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Guest Post: The Truth About Excess Reserves

Tyler Durden's picture




 

Submitted by Azizonomics

The Truth About Excess Reserves

Tyler enquires about excess reserves:

While the current iteration of the Fed, various recent voodoo economic theories, and assorted blogs, all claim that excess bank reserves are never an inflationary threat, it is precisely two Federal Reserve chairmen’s heretic claims that reserves will light an inflationary conflagration, that forced then president Truman to eliminate not one but two Fed Chairmen, and nearly result in the “independent” Federal Reserve being subsumed by the Treasury to do its monetization and market manipulation/intervention bidding. Which then begs the question: who is telling the truth about the linkage of reserve accumulation to inflation — the Fed of 1951, or every other Fed since, now firmly under the control of the Treasury-banker syndicate?

This is of course a live question. Excess reserves are at never-before-seen levels:


Thats’ right — throughout the postwar period, banks have almost always lent out all the way up to the reserve requirement.

So, does the accumulation of excess reserves lead to inflation?

Only so much as the frequentation of brothels leads to chlamydia and syphilis.

Excess reserves are only non-inflationary so long as the banks — the people holding the reserves — play along with the Fed-Treasury game of monetising debt and trying to hide the inflation . The banks don’t have to lend these reserves out, just as having sex with hookers doesn’t have to lead to an infection.

But eventually — so long as you do it enough — the condom will break.

As soon as banks start to lend beyond the economy’s inherent productivity (which lest we forget is around the same level as ten years ago) there will be inflation.

So, will they?

I think that would mean biting the hand that has fed them. The financial complex owes a great deal to the Fed for bailing them out in 2008, and throwing a pig’s ear of slush money their way in 2009 and 2010 in the form of QE. Like any Fat Tony, Bernanke commands the allegiance of his minions. But even the most enduring mafia bosses sometimes get shot. There is no status quo that a black swan cannot shatter.

But there are greater inflationary risks (which also, we must note, may set alight the inflationary potential of the excess reserves). A severe oil shock — caused by (say) Iran closing the Strait of Hormuz, something that America, NATO and the UN seem totally set upon — is one. So too could be a global trade shock caused by a regional war — there are lots of danger zones (North Korea, Pakistan, Iran, Syria, Egypt, Libya, Lebanon, etc, etc, ad infinitum).

And how about the return of some of the trillions of dollars now floating around Asia?


As more Asian nations ditch the dollar for bilateral trade, more dollars will end up getting dumped back into the American market. (Paul Krugman says this is a good thing. Nope.)

So while the amassing of excessive reserves perhaps does not pose quite the same inflationary risk as collapsing reserve currency status, I think it is safe to say that while the 00s securitisation bubble was akin to juggling dynamite, this trend of amassing excess reserves (done, lest we forget, as a stability measure to protect primary dealers against another shadow banking collapse) is closer to going to sleep upon a bed of dynamite.

 

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Sat, 04/21/2012 - 18:50 | 2364101 vast-dom
vast-dom's picture

HYPERreserves for HYPERINFLATION.

 

Oh yeah, FACEBOOK CREATED BY DOUCHEBAGS FOR DOUCHEBAGS, EXCLUSIVELY!

Sat, 04/21/2012 - 19:26 | 2364146 UP Forester
UP Forester's picture

So, you're saying $5.5 to $6 trillion of domestic and Asian dollar reserves is a bad thing?

Hell, that's less than $20,000 per person in the US.

Or less than 1/2 of 1% of the derivatives the Big 5 banks hold.

Or about the amount it would take to upgrade roads, bridges, power lines, etc.

 

Or a helluva big Golden Parachute for TPTB, should get them about a week's worth of food if they don't pull out, quick....

Sat, 04/21/2012 - 19:34 | 2364151 spiral_eyes
spiral_eyes's picture

Key difference between the derivatives and FX reserves: 

The FX is actual dollars that can be spent in US markets on food and energy.

The derivatives, for everything we can say about them in terms of systemic risk (and we can say a hell of a lot about them in those terms) can't actually directly be spent on food and energy, and so don't constitute such an an inflationary potential.

