To denominate domestic transactions with domestic fiat, or with foreign fiat? That is the question.
Janet Tavakoli highlights a simple reality for sovereign nations. Organize, or cede sovereignty. If you can't coordinate and align your own citizen's efforts, and reap your own return-on-coordination then the alternative is ALWAYS WORSE. Far worse. You, your citizens and your country simply become another commodity coordinated by a foreign owner. Sayonara sovereignty.
The #1 rule is always ... NEVER borrow in foreign-currency-denominated terms. In short, never borrow foreign currency!
Yes, that sounds tough and unrealistic to some, but the conditions for such loans are always worse, as already illustrated. This truth implies that some little jurisdictions can't really be free, while others can. And that only the agile will survive. Read on, for more specific examples.
Banks and IMF Ganging Up on Sovereign Debtors
This is a very instructive article, a must read for all citizens in every country - and the hegemony described applies to EVERY bank in every country that does foreign loan sharking in it's own currency. That includes all of the traditional banking centers, from UK to Switzerland to Dubai.
How do YOU safely denominate freedom? And degrees of freedom?
The #1 rule is always ... NEVER borrow in foreign-currency-denominated terms. In short, never borrow foreign currency!
Yes, that sounds tough and unrealistic to some, but the conditions for such loans are always worse, as already illustrated. This truth implies that some little jurisdictions can't really be free, while others can. And that only the agile will survive. Read on, for more specific examples.
Banks and IMF Ganging Up on Sovereign Debtors
This is a very instructive article, a must read for all citizens in every country - and the hegemony described applies to EVERY bank in every country that does foreign loan sharking in it's own currency. That includes all of the traditional banking centers, from UK to Switzerland to Dubai.
How do YOU safely denominate freedom? And degrees of freedom?
19 comments:
"None of this required banks to get any smarter or better disciplined."
So, citizens are screwed, until they decide to stop being screwed?
Until WE collectively decide to be smarter and more disciplined in how we regulate our own, DOMESTIC banks ... we'll continue to forgive, condone and co-enable the very banks that are screwing us out of our own fiat.
Wise up folks. We need a Middle Class gang. One that owns it's own Congresspeople.
Can we start negotiating a joint strategy for the Middle Class?
Wow. This article by Tavakoli ought to drive home 2 simple truths.
1) the TBTF banking industry, like foreign aid, has become just another vehicle for transferring currency from poor people in rich countries, to rich people in poor countries (w the banksters getting a cut of the transaction)
2) Western banks are simply another gang, same as Russian mob - the banksters just operate on a more subtle and hence "civilized" scale.
Civilized rape of the Middle Class? Like faux Irish Diplomats, the banksters have sent us to hell, and 40% of us are still thanking them for the "free" ticket!
@#$%^&! This cannot stand! Or we won't.
Is it possible these people are simply obsessive-compulsive sociopaths? That they can't help do everything in their power to rack up more "points" in their bank accounts, and that sadistically torturing the masses is an added bonus?
Most assuredly, Ben. That's been well documented.
Worse, we observe & applaud their efforts, just like a football match.
Then we elect the "winning" sociopaths to policy offices. Just like we do actors & other celebrities.
So yes, it does come back to us, as usual.
We have to stand up to ourselves? And especially to our own, worst habits. They're killing us.
The glory really does (eventually) go to those who find a better way - to keep themselves from shooting their own foot.
problem is not everyone is able to achieve what you might call "full sovereignty". This is why cooperation between countries is essential, not just competition to become the "most" sovereign.
Absolutely, Y,
Yet it's always advisable to enter negotiations with full Situational Awareness.
That means understanding both domestic and foreign gangsters ... I mean, banksters.
Almost as bad as borrowing “foreign denominated fiat” is borrowing your own fiat held by foreigners (e.g. the US government borrowing US dollars from the Chinese and paying interest to the Chinese).
When the Fed raises interest rates, the purpose is to damp down demand in the US. But if a big chunk of US debt is held by foreigners, then to that extent, there is very little of the desired effect: i.e. “damping down”. Instead, the US just pays more interest to the Chinese.
The solution to this nonsense was spelled out by – you guessed it - an MMTer, i.e. Warren Mosler. He advocated a permanent zero interest rate. See:
http://moslereconomics.com/wp-content/graphs/2009/07/natural-rate-is-zero.PDF
But that implies pretty much of an end to monetary policy (i.e. interest rate adjustments) and adjusting demand primarily via fiscal policy. Now does that matter? Well not really, and one reason is that adjusting demand just via interest rate changes is daft in that in the case of an interest rate cut, stimulus is fed into the economy just via more investment. That makes as much sense as feeding stimulus into the economy just via car production, massage parlors, and any small selection of products you care to choose at random (including Mike Norman’s forex courses – or not).
