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U.S. Federal Reserve Conjures - and Redefines - Money
ATLANTA, Georgia - The private central bank of the United States, the Federal Reserve, has begun purchasing $600 billion of long-term U.S. Treasury Bonds, essentially subsidising the federal deficit for the year.
The Federal Reserve has begun Quantitative Easing 2 or QE2 - "quantitative" because it is changing the quantity of money in the economy, and "easing" because it is easing the pressures of the market. (AFP/File/Patrick Lin)
Many economists say the significance of this new role for the Federal Reserve cannot be overstated, especially because the agency is literally creating money at the stroke of a keyboard.
The practice is called Quantitative Easing 2 or QE2 - "quantitative" because the Federal Reserve is changing the quantity of money in the economy, and "easing" because it is easing the pressures of the market.
The vast majority of all money in the U.S. economy is created already, when private banks issue loans to individuals.
IPS has previously reported on how, through a little-known practice called fractional reserve lending, private banks create new money when they issue loans, although how much new money they are allowed to create is regulated.
This means, when private banks create money, it is not being taken from somewhere and then loaned to someone else; it is instead being conjured into existence.
This also means that private banks control how much money is in the total money supply of the U.S. economy at any given time.
Enter the Federal Reserve
It should not be terribly surprising the Federal Reserve is creating money; this power rests with the U.S. government, although the U.S. has not created money since President Abraham Lincoln printed all the money needed to win the U.S. Civil War against the South.
Economist Ellen Brown explained the mechanics of QE2 to IPS. The U.S. Treasury typically sells bonds, or interest-bearing promises to pay, at an auction, to primary dealers like Goldman Sachs. The dealers sell the bonds to others, including foreign governments like China, although China has recently stopped purchasing new U.S. bonds.
In QE2, the Federal Reserve is buying the bonds from Goldman Sachs with money it literally created. However, instead of profiting off of the interest from the bonds, the Federal Reserve refunds all of its proceeds into the U.S. Treasury. Therefore, the Federal Reserve is financing the U.S. deficit almost interest-free.
Brown argues this is a good thing and even suggests that over time the Federal Reserve could purchase all of the U.S. debt.
"What it [QE2] is doing, why we have to have it, is, we can't afford to pay any more interest on the federal debt. Half of our personal income taxes go to pay interest on the federal debt," Brown said.
"The government is perfectly capable of printing its own money. Ideally, the government itself would issue the money, but what we have is the central bank issuing money to the government interest-free," she said.
"What people don't realise is all money is borrowed into existence. The loans have collapsed. When the loans collapse the money isn't out there and that's why we have a Depression. The credit system has collapsed, the pitcher doesn't have anything in it," she said.
"People are complaining about inflation but what we have is deflation. When old loans get paid off and new loans aren't issued, money is destroyed. Fifteen trillion has disappeared from real wealth. So we need to fill that bucket back up before we can get to inflation," Brown said.
The first quantitative easing by the Federal Reserve, QE1, took place last year. The Federal Reserve bought 1.2 trillion dollars in toxic mortgage-backed securities from private banks.
"If QE1 had any positive impact, it allowed banks to unload some of their toxic waste... it strengthened their balance sheet a little bit, but to really help the banks you'd have to buy trillions in bad assets," said Randall Wray, a professor of economics at the University of Missouri-Kansas City.
Wray argues there is no need for the government to issue bonds, because the bonds are circuitous. In fact, Wray argues, when one understands how the government issues money, the whole idea of a deficit is a myth.
"The way the government spends is through keystrokes. It credits bank accounts," Wray said. "A sovereign government, the U.S., is the issuer of the currency. It's impossible for the U.S. to borrow dollars. You can't borrow IOU's from yourself."
"Really it is religion. Economists figured it out in the 1960s - the way the government spends is by crediting bank accounts. But if the public understood this, they would demand more services. We need the myth [of deficits and the need to balance budgets through borrowing]. They're just really scared to death people will find out," Wray said.
