Posted on 04/19/2014 4:36:32 PM PDT by BfloGuy
Foreign individuals and businesses long ago cut back on their purchases of U.S. bonds. Their place was taken by foreign central banks. The central banks simply created money in their own currency and used it to buy our bonds.
The Federal Reserve always knew that we couldn’t rely on foreign central banks to buy our bonds forever. This may be the main reason it began the program called quantitative easing, in which the Fed created money out of thin air specifically to buy back U.S. debt.
Quantitative easing may have been intended to be a kind of insurance policy. If foreign central bank buying of U.S. bonds collapsed, the Fed would already have a program in place to buy them back itself.
The Fed said that quantitative easing was meant to create U.S. jobs, but this never made much sense. Even a hard core proponent of QE, Fed official William Dudley ( formerly of Goldman Sachs), admitted that the Fed’s own economic models could not explain how creating money out of thin air and using it to buy U.S. bonds would increase employment. Some link to rising stock prices could be demonstrated, if only through the cheap financing of corporate stock buy-backs, but then rising stock prices could not be shown to create jobs either.
One inference from this was that chairman Ben Bernanke, and now new chairman Janet Yellen, were just taking wild stabs in the dark. A more reasonable inference is that they had another reason for QE, one which they did not want to acknowledge.
Viewed in this way, the 2008 bail-out should be viewed not as a bail-out of Wall Street, but rather as a bail-out of Washington. The Federal Reserve feared that the market for government bonds was about to collapse, which would lead to soaring interest rates, and a complete collapse of our bubble financed government.
The Fed did not have the option of creating money and buying debt directly from the Treasury. That would be illegal. The Treasury must first sell its bonds to Wall Street, after which the Fed can then use its newly created money to buy them back. Hence, in order to rescue the Treasury, the Fed felt it had to rescue Wall Street.
This is a simplification of what happened, and only part of the story, but it is the untold part of the story, and in all likelihood the most important part. The Fed was in a panic in 2008, but not primarily about what might happen to Wall Street, and certainly not about what might happen to Main Street. It was in a panic over what might happen to government finance.
This interpretation is strengthened by new information contained in former Treasury secretary Hank Paulson’s recent book. He revealed that Russia tried in 2008 to persuade China to join in a collaborative effort to dump U.S. bonds in order to bring down the U.S. financial system. Although China refused to do so at the time, its government would clearly like to end dollar dominance, and has been paring U.S. bond purchases.
At the moment, Janet Yellen’s worries about finding buyers of government bonds can only be getting worse. For much of last year, foreign central bank purchases of U.S. bonds in aggregate fell. As of October of 2013, they had been negative for three and six months. Then they turned up a smidge, only to fall again, so that the last three months show a decrease of just over 12%.
It is known that Russia withdrew its U.S. bonds from custody of the Fed after the Crimea invasion, and has either been selling or could sell at any time. It will no doubt try again to persuade other countries to join in undermining the U.S. bond market and replacing the dollar as the mainstay of world trade.
Under these circumstances, it should not be surprising that the Fed is today taking only baby steps to reduce its program of creating new money to buy U.S. bonds. This program is probably not just meant to revive the economy, which it has not done and cannot do. It is more likely designed as a desperate and in the long run counterproductive effort to finance the U.S. government and save today’s dollar dominated financial system.
I for one would like to go to the grocery store and pay “2000” prices for my groceries...and maybe a new car.
Who is going to produce that new car for you? Do you think the people working for that company are going to work for "2000" wages?
And how about existing mortgages? Would you have any interest in paying off a 2014 -- or even a "2000" -- mortgage if the home was appraised at what it was worth in 1980?
Do you think the people working for that company are going to work for “2000” wages?
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Most of us are working for less than we made in the 1970’s much less a mere 14 years ago when you factor in the FEDS inflation.. The deflation throughout much of the 1800’s led to shortlived currency/bank panics but the country grew enormously and hard work was rewarded UNLIKE TODAY.. deflation will hurt those that live on compound interest (banks) ... inflation doesn’t mean growth and deflation doesn’t mean contraction (in anything but dollar terms) in real goods or wealth... Jamie Dimon and Lloyd Blankfein can “do Gods work” from cellblock “A” ...
