Oddbean new post about login | logout The US government ceded control over issuance of their currency to a private banking cartel 111 years ago. The US government issues debt, but they're at the mercy of the private banking cartel to create the currency to buy that debt. The banking cartel always has their back, but at a price: the corrupt bankers own the corrupt politicians. So in effect the government always gets what they need, but that's mostly because they're just empty suits acting a part in the banking cartel's dog-and-pony show.
No, they aren't. The fed could dissappear tomorrow and the treasury could still issue debt. It would merely have to be paid for by the savings of individuals, companies, funds, banks, etc.. This is 100% possible without fractional reserve banking and could still be the case on a bitcoin standard in fact. The fed can print at will within reason, but also has to handle inflation as part of their law, so they can't in reality. They certainly could print it, and it doesn't matter. If it stays at the fed, it has zero affect on the global economy. Without the velocity and moving into private hands, it would be just a number.
When the Fed creates new base money, that IS the savings of individuals and companies. It's their savings being involuntarily diluted away by an increase in the base money supply. If the Fed disappeared, the Treasury could issue debt, but what would it be denominated in? The dollar base settlement layer is an SQL database at the Fed, and the Federal Reserve Notes in people's pockets. Without the Fed, who's going to issue dollars? The Treasury would have to do it I guess, which would make the question obvious of why they bother with the charade of issuing debt in the first place. So the Fed can print within reason, but not really because they can't allow inflation? But if they do print it doesn't matter and has zero effect on the global economy and doesn't cause inflation? Can't quite square that circle personally. If it's just a number, why bother? Why not do what you suggest and let individuals buy the debt? At what price would they be willing to buy? 15%? 50%? When the Fed create smoney to buy Treasuries, by definition the money doesn't stay at the Fed. The Fed gets the debt, the Treasury (eventually) gets the money. And they spend every penny about as soon as they get it, so then it's in private hands, driving up prices.
Sorry bro, you have too much there to go back and forth and I just don't have the time. Ill just leave it with 3 key points: The fed doesn't buy treasures. They aren't allowed to by law. Only primary dealers/banks are allowed to buy them. And NOT using fractional accounts, only collateralized accounts/cash. 2nd, over the past 111 years, MOST government debt IS NOT via the money printer. It is from Corp and indv savings, funds, pensions, and other countries. Think about it. The fed balance sheet AND M2 was shrinking at the same time the government added 2.8T in debt this last year. Yes, financing costs on bonds with sound money could be 2 or 3% or 5%. Whatever the market deems appropriate for lending your cash for XX time fram and risk. Remember there is no inflation, so you don't have to 'beat inflation'. Only need to evaluate time and risk. Have a good one. Nice chat.
That's cool, I feel you. 1. Semantics. The Fed is a banking cartel, the banks/ primary dealers and the Fed are functionally the same entity. The fact that banks have to "by law" buy the Treasuries first, before turning around and flipping them to the Fed at a profit, makes zero functional difference in the effect of the debt monetization. 2. Most. Again, semantics. If it's not essential to keeping the system going, why do they do it? Why devalue the dollar by 40% in the early 30s? Why remove the ability for individuals to redeem dollars for gold? Why YCC in the 40s? Why manipulate the gold price in the 60s? Why remove the final link to gold in the 70s? Why the money printing in 08? Why continue printing for almost a decade? Why more printing in 2019? Why print trillions in 2020? It's not the debt bought by individuals, foreigners, etc that's relevant. It's all the "emergency" liquidity injection. Every item in that list was some version of liquidity injection, financial repression, or the equivalent designed for the purpose of keeping the banking system propped up so they can keep the Treasury propped up. If the Treasury wasn't dependent on that system to indirectly finance their fiscal incontinence through inflation, I could see your point. But it's either that, or the Treasury prints it directly. The outcome is the same either way, except for the size of the bankers' cut. The Weimar central bank "discounted Treasury bills" too, instead of letting the Treasury print it directly. Didn't save them in the end either. Sure the balance sheet shrank as debt rose. Reverse repo also got sucked down from 2 trillion to almost nothing. You think reverse repo goes to zero, Fed balance sheet keeps falling, and government debt keeps rising at 2-3 trillion a year? My guess is no, I expect the Fed balance sheet to double from here by 2030. 3. I'll wait to see the US government run $2.8 trillion annual deficits and borrow Bitcoin at under 5%. You can't borrow hard money at interest for non-productive purposes. You'll get wiped out so fast your head will spin. The US government will be no exception. That's my opinion, we'll see how it plays out.
I don’t disagree with any of this. I don’t particularly understand your point about being dependent on the system? Of course if would crash without it and 100% needs the current system to maintain the deficits. No argument here in the slightest and I never, ever, have argued otherwise. I have a degree in macro economics, with a monetary systems and commodities specialty. Nothing you said there is news to me.
Ah okay, I'm probably just misunderstanding your comments. "Governments don't need fractional reserve banking." "The fed could dissappear tomorrow and the treasury could still issue debt. It would merely have to be paid for by the savings of individuals, companies, funds, banks, etc.. This is 100% possible without fractional reserve banking and could still be the case on a bitcoin standard in fact."
For millenia, governments and kingdoms have existed without fractional banking, and banking at all. However they abuse such a plight, and start debasing their goals, pearls, dollars, etc.. This isn't a requirement to run a government. rather a want and desire of powerful men taking advantage of their people. Politics...