Topic: THE FEDERAL RESERVE
A Bonehead Solution to End Government Debt With a bit of Yankee ingenuity, we can virtually eliminate our Federal Debt, light years faster than it was accumulated. But hurry, limited time offer, we must act now!by Gene DeNardo
(centrist liberal libertarian)
Friday, November 28, 2008
A lifetime could be spent [or wasted] attempting to understand the workings of the Federal Reserve. Many of the articles I have read on the Nolan Chart page show a profound grasp of this mysterious institution and others seem to be based more on deeply held religious beliefs concerning the eternal struggle between good and evil. I am by no means an expert on the subject, but I am beginning to absorb the fundamental aspects of the Fed's workings and also beginning to believe even the characters in charge of this monster are barely hanging on to its tail!
Securities, especially Treasury securities, play a big role with the Fed. When crafting monetary policy, the Fed gauges the need for money in the economy and responds by buying or selling securities. If the Fed believes the economy needs more money and doesn't think things are gaining too much speed and causing excessive inflation, the Fed will purchase, sending millions of greenbacks out into the world. Conversely by selling a security, the Fed is absorbing funds and attempting to take money out of circulation.
The Treasury craves funds like an junkie craves herion. The Fed can purchase Treasury Securities, transferring cash to the Treasury in exchange for a written promise that the taxpayers will reimburse the Fed at some point. Lately, the Fed is losing a lot of its power to control monetary policy because of the availability of foreign funds to purchase these securities. As a result of our boundless personal debt, Asian countries have been awash in dollars. We seem to have an insatiable desire to import and accumulate things we want but don't really need, then store them in oversize houses and garages until we have to relocate. Then we liquidate these commodities at pennies on the dollar or throw them away, move and start over! These "outside" funds confound the Fed's ability to predict what the money supply will actually do when they decide to interact, which is constantly.
It is very confusing to me how the Fed generates revenue. It seems they are buying when they should be selling and selling when they should be buying. And they are always setting interest rates either below or above what they might if they wanted maximum return. It has to be difficult to clear a profit in this manner. They are like the great Anti-bank!
The Treasury owns a printing press; at least there is one somewhere in a backroom of our government offices. At what point in the budget deficit do they decide to press the on button? How do they decide when to print money, when to borrow by issuing securities and how does this all tie in with the Fed? Can they just print money and slide it under the table to Bernanky when the Fed needs to purchase and is short on cash? Do they wait till after 7 PM to take advantage of off peak power rates?
The Fed has assets and many of them are in the form of Treasury Securities. This represents a big part of our Government Debt. We, the taxpayers, owe the Fed gazillions of dollars. Which in and of itself doesn't make a whole lot of sense. Can you owe yourself money?
If it is okay for the Treasury to start up this printing press for whatever reason, why not get this thing rolling to pay off the debt? R3volt wrote an interesting article [Print Us Out Of Taxes] on applying this principle to taxes; wouldn't it make sense to apply it to the Debt?
There is a huge advantage to this. And, I say this somewhat tongue in cheek and completely foot in mouth. Starting the money press for any reason, other than paying off the debt is extremely inflationary and devalues our currency. Wherever you send the money there is more than before and currency devaluation is a given.
If we print up enough money to buy every Treasury security owned by the Fed, we have only exchanged pretend money for real assets that exist in the pretend bank, the Fed. Since the Fed and the Treasury are in the running for biggest cartel in the world, a simple understanding between them that the Fed will not bleed that new found cash immediately into the economy will preserve the present status of monetary supply, as pathetic as that may be! No new money has been entered into the overall economy; we have only exchanged security assets for fresh cash assets on the Fed's balance sheet. All for the price of a little electricity and quite a bit of paper. We could reenact the Treasury Secretary Chase $10,000 dollar bill to save paper costs!
This is nothing but a slight tangent off the wheel of "Fiat" monetary policy. The main problem with this devious plan would be twofold, containing the Fed's desire to spend every dollar, real or imaginary, that passes through its hands and the obvious newly created faith based spending cycle that would be possible between the Treasury and the Fed. The more money the Government prints the less debt. Think of the possibilities!
Another drawback would be that we have limited the Fed's ability to control the money supply. Since Fed securities have been replaced with cash, the Fed has lost its main tool to "absorb" money from the economy. Tis a shame! The Fed has less power, what shall we do?
Perhaps we should make this a one time deal. Liquidate the debt, shut down the presses and close the Fed doors? Since we have replaced a good portion of the Fed's security stock with new money, that money can simply be shredded and recycled as newspaper, which will be in great demand for the next morning's headlines.
What becomes of the rest of the Fed assets? Certainly they can be auctioned off, but who receives the payment? Since the Fed exists within our government but is supposedly a separate entity, who owns the Fed? Apparently, the member banks have shareholders but the "Big Boy" doesn't.
Is it possible that this isn't really a "fiscal" question but a "metaphysical" one? It may be that the origin of the Fed lies in the "supernatural" world, "transcending the powers and ordinary course of nature". Little wonder mere mortals are unable to come to any understanding of this sacred institution.
It may be best just to prepare this week's tithe and pray and hope for salvation in the next world; a world in which the dollar machine will run eternally in heaven above and the evil beast inflation will reside only in the darkest, fiery depths of eternal damnation! And it would only be right to permit those same guardians, who selflessly crafted our earthly monetary policy, to keep a very, very close watch on the inflation beast in the afterlife!
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The views expressed in this
article are those of Gene DeNardo only and do not represent
the views of Nolan Chart, LLC or its affiliates. Gene DeNardo is
solely responsible for the contents of this article and is not an
employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
Once people understand fiat money IS debt, then they understand how it is doomed to fail. Either our country falls on its face or we move to sound money. I choose the latter.
Hi Steve, the article you referred is full of good info. But, I am against the fiat system for the same reasons Mosler is for it. The ability of the government to spend money "first" before taxing and the setting of fund rates by the fed. Add to that the removal of "limits" the fiat system offers, all points he sees as beneficial, I see as detrimental. In effect, the Treasury and the Fed "control" the economy rather than letting the economy work and be its own control. This alone, not mentioning the possiblility of implosion[which is possible with any economy, by with the "fiat" system the added possibility of implosion based on bad direction is added], is enough. Essentially, we are letting a small group of humans make the decisions for everyone, when the economy, which is everyone, can figure it out itself by definition. I am also adamantly against subsidized growth which it can be argued is all the "fiat" system really is.
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