Wednesday, December 25, 2013

Federal Reserve Banking -- A Facebook Colloquy

Blogging is going the way of scrapbooks, a relic of bygone days not likely to be seen or appreciated by future generations. But in the same way that other generations saved magazine clippings, event tickets, dried pressed flowers and other mementos -- carefully taping or pasting them into the pages of an album -- personal blogs are a repository of memories from the opening days of the Web. That is the context of this otherwise inconsequential blog post.  

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100 years ago today President Wilson signed a bill creating the Federal Reserve Banking system, following a meeting of the nation's leading bankers at Jekyll Island, Georgia.
And no, they don't "print money." They LEND money. That's what banks do.

A Locked Door, A Secret Meeting And The Birth Of The Fed
The creation of America's central bank includes a secret trip to a place called Jekyll Island.

John Ballard I'm so tired of hearing people who know nothing about monetary matters refer to the Fed "printing money." A few months ago I listened to a guy on the radio rattle on for five or ten minutes about the "government....printing money" when referring to the Federal Reserve (which is NOT "the government") lending money by the use of QE.

Every time we use credit cards we are in effect "printing money" by spending money we do not have. True, we expect to have that much sooner or later, and those of us who pay off credit cards every month and pay no interest actually do float money briefly into the national economy for a few days. But those paying interest actually DO in effect "print money" because that interest did not exist until it got created.

If businesses were still operated on the old-fashioned "payables and receivables" accounting system this would not be a problem. At the bottom of the economy no money was being created. If debts were not paid, the merchant, bank or investor who advanced the credit took the loss.

But modern credit cards are not treated with the same easy-to-understand system. Instead the moment the transaction is made it is treated exactly the same as cash. None of it actually exists yet, most of it will not come into existence until it is earned and repaid, and thanks to large lines of credit and loans against home equity (which we have learned the hard way is less stable than we once thought -- how many home owners are "under water" and how many more have gone bankrupt as the result of balloon credit?) it is less stable than actual cash.

To coin a phrase, this is no way to run a railroad. And it's not really rocket science. Next time you hear someone use the phrase "printing money" tell 'em to put a sock in it.

    Brian Ortego  In reality, I guess, "We the People" creates the money out of thin air, by the Treasury auctioning off T-bills, which the Fed can then buy from indie dealers with their electronic credit card. Apparently the difference is that you and I have to pay our credit card for the money we "create", and the Fed doesn't ever.

    JB   If you think of "The Fed" as a corporate enterprise, their only revenue stream is taxes. So anything that threatens the stability and future prospects of that oxygen supply is what must be protected at all costs. And no one grasps the dangers of economic bubbles better than the Federal Reserve. The concept of "paying back" is a private sector issue which is fiscal, not monetary.

    BO  Are the hundreds of billions reaped by the private stockholders in Fed banks considered fiscal or monetary?
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    Insert here a link to Left Hook, a blog by Dean Henderson, subtitled "A weekly whack at the global oligarchy."  Henderson is self-described as:
    A self-described revolutionary and traveler to 50 countries, Dean co-founded of the U. of Montana Green Party and Ozark Heritage Region Peace & Justice Network. He was Vice-President of the Central Ozarks Farmer’s Union and former President of the Howell County Democrats. In 2004 he won the Democratic nomination for Congress in Missouri’s 8th District. He has authored four books.  His first book, Big Oil and Their Bankers in the Persian Gulf: Four Horsemen, Eight Families and Their Global Intelligence, Narcotics and Terror Network has become a global cult classic among conspiracy researchers.  His second book, The Grateful Unrich: Revolution in 50 Countries chronicles insights gained from a lifetime of overseas travel.  His third book, Das Kartell der Federal Reserve: Acht Familien beherrschen die Welt, is published is German language by Kopp Verlag.  His latest book, Stickin’ it to the Matrix, is a practical guide to dropping out of the evil Illuminati system and kicking it in the nuts!
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    JB  I lay no claim to being an economist, but my layman's grasp of the big picture is that the Fed is something of an amphibian which inhabits both worlds, a part of the overall economic ecosystem we call The Economy.

    The purist likes to imagine that all money is a reflection of something of value. But not all values are the same, as we know well from the food business. The values of service are no only intangible but often vanish the moment the service is rendered. No matter how spectacular the wedding reception or Sunday dinner is, as soon as it's over the value evaporates along with it -- until next time. Ice sculptures, fruit cakes and cake decorations have a longer life expectancy (cheese, cured meat, wine and spirits even longer) but eventually even those products get eaten and whatever value they may have had disappears simultaneously.

    Manufactured goods that can be inventoried, shipped and sold along a supply chain -- import/export, wholesale, retail -- carry longer value still. But even those old vintage cars in Havana, which have held value longer than most, will eventually become junk. So much for the value of goods and services.

