Guest Post: Stealth Monetization in the U.S.A.

Tyler Durden's picture

Submitted by Gonzalo Lira

Stealth Monetization in the U.S.A.

Insofar as money is concerned, governments and central banks should be kept as far away from one another as a pedophile from Dakota Fanning. If ever the twain should meet, very bad things would happen. This is because of the disparate natures of government, on the one hand, and the central bank, on the other.

Governments spend money. They spend money on social programs to keep the people docile and happy, wars to keep up the illusion of safety and security, and—almost as an afterthought—infrastructure. Ordinarily, they get the money for all of these things from taxes and other fees that the government collects.
 
On the other hand, central banks print money. Most of the world’s economies depend on fiat currency—currency that has value because someone says it has value. The person who says it has value is the central bank. They are the custodians of the currency—they take care that it retains its value.

Tons of people say that a fiat currency is unstable, and doomed to fail, and that we will all rue the day that we accepted that abomination into our lives!—and blah-blah-blah, rant-rant-rant.

But in most cases—all cases, actually, regardless of what the tin-foil hat brigade might rant—fiat currency works like a charm. The proof of this is the last 40 years: All of the world’s major currencies have been fiat since at least 1970. The dollar has been fiat since 1973, and by certain definitions, fiat since 1933, or even 1913—and it’s still around. That’s been because of the Federal Reserve (the U.S.’s name for its central bank).

Central bank independence is key for a successful fiat currency. If the government ever got its hands on the central bank’s printing presses, all hell would break loose. Rather than raise taxes and collect fees—which are politically unpopular—the government could (and would) direct the central bank to print all the money needed to carry out the government’s various programs.

This is monetization.
 
What would happen once monetization took place is pretty obvious: So much of the currency would be printed by the government that businesses and ordinary people would lose faith in the currency as a stable medium of exchange. Since fiat money depends on people’s faith in it, this would become a self-reinforcing situation: The currency would fall leading to people losing faith in it, leading to the currency falling even more.

This is the mid-stages of hyperinflation. Eventually, the currency would become worthless, wrecking the economy of the currency.
 
It’s happened more times than one would imagine. But the last time it happened in an advanced economy was Germany in 1922, the so-called Weimar episode. Since then—even during total war in WWII—there has not been an incident of hyperinflation in any advanced economy. (Though as I wrote in Was Stagflation in ‘79 Really Hyperinflation?, there have been bouts of high inflation that had all the traits of incipient hyperinflation.)

A collapse in the currency is why the government and the central bank are kept separate from one another—the fear of monetization, and what could happen, keeps the two apart.
 
However, now, in the good ol’ U.S. of A., monetization is taking place—and it is happening right before our eyes, even though no one is realizing it. This monetization is invisible to sophisticated analyses, but obvious to anyone looking at the situation. Like one of those stealth fighter jets that are visible to the naked eye of a goat herder, but invisible to the radar and infrared and other sophisticated equipment of the professional military? Same thing:

It’s what I call stealth monetization.
 
What happened in the Fall of 2008? Essentially, banks found themselves holding debts that would never be repaid—which meant the banks could never pay back the money that they in turn owed to depositors and other creditors.
 
The bad debts the banks owned—the so-called“toxic assets”—were bonds made from the real-estate and commercial real-estate mortgages, as well as other collateralized debt obligations. Since the properties underlying these bonds had fallen in price—because their prices had been a speculative bubble to begin with—the bonds made from these bundles of loans would never be fully paid off.
 
In other words, they were bad loans. Therefore, the banks which had made the loans—the banks which owned these toxic assets—would lose so much money that they would go bankrupt. If they did go broke, the U.S. and world economies would take a massive hit.
 
So in order to avert this fate, the Federal Reserve bought these toxic assets from the banks—but the Fed didn’t pay the market value for these toxic assets, which were pennies on the dollar: Instead, the Federal Reserve paid full nominal value for the toxic assets—100¢ on the dollar. The banks the Fed bought these toxic assets from became known as the Too Big To Fail banks—for obvious reasons.

