Federal Reserve Trivia

[Texas Contrarian]

Originally Posted by Whirlaway

If I understand the article correctly the author's underlying assumption is that :

The political parties don't control the debt; the FR does. And the blame should be placed at the FR.

I don't see where the author proved his claim. He just makes the passing statement "the truth is that most of the blame should be placed at the feet of the Federal Reserve." and "As long as the Federal Reserve System exists, U.S. government debt will continue to go up and up and up."

If our political parties stopped deficit spending, and paid down debt, wouldn't that make the political parties in charge of the process.

I think this author is trying to set up a boogy man and avoid blaming American public for electing politicans who spend, spend, spend.

Stop the spending, pay down debt and the role of the FR will be diminished.

The author does not state that the political parties do not control the debt. His piece addresses the Federal Reserve only.

As you say, deficit spending is a function of the actions of congresses, not the Fed.

However, the Federal Reserve accommodates deficit spending by the fiscal authorities, which would be far more difficult without monetary operations to enable it.

So there is a certain modicum of interconnectedness between monetary and fiscal policy, but one should avoid conflating two essentially separate issues.

An obvious point to note is that paying down debt is impossible given the current political and monetary structure of the systems. The potential for the Fed to accommodate and bubble-pump has existed for a long time, but accelerated after the breakdown of Bretton Woods and the closing of the gold window in 1971. The system seemed to work OK during what has been called the "great moderation" (generally from about 1983-2000), but broke down again when excessive loosening began in 2001 and ascended toward a peak in 2003. That, of course, provided the fuel for the housing bubble -- after which reckless lending and calamitously destructive financial engineering set the fire.

[Whirlaway]

The author clearly states (1st Paragraph of Myth #2):

"As long as the Federal Reserve System exists, U.S. government debt will continue to go up and up and up."

That is just a bogus claim; if our elected officals STOP defcit spending and pay down debt, how will US Government debt continue to go up and up??????????????

Enquiring minds want to know.

Originally Posted by CaptainMidnight

The author does not state that the political parties do not control the debt. His piece addresses the Federal Reserve only.

As you say, deficit spending is a function of the actions of congresses, not the Fed.

However, the Federal Reserve accommodates deficit spending by the fiscal authorities, which would be far more difficult without monetary operations to enable it.

So there is a certain modicum of interconnectedness between monetary and fiscal policy, but one should avoid conflating two essentially separete issues.

[Texas Contrarian]

Do you really think that's going to happen in the presence of the enabling actions of the Federal Reserve, which continues to promise as much accommodation as necessary, come what may? (ZIRP until 2020 and QE3, anyone?)

If you do, I'd love to have some of whatever you're drinking!

[Whirlaway]

You are bringing up a completely different issue that the author doesn't make in his own article. I can ask the same question about the FR.

But none-the-less, the Author is the one who boldly (and falsely) asserts:

"As long as the Federal Reserve System exists, U.S. government debt will continue to go up and up and up."

He could have qualified his statement, but he didn't he made the intentionly broad claim "as long as"...............like i originally said, with unequiovcal language the author is trying to set up the FR as the boogey man. He is being dishonest and not trying to shed light on the problem.

The author's POV is a distraction from the core problem...he is trying to create the FR as the boogy man when the political class is the real problem.

But I agree. Audit the FR.

Originally Posted by CaptainMidnight

Do you really think that's going to happen in the presence of the enabling actions of the Federal Reserve, which continues to promise as much accommodation as necessary, come what may? (ZIRP until 2020 and QE3, anyone?)

If you do, I'd love to have some of whatever you're drinking!

[Texas Contrarian]

Originally Posted by Whirlaway

...He could have qualified his statement..

I agree with you that he could have (and probably should have) qualified his statement.

A more circumspect statement would have started with something like, "Under the current structure of the Federal Reserve and our fiat money system..."

But the history of central banks which continually accommodate expanding welfare and entitlement states is pretty clear. In a vote-selling environment, nothing ever gets cut and everything gets ratified and expanded.

At the very best, the rate of the growth of federal debt might slow. (It better, or we're headed for even deeper trouble.)

But the aggregate level of our debt will certainly continue to grow.

The political policymakers will not cut anything, since they know that the Federal Reserve -- at the end of the day -- will simply monetize any net debt creation that can't be covered by traditional treasury auctions.

[Whirlaway]

We agree.

I don't think the author is stupid. I don't think his wording was a mistake. It was an intentional mis-leading statement IMO.

Which, as you point out, indicates the author isn't very circumspect when it comes to the issues of debt and the FR. The "poision fruit" so to speak. If the author's fundamental premises are false, then everything that flows from that premise is questionable.

