Fed Reserve profits are the fastest growing revenue source for govt

Discussion in 'Economics' started by bond_trad3r, Feb 13, 2013.

  1. Ed Breen

    Ed Breen

    So what are talking about doing? Feeding a starving person? In the U.S.? Are they the ones without the cell phones? Or are we talking about trains to nowhere that will never pay for the cost? Or windmill farms that cost triple the price of nat gas and need nat gas back up anyway? Who do you think pays for all this nonsense? Where do you think money comes from? Where do jobs come from? Do you really think you can strip your real asset base to give money to the poor until they get a job? That is like burning your roof to keep your house warm. Don't you think you could help the truly needy without blame and asset destruction?
    #31     Mar 10, 2013
  2. You posts go over a lot issues that may be new to some. What you are saying is that money is created and that money goes to pay off the cost of printing money (interest)

    From there more money is needed so that interest in turn used to make more money. This cycle keeps the money out of the economy?

    If that is the case, I imagine that the interest payments would be increasing exponentially and the printing would need to keep up.

    This is important to know, as it means that printing cant stop.

    I have heard that inflation is contained in the bond market and it is a bubble that when it "explodes" will leak inflation in to the world.

    I understand that salaries would go up in inflation, but from what we see in hyper inflation stories is that salaries lag by a big margin.

    As for the collapse. I have this to say, the US is all over the world, it tells its enemies what to do and they comply dragging their feet.

    If they retaliate (like bartering,using gold ect) they die. Sentimate seems to be anti US but action is steady in the favour of the US.

    The us can do what they want, a collapse can only occur if there it is allowed to occur. They are not stupid, they are greedy. Every one prints, paying back debt is on no ones horizon. but that does not mean that there is nothing on their horizon.

    you mention that a test was done and something was learnt, what do you see as the next test? or, do you think this inflation can get out of the loop and do its deed?

    If the money is in a loop, that means debt is taken care of. old money is not going to pay off debt. But by not having to pay of the debt we are actually not taking old money away from the system that would normally be done.

    Is the act of not having to pay for some thing from out side the loop not the same as adding to out side the loop. would this not be inflationairy, or is it simply the steady inflation we see year after year and it is linear instead of exponential ?

    Farm land is good, but farm land WITH water running through it is said to be better.
    #32     Mar 11, 2013
  3. Ed Breen

    Ed Breen

    Traitor, you don't get what I am saying either. I am sure it is because I don't explain it well enough so, I appologize. 'Money' the way you think about it, is not what is important. Its assets that are important. Without assets there would be no money. We create credit based on assets and we trade credit as money. Everybody focuses on the money and they forget about the assets that give the money meaning, such as it is. To quote an old acquaintance, its like 'going to the diner and eating the menue.' When you focus on 'money' as the value issue you confuse the symbol with the thing.

    I have defined inflation many times in these threads, inflation is a process that can take place in an economy where credit markets are healthy and generally expanding. The process of inflation is defined by an accelerating flow of capital from fiancial assets into tangible collateral assets in the context of expanding leverage ratios on those caital assets. Inflaiton is a rapid expansion of credit creating the illusion of increased value in assets that underpin the expansion of credit. When the illusion of asset value is dispelled the credit buble collapses. Two things you need to take away from that: One, inflation is an expansion of credit out of pace with the real value of assets. Two, you can't have inflation if the credit market is not already expanding. The issue is one of 'velocity' when the engine is already running.

    What the continuing crises since 2008 shows is that the manipulation of base money supply and interest rates cannot of itself start an inflation becuase there is no transmission mechanism between the base money creattion and credit expansion. It is demonstrated that private credit expansion (when I say credit expansion in this context I mean private credit) is not started by supply of base money; it is driven by the fiscal context...it is demand pulled at the start.