How did the Fed buy these dodgy assets? Simple: In 2008 and ‘09, the Fed “expanded its balance sheet”. That’s fancy-speak for, “The Federal Reserve created about $1.5 trillion out of thin air.” That’s essentially what they did. The Fed just decided, “We’re going to create $1.5 trillion”—and lo and behold, $1.5 trillion came to be.
 
What did the Fed do with this $1.5 trillion it conjured out of thin air? Why, it used it to buy up all the toxic assets and other dodgy assets from the TBTF banks.
 
What did the TBTF banks do with all this cash? Why, they turned around and bought U.S. Treasury bonds.
 
U.S. Treasury bonds are called “assets” by sophisticated finance types—in fact, sophisticated finance types call all bonds “assets”. But they’re really just debt—including Treasuries. U.S. Treasury bonds are certificates of debt that the U.S. Federal government issues, in order to finance its shortfall, the deficit.
 
The U.S. Federal government has been running monster deficits for a number of years now—but lately, it’s gotten pretty bad. In 2009 as well as 2010, the Federal government shortfall was over $1.4 trillion. This is roughly 10% of total U.S. gross domestic product—both in 2009 and 2010: A staggering sum of money. And it is likely that for 2011, the deficit will be another $1.5 trillion or so.

The Federal government has so much outstanding debt that it is unlikely to ever be able to pay it back.

A lot of people think this. A lot of sensible people think that a day will come when the markets no longer believe in the Federal government’s promise to pay back its debt. A lot of sensible, smart people think that, one day, no one will buy any more Treasuries—

—yet every week, Treasury bonds get sold with numbing regularity. The U.S. Federal government has never put Treasuries up for auction which did not get bid on.

Who are the people who buy these Treasury bonds? The primary dealers—that is, the Too Big To Fail banks.

In other words, the TBTF banks are financing the Federal government’s massive deficits. How are they doing it? With money the Federal Reserve gave them for their toxic assets.
 
This is one leg of stealth monetization.

Buying up toxic assets following the 2008 Global Financial Crisis was not the only way that the Federal Reserve got money into the hands of the TBTF banks, and thereby the Federal government—the other thing the Fed did was open up “liquidity windows”.

Liquidity windows are simply the mechanism by which the Federal Reserve lends money to the banks. The interest rate the Fed assigns to this money it lends to banks is called the Fed funds rate.

Right now—and for the past several months—the Fed funds rate has been 0.25%. That’s right: One quarter of one per cent. The interest is substantially lower than the inflation rate. This means that the Fed has essentially been giving away free money to the banks.

What are the Too Big To Fail banks doing with this free money? Why, they are buying Treasury bonds: The TBTF banks are borrowing money from the Fed at absurdly low rates, and then turning around and lending it to the Federal government by way of Treasury bond purchases.
 
This is the other leg of stealth monetization.

In these two ways, the Federal Reserve has been monetizing the Federal government’s debt. The Fed bought up toxic assets from the TBTF banks, which then went and bought Treasuries. And the Fed is lending money for free to the TBTF banks, which are then buying Treasuries.

Take a step back, and you get the picture: The Too Big To Fail banks are the sewer system by which the Federal Reserve supplies money to the Federal government for all its deficit spending.

This is stealth monetization.

It’s not even particularly stealthy, actually—it’s happening right out in the open. It’s just that nobody is pointing it out—or perhaps because it is an obscure, complicated system, nobody has realized what it actually is.

But it’s monetization, pure and simple. The Fed is printing up all the money the Federal government wants and needs.
 
To put it more bluntly—and disturbingly—the pedophile is in the room with Dakota Fanning.

One of the pernicious effects of this stealth monetization is the dis-incentive it gives banks to lend money to small- and medium-sized businesses. Everyone—including the Fed—is complaining that the banks aren’t lending to businesses. But I don’t know why they’re complaining—it makes perfect sense.
 
