tag:blogger.com,1999:blog-6616959642391988608.post1821407746098130326..comments2024-03-28T00:18:25.641-07:00Comments on Calafia Beach Pundit: M2: the smoking gun of inflationScott Grannishttp://www.blogger.com/profile/14028519647946868684noreply@blogger.comBlogger32125tag:blogger.com,1999:blog-6616959642391988608.post-21436881469128133592023-03-09T15:29:54.841-08:002023-03-09T15:29:54.841-08:00re: "A bank that receives an inflow of deposi...re: "A bank that receives an inflow of deposits necessarily must invest the money in something (e.g., by buying bonds), and that transaction does not create any new money."<br /><br />That's wrong. The acquisition of earning assets by the banks, except where interbank transactions are involved, always brings about an expansion in the money supply, ceteris paribus.Salmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-6616959642391988608.post-55931234147389348172023-03-09T09:34:46.814-08:002023-03-09T09:34:46.814-08:00Link https://www.federalreserve.gov/econres/notes/...Link https://www.federalreserve.gov/econres/notes/feds-notes/understanding-bank-deposit-growth-during-the-covid-19-pandemic-20220603.htmlSalmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-6616959642391988608.post-49876017083719947252023-03-09T09:24:34.429-08:002023-03-09T09:24:34.429-08:00Never are the commercial banks intermediaries in t...Never are the commercial banks intermediaries in the savings-investment process. From the standpoint of the entire payment’s system, commercial banks never loan out, and can’t loan out, existing funds in any deposit classification (saved or otherwise), or the owner’s equity, or any liability item. <br /><br />Every time a DFI makes a loan to, or buys securities from, the non-bank public, it Salmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-6616959642391988608.post-34075516658598308722023-03-09T09:15:52.417-08:002023-03-09T09:15:52.417-08:00Bernanke conducted the most contractionary monetar...Bernanke conducted the most contractionary monetary policy since the GD. Powell created the most expansive monetary policy ever. While inflation is subsiding, it is not going away. So, unless there's a lot of unsold inventory, I don't expect housing prices to revert to mean.<br /><br />A 2% inflation target seems unachievable. It took years for Volcker's inflation to subside, and Salmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-6616959642391988608.post-19568554005339522422023-03-09T08:22:36.502-08:002023-03-09T08:22:36.502-08:00Carl: the BNP Paribas quote your reference is itse...Carl: the BNP Paribas quote your reference is itself misleading. It is not necessarily the case that banks create money when purchasing bonds from a non-monetary entity. A bank that receives an inflow of deposits necessarily must invest the money in something (e.g., by buying bonds), and that transaction does not create any new money. Scott Grannishttps://www.blogger.com/profile/14028519647946868684noreply@blogger.comtag:blogger.com,1999:blog-6616959642391988608.post-51203679070122199762023-03-09T08:16:41.061-08:002023-03-09T08:16:41.061-08:00Re "Any thoughts on the YOY M2 going negative...Re "Any thoughts on the YOY M2 going negative?"<br /><br />Most observers seem to be saying that negative YOY growth in M2 is a sure sign the economy is in trouble. There have indeed been episodes of negative M2 growth associated with economic weakness. But this time is VERY different, because M2 first grew by an explosive 40% or more: totally unprecedented in history. Even with Scott Grannishttps://www.blogger.com/profile/14028519647946868684noreply@blogger.comtag:blogger.com,1999:blog-6616959642391988608.post-2474751923402614152023-03-09T05:25:01.074-08:002023-03-09T05:25:01.074-08:00Steve,
I also think that inflation will go down b...Steve,<br /><br />I also think that inflation will go down by year-end, so with the Fed now over-tightening it increases the probability of recession (not seen in Grannis' data so far, so just speculation).<br /><br />If you agree with this, would you say that now it's a good time to buy some < 2y treasuries?Royhttps://www.blogger.com/profile/09325498485905547125noreply@blogger.comtag:blogger.com,1999:blog-6616959642391988608.post-30646674295964440462023-03-09T04:09:01.889-08:002023-03-09T04:09:01.889-08:00Roy, as a bond trader I totally agree with you. St...Roy, as a bond trader I totally agree with you. Stocks dropped 1.5% but that is almost an inured reaction while bonds haven't done much at all. Both markets seem to be waiting...stevehttps://www.blogger.com/profile/07387986994469835875noreply@blogger.comtag:blogger.com,1999:blog-6616959642391988608.post-80553966210369298162023-03-08T23:05:19.294-08:002023-03-08T23:05:19.294-08:00"But to his credit, he backed off on his tigh..."But to his credit, he backed off on his tightening demands in early 2019 as it became obvious the market was concerned, and I think he will end up doing the same soon."