Why do people think countries need centrally planned money?

Yes, that is what the Fed does. They increase the amount of reserves so that banks can lend more money. But they don't lend more money because the reserve requirement. They lend more money because there are more reserves to borrow. Banks simply lend to qualified borrowers regardless of how many reserves they have and then they go borrow reserves after the fact.

Yes, that is why the Fed created the IOER. It is the newest evolution in the banking system. The Fed is paying the banks interest on their excess reserves. This allows the banks to not have to find interest by lending in to a broken economy or investing it all back in to Govt debt.

This is all that money still sitting in an account at the Fed. These are excess reserves which means banks have not created enough accounts to turn them in to required reserves.

 

but listen to yourself for a moment. You say its a form of money? Or reserves? But dont you see? The banks may not be able to spend those reserves but they sure as heck can leverage them and lend them out...either to hedge funds or just to buy treasuries. So still in an indirect way its new money...whether it directly new money through the fed or indirectly through fractional reserve...whats the difference as its still new money bidding up prices?

 

This is how the Fed affects the money supply. They do so by making it cheaper for banks to lend money. They do not affect the money supply by giving your or I money. So yes they do indirectly create money.

The difference is the banks create debt for the public sector. The Govt creates assets for the private sector. If the Govt didn't spend money the only way we could get money is by borrowing from the banks. That would not be a good economy!

 

I still say its a very dangerous game the fed is playing. Also as stated in my other post, I am sure some of that money is going to hedge funds in order to speculate on commodities or european debt or whatever......so even this in an indirect way is inflationary!

 

None of this money is going to hedge funds. Hedge funds are speculating and investing in commodities because they have nothing else to invest in. The second the economy picks up, you will see a drop in commodities and hedge funds will direct their money back in to growth companies.

It's a dangerous games IF the banks lend this money. But the Fed's can simply reverse this by exchanging the debt back for reserves.

There is absolutely nothing showing that banks are lending this money.

 

from what I understand most of those reserves created are going right back to the government as the banks are using those reserves to buy government debt? So then I say.....its a back door form of monetization. So the fed is not directly creating the money ( actually they are through these new resrves LOL) but the instead of the fed creating the money its the banks through fractional reserve......so like a said....a back door form of monetization,,,a rose by any other name as shakespere would say

 

This is the chicken and the egg to the theory. The bottom line is the Fed works for the Govt. If the Fed didn't do their job by making Govt spending usable, Congress would get rid of the Fed and take over the central banking operations or start a new central bank that will make money accessible to the people that the Govt gives them.

So yes indirectly the Fed is helping monetize the debt by giving banks reserves in which they use to exchange for Govt debt. But the private sector does not see any of this. They simply get a credit in their bank account which they go to Best Buy with to buy a big screen tv.

All control lies in the Govt. The Fed does not determine how much the Govt has or how much the Govt can spend.

 

but you said so yourself that although they cant directly lend out those reserves they sure as heck can leverage and lend out right? So whats to stop a bank from loaning out to hedge funds by just leveraging the reserves they have?

 

Nothing, but you would see the increase in lending. Hedge funds have plenty of money. They don't need to borrow from the banks. Like I said, they are investing in Govt debt and commodities because there is nothing else to invest in right now until the economy picks up.

 

well actually the public "DOES" see the money. Think about it for a monment. As you say the government borrows and the banks lend to the government. When the senior citizen gets the check in the mail are they not "SEEING" the money created? When the military spends a few billion to build a new warship are they not "SEEING" the money? So you see......the money can be seen...you just have to know where to look!

 

so then we are in agreement......a back door form of monmetization...still highly inflationary in my opinion. Now you may say that inflation is still relatively low. But remember two things.....

1) the government does not tell the truth of the true inflation rate
2) the velocity of money is still low thanks to all the central banks buying treasuries in order to halt the rise in their own currency against the greenback
3) once the velocity of money does go up it can get out of control very quickly as was witnessed in spain, italy and greece...there may only be a 2 month window to react!