Sat, 04/21/2012 - 19:59 | 2364171 AUD
AUD's picture

What you don't understand is that the derivatives can be 'money good'. If you read Doug Noland you will begin to understand the more subtle aspects of 'moneyness' & inflationism.

Sat, 04/21/2012 - 20:59 | 2364214 spiral_eyes
spiral_eyes's picture

Meh.

What you need to understand is that using securities/derivatives to inflate commodities beyond the purchasing power of the real dollar economy is stupid and self-defeating, and those people doing it would just be shooting themselves in the foot/face because if you cannot get a buyer at the pump or at the store then your speculations will just rot in inventory (although I'm sure our benevolent overlords would bail such speculators out of their stupidity for they would be "just the poor victims of market forces") To get real hyperinflation you need excessive real dollars circulating in the real economy.

Yes, there is some precedent for these monetary equivalents being used in transactions particularly in commodities/futures/etc (just as there was for their securitizational cousins). But right now any "money" supply expansion from derivatives is being counter-balanced by the relative contraction of three-letter securitisations from the "money" supply (certainly next to where we were in 2006).

There's more than enough money — actual dollars, not pseudo-instruments with varying degrees of "moneyness" (money supply vs "money" supply) — to create hyperinflation (as defined as a 100% y-o-y PPI or CPI). Simply, the quickest way to a serious inflationary impact is a degeneration of the U.S. dollar's role as world currency, thus ushering back a lot of dollars — real dollars — into the U.S. economy. There's a reason why there are lot of rules and regulations trying to prevent the Chinese from acquiring U.S. securities. But they'll just use proxies. The money will flow back.

Sat, 04/21/2012 - 22:42 | 2364308 AUD
AUD's picture

using securities/derivatives to inflate commodities beyond the purchasing power of the real dollar economy is stupid and self-defeating

Meh Meh... what you need to understand is that you talk shit. The real dollar is nothing of the sort. It's just, like all the various credit derivatives floating around.... junk.

Sun, 04/22/2012 - 00:26 | 2364340 spiral_eyes
spiral_eyes's picture

Derivatives in themselves aren't really part of the money supply, or certainly not the money supply that people in the real economy use to purchase goods and extinguish debt.

Let's try it: go purchase an option on some pork bellies or orange juice or sweet light crude for August delivery.

Take a copy of that option into a store.

Try and pay for your shopping with it.

They will laugh you out of the store.

To pay for your condoms, duct tape, vaseline and cucumbers, or whatever you are buying from the store, you have to convert to benjamins. 

I am worried about real hyperinflation, based  (among other things) on a shitload of dollars coming home as a result of the dollar's reserve currency status ending. 

You seem to believe it already happened. 

Sun, 04/22/2012 - 10:10 | 2364651 Element
Element's picture

Can we call them excessive paper-promises instead of reserves?

 

(why does zh's language seem so much clearer than deadshit-Bernank's FED-Speak?)

Sun, 04/22/2012 - 08:14 | 2364527 GMadScientist
GMadScientist's picture

Leverage provides excessive real dollars (or at least credit which is fungible for same).

Regs preventing Chinese from buying US securities?! WTF are you talking about?

China has poured many billions into natural resource companies in the US in the last couple years alone (why buy the coal, when you can buy the whole mine). They have hundreds of billions in treasuries.

What planet are you from?

Sun, 04/22/2012 - 08:38 | 2364549 spiral_eyes
spiral_eyes's picture

"Regs preventing Chinese from buying US securities?! WTF are you talking about?"

Yes of course they own a lot of U.S. securities. I'm talking about them being able to buy the U.S. securities they want to buy (AAPL) not the ones that Timmy G demands they buy (Treasuries).

Let's be honest, when it comes to the Chinese government buying US companies what passes for "due diligence" very often amounts to "China stay out". There have been a lot of (smaller) exceptions, but by no means would that be the case if they started trying to buy out really big names (and by that I mean AAPL, which they have the means and I think the will to do). 

Sun, 04/22/2012 - 09:15 | 2364600 GMadScientist
GMadScientist's picture

You pretend AAPL has no say in the matter. Odd.

