another forum thread asks this very question but didnt get into much depth (plain term descriptions) of the federal reserves inflationary mechanisms.
this link http://mises.org/Community/forums/p/2989/109799.aspx#109799
lists, which i assume are true ( i am not sure), three ways of federal reserve inflation.
the open market operation, the discount rate, and fractional reserve banking - which is i guess is a necessary mode of commercial banking that necessitates a central bank in the first place.
what i didnt see was the federal reserve/us treasury job of creation of currency.
what i believe is called the monetary base.
firstly, are there only four ways in which the federal reservve inflates the money supply?
i routinely see descriptions of the federal reserves activities called pumping or injecting.
are these legitimate descriptions?
increasing the monetary base seems like inflation proper - albeit done by a rather unaccountable organization such as a central bank. no market based risk to begin to produce money.
do the so called open market operations and discount rates more appropriatly create 'loans out of thin air' only to have much of the (virtual?) money retired soon thereafter?
from wiki "...rather than paper records such as banknotes, open market operations are conducted simply by electronically increasing or decreasing ('crediting' or 'debiting') the amount of money that a bank has, e.g., in its reserve account at the central bank, in exchange for a bank selling or buying a financial instrument. Newly created money is used by the central bank to buy in the open market a financial asset, such as government bonds, foreign currency, or gold . If the central bank sells these assets in the open market, the amount of money that the purchasing bank holds decreases, effectively destroying money.
The process does not literally require the immediate printing of new currency. A central bank account for a member bank can simply be increased electronically."
http://en.wikipedia.org/wiki/Open_market_operations
is the wiki description true? if what is described at wiki is true, is the inflation that is spoken of on the previous thread usually followed by a deflation of a similar amount?
does the omo simply facilitate bank asset sales or that would likely not have taken place?
does it provide a regular instant source of non-saved money to continually correct bank goof-ups?
additionally on the wiki site "How open market operations are conducted in the USA
In the U.S., the Federal Reserve (Fed) most commonly uses overnight repurchase agreements (repos) to temporarily create money, or reverse repos to temporarily destroy money...."
this seems arcane to me.
the discount rate i understand even less.
i can see how the fractional reserve aspect (if it actually takes place) of commercial banking creates a spendable loan check, spendable reserves and spendable claims on money - nearly doubling spending opportunities and i would assume raising prices higher than they would have been.
does the money doubling effect on prices however, level off after time?
and finally, could someone here please explain if the omo and discount rate truly operate in an inflationary way or are they rather benign when it comes to money supply increases of the sort that make their way into pushing up price levels.
please..no replies from jon irenicus
thanks
sthomper
Banks are not lending NEW money they receive from FED. Almost all new money is held against excess reserves. If it was lent, it should be moved to statutory reserves (or whatever that is called in English). Banks already have reserves which allow them some lending. However, FED would like that banks EXTEND credit using new reservers, but banks are not doing so. Credit is still more or less growing, but at much slower pace or declining in some areas. Check for actual numbers:
http://www.federalreserve.gov/releases/z1/Current/z1.pdf
But credit need to grow more and more to sustain price rise...
Bank reserves:
http://www.federalreserve.gov/releases/h3/Current/
What would happen if FED didn't buy mortgages? I don't know, but jimmy's guess is as good as mine.
ok...i looked at a chart titled bank credit of all commercial banks it shows a steady increase since 1990...a tapering of for nearly six months in late 2008 ...its shoots up rapidly agin for a short time and has leveled off again.
has this happened before....a trillion dollars or so 'created by the federal reserve' to buy a bunch of bad bank loans only to have banks keep a trillion or so in reserves to just 'sit there'.
is there a lending explosion on the horizon? if such loans began to take place....would this be the inflation that is federal reserve induced....the point of my actual post.
I'm too lazy to check... Obvious candidates are 1929. depression and most notably, Japan's lost decade. Japan tried to reinflate heavily, but has failed. But on this scale in so short time? I think not.
"what i didnt see was the federal reserve/us treasury job of creation of currency.
what i believe is called the monetary base. "
"I don't think you're using the term "monetary base" correctly... you seem to be using this to mean physical cash - which is not how it is commonly used."
just curious but why did you think i was using the term monetary base incorrectly when http://www.federalreserve.gov/pubs/supplement/2008/12/table1_20.htm says
"The seasonally adjusted, break-adjusted monetary base consists of (1) seasonally adjusted, break-adjusted total reserves (line 1), plus (2) the seasonally adjusted currency component of the money stock, plus (3) (for all quarterly reporters on the "Report of Transaction Accounts, Other Deposits and Vault Cash..."
vienna may have a different definition but my post bagan with ""How open market operations are conducted in the USA"
??
sthomper: just curious but why did you think i was using the term monetary base incorrectly when http://www.federalreserve.gov/pubs/supplement/2008/12/table1_20.htm says ... vienna may have a different definition but my post bagan with ""How open market operations are conducted in the USA"
...
I'm presuming this is directed at me, since you quoted one of my posts in there... but I'm not sure I understand the question.
"but I'm not sure I understand the question."
i was reviewing your post for reference.
by my question seems quite clear......why did you think i was using the term monetary base incorrectly when this internet link ttp://www.federalreserve.gov/pubs/supplement/2008/12/table1_20.htm
says
the above link www.federalreserve.gov says of the adjusted monetary base "total reserves" "currency component of the monetary stock" and "other deposits and vault cash"
to refresh...."three ways of federal reserve inflation.
what i didnt see was the federal reserve/us treasury job of creation of currency.what i believe is called the monetary base. "
this was in my original post
you replied with "I don't think you're using the term "monetary base" correctly... you seem to be using this to mean physical cash - which is not how it is commonly used."
clear now?
sthomper: by my question seems quite clear......why did you think i was using the term monetary base incorrectly when this internet link ttp://www.federalreserve.gov/pubs/supplement/2008/12/table1_20.htm says "The seasonally adjusted, break-adjusted monetary base consists of (1) seasonally adjusted, break-adjusted total reserves (line 1), plus (2) the seasonally adjusted currency component of the money stock, plus (3) (for all quarterly reporters on the "Report of Transaction Accounts, Other Deposits and Vault Cash..." the above link www.federalreserve.gov says of the adjusted monetary base "total reserves" "currency component of the monetary stock" and "other deposits and vault cash"
OK, clear now. Although presumably you also saw my original reply in which I pointed to: http://en.wikipedia.org/wiki/Monetary_base
I guess it's really a semantic debate and different sources will use different definitions for the monetary base. I can't really see much use in discussing things in terms of a limited definition such as physical coins and cash though, since the majority of loans (and thus the majority of fiduciary media) are not extended off the back of physical coins and cash but rather off virtual reserves at the central bank - digital leger entries in a computer system these days (although they were no doubt ink in a paper leger many years ago) which can be expanded or contracted without the necessity to actually manufacture real notes and coins (or call them in).
I find it hard to see the relevance of physical coins and paper money in any but the most disasterous of scenarios (such as that painted by Reisman in the Financial House of Cards article that I also linked to in an earlier post in this thread).
Ludwig von Mises Institute | 518 West Magnolia Avenue | Auburn, Alabama 36832-4528
Phone: 334.321.2100 · Fax: 334.321.2119
contact@Mises.org | webmaster | AOL-IM MainMises
Mises.org sitemap