How is this all going to end? Can the Federal Reserve just keep "QE-ing" the government out of its debt problems? And what is going to happen to the Fed when all those toxic assets they've been buying up don't pay up? Won't it go bankrupt too? And if it does, what will happen?
Thankfully, despite the complicated nature of central banking, it's something we can all understand.
First we must look at the Fed for what it is. A separate entity that is technically NOT part of the government, NOR is it a private corporation owned by the "Rothchilds" and Illuminati. It is best described as an NGO that is chartered by congress to be the country's central bank.
Second, we must look at the role it has most recently played that is OUTSIDE its traditional role of central banking. Namely, playing the role of "Jesus Christ."
You may laugh, but regular listeners to my podcast know I jokingly sing the tune "Christ the Lamb of God (who taketh away the sins of the world)" but substitute my own lyrics in it to fit it to the Federal Reseve:
"Oooohhh Janet the Yellen of the Fed
Who taketh away the sins of the banking community
Baaailll out these banksters.
Ooooohhh Janet the Yelley of the Fed
Who bails out the scum who bought McMansions
Prinnnnnt off more money"
Blasphemous as that may be, it's 100% true. The Federal Reserve has served as "Jesus Christ" like entity to wash away all the financial problems that were (and continue to be) created by various entities within our economy. Specifically, all the horrible loans made during the financial crisis AND the federal government's insane deficit spending. And you can see this, quite literally, on the balance sheet of the Federal Reserve:
I apologize in advance for the small font of the chart above, but I have highlighted the key figures that demonstrate the Fed's "Jesus" activity.
In the RED are US government bonds that nobody else in their right mind would buy. Remember, especially under Obama, the US federal government has ran the country's worst peacetime deficits. Worse, that deficit spending was not on genuine investments that would produce the profits necessary to pay back the principal and interest on those bonds, but (frankly) just vote-buying from the parasitic, non-economic producing classes for the democrats (welfare, worthless education, WIC, etc.). Because of this traditional investors who would lend to the US government (pensions, the Chinese, Arab nations, retirees etc,) had no interest in lending money to this effectively insolvent entity. Therefore, the ONLY entity that would buy US government bonds was the Federal Reserve. And in the 7 years following the financial crisis, the Federal Reserve has purchased (lent) roughly $2 trillion to the US government.
But before you go hating on Obama and the democrats, look at the GREEN. The GREEN didn't even exist in 2007. However, recklessly lending money just so they could make a commission on increasingly unprofitable mortgages, bankers and Wall Street drove the US economy, head first into the worst recession since the Great Depression. And since they were at the effective "cardio vasculatory system" of the economy (the financial system is VERY much as vital to an economy just like your heart), they needed to be bailed out. And so where you see:
"Federal Agency and Government Sponsor Enterprise Mortgage Backed Securities"
in English that means
"Crappy mortgages nobody else in their right mind would buy that were created by the bankster scum of the Earth, who conveniently made a 2-5% commission on those deals, but we had to buy these things anyway otherwise the entire financial system would collapse."
We could go on, but if you look at the BLUE square you see that the nature of the Federal Reserve has fundamentally changed. It has gone from that of a central bank in 2007 to an effective "bailout machine" in 2014. We bail out incompetent bankers, we bail out irresponsible borrowers, we bail out socialist politicians, and we bail out the parasitic classes that need government subsidies who vote for them (and if you'll permit this economist a minor prediction - you can bet you'll see "student loans" on the Federal Reserve's balance sheet within our lifetimes).
Third, how does the Federal Reserve afford all this?
Very simple, the Federal Reserve controls the US money supply and thus merely "prints off more money."
Of course, it doesn't literally print it off as they did in the Weimar Republic. That would be too obvious, brash, and Zimbabwean. They use the flashy euphemistic technique called "Quantitative Easing" wherein they merely digitally add more money to financial institutions' deposit accounts in exchange for their worthless mortgage backed securities nobody else wants. But whether the money is digital recordings on bank accounts or actual pieces of paper in circulation, the effect is the same. A booming money supply, going from $1.4 trillion before the crisis to $3.1 trillion today.
Now here is the point where normal people, and even economists get a twinge in the back of their head saying, "Hey, something's not right here." Because whereas "Jesus Christ" presumably washed away everybody's sins, that's a religion. Not the real world. And just like physics has the conservation of mass law, economics also adheres to similar such mathematical laws. In other words, we know there's no such thing as a free lunch. A price has to be paid and somebody has to pay it, which leads us to our fourth point.