    In contrast, the hyperinflation that you are concerned about, is not really inflation at all...it is a credit collapse, the consequence of Sovereign inolvency, the sovereign inability to access private credit markets. It is a monetary contraction where sovereign credit is destroyed and sovereign 'money' looses its function in trade. It is a deflationary event.
    #33     Mar 11, 2013

  4. I am sure the issue in my misunderstanding. Even the most basic of terms of a subject are usually oversimplified by those looking to make sense of things in a easy way.

    Manipulation of base money supply does not create inflation is an idea that hard to swallow. this suggests that if the USA prints trillion dollar bills and there are more of them then the 1$ bill prices will not go up.

    I imagine a homer in his blimp shooting money out the window to the masses.

    You seem to be saying that only an increase in credit can cause inflation. Not being totally confident on where or what backs up credit, I have trouble differentiating the idea of printing money versus creating credit.

    We create credit based on assets
    and we trade credit as money

    I guess we use credit to buy assets, so the act of buying a house means that in fact we are creating credit. So credit is based on value of assets.

    So increasing credit is done through increasing assets?

    Trading credit as money could mean paying off the credit?

    The parts seem to make sense but something is missing to tie things together in a way that a full model can be developed.
    #34     Mar 11, 2013
  5. Ed Breen

    Ed Breen

    Traitor, the Fed creates base money by recording a liability entry on its balance sheet, called "Dollars." The 'Dollar' is the non interest bearing demand credit of the United States. It is a debt instrument, the money is the liability of the Federal Reserve. It says right on the Dollar Bill, "Federal Reserve Note." Dollars are debt...that is not secured...it is an unsecured promisory note backed by "the full faith and credit of the United States.' The dollar is one of the continuum of debt instruments issued by the United States that viewed collectively make up the yield curve of United States credit instrument...Dollar is at Zero...rate used to go up materially as term went out...now more symbolically.

    If you can wrap your mind around that fact that the Dollar is the debt of the U.S. Government that we use as money, lets go back to the Fed creating 'money.'

    As stated, the Fed enters a liability on its balance sheet for Dollars, this is a key stroke event. The Fed then transfers that liability to the Treasury or other holders of Treasury debt, via primary dealers, in exchange for Treasury Bills, Notes, and or Bonds of longer maturity. The Treasury or the holders of Treasury Debt (Banks and Financial Institutions mostly), recieve the 'dollars' as an asset on thier balance sheets in exchange for the Treasury Debt (In the case of Treausry itself, it enters its debt as a liability of course...in a simple exchange the Fed created a liability and transfers it to Treasury in exchange for an asset and the Treasury creates a liabilty called a Treasury securuity and transfers it to the Fed as an asset.

    In any case the Fed trades non interest bearing liabilities for interst bearing assets at an increasing spread as it manages its portfolio out the yeild curve. Banks, Financial Institutions sell or refrain from buying (becasue Fed buys direct at auction) Treasury debt at a higher yield in exchange for dollar assets at a zero yield.

    Because there is insufficient demand for private debt the banks end up depositing the dollars acquired in their reserve accounts at the Fed. The 'money' that the Fed creates, the base money, does not really leave the Fed or the Government Banking system. What happens is that interest on government paper (and now government agency paper) that was held privately is being held by the Fed...so the income shifts from the private financial sector to the Fed...the Fed then takes the income and returns in to Treasury

    ....Now you tell me how much 'money' is being created and who is being benifitted.

    None of this 'new' money is going into private credit formation. There will be no serious inflation until it does. Make no mistake, the Fed has been trying to push this money into private credit formation but they have not been successful. Thier own studies show that the supply of money alone does not increase bank credit or general prices and that the demand for money is created on the fiscal side, not the monetary supply side.

