Author Archives: Eric Tymoigne

Money and Banking-Part 8: The Private Banking Business

By Eric Tymoigne

The US financial system is extremely complicated and this series shades light only on some corners of that system by focusing on the banking sector. Here is a broad picture of the US financial system (some things have changed since the last time I made this). Since the beginning of this M&B series, posts have emphasized the importance of balance sheet to get a solid understanding the mechanics at play in the financial sector. This post continues that trend.

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Money and Banking Part 7: Leverage

By Eric Tymoigne

Given that the concept of leverage will be used often in the upcoming posts, this post spends some time explaining what leverage is and some of its impacts on the balance sheet of any economic unit.

What is Leverage?

Leverage is the ability to acquire assets in an amount that is larger than what one’s own capital allows to buy. Say that an economic unit has a net worth of $100, that it has no debt and that the counterparty is $100 in cash (Figure 1). The balance sheet looks like this:

Figure 1. A balance sheet without leverage

Figure 1. A balance sheet without leverage

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Money and Banking – Part 6: Treasury and Central Bank Interactions

Treasury and Central Bank Interactions

This post concludes our study of central banking matters (there would be a lot more to cover…maybe another time). The post studies how the Fed is involved in fiscal operations and how the U.S. Treasury is involved in monetary-policy operations. The extensive interaction between these two branches of the U.S. government is necessary for fiscal and monetary policies to work properly.

Once again the balance sheet of the Federal Reserve provides a simple starting point. The Treasury holds an account (called Treasury’ General Account, TGA) at the Fed, which is part of L3. To simplify, this post assumes that the Fed still follows the monetary-policy procedures that it followed prior to the 2008 crisis.

tb1

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Money and Banking – Part 5: FAQs about central banking

By Eric Tymoigne

Previous posts studied the balance sheet of the Fed, definitions and their relation to the balance sheet of the fed, and monetary-policy implementation. This post answers some FAQs about monetary policy and central banking. Each of them can be read independently.

Q1: Does the Fed target/control/set the quantity of reserves and the quantity of money?

The Fed does not set the quantity of reserves and does not control the money supply (M1). It sets the cost of reserves; that is it.

In terms of reserves, the Fed was created to provide an “elastic currency,” i.e. to provide monetary base according to the needs of the economic system in normal and panic times. It would be against this purpose to implement monetary policy by unilaterally setting the monetary base without any regards for the daily needs of the economy system.

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Money and Banking Blog – Part 4: Monetary Policy Implementation

By Eric Tymoigne

For convenience, I have put the balance sheet of the Fed below. Post 2 examined the balance sheet and Post 3 provided important information about the meaning of reserves and other basic concepts and their relation to the balance sheet of the Fed. Now let us look at monetary-policy implementation.

1

What does the Fed do in terms of monetary policy and why? Continue reading

Money and Banking – Part 3: Monetary Base, Reserves, and Central Bank’s Balance Sheet

By Eric Tymoigne

(A quick note: I noticed that the M&B posts get posted on other blogs. If you want me to respond to you, you should comment at NEP.)

MONETARY BASE AND THE BALANCE SHEET OF THE FED.

Post 2 examined the balance sheet of the central bank:

f1

Now that we have an understanding of how the balance sheet of the Fed works, it is possible to go into the details of how the Fed operates in the economy in terms of monetary policy.

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Money and Banking – Part 2: Central bank balance sheet and immediate implications

By Eric Tymoigne

[Revised 1/18/16 – updated t-account images]

Post 1 reviewed basic balance-sheet mechanics. This post begins to apply them to the Federal Reserve System (Fed).

Balance Sheet of the Federal Reserve System

For analytical purpose, the balance sheet of the Fed can be presented as follows:

f1

Figure 1. A Simplified Balance Sheet of the Federal Reserve System

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Money and Banking – Part 1: Balance Sheet

By Eric Tymoigne

I struggled a few years to get an M&B course together. It lacked coherency and students had difficulty to link the different parts of the course. A good part of the problem comes from the M&B textbooks that, besides having outdated presentations, are a disparate collection of chapters without a coherent core. So I gave up with textbooks and went my own way, and comprehension dramatically increased among my students.

The core of the financial system consists of financial documents and among them are balance sheets. Balance sheets provide the foundation upon which most of an M&B course can be taught: monetary creation by banks and the central bank, nature of money, financial crises, securitization, financial interdependencies, you name it, it has to do with one or several balance sheet(s). As Hyman P. Minsky used to note, if you cannot put your reasoning in terms of a balance sheet there is a problem in your logic.

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Penny Hoarders: A Contemporary Example of a Problem with a Gold/Silver Standard

By Eric Tymoigne

Yesterday National Public Radio ran a segment on penny hoarders. These are people whose hobby is to hoard pre-1982 pennies. Some even go to their local banks and ask to convert dollar bills into pennies and then spend their evenings triaging boxes of pennies. Why would they do that would you ask? Well, pre-1982 pennies are made mostly of copper and, given the price of a pound of copper tripled over the past ten years, the face value of a penny is half the value of the content of copper: face value is 1 cent, intrinsic value is 2 cents. 100% profit from selling pennies for their copper content!

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Where is the “Recovery”? Where Did the “Stimulus” Go?


The new BEA figures about economic activity continue to point to a replay of a Japanese-style lost decade or, even worse, a 1937 scenario. The current expansion has been the weakest on record since World War Two and the trend since the early 1980s does not provide much comfort. Figure 1 shows that each economic expansion since the 1980s has been weaker and weaker and the rate of decline has accelerated.

The current debate in Washington does not provide any comfort for the short run or the long run with both political parties willing to jeopardize whatever economic growth we have left over a fictitious ceiling that serves no economic purpose. All this suffering is supposed to help in the long run because of the good that will come from “reforming” (read “dismantling”) pillars of economic progress like Social Security.

The 2009 Obama “stimulus” is long gone and all levels of government negatively contributing to economic growth. Since the third quarter of 2009, the contribution of the government to economic growth has been nil on average.