Logic would suggest that it would be the Federal Reserve that pays the ultimate price. It is a separate legal entity, and since it's been buying up all these worthless assets, like any other business it should go bankrupt. Additionally, nobody really owns the Federal Reserve. They actually DO have shareholders (who own an effective "preferred shares" in the entity which only entitle them to a 6% dividend while the remainder of Fed profits go to the Treasury), but based on the latest balance sheet of the Federal Reserve, they only have $57 billion in illiquid shares. Hardly enough to cause a financial crisis in the US should the Fed "go bankrupt."
However, here is where the "Jesusy Magic" occurs. Since the Federal Reserve is not the government, nor is it the financial industry, it effectively becomes a "sink hole" of sorts that wipes away all of our debts. All the federal government has to do is refuse to honor the bonds the Federal Reserve holds and all of the country's financial problems go away. Matter of fact, we don't even need taxation. We could theoretically just have the Federal Reserve lend money to the government ad infinitum and go bankrupt every year. But for those of us on the righter side of the political spectrum, we know this can't be true. There HAS TO be a price to this, and there is.
Inflation.
Since the Federal Reserve's currency is ACTUAL CURRENCY it spreads or "socializes" the costs or "sins" of society by debasing our US dollars. Now, at this point in time, if you listen very quietly, you will hear Paul Krugman and a bunch of other Keynesian economists nearly going into cardiac arrest as they trip over themselves to rush and point out there is no inflation (don't hurt yourself Paul, I'll do it for you here):
And they'd be right. According to the CPI there has been effectively no inflation. But there are two problems.
One, I'm outright accusing them of telling a half-truth, because (if they're economists) they know this low level of inflation, IN SPITE OF A NEAR TRIPLING OF THE MONEY SUPPLY, is due to a TANKING of the "velocity of money."
Without boring the reader, the velocity of money is the rate at which a dollar is re-spent. So you can theoretically have a low money supply, but if people keep spending (either because of faith in the future or a market bubble) instead of saving, you can trigger inflation still. However, the opposite is happening today, and the reasons are (I claim) the total disheartening and destructive effects socialist policies (primarily under Obama) has had on investors, purchasers, innovators, entrepreneurs, businessmen and other productive members of society. The constant assail and assault against "the rich," "corporations," "success," and the always-available evil and hated "white males" has thrown sand into America's most productive economic engines, tanking faith and hope in the future, and thus the velocity of money. And though this has slowed economic growth considerably, this grants the Federal Reserve's "Jesus Strategy" a reprieve in that their money printing has not caused inflation.
The second problem in claiming there's no inflation is that it's simply false. While the CPI does measure what somebody is going to face in terms of prices at the gas pump or the grocery store, gas and groceries are NOT the largest items on people's personal budgets.
Housing
Investments
and
Education are
And if you look at these items, they have skyrocketed.
Housing, though nowhere near it's bubbly peak in 2006, is starting to re-inflate again driving both housing prices and rents up. Using the Price-to-Rents ratio, we can see that Federal Reserve money starting to take its toll on the American public, being more costly than any point in recorded time BAR the housing bubble of 2006:
Investments the same. If you would like to retire, tough. Stock prices are LAUGHABLY overvalued. Largely in part due to the trillions in Baby Boomer retirement money that has mindlessly flooded the market since 1978 through their 401k's and IRA's, but more recently through (once again) Federal Reserve money.
Once banks unload their worthless toxic assets on the Fed for an overinflated price, they have to do something with that money. But since the corporate sector is demoralized by the socialist trend of the US, there's no economic growth and thus no demand by businesses to borrow it. This is why the majority of that money does NOT go into new investments, plant, and companies (which would create jobs by the way), but instead merely goes into the stock market either for repurchasing their own shares or taking a position in stocks and bonds to "hedge against inflation." This has resulted in over a trillion dollars (in this year ALONE) of buy backs. But it has also made stocks simply unaffordable to anybody who wishes to retire. This is more than amply displayed in the S&P 500's PE ratio and dividend yield, which suggests stocks are historically overvalued by about 33%.
Ironically, however, people are happy when the stock market goes up. Which would be akin to being happy that the price of gas "jump to $6 a gallon." Regardless, this is proof positive the Federal Reserve funny money is NOT sitting stagnant in some bank's digital account, but is seeping into sectors of the economy, causing real and serious inflation, and lowering our purchasing power.
And finally, student tuition.
It is no coincidence inflation is appearing where there is federal government money and intervention. Housing is backed up by Sallie Mae and Freddie Mac. The stock market is being inflated by Federal Reserve policy and US government retirement policy. And now with Pell grants, Stafford loans, etc., government money is (and has been) flooding into the higher education system. This flood of money, without an increase in either the volume or QUALITY of education, has resulted in skyrocketing tuition costs:
Of course, student tuition, though the single largest expense of nearly every person under 30, is not considered in the CPI. But again, that doesn't mean those student debts and $300 textbooks aren't real. In REALITY students are also paying the tax of inflation to finance the Federal Reserve's "Jesus Bail Out Strategy."
