Thursday, January 20, 2011
Don't mess with my dogma! My conversation with KT Mcfarland
KT Mcfarland was deputy assistant secretary of defense for public affairs at the Pentagon from 1982 to 1985 under President Ronald and a key member of Henry Kissinger's National Security Council staff. Not a bad resume.
I ran into her at Fox yesterday and I asked her what she was going to talk about.
She said, "China." Then she offered that, "We're really in a pickle with China."
I asked her why and she said because our options are very limited.
Then I said, "That's because we give them the leverage over us."
To which she responded, "Well, we have no choice, they are our banker."
I asked her what she meant by that and she repeated, "They are our banker," then added, "They own $3 trillion of Treasuries and we need them to buy a lot more."
At this point I couldn't sit still. You know me.
"They're our banker?" I asked incredulously. "What are they lending us? Dollars?"
She actually responded by saying, "Yes."
Then I asked her why any nation would need to borrow its own currency?
I didn't get a response, but I did get a cold stare, like the look that a child would get from an adult for being insubordinate. As if to say, "Watch it, or you'll be in even bigger trouble next time.
I continued...
"China sells us stuff and they get dollars. Then they put those dollars into Treasuries, which are just like a savings account."
Another cold stare.
Then I said, "It's like buying a bank CD. Are you financing the bank when you buy a CD? No. If anything the bank is making money off of you."
Silence. She turned to finish reading the Wall Street Journal.
That's it. Another example of policymaking elites totally undesirous of the truth if it conflicts with their dogma.
Aint this fun!
Subscribe to:
Post Comments (Atom)
35 comments:
Mike,
Maybe you and Gideon Gono should have a long sit down with her and explain the magic of wealth creation through the power of the printing press.
You act like you guys have reinvented the wheel. There's nothing new about debasement of the currency to pay for the government's liabilities and debt. It is a very old, bad idea. The government doesn't have to use a printing press or clip the coinage anymore because they can do it through accounting entries. On one side there is a debit and it is offset by a credit. It's so...so balanced you see! You can dress it up in fine clothes; borrow the language of science; and employ esoteric banking jargon to hide its simplicity if you like.
Also, a person who owns a savings account is the creditor to the bank in that instance. You are helping the bank make money which is why the savings account holder is offered interest. Why should we have to save at all though? Don't you guys think that savings can be duplicated by artificial banking procedures anway? Credit can be created out of thin air right?
Yes, the non-government gets and asset that it didn't have before, without a corresponding liability. The non-governnment's wealth as defined by assets minus liabilities has just gone up. It's so...so simple!
But Welfare, this discussion was on the comment that China is our "banker." How is that so? They're lending us back our own money??? Even YOU should be able to see the folly in that concept.
WWS,
"Why should we have to save at all though? "
Yes, if we ran fiscal with the goal of a true full employment policy and a JG, people in the non-govt sector would probably save less. In that case they would be less concerned about being thrown out of their jobs and losing household income, the current continuous threat of which probably inspires much savings. Good point.
Resp,
Mike,
They ARE lending us back our own money. That is the absurdity of situation.
A country only imports to export. The Chinese are sending us real goods in exchange for paper notes that represent a claim check on future U.S. goods. The problem occurs when we have little to export to them. What are they to do with those dollars? They are simply taking those dollar I.O.U.'s and exhanging them for treasury I.O.U.'s. to be recycled into future treaury I.O.U.'s.
So: we get all the real goods and the Chinese get an endless train of promissory notes. The U.S. has only gotten away with this and its large balance of trade deficit because we have had the reserve currency...for now. Under a commodity standard the deficit would have been corrected a long time ago. As it is the corrrection will be forced on us suddenly. Bill Bonner of Agora Financial likes to say the historians are going to laugh/cry themselves silly when they finally figure out the absurdity of this system.
WS:
They're not lending us back our own money. You don't understand. When they sell us something a credit is placed in their bank's reserve account at the Fed. (Like a checking account.) When the buy a Treasury the Fed simply moves that credit from the checking account to a Treasury account, which is like a savings account at the Fed. It would be like you having money in your checking account at the bank and then moving it into the savings account. That's it.
Yes, they can exchange the dollars for U.S. goods and we can sell them the goods IF WE WANT, but we're not obligated to. The exchange is voluntary ONLY. So there is no "claim" and they are not "promissory notes." We went off convertibility a long time ago. I guess you didn't you get the memo.
