Re: Questions about Community Currency.

From: polar bear (bear_at_pole.com)
Date: 03/13/05 

Date: Sun, 13 Mar 2005 06:32:01 -0800

In article <6i2631l0on229dotvd2v4fdvtjj553oovg@4ax.com>, William F
Hummel <wfhummel@comcast.net> wrote:

> On Sat, 12 Mar 2005 01:28:59 -0800, polar bear <bear@pole.com> wrote:
>
> >In article <59l331lkr1rdcf3sn3o375dcb77k8em44a@4ax.com>, William F
> >Hummel <wfhummel@comcast.net> wrote:
> >
> >> On Fri, 11 Mar 2005 00:52:09 -0800, polar bear <bear@pole.com> wrote:
> >>
> >> >In article <ubv031dh0v04njderv9ntqmk1afv016co5@4ax.com>, William F
> >> >Hummel <wfhummel@comcast.net> wrote:
> >> >
> >> ><snip>
> >> >
> >> >>The expansion of the money supply is mainly
> >> >> the result of bank credit expansion, driven by the demand for credit
> >> >> rather than by government initiative.
> >> >
> >> >You should probably read this:
> >> >http://www.safehaven.com/article-187.htm
> >> >
> >> >about halfway down the page, paragraph starting with:
> >> >
> >> >"I think we all suffer from trying to analyze the highly complex
> >> >contemporary financial world through concepts that were developed back
> >> >when the banking system was basically the credit system, and bank
> >> >deposit expansion was the key component of money supply growth."
> >> >
> >> An interesting article, and I fully agree with the observation that
> >> the credit system has expanded far beyond the banking system. However
> >> money supply growth is still largely a function of bank lending. The
> >> main exception is the money market mutual funds which now serve as a
> >> money proxy. There is some confusion about the meaning of the term
> >> "money supply." The usual meaning is that which we use in purchasing,
> >> paying bills, or investing, in other words liquid financial assets
> >> (LFAs). That should be contrasted with non-liquid financial assets
> >> (NLFAs) such as credit issued by non-bank financial institutions.
> >>
> >> The amount of credit far exceeds the money supply. In fact
> >> bank-issued credit, which comprises the main part of the money supply,
> >> now accounts for less than 20% of the total credit market debt. NLFAs
> >> normally expand and contract without affecting the money supply. For
> >> example, investor A lends $1M to finance company B, who then lends it
> >> to business C. The result is that $1M in A's bank account has
> >> transferred to C's bank account. The money supply remains the same,
> >> but the total credit market debt has increased by $2M.
> >>
> >> The author of the article presents an obsolete version of how the
> >> money supply expands through bank lending, the so-called money
> >> multiplier concept. He starts with an injection of reserves into the
> >> banking system by central bank, whereupon the banking system issues
> >> credit money equal to a multiple of those reserves, depending on the
> >> required reserve ratio. This version has not applied for many
> >> decades. Central banks now target the interest rate on money market
> >> funds, and respond to the demand for reserves as required by the
> >> banking system. In Canada and several other countries, where banks
> >> hold little or no reserves since there is no reserve requirement, the
> >> money multiplier concept obviously has no meaning.
> >
> >As far as I'm aware, open market operations are the tool of choice with
> >this Fed. Who they trade with makes little difference however, since
> >the bulk of money created ends up in inflating financial assets, which
> >are then leveraged to buy more inflating assets - same as happened in
> >Japan, and it will end just as badly.
>
> As explained in some detail, open market operations are used simply to
> control the overnight interest rate on banking system reserves. They
> are not used to create money except as required to balance supply and
> demand for reserves at the Fed's target rate. Private bank-issued
> credit is the main source of money used in the economy. The Fed can
> only influence the amount of bank credit issued by its selection of
> the target rate, which affects demand for credit.
>
> >Doug's main point stands. The
> >Fed may target money supply, but that's not where the action is.
>
> Wrong. The Fed does not target the money supply. It targets the
> price of money.
 
Is this what you're refering to?
http://www.ny.frb.org/aboutthefed/fedpoint/fed49.html
In 2000, when the Humphrey-Hawkins legislation requiring the Fed to set
target ranges for money supply growth expired, the Fed announced that
it was no longer setting such targets, because money supply growth does
not provide a useful benchmark for the conduct of monetary policy.
However, the Fed said, too, that "Šthe FOMC believes that the behavior
of money and credit will continue to have value for gauging economic
and financial conditions." Moreover, M2, adjusted for changes in the
price level, remains a component of the Index of Leading Economic
Indicators, which some market analysts use to forecast economic
recessions and recoveries.

The fact that they don't set targets anymore is a side issue. All it
means is they've granted themselves more latitude to respond because
their basic metrics have broken down. Not a very reassuring thought.

"the FOMC believes that the behavior of money and credit will continue
to have value for gauging economic and financial conditions."

Well, Duh!

pb

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