 

Sun, 04/22/2012 - 09:27 | 2364612 spiral_eyes
spiral_eyes's picture

You pretend the pension funds and hedge funds won't say yes to $1,000 a share? 

This is just a suspicion, but I get the feeling there are quite a few U.S. based proxies running off Chinese government money that are vacuuming up U.S.-based equities. I suspect that trend will only grow.

Sun, 04/22/2012 - 08:07 | 2364520 GMadScientist
GMadScientist's picture

Derivatives enable (patently insane levels of) leverage which most certainly can be spent on food and induce inflation today (at least in the price level of anything that isn't financed).

 

Sun, 04/22/2012 - 08:49 | 2364555 spiral_eyes
spiral_eyes's picture

Yeah. 

But the fact that inflation (either the BLShit or Shadowstats varieties) isn't running at 20-30% suggests that the money just isn't finding its way into Joe Schmo's pockets.

There do seem to be a few programs to bring Wall Street style leverage to Main Street (e.g. HARP giving homeowners up to $200,000 for renovations for $100 down) to satisfy the Keynesian craving for aggregate demand.

We'll see how it works out. I still think the biggest inflationary threat is the end of the reserve currency status.

Sun, 04/22/2012 - 09:22 | 2364608 GMadScientist
GMadScientist's picture

Biggest inflation threat is oil price shock. It rips through the rest of the economy and the margin compression that results will be devastating.

Hyperinflation is a function of the health of all currencies (we can hold out a long time in the "least ugly girl in the room" contest due to our liquid T market).

 

 

Sun, 04/22/2012 - 09:34 | 2364620 spiral_eyes
spiral_eyes's picture

"Biggest inflation threat is oil price shock."

Yeah, that's a respectable view. It's definitely up there.

I'm not sure I agree about "least ugy girl in the room". I think that that is something that a lot of U.S. commentators are telling themselves as a way of semi-acknowledging American problems while maintaining the impression of American primacy.

A degenerating empire is always ugly. 

Sun, 04/22/2012 - 10:41 | 2364698 GMadScientist
GMadScientist's picture

Rome didn't have thermonukes. Just sayin.

 

Sun, 04/22/2012 - 11:46 | 2364772 spiral_eyes
spiral_eyes's picture

That makes it much more dangerous.

Sat, 04/21/2012 - 18:57 | 2364111 bank guy in Brussels
bank guy in Brussels's picture

The excellent Doug Noland in his PrudentBear 'Credit Bubble Bulletin' touched on this topic yesterday, with a perspective that the central bank liquidity-pumping role is causing extremely destabilising kinds of asset price inflation, quite significantly dangerous aside from the consumer price inflation question, and that the destabilisation does not have any easy resolution.

http://prudentbear.com/index.php/creditbubblebulletinview?art_id=10654

Sat, 04/21/2012 - 19:53 | 2364166 AUD
AUD's picture

If you don't read Doug Noland you don't know what the fuck you're talking about.

Sat, 04/21/2012 - 18:59 | 2364114 francis_sawyer
francis_sawyer's picture

The problem with 'excess reserves' is 'EXCESS RESERVES'...

Held on a balance sheet in case of emergency?... HAHAHAHAHAHAHAHA!

That's like a heroin addict having 'excess reserves' of heroin on the bathroom medicine cabinet JUST IN CASE the day arrives that the worlds heroin supply runs out...

Sat, 04/21/2012 - 19:05 | 2364121 spiral_eyes
spiral_eyes's picture

You say opium. 

Benny says hopium.

Sun, 04/22/2012 - 06:05 | 2364456 TrillionDollarBoner
TrillionDollarBoner's picture

Excrescence!

I appreciate the downright honesty of the acronymn in any case.

 

 

 

Sun, 04/22/2012 - 00:45 | 2364115 q99x2
q99x2's picture

'going to sleep upon a bed of dynamite'

with a lit cigarette and an ample dose of xanax.


Excess Reserves = too much FED

Sun, 04/22/2012 - 02:13 | 2364392 kiwidor
kiwidor's picture

it's more fun if you mix the xanax with 15 pints of strong lager ...on an empty stomach of course.  makes for a very interesting evening.