Or, they can hold them in Treasuries (savings accounts) forever. Where's the problem?
"You only import to export."
So in other words, when I buy a Honda I only do that so I can sell some Japanese my economic research? No. I buy a Honda to drive a Honda. Period.
Bill Bonner???? Now THERE'S an economic light for you. LOL!!!!!
I called the local "conservative" talk show host here in SE N Carolina to discuss this issue. He went on a rant espousing the same myth about china being our banker and deficit doom and gloom. I asked him, "where does china get the dollars they use to buy our debt?" He got so irritated and angry all he could do was hang-up on me. The ignorance and close-mindedness that exists in this country is stunning.
Mike,
My misuse of term 'promissory' is noted. It doesn't change the content of what I wrote though.
The checking/savings account analogy is correct in a mechanical sense, but is doesn't illuminate what is really going on. China has far more credits than the U.S. possesses. These credits can be used to buy U.S. goods or assets. They have a limited ability to buy U.S. exports because we export so little to them. Those credits can also be used to purchase U.S. Treasuries, but this debt must be payed back at a future date by confiscating more of the income of the American worker. That credit entries are "offset" by debit entries doesn't mean the debtor is in good shape.
I know that you will claim that the Fed need merely to credit the U.S. government's "checking account" with credit money that it creates out of nothing. The result will be a loss of purchasing power--an inflation tax. The piper will be paid one way or the other.
You mentioned that dollars aren't actually claim checks. How many businesses can you name that turn down people who have dollars to spend? The exchange is voluntary, but the exchanges will always take place once a buyer and seller agree on price.
China will not hold U.S. Treasuries indefinitely without demanding payment because they are not fools. What is the point of holding an I.O.U. if one doesn't draw interest and expect to redeem it for cash at maturity? If I owed you $100, would you simply keep the I.O.U. piece of paper forever? It's only an asset, if the creditor gets payed at some point.
As far as imports/exports, of course you don't literally exchange economic research for a Honda. That is barter last time I checked. Pointing out that imports are payed with exports doesn't mean that market actors are literally engaged in direct exchange. If you were in a barter economy, you would clearly see that you would have to produce something in order to trade with a domestic or foreign partner. Introducing the medium of exchange doesn't change this fundamental truth. A country that produces very little manufactured goods (it's hard to export services) will not be able to command much of the rest of the world's exports for long. The purchasing power just won't be there. A country can borrow as with the U.S. to pay for imports so long as the rest of the world is willing to finance its profligacy.
By the way, I think your economic research should command much more than a mere Honda on the market :)
wws,
"China will not hold U.S. Treasuries indefinitely without demanding payment "
Payment in what !?!?
If they just take a credit to a US correspondent bank account when the Treasury redeems, the FDIC only insures up to $250k. Do you think that Hu wants to risk the other $999,999,750,000 by depositing it in an account at Citi?
Matt,
In dollars of course. I'm know the way you think. You're thinking that they are just exchanging one form of debt for another--a Treasury for a dollar. That's just it. They don't want to be continually payed back in dollars for those dollars just to be recycled into new Treasury issuances. I'm sure the Chinese would much prefer to be able to claim goods out of the economy with those dollars.
What the Chinese citizen needs is for the state to stop taking the product of the individual's labor to buy U.S. Treasuries. The Chinese workers can consume much of Chinese production themselves. They can export the rest to countries that actually send them real stuff in return instead of more paper notes to only be recycled into Treasuries. You don't think those poor Chinese laboreres in factories don't deserve one of those washing machines or television sets they manufacturer? Why should the Chinese laborer toil 12 hours a day only to produce a product that an American buys with money partially financed by his own government's purchase of U.S. debt? Why shouldn't the Chinese laborer profit from the product of his labor in full?
WWS,
I'm with you here again (two in one day!). I look at it as though the Chinese elites are suppressing the standard of living of their own people in their zealous quest for USD balances. Literally, they are sending us real products in exchange for us marking up a number in a computer system.
this gets back to a point you made on the other thread wrt how way back when, foreign govts/elites sought out the Roman denarius or the Byzantine. It seems to me that throughout history, for some reason you see a pattern whereby governments/elites outside of the west for some reason always become zealous to acquire the dominant western financial asset of the era.
this looks to me what happened with Rome, (probably Greece before that), Britain's pound, and now the USD.