See, the TBTF banks get money for free from the Fed, and then they turn around and lend it to the Federal government by way of buying Treasury bonds. Treasury bonds are paying absurdly low yields, because they’ve been bid up so high by all those freshly minted dollars that the Fed printed up. But to the TBTF banks, it doesn’t matter how low the Treasury yields are—it’s still guaranteed profits. Lending money to the Federal government is totally safe.

But a loan to a small- or medium-sized business? It’s a risk—and a risk for only a slightly higher profit. The business might miss a payment, or even go broke. Plus it’s a hassle, to lend to a busines—all that administrivia! The paperwork, the loan applications, the due dilligence—blah-blah-blah-blah!
 
“Screw it,” say the TBTF banks. “Let’s just buy Treasuries.”
 
That’s how the American government’s massive deficit is sucking up all the available funds. Why bother lending to the private sector, when the Federal government is paying good interest on the Treasury bonds, and the Fed is lending an endless supply of money for free?
 
This is why private-sector businesses are not getting any loans, no matter how long the Fed keeps interest rates at rock-bottom levels—the Federal government is hoovering up all that money, leaving the private sector with nothing, not even lint.

Ben Bernanke and the Lollipop Gang at the Fed do not seem to understand the disincentive they have created—in fact, they just keep on adding even more liquidity: Backstop Benny has announced that QE2 is on the way—that is, further “expansion of the balance sheet”, so as to create more money to give out to more banks—

—so they can buy more Treasuries from the Federal government.

Other banks which are not TBTF are getting squeezed—everyone acknowledges that the banking industry is really hurting. But the TBTF banks are racking up monster profits, with monster bonuses.

That’s because they’re monsters—or more precisely, they are zombies: The American Zombie banks.
 
Now this is all good and fine, but is there a simple way to verify that this stealth monetization is indeed what is going on?

Yes—look at the markets:

Over the past few months, we have seen two things occurring simultaneously: Treasury bond prices are rising (and therefore their yields are declining), and the dollar has been falling against all commodities and all other major currencies.

This is a contradiction. This cannot be happening simultaneously for any sustained length of time—unless there is some exterior factor making this contradictory situation happen.

It is a contradiction because, if over a sustained period of time the dollar is losing value against commodities and other major currencies, then it would not make sense for investors to be putting more money into Treasuries and bidding up their prices. Not when their yields are at such absurdly low levels.

Stealth monetization: That’s what’s bidding up Treasuries, even as the markets are losing faith in the dollar.
 
Poor Dakota Fanning: She’s in the pedophile’s sights—and she has no idea what’s about to happen.
 
But we do.

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ZeroPower's picture

U.S. Treasury bonds are called “assets” by sophisticated finance types—in fact, sophisticated finance types call all bonds “assets”. But they’re really just debt—including Treasuries. U.S. Treasury bonds are certificates of debt that the U.S. Federal government issues, in order to finance its shortfall, the deficit. 

Who the fuck wrote this, another lib arts major?

mikla's picture

It's technically true -- you give me dollars, and I give you a promise to pay back, which we call a "bond".

With Treasury Bonds, of course, you have no claim to underlying assets (unlike corporate bonds).

All bonds merely represent a promise to repay.

Kayman's picture

Where debt is concerned your liability is my asset. So who the fuck are you ?

doolittlegeorge's picture

"my name is poo-poo.  this my dog foo-foo.  now it's time to screw you."

ZeroPower's picture

Ok... thank you for explaining to me the A=L+SH Eq equation. You entirely missed my point.

Re-read the whole post and try and see where the author is coming from. His opinions sway back and forth and are about as concise as the FED.

Ned Zeppelin's picture

Not sure I see any inconsistencies - where does he go back and forth? 

The only part I thought was off was the fact that .25% interest rates, or the ZIRP,  for the TBTFs have been with us since 2008, have they not? Not "several" months.  And it is a fundamental plank in the Fed statements that this will continue "for an extended period." 

