Inflation - why do we need it?

[Scallop Industry Thug]

Don't the banks have to hold a reserve amount of cash that isnt available for distribution/investment/purchasing, in the events of sudden financial collapse?

 

[fairdinkum]

Don't the banks have to hold a reserve amount of cash that isnt available for distribution/investment/purchasing, in the events of sudden financial collapse?

Yes. It is called 'fractional reserve' banking.

 

[sblack]

Thankyou for your input sb4b.

However, you are only answering the surface of my questions. Yes, the recent rate cut was to stimulate growth in a lagging economy. I get the basics.

But what still hasn't been answered are the more fundamental questions I posed in the OP, along the lines of who controls the money in circulation in this country, and how do they do it.

Are you referring to the RBA using Monetary Policy and DMO to control the total amount of money in circulation (M3)?

 

[fairdinkum]

Are you referring to the RBA using Monetary Policy and DMO to control the total amount of money in circulation (M3)?

Um... ye... yeah, that's what I'm talkin about...

 

[Campbell's Chunky]

 

[sblack]

Um... ye... yeah, that's what I'm talkin about...

Well that is the way the RBA controls the amout of money in circulation.

 

[fairdinkum]

Well that is the way the RBA controls the amout of money in circulation.

Please elaborate.

 

[Karl Pilkington]

*facepalm*

 

[fairdinkum]

*facepalm*

Did you just re-read your post re: 'all currencies indexed to gold'?

Yeah, I can't help but snicker every time I read that, too.

 

[Karl Pilkington]

I have no idea what fd just said (though I assume he's gloating over the one thing Iw as wrong about, which I thought I would be wrong about when I posted) as I have him on ignore.

I was facepalming because he's an idiot, who is desperately trying to save face because he won't admit he's embarrassed by the idiocy of his own thread.

Just, let, it.... go.

 

[sblack]

Please elaborate.

The RBA buys/sells 2nd hand commonwealth government securities (CGS) with banks. By buying CGS, the RBA puts money into Banks exchange settlement accounts (ESA), thus increasing the amount of money in circulation. This also reduces the demand for money, as there is an excess of borrowable funds, making borrowing money easier.

Selling does the opposite obviously

This is also how they reduce Interest rates.

 

[Scallop Industry Thug]

The RBA buys/sells 2nd hand commonwealth government securities (CGS) with banks. By buying CGS, the RBA puts money into Banks exchange settlement accounts (ESA), thus increasing the amount of money in circulation. This also reduces the demand for money, as there is an excess of borrowable funds, making borrowing money easier.

Selling does the opposite obviously

This is also how they reduce Interest rates.

Same process with Federal Reserve in the US.

These bonds are considered high value because they government can never default on repayments, as they have the power to raise taxes to pay them.

Although I think the Chinese have purchased large swathes of US securities so lots of US debt is in Chinese hands

 

[Karl Pilkington]

Same process with Federal Reserve in the US.

These bonds are considered high value because they government can never default on repayments, as they have the power to raise taxes to pay them.

Although I think the Chinese have purchased large swathes of US securities so lots of US debt is in Chinese hands

I know that RBA Bond parcels are generally considered one of the lowest risk investments because of the reason you stated above. But technically they're still not guaranteed.

Like you hinted at, if foreign debtors were to call in large sums of money, and our dollar was falling, you could find yourself in trouble. Mind you, this is much less risky that simply putting it in a bank deposit, which is still pretty low risk anyway.

 

[Scallop Industry Thug]

But technically they're still not guaranteed.

True.

Like you hinted at, if foreign debtors were to call in large sums of money, and our dollar was falling, you could find yourself in trouble.

Yep, although from my understanding the US is China's major market for their exports so I doubt they'd have any wish to send the US bankrupt.

 

[Karl Pilkington]

Yep, although from my understanding the US is China's major market for their exports so I doubt they'd have any wish to send the US bankrupt.

Yeah that makes sense, it would be counter-productive to both nations.

 

[fairdinkum]

I have no idea what fd just said (though I assume he's gloating over the one thing Iw as wrong about, which I thought I would be wrong about when I posted) as I have him on ignore.

For once, you are right.

I was facepalming because he's an idiot, who is desperately trying to save face because he won't admit he's embarrassed by the idiocy of his own thread.

Just, let, it.... go.

Save face? It has taken over 100 posts for somebody to explain how the RBA puts money into circulation. Over 100 posts. So my point has been well and truly made. The only people who have any reason to be embarrassed here are the ones who claimed to know how things worked, when in fact they didn't (like that guy *snicker* who thought that all currencies were indexed to gold *hehehehe*).

 

[fairdinkum]

The RBA buys/sells 2nd hand commonwealth government securities (CGS) with banks. By buying CGS, the RBA puts money into Banks exchange settlement accounts (ESA), thus increasing the amount of money in circulation. This also reduces the demand for money, as there is an excess of borrowable funds, making borrowing money easier.

Selling does the opposite obviously

This is also how they reduce Interest rates.

You seem to be one of a very few around here who know what they are talking about.

Do you have any links to useful online resources for learning more?

 

[sblack]

You seem to be one of a very few around here who know what they are talking about.

Do you have any links to useful online resources for learning more?

Thanks. Online links...hmmm. Probably just have to read articles written by Economists. Try the big sites like Bloomberg... I'm sure a search for Inflation or wateva will give you a surlpus of reading material

There are a few economists I remember from school days. Ross Gittens who writes for The Herald? here in Sydney...Tim Riley, also writes texts books, so would be good if you want to learn something, as he probably writes from a teaching perspective.

 

[nokiacasio]

Do you have any links to useful online resources for learning more?

If you want to learn about montary policy in Australia, why not go to the RBA's website since the RBA handles monetary policy? E.g. http://www.rba.gov.au/monetarypolicy/about_monetary_policy.html

 

[Ripper]

Came across this really good article from the mises institute

http://mises.org/story/3296

 

[Frodo]

does the government/rba control money supply...........or do banks?

banks can loan 7 times their deposits. Is every dollar loaned backed up by a monetary note?

``````````````````````

circle.

company a invents plasma tv's. they cost more than conventional tv's but look good. inflation. consumers buy plasma tv's, and need more money so need a raise. They get a raise but their employers have to raise prices. inflation.

around and around it goes

 

[medusala]

Same process with Federal Reserve in the US.

These bonds are considered high value because they government can never default on repayments, as they have the power to raise taxes to pay them.

??????

NEW YORK, Sept 9 (Reuters) - The cost of protecting U.S. Treasury debt with credit default swaps hit record highs on Tuesday after the government bailed out mortgage finance companies Fannie Mae (FNM.N) and Freddie Mac (FRE.N).

Five-year credit default swaps for Treasury debt traded at an all-time high of 17.5 basis points, or $17,500 a year to insure $10 million of debt, while 10-year swaps traded at a record 21.4 basis points, according to data from CMA DataVision.

 

[Smiling Buddha]

Five years on since this thread was created and I am still no clearer as to why we need inflation.

http://www.nytimes.com/2013/10/27/b...-many-now-think-inflation-helps.html?hp&_r=1&

The federal government expects inflation to ease the burden of its debts. Yet by one measure, inflation rose at an annual pace of 1.2 percent in August, just above the lowest pace on record.

“Weighed against the political, social and economic risks of continued slow growth after a once-in-a-century financial crisis, a sustained burst of moderate inflation is not something to worry about,” Kenneth S. Rogoff, a Harvard economist, wrote recently. “It should be embraced.”

http://www.nytimes.com/2013/10/27/b...-many-now-think-inflation-helps.html?hp&_r=1&

They are printing money like it is going out of fashion and still not enough to bolster inflation. I wonder if that is because the Chinese are using their US dollars to buy up real estate elsewhere on planet earth. Places like... Australia.

http://www.theaustralian.com.au/bus...-property-market/story-fn9656lz-1226747147870

The most recent figures available from the Foreign Investment Review Board show Chinese property investment during the 2011-2012 financial year was worth $4.2 billion, with China the biggest foreign investor in the domestic property market, behind the US ($8.16bn) and Singapore ($5.7bn). The figures for the most recent financial year are to be published by the end of December.

http://www.theaustralian.com.au/bus...-property-market/story-fn9656lz-1226747147870

So the three biggest markets for foreign investment into our real estate are the US themselves, Singapore, then China. Interesting.

http://www.news.com.au/realestate/c...before-next-boom/story-fncq3era-1226704103879

Colliers International's managing director of residential property in Australia, Peter Chittenden, yesterday said Asian buyers were purchasing 60 per cent of units being sold off-the-plan in big developments.

http://www.news.com.au/realestate/c...before-next-boom/story-fncq3era-1226704103879

60% sounds peculiar. But not as peculiar as...

http://www.smh.com.au/business/prop...rd-rate-says-john-mcgrath-20130913-2tocn.html

As much as 80 per cent of homes in parts of Sydney are being sold to Chinese buyers, said chief executive John McGrath.

http://www.smh.com.au/business/prop...rd-rate-says-john-mcgrath-20130913-2tocn.html

What in the **** is going on out there? Here's my suspicion: The US printing presses are running white hot, and a lot of that money is finding its way to Australia, much of it via Singapore and China.

Something bad is going to happen. It might take a few decades, it might be sooner, but something bad is going to happen. And I can't wait.

 

[Hot Pocket]

The Chinese middle class have invested more money into Australian property than the USA, by a decent margin. To the tune of around 55 billion.

Something will have to give eventually, and our lack of protection against it is symptomatic of our willingness to follow the USA down this disaster known as capitalism.

 

[treefingers]

The (very simplistic) way I think of it is the population of the world keeps growing and growing - this increases the total demand of the economy and therefore the prices go up.