Wed Sep 24th, 2008 at 07:59:25 AM EST
In this recent Diary
LQD: Central Banks and Unintended Consequences
I had a quick look at the proposition that current Bank of England policy - based upon conventional thinking about money and inflation - is diametrically wrong and can only lead to the outcome they are aiming to prevent.
More evidence is gathering daily that liquidity is draining out of the system despite what appears to be the valiant efforts of the Fed to maintain it.
A case in point is Norway, and a few others, who have been "bailed out" (honestly!... you couldn't make this up...) by the Fed because they have been running out of dollars to settle inter-bank dollar borrowing.
U.S. Fed Agrees to $30 Billion Swap With Four Central Banks
In fact, on one day last week virtually no Norwegian bank could give a price on NOK/$ at all....
Norway's central bank, or Norges Bank, yesterday supplied $5 billion in one-week dollar currency swaps to ease liquidity in financial markets. The bank also swapped $5 billion to ease dollar shortages last week.
The point is that, as Geoffrey Gardiner pointed out in that LQD there is a big difference between "pro inflationary" printing of dollars "unfunded" by T Bills, and "anti deflationary" printing of dollars to replace the catastrophic destruction of dollars by defaults.
If the Fed continues on this course they can only make a bad situation worse. They have forgotten - if they ever learned - the lessons of deflationary times which is, counter to conventional thinking, that the printing presses must roll to replace the money destroyed.
As I understand it, Gardiner is saying that the Banks are unable to create credit because of a shortage of "high-powered" money.
Now, as Thomas Edison said
"But here is the point: If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good."
That is as true in the age of electronic bills as it was in the age of paper ones.
Why should it not be the case that the users of a pool of Treasury credits, which cost nothing to create, actually pay no "inteerst" but instead pay a provision for the use of the Treasury guarantee, and a service charge to the banks who would manage the system?