You asked for the source of the data I used to state that the EU monetary base and excess reserves were both declining, indicating the destruction of the new euro's that were created: "Interesting if true. I haven't gotten around to finding the relevant data series from the ECB to calculate true money supply. Can you point me in the right direction?" I gave the sources on the ECB site. Your 'answer' was: "Edit: Those Euro statistics seem to be the internal liquidity management funds. I'm not exactly sure what they are." I then linked you an explanation for the ILM: Internal Liquidity Management is not the name of a fund but a description of what the ECB, as a central bank, does within the monetary/financial system built around ECB. This is a good explanation: http://libertystreeteconomics.newyo...w-global-banks-manage-liquidity-globally.html Your 'answer' was: You've raised a plethora of individual questions/issues but I can answer this one quite easily. Despite your questions, you surely don't appear as to be interested in the given answers. The EU monetary base and excess reserves dropped big time since the peak of mid last year. Meaning that the EU equivalent of the US 'Quantitative Easings', were for a big part undone. Scrapped. Destroyed. And as I said and shown along charts, draw a line from the latest plot on the chart to a 2008 plot, and that line has the same angle as the trend before 2008 had. Just like the US, where the net monetary base minus excess reserves, also is just a continuation of the existing trendline, an angle of maybe a couple % more, much less than the monetary base trend itself suggests, due to it having excess reserves as a component. So if the same happens there as in the EU happened, those excess reserves being destroyed, and the monetary base level suddenly sitting on the same trendline as pre 2008, alike the QE's never happened. Is there anything in above you don't understand? Do you think anything in above is wrong? Because that is discussing, 'Wow' and 'You've raised a plethora of individual questions/issues' is not. As you say, it's money available. Now tell me, imagine you had a can Coke. You open it and drink some. Will you open another can if the first isn't empty yet? I assume no? The same applies to the money supplies. If the monetary base, upon which all the rest is piled up, shrinks, then it means that people spend less dollars from their cash and current accounts. Why would they spend the 'wider' monetary resources then? If you have enough dollars on your current account, would you pay with dollars from your savings account? I assume no? Well, the same applies to the narrowest>widest money supplies. As said, the narrowest, being the monetary base, is most likely to be spent and thus most likely to cause price inflation. The wider money supplies, that add other and longer term monetary resources, are least likely to be spent, for the same reason as in the analogy with the current or savings account dollars choice when wanting to pay something. So as you can see, I'm not saying that the wider monetary resources are not price inflationary, I'm saying that they are least likely to be spent, and IF they got spent, then before that, excess reserves will have been spent first. As shown with the figures, excess reserves weren't spent, and we indeed didnt see the price inflation since 2008 as if they would have been spent. And furthermore, on the EU side, half of the excess reserves, were destroyed instead. Just like they were created from nothing, they went again into the void. They were never spent in the economy. IF they had been spent in the economy, we would have seen the monetary base rising or holding with the dropping excess reserves. Both dropped together. Point made.
This is a shorter and simpler explanation of the same: http://www.slate.com/blogs/moneybox/2012/08/03/the_monetary_base_is_irrelevant.html I hope it helps you to change the topic title haha.
Because it's still coke. It is money available and there is no distinction in terms of the way it is spent. Any further storyline based on the assumption that the two types of money in people's hands is different is then based on a flawed distinction.
Do you open a second can coke without drinking the first one empty? Why would anyone spend money from their bank savings account if the money on their bank current account suffices to make the payment? The same applies to the money supply, if there are alot excess reserves, then those get spent first, and only thereafter 'wider', longer term - intended monetary resources. So if excess reserves already arent spent, as the data indicates, then it just means that there is no demand to spend them. The minimum/required reserves already sufficed. And this in turn mean that if the central bank wants, it can just destroy these excess reserves again, which is what is already happening at the ECB, halve of excess reserves gone, 225 of the 450 billion euro's edited away, as simple as they were edited into place a year ago. Those that assumed that they would have added to the amount circulating euro's, well, didnt happen.
