The quoted article states in breathless terms as if it is a new discovery the fact that the Fed does not create the bulk of the money supply ... the banking system does. And so, when the banks are not lending, pumping fiat money into the system is leaning against the wind.
It also discovers in breathless terms that there is no separation between Fed monetary policy and the current fiscal positions ... so we can normally usefully simplify by treating all national government spending as the creation of fiat money, all national government taxation as the destruction of fiat money, with the Fed acting to regulate the cash rate by buying and selling securities in order to inject or withdraw fiat currency from the finance sector.
Ordinarily, the withdrawal of reserves as the economy picks up would be an automatic process. And the breathless concern at the discovery that withdrawal of reserves will be needed would, ordinarily, be silly, since the FOMC can buy and sell Treasury securities at a much more rapid pace than the finance can be provided to expand the expenditure side of the expenditure-income loop.
Ordinarily.
But here is where the reckless policy of Bernanke to inject reserves by lending against and buying junk financial assets raises a serious concern, which is what happens when the normal operation of monetary policy would require selling financial instruments in order to withdraw reserves from the finance sector?
What share of Fed assets will be junk of little or no market value, and what share will be Treasury Securities?
After all, the funding of the Federal Reserve system operates via covering costs (including fixed face value dividends to the banks that own it) out of interest income on its assets, with the balance returned to the Treasury account.
The financial junk will not be generating substantial income. And (not coincidentally), if it is sold, it will be at a substantial discount to its book value, so that the Fed will have to account a loss on the transaction, which it will have to make good out of its interest income. Indeed, the sale of the junk at a loss ought to lead to a revaluation of the same junk still on its books, so even a small sale could lead to a realization of a massive loss (of course, this is realizing the loss that was made as soon as the junk was acquired at a grossly inflated book value).
Yet, if it can only sell a limited amount of junk ... if it has to, for example, find a class of junk that it can unload all at once, so there is only the loss on the transaction ... that means withdrawing reserves from the system will require selling Treasury securities, which will reduce its income stream.
Normally, that is no problem ... but will Bernanke, in support of the lifestyles of senior executives in the large money center banks, plunder the balance sheet of the Fed to such an extent that engaging in ordinary FOMC transactions will put it in a financial squeeze of its own?
Given that the Banks elect 2/3 of the boards of directors of the Federal Reserve Banks (1/3 to represent the banks, and 1/3 to 'represent' the public), with 1/3 selected by the Board of Governors who were generally nominated to placate the Banks (the only ones normally watching who is nominated to the Fed BOG) ... and they select the FRB bank presidents who make up 5/12 of the Federal Open Market Committee, with the balance made of the aforementioned Fed BOG ... so that the majority of the "watchdogs" in the system are from the executives and boards of the big finance companies ... it certainly is plausible. It'd be more of the same style of watchdogging they did over the past twenty years that led up to the (ongoing) Panic of 2008.
What this means is that the US is at serious risk of not just inflation, but hyperinflation as capital inflows into the US collapse and we are forced to face our unsustainable structural current account deficit (averaging in excess of the average rate of GDP growth for over a decade).
Unless, of course, the US is already far enough along the process of closing that hole when the scandal at the Fed breaks.
Which is why I pose the question ... how does the EU stand with respect to its structural current account position? If its at a structural current account deficit of less than its average GDP growth rate, and the Eurozone comes through the next business cycle to the next oil price shock recession without the scandal that is hanging over the Fed, then it would seem that financial leadership in the "Western World" would be quite likely to shift to the Eurozone. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
But what do you mean by "structural" current account position? The brainless should not be in banking. — Willem Buitler
Just like the structural government budget or surplus, the structural current account deficit might be defined as the current account deficit at full employment ... except there's a problem there, in that a stronger level of economic activity than the world average will push a nation / economy toward deficit.
Of course, a precisely measure is unlikely to be an accurate measure, since precise measurement will require a model of the world economy that is sufficiently simple to be analytically tractable, which would therefore be a counterfactual model.
But as a rough cut, the five year moving average would filter out a lot of the cyclical component. Of course it will also increase the recognition lag between changes in the structural component occurring and changes, so the second draft would regress the trade account position against capacity utilization or full employment output gap to get a rough correction to apply to the current current account deficit. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
But the last quarter of 2008 is visible as a sharp drop in both imports and exports signalling a dislocation - so who knows what things will look like on the other side. The brainless should not be in banking. — Willem Buitler
In any event, if the EU has had a netted out trade balance or slight surplus over the past decade, and given that the trade surplus countries want to avoid having the global reserve currency, it would seem to point in the direction of the "big shift" back across the Atlantic unless the US starts getting our house in order. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
One can see that the trade balance in both goods and services separately can go from slightly negative to appreciably positive over a business cycle. This is what I meant by
It appears the range of the cyclical component is not enough to make the balance negative over the past 10 years...
if the EU has had a netted out trade balance or slight surplus over the past decade
I find this ambiguous
it would seem to point in the direction of the "big shift" back across the Atlantic unless the US starts getting our house in order.
Most nations will move toward deficit in an unsynchronized upturn and toward surplus in an unsynchronized downturn ... but, for example, in a synchronized global downturn, an economy like China will move toward deficit and an economy like the US will move toward surplus.
So, especially for a nation with an unsustainable structural current account deficit like the US, a synchronized global downturn can mask the longer term structural problem. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
Non-the-less, he has put a fine edge on concerns I have had since October. Seems to me that the situation would be bad enough solely on account of all of the private capital going deep into hiding. Massive stimulus could be accommodated PROVIDED it was spent on useful projects. But with the Fed loading up on toxic assets, when the time comes to remove capital from the system to prevent massive inflation the Fed is likely to be struck with a severe, if not fatal, case of toxic shock syndrome.
I don't see Bernanke or Giethner reforming anything. They are classic beneficiaries of the existing system occupying positions at the top of the pyramid in terms of influence, if not wealth. They will be the last ones to acknowledge fundamental flaws. The best hope for reform is if the leading edge of the second "V" for the market comes well before Bernanke is up for re-nomination and just as the congressional mid-terms heat up. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
So a coalition of a majority of small and a majority of medium banks in an FRB district would be one of the BOG "public representatives" away from a majority of the board of the FRB bank in that district. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
This is worse than the ancien regime...
Why shouldn't elected representatives do it instead? The brainless should not be in banking. — Willem Buitler
And the Federal BOG selects 1/3 of the Boards of each of the FRB banks.
And the FRB bank presidents in rotation ... always FRB-NY, FRB-Cleveland and FRB-Chitown in alternate years, and then one each from the East Coast (Boston/Philadelphia/Richmond), Southern (Atlanta/St. Louis/Dallas) and Western (Minneapolis/Kansas City/San Francisco) triads.
As to why the layered indirect representation, that would be the same reason that the Teamsters once relied on layered indirect representation ... it makes it easier for the thugs and crime bosses to run the joint. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
