Comments on: It is 2004 all over again. Central banks haven’t shifted away from safe, liquid assets

By: flow5

flow5 — Tue, 24 Jun 2008 15:58:51 +0000

In calculating the flow of funds we do know that to ignore the aggregate effect of money flows on prices is to ignore the inflation process. And to dismiss the concept of Vt by saying it is meaningless (that people can only spend their income once) is to ignore the fact that Vt is a function of three factors: (1) the number of transactions; (2) the prices of goods and services; (3) the volume of M.

Inflation analysis cannot be limited to the volume of wages and salaries spent. To do so is to overlook the principal “engine” of inflation – which is of course, the volume of credit (new money) created by the Reserve and the commercial banks, plus the expenditure rate (velocity) of these funds. Also overlooked is the effect of the expenditure of the savings of the non-bank public on prices. The (MVt) figure encompasses the total effect of all these money flows.

By: flow5

flow5 — Tue, 24 Jun 2008 15:43:06 +0000

“Not printing a lot of money in the process.” That’s mathematically impossible considering the rampant commodity speculation that has characterized the last few years. After the housing market’s collapse, colossal monetary flows (MVt)have simply been re-directed or re-allocated into other channels within the economy.

Maybe Milton Friedman said it best: “Inflation (as evidenced by the commodities bubble) is always and everywhere a monetary phenomenon”.

The evidence of inflation is represented by “actual” prices in the marketplace. The “administered” prices would not be the “asked” prices were they not “validated” by (MVt).

By: Rien Huizer

Rien Huizer — Tue, 24 Jun 2008 09:16:00 +0000

Calv’s piece is mystifying. I read it a few days ago and could not believe my eyes. And that on a site (Vox) with a truly outstanding “faculty”. Perhaps he had an idea in his head that did not come out right.

If you were a foreign central banker sitting on all this moeney, what would you do? Sit on it for a while, buy treasury bills. Eurodollar deposits: too much credit risk. Currency diversification? EUR already pretty high plus not a lot of risk free short term paper round (bank credit risk again). Yen? All kinds of problems, no yield, no short term paper, bank credit risk. Equities? with a high probabilty of comsumption slowdown in the OECD? If they buy equities at all, they are alpha investors, like hedge funds.
But the underlying message from the data is that the Fed is still facilitating a flight to quality by both domestic and foreign investors, and not printing a lot of money in the process. No matter how you define it. How long can this go on?

By: don

don — Tue, 24 Jun 2008 03:22:57 +0000

Brad –
Your objection to Calvo’s argument is identical to mine. It seems incredible that anyone familiar with the data would argue that such a shift has taken place, although it might in future.

By: JKH

JKH — Mon, 23 Jun 2008 20:39:27 +0000

Professor Calvo’s argument seems off the mark. You’ve noted yourself that the Fed’s monetary base hasn’t been growing, and the Fed has been switching out of bills to facilitate the securities lending facility. On the other hand, monetary bases for foreign central banks are what have been growing, and that’s got very little if anything to do with SWF treasury bill management – a bizarre theory.

The primary inflation problem in the world right now is with foreign central banks, and they are starting to tighten. The Fed has merely telegraphed concerns about risk to inflation expectations, and they’ll do it again tomorrow. This is still a far cry from actual tightening.

These are two different worlds for current central banking conditions, but they have been confused. It makes sense that foreign central bank tightening has a good chance of having a critical cyclical effect on EM oil demand, before the Fed needs to act in any significant way.

By: RebelEconomist

RebelEconomist — Mon, 23 Jun 2008 18:30:39 +0000

Lucky US! All you have to do is use the official capital inflows wisely. Here’s how:

http://reservedplace.blogspot.com/2008/04/us-economic-policy-shot-in-foot-2.html

By: Fullcarry

Fullcarry — Mon, 23 Jun 2008 17:31:26 +0000

What will put upward pressure on US interest rates is deleveraging. When levered entities like commercial banks, investment banks and hedge funds are less will to hold fixed income assets, real money needs to step in. All else being equal that will only happen at higher rates.

By: flow5

flow5 — Mon, 23 Jun 2008 16:28:16 +0000

Calvo’s “shift” is illogical. One measure of the strength or weakness in a countries’ currency is the trend rate-of-change in foreign short-term claims relative to long-term investments, e.g., the higher the ratio of short-term claims to long-term claims, the weaker the dollar.

By: flow5

flow5 — Mon, 23 Jun 2008 16:07:29 +0000

“Inflation is always and everywhere a monetary phenomenon” — Milton Friedman.

The money supply is unknown and unknowable.

Since 1942, money creation is a system process. No bank, or minority group of banks (from an asset standpoint), can expand credit (create money), significantly faster than the majority banks expand. Thus, bank credit proxy, loans-deposits (money stock), is a surrogate measure of the degree of “ease” or “restraint” being pursued by the FOMC.

St. Louis Federal Reserve Bank: Bank credit is defined as total loans and investments at all commercial banks.

Using “bank credit” as a proxy: it’s rate-of-change continues to follow an inflationary path (c. 10% roc since mid 2005).

“Bank credit proxy” (total member bank deposits) used to be an FOMC target: “The Federal open market committee’s strategy remained essentially unchanged for more than three years, from Sept 66, when the committee first began including a “bank credit proviso” clause in its directive until Dec 1969.”