I don't know what you are defining as savings account vs current account but the true money supply is the measure of all the money available to be spent. It is what I can physically use to buy a can of coke. The Fed/ECB etc money is a component of the money available but definitely not all of it. The central bank liquidity funds etc are not the whole story with respect to inflation, but can be interesting stories nonetheless.
AFAIK, 'Money Supply' (M1) is broken up into Cash in Circulation, and money 'at call', which is bank accounts, savings and cheque accounts that can be withdrawn and spent immediately. The next level (M2) is money on fixed deposit that may be available in 30 days or 90 days or whatever, then there is money available via the sale of Bonds, shares etc. Those two are the most important. What I cannot understand is how and why the Trillion a year Uncle Ben is 'printing' is not finding its way almost directly into M1 or M2. It is being SPENT (and handed out to zombies) by the government and is thus 'in circulation'. It is not simply being handed over to the big banks to stick in 'Reserves'. Is Walmart flogging stuff off, and depositing the cash in the bank to put in its 'reserves'? A bank makes money by lending it out, not by sitting on it! WHY isn't the US Money supply going up by at least a Trillion a year? Is the US Treasury removing a Trillion a year in Greenbacks from circulation? I have never heard that claimed. I am STILL confused! OC
That's basically correct. Rothbard argued about some of the specifics but the outcome is that TMS is broadly equal to M1. AFAIK the first issue was the credit crunch at the start of the GFC: (a) reduced the inter-bank liquidity as banks didn't know who to trust (b) crushed the value of their assets through the losses in the value of the non-cash (non-reserve) assets. Broadly the value of assets like the mortgage backed securities (MBS) which had been monetised by the private banking system became worthless on the open market (you may remember there was a bit of hullabulloo about the banks not marking to market the value of the MBS' early into the GFC - this was because if they had done so they would have been insolvent). Both of these things resulted in the central banks injecting liquidity back into the banking system by essentially taking over loans between banks, the direct asset purchases (at or near book value) and the open currency swaps. As a consequence of these actions, the bank's excess reserves increased - an increase exactly equal to the amount of the loans. A good way to envisage it is that part of Bank A's balance sheet is a loan to Bank B of, say, $50 (and part of Bank B's liabilities is $50 owed to Bank A). The GFC caused angst about the credit-worthiness of Bank B but rather than Bank A calling in the loan (and effectively deleting the money from the system) the Central Bank stepped in as guarantor and bought the $50 loan. So - Bank A now has increased it's reserves by $50 (by replacing the bank loan on its Assets register with Central Bank cash). - Bank B still has a debt of $50, but it is now due to the Central Bank. - The Central Bank has stepped in as intermediary and debited and credited both sides of it's balance sheet with $50 - cash out of $50 and a loan asset of $50. If Bank A doesn't extract/loan out the cash then it sits on the books as an "excess reserve". (Bank A still needs the asset to remain solvent but has shifted what the asset is.) Hence, reserves have increased by $50 because an A<--B transaction has become A<--C<--B transaction. Consequently, as I have tried to say, the presence of absence of the excess reserves is an interesting story (largely around liquidity issues) but in and of itself the dramatic buildup of excess reserves does not convey information about the the impact on broader money supply (i.e. inflation) or economic activity. I believe the Fed is currently paying interest (~0.25%, I think) on the reserves which presumably increases it's influence on it's goal of setting short term market interest rates. If it didn't pay interest then I strongly suspect that the the large amount of cash in the banks hands would undermine the Central Bank's ability to set the short term interest rate.
Here are dummy balance sheets for the above example. Excess reserves increase by the Central Bank taking on the role as intermediary to increase liquidity but the financial position of the individual banks does not change. Essentially the deflationary pressures of the FRB money-equivalent being destroyed when Bank A calls in the loan to Bank B has been averted by the Central Bank monetising the loan with official fiat money. Ignoring any other implications this is one of the reasons for the central banks existence. If Bank A is willing to buy back Bank B's loan then the excess reserves are effectively deleted by undoing the transaction.