<br /><br />Interesting. The market didn't react. No plunge. So, do you mean he will first raise by 0.5 and then pause if the market goes down?Royhttps://www.blogger.com/profile/09325498485905547125noreply@blogger.comtag:blogger.com,1999:blog-6616959642391988608.post-31907985530910050202023-03-08T19:38:10.900-08:002023-03-08T19:38:10.900-08:00Any thoughts on the YOY M2 going negative? What i...Any thoughts on the YOY M2 going negative? What is the historical precedent on that? Haven't the previous 3-4 times M2 went negative YOY preceded some pretty ugly markets and economic environments? Like historically bad? 1870's, 18903, 1921, Great depression....J2thaYhttps://www.blogger.com/profile/15673875549112148700noreply@blogger.comtag:blogger.com,1999:blog-6616959642391988608.post-84476189401960373912023-03-08T17:44:07.229-08:002023-03-08T17:44:07.229-08:00"Will: Since 2008, the Fed has bought trillio..."Will: Since 2008, the Fed has bought trillions of Treasuries and MBS. It paid for them with bank reserves, which are not part of M2."<br /><br />This is an incomplete statement (and also misleading).<br /><br />See page 4 of the following document:<br />https://economic-research.bnpparibas.com/pdf/en-US/Inside-money-creation-United-States-6/25/2021,43264<br /><br />"However, when Carlhttps://www.blogger.com/profile/17137163333934052456noreply@blogger.comtag:blogger.com,1999:blog-6616959642391988608.post-68326369424174202132023-03-08T11:08:40.780-08:002023-03-08T11:08:40.780-08:00Re: Powell's comments yesterday and today. I t...Re: Powell's comments yesterday and today. I think Powell is making another mistake similar to the one he made in late 2018 when he wanted to hike interest rates more aggressively despite the absence of any signs that inflation was a problem; he worried that the economy was "too strong." This is the classic Phillips Curve knee-jerk reaction, and it is based on the incorrect belief Scott Grannishttps://www.blogger.com/profile/14028519647946868684noreply@blogger.comtag:blogger.com,1999:blog-6616959642391988608.post-36148245649148720302023-03-08T10:59:39.911-08:002023-03-08T10:59:39.911-08:00Will: Since 2008, the Fed has bought trillions of ...Will: Since 2008, the Fed has bought trillions of Treasuries and MBS. It paid for them with bank reserves, which are not part of M2. The Monetary Base, or M0, is equal to currency in circulation plus bank reserves. It used to be a meaningful statistic, but since 2008, with the Fed's adoption of a new monetary policy of allowing abundant reserves, the Monetary Base has changed so much that Scott Grannishttps://www.blogger.com/profile/14028519647946868684noreply@blogger.comtag:blogger.com,1999:blog-6616959642391988608.post-35111158186497377602023-03-08T09:04:41.473-08:002023-03-08T09:04:41.473-08:00Scott
Wasn’t the money supply increased by 2.3 tri...Scott<br />Wasn’t the money supply increased by 2.3 trillion more when the FED started buying MBS’s from the banks(assuming the banks only used 10% money base for the MBS’s)? And didn’t the banks money base increase by this amount allowing them to increase money supply by up to 23 trillion if they wanted? I’m confused is this part of M2?<br /><br />WillWillhttps://www.blogger.com/profile/07464044999062495402noreply@blogger.comtag:blogger.com,1999:blog-6616959642391988608.post-1887694153760757402023-03-08T09:03:29.593-08:002023-03-08T09:03:29.593-08:00Hello Salmo,
So, because banks create money by buy...Hello Salmo,<br />So, because banks create money by buying securities from the non-bank public, is this not in fact where money is created (inflation - asset or otherwise) when the Fed does QE? I.e.:<br />- Fed buys securities from non bank market, but through banks, which in turn create money buying from the non bank public.<br />Why is it that Scott does not think this is printing money? Yes, Richard H.https://www.blogger.com/profile/11837604197337217284noreply@blogger.comtag:blogger.com,1999:blog-6616959642391988608.post-24022456993276572362023-03-08T08:33:38.181-08:002023-03-08T08:33:38.181-08:00It is hard for the average person to believe that ...It is hard for the average person to believe that banks do not loan out savings or existing deposits – demand or time. But the DFIs always create money by making loans to, or buying securities from, the non-bank public.<br /><br />This results in a double-bind for the Fed (FOMC schizophrenia: Do I stop because inflation is increasing? Or do I go because R-gDp is falling?). If it pursues a rather Salmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-6616959642391988608.post-12223826378945193912023-03-07T12:43:18.170-08:002023-03-07T12:43:18.170-08:00Well as expected it doesn't sound like Jay is ...Well as expected it doesn't sound like Jay is going to take Scott's sage advice and sit on his hands. The Fed is almost always late-late to raise rates and probably late to stop raising them!stevehttps://www.blogger.com/profile/07387986994469835875noreply@blogger.comtag:blogger.com,1999:blog-6616959642391988608.post-65748277019966571482023-03-04T07:52:32.850-08:002023-03-04T07:52:32.850-08:00hu456h: As I see it, sharply higher interest rates...hu456h: As I see it, sharply higher interest rates are effectively slowing the uptrend in M2 velocity (i.e., slowing the decline in M2 demand) because higher rates encourage people to hold on to their money balances.<br /><br />I rarely look at 1- and 2-yr implied inflation rates because they are subject to distortions of various sorts. The 5-yr implied rate is much more stable and reliable I Scott Grannishttps://www.blogger.com/profile/14028519647946868684noreply@blogger.comtag:blogger.com,1999:blog-6616959642391988608.post-66885174606340325782023-03-03T15:07:29.154-08:002023-03-03T15:07:29.154-08:00Hi Scott, thank you for your valuable and timely c...Hi Scott, thank you for your valuable and timely content as always. Any comments on the continued up trend in the velocity of M2 and the potential for it to offset declining M2 levels? Also, it appears TIPs implied 1-yr and 2-yr inflation rates have moved up quite a bit recently after falling for several months. Any thoughts on this? hu456hhttps://www.blogger.com/profile/06235692003157922980noreply@blogger.comtag:blogger.com,1999:blog-6616959642391988608.post-34050954040665736022023-03-03T05:09:38.528-08:002023-03-03T05:09:38.528-08:00The error that has escaped the smartest guys in th...The error that has escaped the smartest guys in the room is that banks lend deposits. That's why interest rates were deregulated (by mistake). And then the FED began using interest rate manipulation in 1965 as its monetary transmission mechanism (by mistake). That's why legal reserves were eliminated (by mistake). Powell thinks banks are intermediaries [sic]<br /><br />Monetary savings Salmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-6616959642391988608.post-12007929394378080122023-03-02T17:23:14.703-08:002023-03-02T17:23:14.703-08:00Brent--
Well, you could be right. I guess one mor...Brent--<br /><br />Well, you could be right. I guess one more 25-basis point hit would not crush the economy. <br /><br />But there is more to life than a 2% inflation target. <br /><br />The Reserve Bank of Australia has a 2% to 3% inflation target band. That seems better to me. The People's Bank of China shoots for "about" 3%.<br /><br />2% may be too tight, and actually suffocateBenjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-6616959642391988608.post-78018934569778168962023-03-02T10:10:37.318-08:002023-03-02T10:10:37.318-08:00Carl, Scott:
Isn't this how the money was crea...Carl, Scott:<br />Isn't this how the money was created - as has been discussed so much here?:<br /><br />- Treasury sells debt to public<br />- Banks buy debt from public, CREATING MONEY when they buy this debt (same as loans). <br />- Banks sell debt to Fed (for reserves)<br /><br />i.e. in essence the Fed is financing this through bank money creation<br />Richard H.https://www.blogger.com/profile/11837604197337217284noreply@blogger.comtag:blogger.com,1999:blog-6616959642391988608.post-48175080953799679162023-03-02T05:47:40.643-08:002023-03-02T05:47:40.643-08:00@Benjamin Cole - you wrote:
"The Fed needs to...@Benjamin Cole - you wrote:<br />"The Fed needs to pause for few meeting and test the air."<br /><br />If the Fed doesn't raise the Fed funds rate (target) at its next meeting then it will be going against market expectations and its own dot plot. To my mind that would represent a loosening of monetary policy - I don't believe that would be suitable.Brent Bucknerhttps://www.blogger.com/profile/14754659334435107746noreply@blogger.comtag:blogger.com,1999:blog-6616959642391988608.post-72326423478206439862023-03-02T03:14:26.450-08:002023-03-02T03:14:26.450-08:00Great post.
Well, this gets complicated, but I t...Great post. <br /><br />Well, this gets complicated, but I think when the Fed buys US Treasuries (as opposed to selling to the public), it is essentially monetizing the debt, or engaging in money-financed fiscal program. Michael Woodford says this.<br /><br />I understand it is usually commercial bank-lending that boosts the money-supply, but maybe we are in a new world. <br /><br />And if you Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-6616959642391988608.post-72670316282491152482023-03-01T23:52:38.206-08:002023-03-01T23:52:38.206-08:00Scott, when the Fed buys government bonds from the...Scott, when the Fed buys government bonds from the public in the open market couldn't that raise M2?Royhttps://www.blogger.com/profile/09325498485905547125noreply@blogger.com