What Goes Straight Up?
Graphs of economic statistics usually meander across the page like a walk through the forest; others will wiggle up and down with the business cycle like an EKG machine. Only recently have we been confronted with statistics that shoot up vertically, like a lie on a polygraph test.
Statistics such as the monetary base and the money supply have gone vertical due to the Federal Reserve’s trillion dollar bailouts of big financial institutions. Essentially they have taken possession of some of the banks’ assets in exchange for adding reserves to the banks’ accounts at the Federal Reserve. This is the easy part. All they have to do is to make a bookkeeping entry in the account of the banks and money is created out of thin air.
Monetary inflation is the source of most of our economic problems, but the one people are most familiar with is price inflation. What happens when all that new money makes its way from bank reserves to new loans as intended? Eventually that loaned money makes it into paychecks and then into the markets for gasoline and milk, and this means higher prices for all.
The Federal Reserve has said that it understands the importance of reversing policy and withdrawing excess liquidity to prevent price inflation. In Congressional testimony Federal Reserve Chairman Ben Bernanke said that “We understand the necessity of winding this down at the proper moment so we will not have an inflation problem at the other side.”
Easier Said Than Done
Anyone can push the monetary inflation button and interest rates will fall and the politicians will jump for joy. The hard part is reversing this policy. It will involve the Federal Reserve selling assets like government bonds and asset-backed securities back into the financial markets. This would soak up liquidity, but it would also reduce bank reserves, reduce credit availability and loans, and increase interest rates.
If they start the reversal before the economy recovers, they may be able to beat down price inflation in the economy, but what will the politicians and pundits say to higher interest rates and restricted credit while unemployment is still rising? If they wait until the economy has recovered, most experts think it will be too late to prevent the emergence of higher price inflation in the future.
Of course a better question might be–how often does the Federal Reserve, or any central bank, reduce the money supply? Long term statistics of the money supply show that central banks are clearly in the business of inflating the money supply and debasing or devaluing our money. This way they make money, banks make money, and politicians get to pay the $11+ trillion national debt with depreciating paper money.
This is why economists from the Austrian school have always emphasized the importance of the gold standard where gold and silver serve as money. When money is a tangible thing like a silver dollar and banks are required to hold checkable deposits on reserve, a central bank could not have caused the housing bubble that led to the multi-trillion dollar bailout/stimulus policy. Gold secures the value of money and prevents reckless government spending.
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Keep it up, Mark! This is so simple it is like restating the obvious, “The sky is blue!†to those in the current land of Oz where the sky is green. The Wizard of Oz (Oz the Great and Terrible) passed out green glasses to all his subjects to make things look more lush than they were. (Go find/ read the original The Wonderful Wizard of Oz *book* by L. Frank Baum (1900); it is amazing how this parallels the larger than life wizard in office today.)
So, let’s say a Monopoly board game were underway with six players. The banker gets a secret infusion of a doubled cash reserve out of thin air, but only one or two of the six players in the game (those favored) really knows or understands how to manipulate that… what would be the outcome of the game? What would happen to property values? Is it fair? Welcome to the USA! And Lord help us.
Keith, I think you’re on to something. Could a computer game (perhaps even online) be created that could model the economy and allow the player to be the FED?… based on austrian principles that is.
Not only could this be a profitable commercial enterprise, but it would be highly educational…perhaps a copy could be sent to every congressman
Any of you economists out there up to the challenge? I actually know some puter game producers/owners. I could put you in touch…
Mark–and you other guys:
I hate to tell you this (no–I really do!) but you’re wrong.
If gold does those things, they just take it away from you. That’s what they did in the past. What makes you think they wouldn’t do the very same again?
I’m here to tell you that we don’t have a monetary problem soluble by monetary theory or policy.
We have a government problem. Anyone with ideas about what to about one of those?
Someone from GATA wrote to the IRS and asked about the possibility of gold in private hands being confiscated again in future. The IRS reply: “We reserve the right to confiscate everything.” (Reported by Catherine Austin Fitts in a Solari Report, Feb, 2009).
Like many, I’m interested in how the FED and other bankers can “soak up” liquidity.
The FED selling government bonds they had bought earlier (about $300billion from what I remember) to soak up excess liquidity sounds hard to me. The global central banks injected a couple trillion so far.
