Monopoly Money vs. Bernanke Money, is there a Difference?

Friday, June 8th, 2012

Occasionally I get an email from a reader that makes me pause and think. This is one of those times.

Reader Janet Dight writes …

Hello Mish

As per Ben Bernanke Monopoly Official Rules “The bank never goes broke. If the bank runs out of money, the banker may issue as much as may be needed by writing on any ordinary paper.”

Janet Dight
Clinical Psychologist

Monopoly Money vs. Bernanke Money

So what’s the difference between “Monopoly Money” and “Bernanke Money”?

The difference is theory vs. practice.

In Monopoly, there is no difference between theory and practice. The rules are the rules and they will be honored and enforced by the players in the game. Money is printed and handed out without any regard as to whether it might be paid back. There is no such thing as excess reserves. Players are always willing to put money to use. If players don’t put money to use, they will be bled to death by other players.

In the Bernanke’s world, the Fed can print as much or as little as it wants. What the Fed does print is a loan. That money must be paid back. Collateral (even if speculative) is required and discounts are applied. In Bernanke’s world, money is parked as excess reserves at the Fed if banks do not find good credit risks.

At times, it seems there is little difference between  “Monopoly Money” and “Bernanke Money”. It all depends on the willingness of banks to lend and consumers and businesses to borrow.

However, even when it seems there is little difference, there is a major difference between a bank giving money to players spend and loans that must be paid back.

Constraints are Key

Flashback November 23, 2010: Austrian economist Robert Murphy predicts “high inflation” and and writes a post Has Mish Deflated the “Inflationistas”?

My response which in retrospect has clearly carried the day was Failure to Consider Constraints – My Response to “Has Mish Deflated the Inflationistas?”

I invite you to read my detailed response to someone who was clearly wrong but here is the key snip.

Monetary Printing vs. Debt Deflation

There is $35 trillion in credit on the balance sheets of banks, little of it marked to market. Yet, in spite of the fact that Money Multiplier Theory is totally bogus, supposedly printing $600 Billion to is going to cause serious inflation.

The odds sure don’t look very good to me.

Practical Constraint Recap

1. Ability of consumers/corporations to take on more debt
2. Willingness of consumers/corporations to take on more debt
3. Willingness of banks/credit companies to extend more credit
4. Ability of banks/credit companies to extend more credit
5. Unwillingness of the federal reserve to print themselves out of power
6. Actions of other Central Banks
7. Actions of Congress
8. Demographics
9. Global wage arbitrage
10. Fed cannot create jobs
11. Fed cannot give money away
12. Fed is beholden to banks

In theory the Fed can cause inflation rather easily. In practice the Fed has to deal with many practical constraints.

Theory and Practice

Murphy claims “Bernanke has the power to raise prices if he so chooses”. Can he? With whose help? At cost constraints Bernanke can ignore?

In theory, the Fed can cause massive inflation at will. In practice, they can’t. As Yogi Berra once quipped “In theory there is no difference between theory and practice. In practice, there is.”

You can lead a horse to money, you can’t make him eat it. That’s the very important difference. It’s a question of attitudes.

The Fed can certainly encourage inflation by offering money at seemingly attractive rates, but it cannot force the issue.

Right now, neither consumers nor businesses want the risk. They are too loaded up with debt already, no matter how attractive the Fed wants debt to appear. It’s like trying to give a kid one piece of cake too many. At some point, extra frosting makes the cake look less attractive, not more. At that point the kid will not take another bite.

That is the point we are at now. The Fed is hoping Congress will eat more cake. It’s up to Congress, not the Fed, and I doubt Congress want to eat as much cake as the Fed needs.

Bernanke’s Deflation Prevention Scorecard

In case no one is keeping track, Bernanke has now fired every bullet from his 2002 “helicopter drop” speech Deflation: Making Sure “It” Doesn’t Happen Here.

Bernanke’s Scorecard

Here is Bernanke’s roadmap, and a “point-by-point” list from that speech.

1. Reduce nominal interest rate to zero. Check. That didn’t work…
2. Increase the number of dollars in circulation, or credibly threaten to do so. Check. That didn’t work…
3. Expand the scale of asset purchases or, possibly, expand the menu of assets it buys. Check & check. That didn’t work…
4. Make low-interest-rate loans to banks. Check. That didn’t work…
5. Cooperate with fiscal authorities to inject more money. Check. That didn’t work…
6. Lower rates further out along the Treasury term structure. Check. That didn’t work…
7. Commit to holding the overnight rate at zero for some specified period. Check. That didn’t work…
8. Begin announcing explicit ceilings for yields on longer-maturity Treasury debt (bonds maturing within the next two years); enforce interest-rate ceilings by committing to make unlimited purchases of securities at prices consistent with the targeted yields. Check, and check. That didn’t work…
9. If that proves insufficient, cap yields of Treasury securities at still longer maturities, say three to six years. Check (they’re buying out to 7 years right now.) That didn’t work…
10. Use its existing authority to operate in the markets for agency debt. Check (in fact, they “own” the agency debt market!) That didn’t work…
11. Influence yields on privately issued securities. (Note: the Fed used to be restricted in doing that, but not anymore.) Check. That didn’t work…
12. Offer fixed-term loans to banks at low or zero interest, with a wide range of private assets deemed eligible as collateral (…Well, I’m still waiting for them to accept bellybutton lint & Beanie Babies, but I’m sure my patience will be rewarded. Besides their “mark-to-maturity” offers will be more than enticing!) Anyway… Check. That didn’t work…
13. Buy foreign government debt (and although Ben didn’t specifically mention it, let’s not forget those dollar swaps with foreign nations.) Check. That didn’t work…

Now What?

I wrote about Bernanke’s Deflation Prevention Scorecard in April 2009.

Now, Bernanke is squealing like a stuck pig, begging Congress and China to help him produce price inflation in the US while still chastising Congress about a “fiscal cliff”.

For details on the upcoming fiscal cliff please see Key Words of the Day: “Nothing”, “Fiscal Cliff”, “Later”; Bernanke Speech Template; U.S. Fiscal Cliff and What to Do About It

Regarding points 8 and 9 above: the Fed did purchase treasuries and agencies, but admittedly without an explicit ceiling.

Question of Timeframe

The point of this post is not to lay into Robert Murphy or any other misguided Austrian economists.  I had forgotten about the above debate and found it searching my blog for “constraints“.

Also bear in mind that I happen to agree with the Austrian economists on most points of view except timeframe.

Their timeframe is way off because …

1. They view inflation as an exercise in printing, completely ignoring the role of credit
2. They ignore the changing attitudes towards lending by banks
3. They ignore demographics and the changing attitudes of aging boomers headed towards retirement
4. They ignore constraints on the Fed and constraints on banks
5. They ignore the destruction of credit on the balance sheets of consumers and its effects on prices

Record Low Treasury Yields a Sign of What?

If massive inflation was coming 10-year treasury rates would not be yielding a record low 1.60% and consumers would certainly not be deleveraging!

Might massive inflation be coming down the road?

Certainly, but it will take a change in attitude by consumers and banks or massively reckless policies by Congress.

Interestingly, Congressional policies are indeed “massively reckless” just not reckless enough yet. The emphasis is on “yet”. I will not be a deflationista forever, but I remain one for now.

Looking Ahead

I remain extremely amused by countless emails from people who tell me about how wrong I am going to be.

They all miss my ability and willingness to change my mind! At some point I am going to change my tune. History suggests I will be far too early rather than late. Time will tell.

For now (and as I have been saying for as long as I have been blogging), hyperinflation or even “big inflation” is nonsense.

Constraints and Attitudes are Key

For now, attitudes, deleveraging, demographics, and the destruction of the value of credit on the balance sheets of banks absolutely and without a doubt overwhelm Bernanke’s ability to do anything meaningful about it.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Tags: Austrian Economist, Banks, Ben Bernanke, China, Clinical Psychologist, Collateral, Constraints, Email Reader, Excess Reserves, Flashback, Game Money, Giving Money, inflation, Monopoly, Monopoly Money, Monopoly Rules, Regard, Retrospect, Theory And Practice, Willingness, World Money
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Unraveling The Favourite Child Dynamic,
and other (Holi-day) Weekend Reads

Thursday, April 1st, 2010

The Easter long weekend is upon us. Here are this weekend’s reading diversions for your enjoyment and enlightenment. Happy Easter, and Happy Passover!

