Wednesday, September 13, 2006

economics talking out loud

I'm puzzling through what I consider an economic conundrum. So this post is going to be a bit muddled, and the conclusion I reach (if I reach one) may not be the real answer. Bear with me - and comment if you have something to educate me, please.

I'm back on the subject of inflation/deflation, and creation of money. The specific question is how to apply credit to the thing. In general the monetarists - heck, almost all the economic schools - agree that credit is money "till it isn't". It's a money substitute. Now what I'm trying to do in this little walkthrough is play with the monetarist side of the discussion and apply credit more rigidly.

Let me do a bit of background. Monetarists define inflation as increasing the supply of money. Now in a monetarist's perfect world (as I understand it), fixed money supply leads to gradual price declines as both people and products increase (the latter due to the former's needs and capabilities). To maintain price equilibrium, then, the money supply needs to grow at a rate nominally equal to population and that population's supply and demand capacities.

I'm going to interject here a working definition. My working definition of capital is that it's a supply enhancer. That is, because of capital you are able to produce more than you could without it. It shifts the supply curve outward. This may be relevant - my mind insisted I get it down, anyway. Back to inflation and money supply, and specifically credit.

Credit frustrates the monetarist, or so it seems to be in what I've read. It always gets treated vaguely, with no real means of testing. So the conundrum I've been trying to resolve is:
When is credit money, and when does it cease being money?

Credit is money, obviously, when it is first lent. And in the end, it ceases being money when it's destroyed - that is, when it's returned to the lender. But that's the extremes, and I am still left with the question of money between those two instances. And for that matter, how and when the repayment should be applied in calculation of money supply.

Interjection, again. It appears to me I'm actually trying to decide how to calculate 'total money' - that is, either M2 or MZM PLUS the money that exists due to credit. Or restated, determining monetarist inflation/deflation modified by population demand/supply to include the effect of credit.

OK, let's take a first swing. I lend you $1000, and you agree to repay me $100 per month. (Yes, that's a steep rate, but it makes the math easy). Assuming that before the loan there was $100,000 in the money supply, then the month of my loan to you there is 101,000. This declines by 100 per month till we get a nominal money supply of 99,800. Actually, what we get is 100,000, but now I've got 200 of the 'real' money supply. So 'really', the boosted supply deflates at about 83 1/3 dollars per month. Obviously the simple answer is that I should add the credit as it exists and remove it as it's repaid. Outstanding Debt, in other words. (Note that as I was writing I was thinking I'd have to assume all the loans as repaid the next period. That's not necessary because of the tracking done. Hooray, and an example of not knowing where I'll end when I've started.)

I can do this as it's in the Fed charts. It's got a flaw that's going to niggle at me, of course. That's the fact that I have to deal with default loans that are wiped off the books - forgiven, settled for a loss, etc. Let's use the example to explain and maybe while I do that I'll see a solution (or that it's not a problem).

You stop repaying me after six months - still owing me 600 dollars, and having the money supply still inflated by $500. We fuss and fight, I send a bill collector, and we eventually settle with you paying half - $300. The loan no longer shows as outstanding and so doesn't sit in the Fed's numbers, but we have $200 still in the money supply that needs tracked.

Hmmm. No, it doesn't. It's in the M2. On the other hand, the credit is in there too once it's passed the first iteration. Which means just using 'outstanding debt' is probably a wrong answer. Nuts, but I guess not a surprise as simple answers to human issues do tend to be mistaken.

Or... maybe not. If it showed up, then outstanding debt wouldn't have been multiples of M3. (while M3 was being measured, of course.)

Digression. If you miss the M3, really, really miss it, you can recalculate it from existing reports. My preferred method if I really, really need it is to take MZM and add Small and Large denomination time deposits. Alternately, you can take M2 and add Institutional Money Funds, Large denomination time deposits, and Repurchase agreements. This latter is missing Eurodollars. Both methods can be done using the Federal Reserve's reports. The latter - missing the Eurodollars - is going to be over 99% accurate to M3 when tested historically. The MZM method is accurate as far back as I've taken it. I hesitate to claim 100% because the reports I download are rounded, but it LOOKS like it's 100%.

hmmm. I think I'm going to chart MZM plus outstanding debt - no, let's make it outstanding household debt. The other components of debt are commercial and government, and I am near certain the latter has notes that are already measured and suspect the same of commercial debt. heh - don't you like the back and forth? in my copious free time I'll do both household and household plus commercial outstanding debt as part of the 'money' measure. I'll write about it when it's done.


Blogger BEEBEE said...

A good history of the Federal Reserve if you have not seen it. Some things on this website, I do not have an opinion on. I have this link because of my interest in the Federal Reserve.

Linda from PP

9/14/2006 11:06 PM  
Blogger BEEBEE said...

New York Stock Exchange goes global.

This is all part of the New World Order, that most pretend is not happening.

This way the monopoly cartels can make or break your silver holdings or any commodity that you own. We will soon be paying a world tax. Actually, we already do whenever we finance huge amount of financial loans to other countries and then write off the loans. Our debt system is like an Etch a Sketch, now you see it, now you don't. We are manipulated by the "Masters of the Game."

9/14/2006 11:17 PM  

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