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Source link: http://archive.mises.org/9379/the-insolvency-of-the-fed/

The Insolvency of the Fed

February 5, 2009 by

During the current crisis, financial systems all over the world are increasingly struggling, and the end of the fiat money experiment seems closer. The Federal Reserve System has used up much of its “ammunition” for monetary interventions in an attempt to keep the experiment going, lowering its target interest rate almost to zero. Other central banks are also quickly approaching the “zero limit” for interest rates. FULL ARTICLE by Philipp Bagus and Markus H. Schiml


(8?» February 5, 2009 at 10:53 am

This morning on CNBC, I believe I heard Steve Liesman talking about the fed leveraging their balance sheet 1000 times in order to fund “the bailout.” Never mind that over-leveraged debt is the very disease they are pretending to fight.

I’m starting to think that hyper-inflation is too tame a word to describe what’s coming. This is going to become the black hole that swallowed the world.

Meanwhile, Jim Sinclair believes that gold will indeed be used to rescue the Fed, or more specifically, their obligation known as the dollar, at some point. First though, they’re gonna stuff their balance sheet full of every deed/title/IOU/claim on real property that they can get their hands on.

Then it all implodes, and the new owners in DC swoop in repeating their time honored mantra, “we’re from the government and we’re here to help,” along with “we had to do something!”

Of course, “something” is never the right thing. Only fools would want to live in such a place.

N. Joseph Potts February 5, 2009 at 11:08 am

At the (coming soon) end of this process, I think I see the government owning the means of production.

Oops – I mean, the PEOPLE owning the means of production. Sorry about that, Comrades.

Well, maybe we can at least avoid all the shooting that accompanied a similar takeover in Russia 90 years ago.

David Spellman February 5, 2009 at 11:29 am

If we simply accept that some people would like to see a totalitarian state, then using the Fed as a dumping ground for everything imaginable works fine. In fact, we may find that hordes of critics of every stripe suddenly join our chorus of denunciation of the Fed.

Assaulting the Fed with torches and pitchforks would be the perfect entre act for nationalization of every business in an effort to save us from the false gods of capitalism. What an irony if the Fed was crucified to atone for the sins of the “Free Market” and Fascism were enthroned in the Holy of Holies.

Should we gloat that the Fed may be on its death bed? It may be that powers that be have seen the future and decided that it is necessary for one institution to die for the people. The devil we know may soon be replaced by utter darkness.

I doubt it. Even though every fiat currency has failed, life has always gone on. Civilization ebbs and flows and we will still make a living even as peasants. The immutable laws of economics will still provide for those who obey at the micro scale even if institutions fail at the macro scale. Disaster is fun to watch, but don’t try it in your personal life.

I Hate Taxes February 5, 2009 at 11:37 am

N. Joseph Potts,

I see the government owning THE PEOPLE, LOL !

You are the property of the federal government, crime does not pay !

I Hate Taxes February 5, 2009 at 11:53 am

I guess the two most abundant elements in the universe are Hydrogen and Stupidity !

A long time ago I had lost all faith in God and religion and I became an atheist.

Now, with the way the government and the people are handling this crisis, I have lost all faith in mankind. I am now officially an atheist misanthropist.

Egosumabbas February 5, 2009 at 12:24 pm

@I Hate Taxes

“I have lost all faith in mankind. I am now officially an atheist misanthropist.”

Now and forever I have this image of you terrorizing The Dude with a ferret while chanting “Ya, ve believe in nahting!”

In all seriousness this was an excellent article digging through what the Federal Reserve does on a day to day basis, which is sadly overlooked even in the “best” economics news (WSJ, The Economist).

I Hate Taxes February 5, 2009 at 12:28 pm

“”Ya, ve believe in nahting!”"

And your point is ???

You are an example of what I said earlier about hydrogen and stupidty.

Egosumabbas February 5, 2009 at 12:36 pm

@I Hate Taxes:

Obviously my reference to The Big Lebowski flew right over your head.

I Hate Taxes February 5, 2009 at 12:42 pm


“Obviously my reference to The Big Lebowski flew right over your head.”

Funny that you talk about MY head, given you don’t have one yourself.

Mike February 5, 2009 at 3:34 pm

“Funny that you talk about MY head, given you don’t have one yourself.”

What are you, seven?

john February 5, 2009 at 5:55 pm

From the third paragraph from the end ” …. by monetizing government debt in another blow to the value of the currency.”

How would monetizing government debt happen? What actions would the Fed take? Is this simply another way of saying borrowing?

I Hate Taxes February 5, 2009 at 7:16 pm


“What are you, seven?”

Why ? Are you jealous about me being older than you ?