This three card Monte inspired policy causes the accretion of "apparent" wealth to the TBTFs over that period of time and fills the gaping and disguised balance sheet holes the collapse of their asset values created in September, 2008. If you earn a 300 bps+ spread on massive piles of Treasuries over an extended period of time, you'd become really "wealthy" too. But it's all smoke and mirrors. 

Where does all this money come from? Well, for starters, it comes from all of the savers in the US who do not achieve any meaningful yield on their savings accounts.  In effeect, the interest Mom and Pop would have earned has been diverted to the TBTFs until further notice.  

 But take heart, the money stolen from you by reason of these policies is keeping a banker employed and his payments on the Mercedes and private schools current. AS that empathetic philanthropist Munger said, we should thank god every day Paulson and Geithner did what they did, because they had "no choice." I mean, any other solution would have meant the destruction of the western civilization as we know it, because if one guy at Goldman went under, well, that's a catastrophe - millions of middle class unemployed? Suck it up. 

blindfaith's picture

Ned, your comments are always good ones, and spare us the four letter words that too many feel necessary to shove in our faces.

I urge all to go rent the outstanding series by PBS "The American Experience, history of New York".  It is an uncanny eye opener and provides a bit of history on how and why things are the mess they are now ( the series was done in the early 1990's but it applies now).  The 'new' slogans that are tossed about by the Tea Party and some ultra conservative types, can find their roots in 1850 with the mega rich on 5th avenue loudly proclaiming " if YOU are poor , it is YOUR fault".  "Entitlements!, you are entile to nothing".  How the Irish immigrants were litterly slaves and considered to have no value as human beings. Words tossed around with total indifference to the fast mounting and astounding poverty just blocks away.   There was a price to pay...temporarily. The rich merchants worked them with little and often no pay, they had no rights with the police, they lived like animals.  The new righteous right now call them... Hispanics and Latinos, and the treatment has not changed...has it?  The real problems are just as they were in 1850, the rich bankers and merchants create the poverty and grap the last dollar they can find, while they gather ignorant people behind their 'call to arms' that the enemy is those people.  Those people are our problems, they take jobs we would not do.  Right?

The unholly people have the money to create proaganda to turn us against each other, and they laugh at our ignorance.

These rich bankers and government tyrants have the interest rates this low to force savings into stocks and risk assets, and all at Zero Hedge know how that money will disappear like magic.

I hear from every direction...cut the gov. funding.  Great, there goes your police, teachers, firemen, and most of the civil servants, and the military.  I don't want to see that, but THEY can certainly take a cut like the rest of us.

I hear from every direction...create jobs is OUR agenda if we get to DC...HOW? HOW? HOW?  Not one word on what, how, where, when.  NONE of them has ONE clue, one idea on what to do...NOT ONE!  Who is kidding who?  WAKE up everyone, it is all BS radical screaming.

The mega rich have taken the prosperty overseas, and left us with empty promisses that all of us know full well is BS.  They will keep us fighting among ourselves or hanging onto wishfull thinking,  while they pack the last steamer trunk and head to Shanghi or Singapore...right JIM ?  Don't the66 rich follow the rich to the next port of call?

Bananamerican's picture

I agree with some of what you said, but not the "no cursing" part...Fuck THAT...

and certainly not the illegal mexicans section.

The mexi's sneaking in here by the MILLIONS live like Kubla Khan compared to 19th century Irish legal immigrants. The Irish came from a failed state caused by mother nature and the english empire.

The mexicans are fleeing a failed state caused by... other mexicans. 

They shouldn't be here. They undercut american wages same as offshoring and Hi-B's.

We need giant catapults in the border states to shoot them and the quisling amerikan "employers" who hire them back across.

the end

hbjork1's picture

Ned,

We have a stepson in-law that, approaching 50, that is a lead technical officer at a chain bank (Not on the list of TBTF).  The family lives in a roomy three level house backing on a golf course with marble floors, bath and trim.  The kids are in private schools.  Last year, they they a "deal" on a vacation house on the Gulf coast Florida panhandle) and this year a "deal" on a relatively new mini motor home. (Repos no doubt).  

