Money creation

Enrique Diaz-Alvarez enrique at
Mon Apr 10 08:53:16 PDT 2000

Doug Henwood wrote:

> Enrique Diaz-Alvarez wrote:
> >Monitoring is not the issue. They already monitor M3, which includes MM
> >balances. The issue is control - if MMs create money, then the main Fed tool
> >for monetary control is on the process of disappearing. They may monitor the
> >debt orgy, but they are (or soon will be) powerless to stop it.
> You really think that, say, another point or two rise in the fed
> funds rate would be powerless to stop the debt orgy? You think the
> rate rise of the last year has nothing to do with the rout in tech
> stocks?

Given my past record, I'd rather not make predictions. However, look at the facts: two weeks ago the spending figures came up. Personal income, up 0.4%, personal spending, up 1.0%. Margin debt, up 9%, for the *month* of February. This, on the face of four rate increases, the highest real rates in the industrialized world, and record debt levels.

As for the tech semi -wreck, inflows into stock funds are the highest ever, far higher than last year, in spite of the rate increases. The reason for the decline is that a) insiders are dumping fiercely and b) WS stock-manufacturing facilities are really cranking up to meet demand, with a tsunami of IPO trash. Neither has anything to do with rate increases. The bubble may burst tomorrow, or it may burst a year from now, but interest rates at 7%, 8%, 9% will have little to do with it, I think.

However, I didn't say that the Fed has lost control of the debt orgy yet, just that it is in the process of losing control. If Bubbles came out tomorrow, incresed margin reqs. to 100%, announced a serious review of banks' consumer loans, and his intentions to stop the relentless increase in household, corporate and national net debt, then that would be it for the bubble. But raising rates 0.25% at a time, no way.

> Doug

-- Enrique Diaz-Alvarez Office # (607) 255 5034 Electrical Engineering Home # (607) 272 4808 112 Phillips Hall Fax # (607) 255 4565 Cornell University mailto:enrique at Ithaca, NY 14853

More information about the lbo-talk mailing list