Last week the Fed announced that it was going to Buy $600 Billion in Debt, Hoping to Spur Growth. The idea is to increase the amount of bank reserves so that it’ll lower interest rates which will spur more borrowing to fund real economic activity(i.e. buying stuff and starting new businesses). This move by the Fed was quickly followed by a lot of people freaking out about it (see here, here, here, and here). The basic criticism that I see is that the Fed is “monetizing debt” which will – at some point – cause inflation. Not being an economist, I feel that I must be missing something because I don’t understand the logic of the Fed’s actions nor the logic of its critics.
First, here’s why I don’t understand the Fed’s actions. Banks already have a record high level of cash reserves. What that means is that the banks are already sitting on a pile of cash in their vaults(Okay, I know most of it is just numbers in a computer, but the physical metaphor makes it easier for me to comprehend). The banks are already not loaning out this money. What makes the Fed think that making them have bigger piles of cash will suddenly induce them to start making loans? Will making already historically low interest rates go even lower get the economy going again? My point is that I don’t think monetary policy alone is going to get us out of our depression.
Now, onto the critics of the federal reserve. The argument is that for the Fed to buy these treasury securities is that it will increase inflation either now or in the long-term. To see the ridiculousness of this argument let’s first review what treasury securities are:
A United States Treasury security is government debt issued by the United States Department of the Treasury through the Bureau of the Public Debt. Treasury securities are the debt financing instruments of the United States Federal government, and they are often referred to simply as Treasuries.
So, by law, every time the Treasury spends money that hasn’t been collected in taxes, it must issue some type of treasury security to “finance” that spending. For those who purchase this treasury securities(mostly domestic commercial banks and foreign central banks) they get to earn interest on the debt. So if the United States spends $1,000 that it doesn’t have and Chase Bank purchases the security, it will make $1,000 plus interest. At 3% over 10 years, that will be 1,300 dollars. When 10 years is up, the U.S. treasury pays Chase 1,300 dollars. When all is said and done, Chase makes 300 dollars and the U.S. Treasury is out another 300$ on top of the original debt. (This, BTW, is why people are worried about the growing debt)
Now let’s look at what happens when the Federal Reserve buys the debt instead of Chase Bank. The Federal Reserve gives the U.S. treasury a thousand dollars. At the end of 10 years the U.S. Treasury gives the Federal Reserve 1,300 dollars. The Federal Reserve just made 300 dollars. Now, here’s the kicker. By law, any money that the federal reserve makes must go to the U.S. Treasury at the end of the year. So that 300 dollars the Fed just made by loaning to the U.S. Treasury… goes back to the U.S. Treasury. (addressing the absolute absurdity of this system is beyond the scope of this post, I will address it some other time)
Whether Chase Bank or the Federal Reserve purchases the original treasury security, neither scenario causes long term inflation as long as the Federal Government brings it’s budget back into balance at the end of the 10 years. This is true because no money is “created”. The government eventually pays off its debt by collecting more tax dollars than it spends and that goes to paying its debt.
However, since the federal budget has only been balanced about 7 times during it’s entire existence(and each time it lasted only 2 years or less), it would be a dumb assumption to assume that the debt won’t continue to go up over time as it always has. What that means is that when the debt comes due, the federal government will invariably have to issue new debt to pay for the old debt. If Chase bank owned the debt, the U.S. Treasury will have to create $1,300(the original 1,000 plus 300 in interest\profit) in new debt to pay for the old debt. If the Federal Reserve owned the debt, the U.S. Treasury will only have to create only a $1,000 in new debt because the Federal Reserve had to give back it’s profit.
So, if you assume that the U.S. debt will still be growing in 10 years, which scenario is more inflationary: Chase owning the Treasury security, or the Federal Reserve? Chase owning it is more inflationary. Why? Because to pay Chase, the U.S. Treasury will have to create $1,300 total in new money to pay for the debt(1,000 plus 300 in interest) where as if the Fed owns the debt, only $1,000 dollars in new money gets created. In other words, in the long run, it’s actually less inflationary for the Fed to own this debt than private banks. So all these people yelping about this causing long-term inflation are arguing for policies that will increase long-term inflation.
Now, I’m not an economist, so I admit that I could be wrong. I could be missing something here, but as far as I can tell, the Federal Reserve’s latest move won’t jump start the economy, and neither will it be more likely to cause long term inflation. Right now, the only things that can hurt or save us will be what our congress does to address the economy.
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Ok so Im going to barrow 20 dollars from you and then pay you back in a year with that same 20 dollar bill. In that instance when I return the 20 dollars to you will it technically be worth the same?
Or how about this Im going to barrow the value of ten of my dollars from and in a year pay you 20 of my dollars. sounds like a good envestment until I devalue my dollars to pay my dept to .05% of its original value. Then I win, sure every one else looses but who cares right?
just like who cares that Social Security is a ponzy sceme?
dont you feel secure?
I guess maybe having more dollars will make us feel richer no matter the value?
Dont you feel wealthy already?
I think the problem is that you keep looking at everything in the thought and hopes that they actually want to do good things for every one, and in Gods honest truth you cant. Because no matter what ya do your gonna piss some one off so as any one would do… they help them selves, theyre cronnies, and agendas. Why do we need a small, controlled and affective Government? OH…. Let me count the ways.
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I think you’ve REALLY missed the point I was making: Deficit spending is pretty much the only thing that Government can do to affect inflation. However, people are complaining about the Fed buying Treasury Securities.
How does it matter who buys the Treasury Securities? Whether or not it’s the Fed or the private sector, the U.S. Treasury still has to pay it back. Since the Fed has to give back money earned in interest, it seems to me that the Fed buying the Securities is better for us in the long run.
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What would have been better for us in the long run would have been not to spend us into massive dept. This is all just iceing on the crap cake the Gov. is trying to serve Americans.
I mean come on man, stop trying to sugar coat a shit cycle. People say its bad for a reason, just because they happen to be “fiscally conservative” doesn’t mean they are disqualified from common scense. It may just mean ya gotta dig alil deeper.
remember this old quote “He who does not learn from history is doomed to repeat it.”
Maybe, just maybe its time to actually let capitalism do its job. Thats somthing weve truely never tryed, dispite what most on the left may say.
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You crack me up. You hoot and holler about how everybody in our democratically elected government is evil and lies and can’t be trusted. However, if some “people say” that “its bad”, then you’re willing to accept that it is without understanding their reason.
If you’re not interested in discussing and understanding policy, then you’re on the wrong blog.
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No man, no, Im one of those people saying its bad. The only issue is that Im obviously not intelectually addepted to explaining to you my points in ways that you could consider. So since you wont listen to me perhaps the fact that most Americans (not just poloticians they are evil) calling it a “democratically elected government” is like saying a soft fluffy rabbid dog) would be enough for you to give it another look.
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There’s a reason I put at the end of my post that “I might be wrong”. It’s because I have to admit the shit the Fed is doing seems complicated and hard for me to get my head around.
It’s not that I won’t listen to you or don’t believe you, it’s that you didn’t address my question. You explained to me how inflation is bad. I understand and agree that high inflation is bad. What I don’t understand is how this particular move by the Fed, at this moment in time, is going to cause higher inflation in the future, nor do I understand how this is supposed to help our economy in the short run.
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IDK Amelia…. In my openion, cutting back is good but Im not a strait up libertarian. I mostly just want the Gov. to do its small part as close to perfact as possible. make use of legislation already availible instead of overlaping where applicable because it give false security to the far either side nuts. I feel the same with spending.
Its my personal belief that our nations problems are stem from the Government. Its not that its a democracy its that its an idiocracy. The rules the Gov. works under, our constitution has been molded to suit whom ever idiology they see fit instead of instead of whats best for the American people they act in the best interests of Crony capitalists and Foreign interests, and special interest groups.
Voting in one dirt bag over another only serve to benefit a new list cronies such as General Electric and thier “green” appliances.
every 2 and 4 years we try to fix our problems with a new cast of players hoping thatll fix the issues and we all know it wont, because it never does. Its not the players at all its the game.
We most regulate and limit Government actions. maintain the republic ofcourse (Id like not to have to worry about polotics)
what does the Gov do when a Corperation, industry, franchise, state, country, religion, media, group, social class, race, idiology, bank etc. startes doing somthing outside thier interests?
They limit, regulate, legislate and tax the shit out of them. What do we do when the Gov. acts outside the interests of the American people? We vote, we hope, we argue, we watch things get worse, we go under, get depressed and vote again.
I say we limit, regulate, legislate and tax the shit out of them cuz just voting isnt working.
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Because the Government can not make wealth it can only take it. Printing more money or sending more into circulation won’t make wealth only decrease the value of wealth already out in play. So we have inflation. Not only that but it hugely decresses the value of American dept making America a poor investment.
in my opinion its the burocracy trying to cover theyre asses before they leave office. No one is gonna look if the bill appears to be payed.
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How do you define and measure “Wealth”?
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Wealth is the abundance of valuable resources or material possessions or the control of such assets. The word wealth is derived from the old English wela, which is from an Indo-European word stem.[1] An individual, community, region or country that possesses an abundance of such possessions or resources is known as wealthy.
The concept of wealth is of significance in all areas of economics, especially development economics, yet the meaning of wealth is context-dependent and there is no universally agreed upon definition. Various definitions and concepts of wealth have been asserted by various individuals and in different contexts.[2] Defining wealth can be a normative process with various ethical implications, since often wealth maximization is seen as a goal or is thought to be a normative principle of its own.[3]
In economics, the term currency can refer to a particular currency, for example, the U.S. Dollar, or to the coins and banknotes of a particular currency, which comprise the physical aspects of a nation’s money supply. The other part of a nation’s money supply consists of money deposited in banks (sometimes called deposit money), ownership of which can be transferred by means of cheques or other forms of money transfer such as credit and debit cards. Deposit money and currency are money in the sense that both are acceptable as a means of exchange, but money need not necessarily be currency.[1]
Historically, money in the form of currency has predominated. Usually (gold or silver) coins of intrinsic value commensurate with the monetary unit (commodity money), have been the norm. By contrast, the token bank notes and bank coins of modern currency, as fiat money, have no intrinsic value (i.e. the bank notes and coins). Fiat money is state-issued money which is a medium of exchange for all other economic items in the economy, a store of depreciating real value during inflation and a store of appreciating real value during deflation as well as the depreciating unit of account during inflation and the appreciating unit of account during deflation in an internal economy. Fiat money bank notes and coins have fixed nominal values but either depreciating or appreciating real values. The depreciating or appreciating real value of fiat money – in its form as the functional currency within an economy or monetary union – is indicated by the annual rate of inflation or deflation. Severe hyperinflation can lead to the total destruction of the real value of the entire money supply and all monetary items within an economy: see Zimbabwe.
Wikipedia…
That being said…
Currency is a reprisentation of wealth. Wealth is a reprisentation of resourses. Are created and/or mantained through the economy which uses currancy to represent thier value.. SO.. if resourses are limited then it can be said that so is wealth. In essance if you and to currency you take away from value and vise versa.
Since the economy derives its value from currancy do to the flow of resourses anding to currancy also reduces the value of the economy. kinda like playing shoots and ladders with all shoots.
at least thats the way I see it… I could be wrong I am after all just Robbie
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If that is the case, then how does anyone create wealth?
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By creating resources, which only the economy can do. The Gov. takes its wealth from the economy, it can not create wealth only distribute it. However it can create currency as we know.
To answer your question, when the economy is down resourses are ofcourse limited.
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Does that mean you don’t consider this to be a source of wealth?
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the total gross power rating for the plant, including two 2.4 megawatt electric generators that power Hoover Dam’s own operations is a maximum capacity of 2080 megawatts.[2] The annual generation of Hoover Dam varies. The maximum net generation was 10.348 TWh in 1984, and the minimum since 1940 was 2.648 TWh in 1956.[2] The average has been about 4.2 TWh/year.[2]
Created with taxes from our “capitalist” economy. That is an example of distribution and one of the very few possative ones at that. take a look at Amtrack,
http://reason.com/blog/2009/10/27/riding-the-subsidized-rails-of
WIKI-
A subsidy (also known as a subvention) is a form of financial assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry (e.g., as a result of continuous unprofitable operations) or an increase in the prices of its products or simply to encourage it to hire more labor (as in the case of a wage subsidy). Examples are subsidies to encourage the sale of exports; subsidies on some foods to keep down the cost of living, especially in urban areas; and subsidies to encourage the expansion of farm production and achieve self-reliance in food production.[1]
Subsidies can be regarded as a form of protectionism or trade barrier by making domestic goods and services artificially competitive against imports. Subsidies may distort markets, and can impose large economic costs.[2] Financial assistance in the form of a subsidy may come from one’s government, but the term subsidy may also refer to assistance granted by others, such as individuals or non-governmental institutions, although these would be more commonly described as charity.
NOW… Go to Wikipedia and look up “government wealth”
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So you’re saying that each megawatt of electricity it generates isn’t a created resource? It was somehow “taken”?
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You can neither create nor destroy energy only transform it. Basic physics right there. If you want to be overcritical and obserd then, there ya go…
However if you’d like to for once be reasonable (I know its difficult for liberals but give it a shot anyway).