The Favorite Child: Unraveling This Pervasive Dynamic

Did you know that there are favorite children in every family? Did you know that favoritism impacts every family member for life? In my 30-year practice as a clinical psychologist, I have observed, on a daily basis, the effects of favoritism on favorite children, overlooked children and unfavored children.

Relax! It’ll boost your memory, study shows

Researchers from the United States said their findings could help develop new therapies for people with learning disabilities and some types of dementia.

Heart health: Cutting saturated fat alone doesn’t cut it

For years, experts have warned us to cut down on saturated fat — think butter, cheese, bacon, red meat, and countless other tasty foods — because it clogs arteries and causes heart attacks.

Mayo Clinic’s Guide to Healthy Ethnic Cuisine

These suggestions will help you savor the exotic, while keeping calories, fat, cholesterol and sodium under control

We rate the best supermarket rotisserie chicken

I’m talking about seven supermarket rotisserie birds, rounded up from Toronto-area chains for comparison on my kitchen table.

Recipe: Baked Gefilte Fish

Evidence Suggests Obesity Prevention Should Start Very Early

Schools have banned cupcakes, issued obesity report cards and cleared space in cafeterias for salad bars. Just last month, Michelle Obama‘s campaign to end childhood obesity promised to get young people moving more and revamp school lunch, and beverage makers said they had cut the sheer number of liquid calories shipped to schools by almost 90 percent in the past five years.

Bend Over and Take It Like a Man

Why is it that men are half as likely as women to go to a doctor for a check-up? What are men afraid of? When I ask patients who are seeing me after not having been to a doctor in many years, there are two top answers: 1) I felt okay, so I didn’t need to come in; 2) I knew I’d have to have a prostate exam, so I put it off.

Dealing with the Death of a Pet

Losing a pet can be one of the most devastating things to happen to a pet owner. Sometimes the loss is sudden, but more often it is the result of an illness or condition that has worsened over time, facing the pet wonder with the difficult decision of whether to euthanize or let the animal die naturally.

Go crazy for coconut macaroons

Need a delicious dessert for the holidays? Coconut macaroons serve as a perfect treat for both Passover and Easter.

Men really are the weaker sex

The big, tough guy brought down by a lowly little bug. The sniffles he’s enduring are worse than those faced by anyone else in the house – skeptical wives and daughters, especially.

The Magic of Magnesium: A Mighty Mineral Essential to Health

Calcium has received an enormous amount of attention. It’s likely that every woman reading this article has been told by her doctor to get enough calcium.

Study: Chocolate Could Reduce Heart Risk

The Easter Bunny might lower your chances of having a heart problem. According to a new study, small doses of chocolate every day could decrease your risk of having a heart attack or stroke by nearly 40 percent.

The Nutritional Superiority of Pasture Raised Animals

You are what you eat – and the same goes for the animals whose meat, milk and eggs you put in your mouth. We should not only be concerned about what we eat, but what our food eats as well.

Greek Orthodox Easter – Food and Traditions

Easter is the most sacred observance in the Greek Orthodox faith. Preparations and customs remain some of the most traditional in modern Greek life.

History of Passover

Perhaps the best known of the Jewish holidays, the splendid festival known as Passover has a rich and fascinating history.

Easter History

Easter, the principal festival of the Christian church year, celebrates the Resurrection of Jesus Christ on the third day after his Crucifixion. The origins of Easter

date to the beginnings of Christianity, and it is probably the oldest Christian observance after the Sabbath (observed on Saturday). Later, the Sabbath subsequently came to be regarded as the weekly celebration of the Resurrection.

Ricotta Cheesecake – Martha Stewart

This is the easiest cheesecake to make — it takes just 15 minutes to assemble and doesn’t require a water bath.

Tags: Beverage Makers, Cafeterias, Childhood Obesity, Clinical Psychologist, Daily Basis, Effects Of Favoritism, Ethnic Cuisine, Favorite Child, Heart Attacks, Heart Health, Holi, Mayo Clinic, Memory Study, Michelle Obama, Obesity Prevention, People With Learning Disabilities, School Lunch, Sheer Number, Tasty Foods, Types Of Dementia
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