Resp,
THE PROBLEM IS THAT THEY ARE NOT FULFILLING THE CIRCLE
THEY ARE SAVING AND CREATING A GLUT AND NOT BUYING USA GOODS
OPEC DOES THE SAME WITH THEIR OIL U$D
THEREFORE, IF THE POINT OF LETTING THEM HAVE TREASURIES WAS THEY WERE SUPPOSED TO BUY USA BUT THEY DO NOT
THEY ARE WAGGING THE DOG BY THE TAIL, AND WE HAVE DISCUSSED THIS MANY TIMES BEFORE.
BOYCOTT NIXON'S CHINA - IT'S THAT SIMPLE.
ALSO MIKE'S PREDICTION ABOUT PROBLEMS IN THE STREETS OF USA ARE INDEED POINTED OUT WITH THE TRAGEDY IN ARIZONA -
THOUGH IT IS ONLY A SLIGHT VERSION OF REAL PROBLEMS IN THE STREETS LIKE THAT IN ARGENTINA
MIKE'S SUMMATION OF WARNINGS SHOULD ALSO TAKE NOTE OF THE SOFT GENOCIDE :
A. NO TRANSPLANTS IN ARIZONA - BUDGET TIGHTENING TO SAVE MONEY
B. LESS JOBS DUE TO AUSTRIAN BELT TIGHTENING - FEWER PEOPLE WITH BENEFITS
C. ETC
WE CAN SEE THAT IN A SOFT WAY, JUST LIKE THE USA ARMY DESTROYED SANITATION FACILITIES IN IRAQ WHICH CREATED MINI EPIDEMICS, AUSTRIAN ECONOMICS SCHOOL IS CREATING SIMILAR MINI-EPIDEMICS WHICH ARE KILLING AMERICANS.
REMEMBER ENRON ? THOSE FALSE POWER OUTTAGES TURN OFF THE LIGHTS NOT ONLY IN HOMES WITH BREATHING MACHINES BUT ALSO ENTIRE HOSPITALS.
Matt Franco claims the Chinese elite are supressing their peoples’ living standards in order to build an empire. This idea gains support from the fact that Chinese consumption as a proportion of GDP fell from 46% in 2000 to 35% in 2008. Staggering figures. Got that from Martin Wolf in the Financial Times.
http://www.ft.com/cms/s/0/45c703f4-233c-11e0-b6a3-00144feab49a.html
Those figures don’t absolutely prove the “empire building” point because it’s just possible the Chinese can justify sacrificing current consumption on the grounds that they’ve found some amazingly profitable capital investments, like, er, US Treasuries (ha ha).
In other words my guess is that Wolf’s figures do support the empire building point.
Matt, Musgrave,
Agreed to a point. The Chinese govt. shouldn't be investing in capital equipment with the savings confiscated from the Chinese laborer. The Chinese laborer (whether of the hand or head) is the rightful owner of the product of his labor. If he wants to invest in capital equipment to improve his prodcutive capacity and that of others, the choice should lie with him. If he wants to blow the whole wad by engaging if present consumption then he should be able to do that too.
The system in China can be accurately described as state capitalism. Central planners know best is their motto. It is what the so-called progressives want here--all with good intentions of course. The people are cattle in this system despite pretences to the contrary.
Aren't Chinese companies spending their dollars in Africa and elsewhere?
Buying and holding treasuries is a sign that China doesn't have any other use for their dollar reserves.
Laura,
Ive heard some reports that indicate China may be investing in Africa for nat resources, etc but this is probably a very small portion of their excess USD balances that they get from their trade surplus with the US.
Tom Hickey has reported here that the China GDP is only about $2T equiv. So their trade surplus of $25B/mo with the US (12X = $300B annual) is about 15% of China GDP.
If China were to lose this export surplus, that, by definition, would result in a hit to their GDP of 15% and that would be catastrophic for them the way they currently look at things. Lots of folks over there would be thrown out of their jobs, etc. Could create political unrest, etc... so they prefer to just keep accruing the USD surpluses to keep everyone working and to satiate the zealous USD savings desires of their elites.
I sometimes look at it as they (China) have a Job Guaranty program at the expense of the US worker, again this is as Mike tried to make the point with this moron McFarland, is due to US policy that cedes this to them.
Resp,
We know the world currency game is rigged. We support EU with swap lines and the Euro rises but the dollar falls; we create assets but the dollar falls; we credit banks and the dollar falls; PIIGS fall and the Euro rises, and the dollar falls;
However it should be the opposite.
China holds U$D in U$D which was never traded for Yuan/Renmibi and the dollar falls
The very fact that China holds the U$D should make the U$D rise since exports are not increasing.
