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let me make a general observation addressed to those of you who write in with genuine questions, like those below, and also to those of you who think you already know the answers and call people like me either "ill informed" or "part of a conspiracy"
Gary Barrett -- Conifer, Colo.: Why does federal monetary policy target a 2 percent inflation rate? Why encourage inflation?
Paul Solman: Let me rephrase your question with a dose of skepticism, Gary. "Why encourage inflation of 2 percent a year when that means the U.S. dollar will lose half its value by 2050? How can inflation be a good thing?"
All told, the Fed has newly taken on about $3 trillion worth of loans since the Crash of '08, which it paid for with newly created electronic "Federal reserves." That's the policy known as "quantitative easing," so-called because the Fed increased the quantity of money in the banking system in order to ease ( as opposed to "tighten") economic activity. And to be clear: this is what the Fed has always done when it tried to stimulate the economy. The Fed was blasted by conservative economists Milton Friedman and Anna Schwartz for not having done so in the early 1930s and thus having contributed mightily to the Great Depression by failing to ease.
Yan also asks: "Could [the Fed] give [the Treasury bonds] to the main part of the government? What would the bonds be if that happened? Mad money?"
let me ask a question you didn't pose, Yan: what happened to the nearly $3 trillion dollars the Fed has created between 2008 and today?
Well, look again at the Fed balance sheet. In the second section, entitled "1. Factors Affecting Reserve Balances of Depository Institutions (continued)," the seventh row is labeled "Reserve balances with Federal Reserve Banks." Up until the Crash of '08, that number was in the low billions. Today, as you can see if you look, it's $2.3 trillion.
In other words, most of the money the Fed has created -- "out of thin air," as Fedophobes like to declaim -- is right back at the Fed in the form of deposits by banks.
Janice Bienn -- Dallas, Texas: What are your thoughts on the video "Money as Debt" by Paul Grignon? I sent someone your article, and he fired back with this video, stating that you were either ill informed, or part of the "conspiracy." I don't believe either conclusion is true. But I would appreciate some clarification. Thanks in advance for your time.
Paul Solman: I don't mean to sound defensive, Janice, but if even I am ill informed, after all these decades of time and effort, we might as well go fishing and leave the economy to -- well, whom, exactly? Paul Grignon? His great insight, as near as I can tell, is that money is debt -- true -- and debt is bad. Really? Debt is bad? Money is bad?
Look, debt can be abused. Who would doubt it? The ability to create money can be abused. Again, who would argue otherwise? But for goodness sake, everything of value can be abused, from land to love to food to friendship!
People and larger groups of people (institutions) and even larger groups (governments) take on financial commitments they can't meet. What else is new? This has been happening throughout the entire course of financial transactions. Here's the translation of a message on a clay tablet, in cuneiform, from A. Leo Oppenheim's book, "Letters from Mesopotamia"
The Fed has been buying both longer-term U.S. Treasury bonds ($1.9 trillion and counting) and mortgage-backed securities ($1.3 trillion and counting), using newly created money. But there has been a simmering debate over how and whether the purchases have much effect.
The authors view one of the significant ways that these purchases affect the economy through a “scarcity effect.” When the Fed buys billions of mortgage bonds, the pair finds, other investors who want to hold some amount of the securities have to pay more for them, pushing down the rates on the bonds, and by extension lowering the costs for homebuyers. By the researchers' math, the Fed’s first round of QE, back in 2009, lowered 30-year mortage-backed securities yields by 1.07 percentage points; its 2011 efforts to buy more of the securities lowered them 0.23 percent; and the QE3 policy now underway contributed another 0.16 percent.
They find similar impacts in terms of lower rates for Treaury bonds, but they argue that, in contrast to MBS, these haven’t helped the real economy. In effect, they argue, Treasury bonds fulfill a unique role at the bedrock of the financial system, allowing investors an ultra-safe place to park money that can be readily used as collateral. When the Fed buys up a big chunk of Treasury bonds, fewer other investors can enjoy that benefit.
reply to post by starfoxxx
here's a pretty well written piece about what happens if 'debt' needs to be lassoed in...
the Fed is buying the bad mortgage papoer created by the 'systemically important' banks or TBTF banks...
the government retirement/pensions system are wayyyy in the red ink zone
about all the fed can do is to QE the banks so they don't go bankrupt....
the Treasury will need to capture a lot of private pension wealth in a variety of ways...IRAs, 401Ks, personal accounts at banks...
this seizures (bail in) will likely be synchronized by both the banks that need their derivatives balances collateralized and the federal government to finance pensions & retirements=medicare entitlements & State governments that are in the same unsustainable Debt trap as the federal govt.
cyprus, Poland, Canada were the 1st operations of a Debt holocaust
[...] the Fed increased the quantity of money in the banking system in order to ease (as opposed to "tighten") economic activity.
they were taken down to make way for what we have now:
"Give my control of the currency...."
there's your sign
who majorly funds PBS?