"The Federal Reserve bank buys government bonds without one penny..." Congressman Wright Patman, Congressional Record, Sept 30, 1941
It is often argued, and rightfully so, that the monetary policies realized by our government through the Federal Reserve are inflationary. They are much more than that. The fundamental action of the Reserve when examined thoroughly reveals qualities that do not align with any concept of justice or even simple common sense.
Money creation by the Federal Reserve is said to have an effect "down the line". Those who receive this new money first benefit from the lower costs of goods and resources. As inflationary effects take place, the farther down the receiving end you are, the less the dollar will buy. It is said this devaluation is a taking from all by the government and that line of thought certainly has a lot of merit.
But the biggest wrongdoing occurs in the initial action that is taken, what is known as the Fed's "Open Market Policy".
This policy is a function of the Fed that is hard to understand only because of its opposition to our normal concepts of how things should work. When the Fed wishes to "increase" the money supply, it purchases securities from "special" firms [and elite group of specially selected monopoly investment firms] and credits their ongoing accounts with the Federal Reserve. The strange thing is, this credit is created out of nothing. The Fed merely adds whatever numerical amount the security might be to their clients account, without any corresponding cost to the Fed or the government for that matter. This is the primary way money is created.
At first thought, other than the constant inflationary tendencies, perhaps this is a rather harmless way to get the economy going. It is actually the single most detrimental move to undermine the economy and debase all that defines it.
Theoretically, we live within an exchange economy. We exchange goods and services either directly or more commonly through the medium of exchange, money. These goods and services and resulting assets represent what we do, how we shape the resource with our labor. We all arrive at a value and cost incurs with each transaction. Someone receives a good and they exchange money, which simply represents a previous good or the labor to produce a good. In its best sense, the money is just representation of what was done in the past, the amount of labor and resource used to create something that is needed and is of value to others.
A security is always some form of credit. One party is promising to return funds to another party with a "bonus" or interest attached to make it worthwhile to let go of the funds in the first place. These securities can be "backed" by existing assets. In this case, the party "borrowing" is simply informing the lender that they will become owners of the asset, which usually is of equal value to the loan, if the borrower fails to repay the loan. Aside from more accurate accounting not much different than the workings of a "pawn" shop!
Or, they may be backed by "good faith". We "promise" to pay you back, or else, you probably won't loan to us again! This type of course, should show greater return but this is not always the case. There is more "force" and "leverage" in the markets than anyone cares to admit!
Now the money that is exchanged within these securities should not differ from any other money in the economy. A dollar should be a dollar.
This money represents labor and resource. Workers have shaped the resource, often guided by the entrepreneur, to create products that were valued and sold. Laborers took home their paycheck, Capitalists received their profit, and the process was repeated until someone or some group had enough left over to think about "investment", loaning the extra to someone else to be put to use in the same type of process. This is the workings of our economy; past work paving the way for the future.
A Security is merely an organization of this work and the resulting capital. It is a "product" of society shaped into an investment tool.
The Federal Reserve, through their "Open Market Policy" purchases some form of a security for absolutely nothing. They credit the account of one of their selected dealers and create the funds necessary on the keyboard of a computer, omitting any tangible representation of real product. They make a mockery of our economic system and the foundation of exchange, the transaction. With one action, they are "closing" the market and declaring the entire system dysfunctional. The security, an agreement over the distribution of the surplus product of our economy, the labor and resource, has no value in this exchange. It can be bought by "good faith" alone. There is no need for the "medium of exchange" if you are powerful and crafty enough!
The Fed purchases billions of dollars worth of securities in this manner, if purchase is even the proper term. We can total the economic output of our nation for a year and divide by the increase in money supply created in this manner for the same year and arrive at a percentage of our economic output that was confiscated by the Federal Reserve. This is not a very accurate figure as product represented in a security varies in both time and content. Foreign investors also contribute much to the product contained within these securities, so the action does not cease at our borders.
This is beside the point really. It is common to look at monetary policy as a "tax" on people's savings and earning power through inflation, but examined as we just have highlights the instantaneous tax that it really is. It is a direct taking from the output of the economy. Since the "profit" that the Fed earns is for the most part deposited into the Treasury, the loop is complete. This of course, is not the entirety of the profiting that occurs. The process is ripe with profit and many others benefit from this taking.
If we need any more proof for our case, it is easy to come by. The Federal Reserve also "sells" these same securities. Although this often involves only a "debit" on one of their trusted firm's accounts, it is a debit from a real account and not a fictitious "credit" that facilitated the purchase. We might express pity for these close friends of the Fed, but they are on the receiving end of copious benefits. Their proximity to this phenomenon grants them market advantages others couldn't possibly dream of!
What might be perceived as just a mischievous tinkering of the money supply is in actuality a blatant tax, a tax separate and distinct from the "inflation" tax that ever increasing currency imposes. The Fed commits a direct taking from the economy, from our work output, with each "open market" purchase they complete. They have been granted this power by the US government with no consent or vote from its citizens. It is doubtful we will ever be asked our opinion on this subject.
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©2009 Gene DeNardo, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Tuesday, March 24, 2009
Last modified: Tuesday, March 24, 2009
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