Bordsilver. Do the banks have to keep these reserves as cash $ or could they hold gold in reserve to cover their reqquirements? Especially with the recent promotion of gold to tier one asset?
At risk of getting out of my depth and getting my nomenclature wrong (and I'm unsure how much the rules change between jurisdictions), but there are basically two elements: 1. Reserve ratio requirements. 2. Other regulatory requirements under Basel III such as Tier 1 capital ratios, liquidity requirements and leverage ratios. The Reserve ratio requirements basically set the minimum amount of cash in the banks vaults (or in the Fed Reserves vaults) relative to the amount of their demand deposits. Hence, for every $100 in people's on-demand savings accounts they may only have to hold $10 in actual cash. The other $90 is lent out (or speculated with) in order to generate income. I believe the "vault cash" and the Central Bank deposits are the only things that can be kept to maintain the minimum reserve ratio requirements. At the end of every day, the banks calculate their reserve ratio. If they don't have enough (because they loaned out too much, or savers withdrew too much cash) then they have to borrow enough cash from someone (another bank, or the Central Bank) to meet the ratio (or else fudge the accounts, which no doubt happens). Borrowing from other banks on the overnight market is generally the first point of call as then you do not need to tell the central bank that you screwed up and are noncompliant (who typically take a dim view of serial "offenders"). As we discussed in Hawkeye's thread from a couple of months ago, the Reserve Requirements just show that banks are fundamentally insolvent. The other regulatory requirements through things such as Basel III are additional measures of the "robustness" of a bank to things like a run of bad loans or short term friction in credit markets. The Tier 1 assets are used to calculate the Tier 1 capital ratio which is the ratio of a bank's core equity capital to its total risk-weighted assets. A higher ratio means that they can supposedly weather more negative events such as bad loans. Assets like cash typically have a zero risk weight, while certain loans have a risk weight at 100% of their face value and hence can't be used to meet the Tier 1 capital ratio. The promotion of gold (which I didn't realise had actually happened yet) basically changes it's risk weighting and merit order in the types of assets that banks can use to meet their Tier 1 capital ratio requirements. Like cash sitting on the banks books, gold doesn't generate any income for the bank, hence despite it's promotion I doubt it is being viewed significantly differently to alternative Tier 1 assets. Does that help? OC may be able to confirm/deny.
I'd never thought of it like this, but I think you may be right here. Setting the interest rate is of course the wrong term, the CB enters the market by buying or selling in order to manipulate the interest rate up or down. The "Reserve Bank has set the interest rate at x" is just a nice bit of propaganda for the media and masses to disguise it's true actions. The other thing of course to mention with the CB buying up bad debt is the moral hazard question. It sanctions and encourages bad behaviour.
^ Sorry. Slipped into MSM speak. The ramifications of the liquidity etc actions are many and varied (including the moral hazard issue).