 

Sun, 04/22/2012 - 08:16 | 2364529 GMadScientist
GMadScientist's picture

...and then auto-erotic asphyxiation for a "nightcap".

Just don't do it INXS. (hehe)

Sat, 04/21/2012 - 19:07 | 2364122 HD
HD's picture

Subprime lending has already started. Once again they are sending out pre approved cards to the "credit challenged" at 30% APR.  Want a car loan for a new GM? If you can drool into a cup then you qualify.

System was broken before. Now it's just insane. Bring on $5 gas and $10 peanut butter.

Sat, 04/21/2012 - 19:20 | 2364138 Raymond K Hessel
Raymond K Hessel's picture

That's where the banksters want the deleveraging to occur.  Accounting wise, it's a wash.  Excess reserves against bad loans.  

Sat, 04/21/2012 - 19:21 | 2364139 Raymond K Hessel
Raymond K Hessel's picture

...oh, and I forgot... deleveraging bitchez!!

Sun, 04/22/2012 - 09:04 | 2364583 GMadScientist
GMadScientist's picture

Shouldn't you be in Veterinary School, son?

 

Sat, 04/21/2012 - 19:36 | 2364156 1C3-N1N3
1C3-N1N3's picture

If there are mass defaults coming, and if such an event is severely deflationary, then at that point (just having that trillion-plus still sitting there) the banks will be able to treat themselves to a much higher percentage of the overall purchasing power in existence.

Sat, 04/21/2012 - 19:42 | 2364159 narnia
narnia's picture

Excess reserves in the Great Depression
http://www.haas.berkeley.edu/groups/finance/WP/rpf128.pdf

Sat, 04/21/2012 - 19:58 | 2364170 spiral_eyes
spiral_eyes's picture

Very interesting paper.

I guess the Maiden Lane purchases were Bernanke's attempt to introduce a "deposit insurance" for securitisation (i.e. the shadow banking equivalent of "deposits"). Pretty stupid if you ask me; securitisation is fundamentally flawed and spreads risk around like fucking chlamydia.

Sat, 04/21/2012 - 21:39 | 2364243 itstippy
itstippy's picture

A great read.  Thanks.

It's glaringly obvious that another round of QE wouldn't "jump start the economy", since the banks are already sitting on $1.5T of excess reserves thanks to the Fed's asset purchase programs and ZIRP.

This is called "pushing on a string".  No money velocity at all.  Oh well, maybe another trillion will loosen things up and get us out of this "economic soft patch".  Ya think?

Sat, 04/21/2012 - 20:00 | 2364174 Irksome
Irksome's picture

As I understand it, the Fed is paying 6% interest on all the money parked there.  So even if the trillions are not being directly injected into the money supply, the interest is, right?  I wish I could park my money in the Fed and earn 6% guaranteed.

Sat, 04/21/2012 - 20:26 | 2364192 itstippy
itstippy's picture

The interest rate the Fed pays on excess reserves is .25%

http://www.federalreserve.gov/monetarypolicy/reqresbalances.htm

Sat, 04/21/2012 - 20:26 | 2364196 Irksome
Irksome's picture

Now I'm going to have to hunt up the sources (multiple) that I read last month that the Fed is paying 6% on trillions of bank's money held at the Fed to encourage them to leave it there.  Pretty sure at least one of those was here on ZH.  BRB...

Sat, 04/21/2012 - 20:58 | 2364222 Irksome
Irksome's picture

Well, I can't find it.  Perhaps I'm going senile.  Or perhaps I'll find it in a few days and come update this thread.  In the meantime, I'll go eat a slice of humble pie.

Sat, 04/21/2012 - 23:19 | 2364329 AlaricBalth
AlaricBalth's picture

Perhaps you are referring to the 6% dividend the Federal Reserve System pays to its member commercial banks on the shares they own of the FR banks.
http://www.richmondfed.org/faqs/frs/

Sun, 04/22/2012 - 14:17 | 2364942 Diet Coke and F...
Diet Coke and Floozies's picture

mmmm humble style 3.14159265...