It is true that the guy works all the time but he expects to be able to retire between 55 and 60. 

 

 

Moonrajah's picture

Ima gonna kick your asset.

Hephasteus's picture

The system is so surreal the mind rejects the simple truth of it.

aint no fortunate son's picture

its really simple... just go down any street in NYC and watch the 3 card monte guys running their game. Where do you think Bernanke and Geithner came up with their plan? I'd add that there is another outcome from this monetization.. the TBTF's and several hedge and quant funds are diverting some of that fresh new money into spinning stocks higher via the HFT algos. That money doesn't go directly into the government coffers, but it helps banks make huge profits which repair a small piece of their destroyed balance sheets, pay themselves monstrous bonuses (call it their vig for being the pimp for the FED and Treasury) and a rallying stock market makes everyone mistakenly believe that the economy is recovering just as strongly.. which is supposed to, but is not, getting people optimistic and spending.

maddy10's picture

Everyone knows the "game"

The only thing that has kept going is the unprecedented co-operation among the countries of the world , thankfully.

I am not sure though how long US can still lead the pack with big muscle china in its way ahead

Enjoy people!These are the good times!

Hedge Jobs's picture

My avatar is coming true! But the picture in the article suggests US$ could be used more pratically as tiolet paper and this is simply not the case. The current US$ is far too scratchy. What benny needs to do with his next round of $ printing is soften them up a bit, a 2 ply tissue paper would be far more comfortable, with a nice fragrance as well just top it off!  

Al Gorerhythm's picture

I have to agree with you ZeroPower. First the author praises the CB through the back door, giving them credence by acknowledging their "independent status" from congress. So fucking what! Independence from congress equivilates to congress isn't responsible for any decisions that the Fed makes over money; its rate of creation, destruction, and price.

Pilot washed his hands at the trial of Jesus, effectively absolving himself of the fate of Jesus. Today, congress washes its hands in the trial of money, using the "independence of the Fed" ploy to absolve them of their responsibility to the Constitution. It dosen't wash. The Fed "OWNS"congress, holding its little black book against them, ...... bought and paid for whores.

(My apologies to all honest street walkers. At least you haven't sold out to treason.)

This author then rails against debt as if it appeared out of nowhere, all by itself. This guy is all over the place. You either support the creation of money via ledger book entry or you support the monetary system that creates money through endeavor. 

This crap that the Fed created boundless wealth through debt issuance over the last 40 years, is utter bullshit. They have created debt. Period.

ZeroPower's picture

Word.

I didnt take the time to explain it as well as you did, but that is exactly my point. Hence my statement that this guy formed his opinion on the whole system probably reading USA Today and whatever he was taught in poli sci class at his liberal community college.

You can't pretend to have such strong opinions and then sway back and forth like a fucking swing.

Ned Zeppelin's picture

Well, I hear you, but I think he was simply saying for the past decades, fiat has worked.  But now, its underlying problems are surfacing. I didn't read him as defending central banks - have you read his other posts? 

Al Gorerhythm's picture

Where has fiat worked? Where in the history of money, ever, has it worked. It's an illusion and a delusion. Its usefulness has been in make work programs (the illusion because that is all that has happened) blaringly announced by politicians so as to promote the appearance of the benevolent benefactor.

Wealth hasn't been created just because there are pretty cars on the road, new homes and shiny new buildings with XYZ Bank emblazoned on them. Not if its predicated on debt.

ALL MONEY under fiat is brought into existence through loans or debt creation. The reality of fiat has been and is once again being exposed for what it is. Hollow shelled debt!

People have been ringing a bell of warning since 1913, when the Fed was created.

The price of their funny money is mirrored in today's gold price. It is a delayed reaction to the malevolent behavior of men with hidden agendas. Their theft is blatant, yet some still forgive them. It's akin to the battered wife syndrome. He hit me but I still love him and I don't want to pursue charges.

They have really worked you over.