As you no doubt likely surmised, you knew there was a price to pay for all this central banking hanky panky. The only problem is you couldn't put your finger on it because of the complexities and complications of central banking, the US' Federal Reserve system, and the machinations of "Quantitative Easing." But when you strip it all away, it sadly is very simple. It's just printing off more money.
I don't care how many doctorates in economics they have working for the Fed. I don't care how many of them came from the Ivy League. And I don't care how many Clark or Nobel prize
To quote Holly Gennero, "You're nothing but a common thief" and you "economists" at the Fed, and the majority of the economics profession should be ashamed of yourselves.
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13 comments:
Cappy... I'm no brain surgeon, but you continue to shine bright clear focused light on the serious economic issues of the day. I tried to have a similar discussion with "Warren Mosler" on his boat several months ago stating that at some point it is all going to come unraveled and when it does the ordinary person is F**ked. he laughed at me like i was a moron, if i wasn't 1000 yds out to see i'd have jumped off the boat.
http://moslereconomics.com/
http://www.supercars.net/cars/1374.html
check the link Mosler's economic ideas may be wacky but he makes nice cars
The velocity of money tanked because the increase in the money supply went straight into banks' excess reserves.
https://research.stlouisfed.org/fred2/series/EXCSRESNS
MV=PQ applies. If you increase the money supply, then prices go up if people are spending that money, or the velocity of money goes down if it's just sitting in the proverbial mattress someplace. Pretty much always some combination of the two.
Keynesians tend to think that they'll increase real output by fiddling with the money supply, which is... suspect, at best.
In a system where interest rates are set by the supply and demand for loanable funds, the interest rate signals time preferences; whether consumers want more production now, or more investment now for greater consumption in the future. One of the biggest failings of the Fed is that it uses the interest rate as a lever alongside fractional reserve banking to manipulate the money supply. If that doesn't work, they fire up the QE helicopter. Bleh.
Are you sure the banks spend all that money on stocks? I thought it was just gathering dust as seen here: http://www.washingtonsblog.com/2013/06/81-5-of-money-created-through-quantitative-easing-is-sitting-there-gathering-dust-instead-of-helping-the-economy.html especially with the new Dodd-Frank regulation saying that banks cannot themselves "play the stock market". Correct me if I'm wrong.
And I thought companies like AAPL are mainly doing the stock buybacks and speculators/traders are just riding the momentum. Let me know what's actually going on.
Good catch Jay. Some are buying back their shares. Plus, as you'll notice, I didn't expand on how low interest rates are prompting non-bank companies to borrow and buy back their shares. So even if the banks aren't invested in marketable securities, the are lending out the money to companies that will, primarily through buy backs. Larger point is that the money IS seeping into the stock market somehow.
I'm pretty sure QE reserves cannot be used to buy stocks. Cappy, stocks are rising, but the PE ratio of the S&P 500 is around 19 still despite a 130% rally since 2009. Cash balances & earnings for large companies are at record highs. Low interest rates and QE is a contributing factor, but fundamentals may also be playing a role. Look at all the i-devices apple is selling.
"If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered."
-Thomas Jefferson
And to quote Hans Gruber, "I am an EXCEPTIONAL thief!" I wonder if they'll eventually take the power down also....
Wise words. "We could found a new central bank every year. "
Money is a way of valuing the time and talent people put into it earning it. Money pays for effort and individuality. It pays tribute to the fact, that people are unequal. If you make people more equal you get inflation, money loosing worth, if you allow people to become more unequal, you get deflation, money gaining worth. The millennial generation is worse educated than the previous. Capitalism creates inequality, this causes deflationary busts, the next one is just around the corner, people become more equal again and on it goes.
Look how desperate the banksters were to get Bill de Blasio elected in New York, a Socialist. They need public spending, making people more equal, as a way to generate inflation and save the monetary system. It will not work. Central Banks might never run out of money and debtors, but they run out of time and talent, the time and talent capable people are willing to put into their work. In the end they might even try the "nation at war, everyone has to mobilize" - trick.
Good article. I would only dispute a few points: (1) banksters are the illuminati, (2) velocity has nothing to do with inflation, (3) most of the new money is in the reserves of Fed member banks not the stock market, and (4) the bailout of the student loans is highly unlikely if there is a conspiracy rather than a mere orgy.
Velocity is per-money-unit economic activity. The drop in velocity is because the QE money is mostly sitting in the Federal Reserve System untouched. That would account for the drop in velocity, which is on average.
