Get rid of your mortgage, loans, because interest rates set to rise

Get rid of your mortgage, loans, because interest rates set to rise

Get rid of your loans, guys and gals, because we are going into a high interest rate period. Very high. It will be the equivalent of going into the double digit interest rates we had in the 80s where many people threw their house keys at the bank and we had record numbers of ba

Read More

E-cigarettes save lives, money

E-cigarettes save lives, money

"We know that cigarettes have thousands of chemicals in them and we know that they are killing us. They have been for over a hundred years. So now, the e-cig industry comes along with only one or two chemicals in their mixture and people are freaking out over these as well. Whe

Read More

US inches closer to big bank charges

US inches closer to big bank charges

Federal prosecutors are nearing criminal charges against some of the world’s biggest banks, according to lawyers briefed on the matter, a development that could produce the first guilty plea from a major bank in more than two decades. In doing so, prosecutors are confronting

Read More

Canada’s home sales top predictions; why a real estate crash is inevitable

Canada’s home sales top predictions; why a real estate crash is inevitable

“The assurance of relatively low borrowing costs has likely given home buyers confidence while rising home values have kept new listings at a healthy level. Stable employment has provided some assurance to owners and buyers alike.” Our website is back after many months of

Read More

Comparing today’s recession/depression to the 1980 recession

Comparing today's recession/depression to the 1980 recession

"Much like today, Americans were concerned not only with high unemployment but increasing budget deficits in the early 1980s. A September 1983 Gallup poll found that three-fourths of the public agreed that the federal government's budget deficit was a great threat (42%) or some

Read More

Why savers are getting screwed

Why savers are getting screwed

"Without the intervention of economic policymakers, interest rates would be naturally higher. That would increase the cost of borrowing for businesses and consumers, but there would be some offsetting economic benefits. Savers are getting screwed by the current monetary policy

Read More

Geithner admits USA bankrupt to US Senate

Geithner admits USA bankrupt to US Senate

"Never in our history has Congress failed to increase the debt limit when necessary. Failure to raise the limit would precipitate a default by the United States. Default would effectively impose a significant and long-lasting tax on all Americans and all American businesses

Read More

World economies on verge of currency revaluations to deal with debt

World economies on verge of currency revaluations to deal with debt

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." -- Henry Ford Basically what the world central banks are doing is increasing their money by devaluin

Read More

Is Obama the next Mugabe of Zimbabwe?

Is Obama the next Mugabe of Zimbabwe?

"America, Britain, Japan, Germany, France, Sweden, Holland, Norway, Canada and Australia make up the Fishmongers Group and their meeting on Tuesday will deliberate on the state of the inclusive government, debt relief, public finance administration and the controversial economi

Read More

US raiding foreign countries with dollars, not soldiers

US raiding foreign countries with dollars, not soldiers

""The United States is going to China and saying: we want you to commit economic suicide, just like Japan did. We want you to follow the same thing: we want you to revalue your currency, we want you to squeeze your companies, we want you to go bankrupt,” says Michael Hudson,

Read More

FDIC wants your retirement cash to save banks: Bloomberg

FDIC wants your retirement cash to save banks: Bloomberg

“The FDIC is constantly looking at structures where we can get the greatest opportunity to tap into capital that we have not had the success reaching through previous disposition methods,” FDIC spokeswoman Michele Heller said in an e-mailed statement. “We welcome and work

Read More

Canadian government admits recovery never happened

Canadian government admits recovery never happened

“Not only did their stimulus fail to create the jobs of tomorrow, it also failed to protect the jobs of today,” Scott Brison, the opposition Liberal Party’s spokesman for finance issues, said by telephone. "Most of us were shaking our heads in disbelief early last year w

Read More

Content By: The Coming Depression Editorial Staff (dates cited below)
Copyright: include link to this article on top of reproduction if you use it.
Bookmark and Share
(No Ratings Yet)
Loading ... Loading ...

federal-reserve-note-400

“With just over a month since the QE2 announcement, discussion over the amount, implications and effectiveness of QE2 are almost as prevalent (and moot) as those over the imminent collapse of the MBS system. And the more the printing, the better. One of the amusing debates on the topic has been how much debt will the Fed print.” — ZeroHedge

Those who continue to refuse to acknowledge that the economy is in a near-comatose state, of course, hold on to the hope that the amount will be negligible: something like $500 billion (there was a time when half a trillion was a lot of money). A month ago we stated that the full amount will be much larger, and that the Fed will be a marginal buyer of up to $3 trillion. Turns out, even we were optimistic.

A brand new analysis by Jan Hatzius, which performs a top down look at how much monetary stimulus is needed to fill the estimated 300 bps hole between the -7% Taylor Implied Funds Rate (of which, Hatzius believes, various other Federal interventions have already filled roughly 400 bps of differential) and the existing 0.2% FF rate. Using some back of the envelope math, the Goldman strategist concludes that every $1 trillion in new LSAP (large scale asset purchases) is the equivalent of a 75 bps rate cut (much less than comparable estimates by Dudley, 100-150bps, and Rudebusch, 130bps).

In other words: the Fed will need to print $4 trillion in new money thin crisp new dollar bills (stored in bank excess reserve vaults) will create just a tad of buying interest in commodities such as gold and oil.

How does the Federal Reserve really work? Some things you didn’t know By Robert Prechter

… Let’s attempt to define what gives the dollar objective value. As we will see in the next section, the dollar is “backed” primarily by government bonds, which are promises to pay dollars. So today, the dollar is a promise backed by a promise to pay an identical promise. What is the nature of each promise? If the Treasury will not give you anything tangible for your dollar, then the dollar is a promise to pay nothing. The Treasury should have no trouble keeping this promise.