"There is no financial limit on the government. There's real limits, there's inflation limits, there should be budgets," Wray said.
Japan, over the last 20 years, had its own quantitative easing programme.
"In Japan they did a lot of this, over the last 20 years, they did monetise the debt," said Mark Weisbrot, co-director of the Center for Economic and Policy Research. "They didn't get any inflation out of that at all, five percent total inflation over 20 years. That indicates they could have done and should have done - monetised a lot more."
"We have two competing systems. The European Union is doing the austerity thing- they have a fixed amount of money and they're gonna make do. That system won't work- it won't work with Greece, Ireland, Spain, Portugal. They're gonna have to let more money into the system," Brown said.
"The Japanese have been doing QE for some time, they're still the third largest economy in the world. For a small island, they're not doing that bad. They have a big debt, but it doesn't hurt anything in terms of productivity. Half of that debt is owned by their central bank."
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62 Comments so far
Show All"The government is perfectly capable of printing its own money. Ideally, the government itself would issue the money, but what we have is the central bank issuing money to the government interest-free," she said............................
its still a debt is it not?
Good point!
also "People are complaining about inflation but what we have is deflation."
Deflation from the bank's views who are making a killing and inflation for the people who are out or running out of money and jobs.
Printing real cash is expensive so notice that there is zero hard cash being printed. This is all electronic credits but the people wont get the credits because they can't afford to buy the things that are rising in price ( real inflation) and China and the rest of the big economies don't need to buy Treasury bonds when they sell us what we buy already.
This is bullshit for the people and great for the Banksters and the super wealthy.
Why are politicians, corporations and so many brain-dead working class Americans in a tizzy over the deficit and wasting their time promoting austerity when this article (and many others I have recently read) tell us that quantative easing will make deficits irrelevant ?
The deficit hysteria is a good way to convince people they need to cut social programs.
This is a long standing argument from the right designed to manipulate racist whites with racism. Those non whites above (the jews) now called "elites" or "liberal elites" take all the money and re distribute it to the non whites below "welfare moms" thus squeezing and trying to destroy the "real americans" (whites) who are now called "middle class". It's more of a way to deflect attention as anything else.
You sound like a bigot with your "Those non whites above (the jews) now called "elites" or "liberal elites" take all the money"
comment.
Can you explain your meaning?
If you lost equity in your home, or if you pay taxes, it was you who paid the price for the disaster that were caused by the Banksters.
I don't think it is debt exactly. If you can create money to pay it off, the person who bought US treasuries is not being hung out to dry. He gets his money back (though he may have wanted to hang on to the treasuries longer). So he isn't being screwed. The only limit on how much money can be created is inflation. So far there has been little of that. Now printing lots of currency and circulating it--that is something different--that causes inflation big time. But creating money for the purposes of building infrastructure, for buying toxic assets, for making loans to businesses does not increase inflation. I am not an economist, but I am in the process of reading Ellen Brown's book "The Web of Debt" and her thesis is powerful. The only thing about her thinking that puts me off a bit is her push to get rid of the income tax. I see the income tax as the one way to level the economic playing field between rich and poor. However, I am open to new ideas.
I hear though the internets and RT (Russia TV) that China, Russia, and Brazil and others will no longer trade between them in dollars or buy oil in dollars. The end is near folks. The criminal enterprise that the USofA has become has become is winding down. I wonder how it will all end, with a whimper or a bang?
History points to a bang, especially considering all the tools for "banging" this country has.
Yes, the FOX idols will convince their right winger audience (who have personal arsenals filled with assault weapons and bazookas) that liberals caused the crash. The right wingers will hunt down liberals to punish them.
