Comments on: Triangulating on deficit reduction, 2010 version http://www.creditwritedowns.com/2010/01/triangulating-on-deficit-reduction-2010-version.html Finance, Economics and Markets Fri, 10 Feb 2012 00:37:00 +0000 hourly 1 By: Edward Harrison http://www.creditwritedowns.com/2010/01/triangulating-on-deficit-reduction-2010-version.html#comment-58191 Edward Harrison Tue, 26 Jan 2010 19:32:00 +0000 http://www.creditwritedowns.com/2010/01/triangulating-on-deficit-reduction-2010-version.html#comment-58191 Agreed. But more than private sector debt, it is household sector debt that concerns me. We need to differentiate between the financial and corporate sector and the household sector. That is where a spending multiplier can be beneficial. Agreed. But more than private sector debt, it is household sector debt that concerns me. We need to differentiate between the financial and corporate sector and the household sector. That is where a spending multiplier can be beneficial.

]]> By: Marshall Auerback http://www.creditwritedowns.com/2010/01/triangulating-on-deficit-reduction-2010-version.html#comment-58188 Marshall Auerback Tue, 26 Jan 2010 18:44:00 +0000 http://www.creditwritedowns.com/2010/01/triangulating-on-deficit-reduction-2010-version.html#comment-58188 PRIVATE debt, not public debt. PRIVATE debt, not public debt.

]]> By: Edward Harrison http://www.creditwritedowns.com/2010/01/triangulating-on-deficit-reduction-2010-version.html#comment-58187 Edward Harrison Tue, 26 Jan 2010 15:40:00 +0000 http://www.creditwritedowns.com/2010/01/triangulating-on-deficit-reduction-2010-version.html#comment-58187 Just to be clear, right now the problem is debt. I am saying that additional government spending increases the creditworthiness of borrowers who would otherwise be deleveraging. As a result, it reduces both supply side and demand side credit constraints by increasing actual income of potential borrowers and increasing the marginal propensity to lend because of lenders' perception that borrowers' creditworthiness has increased. This is where a spending multiplier should come in. Martin Feldstein has been saying the debt constraints are so great that they cannot be overcome. Just to be clear, right now the problem is debt.

I am saying that additional government spending increases the creditworthiness of borrowers who would otherwise be deleveraging. As a result, it reduces both supply side and demand side credit constraints by increasing actual income of potential borrowers and increasing the marginal propensity to lend because of lenders’ perception that borrowers’ creditworthiness has increased.

This is where a spending multiplier should come in. Martin Feldstein has been saying the debt constraints are so great that they cannot be overcome.

]]> By: Edward Harrison http://www.creditwritedowns.com/2010/01/triangulating-on-deficit-reduction-2010-version.html#comment-58186 Edward Harrison Tue, 26 Jan 2010 15:30:00 +0000 http://www.creditwritedowns.com/2010/01/triangulating-on-deficit-reduction-2010-version.html#comment-58186 My point is that government spending can have a multiplier effect in increasing aggregate demand such that it decreases economic distress. This should increase the marginal propensity to take on credit. It should also alleviate supply side concerns about creditworthiness of borrowers. My point is that government spending can have a multiplier effect in increasing aggregate demand such that it decreases economic distress. This should increase the marginal propensity to take on credit. It should also alleviate supply side concerns about creditworthiness of borrowers.

]]> By: Edward Harrison http://www.creditwritedowns.com/2010/01/triangulating-on-deficit-reduction-2010-version.html#comment-58185 Edward Harrison Tue, 26 Jan 2010 15:23:00 +0000 http://www.creditwritedowns.com/2010/01/triangulating-on-deficit-reduction-2010-version.html#comment-58185 I'm not talking money multiplier but spending multiplier in the sense it increases the marginal propensity to take on credit. ______________ Edward Harrison http://www.creditwritedowns.com/ I’m not talking money multiplier but spending multiplier in the sense it
increases the marginal propensity to take on credit.
______________
Edward Harrison
http://www.creditwritedowns.com/

]]> By: Marshall Auerback http://www.creditwritedowns.com/2010/01/triangulating-on-deficit-reduction-2010-version.html#comment-58184 Marshall Auerback Tue, 26 Jan 2010 15:21:00 +0000 http://www.creditwritedowns.com/2010/01/triangulating-on-deficit-reduction-2010-version.html#comment-58184 there is no such thing as a "money multiplier" which is an old gold standard concept. In the real world banks make loans independent of reserve positions, then during the next accounting period borrow any needed reserves. The imperatives of the accounting system, as previously discussed, require the Fed to lend the banks whatever they need. Bank managers generally neither know nor care about the aggregate level of reserves in the banking system. Bank lending decisions are affected by the price of reserves, not by reserve positions. If the spread between the rate of return on an asset and the fed funds rate is wide enough, even a bank deficient in reserves will purchase the asset and cover the cash needed by purchasing (borrowing) money in the funds market. This fact is clearly demonstrated by many large banks when they consistently purchase more money in the fed funds market than their entire level of required reserves. These banks would actually have negative reserve levels if not for fed funds purchases i.e. borrowing money to be held as reserves. If the Fed should want to increase the money supply, devotees of the money multiplier model (including numerous Nobel Prize winners) would have the Fed purchase securities. When the Fed buys securities reserves are added to the system. However, the money multiplier model fails to recognize that the added reserves in excess of required reserves drive the funds rate to zero, since reserve requirements do not change until the following accounting period. That forces the Fed to sell securities, i.e., drain the excess reserves just added, to maintain the funds rate above zero. If, on the other hand, the Fed wants to decrease money supply, taking reserves out of the system when there are no excess reserves places some banks at risk of not meeting their reserve requirements. The Fed has no choice but to add reserves back into the banking system, to keep the funds rate from going, theoretically, to infinity. In either case, the money supply remains unchanged by the Fed’s action. The multiplier is properly thought of as simply the ratio of the money supply to the monetary base (m = M/MB). Changes in the money supply cause changes in the monetary base, not vice versa. The money multiplier is more accurately thought of as a divisor (MB = M/m). Failure to recognize the fallacy of the money-multiplier model has led even some of the most well- respected experts astray. The following points should be obvious, but are rarely understood: The inelastic nature of the demand for bank reserves leaves the FED no control over the quantity of money. The FED controls only the price. The market participants who have a direct and immediate effect on the money supply include everyone except the FED. In a message dated 26/01/2010 Mountain Standard Time, writes: ====== Edward Harrison wrote, in response to Zac (unregistered): That is very much on topic. You have two options: increase aggregate demand or decrease it. http://www.creditwritedowns.com/2009/10/the-choice-is-between-increasing-or-decreasing-aggregate-demand.html In either case, the key to recovery is liquidating excess capacity and malinvestment. You're not going to get a lot of spending multiplier from stimulus if banks are capital constrained and businesses and individuals are indebted. Debts must be liquidated and that means private sector deleveraging. In my view, the difference between the two scenarios is the degree to which you believe government can help in cushioning the deleveraging blow. In the Austrian case, you risk a downward spiral that has nasty political and foreign policy implications (think Mazlow's Hierarchy of needs in action). In the Keynesian case, you have government spending money and wasting some of it or propping up bankrupt institutions. Either way, your questions are the right ones. Site URL: http://www.creditwritedowns.com/ IP address: 71.163.44.167 Link to comment: http://disq.us/9svmw ----- Options: You can moderate through email. Respond in the body with "Delete". Respond in the body to post a reply comment. Or use the moderate panel: http://disqus.com/comments/moderate/ To turn off notifications, go to: http://disqus.com/account/notifications/ there is no such thing as a “money multiplier” which is an old gold standard concept.
In the real world banks make loans independent of reserve positions, then during the next accounting period borrow any needed reserves. The imperatives of the accounting system, as previously discussed, require the Fed to lend the banks whatever they need. Bank managers generally neither know nor care about the aggregate level of reserves in the banking system. Bank lending decisions are affected by the price of reserves, not by reserve positions. If the spread between the rate of return on an asset and the fed funds rate is wide enough, even a bank deficient in reserves will purchase the asset and cover the cash needed by purchasing (borrowing) money in the funds market. This fact is clearly demonstrated by many large banks when they consistently purchase more money in the fed funds market than their entire level of required reserves. These banks would actually have negative reserve levels if not for fed funds purchases i.e. borrowing money to be held as reserves. If the Fed should want to increase the money supply, devotees of the money multiplier model (including numerous Nobel Prize winners) would have the Fed purchase securities. When the Fed buys securities reserves are added to the system. However, the money multiplier model fails to recognize that the added reserves in excess of required reserves drive the funds rate to zero, since reserve requirements do not change until the following accounting period. That forces the Fed to sell securities, i.e., drain the excess reserves just added, to maintain the funds rate above zero. If, on the other hand, the Fed wants to decrease money supply, taking reserves out of the system when there are no excess reserves places some banks at risk of not meeting their reserve requirements. The Fed has no choice but to add reserves back into the banking system, to keep the funds rate from going, theoretically, to infinity.
In either case, the money supply remains unchanged by the Fed’s action. The multiplier is properly thought of as simply the ratio of the money supply to the monetary base (m = M/MB). Changes in the money supply cause changes in the monetary base, not vice versa. The money multiplier is more accurately thought of as a divisor (MB = M/m).
Failure to recognize the fallacy of the money-multiplier model has led even some of the most well- respected experts astray. The following points should be obvious, but are rarely understood:
The inelastic nature of the demand for bank reserves leaves the FED no control over the quantity of money. The FED controls only the price.
The market participants who have a direct and immediate effect on the money supply include everyone except the FED.