In Chapter 9 [of Conquer the Crash], I called the dollar “money.” By the definition given there, it is. I used that definition and explanation because it makes the whole picture comprehensible. But the truth is that since the dollar is backed by debt, it is actually a credit, not money. It is a credit against what the government owes, denoted in dollars and backed by nothing. So although we may use the term “money” in referring to dollars, there is no longer any real money in the U.S. financial system; there is nothing but credit and debt.

As you can see, defining the dollar, and therefore the terms money, credit, inflation and deflation, today is a challenge, to say the least. Despite that challenge, we can still use these terms because people’s minds have conferred meaning and value upon these ethereal concepts.

Understanding this fact, we will now proceed with a discussion of how money and credit expand in today’s financial system.

How the Federal Reserve System Manufactures Money

Over the years, the Federal Reserve Bank has transferred purchasing power from all other dollar holders primarily to the U.S. Treasury by a complex series of machinations. The U.S. Treasury borrows money by selling bonds in the open market. The Fed is said to “buy” the Treasury’s bonds from banks and other financial institutions, but in actuality, it is allowed by law simply to fabricate a new checking account for the seller in exchange for the bonds. It holds the Treasury’s bonds as assets against — as “backing” for — that new money. Now the seller is whole (he was just a middleman), the Fed has the bonds, and the Treasury has the new money.

This transactional train is a long route to a simple alchemy (called “monetizing” the debt) in which the Fed turns government bonds into money. The net result is as if the government had simply fabricated its own checking account, although it pays the Fed a portion of the bonds’ interest for providing the service surreptitiously. To date (1st edition of Prechter’s Conquer the Crash was published in 2002 — Ed.), the Fed has monetized about $600 billion worth of Treasury obligations. This process expands the supply of money.

In 1980, Congress gave the Fed the legal authority to monetize any agency’s debt. In other words, it can exchange the bonds of a government, bank or other institution for a checking account denominated in dollars. This mechanism gives the President, through the Treasury, a mechanism for “bailing out” debt-troubled governments, banks or other institutions that can no longer get financing anywhere else. Such decisions are made for political reasons, and the Fed can go along or refuse, at least as the relationship currently stands. Today, the Fed has about $36 billion worth of foreign debt on its books. The power to grant or refuse such largesse is unprecedented.

Each new Fed account denominated in dollars is new money, but contrary to common inference, it is not new value. The new account has value, but that value comes from a reduction in the value of all other outstanding accounts denominated in dollars. That reduction takes place as the favored institution spends the newly credited dollars, driving up the dollar-denominated demand for goods and thus their prices. All other dollar holders still hold the same number of dollars, but now there are more dollars in circulation, and each one purchases less in the way of goods and services. The old dollars lose value to the extent that the new account gains value.

The net result is a transfer of value to the receiver’s account from those of all other dollar holders. This fact is not readily obvious because the unit of account throughout the financial system does not change even though its value changes.

It is important to understand exactly what the Fed has the power to do in this context: It has legal permission to transfer wealth from dollar savers to certain debtors without the permission of the savers. The effect on the money supply is exactly the same as if the money had been counterfeited and slipped into circulation.

In the old days, governments would inflate the money supply by diluting their coins with base metal or printing notes directly. Now the same old game is much less obvious. On the other hand, there is also far more to it. This section has described the Fed’s secondary role. The Fed’s main occupation is not creating money but facilitating credit. This crucial difference will eventually bring us to why deflation is possible.

[Next: Prechter explains "how the Federal Reserve has encouraged the growth of credit."]

Come back later this week for Part III of the series “Robert Prechter Explains The Fed.” Or, read more now in the free Club EWI report, “Understanding the Federal Reserve System.”

Related posts:

  1. US Fed new quantitative easing to buy $1 trillion in coming months“By buying government bonds, the Fed aims to keep long-term interest rates low, hoping it will lead consumers to spend and companies to invest more, thus helping to propel the...
  2. Canada’s $1-trillion debt babyBy Terence Corcoran of National Post The Tory commitment to ‘eliminate’ Canada’s total net debt by 2021 now looks absurd Debt is good, even for governments. But it depends on...
  3. US government budget deficit hits 60 year high of $1.4 trillionThe US budget deficit is expected to hit a record 1.4 trillion dollars in 2009, some 950 billion dollars greater than the shortfall recorded last year, the Congressional Budget Office...
  4. FDIC Insuring 8,200 Banks with $9 Trillion in Deposits and Zero in the FDICIt sure looks like the FDIC is going bankrupt! I suppose only the Treasury Department can save them now. Excerpt Written by MyBudget360 The FDIC has greatly underestimated the problems...
  5. US Fed propping up stock market; QE2 will fail as it should“”The Fed’s best hope seems to be trying to convince investors that short term interest rates are going to remain lower for longer than they currently expect or that inflation...
  6. House panel wants Geithner to testify about New York Fed and AIGBrady Dennis Washington Post January 10, 2010 The chairman of the House oversight committee turned the spotlight Friday once again on the government’s much-maligned bailout of American International Group, saying...

This entry was posted on Tuesday, November 23rd, 2010 at 5:33 pm and is filed under Scams. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

Leave a Comment

Please note: Comment moderation is enabled and may delay your comment. There is no need to resubmit your comment.


Under the 'fair use' rule of copyright law, an author may make limited use of another author's work without asking permission. Fair use is based on the belief that the public is entitled to freely use portions of copyrighted materials for purposes of commentary and criticism. The fair use privilege is perhaps the most significant limitation on a copyright owner's exclusive rights. "