The FED's authority comes from Congress as a part of the Fed Act of 1913. We, the people, let them have this power. It was necessary as the Panic of 1907 demonstrated that our society had gotten too wealthy to expect that an individual could or would bail the banking system out of an over-extension.
The FED never used their authority to any significant degree until the '60s when the McChesney-Martin FED let the cat out of the bag setting the stage for the Burns boys to practice eternal prosperity through Keynesian largesse. They were prudent about money creation until then. The money created by the FED through open market operations is literally fiat money, but you have to understand that there is a need for money creation however of a mechanism exists to do it. Each day we all go out and work creating value. We add to value of society in excess of what we consume, so there must be a growth of representation of value. The various forms of money, RPs, fed funds, currency, demand deposits, time deposits, gold, public and private debt, must increase in their total representation of value, if the representation is to be faithful. That the FED creates fiat money, out of thin paper, isn't the issue. As long as we trust them to faithful production, there isn't a problem. The problems start when the creation is unfaithful, when they create more money than the output of goods and services. Ceteris paribus that means more units of money per unit of output. Inflation. They never go in the other direction. Everyone knows that more money is good, less is bad, so we'll just paint the future good, with lots of money.
There is no limit to the fiat creation of money by the FED. When excess money growth develops into inflation, the FED has to change direction and destroy money. If they don't, their credibility would be lost and society would no longer trust the Federal Reserve System. Society would revert to barter and gold. Extremely unlikely to happen. FED would just change their ways until output growth and money growth were back in line. Would you contend the fungibility of a check from the FED which will end up after clearance back in the FED? The base upon which fractionalization leverages comes from the fiat open market actions of the NY FED as directed by the FOMC.
Don't get confused about money leaving the country. Such money has to be repatriated because it can't be spent elsewhere. Since the dollar has been the world's reserve currency that isn't so true in that mom and pop in Jingaloo will accept your George Washingtons, nonetheless mom and pop clear through Jingaloo's Central Bank which exchanges the dollars for local currency with domestic corporations who use them to buy American goods including T-Bonds. Fluctuations in the conversions occur because of differences in economic efficiency and monetary policy. There is the unstable instantaneous market fluctuations as experts read their tea leaves. Stability means there isn't a net flow of value. There is a transient state where there is a net flow, but eventually either efficiency or monetary policy is changed to reverse the flow back to equilibrium. If we inflate by rigging the reserve board to create excessive money, our output prices rise relative to those of foreigners. Americans buy Toyotas. Jobs aren't created here and we don't generate as much output. The FED has to shrink the supply of money commensurately to output, else stagflation. Until 1979 the FED didn't have the political will to do shrinkage. Since then they got religion, they even erred on the side of shrinkage. Now, that's starting to disappear as they are infinitesimally reprogrammed by the sirens of prosperity into forgetting what they think they had learned.
The Fed's ability to create money is not constrained by the fact that the Japanese own a fairly large chunk of T-Bonds. If the world thought we were a non-inflationary nation, then the Japanese could dump every T-Bond they own in one day and the price wouldn't change. That is, it would instantaneously plunge, but after the smoke cleared, the price would be as the same level as pre-dump. That level reflects the expectations of future inflation plus the actuarial value. The actuarial value doesn't change, so if the inflation premium change is zero, the bonds would asymptotically approach their previous price. Americans would gobble up those bonds because of confidence.
As far as selling dollars on the Forex by Central Banks, the FED can do offsetting purchases for the Treasury, so nothing changes. Recently the BOJ sold dollars to hold the dollar from rising against the yen. The BOJ sold T-bills to get the dollars to conduct open market sales. This has the instantaneous effect of causing short rates to rise. The FED has to initiate unexpected RPs in order to maintain their evident steady rate policy. The RPs make the free float rise so that if this action persisted, the effect would be to make money supply grow. That is, the market would perceive that there was more money available at a given cost (interest rate) than was previously perceived. Borrowing would rise and the FED would have to create more money to prevent interest rates from rising under a regime of capacity limit. This is the Vicious Cycle and the FED can be thrown into it by the actions of foreign Central Banks coupled with booming actions of Americans. However, this circumstance is highly unlikely to persist if only because the Japanese would run out of reserves, but it could be destabilizing.
Indonesia's problems were caused by Indonesians. They grew too fast and made overly optimistic judgements about their ability to afford. They borrowed to buy and now they have to redirect income to pay down the debt. Indonesia is just undergoing normal growth pains. The money that could be returned to the US if that is a coherent statement is a drop in the bucket. Not an issue. You have to define what you mean by "returned". Dollars held by Indonesians returned to the US do so by purchasing dollar denominated securities, T-Bonds, T-Bills, and stocks. FED doesn't mind having someone in the market doing for them what they so nobly cherish to do, buy T-bills to drive down infernal interest rates and to create eternal prosperity.
