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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Tommaso who wrote (49283)	1/9/2006 6:55:36 PM
From: mishedlo	Respond to of 110194

Either he is very confused, or else he is incapable of stating clearly what he does think. Now we are getting somewhere (I think). Yes I find Shostak confusing as well. In fact I can point you to two articles with the EXACT SAME TITLE (but published in different places) that have a differing formula for what money supply is. sheeesh. I struggled with that for months and could not get an answer from him or anyone else)other than Shostak trying to sell me a service). I can also state that I have not seen one frigging report from him on anything that he has written anywhere that gives an actual money supply figure. All he gives is % changes. It is my understsnding that by his definition that we are red for the year. As best as I can tell from his definition (one of them), we are indeed red for the year. Whether or not that really is "money" his definition does have a proven track record at predicting recessions. That is the key point. M2, M3, MZM, etc have no such track record. Thus even if you disagree with his definition, that does not make it useless. In fact I would rather have a flawed definition that accurately predicts something than an accurate one that does not. I believe there is merit to his work. Sometimes I think he is "purposely vague" so that no one can figure out what ih proprietary measure really is (so he can continue charging for it). That is one posibility. The other possibility is that he really is not good at writing. Perhaps it is a combination. mises.org Since January 1994, banks and other depository financial institutions have initiated sweep programs to lower statutory reserve requirements on demand deposits. In a sweep program, banks “sweep” funds from demand deposits into money market deposit accounts (MMDA), personal savings deposits under the Federal Reserve’s Regulation D, that have a zero statutory reserve requirement ratio. By means of a sweep, banks reduce the required reserves they hold against demand deposits. As a result of the sweep program one could argue that the money definition outlined above will not cover the total money supply. This criticism, however, is misplaced, for it has nothing to do with the definition as such, but with the difficulties of measuring money, which was transferred out of demand deposits by banks without the depositors’ consent. (The Federal Reserve of St. Louis provides a monthly estimate of the amount of money swept.) That is the paragraph that proves you wrong about him not understanding that DDA accounts are 100% backed. He fully understands they are not. His bitch is that they should be and his further bitch is that just because the FED does not print sweep data where it can easily be found (it is not in any of the money supply charts) does not mean it should be excluded from them. Provided you agree with his definition of money, it is hard to disagree with that point. The key issue (to me anyway) is having a reasonable definition of money supply that does not double count things and is predictive of economic events. I believe his definition does that. There is no doubt that m3 hopelessly double counts some stuff, and that m1 misses some stuff while double counting oyther stuff. The best example of double counting that I can give is travelers checks. I buy $5,000 worth of travelers checks. I put them in my pocket. American express deposits my 5,000 in a bank. The stupid money supply figures call the $5,000 in my wallet as well as American Express deposit of 5,000 money. Yes they add them together and say there is $10,000 in money supply. Well it is conceptually absurd to think that money supply rises every time someone buys travelers checks. Clearly there is only 5,000 there not 10,000. Shostak might give lousy examples but that is what he is saying. Hopefully you understand my example better. I had to read that stuff a dozen times before I got it. Traveler's checks is the easiest one to understand the flaw in. I hope no one here disagrees with me that buying traveleres checks does NOT increase money supply. But if you look at M1 it does. Bear in mind travelers checks are minor distortions and can probably be ignored. The concept of "claim" is what is important and if you carry that to other types of transactions then you can see how distorted they are too. While expanding credit is important, it is expansion/contraction of "real money" that leads to expansion/contraction of credit. That I believe but can not prove. Shostak never says that in any articles that I have found. Perhaps purposely so. Right now, "real money" as per his definition is contracting for the first time since before the last recession, even as people watching M3 are talking about rampant increase in money supply. I believe I know how this divergence ends and that is the use of his definition. Mish

To: Tommaso who wrote (49283)	1/9/2006 8:54:00 PM
From: basho	Read Replies (1) \| Respond to of 110194

Tommaso, I'm quite sure Frank Shostak is aware that demand deposits don't work that way in our current system but is instead making the case that they should. I had some communication with him many years ago and found him extremely well informed but very doctrinaire. It seemed to me that his unwillingness to accept that the dividing line between money and credit in our financial system is inherently ambiguous leaves him with little choice but to seek to impose precision where none is possible. Once we get beyond the monetary base, the distinction between money and credit is not in my view an easy one to make. Attempts to do so can even obscure rather than clarify the essential issue which to my mind is the degree to which holdings of these credit instruments take on some or all of the characteristics of money in the eyes of their owners. Given that in a fiat fractional reserve monetary system all is based on confidence, perception is as important to consider as "reality". As for the viability of banking under a 100% reserve regime, remember that this strict rule was only ever meant to apply to demand deposits. Any genuine term deposits would be free to be lent out on whatever basis the bank considers prudent. The net result of the total constraint on lending demand deposits would simply be a considerably slower rate of money and credit growth and a less fragile banking system.