I have said countless times on this blog here that the U$D treasuries owned by China are for the few powerful China elite, and the Yuan/Renmibi is for the cloned slaves so they cannot travel and escape China nor improve their lives to complete freedom degree.
The Japanese do this too - they park their wealth in Euro and U$D and bring home monthly. They got hit really hard when the dollar spiked and Yen spiked even more since they were supposedly legally and financially not investing in CDO's and mortgage stuff due to their learning from their 80's real estate boom bust.
A lot of the financial models from quants on wall street were from Japanese financial engineers though, so who knows what is going on.
The Chinese Japanese Emperors have no clothes.
WWS,
Im looking into these Roman coins some more and have come across the archeological record of "Countermarks" on the coins.
Link here.
So we have counterfeit Roman coins made out of pure silver, and now we have the addition of these Countermarks to the legitimate coins. It looks like these countermarks were struck into the coins if the coins were older and perhaps the Emperor whose image was on the coin was dead or deposed or whatever, and the new Emperor wanted to "revalidate" the legitimacy of the coins. So he had his mark struck into the previously issued coins so everyone knew "who was boss". And to whom was owed the poll tax.
WWS, this is now the second derivative removed from the metallic value of the coin. First derivative was the image of the original Emperor at the time the coin was struck, second derivative is the countermark.
I cannot beleive anyone was motivated to use or obtain this currency becasue of the material the coins were made out of.
WWS, the metallists say "it is the value of the metal" that gave these systems legitimacy,
Yet we have an archeological record that empirically shows:
1. Coins struck with Caesars image,
2. People actually go to the trouble and risk to counterfeit the coins out of the same metal,
3. Just to make sure at political changeover, the old coins are re-struck with the countermark of the new ruler.....
I dont beleive the metallists story anymore. The facts dont line up. It has always been the govt enforcement of tax/currency laws that have given civilzation "money".
I think all of you bloggers are exceptional and caring loyal US citizens, and I salute all of you.
In my opinion we should all be focused on the end game and what are your plans when the end game is at hand. For me I am abosolutely convinced after viewing the Martenson crash course which covers all of the subjects and concerns described above. It lays to rest what we should all be concerned about. Population of the world growth is exponential, all economic curves are exponential, and we are at the critical inflection point of a huge turn. The financial system was designed to have eternal growth calculated into the system, (surplus). Without surplus there can be either growth or propserity. The sum of these two equal surplus.
Surplus is finite and hence the fiat system is doomed, as it was designed with the idea of eternal growth due to eternal surplus. Check out the crash course and you will see the achilles heel of fiat, and that is the money supply must eternally grow due to interest payments to maintain the system of eternal growth. We need to rethink the system, or reduce demand on surplus IE reduce population exponential growth, or god willing find new breakthroughs to allow more surplus, its the end game I'm looking at.
Nanotechnology was supposed to be the disruptive force Bob was talking about - complete semiconductor factories in a single chemistry beaker and all that.
This would mean China's rare earth monopoly would fizzle since you don't need rare earth AT ALL when you can manipulate atoms in very unique and cheap ways.
I agree with Bob.
ALL HAIL BOB.
Matt,
Don't have time today to give this more that a cursory glance. My first thought is why would anyone strike a coin in silver, gold, or copper when it could have been struck in a cheaper metal? If the metal itself has no real intrinsic value then why not use the cheapest metal alloy possible? The answer is that gold and silver coinage will command more goods on the market because they are more limited in supply and have other valued non-monetary functions that make them more valuable as monies.
Because the material composition was a secure way to delineate the relative value of the coin, rather than imprinting a numeric value in the image on the coin.
If both a Denarius and an As (say there were 10 As per Denarius) were made out of the same material, as there were obviously counterfeiters employed in the empire, it would be easy to turn an As into a Denarius by restriking the As into a Denarius. But as all Denarius were silver, you actually had to come up with the silver to be able to counterfeit it.
They used the relative availability of the metals as an ancient form of information security within their monetary system.
Matt,
What conuterfeiters would often do was to have an outer layer of silver or gold with the middle being a much cheaper base metal. When the coin became worn the fraud was revealed. This just buttresses my point that is was the value of the metal itself that gave the coin purchasing power. That metals like gold and silver became preferred monies was only because they had intrinsic value because of their ornamental and industrial purposes.
The countermark was done to signify that it had been tested for the weight and purity of the precious metal in the coin.