:)

Sat, 04/21/2012 - 21:31 | 2364254 itstippy
itstippy's picture

Bernanke's the idiot who should be eating humble pie.  But no - he gets to be Time Magazine's "Man Of The Year" for saving the financial system.  The Atlantic writes glowing articles about how great he is; how he saved us all from The Brink.  He strokes his beard and blinks and says learned things. He has lunch with Jaime Dimon and Lloyd Blankfein.  He wears nice suits.

The U.S. financial system is completely dysfunctional.  Bernanke is making things worse and worse by flinging wads of money at behemoth financial institutions who have no intention of doing anything worthwhile with it (for the Nation as a whole, that is).  The Mainstream Media can't say enough about how wonderful it all is. 

We are screwed.  

Sat, 04/21/2012 - 22:06 | 2364287 ViewfromUnderth...
ViewfromUndertheBridge's picture

sub-prime is contained...

Sat, 04/21/2012 - 21:09 | 2364233 DormRoom
DormRoom's picture

lmao.. Paul Krugman is going to do a reddit IAMA soon (TBD).

 

you guys can ask him all the questions you want..

 

[check out right sidebar on the reddit site]

src: http://www.reddit.com/r/IAmA

Sat, 04/21/2012 - 21:20 | 2364241 spiral_eyes
spiral_eyes's picture

Here's one for starters:

How far do you take your belief that "broken windows" are good for growth. Do you believe that America needs more natural disasters, riots, and civil disorder? Surely according to your worldview the money used to clean up would make a great impact on aggregate demand, and thus that would be good for the economy? Why don't you consider that the economic damage of "broken windows" might just outweigh the spending benefits?

Sat, 04/21/2012 - 21:31 | 2364253 miker
miker's picture

You folks seem to have a deeper grasp of hyperinflation causes.  Question:  In your opinion, do you think a widespread loss of faith in debt instruments (treasuries but coroporate debt, munis etc.) could cause hyperinflation?  Where would all those dollars go?

Sat, 04/21/2012 - 22:08 | 2364288 ViewfromUnderth...
ViewfromUndertheBridge's picture

for a loaf of bread...

Sat, 04/21/2012 - 22:23 | 2364297 disabledvet
disabledvet's picture

yeah, well..."welcome to the white swans of natural gas, cloud computing and solar plays." these are MASSIVELY deflationary...as well as "the collapse of Japan" and "the collapse of the EU"...with an Arab revolt as "the income producing opportunity of a generation." which is probably why we never see any data attached to Tylers Durden "capacity for abstract thought." this is a veritable FLOCK of white swans! http://www.youtube.com/watch?v=JLg64RQwIJU&feature=player_detailpage
that's right people. trumpeter swan love! trumpeter swan love!
http://www.youtube.com/watch?feature=player_detailpage&v=DcJac6OykfM

Sun, 04/22/2012 - 00:29 | 2364352 mess nonster
mess nonster's picture

Yeah, it all seems so schitzophrenic...Europe collapsing into a debt sinkhole they cannnot climb out of.  Peak Oil. Looming war with Iran. Foreclosures on the rise again. Derivatives.  Fukushima. 450 OTHER nuclear power plants. X-factors like comets, CMEs, earthquakes, and volcanoes.

That's a short list of various deflationary forces. And on the inflationary side we have... excess reserves?

I know that holding PM's will make anyone wish for hyperinflation, but I don't see it coming. I wish it wouid. I think hyperinflation is the easier way to pay write off debt. Easier that is, than starvation or being struck by bullets, which are the customary deflationary ways.

Sun, 04/22/2012 - 01:00 | 2364363 jimmyjames
jimmyjames's picture

I think hyperinflation is the easier way to pay write off debt. Easier that is, than starvation or being struck by bullets, which are the customary deflationary ways.

***********

The only reason deflation's are so severe is because governments wont let the market work-they get involved in price support/tariffs/trade barriers/subsidies etc. and it does not allow the market to clear-

In the 30's farmers poured out milk and governments paid farmers not to seed land to create a shortage in order to hold prices up and hunger was rampant everywhere-

Let the free market work-if they would have done that in 01-we wouldn't be in the mess we're in today-

Sun, 04/22/2012 - 08:52 | 2364564 GMadScientist
GMadScientist's picture

Yes we would, we'd just have been in it since 02 instead of 08.

