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TCO
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Richmond, VA
Jan 1970
time: 00:27
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quote:
Originally posted by HershOstropoler
Spikey:
"Trust me, a touch of reading and you'll be able to run macroweenie rings around Roland, who has some grasp of economic statistics without the backbone of understanding he needs to use his knowledge well."
Oooh, cutie. But instead of debating with you, let's just wait for the US easy money boom you predicted, shall we.
GP:
"How. I'm not being a ****. Well not on purpose. I need to understand it more tactically to have any idea what is going on. What do they physically do. How does the money move?"
Just consider what a CB usually does in its relations with commercial banks. The CB lends to the banks at a certain interest rate (secured or unsecured), and the banks lend to borrowers. At the CB and the banks, this shows up as bookkeeping entries. Bank X owes Y to the CB, and bank X has Y to lend around. The lower the rate, the higher the demand. The CB can pre- or refund bank lending.
This does not have to be, but can be converted to cash. In a fiat money system, the claim the bank has against the CB is that CB accounts are converted to paper money.
Another factor is the money multiplier. If you pay 100 $ cash into a bank account, and the bank lends the 100 $ to someone else, the money supply is 200 $ (100 $ held in cash, 100 $ held in short term accounts by the non-banking sector). This can be repeated infinately unless there is a minimum reserve requirement. (at say 10 %, this would mean that the bank could only lend 90 $ of the 100 $ it recieved).
One way to inject money directly is for the CB to buy securities.
Of course Spiky will desperately try to find a hair in that soup. |
1. What is the secured/unsecured part mean and which is done? And does the effect differ depending on which is done.
2. Let's say they make all these loans to commercial banks. If the banks ask for currency, how do they produce it? Do they have a mint?
3. How do they choose which banks to loan money to?
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HershOstropoler
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"1. What is the secured/unsecured part mean and which is done? And does the effect differ depending on which is done."
Secured is when the CB lends against securities, like the discount and lombard operations. I think the Fed Funds are being done unsecured (?). The ECB has a flexible policy towards what it accepts as collateral, but it has changed its policy framework somewhat (variable rates) since I was looking closer into this.
"2. Let's say they make all these loans to commercial banks. If the banks ask for currency, how do they produce it? Do they have a mint?"
That's the case for the ESCB, where the NCBs provide notes. In the US it's up to the treasury, I think. How this is exactly regulated there, no idea.
"3. How do they choose which banks to loan money to?"
In a fixed rate system, every commercial bank that meets the criteria can borrow. In the ECB's variable rate tenders, those bidding the highest rates.
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HershOstropoler
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Only if the low real rates create a sufficient demand for lending by people who are willing and able to pay interest. The bank demand is no "independent" part of that. If they have no borrowers, borrowing from the CB is of no use to them.
One avenue is to buy bonds, so the banks can reak in the interest rate difference.
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HershOstropoler
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Which demand? Banks or non-banking sector?
For a bank, if it borrows 100 from the CB, it has 100 available and owes 100. Extra borrowing does not help them unless they can put the money to work.
For the non-banking sector, how many are eligable for negative real rates? Even if the real CB rate is say -2%, even real prime rates would be slightly positive (I think the gap was 2.5-3 % or so vs Fed Funds).
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HershOstropoler
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You've lost me there. You could buy assets that have a nominal return at the rate of inflation. That what you mean?
A top-bet is housing. Even at your CPI-rate, that's a nominal 4 %, + say 5 % as a service. At the moment it's more like 7+5 % vs maybe 6 % nominal interest. While demand is strong, it's not infinite - neither is supply. If mortgages were at 2 %, do you think demand and supply would be infinite?
Oh, and "then".
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07-05-2003 15:53
)
And if the price drops than the CPI is not 4% (I'm using caveat-protected gold as a proxy for the basket of goods and services in the CPI).
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