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I just wanted to thank you for this site, I've been a lurker for a few years and your economic input was missed while you were away. We need reasonable people in these times and for that I thank you. Accountability in everything from politics to the media is lacking and I'm absolutely tired of both of them. They are playing the American people like a fiddle, but hey, if we're dumb enough to believe the rhetoric I guess we'll get what we deserve.

Thank you for this. I can reference your site and your explanation when I get into a discusssion about why the Fed it important and what they actually do.

I'm not saying i don't believe you, but how can the fed "unprint" money that has been used to buy tangible assets, such as treasuries or mortgages? If inflation suddenly takes off, the the fed calls back these dollars, won't these assets crash at a very inopportune time? Also, are there any other problems with deflations aside from increased loan defaults?

David,

The Fed simply buys and sells government securities in the open market, and there is no shortage of buyers in the market for US Treasury securities. To "unprint" money, it merely becomes a seller. Whether or not inflation takes off is determined by the market price it can receive for the securities -- which, so far, are considered the safest financial asset in the world.

Regarding deflation: yes, big problems. Aside from the fact that it cheats borrowers (who must pay back loans in dollars of higher value than they'd bargained for), it can easily lead to a downward spiral of defaults-bankruptcies-layoffs-unemployment, and the Fed has almost no weapons to fight against it once it has reduced interest rates to zero. Deflationary spirals are arguably more dangerous than unanticipated inflation for that reason. (Both conditions have led to the overthrow of governments in the past.)

This isn't Money-printing for dummies, its just for dummies. Haha no offense. The Federal Reserve was created as a way to enslave the U.S. government with debt. The truth is that the U.S. government only goes into debt if it chooses to. Theoretically, one day that U.S. government could simply decide to print as many U.S. dollars as it wants and pay off all government debts. But under the current system that is not allowed. You see, today the U.S. government does not issue any money. The Federal Reserve issues all money. That is why they are called "Federal Reserve notes". Under the current regime, whenever the U.S. government wants more currency to be created it has to go into more debt. The Federal Reserve creates money out of thin air. This fact comes out in congressional hearings and yet the American people just don't seem to get too upset about it. During a recent Joint Economic Committee hearing on Capital Hill, U.S. Representative Ron Paul directly confronted Federal Reserve Chairman Ben Bernanke about this 1.3 trillion dollars. As Ron Paul described how this 1.3 trillion was just created out of thin air, all Bernanke could do was nod his head. Why? Because it was the truth. The huge predator megabanks that now dominate the U.S. banking system use the Federal Reserve as a tool to make money. One of the ways they do this is called the U.S. Treasury carry trade. What happens is that the Federal Reserve lends huge amounts of money to the megabanks for next to nothing, and then these megabanks use all that cash to buy U.S. government debt. This little "trick" helped enable four of the biggest U.S. banks (Goldman Sachs, JPMorgan Chase, Bank of America and Citigroup) to have a "perfect quarter" with zero days of trading losses during the first quarter of 2010. Wouldn't you like to have a perfect batting average? The Federal Reserve devalues our currency. Since the Federal Reserve was created in 1913, the U.S. dollar has lost 96 percent of its purchasing power. The truth is that just a two percent inflation rate will wipe out half of your purchasing power within a single generation. You can clearly see that the beginning of the rapid rise of inflation in the United States coincided with the creation of the Federal Reserve. The Federal Reserve manipulates the U.S. economy by setting national interest rates. By keeping rates high or low, the Federal Reserve has the power to create economic growth or to destroy it. They have the power to inflate massive bubbles and to pop them. Most Americans give way too much credit and blame to presidents like Bush or Obama for how the economy is doing. The truth is that they really don't have that much control over the economy compared to the Federal Reserve. The Federal Reserve also controls the national money supply. They can pump trillions into the economy or pull trillions out without being accountable to anyone. This can have disastrous consequences. For example, after the U.S. stock market crash of 1929, the Federal Reserve continued to contract the money supply. Many analysts believe that this was one of the key things that precipitated the Great Depression. The Federal Reserve is not part of the U.S. government. The truth is that the Federal Reserve is about as "federal" as Federal Express is. In defending itself against a Bloomberg request for information under the Freedom of Information Act, the Federal Reserve objected by declaring that it was "not an agency" of the U.S. government and therefore it was not subject to the Freedom of Information Act. It is kind of funny how Fed officials are always talking about how important their "independence" is, but whenever anyone starts criticizing them for being private they start stressing their ties with the government.The Federal Reserve has become far, far too powerful. The reality is that those running the Federal Reserve are not elected and yet have an enormous amount of control. In fact, Ron Paul recently told MSNBC that he believes that the Federal Reserve is more powerful than Congress.....

"The regulations should be on the Federal Reserve. We should have transparency of the Federal Reserve. They can create trillions of dollars to bail out their friends, and we don’t even have any transparency of this. They’re more powerful than the Congress." The Federal Reserve is dominated by Wall Street and the New York banks. The New York representative is the only permanent member of the Federal Open Market Committee, while other regional banks rotate in 2 and 3 year intervals. The former head of the New York Fed, Timothy Geithner, is now U.S. Treasury Secretary. The truth is that the Federal Reserve Bank of New York has always been the most important of the regional Fed banks by far, and in turn the Federal Reserve Bank of New York has always been dominated by Wall Street and the major New York banks. Federal Reserve Chairman Ben Bernanke wants to completely eliminate minimum reserve requirements for banks. Fractional reserve banking has always been a way that the bankers have conned the public, but now Bernanke wants to get rid of the pretense of "reserves" altogether.It is almost too bizarre to believe, The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system. The Federal Reserve is not accountable to anyone. The Federal Reserve has never undergone a true comprehensive audit since it was created back in 1913. Ron Paul’s proposal to audit the Federal Reserve, which had previously been co-sponsored by 320 members of the U.S. House of Representatives, ultimately failed by a vote of 229-198.