Palin to Bernanke: ‘Cease and Desist’
Here are snippets from Palin’s prepared remarks obtained by National Review Online:
I’m deeply concerned about the Federal Reserve’s plans to buy up anywhere from $600 billion to as much as $1 trillion of government securities. The technical term for it is “quantitative easing.” It means our government is pumping money into the banking system by buying up treasury bonds. And where, you may ask, are we getting the money to pay for all this? We’re printing it out of thin air.
The Fed hopes doing this may buy us a little temporary economic growth by supplying banks with extra cash which they could then lend out to businesses. But it’s far from certain this will even work. After all, the problem isn’t that banks don’t have enough cash on hand – it’s that they don’t want to lend it out, because they don’t trust the current economic climate.
And if it doesn’t work, what do we do then? Print even more money? What’s the end game here? Where will all this money printing on an unprecedented scale take us? Do we have any guarantees that QE2 won’t be followed by QE3, 4, and 5, until eventually – inevitably – no one will want to buy our debt anymore? What happens if the Fed becomes not just the buyer of last resort, but the buyer of only resort?
All this pump priming will come at a serious price. And I mean that literally: everyone who ever goes out shopping for groceries knows that prices have risen significantly over the past year or so. Pump priming would push them even higher. And it’s not just groceries. Oil recently hit a six month high, at more than $87 a barrel. The weak dollar – a direct result of the Fed’s decision to dump more dollars onto the market – is pushing oil prices upwards. That’s like an extra tax on earnings. And the worst part of it: because the Obama White House refuses to open up our offshore and onshore oil reserves for exploration, most of that money will go directly to foreign regimes who don’t have America’s best interests at heart.
We shouldn’t be playing around with inflation. It’s not for nothing Reagan called it “as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man.” The Fed’s pump priming addiction has got our small businesses running scared, and our allies worried. The German finance minister called the Fed’s proposals “clueless.” When Germany, a country that knows a thing or two about the dangers of inflation, warns us to think again, maybe it’s time for Chairman Bernanke to cease and desist. We don’t want temporary, artificial economic growth bought at the expense of permanently higher inflation which will erode the value of our incomes and our savings. We want a stable dollar combined with real economic reform. It’s the only way we can get our economy back on the right track.
An economy -- defined as the sum total of all products and services it produces -- grows over time through one or both of the following: (1) growth in population, and (2) growth in productivity. Our population is stagnant, to the point where we feel a need to maintain open borders just to replace those who retire and die and provide a nominal level of economic growth. Productivity growth has driven much of our economic growth over the last 35 years, but I'm not sure how meaningful this will be anymore now that we've reached the point where our capacity to produce things far exceeds our ability to consume them.
BFL
What about the role of derivatives?
http://en.wikipedia.org/wiki/Hjalmar_Schacht
In August 1934 Hitler appointed Schacht as Germany’s Minister of Economics. Schacht supported public-works programs, most notably the construction of autobahnen (highways) to attempt to alleviate unemployment – policies which had been instituted in Germany by von Schleicher’s government in late 1932, and had in turn influenced Roosevelt’s policies. He also introduced the “New Plan”, Germany’s attempt to achieve economic “autarky”, in September 1934. Germany had accrued a massive foreign currency deficit during the Great Depression, which continued into the early years of the Third Reich. Schacht negotiated several trade agreements with countries in South America and southeastern Europe, under which Germany would continue to receive raw materials, but would pay in Reichsmarks. This ensured that the deficit would not get any worse, while allowing the German government to deal with the gap which had already developed. Schacht also found an innovative solution to the problem of the government deficit by using mefo bills. He was appointed General Plenipotentiary for the War Economy in May 1934[9] and was awarded honorary membership in the NSDAP and the Golden Swastika in January 1937.
Even worse, although derivatives aim to hedge risks as to specific financial positions, they were written in excess and lacked effective management, transparency, and regulatory oversight. This wave of imprudent derivative lending and associated credit guarantees. This created systemic risk by linking major financial players in complicated and obscure ways.
As the 2008 crisis unfolded, it quickly led to a chain reaction of threatened defaults as derivative credit guarantees were called. This began to cause the entire financial system to seize up as major financial institutions began to collapse for lack of liquidity and for lack of trust between buyers and lenders.
