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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

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Here’s Why Consumers are Fleeing Web-Based Email


Wednesday, February 2nd, 2011

by Larry Kramer, via Wall Street Cheat Sheet

Larry Kramer is the Founder and Former CEO of CBS Marketwatch.com. He was the first president of CBS Digital and sits on the Boards of Discovery Communications, Inc., American Media Inc., Freedom Communications, Inc., Answers Corp., Black Arrow Inc., and Harvard Business School Publishing. He is the author of the upcoming book C-Scape: Conquer the Forces Changing Business Today and runs a blog by the same name.

It’s another reminder why businesses have to stay close to their customers and watch consumer habits as they are changing. According to Comscore (NASDAQ:SCOR), via the center for media research, Email is moving along with it’s users to mobile platforms. There are implications to this, including the type and length of emails that will be sent, the timeliness of them and the ability to monetize email. Email moves closer to the world of SMS as more people consume more email on portable platforms. Even when sending necessarily long emails, consumers will likely begin to “layer” their emails with short summaries or lists of points on top, allowing the mobile email reader to get a quick idea of the content without having to read too much.

The number of users going to web-based email sites declined 6% over the past year, while the number accessing email on portable devices jumped 36%. This isn’t an unexpected development, with so much other content going mobile and with the timeliness often mattering on email, it’s not a surprise that people would like access to email wherever they are and whatever they are doing. Increasingly new portable devices are giving them that access in improved ways.

Marketers will have to think through email campaigns and make adjustments that reflect the new ways email is being consumed. The data behind this shift involves use of web-based email, which includes pages like Gmail (NASDAQ:GOOG), Yahoo (NASDAQ:YHOO) mail and AOL mail (NYSE:AOL), but not application-based email like Outlook. Since web-based email is the only type of email that has significant display advertising (other than the emails themselves as ads), the first implications are that services like GMail, Yahoo, AOL and MSN (NASDAQ:MSFT) are going to have a harder time monetizing email service, which is provided to the customer for free. We have already seen larger display ads starting to surface on Gmail in recent weeks.

So one implication of this may be that the Email services start to charge for what they are providing. They have already begun to charge for larger storage or enhanced services, but that trend may accelerate.

Another possible effect is that we might more aggressive revenue-generating behavior on some or all mobile platforms, particularly the tablets. It becomes very difficult to monetize any content with advertising on smart phones, but it may be inevitable. Email is used by 70% of the American public every month, so it remains to be seen how long advertisers can go without figuring out how to make money on it.

But the message to be taken from this is that we are still in a significant period of change, and consumer behavior will continue to be impacted by technological change. As more devices are created that will allow consumers to access information wherever and however they want to, it shouldn’t come as a surprise that they will do just that. The most successful new technology is the kind that enables people to do what they want to do, as opposed to technology that trying to get people to change a habit they aren’t inclined to change.

We are likely to see more and more technology responding to consumer demand over the next few years, and we can therefore expect, once again, that advertisers need to go through a period of understanding how consumer behavior will change and what that means to an advertiser trying to reach and engage those consumers. It will take time to learn the new forms of storytelling that will be needed to do so.

Larry Kramer is the Founder and Former CEO of CBS Marketwatch.com. He was the first president of CBS Digital and sits on the Boards of Discovery Communications, Inc., American Media Inc., Freedom Communications, Inc., Answers Corp., Black Arrow Inc., and Harvard Business School Publishing. He is the author of the upcoming book C-Scape: Conquer the Forces Changing Business Today and runs a blog by the same name.

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