But shouldn't the American people be able to see what is going on inside the Federal Reserve?

Shouldn't we have some way to keep them accountable?

Jason,

Well *of course* the Fed has the power to create money out of "thin air"; that is the definition of fiat money. The Fed also has the power to make money vanish back into "thin air" -- which is the point of my article. For some reason, Ron Paul (and you?) can only see the danger of inflation, never the danger of deflation; that stance ignores half of the problem.

I'd rather the Fed keep the power to create money out of thin air, than relinquish that power to the Russian and South African gold mine owners. Sounds like you'd rather turn that power over to the foreigners -- in which case you and I will simply have to agree to disagree about who should control the USA's monetary policy.

Sounds like you've read one too many Fed-conspiracy-theory books.

Too bad the fed wasn't able to do anything about past inflation in the housing market or hasn't been able to do anything about the current deflation taking place in the housing market. Do we expect the fed to do any better in the future?

Tom,

Fiscal policy (subsidiies of the "ownership" society) pumped up the housing bubble far more than monetary policy. The mortgage interest deduction, for example, pumped up the bubble for decades.

Whether monetary policy should be employed not only for consumer prices but also for asset bubbles is an ongoing debate. To date, the Fed has resisted adding asset bubble control to its objectives.

Good to see you back on the air, Steve. Hope it was a pleasant respite.

Your analysis in this post is well-taken, but I'm curious...

At what point in what looks to be a never-ending cycle of QE1, QE2, QE3, etc., does this practice (a) run out of efficacy and (b) become a danger unto itself? And how will we know when we're approaching those points?

Just as Keynesian stimulus is predicated on the government's ability to continue borrowing, the money-printing tactic seems like it should ultimately reach some hard limit as well.

My own take is that monetary policy has run out of bullets; the only thing left for government to do is in fiscal policy, but the leadership void in DC will ensure continued stalemate on that front -- which might be a relative bright spot compared with the anti-growth possibilities of tax-rate increases or big cuts in defense and infrastructure "spending" (i.e., investing). In short, it's difficult to maintain optimism in the current political climate.

Steve,

I have no issue (or knowledge to disagree) with your charactization of the Fed's money printing and retraction process. However, I wonder if the technically accurate statements really deal with the reason that a lot of average citizens and economists are uncomfortable with the enormous power being wielded by the Fed. I do not really doubt their good intentions, but wonder whether any one person or small group of people - however smart - is capable of pulling the puppet strings so adroitly as the current situation will require.

Most people relate to debt and inflation as they experience those issues in their own lives. It is not a theoretical exercise, but one that has real consequences. To many observers, the Fed is buying treasuries and suppressing interest rates to attempt to keep the Federal Government solvent as it continues to borrow and spend more and more funds recklessly and with little positive result. This may be very well intentioned, but has the effect of helping to drive us further and further down a very dangerous road. It also has the consequence of ruining many people's investment portfolios, presumably in order to delay the reckoning for that debt incursion. Hopefully, Mr. Bernake will be a wizard and be able to walk the tightrope - but it will be quite a trick, and the consequences for failure will be experienced by all of us.

As to politicians and journalists, surely you jest in thinking that many of them understand the issues much less are able and willing to explain them to the public.

Finally, it is true that the Fed is not political in the sense that they are not elected. But, the timing of events and the appointment power of the President brings their status as above politics into some question.

You wrote "To date, the Fed has resisted adding asset bubble control to its objectives."

Oh really. Then what's up with this headline:

Wall Street Aristocracy Got $1.2 Trillion From Fed

Was this not an attempt to manage a deflating bubble. All these banks made tremendously poor calculations. The executives made tons of money based on these bad decisions. Did they suffer any meaningful repercussions. NO. The Fed comes along and bails them out. In the future the bankers know that their profits are private but their debts are the taxpayers. We can expect more of the same.

What was that remark that Greenspan said? Something about "irrational exuberance." Wasn't that an attempt to control an asset bubble?

Jerry,

The Fed has enormous power, that's true. But whichever entity controls the U.S. Dollar supply to the world will yield enourmous power, and that is true of whatever the supposed alternative to the Fed happens to be (...although there really isn't a viable one). The anti-Fed advocates of the gold standard alternative have never explained why we should transfer that power to foreign gold mine owners, mostly governments, who (by the way) would never dream of putting the gold back into the ground ("unmining" it) in the event of a sudden oversupply due to a new discovery or technological breakthrough. Nor would they suddenly increase the supply to avoid stifling real growth potential that exceeded the annual increase in gold due to mining.

The best we can do, based on what I know, is to improve the Fed's results, perhaps by shifting to the Taylor rule or the Mankiw rule to make the Fed's moves more predictable and closer to automatic. The important point is that both inflation and deflation need to be prevented by whatever system we choose. If there's a viable non-Fed alternative, I'd like to take a look at it. (I've been looking for years and haven't found one yet.)

Tom,

The Fed debate is mostly about preventing bubbles from inflating in the first place (with something other than rhetoric). And, although it was absolutely necessary to prop up the banking system to prevent an economic collapse, it's a travesty that nobody went to jail. Privatized profits with socialized collapses do not make for a free market.

Liquidity is what Fed provides that has so far avoided a '2008 great depression!!'


First and foremost Welcome back home Steve. You are lone voice of reason and sanity in this 'bearish and tricky world of global finance.' This is great stuff and you have hit the nail on the head. ' Printing money is the Fed’s tool to fight deflation' or with few big failures a depression unseen and unprecedented.


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