Bob,
errr....think we agree...maybe. Not sure I followed all of that.
"What conuterfeiters would often do was to have an outer layer of silver or gold with the middle being a much cheaper base metal."
"Cheaper" in terms of what? Visigoth dollars? There was no other unit of money in the Empire.
Your sentence should read:
What conuterfeiters would often do was to have an outer layer of silver or gold with the middle being a much more generally available base metal.
The Romans used their metallurgical knowledge to implement security within the monetary system. The need for security/authentication drove the material selection process.
They didnt care how many coins they needed to make/spend/tax as long as they had enough to get what they wanted out of the empire.
Matt,
You are talking about scarcity. The reason that gold and silver are so valuable is because they are much more finite than base metals. They have other functions other than money. These things and others are why they were chosen as monies. It is the metal content of the coins that give them their value. Base metals with gold or silver sheens have value too. Just not nearly as much.
WWS,
I read that these countermarked coins are usually found out in the legionary regions of the Empire, newly occupied areas where the legions were still out there cracking skulls.
Current Emperor would have his countermark put on the coins that the legions were paid in so they would succintly know who they were working for and owed their allegiance to, again it comes back to govt/state authorities, not the metallic characteristics.
If you want an exhaustive explanation of coin history you can read http://moslereconomics.com/mandatory-readings/what-is-money/
I believe most coins had no denomination printed on them but could classified more as tokens akin to fiat money. Making them out of particular elements is simply a necessity or they would rust away.
I also saw a program somewhere where all the elements were eliminated one by one by the characteristics needed for coins.
Can't be to common or everyone can make their own...
Can't be to rare or you couldn't enough...
Can't be too reactive with the atmosphere or it would disappear..
That really leaves you with only one column of the periodic table.
I think I'm remembering that correctly.
Also counterfeiting isn't always a bad thing. We could use a lot more money in circulation at the moment.
right David,
At least there would be more balances to fund the economy with counterfeits put in.
I'm almost ready to throw in with WWS here as at least then we could send some of our unemployed out to dig up gold and silver to trade in at the Treasury to fund the rest of the economy!
Mike was making a similar academic point with moron Stuart Varney in his last TV exchange there when Varney put up the strawman that Mike advocated fraud within the Federal fiscal transfer programs, but as usual the academic point went right over Varney's head.
David,
"Can't be too reactive with the atmosphere or it would disappear.."
If Roman metallurgy back then had included the development of CRES (ie "Stainless Steel"), then I'm sure they would have just used different coin sizes of that same material for different denominations.
Metallic standards and more recently metallic convertability were tried and failed approaches that were in essence derivatives of fiat money. ie the money was fiat first, and oh by the way you could convert it if you wanted to. Didnt work then, wont work now.
Matt,
I know you mentioned your suggestion of digging up gold and silver to fund the Treasury in jest, but even if we had competing commodity monies an increase in the supply of gold and silver supply used solely for monetary expansion would equal no new wealth creation.
If gold and silver were fashioned into oranamental or industrial uses THEN wealth is increased. If those commodities were used to increase the gold or silver money supply then there would just be more commodity money chasing the same amount of goods and services.
The Spanish empire found out that an increased gold money supply doesn't equal more wealth in the long run the hard way about four centuries back. Prices rose substantially throughout the 16th century in europe as the new gold money supply soared. They were able to claim a lot of imports from other countries throughout europe for a time until prices rose to offset the increased money supply. This process took decades because of slow transportation and the disconnectedness of countires at the time. The Spanish confused an increased money supply with wealth itself.
I see this same quantity fallacy of money present with us today. There are those that think credit money created out of thin air equals more wealth. The Spanish empire just called and said, "Nope!"
"...chasing the same amount of goods and services."
So there is no such thing as a demand side of the equation?
There is no one available on the entire planet to make anything extra that my money might want to buy?
David,
Perhaps I should have added "all else being equal" to the end of my statement about "chasing the same amount of goods and services." Of course demand affects specific prices. It is when prices are rising IN THE AGGREGATE that is almost always due to increased money supply or a reduction in the total supply of goods as in a time of war. Individual prices may rise for any number of reasons. When all prices are rising it is driven by monetary inflation.
Why then do the charts at research.stlouisfed.org show no relationship between money supply and inflation yet seem to be tattooed to the price of energy?
David,
That's a good question!
That evidence invalidates the entire Chicago School of Economics imo!
Post a Comment