I was attempting to explain the creation of money by the Federal Reserve to this young person -- at least he projects youth, one can never know on the internets -- and I was having trouble, He had the idea that the only way the Federal Reserve could inject money into the economy was by borrowing it from somewhere. I think he thought of 'money' in overly physicalist terms, like a stack of bills and/or coins. I'll try the explanation again here. The Federal Reserve injects money into the economy by, in essence, creating it as a matter of law. Most money has no physical form at all. It is the set of the numbers we assign to bank accounts. The Bureau of Engraving creates paper money, but that is only a small portion of the total supply of dollars (I've heard around 8%). But that is the tail not the dog. The dog in this situation consists of the idea of money, and numbers that are re-assigned at the tap of keys or the swipe of a plastic card fr...
Posts
Investors in the spring of 2016 could have gotten ahead of events by aligning their portfolios to “a world of lower expected capital market returns and higher forward volatility.” That, at any rate, was the upshot of a thoughtful analysis by Eric J. Wiegel of Global Focus Capital, a Boston based asset allocation advisor. Why does Wiegel think so? Because the market’s inflationary expectations are/were too low. With the benefit of a year of hindsight ... was Wiegel right? So far as I can tell ... no. In particular, the market's inflationary expectations as of the spring of 2016 for the following year were accurate, and following Wiegel's effort to outguess the market would nought have availed. There was no upsurge in inflation numbers in the months after Wiegel wrote, and in fact investors have since then benefitted by higher than expected capital market returns. In the five months before and contemporaneous with Wiegel's article, the inflation rate (annualized, th...
Yesterday, I began a discussion of the work of Professor Guillermo Calvo, now of Columbia University’s School of International and Public Affairs, in an effort to answer the question in the headline of this blog entry, and I got so far as to introduce the word "stickiness." Let's proceed from there. Calvo does acknowledge that fiat money contains within itself the principle of its own destruction. But ... why does its destruction take so long? Even if deliberate government buttressing of the use of its money were "completely absent," he says, this factor would slow the aforementioned destruction. Stockiness is simply a convenient name for the behavioral fact that suppliers of goods and services "broadcast, far and wide, their willingness to take fiat money in exchange" for what they are selling. Further, private sellers often "reaffirm their willingness to do so over extended periods of time." The suppliers find it useful as a mar...
Every once in awhile we hear econo pundits telling us how evil deflation would be. Why? Well ... deflation is often a symptom of bad times. If a lot of people are out of work and have no purchasing power, demand for a wide range of products will drop and so will the general level of prices, i.e. there will be deflation. This is one way of getting to deflation, and the causes of that symptom are, to those directly affected, bad things indeed. BUT ... deflation there is only a symptom, not a cause of the trouble, and this doesn't rule out the possibility that deflation in other contexts may be harmless, or better-than-harmless. One often encounters a suspicion of deflation that goes beyond any real justification, and this is the background of an expectation that a central bank should program into an economy a mild level of price inflation, say 2 to 3%. Just to keep those deflationary demons away? These thoughts are motivated by Apple's product launching event on March 2...