The Gold Standard, Printing Money and the Federal Reserve
The gold standard didn't work, the Federal Reserve does not PRINT money and Quantitative Easing is good ! by James Luko
(centrist)
Saturday, July 23, 2011
The media is hyping and harping on the issue that the Federal Reserve will resort to PRINTING more money to feed another round of "quantitative easing." This is a wholly incorrect fact. The Department of Treasury prints our "paper currency" NOT the Federal Reserve. "Quantitative easing" is the Federal Reserve increasing bank reserves- thereby creating new money electronically- but, for a stated purpose of "stimulating" the economy and NOT for paying government debt. This is a salient point that the media mixes up, assuming and misinforming the public that QE is paying for increased government debts. QE serves a fundamental reason the Federal Reserve exists- LENDER OF LAST RESORT. There is no mystery or secret function in quantitative easing- it is an "envisioned" power of the Federal Reserve to shore up financial institutions or companies which hold debt during times of crisis in liquidity. In Quantitative Easing, government securities as well as commercial paper are NOT purchased directly, but rather on secondary markets- meaning, liquidity is being pumped into the private market and not by directly "monetizing government debt" nor with the intent to directly finance government debt.In the 2007-2009 QE policies, the Federal Reserve did not purchase direct government debt- but rather purchased mortgage backed securities and other asset-based securities, NOT government bonds.
These are SIGNIFICANT details to know and remember when caustically screaming about the Federal Reserve "printing money" to restore our financial soundness. Those making paranoid attacks on the QE policy of the Federal Reserve are obviously not reading the details of how and what was being purchased by the Federal Reserve in order to stabilize the banking system and restore credit and liquidity in credit markets. The 2007-2009 Quantitative Easing actions by the Federal Reserve DID NOT "monetize" government debt.
Second, let's be informed that the Federal Reserve hardly "demands" the Treasury Department to "print" money on demand. This is a very rare occurrence as a cursory glance at the operations of the Federal Reserve would easily illustrate to the public that the Fed's function in liquidity in our economy is NOT based on "printing" fiat currency. Liquidity- in the narrowest form- paper money and money supply overall (M1,M2,M3) is mainly controlled by the Fed via selling and buying notes, setting bank reserve requirements and interest rates. Therefore, increasing or decreasing the money 'supply' by intervening in private financial markets and NOT by demanding the Treasury to PRINT dollars is what QE policy is all about. Printing money can only be conducted by the Treasury Department which comes under the direction of the President of the United States, NOT the Federal Reserve.
Third, it's actually irrelevant to discuss printed paper money, since it represents a tiny portion of our money supply. The vast majority of our money supply is electronic- not paper money.
Fourth- our money is not worthless, it represents value- either assets or labor, so it’s not worthless- it's intrinsic value as a piece of paper is of course worthless- but for thousands of years we used shells, rocks, leafs, etc as money- so the negative hype, conspiracy rants, misinformed economic theories which attack the concept of "paper currency" is grossly misplaced. Thinking that "money" needs to have an intrinsic value- such as gold or silver is to create even greater problems than based currencies would solve [1]. Why don't we use diamonds or rare gems as money since they have "intrinsic" value?
Fifth- Based currency (money based on gold) has already been tried, and proven to be very unsuccessful. The United States experienced more depressions and recessions and banking crisis in our history under the gold standard than with fiat currency. Since going to a fiat currency- no major industrial country has experienced a depression (ala 1929). [1] Gold based currencies introduce several major problems, such as an inability to have an elastic money supply (in order to put in or take out money from the economy), gold hoarding, not enough gold to base a growing American or global economy, limits of total gold supply, foreign countries depleting America’s gold supply with trade deficits, a soaring price in gold based on almost limitless demand by today’s global economy.
Sixth- inflation- a dynamic and growing economy needs "some" inflation. Inflation provides an outer elasticity to know whether we need to push growth or slow growth down. Push it- to provide more jobs and economic development- or slow it down in order to avoid bubbles, over-employment (which triggers very high inflation) etc... So, having 'some" inflation is a general indicator and insulator for the economy- perfectly normal- and absolutely necessary for a dynamic economic system. Deflation would be a MAJOR risk under a gold standard and is much harder to recover from- i.e. Japan has still not recovered from its deflation 10-15 years ago.