As a former military man I do understand the benefits of Government spending (I sure do love my guns).
But, anyone with half a mind can see that there are many more situations of fraud, waste, and abuse of the tax payers money than there are those such as Hoover Dam.
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I have NEVER said that we should stop Gov. spending in its entirety. That is an idea created to shut down an argument and mock me and other conservatives as fools. Its a fairly common trend, such as
http://newsbusters.org/blogs/noel-sheppard/2009/04/16/garofalo-tea-partiers-are-all-racists-who-hate-black-president
http://www.msnbc.msn.com/id/38234502/ns/politics/
http://en.wikipedia.org/wiki/Media_bias
http://www.democraticunderground.com/top10/index.html
http://jjocarolata.newsvine.com/_news/2010/08/09/4852378-the-7-types-of-republican-idiots-
http://weaselzippers.us/2010/11/23/msnbcs-special-ed-racist-right-using-tsa-controversy-to-promote-racial-profiling/
http://www.msnbc.msn.com/id/38234502/ns/politics/
http://www.youtube.com/watch?v=eVo6llKv1Pg
who is this Ed Schultz guy? Has he ever actually watched Fox News? I do and the only real hate I see is directed at Fox News. Every body knows Fox is bias ya cant get around that fact, but, are they hateful? Or is that just the liberal opinion? Maybe we should ask Juan Williams about the “hateful conservative agenda”. ANYWAY.. my point is …
there is always a way to win an argument but, winning doesn’t make you right. Being right makes you right and that’s why I always vote right..jk lol.
Its not about winning for the sake of winning is it. Make the most obsurd points for nothing more than a cheap shot. I think we agree on much more than not, so why can’t we work the rest out?
Oh wait a minute, I forget we can’t work it out because … Your all marxist anti-American elitests JK, LOL
Its really too bad this is only a fiscal blog. We could have some fun.
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Your last 2 comments show that you’ve completely missed the point I was trying to make. You stated that “Government can not make wealth”. I was pointing out, that it can, and in fact, has.
I was trying to lead you to that point using your own definitions and language of “wealth”. However, I could only lead you to that fountain of knowledge, but I couldn’t make you drink it. Instead, you decided to tell me how hateful I am.
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I was just messin with ya on the hateful stuff you know that.
And.. your right, I should have gone back and read the argument again, I lost the whole point. the Hoover dam is still a rear thing. When you look at the history of it, you can’t help but be reminded of the American spirit and the fact the Government isn’t totally jacked up. BUT, that still leaves us with the broader argument. I mean I could say that the Gov. didn’t create the river nor the finanses it ussed what it could get and on this rear occation succeeded. Can the Gov. use taxes to become an actor within the economy? YES. Are they historically any good at it? NO. Is it good for the economy to do so? I would argue that generally not so much. Capitalism relies on the ability for biznass to succeed or fail and the Gov. can’t fail so where does that put thier biz? apon the shoulders of the tax payer.
I say that the Gov. can not create wealth and I stand by it. Because, in order to create anything it must draw its resources from the people whom have little or no choice what is done with those resources. In biz. you must create your resources within the economy… I believe Ive already explained this…
maybe Ill say it another way..
the only way I could say the the Government can create wealth is if we were slaves and the Gov. owned everything. In that situation the only one who has wealth is the gov.. Luckely for us we are not yet Comunists
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Let me give you a scenario.
Let’s say
1. A music teacher is unemployed.
2. A local school has no music teacher
3. The local school has a piano that works, and books with music in them that aren’t being used.
What would be the cost to the economy of the federal government hiring that teacher at the local school to teach music?
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Salary plus benefits.
But, lets pretend that said teacher inspires the next Bono. Then you might say that the Government created a wealth person but you’d be wrong. Tax payers created a rich egotistical self-centered ignorantly righteous individual. Who then convinces large portions of the population to donate huge portions of our economy to wartorn provences in Africa under the guise it may actually help some one. Cost to the economy BILLIONS!!!!
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What in the world is Robinson’s point here? Here’s someone who has come to the end of his/her arguments and decides to end the discussion with Bono and the motivations of folks donating money where they see a need. WFT? (And hate to be picky, but basic spelling and grammar make for a much more readable comment and, hence, argument – and I’m not talking about your use of common text messaging abbreviations haphazardly mixed in, Robinson.)
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I’ve tried to answer your questions in three parts:
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but it seems that answer of yours is bit confusing .