    There is another layer of the economy deriving from nothing more than pure manipulation of money and credit -- both of which in effect, in the same way that our private credit cards do -- create more "wealth" (whatever that means). I think of all interest and income derived from risk management (i.e. insurance profits left over after the risks have been balanced actuarially and administratively) also as artificially created "money." No goods or services are involved once the books are balanced. (Mutual funds are the exception -- those taking the risks pool their bets and split whatever may be left at the end of the accounting period, thus returning to the original owners a portion of whatever risks they might have taken. Same is true of cooperatives as opposed to corporations. In the early years of our marriage my wife and I were in a baby-sitting co-op which exchanged chits instead of money with other members of the coop to keep up with traded hours of child-care.)

    One part of the economy which is normally ignored is what can be called the shadow economy -- which runs anywhere from the endless numbers of 1099's issued by subcontractors which typically never get reported by those who receive them, to transactions at flea markets and garage sales, to illicit transactions for everything from drugs to sex trafficking. All that is also part of The Economy, and none of that is taken into account when most people think about economic theory. Is all that fiscal? Monetary? What???

    Finally there is another phenomenon that is now rarely mentioned which I read about in the Eighties when inflation was such a bitch: VELOCITY. I put that in caps because it is almost never talked about.. It refers to how rapidly money flows though The Economy. A dollar which I put in my wallet for a rainy day will not likely get used for a long time -- maybe never. The same dollar deposited in my checking account will stay put for a month or so (not counting the minimal balances I usually keep). If it goes into the savings account it may stay there for a year or two. If I spend it on groceries it is apt to go sailing along several times before it slows down again. All this is to illustrate how the economy "speeds up" or "picks up" or "slows down" -- all terms people use to describe either a "good" economy or a "poor" economy. And all else being equal, the actual supply of available money becomes irrelevant (or secondary) to the health of The Economy.

    This is a long-winded way of saying that how much money is either printed OR taken out OR fed back into The Economy is not nearly as important as most people imagine. Like those bankers at Jekyll Island finally had to come to terms with is that they were not the last word in the world of economics. Even they depended on being able to borrow money when conditions got bad, so the Fed was created as the "lender of last resort" which in those days meant staving off a run on banks. Today we call it "having enough cash reserves" or something similar. That's why the so-called Volker rule is so important, to protect hard money from being risked too far. After all, when you get down to basics, the least value created of all the ways to make money has nothing to do with either goods OR services -- it has to do with interest returned on borrowed money. And the amount of interest is really more artificial than the "money" you and I create when we use our credit cards. Interest is value created out of thin air. (But it is certainly important as a reward for saving money. And that has been a real hardship on anyone depending on interest income too much during the last few years with ZIRP in placd -- Zero Interest Rate Policy. That's been in effect in Europe as well, incidentally, and I don't know about the rest of global banking.)

    And that brings us to another variable most people don't think about when they complain about the Fed or mint "printing money" -- the fact that US currency is the medium of exchange for the entire world. Whether it is a third-world transaction or the European equivalent of a black market transaction, the exchange of dollars is done all over the world. I don't think anyone has any idea what the amounts involved are, much less the velocity (remember *velocity*?) which is just as much a variable *outside* The Economy as it is as a part of it.

    I'm sorry this took so long, but the question of whether the debts of the Fed were fiscal or monetary was too complicated for me to condense all my thoughts into a short paragraph or two. It is, as I said, both and neither. In many ways what we call The Economy is not at all as efficient as we like to think. It leaks. It swells. It shrinks. It's as unpredictable as a high school sweetheart. It gets bubbles and they bust. And anybody who thinks they know how to control it is living in a fool's paradise.

    I think of something a biology teacher once said about plants -- they are not nearly as efficient as we like to think. Of all the energy they might access from the sun, the process of photosynthesis is a very poor takeaway. Man-made solar panels are much more efficient. And the business of living, growing and dying involves a very inefficient use of available resources. Water, for example, is necessary for the chemistry of getting soil nutrients to the leaves and getting the results of photosynthesis back down to the roots. But in the process of everyday life, he said, a typical large oak tree will lose nearly fifty gallons of water a day just by guttation. That's the little droplets of moisture we sometimes feel standing under the tree on a hot summer day, or the spots it leaves on the just-waxed finish of your newly-washed car parked in the shade. Fifty gallons is a lot. And no matter how you cut it, that's not an efficient use of water by manufacturing standards. That's how I see The Economy. And that's why in the Old Testament we read about how important it was to leave enough of the harvest in the fields for gleaners. And why in the old Hebrew economy they had that year of Jubilee, now considered as obsolete as David's sling shot, but totally essential to balancing the economy of those days.

    And that, in a word or two, is why I'm not overly worried about anything the Fed does or does not do.

