Thursday, March 26, 2009
Worried About Inflation? Just Let the Fed Float Its Own Debt
I tease him a lot, but Robert Wenzel is right when he gloats that he has been blogging about the real reason the Fed wants to issue debt. (I recall much more pedigreed economists being baffled by the Fed's request.)
So anyway, SF Fed Bank President Janet Yellen confirms Wenzel's theory: The Fed wants to issue debt in order to suck reserves out of the system without having to wreck the mortgage-backed securities or Treasury markets. I didn't see the connection with the Fed issuing debt, but--if you'll permit some horn-tooting--I have been saying for quite some time that Bernanke has painted himself into a corner. Once price inflation really kicks in, he will have to suck reserves out of the system. But if the CPI starts blowing through the roof while the banks are still crippled and unemployment is still high, Bernanke will be reluctant to unwind all the life-support propping up MBS and keeping Treasury yields low.
So the "solution"? The Fed can sell its own IOUs to the public. So if you buy a note from the Fed promising you $10,000 in 2015, you write them a check today for it (for less than that, of course, to give you interest) and when the Fed processes the check it drains reserves from your bank.
I hope no one thinks this is a solution to the problem. Almost literally, what it does is shift (say) 10% inflation this year to (say) 15% inflation in two years. Unless of course the Fed just allows its debt to grow exponentially, which it probably will do.
The only way this can even work in theory, is if it buys the Fed enough time for the markets to recover so that selling off the MBS and Treasury bonds when the Fed notes come due, is more feasible. But if things continue to deteriorate--and if you don't believe they will, I would like you to tell me what else the government would need to do and promise to do, in order to make you pessimistic--then we will be in the same spot in two years, except the Fed will now have an additional trillion dollars in new reserves it is supposed to pay out to its noteholders. Oops.
So anyway, SF Fed Bank President Janet Yellen confirms Wenzel's theory: The Fed wants to issue debt in order to suck reserves out of the system without having to wreck the mortgage-backed securities or Treasury markets. I didn't see the connection with the Fed issuing debt, but--if you'll permit some horn-tooting--I have been saying for quite some time that Bernanke has painted himself into a corner. Once price inflation really kicks in, he will have to suck reserves out of the system. But if the CPI starts blowing through the roof while the banks are still crippled and unemployment is still high, Bernanke will be reluctant to unwind all the life-support propping up MBS and keeping Treasury yields low.
So the "solution"? The Fed can sell its own IOUs to the public. So if you buy a note from the Fed promising you $10,000 in 2015, you write them a check today for it (for less than that, of course, to give you interest) and when the Fed processes the check it drains reserves from your bank.
I hope no one thinks this is a solution to the problem. Almost literally, what it does is shift (say) 10% inflation this year to (say) 15% inflation in two years. Unless of course the Fed just allows its debt to grow exponentially, which it probably will do.
The only way this can even work in theory, is if it buys the Fed enough time for the markets to recover so that selling off the MBS and Treasury bonds when the Fed notes come due, is more feasible. But if things continue to deteriorate--and if you don't believe they will, I would like you to tell me what else the government would need to do and promise to do, in order to make you pessimistic--then we will be in the same spot in two years, except the Fed will now have an additional trillion dollars in new reserves it is supposed to pay out to its noteholders. Oops.
Comments:
Mr. Murphy----you are more knowledgeable than I on economic matters by several orders of magnitude, so what I propose here may be picked apart by you mercilessly, but I ask for you critique:
American Freedom Note Amendment
The fractional-reserve banking system, established by the Federal Reserve Act of 1913 to oversee a debt-based currency, is obsolete and destructive of the needs of the American people in the 21st Century. The very act of creating money by debt-assumption on the part of the citizenry gives unwarranted power to the banking system and erodes the very foundations of the American Republic. The constantly increasing debt with its associated interest acts as a millstone around the neck of industry and stifles economic creativity.
Therefore----by amendment to the US Constitution, establish a new currency, the American Freedom Note.
