Saturday, April 23, 2011


Anonymous has left a new comment on your post "$500 BILLION ADDED SINCE FIRST OF YEAR!":

Sorry to inform you have it backwards.(*I actually hadn't gotten it backwards as I just posted the madness of this others have as well) The madness you describe has already happened aka extension of credit.(*In reality though, a HUGE amount of money resides as EXCESS RESERVES which the FED pays a small amount of interest it is NOT getting LOANED OUT to where it might be needed) During 2002-2007 period credit was extended to even people with no jobs. (NINJA loans). The monetary base has NOTHING to do with lending. The monetary base increases come AFTER the extension of credit. This is where modern economists get it wrong. The peripheral banks extend credit first without reserves to back the loans. Once the bust comes the central banks "come to the rescue" by increasing monetary base.

Please refer to the articles for more on how the monetary system works in the real world as opposed to theory. So yes Bernanke is frantically increasing the monetary base but that has nothing to do with lending. The lending part has already been done and Bernanke is just playing catch up. What is happening now is the big players who know the game are positioning themselves so they benefit from the increase in monetary base. For example the Fed buys 10 billion in bonds from the market players (note that the fed is not buying directly from the treasury which would not help the big players). Now these market players will not use that money to build a factory to make goods or plant corn or do anything that will help the country. Instead they will use the cash to bid up say oil futures silver futures corn futures etc. So what happens is middle clas gets squeezed even more and the big boys get billions of dollars in bonuses. Its frustrating and wrong but nobody in Washington seems to care in the slightest.

Now Obama is asking a team to find source of speculation to explain rising oil prices. How moronic is that.

So to summarize the rise in monetary base is stagflationary (big boys bid up prices but the general population just gets squeezed more)but not inflationary (increase in 2 trillion in monetary base will NOT translate into 20 trillion in loans. The loaning part has already been done.) So if you are an average person living on a salary the vice just gets tighter around your nuts. Just pray they use some spit before they get rough with you! However if you have to savings to speculate you can use the ponzi scheme to make some money on the side. And help others with thig blog. *(thank you, that has been my goal for the last 8 years)
"At any time, the FED can get all banks lending. All it has to do is impose a fee on all excess reserves. It can test each fee. It can keep raising this fee until the banks have withdrawn most or all of their excess reserves. To do this, they must lend the money. For every dollar of decrease in excess reserves, the bank must buy an asset to offset the bank's legal liabilities to its depositors. It must offset these liabilities with equal-valued (book value) assets: loans.

The FED is in complete control over excess reserves. It pays banks a pittance to maintain these reserves. It is legally authorized to impose fees.

Alternatively, it could decide, on its own authority, to lend out all of the money kept in excess reserves. It could buy T-bills. The government would like that. The money would flow back into the economy. It would be spent. The money multiplier would rebound and go positive. The offsetting excess reserves would no longer offset the increase in Federal Reserve credit. The M1 money supply would double. Within a year, prices would be heading for a triple-digit increase.

All of this is legally possible for the FED to do. It refuses to do it. Why? Because it likes the present policy. It does not have to wind down – sell off assets. It also does not have to face rising long-term interest rates that would result from a doubling of the money supply. It does not have to worry about a collapse of the housing market as a result of 25% or 40% mortgage rates. Also, the corporate bond market has not collapsed.

What has it cost the FED to allow excess reserves to rise by a trillion dollars? Only the interest on 0% to 0.25% interest payments to the banks. That's a low price."

No comments: