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eserves one of then adjusted for changes in reserve requirements the other not adjusted what s the difference posted by the arthurian at 12 00 pm 4 comments oh my fred lists several number series for reserves i wanted to look at total debt relative to total reserves for yesterday s 4 o clock post i ended up using required reserves which i think was more relevant for that post but i also looked at the board of governors total reserves not adjusted for changes in reserve requirements i looked at total credit market debt owed relative to that the thing increases relentlessly for more than half a century then it drops almost overnight and it ends up in 2010 right back where it was 50 years before one has to wonder if policy is based on anything more than trying to make the current numbers match some numbers from long ago come to think of it i have exactly that objective for the debt per dollar graph see also fygfd repetition posted by the arthurian at 4 00 am 0 comments monday june 20 2011 clinton thumbs down i hesitate to put thumbs down in the title tell you why after the quote from page 4 of it s still the economy stupid by bill clinton under the heading 12 cut corporate taxes i d be perfectly fine with lowering the corporate tax rates simplifying the tax code and saving some money on accountants but broadening the tax base so that all of them pay a reasonable amount of tax on their profits lower the rates to be competitive but reduce the loopholes that cause unfair disparities we all need to contribute something to help meet our shared challenges and responsibilities including solving the debt problem including solving the debt problem first of all the heading is deceiving clinton wants to increase corporate taxes not cut them now i don t have a problem with that but i do have a problem with hiding one s intent under a false heading second let s assume that raising corporate taxes will solve the problems that have arisen since we went over to the supply side that doesn t mean it will solve the problems that arose in the 1970s that drove us to the supply side thumbs down posted by the arthurian at 6 55 pm 7 comments clinton clarity from page 4 of it s still the economy stupid by bill clinton the real thing that has killed us in the last 10 years is that too much of our dealmaking creativity has been devoted to expanding the financial sector in ways that don t create new businesses and more jobs and to persuading people to take on excessive debt loads to make up for the fact that their incomes are stagnant posted by the arthurian at 6 53 pm 1 comments the ratio of debt to money 13 june 2011 next blog brings me to jake s econompic where the second post federal debt per employee links to steve keen s epic piece that changed my understanding of the economic collapse jake says i m reviewing the epic piece this month s debtwatch keen writes is dedicated to analysing how these cavaliers actually make money and debt something they think they understand but in reality they don t i don t know how he gets from that to the myth of the money multiplier but he does let me quote a chunk of it just because it is so irritating the conventional model the money multiplier every macroeconomics textbook has an explanation of how credit money is created by the system of fractional banking that goes something like this banks are required to retain a certain percentage of any deposit as a reserve known as the reserve requirement for simplicity let s say this fraction is 10 when customer sue deposits say 100 newly printed government 10 notes at her bank it is then obliged to hang on to ten of them or 100 but it is allowed to lend out the rest the bank then lends 900 to its customer fred who then deposits it in his bank which is now required to hang on to 9 of the bills or 90 and can lend out the rest it then lends 810 to its customer kim kim then deposits this 810 in her bank it keeps 81 of the deposit and lends the remaining 729 to its customer kevin and on this iterative process goes over time a total of 10 000 in money is created consisting of the original 1 000 injection of government money plus 9 000 in credit money as well as 9 000 in total debts keen follows that explanation with a spreadsheet where the sequence of lendings runs for 20 weeks one new loan per week generating a total of more than 8900 from an original deposit of 1000 he then shows that the final total would come to 10000 but he neglects to say that it would take eternity for that to happen here s the picture after the first 20 relendings of that original thousand dollar deposit graph 1 it came out orange the first vertical bar is the original 1000 deposit each subsequent vertical bar is 90 of the previous bar because 10 of the previous deposit is kept in reserve and 90 is lent to another customer and becomes a new deposit of which 10 is kept in reserve and 90 is loaned out this reminds me of a bad joke my chemistry teacher told many years ago i don t understand why there is hunger in the world he said give em a pound of butter and tell em to eat half of what s left every day they ll always have butter my teacher wasn t making a joke really he was explaining the concept of always approaching a number yet never getting there if you have something and you take 10 of it away or 50 of it you always have something left no matter how many times you take a bit away graph 2 after 100 weeks the amount available for lending is three cents after 116 weeks the amount available is so small that at two decimal places it rounds off to zero after 250 weeks however if we run the numbers out that far the amount available for additional lending is still greater than zero these are the fractions of fractions of pennies that gave richard prior the big paycheck in that old superman movie as the new loan amounts approach zero the total amount of money created by this fractional reserve lending process approaches but never reaches a maximum suppose you draw a square on a piece of paper then you draw a line down the middle of it and shade in one half then you draw a line down the middle of the unshaded portion and shade in one half then you draw a line down the middle of the unshaded portion and shade in one half eventually the square will be almost all shaded in but you could keep going forever shading in half of what s left undone and never get done however the total amount of the shaded in area would before long be almost equal to the total area of the square you started with what this means is the approximate total shaded in area is known or can be determined by exactly the same logic the approximate total amount of money created by the fractional reserve process is also a known amount that total depends on the amount that must be kept in reserve and there is a simple way to figure it out the textbooks always use a ten percent reserve requirement ten percent can be written as a decimal as 0 10 okay take one dollar or just the number one and divide it by 0 10 and it tells you the total amount of money that can be created by the fractional reserve process from one dollar deposited if the reserve requirement is 10 10 can be created if the reserve requirement is 20 5 can be created if the reserve requirement is 50 2 can be created if the reserve requirement is zero there is no limit to how much money can be created from one dollar deposited but expect to get an error if you try to work that out with a calculator the billy blog here has an