For anyone scratching their head on what "MP3" is: monetary policy 3, i.e. "helicopter money," i.e. "the government be handin out them stimmies," i.e. the government injected COVID-19 relief funds into the economy, giving an across-the-board increase in demand for goods & services, but there aren't enough "goods & services" to keep up with this demand.
Actually, that's a good point. Inflation would be even worse if that cash was going into physical goods and services. The government now has an incentive to leave crypto alone aside from providing clarity.
In the macro economic sense, fiat money isn't 'used up' or 'locked away' when you buy something like crypto, it's transferred from your account to someone else's bank account. Worse, it goes through the process of fractional reserve banking and multiplies about ~10x after changing hands repeatedly.
There's no such thing as fractional reserve banking. It's an urban myth that has been debunked by QE for over a decade. Lord only knows why people still believe it.
Banks create money on demand by discounting collateral. Government creates money on demand by discounting the power to tax.
Fiat money disappears by the drain to taxation, to repaying loans and to 'rainy day funds'.
QE is so thinly related I can hardly imagine how you could contort it to have "disproved" something which is codified in law and taught in basic finance and economics courses.
1) It appears to me that the document you provided actually refutes what you are saying. It supports fractional reserve banking. Here is a quote from the conclusion: "Most of the money in circulation is created, not by
the printing presses of the Bank of England, but by the
commercial banks themselves: banks create money whenever
they lend to someone in the economy or buy an asset from
consumers. "
2) "infinite money" without a legal limit to reserve ratios would only occur if every single bank actually had exactly 0% reserves, and it would take infinite time and infinite transactions for that to occur.
FYI using the observed absence of 'infinity' as a proof is generally poor logic as there is lots of mechanisms blocking infinity from occurring in reality.
That's correct. However, investing in Crypto using dollars will inflate the dollar. Thus, the arguments that the government will probably leave crypto alone, still holds.
But if someone with money to spend transfers it to a crypto scammers account rather than buying say a car, that avoids inflationary pressure on car prices.
Although if you have X in circulation as money, and Y in stock market valuation, you could say Y/(X+Y) of total value is in the stock market.
If the market valuation goes up to Y+Z, you could say money has "entered" the stock market, pushing its share of value to (Y+Z)/(X+Y+Z) even though the money in circulation, X, could be unchanged.
Not sure about that. Money velocity went down a lot. If you pay Apple money, Apple – the company – keeps that money as cash reserves in some form or another. This might be reinvested and circulates a bit more, but is it really spend in the real economy so that average Joe benefits from this?
Yes, when you buy newly issued shares from Apple (rare), cash flows through the stock market into Apple's accounts, but again, no money went 'into' the stock market.
If you're talking about Apple selling devices, then it's another concept entirely.
Yes, although you could argue that money that was transferred from a checking account to a brokerage account has « flowed into » a market, at least for the time it takes to settle any trades and for the counter party to withdraw theirs (since it will not be used for consumption)
That is an interesting justification for leaving crypto alone.
“Well if those poor people weren’t gambling on that ponzi scheme for a new dog coin they would actually be materially improving their living conditions and prices for everyone else would go up”
It’s interesting to see the wealth transfer of all these people that usually buy weekly lotto tickets get crypto instead and send their 10s of millions to programmers making an ICO and a fancy website.
Banks don't need to be. If half their customers declare bankruptcy or default on their mortgages, loans, etc; The bank won't have enough liquid assets to take on the subprime loans.
It doesn’t work like that though. If I buy BTC at 60k then someone is selling BTC at the same price. The fiat is just moving from one account to the next. The people getting cash-rich from crypto are either spending it (on lambos) or putting it back into the stock market.
You buy 1 BTC from me for 60k. Now let's say I want to buy BTC again, but you want to sell it for 120k, so now I buy 0.5 BTC from you for 60k, and if everyone agrees that 120k should be the fair price, we've just bid up the market cap and value of BTC without really increasing the fiat.
Now imagine that with different crypto, stocks, other financial instruments, real estate, etc etc and in different combinations and with margin and derivatives and what not.
In all probability, you’re selling to a crypto trader or bot who then uses those funds to make more crypto trades, so the money is in a sense trapped in crypto markets until someone withdraws it from the exchange. The extent to which this money is being absorbed by crypto can be seen by analyzing exchange flows.
Which contribute to a chip shortage making cars more expensive, seemingly pure financial instruments directly causing inflation for everyday people, there is no escape
Oh I figure he's being super sarcastic and saying that all that money went into propping up prices in NFTs and crypto that will at some point show their inherent worth. Maybe I read it wrong compared to all the other commenters
Yes, but the marginal propensity to consume matters here. If it’s an average person buying Bitcoin from a millionaire (or many such average people), it acts as a liquidity sink (since the millionaire has lower marginal propensity for consumption)
No, there are new ICOs with trillions of coins minted every month. It’s the FED injecting cash into newly minted monthly ‘stable coin’ wallets. Can’t wait to see the documentaries on the overnight millionaires who set up fancy ICO websites during the pandemic :D
No, it hasn’t. As money spirals deeply into inflation, crypto holdings and equities will have to be liquidated so that people have money to live off of. This will only feed into the inflation more. Investments haven’t absorbed inflation. They’ve delayed it slightly.
