News & Analysis
Fed Saves the Day by Sterilizing Money
Fed mulling sterilized bond purchases ... Federal Reserve officials are considering a novel approach to bond buying aimed at countering some of the worry that another round of asset purchases by the central bank could fuel inflation, according to the Wall Street Journal. Citing people familiar with the matter, the newspaper reported on Wednesday that should the Fed decide to buy more bonds to boost growth, it could borrow back the money it used to buy those bonds for short periods of time at low interest rates. Doing so would take that money out of circulation, or sterilize it. Representatives from the Federal Reserve and the New York Federal Reserve Bank, which conducts the central bank's bond trading, declined to comment on the report. The Fed is holding a regular policy meeting next week but is not expected to launch another round of bond buying at that time. It cut benchmark interest rates to near zero in December 2008 and has bought $2.3 trillion in bonds to push down short- and long-term interest rates low to stimulate growth. − Reuters
Dominant Social Theme: The Fed has so many "weapons." We don't have to understand them; just be comforted that they are there.
Free-Market Analysis: Another day, another power elite dominant social theme. The more we study monopoly-fiat central banking, the more shocking it becomes. We wonder why and how we ever accepted its justifications. And now we are hearing once more about a hoary old monetary tool, sterilization.
Sterilization is an attempt by Fed leaders to reassure people that the big central banks can remove money from the system as well as add it in. But after a while, one who follows this stuff simply gets the feeling they are "making it up" with increasing desperation.
What these reports (see above) really mean is that Fed leaders are well aware of the anger that is rising over their constant injection of funds into the larger economy. Thus they have issued another statement using another kind of gobbledygook. Here's some more from the article:
Fed officials are considering different options should they decide to embark on another round of asset purchases, the report said. Among these is an approach in which they would buy bonds, but restrict how investors and banks could use that money.
The Fed has tested tools to take money out of the financial system such as reverse repurchase , or repo, agreements to prepare for the day when the central bank wants to begin to tighten financial conditions. Other bond buying options are avenues the Fed has already pursued, according to the article.
These are outright purchases of new Treasury or mortgage-backed securities, known as quantitative easing (QE); or selling shorter-term Treasury securities and replacing them with longer-dated Treasuries, a strategy that is already in place and known as Operation Twist.
All of this is old stuff. That is, it was explained in textbooks and newspaper articles in the 20th century and received with great admiration and credulous assent. Monetary sterilization? Of COURSE. Makes a great deal of sense.
But it doesn't. One can almost imagine top central bankers sitting around a big table at an expensive restaurant and trying to figure out how to convince people that in addition to printing money, central bankers could REDUCE the money supply.
Of course, one can always raise interest rates. That doesn't actually reduce the money supply but it certainly makes it SLOWER. (Of course, this assumes that there is DEMAND for money in the first place; demand, not velocity, is the prime mover of money.)
Anyway, after enough glasses of sherry, someone exclaims, "Let's swap short bonds for long ones and call it a twist!"
And another exclaims, "Let's borrow back money that we've already lent and say we're sterilizing the market!"
A third one wonders if the banking system will cooperate. He is scoffed at. "Of course the banking community will cooperate," he is told. "They will do whatever we ask."
"But that doesn't sound like much of a free market to me."
The rest of his remarks are drowned out by laughter.
And that is the point, of course. This type of market manipulation is truly ludicrous. It seemed logical in the 20th century when it was presented on the front page of the New York Times and nobody said a word against it. But in the Internet era, these kinds of manipulations are increasingly seen for what they are: price fixing.
There is no such thing as "sterilization" and central banks cannot perform it. Central banks, including the Fed, have printed something like US$50 TRILLION. Not all of this is currently in circulation but more and more will find its way into the "real" economy.
Price fixing, setting the volume and price of money, is always distortive sooner or later. It will cause first a boom and then a bust. The marketplace itself must decide on the volume and price of money without the arrogant and destructive hand of man.
Conclusion: Thus, no matter what sterilization the Fed performs, there is too much money in the system already. There is already inflation. What the Fed is responding to is the possibility of price inflation. And that is already on the way as well.