    I know that seems hard to accept becuase you have been sold the idea that the quantity of base money determined the value of base money and that the value of base money is what drives inflation. However, the Quantity Theory of Money that was created in the 17th centuary when money was collateralzed by Gold does not function with regard to base money now that the base money is 'fiat,' uncollateralized, unsecured. Money only has value so long as the aggregate assets available to the sovereign to make good on the promise to pay are perceived to produce income sufficient to continue to pay the sovereign debts.
    #35     Mar 11, 2013
  6. It is not hard to understand because I have been sold an idea. If it were then I think by now we would have come to and agreement.
    #36     Mar 11, 2013
  7. Ed Breen

    Ed Breen

    Understand that the logic of the Quantity Theory of Money still works in a fiat context if you include private credit in your idea of money....then the money supply issues merge with the aggregate credit issues so, you have to look at the private credit aggregage and its rate of change along with notions of base money to understand the concept of 'money supply' in a fiat money economy.
    #37     Mar 11, 2013
  8. Ed Breen

    Ed Breen

    Traitor, Oldtime, and some others...I think Richard Fisher of the Dallas Federal Reserve called you guys, "schmucks' today. This is what he said in his speach:

    “The elemental Jewish commandment” in the working-class neighborhood where [Irving] Kristol grew up was: “Don’t be a schmuck. Don’t fall for fantastical notions that have nothing to do with the way people really are.”

    ...Confined as the Fed is at the “zero bound,” the only means of adding monetary fuel to the economy has been to purchase Treasury and MBS securities. When we buy something, we pay for it, putting money into the economy. That money—backed by an assurance that the FOMC will hold interest rates at zero and continue large-scale asset purchases for a prolonged period—should, theoretically, be put to use: a) by banks’ lending to consumers and to businesses that will expand employment, or b) by investors who, rediscounting valuations in the fixed-income and equity markets, will drive those markets higher in price, creating a “wealth effect.” This wealth effect should lead to further consumption as well as greater employment by businesses whose balance sheets have been reconfigured and enriched both by the cheapest leverage in American history and by booming prices for their stock.

    All these actions are in keeping with the dual mandate that the Federal Reserve was given by the Congress of the United States. It calls for us to operate independently both to maintain price stability and conduct policy in a way that engenders full employment. Given that inflation and, importantly, inflationary expectations are presently “contained,” it would seem theoretically compelling to pursue the policy that we have undertaken.

    But a not-so-funny thing has happened on the way to the reality forum. While bankers and other sources of credit have slowly but consistently liberalized their lending practices, borrowers have not been especially keen to put cheap and super-abundant credit to use in expanding payrolls to the degree the FOMC desires.

    It seems that Richar Fisher has figured out what I have been trying to explain to you guys...I wonder how long it will take a Princeton guy to get it.
    #38     Mar 11, 2013
  9. well Ed, In the long run I am sure you will be proven right (it's only math), and I will come out looking like a schmuck. But I only have a few years left to live.

    In that short time I would rather give someone something they need now (namely an income) and worry about how to pay for it later. Especially if you are going to loan me money practically for free.

    They'll come a time when they won't loan me money anymore, and hopefully by then, some of those income consumers will have become income producers.
    #39     Mar 12, 2013
  10. Ed Breen

    Ed Breen

    Really Oldtime, I am sorry you are resolved to die...but the sentiment you propose before you go is morally currupt and obviously stupid, as well as impractical.

    You suggest that you (and suppose by extension your government) will borrow money with the expectation that you will die and never pay it back and that you will use that money in the short timie you have to borrow it, to give it to people who have no income and then you hope that after you are dead and no longer able to borrow money that they will be able to fend for themselves.

    Did you think about that at all before you wrote it?

    What do you think makes someone a producer beyond your expression of hope? Is it magic? Does it come from worshipping plains flying overhead? is it revealed in a dream after years of eating food stamp cheetos, drinking subsidy beer, and watching soap operas to hone your employment skills?

    You propose to provide income to people without yourself being an employer who produces anything. You propose to steal money through fraud by borrowing the money with no intention to pay it back....and you think you have a moral basis for that?
    #40     Mar 12, 2013