggregates) here:

http://www.shadowstats.com/charts/mo...e-money-supply

And here is a nice measure of inflation historically:

http://www.shadowstats.com/alternate...flation-charts

If you're theory that bank money wasn't money...or more importantly it did not have the affect of the money (like inflation) then in 2008 when the MB spiked to unprecedented levels (bottom right graph of the first link) we should have seen more than a 10% spike in inflation. Indeed if you compare the charts...the inflation graphs (using the pre-1980 measure which is more honest) much more closely corresponds with the Bank money aggregates (M1, M2, and M3) than it does with MB.

Certainly creating more of the monetary base will probably create more inflation. But the biggest reason is because it further enables banks to create more money on their end.

Other thing to consider is...there are other causes of inflation. Crop failures, over-population, immigration, monopolies, redemptions of the dollar from being a reserve currency, competition with other currencies and more are all causes. You can largely look at the supply of money but it is not the whole story.

[matt0611]

rpwi, what's the difference between MB and M0? I always thought they were both just the sum of all FRNs + coins + electronic deposits at the Fed that can be exchanged for FRNs or coins.

[Black Flag]

Yes...the terminology the Fed uses is confusing...but they do award deposits to banks. It used to be these deposits were fractionally backed by gold but now they are mostly backed by t-bills.

"Used to" is 80 years ago ... so its not relevant at all today.

They are not backed by T-bills.

A Treasury note is debt .... it is used for the government to GET money, not to BACK money.

You do not make an IOU, get money for it, then claim your IOU 'backs' the money you just got.

It should be noted that it would be quite rare for the Fed to directly purchase t-bills from the Fed. If they did they would cut out the middleman in the primary dealers and they wouldn't get as many profits.

Possible true.

The reason they do the charade is to mask the raw creation of money by using the middle man to give credibility to it.

My point is just that M1 or bank money or checking accounts...is also money.

My argument is:
it is absolutely not money.

It is a debt and liability; money is never a debt nor a liability, no matter who holds it.

Demand deposits create an obligation on a party to the benefit of another; money never obligates anyone nor grants a benefit to someone other than the holder of money.

My point is:
- if you assign the cause/effect of money to something that is not money, you will build crackpot theories and crackpot explanations for economic effects which will lead you to make bizarre claims (paying off debt shrinks money supply) and proclaim bizarre policies which, in the end, will undermine the marketplace.