Absolutely, NC-Tom, and I've also read that one of the reasons for Saddam's removal was that he was planning on selling his oil for euros and Iran is now doing the same. (The current reserve currency for oil is US dollars -- if oil-trading nations start using the euro as a reserve currency, the value of the dollar will fall even further to nearly nothing, just like the German Deutschmark in the 1920s.) Along with China refusing to buy more US T-bills -- an ominous sign they are about to cut off loans to the US since, with the declining spending power of the American middle-class, the amount loaned now exceeds the amount China takes in from exports to the US -- these are all portents of a massive economic collapse, perhaps as soon as 2012. What comes after that is anybody's guess, but the criminal class that run our financial and banking systems will mostly be broke.
Gadfry! Try to keep it real. The dollar is not going to fall to "nearly nothing." Your entire post is simply hilarious in its dire insanity. Chicken Little bs is as worthless as bs gets.
If the dollar gets dumped, then what could keep it afloat? Arms sales.
You need to study economics a bit more. You have fundamental misunderstandings of what makes the economy work. Your burn-it-all attitude does nothing but drag us all down.
Greg R, your protestations and offhanded dismissal of my post is the same thing I read when myself and others, like James Howard Kunstler and Mike Whitney, warned years before the fact that Wall Street and the banks were going to go belly-up. They did in 2008 and the 'realists' who said it couldn't happen conveniently forgot their previous cheery predictions. That 'dire insanity' was also dismissed pre-2008 as hilarious and 'impossible,' and even 'profoundly stupid and demonstrating a total ignorance of how the markets work.'
Proclaiming 'the dollar is not going to fall to 'nearly nothing' is smug fatuity on the order of the Titanic's unsinkability or Nixon never quitting, and the greatest load of bs imaginable.
Seems to me you're trying to whistle pass the graveyard, Greg.
the lameness of capitalism.
Its this seeminlgy complicated excercise that has all US citizens paralyzed. Look at what you need and who produces it and you quickly realize, they are killing us with our(your)ignorance. We do not need credit, we need food and shelter. We do not need leaders, we need sustainability. We need to pay attention to what is real and not the flawed system designed to accumulate wealth, ie... control of people and resources. Please stop giving these crooks your bank credits. Spend the fake money at Ma and Pa retailers or service providers. Do without something today. You'll be surprised that you don't need much of it anyway.
i am wondering whether the planned December 7th run on banks would be made more of a hiccup by this action of the Fed's....
No worries. The only people who will actually withdraw their money are mostly-broke idiots. Add them all together and you don't even get the froth on a tiny wave in the ocean. Now, if a billion people across the planet, ones with actual money, did this, it'd plunge the world straight into a deep depression if the governments did nothing. Instead, they'd just loan the banks the money.
So an idiotic idea on every level. It's like protesting the laws of physics.
"There is no financial limit on the government. There's real limits, there's inflation limits, there should be budgets," Wray said."
But there are limits to resources on a finite planet. Maybe the money won't be backed by a "gold" standard, but eventually it will have to represent or ration fuel, water, and food, and then the fun begins. The consumer party can't go on forever because, in the end, it's fueled by limited resources.
Hmmm
First lets clear up a false statement: When the Fed prints money it of the US Government it is interest free. WRONG! The FED as ALWAYS charged interest on every single dollar printed/conjured up from the depths of nothing. In fact over a year ago the FED demanded and the Congress authorized an INCREASE in the interest rate charged!
Bye the way, how many people know that in 2013 the FED loses its charter? Thats right; unless Congress creates a new Charter or extends the old one, the FED ceases to exist in about 2-1/2 years. The Federal Reserve Act of 1913 granted a 100 year Charter. This is why the FED has stolen nearly 20 Trillion. And to cover its tracks it will bring down the US economy and the Federal Government with it. Or start WWIII. So they are stealing everything not nailed down before they go.
We MUST STOP the FED right now! revoke its charter NOW and rule all its debts and obligations to the American People null and void!
The Fed is so unpopular, Congress might not renew it.
This may be Obama's or the next president's first emergency executive order.
