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Fed: Monetary Base v Inflation

This chart shows the relationship between “high powered money” (monetary base) and the consumer price index (inflation).

The theory that an increase in money automatically leads to inflation doesn’t seem to be proven.


Fed: Net Worth of Households (Graph)

(Click on the chart for a better view.)


This is chart is interesting, because is shows how much damage was done during the last recession, and how much of it has been repaired.

Basically, it shows households lost $15 trillion between April 2007 – just before the recession officially began – and Jan 2009, just before it officially ended. Since Jan 2009, US households have regained $9 trillion of that.

Since we started with $65 trillion in net assets, $15 trillion represents a substantial amount.

It’s evidence that it was the decline in asset values that caused the recession, rather than the other way around.

The Money Multiplier & Loanable Funds

The “money multiplier” and “loanable funds” models are wrong. What’s wrong with them is not just that they don’t describe how banks actually work: they get the nature of money wrong as well. They’re dependent on an understanding of money as an asset, and asset only – like gold. Modern money works differently. It is always an asset to one party, and a liability to someone else. Commercial bank deposits are liabilities on a commercial bank – and assets to the public. Central bank deposits are liabilities on a central bank – and assets to commercial banks.

In no case is there a preexisting pool of money, and in no case is there any physical limit to the amount of money that may be lent. The process – or act – of lending actually creates the money that is lent. Lending precedes deposits, because without lending, there is no money to deposit.

Banks can create indefinite amounts of money so long as there are willing customers and opportunities to make profits. A central bank – by reducing reserves – can drive up interest rates, but that’s all.

How Slow Is The Recovery? (Comparing 2001 and 2009)

Click image for a larger view:

A couple points.
1. The recovery from the most recent recession started sooner than it did in 2001.
2. There’s still a long way to go – because so much damage was done in 2008-2009.
3. (Not to be political or anything, but) Bush left office with fewer jobs than when he started.

Macroeconomics: “Savings”

Multiple choice:

“Savings” is:

1. Money not spent.
2. Money spent on “investment” (things not consumed).
3. Money spent on “investment,” plus the market value of unsold inventory.
4. The value of all things that are created, but not consumed.
5. The difference between income and expenditures.
6. The difference between income and expenditures on consumer goods.

One of the troubling things about macroeconomics is that definitions are often used inconsistently, without specifying which one is meant.

For example, “Savings = Investments” is sort of mystifying, unless you’re using definition #2, in which case it’s true by definition.

In microeconomics, savings is money not spent. This is the definition people are thinking of when they use ordinary English.

In macroeconomics, however, savings cannot mean “money not spent”, because spending = income. In other words, the amount of money spent by everyone is always the same as the amount of income that everyone earns. One person’s savings is income lost to someone else.

You could look at this is a few different ways.

One is that savings is the inverse of spending. Or, in other words, the inverse of the velocity of money. If the average velocity of money was, for example, 12/year (meaning that each unit is spent, on average, twelve times per year) then the savings rate would be the inverse – or 1/12. Meaning that the average amount of time money is saved (not spent) is one-twelfth of a year.

Another would be to sum up all the money people consider to be their savings – whether saved in piggy banks, time deposits, or wherever. This is problematic for a number of reasons. For example: a person’s statement about the amount of his savings is really a statement about his intent – what he intends to do in the future.

A third way is simply to acknowledge that savings for the economy as a whole always equal zero, so summing the sectors of the economy will also equal zero.

If you wanted to know how much Americans saved, versus everyone else in the world, the answer would be the trade deficit, or $500 billion (2010). If you wanted to know how much the private sector saved versus the national government, the answer would be the Federal deficit: $1.3 trillion (2010). If you wanted to know how much the US domestic private sector saved, versus everyone else, the answer would be $700 billion.

P (domestic private sector) + G (government) + F (foreign) = 0.
P = -G -F.

Two Questions

1. If MMT offers anything important or meaningful, what predictions (if any) does it make that are different from those of mainstream economics?

I ask because MMTers sometimes complain that mainstream economists don’t take them seriously. But if they could make reliable predictions, getting people to listen would be the least of their worries. People would pay to hear what they have to say.

2. (And on an unrelated subject) The US could hire about half the unemployed – about 7 million people – at a salary of $30000 per year, at a cost of $210 billion.

In comparison, Social Security is $761 billion, unemployment benefits, welfare, and “other” are over $600 billion, DoD is $553 billion, and interest on the debt is $242 billion. Unemployment is regularly described as an intractable crisis.

So my question is: why not hire them?

Labor’s Share Of Income

What this chart shows is a decline from about 67% to about 57% in the share of all income that goes to workers – rather than to owners.

It goes a long way toward showing why the incomes of the very rich have increased so much, even while the incomes of ordinary people have stagnated.

From Zero Hedge.