I'll grant you all the interventions you mentioned were fruitless or even detrimental, but that doesn't obviate your causal cart being before your horse.

So you just "roll D20 to disbelieve" deflationary spirals?!

 

Sun, 04/22/2012 - 09:55 | 2364643 jimmyjames
jimmyjames's picture

Yes we would, we'd just have been in it since 02 instead of 08.

I'll grant you all the interventions you mentioned were fruitless or even detrimental, but that doesn't obviate your causal cart being before your horse.

So you just "roll D20 to disbelieve" deflationary spirals?!

************

If the market would have had any say-there would be no bad debt today-there would be no more TBTF banks--the bailed out giant corporations ie: GM would have been bankrupted and sold off where they could have been restructured-

Prices would have fallen to affordability which would have brought buyers into the market-

How does wiping out bad unpayable debt-put the cart before the horse?

That's the first thing that has to happen before we have any chance of moving ahead--bankruptcy is balance sheet positive-

Sun, 04/22/2012 - 08:03 | 2364515 itstippy
itstippy's picture

Certain conditions must be met to wipe out debt via inflation:

1) It must be legacy debt.  You can't be taking on new debt.  If an individual, corporation, or government needs to continue borrowing money to meet current expenses they won't be saved by inflation.

2) The debt must be long-term and at a fixed rate.  If an individual, corporation, or government needs to keep rolling over the debt every couple years they won't be saved by inflation.

3) Income must keep pace with or outpace inflation.  Wages (individuals), profits (corporations), or tax revenues (governments) must go up above the inflation rate or they won't be saved by inflation.

Inflation is not a silver bullet for killing debt.  An individual with a big mortgage or student loan in an inflationary environment that is stimulus-driven (vs. wage-driven) can get eaten alive.  Living costs go up, real income goes down, the debt becomes ever more burdensome.  The asset they spent the money on (a house or a diploma) doesn't inflate in value, but food and fuel does. 

Sun, 04/22/2012 - 02:43 | 2364355 jimmyjames
jimmyjames's picture

Thats’ right — throughout the postwar period, banks have almost always lent out all the way up to the reserve requirement.

As soon as banks start to lend beyond the economy’s inherent productivity (which lest we forget is around the same level as ten years ago)there will be inflation.

**********

There were essentially no reserve requirements-it was manipulated in 1994 by Greenspan talking Congress into allowing the use of Sweeps-which amounts to an overnight transfer (sweep) of checking deposits into savings deposits and presto--it looked like new deposit money to be levered up and loaned out-

http://bit.ly/GZXzCG

That is how credit ended up being  60 times the cash supply when it all went to hell in 08-they have deleveraged debt some ie: hid it in FNM the Fed etc. and at the same time cranked up the money supply to about 20+ to 1

Of course very little of the deleveraged debt has really gone anywhere-it was just transferred through the conduits to future taxpayers and we can see by the reserves in Commercial banks that the money is not moving out of there in a rush-

http://research.stlouisfed.org/fred2/series/EXCRESNS

http://research.stlouisfed.org/fred2/series/TCMDO

http://research.stlouisfed.org/fred2/series/BASE

Unless they do like China and force the banks to lend and maybe force people/business to borrow- i don't see anything inflationary being caused by the pile of "bankers stolen loot"-if you think they're gonna loan the booty out to the peasants in this environment--i think you're dreaming-

 

Sun, 04/22/2012 - 08:47 | 2364557 GMadScientist
GMadScientist's picture

Will those reserves stay in Eccles forever? If not, what happens after?

An analog of potential and kinetic energies.

Sun, 04/22/2012 - 07:54 | 2364508 Happy Swede
Happy Swede's picture

Banks do not lend reserves. Loans creates deposits out of thin air. Banks are not revenue constrained they are capital constrained in their lending i.e. reserves does not really matter, just a way for the fed to control the overnight interest rate.