I’m sure most of the injection has evaporated, but can $300billion of bonds back on the market really do that? Don’t the buyers of the bonds consider other securities just keep bonds competitive? And can’t bond prices fall to the point where it doesn’t soak up all the liquidity?
Thanks
To understand how the Fed can sell bonds to reduce the money supply you must first understand that the Fed printed the money it purchased them with at the start. And by “printed” I mean changed a few digits in a computer system somewhere. And when the bond is sold, a check pointing to a digital account of USD somewhere will be sent to the Fed, at which point the digits zero out and return to the void from whence they came. To understand it better, read a book called “The Creature from Jekyll Island.”
Note back to Gene Berman above (if that’s ok): You may very well be right, and your point is well taken. But let’s remember the mission and point of this web site and institute is to educate the public as to exactly why and how there is a serious economic and government problem.
We are pretty well aware of the huge forces at work. However…
The header on this blog is ‘Do not give into evil, but proceed ever more boldly against it.’ Besides prayer, the best way to do that is to gently but intelligently educate the public as to how we got here, what the technical problem is, then let them form their own conclusions. Maybe, if democracy is not yet a total illusion, government can be changed. Thanks for chiming in.
All this is true, so it has been written!
Every Grassroot, needy Government Depended program spends money without much return on the dollar….Federal has future blood stained paper money. “HUSH”money! Yea, that’s what they call it. Keep up the great work for freedom!
Everyone who post or reads a posting carries a potent tool and a responsible task to turn public support forward into a freedom tool or into a public outhouse.
Turning clock’s back is hard enough twice a year….1920 is a stretch.
But, Backing all Federal notes with real assets; makes more sense then. Printing more money! Power in it’s purest form is GREED! Both side want more Government power! It makes no differance who’s in the Drivers seat. i’m letting you know i’m going tonight to listen to my congressman speak of Loans and Grants for maryland projects.
“a lesson in funding without return on my investment that will be back for more funding and continued dependance on Government Money…”
the key is more bean’s in the broth. Makes a good stink!
How do you steer a congressman who’s vote purchased with lobby money, buys a sytmlus package into which the money flows back to the lobbist. So, in print more projects needing more funding… that’s thier stand on accepting Federal Funding….. A Deeper Hole!
How do you fall in a hole? Yes, You look over the edge! Thanks
You may be right in the larger sense, but the analysis here is somewhat lacking.
“What happens when all that new money makes its way from bank reserves to new loans as intended? Eventually that loaned money makes it into paychecks and then into the markets for gasoline and milk, and this means higher prices for all.”
Theoretically, yes. But the current situation has a few wrinkles that confound the theory. For instance, it is very unlikely that wages will be rising in the near future. Unemployment is high and rising, and the recovery is likely to be long and shallow. Furthermore, this recession has accelerated some of the structural weaknesses in the US economy, without creating many opportunities. No, wages are likely to go down or stagnate for some time.
You also didn’t mention deflation once, which is ridiculous.
On a somewhat related note, are any of the LvMI boffins watching the bond market lately? If you consult sources other than the happy-sappy MSM, this is causing a little bit of excitement right now, e.g.
It Is Failing: ALL OF IT
“The Bond Market has had it with the games, and despite a “good” auction today signaled its disgust with the lies, the unending deficits and both bonds and stocks sold off at the same time“
“… this is the start of the bond market dislocation that I have written about for the last two years. It may stop or it may accelerate, but this much is certain – even if it stops here the dream of a 4% mortgage that Bernanke has hawked as the “key” to housing stabilization is not going to happen.”
“To understand it better, read a book called “The Creature from Jekyll Island.”
Wow. Back in 1999, I read a WSJ op-ed written by Jack Kemp advocating a Fed gold-targeting policy. Now, Kemp was a childhood hero of mine (I’m from Buffalo) and I was just becoming interested in economic issues. It annoyed me to no end that I couldn’t understand why what he was proposing was supposed to work and I vowed to educate myself on economics.
I went to the local Borders’ “Economy” section (pitiful) and picked at random a book titled ‘The Creature From Jekyll Island’. It was riveting. From there I read Thomas Sowell’s ‘Basic Economics’; graduated from that to Adam Smith — and, lo these many years later, am hip-deep in Mises, Hayek, Bohm-Bayerk, etc..
Really, you could do worse than the “Creature From Jekyll Island”.
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