Joshua Park February 5, 2009 at 7:18 pm

Reading this article, I felt like I was in the future with a microscope in history, examining the point that the world’s currency collapsed. That’s a neat feeling. It’s also like watching a building sway in an earthquake.

john, I think “monetizing government debt” means that, say, we owe 11 trillion dollars, so the Treasury prints $11T and uses it to pay off our debtors. Essentially, the debt gets passed on to everyone through inflation of the currency.

IMHO: I might also add to any people who have lost faith that God started with a direct theocracy, which the people (Israel) eventually rejected. Then He implemented a system of non-governmental judges to settle disputes, which the people eventually rejected. They then whined enough to get God to say, “Hokay, fine! Have a king, you brats!” (paraphrased) Mmmm.. and we’ve had a bunch of trouble from it, yeah? It went from freedom, to courts, to the State. So… don’t blame God. We screw ourselves.

Mike Sproul February 6, 2009 at 9:20 am

Philipp and Markus:

“Since August 15, 1971 the US dollar has been an irredeemable paper currency. Every irredeemable paper currency in history has failed. Yet, the experiment of the US dollar and the rest of the fiat paper world continues.”

“These assets back the liability side of the balance sheet, which mainly represents the monetary base of the dollar. The assets of the Fed, thereby, hold up the value of the dollar.”

If the fed’s assets back the dollar, then the dollar is not fiat money. You are correct to say that the fed’s assets back the dollar, but you are mistaken in calling the dollar fiat money. In 1971, the Fed suspended one kind of convertibility: instant convertibility into gold at the customer’s option. The Fed still maintains many other kinds of convertibility, one example being that the Fed stands ready to use its bonds to buy back its dollars. The real bills doctrine makes this clear.

Kalani February 6, 2009 at 12:07 pm

The one thing I noticed flawed in this article was the revaluation of gold section. The Fed lends gold to gold banks at 1% (I think) and then they sell the gold. A revaluation seems as though it would instantly bust the ‘gold banks’ since they already sold the gold that they have on loan. Which would more or less expose the fraud the fed and these banks were comitting

@Texas .. Please try to be civil, it makes reading the blog comments much more pleasing.

Joe Stoutenburg February 6, 2009 at 12:10 pm

Mike Sproul:

You’ve made headway with me regarding your monetary views. Yet I still continue to get the sense that you defend the Fed. Can you clarify?

I am open to RBD but not to monopolies over currency. Yes, the Fed has assets to back its currency. But it is clear that the quality of those assets has gone through a dramatic change recently (and to the worse, in most peoples’ opinion). In a free market of banking, institutions acting under RBD may be subject to bank runs. This may have the effect of keeping them honest. The Fed’s grasp over banking assures that instability has to reach a society wide level before bank runs are seen. In the meantime, havoc is wrecked in the overall economy.

I can see your case for RBD as a theory. But can you possibly defend the Fed? Your assertions fall flat on many people, I think, because of this apparent defense.

Mike Sproul February 6, 2009 at 1:36 pm

Joe Stoutenburg:

I do not favor government monopoly of the issue of money. But the real bills doctrine says only that the value of money issued by some institution is equal to the value of the assets held by that institution as backing for that money. This would be true for both a government bank and a private bank, so a government bank ‘works’ in that sense. But it will work less efficiently than a free banking system of competitive money issue, since free banking brings the obvious advantages of the invisible hand to bear on the issue of money.

I agree that the Fed’s recent asset swaps amounted to trading valuable bonds for less valuable mortgages. The resulting loss of backing creates pressure for higher prices.

Any bank, public or private, runs the risk of becoming insolvent. In this case the bank can still avoid a run by either suspending convertibility or devaluing its money–both of which, while unfortunate, are preferable to a bank run.

The Fed’s grasp over banking, together with other government regulations, does indeed paper-over the problem of insolvent banks and makes the ultimate insolvency even worse. But even in that case, a bank run is still avoidable by suspending or devaluing.

As I remember, the only ‘defense’ of the Fed that I have ever offered is to refute the claim that the Fed is a counterfeiter. The Fed puts its name on its dollars, holds assets as backing for them, and stands ready to use those assets to buy back those dollars. No counterfeiter does that.

hjmaiere February 6, 2009 at 4:12 pm

Mike Sproul writes: “If the fed’s assets back the dollar, then the dollar is not fiat money.”

We are forced by the government to accept Fed Magic Tokens as payment of debt. We are forced to come up with them at tax time or face the confiscation of our property. The government works very hard to make sure no one gets away with using anything other than Fed Magic Tokens as money. (See the sad case of e-gold, for example.) Even the entire section of the world controlled by the U.S. empire is forced to use Fed Magic Tokens when purchasing oil.

The idea that Fed Magic Tokens , i.e. dollars, are not fiat money is completely absurd. They are ultimately backed by the threat of force, and nothing else. Period.

Insolvency April 18, 2010 at 10:48 pm

dollar is which type of money which burden is very much

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