Ways to reduce money supply?

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Sclass
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Ways to reduce money supply?

Post by Sclass »

Hi,

I just got back from a talk with my mom's investment advisor and we got in this big discussion about "money on the sidelines". Apparently this investment service company has data showing a lot of money on the sidelines in investment accounts, I.e. People are holding more cash than usual. It was an indicator to these guys that the market can go up as cash floods in chasing rising prices.

So I started reading into cash on the sidelines and there seems to be discussion of a myth about it. They say that all cash is technically on the side and that the presence of cash in accounts is not an indicator of a potential rally. One guy sells a share and gains cash and another guy pays for it and loses it. There is no net destruction or creation of cash so the money is technically always on the sidelines...just in somebody else's seat.

So the question in my mind is can the cash supply be reduced by anything other than a federal government bond sale? I guess it can be created by "money printing" in its various forms, but are there a lot of ways to destroy money (besides fire :lol: )?

I lived in the epicenter of the dot com bubble and I used to think cash got destroyed by the printing and selling of worthless stock certificates. But when I think about it, some lucky bastards walked away with the bag. Nonetheless it hit the city of Palo Alto like a bomb. Money just dried up. Maybe credit can dry up but cash just gets squirreled away?

Unfortunately I never took Econ 101.
Last edited by Sclass on Sat Apr 01, 2017 9:12 am, edited 1 time in total.

jacob
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Re: Ways to reduce money supply?

Post by jacob »

https://www.hussmanfunds.com/wmc/wmc060710.htm

(You might be instantly enlightened if you think of cash as "credit in checking accounts" rather than notes and coins. Hint: How does that credit come into existence in the banking system as we know it?)

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Sclass
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Re: Ways to reduce money supply?

Post by Sclass »

Thank you for the informative article. I get the basic gist of it but I'll have to read it again. A lot there.

What :o you mean a bank doesn't exist to stack my money in neat piles in their vault for fees? :lol:

My knee jerk reaction was cash can be destroyed by hookers and blow. But even those have closed sums unless the dope dealers are using c notes to light their cigarettes.

Dragline
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Re: Ways to reduce money supply?

Post by Dragline »

In our system (debt-based fiat money), money is destroyed when credit contracts. When you borrow $10,000 from the bank, that money is created and put in your account. When you pay it back, that money is destroyed.

It can also be destroyed indirectly in bankruptcies, which wipe out debts, never to be repaid.

But the money supply is only half of the story. The other half is the velocity of money, which measures how many transactions there are in the system in a given time period, which gets you to how GDP is measured (in transactions). You might think of the money supply as the water in a tank and the velocity related to the size of the spigot and how far you open it up. If there is no flow, there are no transactions and no economy, regardless of how much water is in the tank.

Contrast this to a "hard money" system like the gold standard, where money can only be created by mining it from the ground and selling it to the government, who would then create more money in exchange for it. The "Free Silver" political movement in the late 19th Century was actually a movement to increase the money supply by treating silver as money that could be exchanged for dollars, in addition to gold.

ducknalddon
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Re: Ways to reduce money supply?

Post by ducknalddon »

Dragline wrote:
Sat Apr 01, 2017 12:15 pm
When you borrow $10,000 from the bank, that money is created and put in your account. When you pay it back, that money is destroyed.
That's not my understanding, central banks (federal reserve) can create money but the money you borrow from your local bank has been deposited. It may have been round the system a few times (fractional reserve) but they can't just magic it out of thin air, imagine the chaos if they could.

vexed87
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Re: Ways to reduce money supply?

Post by vexed87 »

Actually commercials banks do create money when they loan it. There are rules about how much they can loan based on how much they keep in reserve (to maintain solvency and ensure there's enough to meet demands for withdrawals.)

Central banks have a role in controlling the amount of money in supply indirectly, they can do this via QE, or bond/stock buying, but mostly they do so by manipulating interest rates. Higher the interest rates, the more money gets destroyed. This is why higher interest rates can be used to curb inflation.

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Re: Ways to reduce money supply?

Post by jacob »

https://www.hussmanfunds.com/html/fedirrel.htm - More detail about how the beast actually works.

https://en.wikipedia.org/wiki/Blind_men_and_an_elephant - Like with any discussion of complex systems, disagreement easily results from not even realizing that everybody uses their own definition of the terms. Best to first agree on wth each person means when they say "money", "supply", or "reduction" for that matter. Good luck!

For a similar exercise, I invite people to properly define "sea level" :P :? :twisted: :ugeek:

vexed87
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Re: Ways to reduce money supply?

Post by vexed87 »

Oh wow, I had no idea the fractional reserve rules were that relaxed...

IlliniDave
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Re: Ways to reduce money supply?

Post by IlliniDave »

If in the aggregate people are adding money to investment accounts and leaving it sit in cash, then in the universe of investment accounts there can be a growing amount of cash. It's not a closed universe. Doesn't mean stock prices are going up.

Dragline
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Re: Ways to reduce money supply?

Post by Dragline »

ducknalddon wrote:
Sat Apr 01, 2017 12:40 pm
Dragline wrote:
Sat Apr 01, 2017 12:15 pm
When you borrow $10,000 from the bank, that money is created and put in your account. When you pay it back, that money is destroyed.
That's not my understanding, central banks (federal reserve) can create money but the money you borrow from your local bank has been deposited. It may have been round the system a few times (fractional reserve) but they can't just magic it out of thin air, imagine the chaos if they could.
Your understanding is incorrect. Banks have limits dictated by regulation, but they do not work like that with "per se" limits that need to be adhered to every day. A better example to contemplate may be purchasing stocks on margin. When you do that you create money, which the seller of your purchase can use however he/she wishes. When you reduce your margin, that money is destroyed because you have received money that you will never use.

bryan
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Re: Ways to reduce money supply?

Post by bryan »

Well you could send your money to an un-spendable state. e.g. some Bitcoin transactions or literally burning it.

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Sclass
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Re: Ways to reduce money supply?

Post by Sclass »

Dragline wrote:
Sat Apr 01, 2017 12:15 pm
In our system (debt-based fiat money), money is destroyed when credit contracts. When you borrow $10,000 from the bank, that money is created and put in your account. When you pay it back, that money is destroyed.
This makes sense. Ultimately the bank is lending out some multiple of deposits allowed by the federal reserve and thus returning the money reverses the process.
Dragline wrote:
Sat Apr 01, 2017 12:15 pm
It can also be destroyed indirectly in bankruptcies, which wipe out debts, never to be repaid.
This one I'm having trouble understanding. Doesn't somebody get the money? I've had to deal with bankrupt clients and vendors and they certainly took my cold hard cash or sold my real inventory before they sought protection.

Dragline
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Re: Ways to reduce money supply?

Post by Dragline »

Sclass wrote:
Sun Apr 02, 2017 12:03 am

Dragline wrote:
Sat Apr 01, 2017 12:15 pm
It can also be destroyed indirectly in bankruptcies, which wipe out debts, never to be repaid.
This one I'm having trouble understanding. Doesn't somebody get the money? I've had to deal with bankrupt clients and vendors and they certainly took my cold hard cash or sold my real inventory before they sought protection.
Well, the rules surrounding bankruptcies are complicated, especially if you are talking about the difference between a reorganization and a liquidation. Certain assets get different treatment.

But for the purpose of this discussion, take the simplest case -- a personal bankruptcy that is a liquidation. You owe $10,000 of unsecured debt to a bank, say on a credit card. To the bank, that money is recorded as an asset on its books, representing an account receivable (money receivable now or in the future). When you declared bankruptcy, that debt is wiped away -- from your perspective. But it also wipes away the ASSET from the bank's perspective. That money is effectively destroyed and the bank must write it off. Every write-off of a financial asset that is expressed in terms of money is effectively a destruction of money.