A savings account is the bank account you put your money for the long term. It gives the intrest rate determined by the central bank. A current account is the bank account you transfer money from to pay others, or withdraw cash from. It's also the bank account on which your employer pays you and on which you receive others payments. It gives nearly no intrest. For ex in my country you can't pay anything with money on the savings account, you first have to transfer it to your current account, and only then you can withdraw it as cash, or pay with it as a bank transfer. The current account is most likely to be spent in the near future. The savings account is much less likely to be spent in the near future, and in case fixed money for X years, the bank may give you a penalty cost if you prematurely end it. On the savings account, you can 'fix' money for X years, and you get a little higher intrest as a method to make you do this. The different money supplies (Base, M1 and onwards) go from narrow to wide. Every wider one adds longer term / less likely to be spent in near future balances. The current price inflation, is mostly determined by the narrowest money supply, being the monetary base, which holds the current accounts (and also cash-banknotes-coins). Every higher numbered money supply is less likely to be spent and thus less price inflationary. Banks that have enough dollars to meet required reserve ratio, move the surplus to their account at the central bank, in the Excess Reserves pool. The central bank uses then an intrest rate on it, to control the lending out of the longer term saved money, and thus to control price inflation. By manipulating that intrest rate, negative over zero to positive, the central bank can reward or punish banks that lend more out. Excess Reserves can be destroyed at any time. Since they are not needed to meet the legal requirements (required reserves, being the 'fraction' of the fractional reserve banking system). As long as not too much longer term savers withdraw/spend their savings account simultaneously. The central bank tries to control that behaviour of bank savers, if they notice that too many people start to spend their savings, they increase the intrest rate on savings, as to reward those that don't spend and keep the money on the savings account. And vice versa, if the central bank wants savers to spend, then they drop the intrest rate on savings. Of course, this intrest rate on savings is coupled to the intrest rate to borrow. Lending out at 8% and giving savers only 1% would make savers angry and they might withdraw their money. This intrest rates spread isn't fixed but limited within what is 'acceptable' for people. This coupling between the lending/savings intrest rates poses the central bank a problem, it limits the speed at which the central bank can erase debt and in case alot debt, this can become problematic, since moving the savings intrest to zero or even lower, can cause bank depositors, that now have to pay the bank to lend their money out, to get angry, and withdraw/spend, which can quickly cause severe price inflation upto hyperinflation. And thus, the remaining option in that case for central banks is to just block the spending. That's what those bank 'holidays' are, why they close bank offices, why they limit transactions, why they guarantee only 100,000 euro in EU (the rest not, so if you saved 200,000 euro to buy an average house, you lose halve of it and are thus unable to buy the house without lending), and why they even directly confiscate (case Cyprus). Since that remaining option is 'brutal', bank depositors obviously don't like it, the central bank found a smarter method: Excess Reserves. For every new QE dollar that enters circulation, an existing saved dollar is moved by common banks towards their Excess Reserves account at the Central Bank. So, the inflationary effect of the new QE dollar is undone by removing the inflationary effect of an existing dollar. Also, IF too many bank depositors simultaneously try to withdraw/spend from their savings account, the Central Bank can deadstop