Other countries don't like QE because the credit will go to those places with assets worth borrowing to buy, thereby making asset bubbles in those places more likely. So it might be good for the home team but not so much for others unless there was a way that the credit could be tied to using it locally. That would stimulate the local economy while at the same time not be a threat to other countries. As it stands, it won't help us and will hurt others.
That's a good point--tying QE to local issues. Buying toxic assets might not be a bad idea--at least you would be dealing with the housing bubble in the US. Creating a fund for infrastructure improvement would be another way to keep the money at home.
So if this magic of electronic easing is real and new debt without interest is the future because it is only on the Fed's computer than there is no need to layoff anybody or worry about debt or inflation anymore... free healthcare and credit to the poor and unemployed for everyone if this is true and if it is true now it would have been true for the last hundred years.
But the government knows the truth and that is why we have the Cat Food Commission.
"So if this magic of electronic easing is real and new debt without interest...there is no need to layoff anybody or worry about debt or inflation anymore... and if it is true now it would have been true for the last hundred years."
This statement ignores the evolution of the financial system over time. The US monetary system has changed, and with it the rules of the game change. We are no longer on the gold standard, nor do we have a system of fixed exhange rates. Instead we have floating exchange rates and a sovereign fiat currency.
The result is that the US may create as many dollars as necessary to purchase what is for sale in dollars. Under this sort of system, the only limit is the physical, real productive capacity of the economy. Currently, capital utilization rates are in the neighborhood of 60%, and unemployement ranges from 10-20% depending on which measure you use. What this means is that those newly created dollars are NOT INFLATIONARY right now. Period.
Now I know there is a lot consternation regarding the mysticism of the Federal Reserve. Yeah, I saw Zeitgeist too and I've had an internet connection for the past decade. But, it is time to get past the mass hysteria regarding state finance and seek some understanding based upon truth and temperence.
If you would like to learn more about how the modern financial system works here a few references to get started:
moslereconomics.com
neweconomicperspectives.blogspot.com
cfeps.org
OK, but everybody knows we are not on the gold standard but gold is still essential to back up any government when all else fails and much is failing with "modern economics". You don't mention your "Modern Economics" is the War Economy.
If you are so into the "modern economics", how is it working for you?
Your site talks about how Germany and France are growing so-fantastically, but the people don't see the results and your site doesn't talk much about the USA Fed that I can tell.
Tell me something you can prove because your references don't back up your comment.
$1.00
$10.00
$100.00
$1000.00
$10,000.00
$100,000.00
$1,000,000.00
$10,000,000.00
I'm crediting my bank account by typing entries on my computer screen just like the well intentioned and erudite Mr. Bernanake!
I'm rich! I'm rich! Yippie!
All my financial problems are solved!
Who knew it would be so easy!!
What could possibly go wrong??
The Fed can do what you are doing. Ordinary banks can, too--whenever they finance a mortgage, for example. But, alas, you cannot. Ellen Brown argues that the government should create electronic money and direct it towards whatever a country needs--interest free--unlike the banks and the Fed, both of which demand their share.
That is how it should work.
The government could hire all currently unemployed people to repair roads, bridges, schools, hospitals, etc. Manufacture and install clean carbon-free energy infrastructure.
Yet, it won't.
This is just watering down our dollar; making each dollar more worthless compared to countries that are more fiscally responsible.
However they are all bailing out their banks!! ??
It's a kind of austerity competition!
Except, the people loose!
Yes and it all stems from the wars and the war economy more than any other cause.
This cartoon sums it up better than the article:
http://www.realecontv.com/videos/central-banks/the-coming-financial-disaster-in-a-nutshell.html
Help make this video go viral!
Notice the fun part. Not only is the Fed creating money out of nothing -- currency debasement by definition -- but (surprise surprise!) Goldman Sachs is making money off the transaction.
This essay by Matthew Cardinale is deceptive and dangerous.
