Fed plotting how to achieve infinite money

[Gools]

The original story appears behind the pay wall of the Wall $treet Journal here:http://online.wsj.com/article/SB1207..._us_whats_news

A more complete version appears on GATA's website here: http://www.gata.org/node/6218

So the Fed is seeking ways to expand its balance sheet without causing the federal funds rate to drop.
...
The likeliest option, one the Fed and Treasury have discussed, is for the Treasury to issue more debt than it needs to fund government operations.

Treasury's principal constraint is the statutory limit debt. Treasury debt was $453 billion below the limit Monday. In the past, Congress always has responded to administration requests to raise the limit, sometimes only after political theatrics.

You get that?

The plan is to allow the Treasury to issue more debt than the statutory debt limit to be used by the FED to create a new class of debt instruments. They are trying to circumvent what little congressional oversight still exists on the issuance of money and spending limits!

The Fed would use the cash to purchase an offsetting amount of Treasurys in the open market; for legal reasons, it generally cannot buy them directly from Treasury.

It has never done so; the legality is unclear.

No Kidding!!!

Another possibility is seeking congressional approval to pay interest on banks' reserves immediately instead of waiting until a 2006 law permits that in 2011. If the Fed paid, say, 2% interest on reserves, banks would have no incentive to lend out excess reserves once the federal funds rate fell to that level.

Congress put off the effective date because paying interest on reserves reduces the Fed profits that are turned over to the Treasury each year, widening the budget deficit.

Great another way to increase the deficit.
These people are brilliant! :rolleyes:

Although preliminary explorations suggest Congress would be open to accelerating the date, the Fed is leery of depending on action by Congress.

No kidding!!!

Unbelievable!


What is iTulip's take on this?


My first post on iTulip, please forgive any formatting or style errors I'm not aware of.

[c1ue]

Re: Fed plotting how to achieve infinite money

Gools,

Welcome to iTulip.

Not to scare you, but I believe the iTulip consensus is pretty much that the Fed will just change rules as needed to continue their policies.

Whether it is Freddie/Fannie 'restrictions', raising Fed borrowing limits, etc nothing should be a surprise.

That's why it is more important to understand the goal: debasement of the US$ in order to devalue monstrous existing US debts.

[idianov]

Re: Fed plotting how to achieve infinite money

Buying government treasuries from treasuries or market for freshly printed dollars to dillute the FED balance sheet (and every holder of US dollars in the process) is very much inflationary. The spin it is not inflationary because the US dollars will stay in the FED is outrageous.

Igor

[Gools]

Re: Fed plotting how to achieve infinite money

Well here is Mish's take on the matter.

(Note: I'm agnostic when it comes to different economic theories and where we are heading but I'm learning and leaning toward hyper-inflationary depression à la Puplava these days)

http://globaleconomicanalysis.blogsp...terrified.html

The Fed has already sponsored 3 new lending facilities, yet is having still more discussions on what to do next.

Recap Of Fed Sponsored Facilities

* The TAF (Term Auction Facility) failed to restore liquidity.
* The TSLF (Term Securities Lending Facility) failed to restore liquidity....
* The PDCF (Primary Dealer Credit Facility) will be the next "facility" to fail.

The Fed's ongoing discussions shows deep concern that the above facilities will not be sufficient.

The Fed is now considering borrowing from the Treasury (US taxpayers). Were the Fed to have to do this to remain whole, i.e., have the Treasury underwrite the Fed's balance sheet, the US central bank would be de facto insolvent, having insufficient assets to carry out its mandate.

The perceived invincibility of the Fed's ability to reflate is now clearly in question. The Fed's own discussions prove it.

Does he have a point in basically saying the FED is heading for failure? (would be the third time in US history) He seems to think this development supports his deflationary point of view.

Thoughts?
.

[Starving Steve]

Re: Fed plotting how to achieve infinite money

My nightmare scenario is a US hyper-inflation and melt-down of the economy. By hyper-inflation, I mean something like 10% or 20% per year inflation.

