M&B Midterm 1

Inflation averaged ___% during 1992-2020

1.8%

Inflation surged to ___% in 6/22

7.1%

Inflation went down under ___% by 11/23

3%

Now (6/26), inflation is back up to ___%

3.7%

During 1967-83, inflation was generally above ___%

4%

During 1973-75 and 1979-81, inflation was generally above ___%

10%

National Debt now ___% of GDP

123

2021-23 inflation surge erased ~___% of debt despite large deficits

8%

Between 2008-2021, Fed increased Base ___ fold by buying ___

7.5 fold

Treasury debt + mortgages

Monetary Base = ____ + ____

Currency + Bank Reserves

From 2000-2006, home prices increased by what amount?

Doubled

In 2009, home prices fell by ___%, causing ____

30%

Mortgage defaults

What happened in 2009 after widespread mortgage defaults?

Housing construction fell sharply, led to recession

When was the “Great Recession”?

2008-2014

Unemployment remained above ___% between 08/2008-08/2014, and hit ___% in 10/09

6%

10%

Ben Bernanke on 2008 financial crisis

• “The immediate trigger of the crisis … was a sharp decline in house prices, which reversed a previous runup that had been fueled by irresponsible mortgage lending and securitization practices.” – 1/3/14 AEA address

• “The bursting of the bubble helped trigger the most severe financial crisis since the Great Depression [of the 1930s].” – 1/3/14 AEA address

• “Sept. and Oct. of 2008 was the worst financial crisis in global history, including the Great Depression”

What was the maximum unemployment rate during the Great Recession?

10%

What was the maximum unemployment rate during 1982?

10.8%

What was the maximum unemployment rate during 1932?

22.5%

Remained mostly >10% through 1940

How many banks failed between 2009-12?

Over 100/yr in 2009-10, max 157

How many banks failed between 1982-92?

Over 200 failures per year

How many banks failed between 1930-33?

Thousands of failures per year

Barter (Direct Exchange)

Mutually advantageous direct exchange of commodities

or services

Monetary (Indirect) Exchange

Exchange of less desired commodities or services for more desired commodities etc, by means of the acquisition of, and then disposal of, an even less desired commodity than is originally given up

Why can’t we just use barter, why bother with money?

• Barter is always adequate in a 2-person economy

• In a larger economy, direct exchange may be incapable of achieving all (or even most) mutually beneficial exchanges

What are the implications of money as an indirect means of exchange?

• Purchasing Power of M must be ascertained before it is accepted (Step I), and is determined entirely by experience of prior acceptability

• M must be held for a while as M (creates a demand for M)

Why will one good tend to be adopted as the medium of indirect exchange?

By means of contagion. If c is already being accepted by A as M, a fourth person D is more likely to also accept c as M

The right M to use is the one everyone else in your society is using, just as…

…the right language to use is the one everyone else around you understands

6 Desirable Features of M

• Durable

• Portable

• Divisible

• Fungible (uniform and interchangeable)

• Recognizable

• Stable in value

Money Prices do 2 key things

1. Communicate marginal values and costs of unlike goods in a common unit

2. Permit rational economic calculation, efficient coordination of decentralized economic plans, and delegation of decisions to managers

Who developed the Indirect Exchange Theory of Money?

Austrian economist Carl Menger, ”On the Origin of Money

Monetary Certificates

Title to a unit of the M commodity, authorizing bearer to take delivery on demand

100% Reserve Deposit

Account backed 1-for-1 by monetary commodity, transferable by check

In US, when did gold certificates circulate until?

1933

In US, when did silver certificates circulate until?

1964

Fractional Reserve Bank Notes and Deposits

• Bank could lend out some of reserves to earn interest and still might be able to meet all redemptions

• Would help cover operating costs + allow it to pay interest on deposits

• Customers ordinarily prefer this arrangement

Fractional reserve bank liabilities are contracts, not titles to property. So the breach of contrast is a ____.

Tort.

Which is not a crime. It may result in bankruptcy and/or lawsuits but not jail.

Why may inconvertible notes and deposits w/ no backing still have value?

received status as M + demand for M

Fiat Money

Paper M that is not, and never will be, redeemable in a physical commodity.

What do governents often do with Fiat Money?

Give themselves a monopoly over creating it + use it as source of profit

State Theory of Money (c.p. Indirect Exchange)

• Money is that which the State (government) declares to be money.

• It is valuable because the State requires taxes to be paid in units of it.

Colonial Silver Standard

• Colonists used Spanish Dollar (aka peso de ocho) = 8 reales (8 “bits”) for transactions.

• Name originated as Habsburg Thaler, first minted in St. Joachimsthal

• USD designed by Alexander Hamilton to have same silver content as “circulating Spanish dollars

When/what was the Bimetallic Standard?

1972-1861

Use of both silver and gold as currency at a legally fixed value ratio

What are the pros and cons of gold and silver?

• Silver heavy and not very portable for large transactions, but quite divisible for small transactions.

• Gold more portable, but not very divisible for small transactions

What was the mint price of silver during Bimetallic Standard?

$1.293 / troy oz

Was there free and unlimited coinage for silver/gold during Bimetallic Standard?

Yes

No seigniorage (profit) from minting

What if silver coins were worn down during the bimetallic standard?

Worn coins were only legal tender (valid for payment of debts) by actual weight (50¢, 25¢, 10¢, 5¢ coins w/ prop. silver)

What were the silver coins made of during the bimetallic standard?

Alloy 90% silver + 10% copper (improve durability)

What was the mint price of gold during Bimetallic Standard?

$19.39/oz

What were gold coins made of during Bimetallic Standard?

1 gold Eagle contained 1/1.939 troy oz pure gold.

What was the OG mint ratio?

19.39:1.293 = 15 :1

What was token copper coinage used for during Bimetallic Standard?

• 1 cent, 2 cent pieces

• Legal tender only for very small sums

• Supply limited by Demand for small denominations

• Created “Seigniorage” profit for Treasury, helped defer costs of gold/silver coinage

1 oz Troy = ___ gm

31.1

Gresham’s Law

If two forms of money are both legal tender, at a mint ratio that differs from the price ratio on the world market, the overvalued money will tend to drive the undervalued money out of circulation

After 1800, the French mint ratio was ___

15.5:1

After 1800, the US mint ratio was ___. What was the impact of this ratio?

15:1

US overvalued silver relative to gold. Silver drove gold out of circulation in US, leaving US on a De Facto (in fact) Silver Standard prior to 1834, even though De Jure (in law) Bimetallic.

When was the US on a De Facto Silver standard?

1792-1834

Since silver was heavy, bank notes became only currency in US for over $1

When was the US on a De Facto Gold standard?

1834-1861

Why did the De Facto Gold standard occur?

• Accidental!

• Andrew Jackson raised mint price of gold to $20.67 to provide a “hard money” substitute for paper bank notes

• US mint ratio changed to 16:1 (c.p. global 15.5:1)

• Now, US overvalued gold relative to silver, drove out silver dollar

Subsidiary Silver Coinage (1853-1965)

• Silver 50¢, 25¢, 10¢ reduced to 93% of full silver

• Nickel 5¢ piece replaced silver half-dime

• Minting not free or unlimited (small seigniorage)

• Legal tender only for small payments

When was the Greenback Standard?

During the Civil War, 1862-1879

What was a Greenback?

• Issued by US Treasury

• Originally paid in gold, but by end of 1861 conversion was suspended

• February 1862, Made legal tender and drove gold/subsidiary-silver/copper out

When/what was the Coinage Act?

1873, eliminated silver definition of dollar

When was the Monometallic Gold Standard?

1879-1933

Was there any silver as legal tender during Monometallic Gold Standard?

Yes. Some limited minting of legal tender silver dollars, but not enough to drive out gold & mostly used to back silver certificates

By 1894, the mint price of silver decreased to ___

$0.63/oz

When/what was the Bimetallism Movement?

• Occurred during 1890s

• Advocated restoring unlimited minting of silver and making it legal tender for all future/prior debts

• Dominated 1896, 1900 presidential elections

  • Bimetallism: Wm. Jennings Bryan (D)

    • "Cross of Gold" speech

    • "Crime of 1873"

  • Gold: Wm. McKinley (R, won twice)

What were Federal Reserve Notes?

• Introduced in 1914

• Originally obligations to pay gold on demand

  • Backed 40% w gold, 60% w gold-denominated loans

• Originally not legal tender

What is the Fiat Money Standard?

• 1933-present

• Banking Crisis at onset of Great Depression, 1930-33

  • FD Roosevelt declared “banking holiday” March 1933, immediately after inauguration.

• Gold coins “temporarily” called in, but actually replaced by Federal Reserve notes as legal tender

What is the current mint ratio (09/26)?

• Gold is $4362/oz, Silver $64.11/oz

• Ratio = 63.0:1

What is the CPI-U?

Consumer Price Index for All Urban Consumers

What is the current base year for the CPI-U?

1982-4

How often is the CPI-U computed?

Monthly

Who computes the CPI-U?

Bureau of Labor Statistics (BLS) in U.S. Department of Labor

When is the CPI-U released?

In a one-month lag. It is final on release (except for seasonal adjustments).

What scale is better to visualise growth rates? Linear or logarithmic?

Logarithmic. Slope indicates growth rate.

CPI-U grew much ___ during “Great Inflation” of 1967-83 than in 2021-3 surge

More

Inflation

Rate of growth of price level

Deflation

Negative inflation; rate of decline of price level

What was the inflation rate between 8/26 – 8/25 (1982-4 = 100)?

3.3%

What was the inflation rate between 8/25 – 8/24 (1982-4 = 100)?

2.9%

If you use a CPI with a different base rate to compute a given inflation rate, will you get the same result?

Yes

Is month-to-month CPI-U worthwhile?

Month-to-month inflation is mostly noise + rounding error.

Year-over-year is more meaningful.

In 1973-74, 1979-83 inflation was above ___%

≥10%

Between 2008-09 (7/08 - 7/09), the inflation rate was ___%

-2.0%

What are the major categories of the CPI-U?

• Food

• Energy

• Shelter

• Vehicles & parts

• Transportation services

• Apparel

• Education & communication services

• Recreational services

• Medical services

Seasonal Adjustments

• Many prices and quantities are highly seasonal

• CPI-U is published both with Seasonal Adjustment (SA) and Not Seasonally Adjusted (NSA)

Are SA figures are more commonly reported than NSA?

Yes

Are SA ever revised?

Yes, as new data comes in.

Does seasonality affect year-over-year inflation?

No, except for the revisions

The payments on Treasury Inflation Protection Securities (TIPS) are indexed to ___? Why?

CPI-U (NSA)

CPI-U (SA) would not be suitable because of the revisions to the seasonality

Boskin Congressional Commission Report (1996)

Found CPI-U had overstated "true" inflation by about 1.1%/yr

• 0.6% due to new products

• 0.4% due to substitution away from goods whose prices increased

• 0.1% due to changing shopping locations

GDP Deflator

• Measure of how high prices are in each year as compared with base year (currently 2017)

• Released quarterly

• Revised repeatedly as new data comes in

• Includes investment, gov’t expenditures that are not part of the cost of living

PCE

Personal Consumption Expenditures (PCE) are major component of GDP that directly correspond to the goods whose prices are measured by CPI

What is the PCE-PI?

• PCE Price Index

• Released monthly since 1959

• Base year is same as GDP Deflator

• Revised repeatedly as new quantity data comes in (final revision is more accurate than first release CPI-U)

GDP and PCE are almost ___

Identical

Are GDP and PCE the same as the CPI-U?

They are not the same, but they tell a similar story.

What is the Fed’s preferred price index for measuring inflation?

Personal Consumption Expenditures Price Index (PCE-PI)

Since 2000, annual US inflation as measured by the CPI-U has

averaged ___% ___ than PCE inflation

0.36%/yr more

Chained CPI-U

• Uses past/future weights, so behaves more like PCE-PI

• Is still revised but not as much as PCE PI

• Since 2000, exceeds PCE-PI inflation by 0.10%/yr (vs. 0.36%/yr for CPI-U)

• Effective 2019, Federal income brackets are indexed with Chained CPI-U, not CPI-U itself