In a message dated 26/01/2010 Mountain Standard Time, writes:
======

Edward Harrison wrote, in response to Zac (unregistered):

That is very much on topic. You have two options: increase aggregate demand or decrease it.

http://www.creditwritedowns.com/2009/10/the-choice-is-between-increasing-or-decreasing-aggregate-demand.html

In either case, the key to recovery is liquidating excess capacity and malinvestment.

You’re not going to get a lot of spending multiplier from stimulus if banks are capital constrained and businesses and individuals are indebted. Debts must be liquidated and that means private sector deleveraging.

In my view, the difference between the two scenarios is the degree to which you believe government can help in cushioning the deleveraging blow. In the Austrian case, you risk a downward spiral that has nasty political and foreign policy implications (think Mazlow’s Hierarchy of needs in action). In the Keynesian case, you have government spending money and wasting some of it or propping up bankrupt institutions.

Either way, your questions are the right ones.

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IP address: 71.163.44.167
Link to comment: http://disq.us/9svmw

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]]> By: Edward Harrison http://www.creditwritedowns.com/2010/01/triangulating-on-deficit-reduction-2010-version.html#comment-58183 Edward Harrison Tue, 26 Jan 2010 15:19:00 +0000 http://www.creditwritedowns.com/2010/01/triangulating-on-deficit-reduction-2010-version.html#comment-58183 That is very much on topic. You have two options: increase aggregate demand or decrease it. http://www.creditwritedowns.com/2009/10/the-choice-is-between-increasing-or-decreasing-aggregate-demand.html In either case, the key to recovery is liquidating excess capacity and malinvestment. You're not going to get a lot of spending multiplier from stimulus if banks are capital constrained and businesses and individuals are indebted. Debts must be liquidated and that means private sector deleveraging. In my view, the difference between the two scenarios is the degree to which you believe government can help in cushioning the deleveraging blow. In the Austrian case, you risk a downward spiral that has nasty political and foreign policy implications (think Mazlow's Hierarchy of needs in action). In the Keynesian case, you have government spending money and wasting some of it or propping up bankrupt institutions. Either way, your questions are the right ones. That is very much on topic. You have two options: increase aggregate demand or decrease it.

http://www.creditwritedowns.com/2009/10/the-choice-is-between-increasing-or-decreasing-aggregate-demand.html

In either case, the key to recovery is liquidating excess capacity and malinvestment.

You’re not going to get a lot of spending multiplier from stimulus if banks are capital constrained and businesses and individuals are indebted. Debts must be liquidated and that means private sector deleveraging.

In my view, the difference between the two scenarios is the degree to which you believe government can help in cushioning the deleveraging blow. In the Austrian case, you risk a downward spiral that has nasty political and foreign policy implications (think Mazlow’s Hierarchy of needs in action). In the Keynesian case, you have government spending money and wasting some of it or propping up bankrupt institutions.

Either way, your questions are the right ones.

]]> By: Zac http://www.creditwritedowns.com/2010/01/triangulating-on-deficit-reduction-2010-version.html#comment-58182 Zac Tue, 26 Jan 2010 15:11:00 +0000 http://www.creditwritedowns.com/2010/01/triangulating-on-deficit-reduction-2010-version.html#comment-58182 Ed it's off topic but, in Keynesian way if you want to start economy you have to permanently employ the unemployed (middle and lower class, because they bring bulk of demand), and raise general level of wages it would bring healthy demand (or inflation) and more important it would bring down general level of indeptedness... So how to achieve that is mi. $ question? Stim. II, for average joe? Another way is just to bring down general level of indeptedness and it is very painful path... Generally, global wages mismatch is most dangerous problem in Economy throughout history... Ed it’s off topic but, in Keynesian way if you want to start economy you have to permanently employ the unemployed (middle and lower class, because they bring bulk of demand), and raise general level of wages it would bring healthy demand (or inflation) and more important it would bring down general level of indeptedness…
So how to achieve that is mi. $ question? Stim. II, for average joe?
Another way is just to bring down general level of indeptedness and it is very painful path…
Generally, global wages mismatch is most dangerous problem in Economy throughout history…

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