Re: clarifying FOMC

[Basil Moore <bmoore@xxxxxxxxxxxxxxxxx>]

John
I seems obvious to most economists that the government can expand the money
supply exogenously by simply printing currency and injecting it into the
economy..

But I believe I can show you that this view is false. It fails to follow
all the steps in the process.

Suppose the government buys goods and pays for them with newly-created money.

This money will be deposited in the banking system, and the banks will find
that their total reserves have increased. The argument usually ends here.

But this additional money will reduce the banks' need for borrowed reserves
(BR), since their NBR's have risen by the amount that the government
increased the supply of base money.

If the CB is targeting the interest rate, it must immediately sell
securities on the open market, so as to reestablish the original targeted
level of BR's. This represents the level of "reserve restraint" consistent
with the CB's ff 's target rate.

The Fed is continuously adding and withdrawing funds from the system to
keep the ff rate at its targeted level, or if you prefer within its
targeted bands.

In other words, whenever the CB has an interest rate target, it must supply
base money in a completely endogenous fashion, in order to keep rates at
their targeted level.

As a result In such a regime the government cannot create or destroy base
money, because any changes in the base will be immediately offset by the CB
in its interest rate targeting operations.

Basil Moore

At 11:58 AM 12/1/00 -0800, you wrote:
> Basil Moore wrote:
> >
> > >
> > >Barkley
> >
> > May I be so rude as to give you a short lecture? Thank you.
> >
> > Monetarism is based on the twin notions that
> > 1) monetary change explains changes in  income and prices, and that
> > 2) the money supply (MS) is under the exogenous control of the monetary
> > authorities.
>
> Perhaps in your world. In mine, monetarism means dQ/dM = o,
> nothing more nothing less. As a consequence of this, only
> the value of money [i.e. -- The price of money is the amount
> of goods and/or services money will buy; it is not the
> rental or interest rate of money.] is directly affected by
> the quantity of money.
>
> Any effect changes in the quantity of money have on economic
> activity are solely because of the inherent redistribution
> of purchasing power that accompanies changes in money supply
> the outcome of which is not predictable as to its effect on
> the economy, if any. Further, the money supply, if defined
> as the commodity issued by the central bank, [Sometimes
> called "high powered money" or "reserves" or by some other
> restricted phrase.] is directly under the control of the
> central bank or, if defined to include commercial bank
> credit, is indirectly under the control of the central bank
> and/or another controlling agency such as, in the US, the
> FDIC.
>
> > The PK recognition and proof that the MS moves endogenously in response to
> > changes in demand for bank credit, and that the authorities provides
> > reserves endogenously and passively (accomodate the banking system's demand
> > for reserves), but at a price (short term interest rate) of their choosing,
> > puts paid to the second monetarist notion.
>
> Proving a falsehood is not proof, it is merely error. The
> choice of measure the central bank to determine how it
> adjusts the money supply does not change the reality that it
> does change the money supply to accomplish its end be that
> end an interest rate, an arbitrary measure of the supply or
> the value of money.
>
> > Banks are retailers of credit, not portfolio managers, and like other
> > retailers the amount they sell depends primarily on the demand for their
> > product.
>
> A demand that is affected by, among other things, the
> interest rate charged for that credit which, in turn, is
> determined by the quantity of money [or reserves] provided
> by the central bank.
>
> <<SNIP>>
>
> --
>                         -- jbod
>
>                 Tax Privilege, Not People
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