Posted by Dilence Sogwood on 03/20/12 04:12 PM
A little off topic, but I know you guys have struggled with CDS in the past. Here is an amazingly verbose defense of CDS from a libertarian perspective. You guys might like it.
Click to view link
My defense is simple. CDS are private, zero sum contracts. If you dislike them, then you should also dislike the listed equity options market, as they are the same. As seen with Greece, the liquidity of Sov CDS provides a price mechanism when the technocrats try to bully the markets. The Greek swap settled at 21 cents on the dollar. Angela would have preferred not to have been made aware of that sad fact.
Reply from The Daily Bell
We haven't struggled with them. We've simply argued that in a truly PRIVATE market, derivates generally would likely not be the factor they are and perhaps would not even have caught hold at all.
Wall Street is an ARTIFICIAL concentration of cash and technology and has been increasingly manipulated since the Civil War.
God knows what an unmanipulated securities market would like. We think securitization and financial markets generally would be quite a bit smaller than they are now.
It is fiat monopoly central banking that is ultimately responsible. The money industry is the ultimate bubble. But thank you for the link. Interesting reading.
Posted by Bischoff on 03/13/12 01:35 AM
You made things as clear as a bell... .without ever resorting to Mars talk... . Congratulations... .!!!!
Posted by amanfromMars on 03/12/12 04:12 AM
I would like to amend the last paragraph of that earlier submission ... . Posted by amanfromMars on 03/12/12 03:50 AM ... .. to remove the errant nonsense which is written there ... .. "And I agree with you, Bischoff, that Bernanke is no thinker at all and that makes him the most useful of useless fools' tools." and replace it with that which has been proven itself to be an indisputable fact in the fictions which are perpetrated as realities and aided and abetted by media in their pimping and pumping of news and current affairs. ... ... And I agree with you, Bischoff, that Bernanke is no great thinker at all and that makes him the most useful of useless fools' tools.
Posted by amanfromMars on 03/12/12 03:50 AM
Here is a tale which mirrors the present fate of fiat currency, and any and all treasury bonds/gilts etc which are to be paid/redeeemed on maturity with just more fiat currency, and the danger which every day faces those currently responsible for the scam that has wealth deluding itself as a power and control over intelligence. ... ... ... .. Click to view link
And I agree with you, Bischoff, that Bernanke is no thinker at all and that makes him the most useful of useless fools' tools.
Posted by Bischoff on 03/10/12 10:11 PM
CORRECTION: "... under "franchise" (charter) from the Federal Government an irredeemable national currency"
SHOULD READ: "... under "franchise" (charter) from the Federal Government a REDEEMABLE national currency"
Posted by Bischoff on 03/10/12 10:08 PM
"Bernanke studied the Great Depression and, like Milton Friedman, concluded the FED was too cautious in creating new reserves to counter deflationary forces."
Yes, Bernanke might have studied the Great Depression, and like Milton Friedman took away totally wrong conclusions.
Neither Bernancke nor Friedman seem to understand that the "Fed" (Federal Reserve) did not come into existence until 1935. While they certainly were aware of the Federal Reserve Act of 1913 which created the "Federal Reserve System", for some odd reason they equate the "Federal Reserve System" with the "Federal Reserve". They are two entirely different institutions.
The "Federal Reserve System" was a system comprised of twelve independent, regional, private reserve bank associations which created under "franchise" (charter) from the Federal Government an irredeemable national currency against the value of Bills of Exchange and gold held by their regional member banks.
Starting in 1920, the regional, private New York banking association, aka Federal Reserve Bank of New York, created an Open-Market Investment Committee which acquired U.S. Government T-Bonds (Gold Bonds) to sell them for redeemable Federal Reserve Notes in secondary markets. Sales of Gold Bonds for currency in secondary markets was strictly prohibited by the Federal Reserve Act of 1913.
These illegal secondary market sales, aka Open Market Operations, inflated the redeemable Federal Reserve Note currency. If the "Federal Reserve Board", the oversight arm of the Congress for the operation of the Federal Reserve System, voiced any objections to the rogue acts committed by the NY FRB, the politicians surely didn't intervene to stop it.