This is effectively what you saw in 2008 when the real estate market fell out -- lots of bankruptcies and the destruction of money on a deflationary scale. The only reason you did not see more Lehman Bros.-type collapses is that the government stepped in and flooded the financial markets with new money so bankrupt entities like AIG could pay their creditors and they would not have to do write-downs on those financial assets.

BRUTE
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Re: Ways to reduce money supply?

Post by BRUTE »

the way brute has heard, commercial banks do inflate the money supply (m1? m3?) when lending out money to customers, but they cannot do it "out of thin air" - it is demand driven. when a customer borrows $10,000, the bank will lend out $10,000, but only be required to have reserves for 5% or whatever it is now. so for $100 deposited in it, a bank could potentially loan out 20x that (1/5%), or $2,000.

but if there is no customer demand for credit, the bank can't simply do this on its own.

7Wannabe5
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Re: Ways to reduce money supply?

Post by 7Wannabe5 »

So, fiat money is kind of like breast-milk being created on demand of greedy infant, only to be limited by the eventual energy/resource depletion of the mother/underlying-economy/ecology. Ergo, I would suggest firm application of wide bandage and cold compress.

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Re: Ways to reduce money supply?

Post by BeyondtheWrap »

Dragline wrote:
Sun Apr 02, 2017 11:04 am
But for the purpose of this discussion, take the simplest case -- a personal bankruptcy that is a liquidation. You owe $10,000 of unsecured debt to a bank, say on a credit card. To the bank, that money is recorded as an asset on its books, representing an account receivable (money receivable now or in the future). When you declared bankruptcy, that debt is wiped away -- from your perspective. But it also wipes away the ASSET from the bank's perspective. That money is effectively destroyed and the bank must write it off. Every write-off of a financial asset that is expressed in terms of money is effectively a destruction of money.
The money hasn't been destroyed, though. The store where you spent the $10,000 still has it.

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Re: Ways to reduce money supply?

Post by BlueNote »

BRUTE wrote:
Sun Apr 02, 2017 11:31 am


but if there is no customer demand for credit, the bank can't simply do this on its own.
It's not just the demand for credit, that can be controlled for by simply lowering interest rates until customers (borrowers) show up . Depository banks make most of their money on the spread between interest from their loans to customers (which are considered bank assets) and interest paid on deposits from customers ( which are considered bank liabilities). Banks generally make decent returns on equity except every once in a while you get a recession or some other event and they get killed because they're debt to equity ratio is so high. So there are several factors affecting the money supply but it can roughly be controlled through interest rates. Example: Government lowers interest rates by buying their bonds back with 'printed' money, money gets in economy, newly created cheap money ends up in depository bank at low rate of deposit interest because the safe competing rate from government bonds is low. Bank lends out at relatively low interest rate making spread (competing with other banks for spread by keeping spread competitively priced), money gets in economy, some ends up being deposited back into a depository bank, rinse & repeat. (Google fractional reserve banking, Velocity of money and multiplier effect).

Dragline
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Re: Ways to reduce money supply?

Post by Dragline »

BeyondtheWrap wrote:
Sun Apr 02, 2017 5:57 pm
Dragline wrote:
Sun Apr 02, 2017 11:04 am
But for the purpose of this discussion, take the simplest case -- a personal bankruptcy that is a liquidation. You owe $10,000 of unsecured debt to a bank, say on a credit card. To the bank, that money is recorded as an asset on its books, representing an account receivable (money receivable now or in the future). When you declared bankruptcy, that debt is wiped away -- from your perspective. But it also wipes away the ASSET from the bank's perspective. That money is effectively destroyed and the bank must write it off. Every write-off of a financial asset that is expressed in terms of money is effectively a destruction of money.
The money hasn't been destroyed, though. The store where you spent the $10,000 still has it.
Well, its not quite that simple, but this is why I said bankruptcies have indirect effects on the destruction of money.