In this scenario, there would be no safe places to put U.S. dollars.

Gold would be something like $2000 per ounce. Any takers? And how are you going to eat? Saw a piece off of your gold bar? Take your gold to the grocery clerk, and see if they would take it? ( Dream along with me! )

Bonds? The bond market would be all but worthless as interest rates would be in double digits. If you sell into this market, you just got wiped, and if you wait until maturity, you take the worthless pesos.

Even worse, Bernankee still is at the Fed, and he refuses to admit to more than 3% inflation in the economy. And no-one will pay double-digit rates of interest when the money is being adequately supplied thanks to the Fed.

Real estate? See what real estate would be worth if mortgage rates are 20%--- if you could even get a mortgage. The fact that banks are flush with cash doesn't mean that banks would be willing to lend on domestic mortgages. ( Banks have better investments abroad. )

Cash? It's peso time. (It isn't even good for wall-paper because the glue is too expensive.)

Stocks? The U.S. companies would be worthless because their earnings are in pesos. And few companies would be able to increase their earnings at a rate faster than the currency is going down.

Land? Your land is worthless because the taxes just wiped you out. And no-one can afford your land because they can not finance it.

Rental real estate? No-one can afford to pay the rents, and they turn your property into a drug-den if the do pay the rent. Either this, or your renter comes up with the rent by sub-leasing to several of his friends in a motorcycle gang.

Selling your labour? There is no need for your labour. And if there was, your pay-cheque would buy nothing anyway. To compound your problems, your retirement savings now buys a few postage stamps.

Farming? Your water bill, your potash bill, your diesel bill, your electric bill, your gasoline bill, your seed bill, your mortgage bill, your machinery replacement and repair costs just wiped you out.

In the nightmare scenario, everyone starves. The point is: everyone depends upon everyone else, and no-one would be able to escape the depression.

In a complete breakdown of the U.S. economy, the gangs and drug-dealers would control the land.

[FRED]

Re: Fed plotting how to achieve infinite money

The original story appears behind the pay wall of the Wall $treet Journal here:http://online.wsj.com/article/SB1207..._us_whats_news

A more complete version appears on GATA's website here: http://www.gata.org/node/6218


You get that?

The plan is to allow the Treasury to issue more debt than the statutory debt limit to be used by the FED to create a new class of debt instruments. They are trying to circumvent what little congressional oversight still exists on the issuance of money and spending limits!

No Kidding!!!

Great another way to increase the deficit.
These people are brilliant! :rolleyes:

No kidding!!!

Unbelievable!


What is iTulip's take on this?


My first post on iTulip, please forgive any formatting or style errors I'm not aware of.

iTulip's position since 1999 is an eventual managed high inflation, not hyper-inflation and certainly not deflation.

The US might suffer a hyperinflation except that US foreign debt is denominated in US currency, so the US has a level of control over the process, just as it has for the first 40% devaluation. It may go on for five years or may go on for ten or more. However, the process is inexorable.

The US cannot suffer a deflation because it cannot cause its currency to appreciate. The only way the US could cause the dollar to appreciate is if the US goes back on the gold standard. Then the US would quickly fall into a 1930s style deflationary depression. We'd put the probability of that at less than 1% and your WSJ story suggests the exact opposite.

Anyone who expects US monetary deflation does not understand double entry book keeping. The way money is created is as follows.

Borrower: "Lend me $1,000."

Lender: "OK, I've added $1,000 in the assets to my balance sheet and debited my reserve account by $50 in accordance with the 5% reserve requirement for that type of account. Here's $1,000."

Borrower: "Thanks! I'll put $1,000 my cash account and add a $1,000 liability to my balance sheet."

That's it. The mind is repelled at the simplicity, as Galbraith said.

What keeps a bank from added new $1,000 entries on behalf of borrowers? Rules. Change the rules, such as by lowering reserve requirements and loosening lending standards, and new $1000 loans are made.

Banking without constraint of a gold standard is like playing basketball on a court that can be changed as follows if you are losing: ball shrunk by half, foul line moved five feet closer to the hoop, hoop doubled in diameter and lowered to waist height.

[ax]

Re: Fed plotting how to achieve infinite money

I am shocked by the simplicity. Fred, can you elaborate on these "Level 3" securities GS is claiming to have gained 39% in over the last quarter? Is it really an entity that only GS' computers can truly evaluate?

[Jeff]

Re: Fed plotting how to achieve infinite money

In 1933, in the depths of the First Great Depression, the 21st amendment reversed the 18th, and booze became legal again. A bonus was the removal of lots and lots of revenue for gangsters and bootleggers. Another bonus was the upward pop in employment and tax receipts..

If there's anyone bright in the next administration, they'll realize we could almost fund this whole thing by legalizing and taxing the hell out of marijuana, cocaine, heroin and prostitution.

When you starve a bluenose, you get a pragmatist.

[ax]

Re: Fed plotting how to achieve infinite money

"Freedom." That's the name of the junk debt package Lehman just swapped for $2.8 billion in Fed loans. Are they just poking fun at us now?

http://www.cnbc.com/id/24064762

[FRED]

Re: Fed plotting how to achieve infinite money

I am shocked by the simplicity. Fred, can you elaborate on these "Level 3" securities GS is claiming to have gained 39% in over the last quarter? Is it really an entity that only GS' computers can truly evaluate?

The securitized debt market is broken to be sure. We told everyone in Risk Pollution: Financial Markets Polluted with Risk April 2006 that was going to happen. No surprise there. But just because one form of credit to fund the inflation of one kind of asset has blown up does not mean a new form of credit to fund inflation of some other kind of asset can't develop. That's how the endogenous credit system of bubble cycles operates.

Broken and devolving: mortgage credit, LBO deal credit, muni credit
Breaking: Commercial real estate credit and credit card credit
Developing: Credit to fund infrastructure and energy related assets

[Andreuccio]

Re: Fed plotting how to achieve infinite money

In 1933, in the depths of the First Great Depression, the 21st amendment reversed the 18th, and booze became legal again. A bonus was the removal of lots and lots of revenue for gangsters and bootleggers. Another bonus was the upward pop in employment and tax receipts..

If there's anyone bright in the next administration, they'll realize we could almost fund this whole thing by legalizing and taxing the hell out of marijuana, cocaine, heroin and prostitution.

When you starve a bluenose, you get a pragmatist.

Okay, I'm on board with marijuana and prostitution (;)), but do you really think it's a good idea to legalize heroin?

[Jeff]

Re: Fed plotting how to achieve infinite money

Legalizing heroin fixes many problems:

Afghanistan suddenly has a thriving legal agricultural crop.
Afghan warlords lose their major source of funds.
The US saves bazillions in police and DEA expenses.
Prison costs fall precipitately.
Crime committed by junkies goes to zero.
The positive tax consequences are in the billions.

The downside? No law to prevent addiction. But the law isn't working. Heroin is cheap and available in every corner of America, with no age restrictions. We just need to buy up those old 50's style strip motels that are everywhere, and fit each tiny room with 4 to 8 bunk beds. Junkies get 3 MRE's a day, clean needles and a gram or two of smack a day.

Once a year, elementary school students and high school students would get trooped through the place to see how glamorous all the snot nosed, nodding junkies look, and plan their own future drug use.

[ax]

Re: Fed plotting how to achieve infinite money

Jeff's right on. In countries where heroin is legal, crime rates are significantly lower. We could dispense with many services as he says, including methadone maintenance. Some of the addicts I treat in ER tell me it's cheaper to score heroin than follow through with managed pain care meds.

[Andreuccio]

Re: Fed plotting how to achieve infinite money

Jeff's right on. In countries where heroin is legal, crime rates are significantly lower. We could dispense with many services as he says, including methadone maintenance. Some of the addicts I treat in ER tell me it's cheaper to score heroin than follow through with managed pain care meds.

You've convinced me. Where do I sign the petition?

[Jeff]

Re: Fed plotting how to achieve infinite money

Here's one place.