Sun, 04/22/2012 - 08:04 | 2364514 Monedas
Monedas's picture

Just as many lifeboats on the Titanic were lowered only half full...TPTB will line their pockets with Gold as they suppress the price !  They have lived well on their fiat....why not use it to secure their future....first class has it's privileges !   Monedas  1929   Government takes care of it's own first on the backs of the private sector slaves....but it can't take care of all of them !

Sun, 04/22/2012 - 09:00 | 2364574 GMadScientist
GMadScientist's picture

Excess relative to...their myth-to-market valuations?

Let's put all the cards on the table and nationalize any bitches that happen to actually be insolvent.

I call.

 

Sun, 04/22/2012 - 10:13 | 2364656 dizzyfingers
dizzyfingers's picture
“What Has The IMF Done With Our Money?” It's long past time to end its subsidization of failure.

Date Published: January 26, 2011

Publication: Forbes

Author: Matt Kibbe

For decades government officials have been touting the fallacy that International Monetary Fund payments cost American taxpayers nothing. Even former U.S. Treasury Secretary Robert Rubin claimed that "the IMF has not cost the taxpayer a dime."

This is misleading. Since the IMF operates under a veil of secrecy, these hidden taxpayer subsidies are not subject to annual appropriations, and they are nowhere to be found in the federal budget.

Out of the IMF's 187 member countries, U.S. taxpayers have the highest burden, providing over 17%, around $55 billion, of the IMF's total funding. Since voting weight is determined by the amount of money a country provides to the IMF, the U.S. also has the highest voting stake, at roughly 16.74% of the vote. This means that the U.S. is the only nation with the power to veto all major decisions that require an 85% supermajority to pass. We must put pressure on U.S. Treasury Secretary Tim Geithner to veto IMF bailouts for the first time in history.

The original mission of the IMF was to temporarily assist nations with short-term balance of payments problems under the Bretton Woods system. When that system of fixed exchange rates fell apart in the early 1970s, the IMF had no justification to continue. Instead of closing down, the fund simply redefined its mission.

In recent years the IMF has shown itself to be a prime example of our bailout culture. The fund has regularly put American taxpayers on the hook to bail out powerful banks and profligate nations with poor economic policies. Most recently the IMF sent $145 billion to the widely profligate Greece. The nation had long been living far beyond its means. According to the Organisation for Economic Co-operation and Development, total government expenditures  in Greece were 44.8% of GDP in 2008. Greece's failure to cut its bloated public sector and lavish welfare programs left it bankrupt. We were forced to pay for its mistakes.

This has opened the floodgates to massive European bailouts. As the Hoover Institution at Stanford University notes, "it would be difficult to devise a more regressive wealth transfer scheme than IMF financing programs. IMF loans are used to rescue wealthy, politically connected bankers, investors, and financiers at the expense of domestic taxpayers." The IMF recently announced plans to send $130 billion to spendthrift Ireland. It is reported that Portugal and Spain may be next in line to seek funding, followed by Italy and Belgium. The IMF has institutionalized what economists call moral hazard. It has encouraged reckless behavior by holding out the prospect of a bailout to any nation or large, politically connected bank that fails.

The IMF's counterproductive efforts have made financial crises much worse. Even former Russian Deputy Prime Minister Boris Federov has stated, "I strongly believe that IMF money injections in 1994-1998 were detrimental to the Russian economy and interests of the Russian people. Instead of speeding up reforms, they slowed them."

Take Argentina. For many years the IMF poured into the country taxpayer-subsidized loans with an exceptionally low interest rate of 2.6%. After receiving IMF bailout packages of more than $40 billion, the Argentine economy collapsed. The Joint Economic Committee found that the IMF "led to moral hazard problems" and "sustained and subsidized a bankrupt Argentine economic policy, whose collapse is now all the more serious."

Rather than encouraging pro-growth policies, IMF loans foster a culture of dependency among developing nations. It has created a horde of loan addicts. More than 70 countries have relied on IMF loans for more than 20 years, and most of these countries are left with massive debts that they cannot afford to pay, which only escalates poverty and instability. These IMF loans have distorted incentives to advance policies that spur economic growth. As Zambian economist Dambisa Moyo states, "foreign aid has been the biggest single inhibitor of Africa's growth." She further states "a constant stream of 'free' money is a perfect way to keep an inefficient or simply bad government in power." Even worse, these taxpayer-subsidized loans end up in the hands of corrupt dictators.