    BO   The dynamic not to be discounted is that this up and coming generation of tax payers aren't too savvy on being slave to a system that appears to be stacked in favor of a select few. The idea of working their entire lives performing what amounts to janitorial service work on computers, while sitting in a cubicle is a hard sell. We appear as fools to our children for going working the majority of our lives as a pawn for a company, in order to have a house and healthcare, and a meager existence. It's not that the work ethic is all that different; it's that the secret of the Ponzi schemes are out, and the hope of attaining their dreams seem to be a long shot. The politicians kicking the can, and rolling the massive debt of the social and entitlement programs forward onto their shoulders is not eagerly accepted as the patriotic thing to do for the greatest generation. The Fed and Social Security are at the crux of the issue.


    A century ago the the Creature from Jekyll Island showed itself to the world. a bit academic, but for those who care it is an excellent explanation of how the Federal Reserve came to be.

    BO  It seems that this meeting in Chicago turned out to be a message for President Obama and the man he sent to be the mayor, Rahm Emanuel. Looks like they're fed up!


    This past Thursday, a town hall meeting hosted by Al Sharpton and the National Action Network to address gun violence exploded into a revolt against "Chicago...

    JB   Brian, I'm afraid libertarian sermons are wasted on me. I read Atlas Shrugged in high school and thought it was nutty then. I never imagined it would be taken seriously, but I was wrong. I have watched with dismay as that stripe of fantastical nonsense from Ayn Rand's demented mind has become something like Scripture for a large population of dedicated followers who believe they have found the Holy Grail of the history of Economics. Sorry to sound so negative, but if anything strikes me as worse than bigotry it is the cold-blooded indifference of the Libertarian Puritan mind. I listened to the opening fifteen minutes and decided the limited number of hours I have left on this earth would be cheated if I continued to listen to the rest.

    BO  It does seem ridiculous that taxpayers pay interest on almost two trillions dollars in imaginary debt to the Federal Reserve each year, while we talk about income inequality.

    JB  Perhaps. But I look at that two ways.

    I recall the time before we paid off our mortgage that a the monthly payments, mostly interest in the early years, and even toward the end with most of each payment applied to principal, took a third to half of all our income. And for most families, even those who rent, that's how much housing takes.

    Also, from a global perspective America has a relatively small population but consumes the lion's share of energy and resources, thanks to how the global economy is configured (mainly by guess what? US trans-national corporations).

    So interest on the national debt is just part of the price of all that comfortable place in the world -- not to mention that the US dollar continues after all these years to be the world's standard currency. It's really a small price for the benefits we have. Other parts of the world have figured out that borrowed money is an important part of their respective economies (and those that piss away their resources as soon as they get their hands on them, exactly like so many people you and I both know who live payday to payday, continue to find themselves constantly running behind developmentally).

    A growing number of Americans, terrified of debt in any form, would not be disappointed to see this country become part of that payday-to-payday crowd. I'm not among them. In fact, I find poetic justice in the often cited statistics that more and more tax dollars are collected from fewer and fewer tax payers, those at the top of the income scale. I heard yesterday that some eighty or ninety percent of New York's tax revenue is collected from the top three or four percent of income makers. Somehow I don't think that is inappropriate, considering how high the cost of living is there and how many ordinary people live out their lives grinding away, year after year, leaving little or nothing to their heirs other than the prospect of more of the same. (But New York is exceptionally tilted. Too bad Chicago, which your video link pointed out has far more problems, should be so lucky. And Detroit illustrates what happens when the tax base vanishes for whatever reason.)

    As you pointed out elsewhere, raising the minimum wage (which would have a ping-pong effect on many wages just above the minimum as well) would generate more taxes -- income, Medicare and Social Security -- which would broaden the tax base. The same can be said of a good immigration reform package which would sweep an untold number of people now living and working in the shadow economy into the same tax-generating place. Those are important first steps to correct income inequality. And they are such easy to understand concepts I am amazed more people don't get it.

    BO   Ironically, whether it's millenniums or immigrants, the majority will have to be dragged into the system, kicking and screaming, before they relinquish to the fact that they must pay taxes or buy insurance. As the majority of millennials and immigrants get married and have children, this will change.

    Austin recently shut down a few large rental properties, due to structural failures of walkways, and have threatened increased regulation and inspections. They, along with the press, are highlighting the fact that the rents are almost doubling, when these distressed and rundown properties are renovated, displacing a large number of residents, who no longer can pay the rent.

    In a different value system, many of these apartments, on the east side downtown, are rented by immigrants, who care more for the lowest possible rent than amenities and condition, in order to cover living expenses and still be able to send remittance payments back home. When expenses rise to the point that this balance is affected, those working service job will work another job, and those in building trades will work longer hours. If enough work is not available, or if "La Migra" (ICE) is active, workers will move to where the work is. Similar to the forced migrations from the Dust Bowl or Rust Belt, when workers in depressed areas moved across the U.S., in search of a better life.

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