Fiat Money vs Sound Money

reply to post by Rockpuck


If you go into the article and read, it states they were buying "Long term treasury bonds" in this instance. I wasn't making it a point of contention as we are arguing the same thing basically, just throwing out information you may find useful.

I do have to ask you about your previous post though.

You stated that "The interest paid back to the Treasury then is the only real, lasting, form of inflation." This seems to be in contrast to what we both said about bond repayments causing deflation. Can you explain this to me, or was it a typo?

reply to post by VonDoomen


The Federal Reserve while performing Monetization (buying directly our national debt in order to keep interest rates in check) will only buy short term bonds.

During Quantitive Easing, which is very different than Monetization, the Fed buys the debts from the banks (yay corruption!) for an excess amount to increase the reserves of the bank under the condition the banks use the reserves to buy Treasuries. The type of debt purchased is technically up to the bank that buys it, but it's more profitable to buy, then sell back to the fed, shorter term bonds like 1-10yr notes. There are other mandates that require banks to buy longer term notes in order to keep interest rates in check, elsewise it's about what makes the best profit. The point of QE1 2 and 3 is not keep interest rates low (directly buying from the Fed) but to inject a very specific amount of "new money" into the system. This is why it's such an unusual policy.

So let's consider Monetization, since that's the "normal" US monetary policy:

Fed buys $1,000 in US Treasuries. This money did not exist before. So the monetary base in the US expands by $1,000 .. inflation. It's a 1yr note at .2%.

In one year the note matures, the Treasury pays the Federal Reserve $1,002 back .. the Fed destroys $1,000, keeps $0.12 for its self, gives the Treasury $1.88

So from monetizing a $1,000 treasury, after it matures, leaves a lasting inflation of $2

Now times that by ... several Trillion Dollars.


The thing is though, when the $1,000 is destroyed, it's always created again .. the process is repeated. So you never see "deflation" .. just a constant stream of inflation. QE is different in that it's single purpose of existance is to flood the economy with money.. it's not about the birth/death cycle of monetization.

The Federal Reserve can at any time "call back" the loans .. so one year they buy $1,000 worth of Treasuries then the next they buy $800. This removes money from the system.. so in the next few years when Inflation becomes a horrible nightmare, the Fed will have to play the careful balancing act of removing hundreds of billions of dollars from the economy to create artificial deflation to counter inflation.

Everything has a purpose.. even if it's incredibly complicated.

reply to post by Rockpuck


Very understandable, good write up!
So the lasting inflation is the 2$ given to the treasury, as that is new money that stays in the system. And repeated over time causes inflation.

I wonder what the effect of the $900 billion long term bonds they bought will be. Guess we'll see in 30 years

reply to post by VonDoomen


I think we are seeing the inflation effect of Quantitative Easing (which is just throwing fists full of money at the system to see what happens)

The Fed has been desperate to create inflation since 2008 .. but they expected it to start occurring in........ 2008. It didn't. We are just now seeing the effects of QE1, 2 and 3, as well as the effects of bailouts and monetization.

If the Fed did it right, we would see a perfect inflation rate of about 3-4%.

If the Fed # up we will see inflation at 5%+ and they will have to start removing money from the system (likely resulting in large budget cuts)

Or if the Fed # up epically ... we will see deflation. Again.

reply to post by Rockpuck


So how does 16 TRILLION in interest free secret loans affect the economy? I doubt that money is going to go back to the FED any time soon, if it ever does. If the banks and corporations that got that money had to pay it back tomorrow most of them would probably go bankrupt.

reply to post by ChaoticOrder


16 Trillion? I don't know what you're talking about in term of quantity. However the bailouts and overnight loans to the banks via the Fed mostly covered reserves from exposure left by the vacuum of derivatives. A good analogy is that after 2008 and the assets collapse on banks, even after calling their various derivatives left a gaping hole in their reserves. The bailouts filled the hole.. nothing more. Some banks (Goldman.. Citi .. Bank of America notably) used the funds to expand equities investments and made a killing.. But this is why there was seemingly no effect on the economy.. we through hundreds of billions of dollars at the system and saw no inflation .. because the blackhole of liabilities and reserve deficits ate the entire thing and then some.

If that's what you're talking about anyways. I don't know of any 16T "interest free loans" that were made.

reply to post by ChaoticOrder


You typed... ''And sound money, as far as I can tell, is money which is backed by a precious metal or some other commodity that has intrinsic value. ''

We have sound money, backed by the (hopefully productive) life of each citizen. People as commodity.

reply to post by ChaoticOrder


You typed...... ''You see, the bankers were very scared of this idea that the US Government could print its own money and issue it directly to the citizens interest free, because it took power away from them and put the power of real wealth into the hands of the citizens.''

The power of real wealth actually is in the hands of (hopefully productive) citizens. You get what you earn. There are many games to choose from within the context of the overarching money game. You can be a ditch digger or a pole dancer.

reply to post by Rockpuck


Sorry, the loans were "virtually" interest free. I highly doubt you don't know what I'm talking about.

There was an audit of the Federal Reserve last year, although it was scarcely reported in the msm, which may be why it has slipped past you, if indeed you know nothing of it. The FED fought tooth and nail to resist an audit, but it happened eventually.

www.sanders.senate.gov...

The first top-to-bottom audit of the Federal Reserve uncovered eye-popping new details about how the U.S. provided a whopping $16 trillion in secret loans to bail out American and foreign banks and businesses during the worst economic crisis since the Great Depression

The non-partisan, investigative arm of Congress also determined that the Fed lacks a comprehensive system to deal with conflicts of interest, despite the serious potential for abuse. In fact, according to the report, the Fed provided conflict of interest waivers to employees and private contractors so they could keep investments in the same financial institutions and corporations that were given emergency loans.

For example, the CEO of JP Morgan Chase served on the New York Fed's board of directors at the same time that his bank received more than $390 billion in financial assistance from the Fed. Moreover, JP Morgan Chase served as one of the clearing banks for the Fed's emergency lending programs.

The Fed outsourced virtually all of the operations of their emergency lending programs to private contractors like JP Morgan Chase, Morgan Stanley, and Wells Fargo. The same firms also received trillions of dollars in Fed loans at near-zero interest rates. Altogether some two-thirds of the contracts that the Fed awarded to manage its emergency lending programs were no-bid contracts. Morgan Stanley was given the largest no-bid contract worth $108.4 million to help manage the Fed bailout of AIG.

reply to post by XXX777

The power of real wealth actually is in the hands of (hopefully productive) citizens. You get what you earn.

Then get back to work sonny boy! What are you doing posting on ATS hmmm? I want to see sweat dripping from your forehead within the hour!