So it has, by your own admission. You predict a worse eventual outcome, which is not insightful. When this will all end badly is the question, not if. Rome lasted a good long time playing these games.
You can assume some stickiness on investment decisions. If people end up panic liquidating it would on the one hand deflate crypto on the other indicate lower demand.
If 10000 people buy bitcoin at 60k per coin as an investment and later have to sell at 10k per coin to make ends meet, I somehow doubt that the guy that pocketed the difference will contribute to inflation as much as the 10000 guys trying to put up a meal for tomorrow.
It feels like saying Elon Musk will make make your next stop at the grocer's more expensive, because selling his 10% of shares for $20 billion will contribute to inflation because of all the stuff he's gonna buy with that money.
The government didn't even grant people a months worth of rent in my city. Not sure how that lead to such a huge infusion of demand that continues to persist, unless there are just that many people with very little rent who are driving this demand. Seems like such a small amount in the grand scheme of things considering most people even working a minimum wage job might see more money back on a tax return than the measly $1200 that's been dispersed.
Not sure where you live, but a family of two adults and 3 kids got $13,900 in stimulus checks so far in the USA, not counting the expanded child tax credits (which would be another $5400 if the kids are young, dispersed in $900 monthly payments for the last 6 months of the year).
Even a single adult with no kids would have gotten $3,200 so far.
It isn’t just direct stimulus to private citizens.
It’s the near zero interest rate policy, the literally illegal purchasing of mortgage and corporate bonds by the fed and so much more that is flushing the entire economy with trillions of dollars.
So what exactly happens in between the fed purchasing mortgage bonds and allegedly consumer driven supply runs on everything from toilet paper to golf clubs?
As the fed buys bonds, it raises the price which lowers the rate.
As rates are lowered for things like mortgages and corporate bonds, people and corporations have more money to spend. Which they do generally spend which stimulates the economy.
Lower rates also cause corporations and people to borrow more which in a fractional reserve banking system actually creates money out of thin air. The reason why corporations borrow more is because with a lower WACC (weight average cost capital) they can invest in more projects (I.e. spend money) for any initiative that has a positive NPV.
Not everyone is a homeowner and on top of that not every homeowner has refinanced their home during covid. I don't think people are borrowing money to buy toilet paper or a golf club. How do lower rates for corporate loans affect behavior that's at the consumer level? I'm trying to understand this relationship better.
It doesn't directly go from fed to toilet paper. It starts with fed, inflates assets like real estate, stocks, commodities and leaks into actual economy due to the expected returns on these assets. For example, rents, prices of hardware and capital intensive sectors, oil all go up because on one hand these are getting indirectly pumped up by suppressed yields on bonds thanks to fed while on the other hand they are also getting consumed by economy (industry/people) which has to pay more to match the appreciation in prices to use/consume them.
All this results in higher wage expectations due to people expecting higher wages based on higher prices (gasoline, cars etc) which moves the fed money to people's hands and increases the prices of consumer goods including fmcg like TP.
As you can see there is a long link from cause to effect which is why we are seeing the slow increase in inflation. In many sectors like agriculture this is not even priced in yet as they are ultra competitive. But as their inputs go up (people and raw materials, hardware ), they will also have to increase prices.
Even when eventually fed raises rates or tapers their buying, prices once gone up have a way of sticking around unless efficiency improvements like automation reduce input costs.
Are people actually seeing higher wages on the whole? Some cities have raised minimum wages like a few dollars more an hour but minimum wages have not been keeping pace with inflation as it was. Has median wage gone up in this time? My understanding has been that wages have been pretty flat for middle income earners for years despite cost of living increases rising over these same years.
Scenario 1: Fed buys $20 billion of corporate bonds per month from Microsoft.
Scenario 2: Fed does not buy $20 billion of corporate bonds per month from Microsoft.
Consider all other things being equal, in the first scenario Microsoft's borrowing costs are drastically reduced. This means that Microsoft has more money. This means that Microsoft is able to hire more people, that the people that work for them get larger bonuses because they are typically tied to the profitability of the company.
This puts more money into real people's hands to buy toilet paper and golf clubs. That then multiplies throughout the economy. Suggestions for additional reading if you are really interested in these things:
People are borrowing money to buy toilet paper and golf clubs? I think you are missing some details in the path from mortgage bonds -> your average consumer buying average consumer goods. I'm not being cynical or anything, I'd just like to understand this relationship a bit better.
I think it's less taking a loan to buy golf clubs and more "feeling less financially stretched makes people more willing to spend money."
Example: Joe just had a kid and was going to buy a house in a good school district no matter the cost. With a higher mortgage rates, he'd have wound up house poor for a few years. With today's rates, he has a comfortable savings rate. Since he's not scrimping, he decides this month he'll buy that putter he'd been eying.
My understanding with housing is that is nearly always costs the same amount no matter what mortgage rate is, so in times of high rates list price is lower, times of low rates list price is higher, and adjusted for inflation the ultimate montly payment of mortgage+interest remains about the same. Seems like if you bought today you'd have to cough up a huge down payment vs when rates were higher, and its this initial costs from things like down payment and paying pmi that makes people initially house poor.