it right there, by changing the intrest rate between common and central bank as to inflict banks big penalties when being 'loose' with the savings accounts dollars. Later on, when the central bank thinks that the risk of depositors spending en masse, is gone, they can just destroy those Excess Reserves. There is a small example of that on the dollar side: http://research.stlouisfed.org/fred2/data/EXCRESNS.txt EXCRESNS 1990-12-01 1.665 1991-01-01 2.141 1991-02-01 1.805 1991-03-01 1.182 1991-04-01 1.029 1991-05-01 1.035 1991-06-01 0.996 1991-07-01 0.905 1991-08-01 1.085 1991-09-01 0.934 1991-10-01 1.057 1991-11-01 0.893 1991-12-01 0.990 1992-01-01 0.993 1992-02-01 1.046 1992-03-01 1.026 1992-04-01 1.134 1992-05-01 1.004 1992-06-01 0.924 1992-07-01 0.976 1992-08-01 0.940 1992-09-01 1.015 1992-10-01 1.063 1992-11-01 1.043 1992-12-01 1.155 1993-01-01 1.263 1993-02-01 1.093 1993-03-01 1.233 1993-04-01 1.103 1993-05-01 0.999 1993-06-01 0.896 1993-07-01 1.068 1993-08-01 0.953 1993-09-01 1.087 1993-10-01 1.078 1993-11-01 1.120 1993-12-01 1.070 1994-01-01 1.460 1994-02-01 1.149 1994-03-01 0.984 1994-04-01 1.142 1994-05-01 0.870 1994-06-01 1.117 1994-07-01 1.117 1994-08-01 1.010 1994-09-01 1.049 1994-10-01 0.798 1994-11-01 0.997 1994-12-01 1.171 1995-01-01 1.333 1995-02-01 0.970 1995-03-01 0.824 1995-04-01 0.758 1995-05-01 0.874 1995-06-01 0.984 1995-07-01 1.107 1995-08-01 1.007 1995-09-01 0.972 1995-10-01 1.080 1995-11-01 0.946 1995-12-01 1.291 1996-01-01 1.468 1996-02-01 0.861 1996-03-01 1.142 1996-04-01 1.127 1996-05-01 0.911 1996-06-01 1.115 1996-07-01 1.022 1996-08-01 0.961 1996-09-01 1.051 1996-10-01 1.008 1996-11-01 1.056 1996-12-01 1.419 1997-01-01 1.228 1997-02-01 1.035 1997-03-01 1.169 1997-04-01 1.015 1997-05-01 1.283 1997-06-01 1.344 1997-07-01 1.238 1997-08-01 1.260 1997-09-01 1.297 1997-10-01 1.416 1997-11-01 1.669 1997-12-01 1.687 1998-01-01 1.765 1998-02-01 1.535 1998-03-01 1.351 1998-04-01 1.391 1998-05-01 1.291 1998-06-01 1.619 1998-07-01 1.375 1998-08-01 1.533 1998-09-01 1.698 1998-10-01 1.576 1998-11-01 1.611 1998-12-01 1.513 1999-01-01 1.490 1999-02-01 1.194 1999-03-01 1.269 1999-04-01 1.155 1999-05-01 1.221 1999-06-01 1.298 1999-07-01 0.964 1999-08-01 1.162 1999-09-01 1.214 1999-10-01 1.148 1999-11-01 1.329 1999-12-01 1.295 2000-01-01 2.014 2000-02-01 1.113 2000-03-01 1.208 2000-04-01 1.167 2000-05-01 0.971 2000-06-01 1.115 2000-07-01 1.143 2000-08-01 1.054 2000-09-01 1.146 2000-10-01 1.148 2000-11-01 1.203 2000-12-01 1.326 2001-01-01 1.264 2001-02-01 1.345 2001-03-01 1.251 2001-04-01 1.258 2001-05-01 1.019 2001-06-01 1.249 2001-07-01 1.402 2001-08-01 1.203 2001-09-01 19.015 <- 1 september 2001, big (not in terms of today though) Excess Reserves creation. 2001-10-01 1.327 <- next month destroyed, see below the BASE change 2001-11-01 1.439 2001-12-01 1.643 2002-01-01 1.406 2002-02-01 1.373 2002-03-01 1.403 2002-04-01 1.205 2002-05-01 1.259 2002-06-01 1.238 2002-07-01 1.377 2002-08-01 1.607 2002-09-01 1.484 2002-10-01 1.533 2002-11-01 1.638 2002-12-01 2.008 2003-01-01 1.708 2003-02-01 1.964 2003-03-01 1.629 2003-04-01 1.539 2003-05-01 1.617 2003-06-01 2.040 2003-07-01 1.934 2003-08-01 3.764 2003-09-01 1.508 2003-10-01 1.467 2003-11-01 1.483 2003-12-01 1.047 2004-01-01 0.888 BASE around that 2001 september: http://research.stlouisfed.org/fred2/data/BASE.txt 2001-07-25 640.976 2001-08-08 645.826 2001-08-22 647.202 2001-09-05 654.669 2001-09-19 688.793 <- spike due to that Excess Reserves creation 2001-10-03 662.714 <- Excess reserves again destroyed. 