Ben Fleeced's picture

I see it as reaching out to a broader audience.

win's picture

NETFLIX CEO: 'Self absorbed' Americans
won't notice Canadian price discount...

yea,
and self absorbed americans won't notice
monetization either

midtowng's picture

I couldn't disagree more.

Central banks are an evil thing, and fiat currency is their tool. It's amazing to see someone on Zerohedge praising central banking and fiat currency just as the whole system is coming apart. it's sort of like seeing the BusinessWeek magazine cover praising housing in 2005.

mikla's picture

I didn't read it that way -- IMHO, the article's assertion was that previously the central bank was designed to be separate of government spending (e.g., the Fed can print but the Treasury must issue bonds), but that the system is now breaking down and we're merely doing "raw monetization".

I agree with you -- Central banks are evil, and debasing is what they (and governments) do (it's a hidden tax).  I don't think the article contradicts that, though.

Kayman's picture

ZH has discussed monetization of U.S. debt since it started in the Fall of 08. Nothing new here.  Bernanke prints worthless paper and funds Blankfein, Blankfein funds Timmy, Timmy gives Blankfein offsetting worthless paper and Blankfein collects the vig. The vig becomes bonuses.

If this was a game that could last, it would have been done before. Unfortunately these guys are gambling with the full faith and credit of the USA. And that my friend means you and your family.

Al Gorerhythm's picture

"I didn't read it that way...."

Then read it again.

Stevm30's picture

Our ancestors fought a revolution to NOT have a king.  The Federal Reserve can only expect "independence" when they give up their dependence on the state enforcing that their money alone can be used.  I'm waiting for a state to set up a new gold based currency and watch the fireworks fly!

 

http://en.wikipedia.org/wiki/Liberty_Dollar

puckles's picture

They tried to set up a gold currency in a rump Sharia-law corner of Malaysia last month.  It flopped.  There was a run on coins that was simply unreal (their error was to keep taking the worthless, and unconvertible, paper to buy the coins)....

Snidley Whipsnae's picture

"Bad money always drives out good"...everyone learns that in econ 101...or, they used to teach that.

A paper currency convertible upon request to gold can only work if the people believe there is enough gold in the banks to cover the paper. Otherwise the paper will be turned in for gold and the gold hoarded.

fearsomepirate's picture

Works with anything.  Just announce you're trading original Mickey Mantle baseball cards for pieces of dryer lint, and you'll get the same effect.

i.knoknot's picture

why hasn't ZH or jim turk or ... covered this little gem of information (the failure, that is - they did cover the original announcement...) .

i was under the impression they were the start of an avalanche.

not enough snow yet, i guess.

any references?

Stevm30's picture

100% reserve would work - can't have a run on that, by definition.

doolittlegeorge's picture

interesting thought here.  whose face is on the $1000 bill?  Now ask yourself "why that guy"?  The only democrat elected after Reconstruction up until Wilson who had "the big one" trying to "win the peace" after WWI.  I agree--the Fed is very much acting like a King.

frankTHE COIN's picture

Animal spirits, Teen spirits....

doolittlegeorge's picture

i like a little teen spirit.  tell me where...

Rogue Economist's picture

The Fed is trying to monetize, but unfortunately failing to do so. The notional money they are creating and handing out for free to the TBTF banks is mainly going into keeping the stock market artificially inflated and as you mention, buying USTs. There is no real "cash" being printed here, and certainly none making it out into the Main Street economy.

Eventually, the Stock Market will crash, as will the value of USTs, so all the money recently "created" will just as quickly disappear off the face of the Earth, in the Greatest Bonfire of Paper Wealth in All of Recorded History.

You don't get your hyperinflation until you get the Free Money into the hands of the people. As long as the people are starved for Cash (which they are with increasing unemployment), there is no money inthe Main Street economy to drive a hyperinflationary event.