Implementing a “fiscal policy only” system would need a more flexible fiscal stimulus adjustment system than exists at the moment. But anyone with an IQ above zero ought to be able to make the existing fiscal adjustment system more flexible.
Until economists start regularly modeling the global economy as a closed system, these distortions will persist as each country pursues its own perceived interest from a limited perspective.
Are dollars invested in Tsy Bonds by the Chinese borrowed? As Ralph Musgrave said?
Are dollars invested in Tsy Bonds by the Chinese borrowed? As Ralph Musgrave said?
After a manner of speaking. But "borrow" has different meanings when currency users "borrow" and when a currency sovereign "borrows." Currency users have to get currency that they don't produce, while the currency issuer does not since it produces the currency by marking up accounts. All kinds of nonsense results from missing the difference, and some who know better are willing to play on the ambiguity to advance their agenda.
Thanks Tom, so...
Could you walk through the steps of a new dollars being created?
I thought Tsy borrowed dollars ONLY from the fed reserve, never from China.
So, I am missing something here.
Tom,
Tsy Bonds are invested in using already issued dollars.
Are the dollars removed from the China's reserve account, and replaced with a bond?
And then Chinese dollars are parked in Tsy's account?
So, new dollars have to be issued when Tsy Bonds come due?
How does that new dollars get created -- I know the fed creates it out of thin air, but when in the cycle?
When the US government spends Treasury instructs the Fed as the government's bank to credit a deposit account in payment of an invoice or a transfer payment like Social Security. The Fed does this by crediting the recipient's bank with an increase in its reserve balance (rb), and the bank then credits the customer's deposit account. This creates additional reserves in the system (monetary base) as well as an increase in M1 money stock through the added deposit.
The Treasury must have the reserves on account at the Fed to credit the account of the recipient, and if there are not sufficient reserves from taxes, then the Treasury directs the Fed to sell Treasury securities (tsys) into the private sector at auction. Only primary dealers participate in these auctions and acting as brokers they sell the tsys on to bidders.
Anyone with USD can buy tsys in the tsy market, just like any one can exchange other currencies for USD in the foreign exchange market. This includes other countries or buyers in other countries. If the People's Bank of China accumulated USD owing to trade by Chinese firms, it can either hold those dollars at low interest or buy US tsys paying higher interest. This is essentially switching from a deposit account at the Fed to a time account. The Fed debits the deposit account and credits the tsy account, and when the tsy comes due the Fed debits the Treasury's account and credits the account of the hold of the tsys being redeemed. Or else, the tsys are just rolled over.
So all that happens is that the USD that were in a demand account owned by China get shifted to a time account owned by China. When they decide to use the USD, then they sell the tsys on the market and the Fed marks up their deposit account with the reserves used to purchase the tsys and marks down their tys account. It does the opposite with the accounts of the entity buying the tsys. Then China can do with the USD as it wishes. Notice that the USD never actually left the US unless some of the rb were converted to cash and physically exported.
What this means is that instead of the Treasury just crediting a deposit account and the Fed supplying the reserves to clear, Tsy has to issue tsys to obtain the reserves that are needed in the case of deficit spending.
This is operationally unnecessary and the interest payment involved is an unnecessary subsidy to those who hold tsys.
It's a holdover from the gold standard that could be done away with now that the world is no longer on the gold standard, and some have proposed that it should be done away with as an unnecessary subsidy.
There are further considerations having to do with monetary policy and interest rate setting by the Fed, but I won't get into that in this comment.
only part you skipped over Tom is how the PD banks buy treasuries w/o creating even more banking reserves
That's where the arbitrary rule about using TTL accounts comes in. As I understand it, transactions from TTL accounts are free from the double-entry accounting rule of every credit being matched by a corrersponding debit.
As Mosler has noted:
By the time ...
1) PrimaryDealer (PD) banks obligatorily buy all the fiat-currency T-Bonds the Treasury wants to sell
2) (thereby adding - or not adding, depending on which "accounts" are used - to accumulating Banking Reserves, which affect inter-bank interest rates), and
3) the Fed later buys back said bonds at will, in Open Market Operations (OMOs) -
4) to drain the accumulating Banking Reserves which it insists had to be created - then ...
... it's functionally as if the Bonds had never been sold in the first place.
(It's worthy of a Laurel & Hardy routine.
http://www.youtube.com/watch?v=J_gSWTQKE-0
Ok, Abbott & Costello, I knew I'd get some arcane detail wrong! :) )
see the references mentioned here:
http://mikenormaneconomics.blogspot.com/2013/04/high-school-home-ec-tt-accounts-bank.html
ps: Treasury securities may have looked like a significantly lucrative scam at one time, but it has seemingly turned, over time, into a lost game for PDs;
Other Control Fraud schemes are FAR more profitable, as the Great Recession shows.