As it was, under Bernanke, the US Treasury, the Fed, and allied central banks and governments pumped out emergency liquidity. Asset values mostly recovered, the immediate crisis passed, and the economy of the US and the world was spared a recurrence of the Great Depression.
Unfortunately, the continued pumping out of liquidity -- the so called "quantitative easing" -- has come to be so accepted and relied on by the markets that it has led to distortions. Even worse, with rare exceptions, the US and other major governments have avoided the tax, spending, and regulatory cuts that are essential to full economic recovery. Without such structural reforms, the result is chronically high unemployment, low rates of economic growth, and diminished opportunities -- but with the world's bankers doing much better.
My idiosyncratic and populist streaks combine in that, unlike so many conservatives, I would fiercely attack Obama and the Democrats for protecting Wall Street and shafting Main Street and working people. Instead, so many conservatives seem to prefer to bash the Fed and pine for the gold standard, showing a lack of knowledge of modern economics and littlse sense of how to exploit an adversary's political weaknesses.
Of course, if the Feds can't stand the bust/deflation, they shouldn't condone the bubble/inflation.....
A true shame that Palin has been denigrated as she had.
It’s bad enough that they’re creating money out of thin air. It’s even worse that we, the taxpayer have to pay it back. Can we create our federal tax payments out of thin air, too?
The mere fact that bankers may require "emergency liquidity" indicates a serious flaw in the banking system that should be fixed, not papered-over with a government agency to save their sorry butts by cheapening the currency.
Any other business goes bankrupt. Why do we so revere the precious banks? I still believe the motives for the Fed's founding were ill-considered and devious.
Such a condition would be too subjective in my opinion and subject to politics and cronyism [but I repeat myself]. There should be no "emergency liquidity". The bank should declare bankruptcy as would any other business.
Your views on the failure to take advantage of a political opponent's weakness certainly did not seem idiosyncratic to me. I do not believe the Old New Left, would have succeeded in becoming such a clear and present danger to liberty without an incompetent opposition.
Thanks again.
Thank you.
For decades, emergency liquidity through the FDIC has been the norm in US commercial bank failures. The core of the 2008 crisis though involved Wall Street investment banks that were not chartered as commercial banks, so the policy innovation was in providing emergency liquidity based not on a system of deposit insurance but on Wall Street's systemic importance and to prevent failures of insurers and pension and investment fund in the US and Europe.
Over the last decade, I have gradually come to the opinion that our money should be inviolable. That is, no politician may have the ability to debauch it for any reason.
Banks must stand on their own and suffer bankruptcy [with all its attendant negative effects on the depositors] just as any other business.
Only the market may influence its purchasing power.
The debauching of the money that you refer to is the Fed policy of "quantitative easing" in which the Fed buys bonds in the market in return for cash, with the sellers of the bonds then having additional cash to spend. When this cash is new money created by the Fed, it is a net addition to the stock of money in the economy.
I surmise though that your fundamental point is that since we are not on the gold standard and the dollar is not otherwise based on some other valuable commodity, the dollar is already "fiat money" and thoroughly debauched.
We disagree in that I do not see the gold standard as viable today for two reasons: (1) an essential premise -- international control of transfers and accumulations of gold -- is implausible without some sort of powerful global political authority; and (2), most of the world's mineable new gold is in countries that are corrupt and unstable (South Africa) or corrupt and unfriendly (Russia).
As for letting banks stand or fall based solely on the market and putting their depositors at risk, it would make the financial system fragile and unstable in a crisis. In the worst case, the result is the creation of a large class of victims among the ordinary public, thus building a mass sense of grievance and bringing discredit on the entire financial and political system.
That is what happened during the Great Depression -- and the Left never had a greater aid to their drive for power. I suggest that risking that again would be unwise in the extreme.
I understand your point. When the classical gold standard was still in effect, though, there was no need for a global authority. Most everyone agreed that it was the best system possible and honored its obligations.
(2),and most of the world's mineable new gold is in countries that are corrupt and unstable (South Africa) or corrupt and unfriendly (Russia).
That doesn't matter. The amount of gold the people of a particular country own only serves to control the pyramiding of paper money from it. One gram of gold is enough to underpin a stable currency for an entire country if its leaders are committed to it.
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