When interest rates rise, the debt falls because the issuing authorities lose the public ok to do so. There is a lag and that usually confuses people into believing the opposite.
The national debt is not an issue of any significance. If you think it is, then you think taking out a mortgage to buy a house is also significant. Why should one be ok and not the other?
The Treasury can't float in unlimited supply of bonds. The FED can't float an unlimited supply of currency. It isn't at issue. No one believes they would do that and there is no circumstance where they would. That's not the potential problem. The problem is persistent small abuse that creates unknown levels of equilibria in markets. The FED crafts a regime of prosperity which eventually is discovered by the market to be specious. Then there is adjustment. Nasty adjustment.
It is totally possible for the FED to control the money supply. Totally. What economists are saying is that if there is no trust in the FED and then if the FED floods the country with gadzillions of bucks pushing rates to 0%, no one will borrow because they don't believe they will have the money in the future to make the hyper-inflated interest payments. Liquidity trap. You can't push on a string. It is a game of trust. Abuse that and you don't have any trust, game, or authority, and it is the latter that is most important for identity people.
Price rises couldn't occur unless the confidence existed such that the ability to sell more at higher prices existed. The confidence comes from the Central Bank when they provide extra money at a given cost. The market would like to raise the cost because the supply coming back into the market isn't as great as the demand taking it out. You see this disequilibrium when the FED interferes intentionally or unintentionally and during periods where individuals are speculating on inflation by borrowing to buy inflating assets.
The regulating of interest rates, targeting interest rates, is a flawed policy that the FED is now entering. Rate management is a short term action whose cumulative effect you never know and whose effect the market never knows. All economic disasters of the past have their roots in interest rate management. Rates exist in the minds of individuals. You can't get at them. On the other hand money supply is a quantity that is controllable, you just have to remember that money supply control takes patience and principle. If you fix the rate of growth of money to the growth of the ability of humans to add to value, then interest rates take care of themselves. They remain low and stable. It is a simple truth. If the demand for loanable funds exceeds the ability to supply back to the market the funds to keep rates constant, rates will rise cooling off the loan demand. The reverse is true also. A natural mechanism. It always works regardless, but if the pretentious authorities come in with their knowledge about the way things ought to be, they create disequilibrium states that take decades to resolve. They waste everyone's life. In some places like Soviet Union they waste generations.
Inflation in the US is caused by our domestic policies. That's true of other countries too. Since we are so big and powerful, the other countries are still effected by our domestic policies. In the future that will change.
Instead of invoking the gods about economics, just think of the relation of money supply to inflation in a simple way. Think, conservation of value, like conservation of mass-energy in physics. We can't even formulate any coherent theory of physics without that conservation law. The world is only chaos without it. Same in economics. Total value is instantaneously conserved. If you create more money than goods the represented value of goods must rise. God isn't going to give you something for nothing. Wonder what economists are thinking when they assert that that isn't true? As long as the FED targeted money supply rates fell. Now they're targeting interest rates and rates are bottoming. I'll bet if I look at the St Louis FED data it will show rapid money growth. Maybe not M2, but monetary base or L.
The dollar is locked into gold. They determine the convertibility rate just about every day. Because of this change in the FED's integrity as expressed in the interest rate targeting, the convertibility of gold will be rising. I think you're get too caught up with the representation of value rather than the engines of it. All the machinery you're mentioning is under its own constraints. If it wasn't, it would bust down and be replaced.
What isn't under constraint except the constraint of the bad times brought by such actions, is the will of the people to inflate. If I demand more pay than what I'm worth and I have an ugly mob backing my demands, I'll get the extra pay. Someone else will have to pay through increased prices for my output. My attitude would be, "I don't care about them. They're all greedy capitalist pigs and they're rich and can afford it. So I'm going to steal back from them what they stole from me. I decide fairness." What's to stop me? Nothing. Except the FED. My inflationary demands have to be mimicked by everyone else so the society would hyper-inflate and collapse unless the FED came in and created unemployment using whatever means necessary. Then the mob would disband until next time. That would mean at least 21% interest rates and they wouldn't give a damn what happened to the money supply. So, long before that whole thing starts coming down, they gotta knock me down. While we all are waiting for the FED to rumble, the price of gold will rise. The price of gold represents human mutual distrust and the FED has to do what is necessary to keep the price of gold down. |