The Federal Reserve and fiat currency system has produced the highest standard of living for the highest percentage of Americans in its history- as well as reducing the percentage of people living under the poverty rate in America. That is "proof" in the pudding.
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"“Quantitative easing” is the Federal Reserve increasing bank reserves- thereby creating new money electronically- but, for a stated purpose of “stimulating” the economy and NOT for paying government debt."
So then, stimulating the economy is "increasing bank reserves"? Sounds like econospeak to me. Increasing bank reserves by electronically printing or some would say "counterfieting" money is just that: creating money out of nothing and increasing bank reserves by buying securities that would otherwise would not be bought or would have to be sold on the open market at a lower price, possibly at a loss. That's not to mention that the securities are purchased by the banks in the first place by the means of their "profits" that they procured from a corrupt financial system.
" The 2007-2009 Quantitative Easing actions by the Federal Reserve DID NOT “monetize” government debt."
The Fed is the largest owner of US debt. The Fed turns all its profits over to the Treasury at the end of the year. Fed profit is largely made up of interest it collects. I think you can take it from there.
"Fifth- Based currency (money based on gold) has already been tried, and proven to be very unsuccessful."
Very true, any currency based in coercion and corruption will prove to be unsucessful. gold is no different.
"Sixth- inflation- a dynamic and growing economy needs "some" inflation. Inflation provides an outer elasticity to know whether we need to push growth or slow growth down."
Complete circular logic. Control the economy by force which causes inflation and then state that we need inflation in order to control the economy.
"The Federal Reserve and fiat currency system has produced the highest standard of living for the highest percentage of Americans in its history- as well as reducing the percentage of people living under the poverty rate in America."
Last time I checked it was people who actually went to work and produced goods and services that provided other people with what they needed. That's like saying the "King" planted his fields. If the system you describe is so fantastic, why is force needed to keep it in place?
The distinction between "printing" and "creating" money is unimportant. It doesn't matter whether the money is printed on paper or issued electronically. The bottom line is that the money supply still increases, and in the long run that activity ends up destroying the value of each unit of currency. I couldn't help but notice that you deliberately overlooked that fact in your article.
You wrote, "Federal Reserve did not purchase direct government debt- but rather purchased mortgage backed securities and other asset-based securities, NOT government bonds." Actually, we don't know that for a fact. We do know that they purchased mortgage-backed securities, otherwise known as "toxic assets" because if valued at their true value they would be worth far less than their face value. We also know that they purchased these securities by creating money out of thin air. But that doesn't mean that the Fed hasn't been purchasing direct government debt. To the contrary, the government has been running out of buyers for its debt. All the biggest buyers, including China, Japan, and Russia, have dramatically curtailed their purchases, and they will likely continue to do so.
Of course, the Fed is an opaque organization, so there is no way to know exactly what they're doing. That's one key reason why Cong. Ron Paul has called for a full, public audit of the Fed, and not the sham audit the government currently conducts.
Despite the fact that the Wall Street Reform and Consumer Protection Act of 2010 included only a watered-down version of Audit the Fed, we got a quick glimpse of Fed activities from the revelations that came out of that law. Yet, even that quick glimpse tells us that the Fed bailed out the leading European banks as well as banks in other countries via the discount window. This money was also created out of thin air, yet the Fed told us nothing about it before they were forced to do so. So how can you be sure that the Fed isn't buying government debt? The honest answer is: you can't.
You wrote, "Third, it's actually irrelevant to discuss printed paper money, since it represents a tiny portion of our money supply. The vast majority of our money supply is electronic- not paper money." You know perfectly well that the term "paper money" is euphemistically used to describe the entire money supply. Some of us refer to this as the "fiat" money supply, but we unjustly get shot down for using that term, too. So what term is acceptable to you, Mr. Luko? After all, if not for the fact that our money is based on paper, we would not be at a place where electronic money could be increased ad infinitem at the whim of the Fed.
You wrote, "Fourth- our money is not worthless, it represents value- either assets or labor, so it’s not worthless." Then why does it keep losing value? Why is today's dollar worth less than 4 cents compared to the 1913 dollar? If that's not worthlessness, what is? Does it have to reach zero before you'll admit it's worthless? If so, you have a craven view of "worth".
You wrote, "Based currency (money based on gold) has already been tried, and proven to be very unsuccessful." No, that's not true. Rather, the gold standard was undermined by the government in collusion with the banks by permitting more paper/electronic/fiat money to be created than was actually held in reserves. This inflation of the money supply is what led to all the troubles you described in that paragraph. Blaming gold for these developments is like blaming store owners for the fact that there are thieves that rob those stores.
You wrote, "Sixth- inflation- a dynamic and growing economy needs 'some' inflation." This is a long held truism that has not a shred of evidence to support it, and I cannot help but notice that you continued that tradition by refusing to provide any evidence to support your wild claim. You simply stated that your truism is true, as if stating it proves it. Inflation, specifically monetary inflation, is nothing more than the stealing from the poor and the middle class by the rich, via destruction of the currency.
Lastly, I want to address your statement, "The Federal Reserve and fiat currency system has produced the highest standard of living for the highest percentage of Americans in its history- as well as reducing the percentage of people living under the poverty rate in America."
This falsehood has been the rallying cry for decades, but it simply isn't true. The quintessential point is the famous gap with the rich getting richer while the poor get poorer. This isn't just a fancy political claim. It also happens to be true. Just because dollar amounts increase doesn't mean that the poor are better off. To the contrary, the dollars buy far less than they used to.
The truth is that the poor should no longer be poor. Poverty should be eradicated by now, and it would have been if not for the fiat money system. The rat race should be over, but it doesn't end because the middle class finds that their goals are always just out of reach, like a carrot dangling on a stick. Again, this is due to the fiat monetary system where the value of the unit of money keeps decreasing over time. This tendency for the dollar to always lose value over time is the greatest theft in the history of mankind.
Posted By: Bill Gee
Date: July 25, 2011 11:58:13 AM
I would also like to add my "two cents" to the argument regarding our supposedly increased living standards.
In an ideal society, the young go to school, those of "working age" work, and the elderly enjoy a reasonably comfortable retirement. The is accomplished by 1) providing low or no-cost education to the young so that they can build the skills they need to be contributors to our society. 2) Those of working age contribute to the wealth of the nation by working and they put just enough money away into savings accounts for their eventual retirement so that 3) by the time they retire, they have enough accumulated savings in order to enjoy the final years of their lives. The current monetary situation makes this "dream society" impossible.
This is because our economy only grows in terms of spending, rather than saving. When we are young, we have to spend enormous and ever-growing amounts of money for our education. Education, as a contribution to GDP is very limited in that the expenditures are limited to the act of educating and not to the eventual economic contribution of the student following graduation. With less money going to public education, more money must be spent for private education, which further erodes the consumers willingness to save. When we are of working age, savings are usually eaten up by spending. This is because as money languishes in a savings account (even one with a relatively high yield) it tends to lose value over time. Also, savings does not contribute to GDP nor does it stimulate other economic activity. Therefore, all our hard-earned cash is used to pay for stuff we need (and don't need) while little to nothing is put away in savings. By the time we reach retirement age, more and more of us are dependent on Social Security than ever. Today, seniors receive some assistance with Cost-Of-Living-Adjustments (COLA's), which increase benefits based on the Consumer Price Index (CPI). One of the reforms to Social Security favored by both Democrats and Republicans is changing the COLA to what they call a "Chained-CPI", which takes into account the substitution effect. This means that Seniors on Social Security will be left with no choice but to use "inferior goods" as inflation contiues to eat away at the real value of their limited income.
Money must retain its value over time in order for a society to build wealth in the long run. When both money and the things it purchases lose value over time, it is the producers that get wealthy as the rest of society gets poorer. Healthcare and real inflation has made Social Security unsustainable, so that in order for people to survive, they must continue to work for a living long after they have reached retirement age. That is NOT prosperity and it is foolish to think otherwise.
Posted By: jamesluko
Date: July 26, 2011 03:11:37 AM
Yes, increasing bank reserves DOES stimulate the economy by giving banks more money to lend. That is NOT econo-speak to me its common sense. This creates, in my interpretation, NOT counterfeit money but “I owe you’s” as it is in the domain of “fractional reserve banking” the money is not counterfeit but eventually- must be paid – as they represent an “ I owe you.”