2001-10-17 665.380 2001-10-31 664.004 2001-11-14 657.529 Excess Reserves is now extremely high, that 'spike' in 2001 was 18 billion dollar, just a fraction (2-3%) of BASE. It was begin april 2012 1769 billion, BASE was then 2986, so Excess Reserves is now 60% of BASE. That's all dollars they don't need to meet requirements. Destroyable upon simple Central Bank decision. Is that likely to happen? Well, in the EU it's already happening: BASE: http://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=123.ILM.M.U2.C.LT01.Z5.EUR 2013-05 1333817 E <- offset point, 1750966-1333817=417149 less 2013Apr 1369052 E 2013Mar 1428842 E 2013Feb 1534126 E 2013Jan 1630913 E 2012Dec 1630969 E 2012Nov 1675264 E 2012Oct 1736211 E 2012Sep 1766244 E 2012Aug 1750966 E <- reference point, where Excess Reserves created, see below. 2012Jul 1774568 E 2012Jun 1762300 E Excess Reserves: http://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=117.BSI.M.U2.N.R.LRE.X.1.A1.3000.Z01.E 2013-05 217281 A <- offset point, 403239-217281 = 185958 less 2013Apr 241136 A 2013Mar 297341 A 2013Feb 360807 A 2013Jan 382990 A 2012Dec 403527 A 2012Nov 422720 A 2012Oct 431095 A 2012Sep 432898 A 2012Aug 403239 A <- reference point, creation of 400 billion euro. 2012Jul 4616 A - 185958 (186 billion) euro's from Excess Reserves were destroyed. - 417149-185958=231191 (231 billion) more euro's from BASE were destroyed. So you can see, they destroyed even more BASE than Excess Reserves, likely because EU sits close to/in recession, unlike the US. Despite the 'better' US news, the money velocity is still trending down there too, http://research.stlouisfed.org/fred2/data/M1V.txt 1995-04-01 6.418 1995-07-01 6.513 1995-10-01 6.657 1996-01-01 6.810 1996-04-01 6.972 1996-07-01 7.153 1996-10-01 7.404 1997-01-01 7.552 1997-04-01 7.775 1997-07-01 7.864 1997-10-01 7.953 1998-01-01 7.990 1998-04-01 8.074 1998-07-01 8.216 1998-10-01 8.266 1999-01-01 8.338 1999-04-01 8.400 1999-07-01 8.564 1999-10-01 8.639 2000-01-01 8.726 2000-04-01 8.982 2000-07-01 9.098 2000-10-01 9.267 2001-01-01 9.220 2001-04-01 9.194 2001-07-01 8.849 2001-10-01 8.840 2002-01-01 8.812 2002-04-01 8.911 2002-07-01 8.962 2002-10-01 8.887 2003-01-01 8.819 2003-04-01 8.696 2003-07-01 8.701 2003-10-01 8.777 2004-01-01 8.789 2004-04-01 8.805 2004-07-01 8.829 2004-10-01 8.846 2005-01-01 9.023 2005-04-01 9.139 2005-07-01 9.265 2005-10-01 9.379 2006-01-01 9.531 2006-04-01 9.654 2006-07-01 9.818 2006-10-01 9.922 2007-01-01 10.058 2007-04-01 10.164 2007-07-01 10.292 2007-10-01 10.365 2008-01-01 10.320 2008-04-01 10.327 2008-07-01 10.078 2008-10-01 9.201 2009-01-01 8.827 2009-04-01 8.525 2009-07-01 8.406 2009-10-01 8.388 2010-01-01 8.411 2010-04-01 8.414 2010-07-01 8.357 2010-10-01 8.122 2011-01-01 7.906 2011-04-01 7.767 2011-07-01 7.296 2011-10-01 7.112 2012-01-01 6.991 2012-04-01 6.894 2012-07-01 6.750 2012-10-01 6.544 2013-01-01 6.484 <- V now as low as in 1985 and 1977. Take into account though that the velocity of money should never be used as an indicator on its own, since it can 'miss' certain kinds of spending. Conclusion of all above? The central banks can destroy money as long as bank savers can save and are willing to save. The former is determined by price increasings/wages/economical situation, the latter is determined by their trust in banks and the currencies. And that is why we should be very cautious about those QE's. The dollars aren't inflationary because their spending is compensated for by others spending less / saving more. And this situation now already 'survived' 5 years. Makes quite clear that the 2008 crisis and the QE's weren't the stories that the media and some precious metal related groups told us. My unwareness of Excess Reserves back then, inflicted me a 30% unmaterialized loss on my silver. So far. How many years further and more careful buying will I need to revert that to the green? It's 2008+5 years, and the Excess Reserves are piling up still nearly as fast as the dollar creation. Not any sign of a slowing down relative to BASE.
