A Canadian explanation of global monetary policy

One of my kitties decided to stay out all night, and consequently I had trouble sleeping and found myself wide awake in the wee hours of the AM.  So I turned to Market Watch and Bloomberg News to see the latest.  First I turn to John Markman of Market Watch who claims that Timothy (I-forgot-that-I-had-to-pay-taxes) Geitner has cooked up a scheme that will save Europe (Geithner’s plus-sized euro bailout is stealth QE3).  :

The plan, cooked up by U.S. Treasury Secretary Tim Geithner, is to persuade European leaders to vastly expand the size of the emergency bailout fund known as the EFSF, or European Financial Stability Facility. His proposal, and I’m not making this up, would use leverage — i.e., borrowing — to increase the size of the already borrowed money in the fund by up to 10x. … snip

This is a little hard to believe, but it’s the truth. The funds from euro-zone countries in the EFSF have already been borrowed. And now the plan espoused by Geithner is to use that money as collateral to borrow as much as ten times more. The guy does not get enough credit for his evil genius.

Where is Geitner going to get this money?  Apparently, if I understand correctly, from the Federal Reserve Bank.  So Bloomberg says (Euro Crisis Makes Fed Lender of Only Resort),

The ECB said Sept. 15 it will coordinate with the Fed and other central banks to provide three-month dollar loans to banks to ensure they have enough of the currency through the end of the year. The Fed bears no foreign-exchange or credit risk on the swap lines because the Frankfurt-based ECB is its counterparty.

So let’s get this straight:  The Federal Reserve will lend money to the Europeans.  This money will come from where?  It will become a new line on Fed balance sheet and will thus increase the adjusted money base.  This has become known as quantitative easing.  The money won’t be printed, and so nobody will see wheel barrows cash in the market places of Europe as they did in the Weimar Republic.  No, it will just be line in a balance book, electronically created from nothing at all (see Niall Ferguson, The Ascent of Money, 30-31, quoted in this post).

Now the best explanation of global monetary policy is in Corner Gas, season 3, episode 1, which is actually an allegory of banking in our times:  Oscar has made some bad bets in his stock picking game with Hank, who is beating him hands down.  They each started with $10,000 of fictional money, but Oscar’s picks have gone South.  But he’s seen the news about Ark Research’s insider trading, and he believes that knowledge will help him defeat Hank.  He decides to bet big on Ark Research, but he is in desperate need of liquidity.  So Oscar (a.k.a., the European banks) goes to his son Brent (i.e., the Federal Reserve Bank) and asks for $10,000 from his fictional money tree.  Brent says, Why can’t you do it yourself?  Did a fictional hooligan steal your make-believe ladder?  No, Oscar says, that would be against the rules.  Without rules nothing makes sense, he claims.  With rules, this makes no sense, Brent responds.  The monetary policy part of the clip begins at 0:39.  (@7:08 Oscar explains that he lost all the money and he can’t pay Brent back, and that is exactly how the loan to Europe is gonna go down).

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The Secret of Oz: Anti-central bank, anti-gold standard

This film was certainly interesting and well-made.  It is in favor of fiat money which is controlled not by central banks but by democratic government.  The title is based upon Hugh Rockoff’s allegorical interpretation of the 1900 children’s book Wizard of Oz, setting the story in the political controversies at the time of the author, L. Frank Baum (1856-1919).  According to this interpretation, the silver slippers are representative of silver money in competition with the gold standard, the Scarecrow, who is actually smarter than people think at first, is the American farmer who is destroyed by deflation, the Tin Man is the American industrial worker, who is in need of liquidity (oil), who comes along side the farmer in common cause and the cowardly Lion is William Jennings Bryan who was in favor of silver money and the US government issued greenback.  The wicked witches of the East and West were two major banks, and the water that kills the witch is the easy liquidity of the government’s own ability to create fiat currency which is not debt-based.

In my opinion the films successfully show how the gold standard can be manipulated by big banks and can have depressive effect on money–which can (1) stifle the growth of an economy and (2) create serfs out of people who cannot pay back their debts because of inadequate liquidity in the system.

The film fails to show how giving control of fiat currency to government can stop the government from politicizing the money supply and ultimately from creating hyperinflation.  The film also mistakes fiat money creation for wealth creation:  While it is true that wealth creation requires liquidity, it is a mistake to confuse wealth creation with the creation of fiat money.

I would conclude that restrained form of monetarism could be the best system in that it would grow the money supply in conjunction with economic production–but that all systems of money are open to manipulation and greed–and this is why the Austrians point out that all paper currencies eventually become worthless.  The advantage of a system of money which is based on precious metals is that neither a central bank nor a government can steal people’s wealth through the excess creation of money.  A stable currency would also encourage saving, as currency would be store of wealth.  The disadvantage of the gold standard is that liquidity can be dried up and there can arise situations in which money becomes too scarce.

Hyperinflation is now here: throwing gasoline on the fire

Kapitalcon cited my post discussing the $223 billion dollar US Federal deficit in February, and then went further to predict QE III:

Important to note is the Federal Reserve’s recent announcement that it may have to begin its third round of QE in response to sky-rocketing oil prices.  Atlanta Fed President Dennis Lockhart stated at the National Association of Business Economics in Arlington that “If [the rising price of oil] plays through to the broad economy in a way that portends a recession, I would take a position we would respond with more accommodation.”  As oil increases, so too does the cost of most, if not all, goods and services. This includes anything that requires petroleum in the production process, not to mention increased transportation costs for moving the product to market.  Such is the rationale for QE3.

Do I fear my commodity stocks going down like they did in 2008-9?  Not with people like Mr. Lockhart running the Federal Reserve Bank.  The problem of the commodities is too much liquidity chasing too few goods.  If the Federal Reserve Bank’s solution is to just throw more fuel on the fire, then I’ve nothing to fear.  QE, which I affectionately call the Bernanke Put, will be the ultimate cause of hyperinflation.  It is as though they are trying to fulfill this prophetic video that the National Inflation Association created a few months ago: