[...]... who owns the debt, can be found in the other 144 tables spread across the Flow of Funds Accounts of the United States All the data series can be easily downloaded from 1945 Much of the analysis in this book is built on the data supplied in the Flow of Funds report The Rest of the World The third development responsible for the credit conflagration in the United States originated outside the country... bonds then owned by other investors, they pushed up the price of those bonds and drove down their yields That explains Chairman Greenspan’s so-called “conundrum” over why government bond yields wouldn’t rise despite the 17 rate hikes by the Fed between June 2004 and June 2006, which were designed to push them up In other words, the Fed lost control over U.S interest rates and, therefore, over the economy... euro-denominated assets between the breakdown of Bretton Woods and 2007, the year before crisis began Most of the rest of this chapter will consider the impact that the investment of $5 trillion into dollar-denominated assets had on the U.S credit market In 2007, TCMD outstanding in the United States amounted to $50 trillion Therefore, the $5 trillion invested into the United States by foreign central... age during the 1980s, and by 2007, they provided 6 percent and 5 percent, respectively, of all credit supplied by the financial sector Credit without Reserves By 2007, the GSEs and the issuers of ABSs provided 24 percent of all the credit in the country Their rise made the financial system much more leveraged and complex than when it had been dominated by the commercial banks First of all, the GSEs and... to whom the debt is owed, “Total credit market assets held by.” The top half of Table L.1, the breakdown of who owes the debt, has been provided as Exhibit 1.9 There are three major categories: EXHIBIT 1.9 Credit Market Debt Outstanding Source: Federal Reserve Flow of Funds 1 The domestic nonfinancial sectors 2 The rest of the world 3 The financial sectors Note: Detailed information on each of these... required to hold until they were so small that they provided next to no constraint on the amount of credit the system could create The money multiplier expanded toward infinity A proliferation of credit created an economic boom that transformed not only the size and composition of the U.S economy but also the size and composition of the global economy The collapse came when the borrowers became too... it to buy the currencies of its trading partners Such intervention served to push up the value of the other currencies and depress the value of the currency being created, making the products of the currency-manipulating country more price competitive in the international marketplace Central banks accumulated approximately $6.7 trillion worth of foreign exchange between 1971 and 2007, when the global... of the Chinese government’s plan Therefore, the government instructed the central bank, the People’s Bank of China (PBOC), to buy all the dollars coming into China at a fixed exchange rate so that the yuan would not appreciate And that is what the PBOC did The central bank created the equivalent of $259 billion worth of fiat yuan and used it to buy $259 billion at a fixed exchange rate so that the. .. repay what they had borrowed By 2007, the reserves ratio of the financial system as a whole had become so small that the amount of credit that the system created was far beyond anything the world had experienced before By the turn of the century, the reserve requirement played practically no role whatsoever in constraining credit creation This came about due to two changes in the regulation of the financial... ratio is the factor that determines the maximum amount of deposits (and credit) that can be created In this example, at the end of the process, there are $500 of deposits, or five times the amount of gold initially deposited, and $400 of credit that did not exist before The inverse of the reserve requirement is known as the money multiplier Here, the money multiplier is 1/20 percent or 5 times If the reserve . 4: The Quantity Theory of Credit The Quantity Theory of Money The Rise and Fall of Monetarism The Quantity Theory of Credit Credit and Inflation Conclusion Notes Chapter 5: The. government’s policy response to the crisis. When seen through the framework of the quantity theory of credit, the rationale for the stimulus packages, the bank bailouts, and the multiple rounds of quantitative easing. money, government policy will determine the direction in which asset prices move. The New Depression has not yet become the New Great Depression. Tragically, the odds are increasing that it will.