 

I said they do not see the money created from the Fed. The Govt credits accounts before they issue debt since the Govt doesn't actually know what they need to borrow. They do this EVERY single business day of the year. The Treasury, the Fed, and the Primary Dealers get together to discuss how to finance that days spending. And they'll use tricks like TT&L accounts an other reserve trickery to keep reserves constant until the Treasury issues debt. It is an incredibly complicated system... but the bottom line is that the Govt can spend whatever they want whenever they want.

Congress decides everything and the Fed can not tell Congress that they do not have enough money.

 

Lol, the velocity of the money isn't even close to getting out of control. Bank lending isn't even close to getting out of control. Our biggest problem is there is not enough money in the system because the velocity is too low.

And we are not in agreement. The Fed does not monetize debt which you said. Now you are saying they do it indirectly. I'll give you that you can make a possible case that it is indirect monetizing. But the real monetizing happens when the Govt credits your bank account or sends you a check (after taxes that is).

 

This is the first time I've ever gotten the feeling that you are actually agreeing with me in a sense.

 

perhaps....but its still monetization though......its just a fancy new way of doing it thats all!

 

well yes and no.....I still say its monetization and that its inflationary and you say its not.


But hey you did teach me exactly how the fed is doing it as I was not aware of the new fancy way Bernacke is loaning out money. About this loaning out reserves and then its the banks that are creating the money instead of the fed.

Like I said.....a rose by any other name!

 

But the purchasing of debt from the Fed isn't monetizing, which is the point. Indirectly the reserves they give to the Fed which allows them to leverage more is monetizing the debt. So essentially the Govt debt is monetized before any action by the Fed.

But I'll reiterate. The Fed does not do this because they have a choice. Their mandate is to maintain stable prices and reach for full employment. If the Govt spend $2 trillion and the Fed did not turn those in to reserves, they would be violating their mandate and Congress would get rid of them in a second.

So the Fed does this stuff by necessity not for any malicious intent of destroying the economy. If there is anyone all you anti-Fed haters should be hating it is Congress, because Congress alone determines how much money can and is created.

 

Lol! But I will not stop until you stop blaming the Fed for this. Bernanke is just doing his job. The Govt is the one that ran $5 trillion in deficits the past 3 years which required the Fed to do all sorts of crazy things to make this work.

If the Govt gave us $5 trillion and the Primary Dealers were stuck with $5 trillion in Govt debt, interest rates would be like 30% since the banks would not have anywhere near enough reserves to satisfy the amount of money we had.

Bernanke would be fired and the Fed would be abolished if they did this. But since they are all in cahoots this would never happen.

 

Ok sorry I phrased it wrong....the velocity of money can slowly start rising and it wont take long to start to rise dramatically. What I meant was that the bond vigilanties can panic rather quickly and within a few short months can start dumping bonds and treaauries. So this is the danger point....what does Bernacke do? He can either do nothing and watch interest rates skyrocket to 8% or higher....or....he can jump in and start buying all the bonds being dumped on the market......and this is when the "REAL" threat of hyper inflation sets in!

 

Bernacke could of just said no and let interest rates rise. This would of forced discipline on the politicians ever thought of that? And yes he would of been fired but at least he can say he was not the cause of the disaster that awaits the US soon!

 

That's what we have the Primary Dealers for! Bond vigilantes have no chance at competing against the Primary Dealers.

 

Well the money is still spent regardless. So either he does create reserves to prevent ridiculous interest rates or he just lets the banks and the American people suffer by not having enough credit, which would in turn make the Govt spend even more money causing more deficits and causing higher interest.

Ben has no choice in this situation. He has to be the bad guy!

 

Ok so lets say all of the sudden ( within a few short weeks) over 2 trillion get dumped on the market? You saying the primary dealers will buy it all? And where does all the money come from?

 

OK so lets assume for a moment that the fed and banks could get away with this indefinately...then why have taxes? Hey why not just have the government borrow it all and then the banks could buy it all through the increase of more and more reserves by the fed? Do you not see the flaw with this action?

 

I was actually wrong about that. Based on my own description of how the system works the Primary Dealers would not be able to purchase debt on the secondary market with reserves.

I'll get back to you... but I'm sure we aren't going to have anywhere near the problems you are talking about. You'll be saying this same thing 2 years from now, 5 years from now, etc.