All debt instruments (loan contracts, bonds, govt debt, etc.) originating in Federal Reserve banks, all existing Federal Reserve Notes and checking account balances, are exchanged for American Freedom Notes. Creditors forgo liens and are cashed out 100%. Debt is exonerated, and debtors assume 100% ownership of any encumbered assets, including---and most importantly---the productive assets of the country (factories, farms, productive enterprises in general).
A fixed quantity of AFNs results from this system-wide exchange and these fresh accounts can be loaned at interest rates determined freely in the marketplace, with the strict proviso that fractional-reserve lending is considered fraud and prohibited by law from that point forward.
Over time a natural deflation occurs as the economy grows and the American Freedom Notes, fixed in quantity by this Amendment, acquire increasing purchasing power.
Debt forgiveness, greed forgiveness. Lenders are bought out generously (even though in a fractional-reserve banking system these loans were actually made without "consideration", in the sense of contract law), the rest of us indentured servants are freed, and most importantly, no blood in the streets. We get to keep America.
Regards, Dennis Spain
American Freedom Note Amendment
The fractional-reserve banking system, established by the Federal Reserve Act of 1913 to oversee a debt-based currency, is obsolete and destructive of the needs of the American people in the 21st Century. The very act of creating money by debt-assumption on the part of the citizenry gives unwarranted power to the banking system and erodes the very foundations of the American Republic. The constantly increasing debt with its associated interest acts as a millstone around the neck of industry and stifles economic creativity.
Therefore----by amendment to the US Constitution, establish a new currency, the American Freedom Note.
All debt instruments (loan contracts, bonds, govt debt, etc.) originating in Federal Reserve banks, all existing Federal Reserve Notes and checking account balances, are exchanged for American Freedom Notes. Creditors forgo liens and are cashed out 100%. Debt is exonerated, and debtors assume 100% ownership of any encumbered assets, including---and most importantly---the productive assets of the country (factories, farms, productive enterprises in general).
A fixed quantity of AFNs results from this system-wide exchange and these fresh accounts can be loaned at interest rates determined freely in the marketplace, with the strict proviso that fractional-reserve lending is considered fraud and prohibited by law from that point forward.
Over time a natural deflation occurs as the economy grows and the American Freedom Notes, fixed in quantity by this Amendment, acquire increasing purchasing power.
Debt forgiveness, greed forgiveness. Lenders are bought out generously (even though in a fractional-reserve banking system these loans were actually made without "consideration", in the sense of contract law), the rest of us indentured servants are freed, and most importantly, no blood in the streets. We get to keep America.
Regards, Dennis Spain
I'd also be worried if the inflation rate is higher than interest rates of the Fed's IOUs. People will lose money by letting the Fed inflate the economy with their own money.
This sounds exactly like how my state govenor described issuing bonds in a state that does not allow the state to increase its debt. 1st get a mortgage, then rack up the credit cards.
Would the state governments be the ones buying these Fed bonds, not individuals?
A minor point: Watching the Treasury Sec & Banana Ben I see two men who probably have a conflict of interest with what they are charged with doing. I could be wrong, but, do they have overly leveraged houses in relation to their income, which the private keeping of- depends on their public success? How is it that what they are doing is not simply saving their own houses? Isn't this some kind of security clearance breach? Shouldn't these two positions only be filled with someone who owns their own house?
Would the state governments be the ones buying these Fed bonds, not individuals?
A minor point: Watching the Treasury Sec & Banana Ben I see two men who probably have a conflict of interest with what they are charged with doing. I could be wrong, but, do they have overly leveraged houses in relation to their income, which the private keeping of- depends on their public success? How is it that what they are doing is not simply saving their own houses? Isn't this some kind of security clearance breach? Shouldn't these two positions only be filled with someone who owns their own house?
# posted by 
: March 26, 2009 at 5:24 PM
: March 26, 2009 at 5:24 PM
An example of working ABCT in practice today: the millions of households who lived within their means, avoiding debt and high leverage. They do not need bailed out now. Will they be forced to buy, "liberty bonds" from the fed - on credit only or through public service?
Would that be a negative savings rate?
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Would that be a negative savings rate?
# posted by : March 26, 2009 at 5:28 PM
: March 26, 2009 at 5:28 PM Subscribe to Post Comments [Atom]
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