A unit of money is simply an object of symbolic value based on faith. Fiat money - like the US dollar - has no intrinsic value. In simplest terms, material items with intrinsic value all originate from three sources - agriculture (including aquaculture), mining (including oil & gas) and manufacturing. A bushel of wheat, a drum of oil or a set of pots & pans all have intrinsic value because they are useful goods. Generally, useful goods maintain a value in happy times and in bad.
For the most part, when a nation's central bank is forced to monetize debt, that nation is admitting it's finances are either unstable or unsustainable. The need to print money to cover pre-existing debt can cause a loss of faith in that nation's fiat currency. Primarily, that is why so many people are investing in precious metals and other commodities. Not surprisingly, as precious metals and commodities are speculatively purchased their prices go up in the marketplace and investment "bubbles" emerge that will eventually pop to create a new crisis.
The value of our green inked paper is only as good as investors and the invested imagine it to be. If the Chinese, Japanese or Russians lose confidence in the value of their US paper mountains and begin dumping dollars into the world money markets, the US of A could face a currency crisis followed by an economic collapse.
Thank you, China. But I doubt it will last. China wants the jobs and seems willing to do whatever to keep them.
... or our exports could pick up, bringing jobs and manufacturing back to the US.
It is possible. You have two major exorts. Arms sales, and a global monopoly on software, i.e. Microsoft. The global monopoly is self perpetuating, the monopoly exists only because a software monopoly brings huge advantages. Those who use Linux have always known this. If that monopoly were to ever be changed, and if China eventually muscles in on the arms industry, then US exports would most likely plummet.
China is no longer buying treasuries, but the Fed is. As countries sell their US treasuries, the Fed will write checks to China, Japan, and Russia to pay off those who invested in US debt; they will not be shortchanged. If other countries do not want dollars, then--guess what?--we will spend them here building the infrastructure and factories we need. We should back off on QE if and only if inflation becomes a factor. There have been numerous examples past and present where issuing greenbacks--certificates not backed up by anything like gold, for example-- did NOT provoke inflation. This QE idea is the best idea since sliced bread.
Despite what Ellen Brown, Paul Krugman and Dean Baker say QE2 is not safe or wise.
Bernanke's funny money is helping to balloon the price of food commodities around the world sending hundreds of millions into hunger. This will bring with it violence, death and instability.
Additionally, QE2 has led Russia, Brazil and China to arrange trading exclusively in their own currency, the dollar is no longer welcome.
This is only the beginning of more bilateral trade agreements where the dollar will be frozen out.
Underreported is that China has stopped buying our debt. Amazingly, this ground shaking news is hardly being mentioned. The Federal Reserve will be forced to pick up the slack until congress can hatchet the social safety net so that the wars can continue to be financed. Soon the Fed will own more U.S. debt than China. Compared to the Fed, the Chinese government is a relatively transparent institution.
The Fed Reserve policies will likely cause higher spikes in commodity prices, but fundamentals will rule in the end. If farmers grow huge amounts of food, prices will not continue higher. We can only hope China quits buying our debt! We must have a weaker dollar to bring jobs back to the US and allow us to increase exports.
Greg R, it will also lead to much lower-paying jobs, which will eliminate our middle-class and standard of living. Remaking America into serf labor China is not a very bright future. Instead, we should do what the Founders did: protect our markets and impose tariffs on foreign imports and services so that it's cheaper to make it here than over there. That would build the earning power of our middle-class and bolster the value of the dollar. This is, BTW, exactly how the Chinese have become so prosperous, except the communist government kept the money rather than distribute it to the people, or allow them to negotiate their own wages.
Lower paying jobs for many are what we are stuck with for a while. Erecting tariffs will not increase jobs, except for some low wage jobs. We have so much assorted "stuff" that we have imported from China for next to nothing, that very few people would want to buy more of this "stuff" for 10 times the price in order to pay Americans a 'living wage' to produce it. We must have a viable export market in order to thrive. If we erect tariffs, others will follow and maybe double. China is starting to look like the US in one way. The growing segment of Chinese capitalist elites are getting rich.