As far as the store is concerned, it simply engaged in an exchange of assets for money. There was no borrowing, and no creation of money was necessary for the customer and store to engage in an exchange. The store had no idea whether the customer got the money from borrowing from the bank or from cash under his mattress that he then deposited on the card before using it.

Debt-based fiat money is neither created nor destroyed by exchanges. It is only in the creation and extinguishment of debt that money is created or destroyed. And you have to look at the entire system to decide what has occurred in that regard. What makes it even more confusing is that snapshots are often misleading, since there is a time factor involved in all debt repayments.

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Re: Ways to reduce money supply?

Post by jacob »

The rabbit hole goes deeper.

At this point, it will be helpful to distinguish between

* government/fiat money - Coins and federal reserve notes. They used to represent gold and silver in the king's treasure. Now they represent the government's promise to redeem/cancel your debt to the government. These are destroyed when you pay taxes or otherwise transfer money to the government.

Example: You borrow $100 from the bank (you have $100 in your checking account (your asset/bank's liability) and the bank has $100 in its loan portfolio (your liability/bank's asset). You know withdraw $100 in cash (your asset/government's liability), the loan portfolio stays the same, and the bank is also out $100 in cash (bank's liability, fed's asset) [this is where the 'discount window' matters] [alternative, the bank can borrow the money from another bank, so the fed just acts as a sort of public option on liquidity]. (Note that FOMC operations have more impact than setting the discount rate.)

Now, lets say you spend the $100 on stuff. The merchant now has $100 in cash. Etc etc. And you declare bankruptcy. The merchant still has $100 in cash. You have nothing (no cash, no checking). The bank cancels its loan asset to you. So we're doing to the bank owing the feds or some other bank $100 and that entity being owed $100.

Example: Same thing except you pay the merchant with a check. The merchant now deposits the check in his checking account (his asset, his bank's liability.) You declare bankruptcy. Net result: you have some stuff and you're bankrupt, merchant has $100 in his checking (and no more stuff), your bank has a $100 liability to his bank, his bank has $100 in claims against your bank in assets.

So ... in terms of bankruptcy. If you still have unspent credit when you declare bankruptcy, the bank will take it back and cancel it out with its loan asset. If you don't have credit, they'll try to claim your stuff as much as they can; then sell it, and use the proceeds to cancel out liabilities to other banks. If you burned your stuff, then the bank still has liabilities to the other bank.

* banking credit - This is the credit generated via reserve banking. This is the stuff that's generated by lending money out. It gets destroyed when it's paid back to the bank; just like fiat gets destroyed when it's paid back to the government.

===

Note, the way the government gets its spending money is different. Basically, it sells bonds to the public in exchange for cash which the public can then use for transactions but NEED to pay taxes.

===

PS: Most economic "confusion" comes from forgetting/not realizing that the modern economy doesn't work at as barter system but rather as a credit system. Credit system all feature double-entry book keeping. <= Important point. So everytime anyone does anything, it affects TWO entries. If you only think of one side ... you're missing something. The problem with online/teaching/discussion/debates .. is the attempt to explain credit in barter terms. I don't think that works very well. "A theory/explanation should be as simple as possible, but no simpler!"

PPS: For the STEM people, think of it as energy and charge conservation. You can generate an electron and a positron for an amount of time via quantum fluctuations. You can't just generate one electron and no positron. Nor can you generation a pair and just destroy one of them. However, you can generate them and move them about in all kinds of complicated manners. To destroy them, you have to cancel them out. Here the confusion would materialize when some only focus on electrons that are sitting in atoms (the A1 supply), others only for electrons in molecules (M2), etc... These "limited counts" can certainly be destroyed and created. However, there's always a corresponding creation or destruction elsewhere. It's just that it doesn't show up if limit your observations to certain localities.

7Wannabe5
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Re: Ways to reduce money supply?

Post by 7Wannabe5 »

What about the heat being lost off the skin of the bank teller while she spends 30 minutes at her window counting out bills and then 30 minutes in the bathroom pumping milk for her infant in the daycare center 5 miles away?

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