When the inflation of the redeemable FRN by the continued OMOs created the Florida real estate bubble, as well as the equity bubble in the late 1920s, it was just a matter of time before the redeemable Federal Reserve Note currency was going to collapse.
When people started to catch on what was happening with the inflation of the currency, they demanded gold for their redeemable Federal Reserve Notes. When banks were finally neither willing not able to redeem Federal Reserve Notes for gold, the Congress officially abandoned the gold standard in 1931.
After 1931, the new type of U.S. Senators (elected under the 17th Amendment with campaign funds from the big NY banks) did everything to hide the violation of the original FRA by the NY FRB. First by passing ex-post-facto amendments to the FRA, and then by gutting the original intent of the FRA by modifying the FRA with the Banking Act of 1935. The "Federal Reserve" with its Federal Open Market Committee, which emerged with the Banking Act of 1935, is exactly the kind of system which the NY FRB ran by engaging in illegal Open Market Operations in the 1920s.
These machinations of keeping the name of "Federal Reserve Act" but essentially gutting its intent with ex-post-facto amendments and the Banking Act of 1935, are an attempt to mask the rogue OMOs of the NY FRB in the 1920s.
The Banking Act of 1935 established the "Federal Reserve", aka "Fed". It is an independent government agency consisting of the Board of Governors of the Federal Reserve headquartered in Washington, DC, and of twelve Federal Reserve District Banks located in major cities throughout the country.
What Bernancke and Friedman didn't get was that the NY FRB by engaging in illegal OMOs starting in 1920, undercut the redeemable Federal Reserve Note currency issued under the Real Bills Doctrine and the gold standard. The OMOs created inflation causing a huge asset bubble, first in Florida real estate which burst in 1925, and then in the stock market which crashed in 1929.
Bernancke and Friedman don't seem to understand that by abandoning the gold standard, and by nationalizing the gold of U.S. citizens, the government also killed the Real Bills market.
Real Bills are a tool to finance consumer item production. They contain a so called "wage fund" (funds to pay the labor portion in the production process). Real Bills and the Real Bills market are essential for the expansion of productive businesses and for the employment of workers.
Since the government killed the Real Bills market by nationalizing gold, it also killed the "wage fund" contained within Real Bills. Beginning in 1935, the new government agency, the "Fed" issued irredeemable Federal Reserve Notes under the Keynesian theory of currency creation. It tried to make up for the loss of the "wage fund" by issuing lots of new irredeemable FRNs, by public works projects and by devaluing the U.S. Dollar held by foreigners. To no avail. No matter what the Fed tried with Keynesian monetary theory, it could not stimulate the economy. Entrepreneurs did not trust the government's New Deal policies, the National Recovery Act (NRA) not withstanding. They refused to put capital at risk to create jobs and to hire employees. No matter what the "Fed" and the government tried under the New Deal during the 1930s, it made things worse rather than better.
Given my explanation of the "Federal Reserve System" as compared to the "Federal Reserve", the contention by Bernancke and Friedman that the "Fed" failed to create sufficient amounts of irredeemable currency during the Great Depression to stave off asset deflation must seem ludicrous, don't you agree... ???
Posted by DrThorndike on 03/10/12 02:22 PM
As if 'on cue':
NPR/Diane Rehm promote the end of cash:
Click to view link
sickening how such blatant propaganda is swept into the minds of the statist 'do gooders' listening in!
Posted by LloydMiller on 03/10/12 02:11 PM
Sterlizing the new reserves is what prevent economic growth.
Posted by LloydMiller on 03/10/12 02:09 PM
Bernanke studied the Great Depression and, like Milton Friedman, concluded the FED was too cautious in creating new reserves to counter deflationary forces. So Bernanke increases the reserves (high power money) dramatically, but then, in fear, encourages banks not to lend it by pay interest on excess reserves, maintaining impossibly high loan standards via regulation etc. . . His sterilization of the new reserves is a major factor in the lack of economic recovery though domino bankruptcies of favored institutions has been prevented.
Posted by Nightcrawler on 03/09/12 11:09 PM
I'm getting the distinct impression that inflation of the currency is the politician's best friend. How's that all work!