explanation similar to keen s the formula for the determination of the money supply is m m x mb so if a 1 is newly deposited in a bank the money supply will rise be multiplied by 10 if the rrr 0 10 the way this multiplier is alleged to work is explained as follows assuming the bank is required to hold 10 per cent of all deposits as reserves a person deposits say 100 in a bank to make money the bank then loans the remaining 90 to a customer they spend the money and the recipient of the funds deposits it with their bank that bank then lends 0 9 times 90 81 keeping 0 10 in reserve as required and so on until the loans become so small that they dissolve to zero like keen bill mitchell shows a spreadsheet which runs through the first 20 steps of the process mitchell observes in this particular case i have shown only 20 sequences in fact this example would resolve at around 94 iterations as you can see on the graphs where the succesive loans then fractional deposits get smaller and smaller and eventually become zero keen says the money multiplier is completely inadequate as an explanation wordy bill says the money multiplier is not even a slightly accurate depiction of the way banks operate in a modern monetary economy characterised by a fiat currency and a flexible exchange rate i say so why then do these guys spend so much time going step by step by step by step through the process look it s simple clear your calculator hit the number 1 hit the divided by key type in the reserve requirement and hit the equal key that s it that s how much money can be created from a dollar the question as to whether the money multiplier process actually works or not has nothing to do with determining how much money can be created by fractional reserve lending i think the how much question is raised as a smoke screen something to distract and confuse the reader so that when keen and mitchell tell you it doesn t work you re glad to hear it and glad to toss the concept aside keen presents two hypotheses about money that arise from the money multiplier model one is that government money is created first and credit money is created from it but after the government money is created keen references a study showing that the opposite is true the other is that each new loan in the fractional reserve process creates new money and new debt in equal amounts so that at the end there should be exactly the same amount of money and debt except when we add in the money we started with we end up with more money than debt the amount of money in the economy should exceed the amount of debt with the difference representing the government s initial creation of money therefore keen says the ratio of debt to money should be less than one this is the first time i have seen anybody other than me talk about the ratio of debt to money which i call debt per dollar so i m kinda thrilled by this more than kinda because it s keen but i ve been looking at it for 30 years and it never occurred to me that if the money multiplier idea is correct there should be more money than debt maybe keen s right i don t know but let me show you why i ve been looking at the thing for 30 years back when i first looked at it using numbers from the historical statistics the history of the ratio of debt to money looked like this graph 3 starting with five and one half dollars of debt for every circulating dollar of money debt rose to over 7 a depression ensued but debt kept rising reaching eight and one half dollars for every circulating dollar of money then from 1933 to 1947 debt fell reaching a low of less than 4 then it started rising again by 1970 it was higher than it had been at any time during the great depression i didn t have to know why this happened to know that it was significant i ve been watching debt per dollar ever since i figured policymakers would stop the increase of debt before it gave us another great depression i was wrong graph 4 but my graph only goes up to 2007 which is before the crisis so it doesn t show what happened since but fred shows it graph 5 the peak is far higher this time than it was in the 1930s the bigger they are the harder they fall oh but to tie up a loose end both steve keen and bill mitchell deny that the money multiplier is an accurate picture of what happens in the economy could be they re right when i look into it a little it seems like they re right loans create deposits if the bank doesn t have enough reserves to lend what it wants to lend it lends anyway and gets the reserves later but what happens if the bank does have enough reserves to lend what it wants to lend then the money multiplier works normally right the bank s not going to borrow reserves if it has the reserves it needs do keen and mitchell deny that so i think their rejection of the money multiplier is a bit stronger than it should be or again if the banks always borrow the reserves they need in order to lend then the ratio of debt to reserves should be more or less constant it seems to me taking a guess what measure of reserves is relevant i ll look at total credit market debt relative to required reserves not adjusted for changes in reserve requirements how required reserves can possibly be not adjusted for changes in requirements i cannot fathom but hey i didn t make it up graph 6 not constant at all not even close so maybe i picked the wrong data but while we re looking at this graph look at the 1980s when the ratio is about 200 dollars of debt for every dollar of required reserves that figures to be an effective reserve requirement of one half of one percent and at the peak there when there was 1200 of debt per dollar of required reserves that s less than one tenth of one percent in reserve hopefully i m looking at the wrong data posted by the arthurian at 4 00 am 0 comments sunday june 19 2011 the world in red and blue 3 my graph 3 from yesterday graph 1 domestic financial gross federal debt billions red is federal blue is financial looks like the red and blue lines run really close together for a really long time well they could be pretty far apart and still look close because the recent numbers are so very very big so i want to compare the red and blue lines with a ratio graph 2 federal debt per dollar of financial debt graph 3 financial debt per dollar of federal debt oh just so you don t get the wrong impression the red line on graph 4 below is the same as the blue line on graph 3 above after world war ii there was a lot more government debt but not any more posted by the arthurian at 4 00 am 0 comments saturday june 18 2011 the world in red and blue 2 my graph from yesterday graph 1 domestic financial gross federal debt relative to gdp red is federal blue is financial i am fascinated by the parallel of the red and blue lines between 1980 and 1995 or so i want to look at the difference between the red and blue lines if i take the graph above take the red line and subtract the blue line from it it looks like the graph below graph 2 gross federal less domestic financial debt relative to gdp well look at that the golden age curve is now a golden age straight line decline from 1950 all the way to the 1974 recession then there is a possible sniff of decline from 1974 to 1980 but the line is really very flat from the mid 1970s to the mid 1990s that is the time of parallel and near parallel red and blue lines on graph 1 then beginning in the mid 1990s with the balancing of the federal budget our trend line drops to ...
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