Is this new? It's already the case since fractional reserve banking came into existence, a century ago. Of course such banks are fundamentally insolvent, if you interprete insolvency as that all owners cannot get their properties back simultaneous. But it's not insolvency according to the laws. It's legal. So in terms of actual legal bankruptcy, the banks are not insolvent. Economically, you're right. And I agree with it completely. And the problem is not that banks lend out money from depositors, explaining the fractional reserve existence reason, but that they can do so while falsely suggesting depositors that they just store their money, most people don't even know that banks lend out most of the saving accounts money. Banks should need explicit permission, so that the depositor is very aware of the involved risk, abit like stocks. Depositors then dont receive intrest, but also don't risk losses, and in the end, that intrest is actually still a loss anyway, due to new money creation and subsequent price inflation rate that is higher then the intrest rate, about 99% of the time, and especially near the end of a supercycle, such as now, where the exponential factor in the intrest (the next 5% includes previous 5%) accumulates most weight. It's also not the way you describe it, for every $10 in cash or at deposits at the central bank (doesnt need to be cash there so no vault just electronic account), they can lend out $x times under a central bank / legally determined multiplier. The minimum/required reserves are since some decades different than before, the 90/10 has gone since, and became close to zero, for ex in 2000 the ECB had 2%, which they dropped in 2008 to 1%. And this makes clear what I said in a previous post, where I described minimum/required reserves as a silly small bucket that goes over in a large pool Excess Reserves. And why? Because during crises, this money multiplier does NOT link broader money to base money anymore. http://en.wikipedia.org/wiki/Money_creation
That makes sense but the important distinction is time. True Money Supply does not include term deposits. It is the amount of money you have to go about your daily business. It is the amount of money consumers see. They don't see the monetary base so I still think you're focussing too much on the wrong level. The fact that a large portion of the TMS is in money-equivalents that can disappear overnight in a bank run or series of loan defaults is a completely different issue. In terms of the Central Banks creating and destroying money, look at the dummy balance sheets. The total amount of money in the hands of consumers to go to the supermarket is unchanged when we created excess reserves. The banks balances sheets are unchanged except for the addition of a third party. The excess reserves can be created and destroyed with absolutely no impact on total money supply. The excess reserve story allows some insight into what's happening in the underlying banking system but it does not tell you anything useful about inflation or deflation at the consumer level. Mostly it can tell you what actions the central bank has done to prevent a large deflationary event by preventing the money equivalents from being destroyed. I don't think it's possible for the central bank to "create" excess reserves without them being used to replace existing money equivalents. To create an excess reserve requires the other banks to sell assets to the central bank (or savers to be paying down aggregate debt). So although the central bank can choose whether it wants to have the asset it is an after-the-fact replacement of money-equivalents with official fiat. Edit: On second thought, they can technically create excess reserves by paying above book value for assets (such as that trillion dollar coin idea) but this is essentially normal old inflationary money printing which is what we are trying to untangle (ie. the inflationary printing from the non-inflationary printing).
It's not the amount money that consumers 'see' that moves prices. It's the amount of what they 'see' that they 'spend'. And the monetary base is the closest approach to that, minus excess reserves then, since for some reason they are included as a component of it. And I'm not saying something new here, so it appears alike we disagree and I can't find out on what exactly, since you use other words (like here 'see' instead of 'spend'), and a discussion along different and ambiguous words isn't actually one. It's more like I tell a story, you tell a story, and that's about it. I can 'see' 100,000 euro on my bank account, if I only spend 10,000 then the remaining 90,000 does not affect prices (with the exception of speculation that I would spend them). And its this spending that the central bank tries to control, as to control inflation. If they don't like me spending that 90,000 they can increase intrest rate on savings as to disencourage me to spend it. But I'm parrotting again, nothing new here.
Two points. People spend non-monetary base money as well. All that happens is that it changes account name but but is still used to bid up prices. Second, having a cash balance is also spending since people have a demand for holding cash balances for many reasons including simply to enable them to live through until the next paycheck. For example if someone gets paid $1,000 per month and they spend every single cent at, say, $250/week, then their cash in the bank at the end of every week looks like: - Week 0 = $1,000 - Week 1 = $750 - Week 2 = $500 - Week 3 = $250 - Week 4 = $0 Average cash in the bank over the month is $500 and yet they haven't saved a cent.