Even though the margin is low, however, it's still a great method for distracting the general public from other, ongoing Control Frauds.
Useful enough to pay large sums to people like Bowles &/or Simpson.
This is std Anthropology.
Given tools are very slow to disappear from human toolkits.
Instead, they often get re-purposed for surprisingly long periods. Often in entirely unpredictable ways.
When people are forced to tackle novel tasks, they always prefer to try it as long as possible using familiar tools.
How long did the Phillips screwdriver, decimal system, metric system, etc, etc take to catch on?
Hi Tom, thanks, I'm trying to follow.
Following the reserve thing is difficult for me -- too many balls in the air for my brain :)
Simple question:
China has a dollar in it's reserve/checking account. It decides to invest in a Tsy. Their checking account is marked down, their reserve account is marked up.
Ok. Got it.
So, where is their dollar?
Is it in their savings/securities account?
Or is it in Tsy's account at The Fed?
When their Tsy matures, does a new dollar have to be created to pay them back?
Because Tsy has already paid a soldier by using China's dollar, so it's now gone?
To simplify, assume the PBOC has access to the FED directly. The PBOC has USD in its account at the FED in the form of reserve balances from trade involving Chinese companies exporting to the US. It can either leave those USD in its reserve account, which usually receives no interest but with the FED now paying interest on reserve balances (IORO it receives minimal interest. It can improve its yield rate by buying tsys with the funds in its reserve account. All that happens is the reserve account of the PBOC at the FED gets marked down and its tsys account gets marked up and it begins receiving the higher interest payments. The tsy account of the seller bets marked down and the seller's reserve account gets marked up.
When the tsys matures, the PBOC chooses whether to roll it over, in which case nothing happens substantially, but the there is an accounting on the books of the Treasury and Fed of the rollover. If the PBOC which to take payment on the tsy, then the Treasury account is debited that amount in reserves and the PBOC tsy account is marked down and its reserve account marked up. If Treasure has enough reserves to cover, nothing else is needed. If the Treasury doesn't have enough reserves to cover then it gives the Fed another tsys to auction to clear the transaction.
All this is very simple to understand if you think of it in terms of double entry accounting and the marking accounts up and down to keep them in balance. The difficulty arises when banks and non-banking parties are involved in that there are entries involving the Fed payments system which deals in reserves and the banking system which deals in entries in bank books wrt customer accounts. A single transaction therefore may involve both marking books in the payments system and simultaneously in the banking system.
In the above example "China" is the Chinese central bank, which has an account at the Fed. But the trade accounts that resulted in the USD surplus in the PBOC came from transactions of firms in the commercial banking system that resulted in the foreign exchange being held by the PBOC.
This is a stylized example to show the basic accounting but the actual transactions involved in trade are, of course, much more complicated. But every transaction is recorded and can be deconstructed in someone's books.
Tsy has already paid a soldier by using China's dollar, so it's now gone?
The dollar that was credited to a soldier's account by the Fed that the Treasury's direction (this happens automatically on schedule in the payments system) was created by the Treasury's spending iaw congressional appropriation.
Owing to the voluntary rule established by Congress, the Treasury cannot borrow (run a negative balance) with the Fed. So in creating USD in excess of the rb credited to its reserve account from taxes involves the Treasury issuing Treasury securities (tsys) and the Fed auctioning them into the market through the primary dealers.
At the macro level, rb created by the dollar that the soldier received is used to purchase the tsy. This means that the monetary base decreases in amount of reserves and the amount of tsys gets increased in that amount. There is a transformation in asset composition and term but not in amount. A tsy is just a USD that pays interest. Shifting rb to tsys and vice versa doesn't affect the dollar amount other than the interest accumulated.
The tsy issuance functions as a reserve drain. This is only needed operationally if the Fed is not paying IOR and wishes to set the overnight rate above zero, since the amount of excess reserves affects the overnight interest rate in the payments system.
Think of it this way, If more dollars are created, that is, the amount of USD increase, then its fiscal. If it just involves switching USD in reserve and tsy accounts its monetary. Fiscal adds or subtracts from the amount of net financial assets held by the private sector. Monetary does not, other than in the payment of interest, which is a Treasury liability created along with the bond issuance.
However, the central bank buying and selling real assets like gold is fiscal in that there is an increase in non-government net financial assets when the owner's account in a commercial bank is marked up. Similarly, when the Fed pays IOR that increases non-government net financial assets also.
Tsy has already paid a soldier by using China's dollar, so it's now gone?
That dollar the soldier is paid creates a reserve balance in the soldier's bank. That reserve balance remains in the private sector money supply until it is taxed back, in which case that dollar is extinguished as far as the private sector is concerned.
The tax credit is credited to the Treasury, but it doesn't figure in the monetary base, so for all practically purposes money created in the private sector by Treasury spending is destroyed by taxation, fines and fees.
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