The IMF has spent decades propping up some of the most repressive regimes in the world. So far, there has been no correlation between IMF loans and growth. Even a Clinton administration task force acknowledged that, "despite decades of foreign assistance, most of Africa and parts of Latin America, Asia and Middle East are economically worse off today than they were 20 years ago." IMF loans are government-to-government transfers. A Joint Economic Committee study finds that "evidence suggests that the IMF knowingly makes loans to corrupt governments while recognizing that some of its loan conditions and procedures can create circumstances promoting additional corruption ... thus, IMF lending operations may be consistent with subsidizing corruption."

The U.S.' participation in the international bureaucracy threatens our sovereignty. Our elected representatives have no say in the IMF's bailout packages. IMF head Dominique Strauss-Kahn is a self-described socialist. In the 2007 election he sought nomination of the Socialist Party to run for president of France. He has called on European countries to yield power to the European Union, stating that "countries must be willing to cede more authority to the center."

Moreover, the IMF has proposed the idea of a global currency. An April IMF study reads, "a more ambitious reform option would be to build on the previous ideas and develop, over time, a global currency. Called, for example, bancor in honor of Keynes, such a currency could be used as a medium of exchange." In 1940 John Maynard Keynes first developed the idea of a supranational currency, called the bancor, to be the world's key currency. Clearly the IMF heads favor the ideas of Keynesian economics instead of free market principles that promote wealth and prosperity.

When will we say "enough is enough?" Let's send a message to the world that we will not tolerate the IMF's abuses. For the sake of American taxpayers and global financial stability, the United States must put its foot down. Let's end the madness by using our veto power to stop these irresponsible bailouts. The sooner we act, the better.

Matt Kibbe is president and CEO of FreedomWorks, a nationwide grassroots organization fighting for freedom, lower taxes and less government, and the author of Give Us Liberty: A Tea Party Manifesto.

Sun, 04/22/2012 - 12:05 | 2364806 ThirdCoastSurfer
ThirdCoastSurfer's picture

Money is just a transfer medium. 

Instead of bartering to obtain a car with 40,000 cans of corn, we use money instead to make the exchange. 

So money, or lending as it were, can never be the "cause" of inflation. 

Not that inflation due to temporary excess fiat will not result when the market is flooded with electronic ones and zeros from the Fed. These events are floods. Just like a flood they reek havoc but recede. 

Inflation, the core type that we follow, results when everyone with a car wants a can of corn. 

 

Sun, 04/22/2012 - 14:35 | 2364990 covert
covert's picture

fiat currenct lacks negotation power.

http://expose2.wordpress.com

 

 

Sun, 04/22/2012 - 15:36 | 2365083 John Wilmot
John Wilmot's picture

Suppose that the banks never lend out their excess reserves - so what? The federal government is spending about $3.8 trillion annually, and about $1.3 trillion of that is financed on credit, and the Fed is the buyer for about 60% of all treasury issuance. This means that about $780 billion in newly printed money is being spent into the economy annually - that's a lot of inflation folks. Much of it is still exported at this point because the dollar is still the reserve currency, but that's changing. I don't expect the banks to start major consumer or commercial lending any time soon, so I expect their excess reserves will continue to grow, but that in no way means the absence of inflation.

Mon, 04/23/2012 - 02:34 | 2366048 wtlf555
wtlf555's picture

Ahhgggg! YOU CAN'T CREATE DEMAND. If no one want to borrow it does not matter how much excess reserves there are! It's always supply and demand and until asset deflation absent cb intervention is allowed to happen there WILL NOT be demand for loans. Excess reserves could quadruple and demand for loans would be unchanged. The only thing the fed could do is to pay people to borrow and this does not seem out of the question for the US or Japan.

 

 

 

 

Mon, 04/23/2012 - 02:37 | 2366051 wtlf555
wtlf555's picture

There is no correlation between excess reserves and inflation in consumer goods - only a coorelation between excess reserves and speculative bubbles which leads to temporary spikes in inflation which dissapate ala 2008

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