Yes you are right, the FED is the largest owner of government debt, but I just said that the last QE was NOT with the intention of purchasing government debt- so one has nothing to do with the other.
A system of currency is complex and different systems will have different advantages and disadvantages, so please explain the “perfect” system of currency for a complex economy and we can solve that problem.
Inflation, well either on the gold standard or not, distributional and resource hiccups will cause bouts of inflation, NOT, just expansion of money supply that is not proportional to economic growth.
People producing goods and services ? Well, finance is a service last time I checked. You aren’t suggesting going back to an agricultural economy ? As far a producing goods- America is still the largest manufacturer in the world- please see my other articles on Nolan regarding American manufacturing.
Posted By: jamesluko
Date: July 26, 2011 03:14:46 AM
I don’t agree with your implications of the low savings rate in America. American’s don’t have to save as much as people in Japan, China or Russia because more Americans- than they, have their savings in their homes, pension plans and health insurance plans. Thus, when the hammer falls, most Americans are covered for shelter, health and pension needs- but in Japan, China and Russia – for example, they are NOT, thus, they need to save more money for those requirements later in life.
Second, regarding the erosion of the value of our money- that is nonsense, so what if a dollar in 1914 is only worth 4 cents today- we are not paid in 1914 salary rates are we ? with the erosion in “relative” value- we are paid more- thus making up that erosion- it’s a completely irrelevant factor as compensation has increased many fold to make up that loss in buying power of a 1914 dollar.
Posted By: jamesluko
Date: July 26, 2011 03:17:55 AM
An increase in money supply, in theory, would NOT result in price inflation if the money supply grows in proportion to increased economic activity. Second, distribution and resource factors also creates price inflation, NOT just an increase in money supply. However, even that said, it is an economic tool to use in an imperfect economy- that is basic economics 101.
Selling government debt to foreign governments is NOT as important as you imply. Most government debt is held by the United States, NOT foreign governments. Foreign governments own only 37% [1] of American public debt. The amount of debt held by foreign governments is grossly exaggerated and overblown by the media and by your own comments. (see treasury website)
I agree better audits of the Federal Reserve is necessary but that doesn’t impede on basic economic theory.
Walt, I don’t agree with the term “printing money” when money is not being printed as opposed to electronic creation of money. In the case of electronic increases in money supply, for example, by lower bank reserve requirements, that is part of our fractional reserve system in which all the money is eventually owed and payable by the bank, and one of the main functions of the Federal Reserve is to regulate money supply- so by law, it is indeed legal, and not counterfeit or an illegal action.
In addition, it is one thing to argue that the Federal Reserve Act is/was illegal or unconstitutional, but as of yet, it IS the LEGAL law of the United States of America. Furthermore, the Federal Reserve Act, Section 2A- (which is the Law of this land) states exactly that….
The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates [2]
check the law, Federal Reserve Act Section 2A
So I ask of you, what is ILLEGAL here ? What the FED is doing is the LAW of the United States of America, it has not been struck down as unconstitutional, therefore, it is a legally standing law and the acts of the Federal Reserve are explicitly LEGAL. Increasing the money supply through the actions of the Federal Open Market Committee (which includes electronically creating money) is a legal function of the Federal Reserve.
It is self-evident that we need inflation to act as a buffer for an economy which we cannot exactly predict or measure.
Regarding the Federal Reserve Act’s role in creating this nations monetary policy, it has indeed brought the highest standard of living to the highest percentage of Americans. If one compares our standard of living from 1920, 1950 and today- one would find that we have a much higher per capita GNP, more Americans live in homes, Americans live in much larger homes, Americans live longer, Americans are taller , more Americans graduate from high school and college, etc. etc. all indicators of an increased standard of living. ( you can study an entire list of standard of living indicators to see how much better we live today- in so many ways, than before).
You have made a whole series of false statements here, and I'm tired of debunking them, because clearly you have no intention of ceasing to make them. So instead, I'm going to issue you a challenge. I challenge you to document each and every false claim you make, by creating links to documented evidence to support your false claims. So far, you have failed to provide a single shred of evidence to support any of your wild fantasies. Instead, you've declared them to be truths merely because you state them. Let's see what you can do when you try to actually show documented, factual evidence that can be re-checked by the reader to back your outrageous claims.