Posted by Nightcrawler on 03/09/12 11:00 PM
If they can make it appear out of thin air, I guarantee you they can make it disappear just as easily.
Posted by Bischoff on 03/09/12 09:30 PM
We all know that a currency system based on monetizing debt by selling bonds in open market operations is a Ponzi Scheme. A Ponzi Scheme is like an up side down pyramid which in the long run will topple without fail. The more unviable this Fed currency becomes, the more desperate are the attempts to keep it alive.
When the Fed monetary system, threatened to topple in 2008, TARP saved the day. Soon the currency was in trouble again, and and the new savior was QE1, then QE2... now we are into ZIRP, reverse repos, and who knows what else...
I am sure that while I am writing this, the computers at the Fed are running to test the next scheme which might prevent the whole currency regime from inevitable collapse.
Of course, whatever those smart guys at the Fed come up with, it's not going to make a difference in the long run. In the long run, the Fed irredeemable currency will destruct. However, in the meantime it is fun watching the attempts by the Fed to keep this upside down pyramid from toppling.
Posted by Danny B on 03/09/12 04:17 PM
As mankind advanced, he had to specialize. He had to have faith in other specialists. When he cheated, it had a small or large negative effect.
When the subs brought up pieces of the steel from the Titanic, it was discovered to be very brittle because the amount of sulphur in the steel was WAY above the limit specified by the ship builder. Instead of deforming, the hull shattered and ripped. The same is true for dams and buildings that had adulterated concrete.
Somebody substituted transformer oil for cooking oil in Spain many years ago and killed & maimed about 700. There are endless cases of death from adulteration. While you could argue that cheating was a survival mechanism, it created huge burdens from loss of trust. As society becomes more and more complex, the damage from cheating is a huge burden. The parasites don't see it as a problem,,, just a blessing. Like the scorpion that stung the frog in mid-stream, they know no other way.
Posted by 4irw4y on 03/09/12 02:33 PM
((-: Must a comma follow the dots, and if it does make it after a difference?
Posted by 4irw4y on 03/09/12 02:31 PM
(-: Must a comma precede the dots?
Posted by amanfromMars on 03/09/12 11:45 AM
"Imagine if everyone operated like Bernie Madoff." ... ... Imagine the weight of shameful guilt to be wailed away by those just like Bernie and friends.
And as for ... "The teachings of the Jewish religion are based on an understanding of basic human nature that is greater than that for most religions" ... ... if we substitute different for greater is the delusion rendered safe and harmless with its removal from the scene.
Posted by Danny B on 03/09/12 11:02 AM
AMFM, your links are very interesting, especially CREST and CESG.
Concerning the discussion between Weebly and Bischof on religion, there is a practical aspect to religion.
"The teachings of the Jewish religion are based on an understanding of basic human nature that is greater than that for most religions"
This is false. The jews are well known for cheating the goyim.
Society and commerce require trust. If the jews gain advantage by cheating, this can be called a "survival trait" but, it can't be beneficial for society overall.
Imagine if everyone operated like Bernie Madoff.
Posted by Dilence Sogwood on 03/09/12 10:26 AM
So the Fed borrows short term from the banks in an amount equal to the new money. As soon as they stop rolling that facility, the money supply goes up.
... Now ask yourself this: Why would the banks exchange yielding assets, which are currently hard to come by, in exchange for a lower yielding and much shorter term (reinvestment risk) term deposit?
The answer is that the assets they are selling must be crap. So if they are selling something they are carrying at 75 for 100, the 100 they receive inflates the money supply by 25.
More specifically, the value for re-priced (deflated) assets is being inflated. This is happening at the same time the money supply is being increased. This does not confer a social value, because the anti-deflationary effect is limited to a specific asset while the inflationary effect is distributed to everyone.
Posted by Pewky on 03/09/12 07:38 AM
Are car dealers trained by the Fed? This sounds like horse trading to me... ... .
Posted by Abu Aardvark on 03/09/12 07:01 AM
Wheee, I guess we're all going to be save and happy soon ... provided that the Greenbackers have their way:
"Public Sector Banks: From Black Sheep to Global Leaders" by Ellen Brown
Click to view link