So, fractional reserve banking.

[Bohner]

Sums what up? The monetary base is not a measure of the money supply. If that is what you want to look at, M2 is the most commonly used measure. And for all the money the Fed has tried to put out there to cause price iflation, it has to be circulating. That means people earning or borrowing and spending it. Prices rising becasue people are using more dollars to try to purchase goods. The POTENTIAL is out there due to the various Quantative Easing the Fed has done but it is not getting lent out and spent. That is known as velocity- and that is way down. It is also sometimes known as a money multiplier. If velocity picks up, prices likely will as well and as prices rise, interest rates will rise as well (that iflation portion of interest rates I mentioned earlier). The faster money moves through the system or the more often it changes hands, the greater the pressure on price inflation.


http://research.stlouisfed.org/fred2.../M2V?cid=32242

Doesn't matter. Any money the fed loans to the bank is added to the monetary base. It doesn't necessarily lead to an increase in M2, much less it's velocity.

But yes, throughout the past 20 years, the fed has kept interest rates low by lending the bands money. Hence the increase in the monetary base.

[Zippyjuan]

Yes, it does matter as far as price inflation goes. You are right that it does't necessarily change M2 or the velocity. The market determines velocity- consumer activity. If a bank borrows money from the Fed and turns around and lends it out it will not effect the Base but if they kept it as reserves it would be added to the base. But unless their books were out of balance why would they borrow and keep it? Pay the fees and put up the collateral for the loan?

Let's look at how much money the Fed has been lending to the banks over time. We can check that as well. That would be through the Discount Window. Other than the spike during the bailouts (AIG was a huge chunk of it), it has been pretty much zero so they haven't been lending tons of money to the banks over the past 20 years.
http://research.stlouisfed.org/fred2/series/DISCBORR

[Zippyjuan]

So lets go back to the original premise of low inflation the biggest reason for low interest rates. One simple chart will show us. The red line is the US inflation rate, the blue line is the interest rate the Fed sets. Nice how they all move together pretty well.


http://wehrintheworld.blogspot.com/2...ince-1970.html

Compare that also with mortgage rates chart and you see the exact same thing:


http://inflation.us/charts.html

[Bohner]

So lets go back to the original premise of low inflation the biggest reason for low interest rates. One simple chart will show us. The red line is the US inflation rate, the blue line is the interest rate the Fed sets. Nice how they all move together pretty well.


http://wehrintheworld.blogspot.com/2...ince-1970.html

Compare that also with mortgage rates chart and you see the exact same thing:


http://inflation.us/charts.html

In some industries where bubbles end up becoming formed, prices rose WAY faster than the CPI. The CPI did a piss poor job of detecting that and the low interest rates allowed the bubble to grow much bigger than they would have under a free market monetary system. Those interest rates were far from natural.

[Zippyjuan]

In some industries where bubbles end up becoming formed, prices rose WAY faster than the CPI. The CPI did a piss poor job of detecting that and the low interest rates allowed the bubble to grow much bigger than they would have under a free market monetary system. Those interest rates were far from natural.

There are always some prices rising faster or slower than others or the CPI. The CPI measures prices- it does not predict them. It weighs the prices based on what percent of they average person's income gets spent on that item. If the average person spends 10% of their income on food, changes in the prices of food count as ten percent of the total CPI figure.

Bubbles constantly form and pop- some quietly, some with a bang. That says nothing about if interest rates were "natural" or not. If they are not "natural" what should interest rates be and why?

[matt0611]

I recently heard JEGriffin mention that fractional reserve banking works this way:

Assuming 10% reserves required by banks: I deposit $100, so the bank can now lend out up $900

I remember thinking myself that 10% reserves meant that if I deposited $100, the bank could loan up to $90 of that $100, leaving $10 reserves.

To me these are very different, the first example being inflationary, the second one not (I think).

Which one is correct? I figure JEG is correct, but just thought I'd ask.

They're both correct in a sense.

Because that $90 can potentially get into the banking system and then that bank can lend out 90% of that etc

If you keep going it adds up to a total amount of $1000 in the M1 money supply out of the $100 base money.

[Bohner]

There are always some prices rising faster or slower than others or the CPI. The CPI measures prices- it does not predict them. It weighs the prices based on what percent of they average person's income gets spent on that item. If the average person spends 10% of their income on food, changes in the prices of food count as ten percent of the total CPI figure.

Bubbles constantly form and pop- some quietly, some with a bang. That says nothing about if interest rates were "natural" or not. If they are not "natural" what should interest rates be and why?

I kind of agree with this guy on the issue...

[cubical]

So lets go back to the original premise of low inflation the biggest reason for low interest rates. One simple chart will show us. The red line is the US inflation rate, the blue line is the interest rate the Fed sets. Nice how they all move together pretty well.


http://wehrintheworld.blogspot.com/2...ince-1970.html

Compare that also with mortgage rates chart and you see the exact same thing:


http://inflation.us/charts.html

Or you can look at the real inflation rate. When new money enters the system through the purchasing of debt, of course rates will go lower(at least for a time).

[FindLiberty]

A Mandrake headache is 9 times worse than a migraine headache.

http://www.freerepublic.com/focus/f-news/888963/posts

[Bern]

There are always some prices rising faster or slower than others or the CPI. The CPI measures prices- it does not predict them. It weighs the prices based on what percent of they average person's income gets spent on that item. If the average person spends 10% of their income on food, changes in the prices of food count as ten percent of the total CPI figure. ...

Are you suggesting the CPI is not manipulated for political (or centrally planned economic) reasons?

...
In a letter sent to the White House, Republican leaders outlined a plan that they said would provide $2.2 trillion in deficit reduction over the next decade. On top of the $800 billion in new revenue from a tax code overhaul, Republicans estimated they could save $300 billion by cutting discretionary spending, $600 billion in "health savings," $200 billion in changes to the consumer price index and another $300 billion in mandatory spending.
...

http://news.yahoo.com/blogs/ticket/h...-election.html