RE

Nathan Muir's picture

You could not be more wrong.  There is real money in play, and it makes its way into the economy via gov. spending - think ARRA, entitlements, etc.  Fed creates cash, TBTF gets cash and buys T's, Gov spends said cash on BS programs in the real economy.  Further, the trillions already in existence can create hyper-inflation, when/if the T market blows the markets will be flooded with dollars, couple this with a rush into commodities - boom, HI.  If I am wrong, riddle me this - what does the gov do with the money it recieves for T's?  Answer = spend it.

doolittlegeorge's picture

the art of simplicity is always hard to argue with.  all i would ask is are you sure they're all "BS" programs?

dark pools of soros's picture

well it did get the opium trade roaring back in afghanistan....

mojine's picture

If the government is running "it" - whatever "it" may be, rest assured it is BS!

Rogue Economist's picture

The amount of money Da Goobermint is handing out now in terms of entitlements, military spending et al isn't a whole lot different than it was in 2007.  It didn't drive a hyperinflationary event then, it won't now either.  Most of the ballooning Fed balance sheet and $Trillions in Funny Money is NOT going into entitlements, its going to shore up the Swiss Cheese balance sheets of the TBTF banks.    They in turn invest said funny money in the Stock Market and USTs and look solvent, at least to Mr. Magoo.  When both the Stock Market and Treasuries crash, said funny money disappears into the ether and is NOT available for driving hyperinflation.

RE

The Rogue Economist's picture

Hyperinflation doesn't necessarily need a huge increase in the money supply. It can also happen when a previous use of a currency suddenly collapses (sudden bond crash with a flight into commodities, reserve currency replacement with the SDR?, Saudia Arabia starts accepting other currencies for oil and the world dumps it's oil buying dollars, et cetra.). What really defines a hyperinflation though, is when the velocity of money starts climbing toward infinity as more and more people panic and try to foist it off on real goods/assets sellers who need more and more of it to care. Ironically this means that there is an actual shortage of money in a hyperinflation, as the falling value means that there's never enough units of the currency to cover what's needed to keep the economy functioning.

Long story short...All it takes is a hard enough shock to the faith in a fiat currrncy's value to cause a panic out of it (hyperinflation).

Ned Zeppelin's picture

It also rolls over old debt, so the "net" is the new money. 

B9K9's picture

Wrong on two accounts:

  1. The Fed isn't trying to monetize anything. Ben has always known the Fed couldn't possibly offset enough (virtually worthless) private credit eg MBS with newly digitized base money without creating utter havoc. The game all along has been a mad attempt at re-igniting organic credit growth. Hence, the endless green shoots BS, manipulated equities, ZIRP, falsified statistics, ad infinitum, in order to entice good 'ole J6P back to the 3 card monte table.
  2. Hyperinflation doesn't require an increase in base money; in fact, it can occur with deflating base money. All it requires is loss of faith/confidence. One day someone is willing to sell X amount of food for $Y dollars. The next, they don't care how many fiat $Y dollars you have, they're hanging on to their X food.

As to the rest of this article, wow GL, you have really exposed yourself this time. You should have stopped when you were still ahead after essay #2.

First of all, the Weimar hyper-inflation event occurred while the Reichsbank was still private, just like the Fed is today. Secondly, the Reichsbank was actively lending money to shorts who were driving the price of marks down. Ready the full story here:

http://www.monetary.org/

Thirdly, there is a fundamental, core element regarding the theory of money that is separated by two primary schools of though. Is money:

  • Purely a legal construct? or
  • An asset unto itself?

Let us first dispense with point #2: Gold (or any other commodity, PM or otherwise, that holds intrinsic value) as money - is subject to its own supply/demand valuation vis-a-vis a market basket of goods/services being bought/sold.

Ok, now for point #1 - point number one of course is fiat. Now, if we are to have fiat, should the people, via their collective association aka government control its creation and license/regulate private credit, or should it be outsourced to a private party?

Many who believe in #1 (I for the record stand for #2) make a reasonable case that it should be treated as a 4th branch of government. Using this logic, it is way, way too important to be outsourced, for all the obvious reasons that we see manifesting themselves today.

