I have argued that high oil prices are contractionary in part because the funds are parked in Treasuries. The price of treasuries is determined by the time-path of the Federal Funds rate so unless the Fed Funds time-path responds by lowering in response to an increase in oil prices this is de facto tightening.

Money goes into T-Bills, but it can’t come out.

The thing is, the same thing is now true of IPhones. IPhones are contractionary. For exactly the same reasons. Folks hand their money to Apple, but Apple doesn’t hand it back to anyone.

From Cadiff Garcia

Apple alone represents $64 billion or 36% of the total $179 billion increase in corporate cash since 2009. And in 2011, overall corporate cash would have actually declined by $6 billion had it not been for Apple’s $46 billion increase. Unless Apple changes its philosophy towards liquidity by instituting a one-time or ongoing common dividend, or if Apple starts to buy back stock, we estimate Apple’s cash balances could increase by more than $50 billion in 2012 and approximate $150 billion.

Supported by our expectations that consumers worldwide will continue to feast on Apple products, we expect overall corporate cash and its concentration will increase in 2012. Apple alone could represent 12% of total corporate cash, about three times more than the next cash kin

Again, when Apple buys more T-Bills the price of T-Bills does not rise. This is obvious now since T-Bills are selling at essentially a zero interest rate. However, this is indeed always true.

If the price of T-Bill were to rise in response to Apple’s buying them then banks would sell T-Bills and lend the proceeds in the Federal Funds market. This would push the Fed Funds rate down.

The Fed would then contract (or in reality, decline to expand) the supply of money so that the Fed Funds rate would rise back to its target. It would do this by selling (or declining to buy) T-Bills, thus lowering the price of T-Bills back to where they were before Apple intervened.

Thus, if $64 Billion in profits are collected by Apple, $64 Billion is subtracted from the money supply.

In today’s world the way it works practically is that every dollar of profit collected by Apple simply represents another dollar in excess reserve balances held by banks.

About these ads