Funny money? Hilarious. What is money? Do you have a clue?
Probably the term "funny money" represents money created from nothing and kept on electronic spreadsheets only, never as coins, for example. It is useful for making loans, of course, but from the point of view of the worker who sweats to get ten bucks per hour, money is something altogether different. It is understandable that most people would like to differentiate between the money they get as wages from money that is created for corporate take-overs and playing the markets.
The last President that tried to reign in the Fed met a tragic end. Ponzi money always concludes in pain and suffering, and then the real work begins.
Crossfire, The Plot That Killed Kennedy by Jim Marrs, 1989, Excerpts
Another overlooked aspect of Kennedy's attempt to reform American society involves money. Kennedy apparently reasoned that by returning to the Constitution, which states that only Congress shall coin and regulate money, the soaring national debt could be reduced by not paying interest to the bankers of the Federal Reserve system, who print paper money then loan it to the government at interest.
He moved in this area on June 4, 1963, by signing Executive Order 11,110 which called for the issuance of $4,292,893,815 in United States notes through the U.S. Treasury rather than the traditional Federal Reserve System. A number of "Kennedy bills" were indeed issued but were quickly withdrawn after Kennedy's death.
Considering that the battle over U.S. monetary control by a monolithic central bank is an issue that dates back to the founding of the Republic, some assassination researchers believe Kennedy's little-noted efforts to reform the money supply and curtail the Federal Reserve System may have cost him much more than just the enmity of the all-powerful international bankers.
http://theformofmoney.blogharbor.com/blog/_archives/2006/7/6/2088735.html
More free money for the banks to buy foreign enterprises. The trouble is China, Korea, Brazil, et. al., can and will take action to prevent it. Notice that this intentionally does nothing to fix what's broken in the US, something banksters do not do.
Japan might have employed QE2 but the disparity between the salaries of its CEO's to those of the Japanese labor force is nowhere near as wide as the difference between the income of American CEO's and that of middle class workers in this country. In fact, many of Japan's socio-economic structures would be interpreted as downright socialist in the U.S. With the resurgence of wild west capitalism as espoused by Milton Friedman and set loose by Reaganomics with its massive transfer of wealth upwards for the top 1% of income earners, the Fed's actions are right on script. In fact the Fed's loose monetary policy will exacerbate the long-term unemployment problem and as has been stated in this thread, will further promote the creation of asset bubbles adding dangerous risk factors which will hurt long-term economic stability and real jobs creation, adding insult to injury to an already burdened and despairing middle class headed towards economic serfdom.
While the majority of your post is quite reasonable, your statement that "the Fed's loose monetary policy will exacerbate the long-term unemployment problem" does not seem reasonable. Please explain.
The money lent by the Fed to banks is being used by the banks to shore up their balance sheets. It is also creating a surplus of liquidity which bank financiers are using to buy up foreign currency and make a tidy profit. Why bother to lend capital to start up businesses and Main Street when far quicker profits can be realized following Wall Street's blueprint of a global casino economy where greater/quicker profits are made by betting on shares of multi-national companies and other big businesses who are in the habit of buying up the competition, quickly downsizing the workforce or even transferring its operations in emerging markets where labor is far cheaper and they face far less regulations?
The Fed has proven to be a mediocre middle man for Main Street. It constantly plays the economic poker game that favors the advantage of big business. Why not move away from the Fed paradigm and set up National, State, or Credit Unions which could much better implement monetary policy that actually administers the medicine of liquidity where the pain is? The Fed's loose monetary policy is cheap money for big investment banks like Goldman Sachs not for the greater economy that actually creates jobs. It is no coincidence that Wall Street's profits have soared as high unemployment continues to be a long-term prognosis.