If you're going to advocate or defend fiat in any way, it's hard to defend our current circumstances of fraud, corruption and national decay as in any way preferable to government controlling issuance in the first place, with all the attendant problems that would bring.

From a free market/libertarian point of view, it is best to avoid discussion of fiat altogether and focus on money floating subject to its own demand/valuation as the only true mechanism for promoting liberty and freedom from government interference.

Spalding_Smailes's picture

(#1)The Fed isn't trying to monetize anything. Ben has always known the   (#2) Fed couldn't possibly offset enough (virtually worthless) private credit eg MBS with newly digitized base money without creating utter havoc.  (#3) The game all along has been a mad attempt at re-igniting organic credit growth. Hence, the endless green shoots BS, manipulated equities, ZIRP, falsified statistics, ad infinitum, in order to  (#4) entice good 'ole J6P back to the 3 card monte table.

 

 

 #1-Monetization is the process of converting or establishing something intolegal tender. They must instead pay with currency already in circulation, or else finance deficits by issuing new bonds, and selling them to the public or to their central bank so as to acquire the necessary money. For the bonds to end up in the central bank it must conduct anopen market purchase. This action increases the monetary base through the money creation process. This process of financing government spending is called monetizing the debt.

#2 Since the mbs are market to 90% plus...& hidden from view, this is not that big of issue, accounting, basel II sidestep, uncle sam is spending for us & all is it takes is a big old tax cut to inject life into joe six pack, but at this time helping joe with a big old tax cut is off the table, until they want to induce a bit of inflation.

#3 Credit contracting like crazy, banks have no interest in extending credit to joe six-pack, borrowing dropped at an annual rate of $3.6 billion in July, the Federal Reserve reported Wednesday. That marked the 17th drop in credit in the past 18 months. If joe six-pack could kick the can he would, he has no interest in drinking his med's...

#4 Uncle Ben Sholom knows very well that the buyers for mortgage backed secuities are long gone, and joe six pack is underwater, he would love to refi but he would have to come up with another 20,000 & going back to (#3) Would he not go to the well one more time if he could? The credit window has been shut.


doolittlegeorge's picture

i miss your old picture but this one did cause me read your entire piece which was quite good.  you tell me which is better.

DosZap's picture

spalding,

"#3 Credit contracting like crazy, banks have no interest in extending credit to joe six-pack, borrowing dropped at an annual rate of $3.6 billion in July, the Federal Reserve reported Wednesday. That marked the 17th drop in credit in the past 18 months. If joe six-pack could kick the can he would, he has no interest in drinking his med's..."

I am surprised some have not figured this out, as it's talked about daily.

No one want's to borrow money, only people who are running up CC's to max, and walking are using credit.

The BIG users of credit, are not playing this game.They cannot see their way clear to MOVE ahead with their futures,and their businesses.

Their are no clear rules, and the ones they can see they do not like.

Headline today, "OBamaCare Worse than Expected".

The devils in the details.............no one is going hire, expand, or try and grow a business in a climate of uncertainty.

The lone exception is Exporters. Small/Med businesses are the prime engines of growth for this country, always have been, always will be.

Until there is some semblance of STABILITY, they are simply not going to risk their fortunes, and livlihoods on a whim.

Bank it.

Ned Zeppelin's picture

Couple of points:

1.  Also think about the notion that Lira talks about that the money system "must" be controlled by an "independent" central bank. Let's get serious - it's not "independent" - this is a cover story for permitting control by elites. In effect - people, you're too stupid to be trusted with "our" money.  I submit the same problem - currency debasement - that is the "excuse" for "independence," will occur, and they know it. It's just that when it occurs, the timing and manner is controlled to serve the elites.  Follow the money. 

 

2.  Another point I have been pondering is that while we point to the bad debt, we forget the enormous pile of derivatives that are failed that were built on top of that failed debt (Originally designed, like CDOs, to multiply profits from the same transactions). The actual losses are much, much bigger than we know.