Fed Continues Poor Decisions, Inflation Explained
The news has been flooding in for the past few days with more company layoffs and general downsizing. One company that surely isn't downsizing in this mess is the Federal Reserve. Uncle Sam doesn't seem to want to cut his spending either. But the biggest news from today probably comes from the FOMC meeting.
Fed Keeps Rate Near Zero, Is Ready to Buy Treasuries
Jan. 28 (Bloomberg) -- The Federal Reserve left the benchmark interest rate as low as zero, said it’s prepared to purchase Treasury securities to resuscitate lending and warned inflation may recede too quickly.The Fed is ready to buy “longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets,” the Federal Open Market Committee said in a statement today in Washington. Any purchases before the FOMC’s next meeting in March would still need a vote to authorize the action.
Chairman Ben S. Bernanke, by making emergency credit programs rather than rates the focus of policy, is quelling some of the panic in markets while failing to revive growth. Falling home prices, rising unemployment and more than $1 trillion in losses and writedowns at global financial institutions are deepening the longest recession since the 1980s.
I think most people reading this blog should not be surprised to hear that Bernanke and his policies are "failing to revive growth." It seems that as long as the Federal Reserve is doing something, then they are failing to revive, and are even hindering, growth.
Fortunately for us, the Federal Reserve actually did nothing today. They essentially talked about many things, and acted on nothing. They cannot lower interest rates, and they have not begun to buy longer-term treasuries (though I think they probably will in the future). Let's see some of the talk that they presented.
“The focus of the committee’s policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve’s balance sheet at a high level,” the Fed said in the statement.
The Federal Reserve's balance sheet is guaranteed to stay very high this year, but how much that will "support the functioning of financial markets and stimulate the economy" is very debatable...in fact it wont do this at all.
When the Fed expands its balance sheet, it essentially is extending loans to (mostly) banking institutions that have been very poorly managed. These are companies that have essentially been leveraged to the hilt, and are imploding in on themselves.
What generally happens when companies extend themselves too far like this is that they go bankrupt. The incompetent managers that foolishly extended the company beyond its means are forced out of business, and the assets remaining can be bought by people who have (hopefully) learned from those mistakes. These new owners can (hopefully) start a better, more profitable and more well-run business around these assets.
For this process to happen, the assets must be marked to a fair value (a value that someone else in the market -- not the government -- is willing to pay for them). What the Fed is doing is preventing these asset prices from being marked at their fair value (often by buying them and replacing them with "reserves") so that the banks don't have to write them down (and essentially this means they don't have to file for bankruptcy....yet, at least).
So the Fed is keeping the poor management in place, propping up zombie companies that are insolvent, and preventing market participants from buying these assets and making productive use of them (because the price is not dropping to a favorable point).
What we can see from all of this is that the Fed is certainly not supporting "the functioning of financial markets" nor stimulating "the economy through open market operations." The economy can take care of itself through true open market operations. We don't need a governing body to do this for us.
All of these actions increase the size of the Fed balance sheet, but where are these "assets" that the Federal Reserve has on its balance sheet coming from?
They are coming from debt. When the Fed expands its balance sheet, debt is being expanded to someone else, usually this is our government (and thus the taxpayers), but recently a lot of the debt has been extracted from banks to help prop them up.
Make no mistake about it, American Citizens do not want a Federal Reserve with a large balance sheet (in fact, they should not want a central bank at all!). This is not good for the economy, but good for "banksters" and a select few that are being saved at the expense of everyone else.
Too Little Inflation?
The Fed said there is a risk that inflation could fall too low. “The committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term,” the statement said.
The Fed’s preferred inflation gauge, the personal consumption expenditures price index, excluding food and energy, may rise just 0.78 percent this year, according to Macroeconomic Advisers LLC in St. Louis. That’s about 1 point below the preference range that policy makers signaled in their third-year forecasts in January 2008.
Risk that inflation could fall too low? First let's look at what inflation is. Inflation is an increase in the supply of money and credit. Essentially what this means is that during inflationary periods, dollars are easier to get because there are more of them available. Each time a new dollar (either of real money, or of credit) comes into existence, it lessens the value of everyone else's dollars. This is because it is now easier for people to get dollars since there are more available. As the value of the dollars fall, this causes prices to go up.
A key thing to notice here is that the real price of goods is not increasing, but merely the purchasing power of the dollars is falling, and prices of goods are rising in dollar terms to make up for the lost purchasing power of the medium of exchange (the dollar).
So how does the money (and credit) supply expand? Most of the money supply is actually expanded today through credit. This is done by your friendly neighbourhood bank. Every time they make a loan, they are creating new money into the system that lessens the value of all the other dollars out in the system. This lessening of the value of other dollars takes some time, however, so the people that get access to the new money first have the advantage, they can basically buy things at the "old" price quickly before they have adjusted to the lost purchasing power caused by the new money.
It is important to note here that this process of banks creating money out of thin air is actually fraud, albeit government legitimized fraud. Banks take deposits and use them to create new money for free. A 100 dollar deposit in a bank can create around 900 dollars of new money in the economy. This happens because the borrower deposits the borrowed money into another bank, and then that bank loans out 90% of that money, and on and on. The kicker then, is that the banks mark that new money on their balance sheets as an asset! Banks put assets on their balance sheet for free simply because there was demand from someone in the market to borrow money from them. This is fraudulent in any other sector.
What this brings us to see, is t
hat banks are actually stealing purchasing power from everyone in the economy to increase their balance sheet. When they make their loans and everyone's dollar loses value, the banks gain assets. It borders on theft, but we'll just call it "inflation".
Now we come back to the Federal Reserve arguing that there is "too little inflation." I boil this down to mean that the Fed believes there is too little theft going on in the system, and banks can no longer make enough money for free.
I would argue that 0% inflation is a very good thing, and deflation is not even so bad. Deflation is only bad for those with debt. People who have been diligently saving their money and not overextending themselves are being rewarded (their saved money is gaining purchasing power). Those who foolishly extended themselves beyond their means are now being hit hard (their debt is becoming harder to pay off). This is how things work.
The attempts that are currently being made to, literally, "reinflate" the economy, are simply attempts to keep this banking ponzi scheme alive. None of this could happen if we eliminated fractional reserve banking and returned to a 100% reserve requirement for banks. This is the ultimate solution, and yet one that the Federal Reserve will never even consider.
Price Stability?
The excerpt I have quoted above also implies that there is some inflation rate that will "best foster economic growth and price stability in the longer term." Inflation helps foster economic growth for a few people in the economy (those with access to new money first -- not most people), while destroying purchasing power for the rest. Also, I would have to say that inflation guarantees nearly the opposite of "price stability." In an inflationary environment prices are never stable; they are always rising. How can they even say these things?
The Fed's Policy Goal
Next month, the Fed plans to launch the $200 billion Term Asset-Backed Securities Loan Facility, which will buy bonds backed by newly issued consumer and small-business loans. The program can be expanded to include other assets.
Readers should see by now that this is not a good thing. 200 billion more dollars squandered on weakening the economy. When will the Fed learn? And if they aren't going to learn, when are the American people going to hold them accountable and/or do something about it?
"The program can be expanded to include other assets." Maybe the fed can become the proud new owner of candle stores, car dealerships, and anything else that people aren't going to want to be spending money on any time soon.
Maybe the Fed should just decide which companies we need, that way consumers don't have to decide where they want to shop because there will only be a few choices (or less). Under this system, profitability won't matter for those companies (because the Fed will keep them going), so they will never have to lay people off!
I guess they thought of this before me.