"Instead of creating new money through additional lending, the Fed’s QE policies have greatly expanded the amount of excess reserves in the banking system. (See Chart 2.) In other words, banks have mostly decided to hold onto the cash that the Fed gave them when it executed all those securities purchases. Consequently, it is rather difficult to argue that these Fed policies have done much to expand the economy."
Source: http://www.heritage.org/research/reports/2014/08/quantitative-easing-the-feds-balance-sheet-and-central-bank-insolvency
It is worth looking at the accompanying graph with the source.
The drop in velocity means there has not been a stimulated increase in activity. We know from negative interest rates that the parasites are so prolific there is no way to economically move. What economic activity yet lives is what there is.
Baby Boomer retirement money is in the stock market no doubt, but that is not QE money; therefore, the stock market is not the home of most new money.
Young adults are the prize laborers. If this economy is a planned debt-slave economy, then the masters will intentionally keep them working as much as possible. Jailing half the young adults for debt is of course counterproductive, so it could happen, but is has not, and I think that says something. I think instead of outright loan forgiveness, you will see work programs that will be gentle versions of chain gangs.
"Matter of fact, we don't even need taxation. We could theoretically just have the Federal Reserve lend money to the government ad infinitum and go bankrupt every year. But for those of us on the righter side of the political spectrum, we know this can't be true. There HAS TO be a price to this, and there is.
Inflation."
Why do you think that Saudi Arabia keeps printing OIL ?
If you print money and back it up with cheap energy, that energy will enter the market and boost productivity and eliminate the inflation.
You can then do without taxation and fund the government directly from this energy printing.
And if this is implemented under the rule of a democrat, economists will scratch their heads in disbelief.
Top notch article. I know the Fed's official policy, but it is also clear that they are choosing who benefits from their largesse and who doesn't. How do they decide and how do they make that happen?
OK Kiddies, listen up. So-called money velocity is pure Keynesian Bxll ShxT. And here's why.
You may be thinking that money velocity is surely a determinant of inflation...that's what the money experts always say, right…? (Pssst, sorry, you’re wrong). It’s true that people acting in concert by spending their money at once to obtain finite supplies can certainly drive up prices, but that action belongs in the category of “money demand,” not rising money velocity¹. Money velocity is yet another (yawn) misnomer that is represented by a false, but seemingly legitimate, Keynesian math formula probably cooked-up by a group of math geeks to impress their colleagues.
Consider this: if a high rate of velocity causes inflation to rise, then the opposite must also be true, a low rate of velocity must cause deflation. So I ask you, where are those screamers who shout out warnings of imminent inflation when velocity starts to pick up, but these same Chicken Littles remain curiously silent about predicting deflation when we go back to low velocity? Or maybe it means velocity is permanently stuck in high gear? Perhaps this is one of those exceptions to the rule and the case of a one-way street of bad consequences (inflation) caused by high velocity, but we don’t get the good consequences (deflation) caused by low velocity? Or is high velocity like perpetual motion in that once it gets going it stays in motion leading quickly & inevitably to hyperinflation? But if velocity does slows down, how come we never get deflation? In the past all we ever got was “disinflation” which is a lowering of the inflation rate. The whole theory is just nuts. The gatekeepers who advance this notion want you to believe that money velocity is akin to holding a hot potato. Apparently people just can’t stand the idea of having money in their wallets for more than a very short time. They seem to feel they must immediately spend every paycheck as quickly as it comes in which is why we get the dreaded inflation. Really? This brings the term “easy come, easy go” to a whole new level. The pseudo-science of money velocity is simply a ruse that was invented to help the Fed obfuscate what it’s doing behind closed doors. It’s a counterfeiters’ favorite fall back position that gets them the get-out-of-jail-free card when inflation really gets going. They simply trot out their standard sales pitch: “don’t look at us, it’s not our fault we have inflation, it’s you quick-spenders out there that’s causing it”…and no one ever seems to be the wiser.
BTW, how is it even possible to accurately measure velocity? Is there some super-secret formula known only to certain intellectuals at MIT or Harvard? Maybe those geniuses at the Treasury or the Fed have the answer. If you believe that I’ve got a bridge to sell. The answer of course is it can’t be measured, or at least measured accurately enough to be of any value to anyone. The Fed’s current Einsteinian formula that’s used to measure velocity is simply a grade school idea someone pulled out of thin air. Armed with this new magic formula, the fraudsters tell us with a straight face that we’re to rely on their infallible math criterion to measure infinitely complicated interactions of millions of human beings involved in trillions of transactions. Check. Got it.
For more info:
http://www.theburningplatform.com/2015/02/27/inflation-economics-in-one-easy-lession-or-how-i-learned-to-stop-worrying-and-loathe-the-fed/#more-93292
https://www.caseyresearch.com/articles/that-couldnt-possibly-be-true-the-startling-truth-about-the-us-dollar
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