And you, CM, actually touch a more important point, not addressed by the author. The fact that in representative nation states, it is very difficult to regin in spending and control debt. As we all know, voters who don't pull the wagon demand more and more from us oxen laboring under the yokes.

Maybe our founding fathers had it right ?- only property owners should vote.

But unfortunately, the pendulum has swung so far left, and today's Progressive Democrats think people living in our country illegally should have the right to vote !

Originally Posted by CaptainMidnight

I agree with you that he could have (and probably should have) qualified his statement.

A more circumspect statement would have started with something like, "Under the current structure of the Federal Reserve and our fiat money system..."

But the history of central banks which continually accommodate expanding welfare and entitlement states is pretty clear. In a vote-setting environment, nothing ever gets cut and everything gets ratified and expanded.

At the very best, the rate of the growth of federal debt might slow. (It better, or we're headed for even deeper trouble.)

But the aggregate level of our debt will certainly continue to grow.

[CuteOldGuy]

Deficits and taxes are fiscal policy, controlled by the Congress. The Fed controls monetary policy, that is, the value and supply of money. As long as the Fed controls the supply and value of money, fiscal policy, while not irrelevant, is certainly secondary.

The Fed is currently accountable to no one. We need a full scale comprehensive audit, and then we need to return the control over the money supply to Congress, where the Constitution says it should be.

[Whirlaway]

IMO arguing over the FR is a distraction to the bigger problem that will ultimately destroy us - politicans (and their constituents) who want more spending and refuse to be fiscally responsible.

The FR is just the zoo keeper that provides the food. The problem isn't the zookeeper but the political animals that are out of their fiscal cages and running around wild and wreckless. Why the American electorate let them out is beyond me. And getting them back into the cages will be nearly impossible.

[CuteOldGuy]

I think the Fed is a much bigger problem. They print and squander trillions of dollars that they print, and the US is left holding the bag. We certainly must get spending under control, but the Fed has to be brought under the Congress. Right now they are answerable only to their member banks, and the banks don't always have the best interest of the citizens at heart. Neither does Congress, but we have a better chance of changing them.

[I B Hankering]

Can the U.S. return to the gold standard as Ron Paul suggests? What impact would such a change have on the U.S. economy?

[CuteOldGuy]

There would be an enormous shock to the economy. But I don't think it would be as bad as if we didn't do it. The collapse of the dollar and our country is certain, if we keep printing and spending money we don't have.

[Texas Contrarian]

As everyone recalls from classes we took as kids, the Constitution directs Congress to "coin" our money and control the value thereof. The fact that the Fed resists all efforts to conduct a meaningful audit should be considered an outrage of the highest order.

When a central bank exhibits the willingness to offer liberal accommodation (including, but not limited to, various forms of covert or overt monetization), fiscal authorities in virtually all cases have rushed in the fill the space. Almost nothing is more tempting than buying votes with other people's money.

And as I mentioned earlier, bailouts via the carry trade continue unabated. The stocks of regional Fed banks are owned by banks operating in that region. So to whose drums do you think the Federal Reserve is likely to march?

Edit after seeing the previous two posts:

I think a return to the "old fashioned" form of the gold standard would be extremely contractionary in the short run, to say the least, as COG stated. And a number of economists believe that there isn't anywhere near enough gold anywhere on the planet for it to work in our world of industrial economies that are many times larger than they were a few generations ago. However, some people think that a "modified" gold standard or commodity-linked monetary system of some sort could provide the anchor for a sound monetary system. (Bretton Woods was a form of "modified gold standard.") Any such course would involve some wrenching changes that would certainly produce a lot of problems to work through. Although I have difficulty believing that the end results could be worse than what we'll see if we stay on our current course, I can't conceivably imagine any of today's political "leaders" ever making any attempts to do anything like the amount of heavy lifting required to effect such reform.

[Whirlaway]

Who squanders?

Congress NOT the FR.

[CuteOldGuy]

Let's discuss that AFTER the audit. Just a partial audit found this.

http://www.rawstory.com/rs/2011/07/2...ergency-loans/

Remember, this came to light AFTER the partial audit.

And please, be quiet! We don't want Congress and the Fed in a contest to see who can squander the most!

[Whirlaway]

Those loans have likely been repaid. But yes absolutely audit the FR.

I don't see where you have backed up (with facts) you claim of squandering.

Please provide.

Thanks in advance.

Originally Posted by CuteOldGuy

Let's discuss that AFTER the audit. Just a partial audit found this.

http://www.rawstory.com/rs/2011/07/2...ergency-loans/

Remember, this came to light AFTER the partial audit.

And please, be quiet! We don't want Congress and the Fed in a contest to see who can squander the most!