Liberty Street — The New York Fed DSGE Model Forecast–July 2018

This post presents an update of the economic forecasts generated by the Federal Reserve Bank of New York’s dynamic stochastic general equilibrium (DSGE) model. We describe very briefly our forecast and its change since March 2018. As usual, we wish to remind our readers that the DSGE model forecast is not an official New York Fed forecast, but only an input to the Research staff’s overall forecasting process. For more information about the model and variables discussed here, see our DSGE model Q & A.

 FRBNY — Liberty Street Economics
The New York Fed DSGE Model Forecast–July 2018
Sushant Acharya, Michael Cai, Marco Del Negro, Abhi Gupta, and Pearl Li

Helene Lee and Asani Sarkar — The Role of Central Bank Lending Facilities in Monetary Policy

Central bank lending facilities were vital during the financial crisis of 2007-08 when many banks and nonbank financial institutions turned to them to meet funding needs as private funding dried up. Since then, there has been renewed interest in the design of central bank lending facilities in the post-crisis period. In this post, we compare the Federal Reserve’s discount window with the lending facilities at three other major central banks: the Bank of England (BoE), the European Central Bank (ECB), and the Bank of Japan (BoJ). We observe that, relative to the other central banks, the Fed’s discount window is less integrated into the monetary policy framework. In a follow-up post, we will discuss differences in the central banks’ counterparty and collateral policies.

FRBNY — Liberty Street Economics
The Role of Central Bank Lending Facilities in Monetary Policy
Helene Lee, senior associate in the Federal Reserve Bank of New York’s Markets Group, and Asani Sarkar, assistant vice president in the Bank’s Research and Statistics Group

JP Hochbaum — T Accounts of monetary operations

Put together by Nathan Cedric Tankus

FYI.

Heretical Druthers
T Accounts of monetary operations
JP Hochbaum

The Fed's independence from the public process *updated

As someone who works in financial regulatory compliance, I regularly hear about various types of risk- credit risk, reputation risk, liquidity risk, etc. Recently however, one type of risk has been consuming a lot of time and energy in the banking world- that of interest rate risk. Interest rate risk is simply what might happen to the balance sheet of a depository institution should its cost of short term funding rise as a result of deliberate policy decisions from the FOMC.  Policy and compliance staff at DIs have been spending time developing strategies to mitigate interest rate risk, which usually involves some combination of limiting fixed rate lending, and hedging with plain-vanilla derivative investments. 

Most of the MMT community seems to agree that there is nothing wrong with our current zero interest  rate environment, and that it should be made permanent--so from our point of view all this IR risk mitigation is a waste of time, since the Fed should just leave rates at zero forever and control credit growth by regulating underwriting and capital standards. 

I would argue that changes in monetary policy are just as, if not more, intrusive and burdensome to financial institutions as other types of central bank action. During the traditional rulemaking process, there is (quite appropriately) long periods of agency research, thought, and regulatory development, with opportunities for public comment along the way.

However when it comes to monetary policy, these ideas don't seem to apply. Instead, it is taken as a given that the FOMC-

1) Has all the information in needs

2) Knows what it is doing

3) Can just do whatever it wants

4) Can ignore public input

5) Can safely ignore the “full-employment” part of its dual mandate

All of the financial and economic media/punditry takes all these factors as a given and never challenges them. The FOMC is given an astounding amount of deference and goodwill, despite the increasing evidence (from  minutes and transcripts) that it cant come to a consensus on what is going on in the economy or what its decisions actually do. 

As a political matter, legislators and pundits frequently make comments about “oppressive regulations”, “red tape” and “out of touch bureaucrats” when discussing regulatory agencies. However when it comes to the FOMC, which is one of the least accountable organizations of the federal government, and whose decisions have broad consequences for the banking system and labor market, none of these terms are ever used (BTW, courts have also ruled that the FOMC can't be FOIA'd). People just seem to let the FOMC do whatever it wants, as if it were a mystical tribe of holy oracles, whose intelligence is just to stunning for us lowly commoners to comprehend. 

So even more scandalous, in my view, is that the standard rulemaking procedures established under the Administrative Procedures Act do not seem to apply to FOMC decisions to change interest rates. The primary mode of changing interest rates is the federal funds target rate, which is voted on by the FOMC and carried out by the Federal Reserve Bank of New York. This particular action does not involve amending existing regulations, so I can see how at least this part could escape public input. 

However, open market operations are no longer the Fed's main tool. With the banking system now holding trillions in excess reserves as the result of 3 rounds of QE, the Fed cannot easily change interest rates through open market operations as in the past. It has also indicated that it does not want to rapidly shrink its portfolio. So instead, the Fed can change the rate it pays on required and excess reserve balances, which serves as a floor to interest rates. Thankfully, the rates paid on required and excess reserves are set by regulation and codified in the Code of Federal Regulations.  CFR section §204.10, "Payment of interest on balances" is where the Fed established the rates it pays on reserves. It has been changed only once since the interest on reserves program was established in late 2008. 

The Fed also loans out reserves directly through its discount windows, the rates of which are also set in regulation (smaller amounts of intra-day liquidity are also provided through daylight overdrafts which have similar costs to DW lending, however post-QE with trillions in excess reserves, the volume of overdrafts has plummeted to near zero). 

Section §201.51 of the Federal Reserve Board’s Regulation A is “Interest rates applicable to credit extended by a Federal Reserve Bank.” This section of the US Code of Regulations (CFR) establishes the rates that Federal Reserve Banks must charge to institutions that borrow reserves through the Primary Credit Facility and others. This borrowing price is one of Fed’s tools in implementing monetary policy. As a matter of policy, the Fed usually keeps these discount window rates slightly above its targeted federal funds rate, so every time the FFR target is changed, the discount window rates  are adjusted accordingly.

Therefore, it would seem that in order to change these rates, the Fed would have to initiate the rulemaking process, since amending regulatory text always requires this process. However, as I have recently realized, the Fed does NOT have to follow APA procedures when amending the interest rates it pays on reserves or charges from the window.  Each time the Fed amends Regulations A or D to change these rates, it does use a rulemaking. However, unlike other agency rulemakings, the Fed simply releases these changes as final rules, skipping the public notice-and-comment stage altogether. This loophole completely robs the public of any chance to comment or lobby on the potential effects of such an interest rate change.  

For example, each of these rules are published as final in the Federal Register, and each states near the end-

Administrative Procedure Act

    The Board did not follow the provisions of 5 U.S.C. 553(b) relating to notice and public participation in connection with the adoption of these amendments because the Board for good cause determined that delaying implementation of the new primary and secondary credit rates in order to allow notice and public comment would be unnecessary and contrary to the public interest in fostering price stability and sustainable economic growth. For these same reasons, the Board also has not provided 30 days prior notice of the effective date of the rule under section 553(d).

(Here's an example) 

The crucial text here is “The Board for good cause determined that delaying implementation….in order to allow notice and public comment would be unnecessary and contrary to the public interest.” This is quite an astounding statement that no other regulatory agency could possibly get away with. If the EPA, for example, simply decided that allowing public comment on a Clean Air Act regulation “would be unnecessary and contrary to the public interest”, it would raise an unbelievable shitstorm from both chambers and aisles of Congress.  

As any federal regulator will tell you, public notice-and-comment consumes an large amount of agency time and resources and is a crucial step in developing policy. Some of the reasons for this are good ("the public" should have input into how its country is run), while some are bad (when it comes to influencing regulations, "the public" usually means wealthy corporate lobbyists). 

So lets get some perspective here. How is it that the Fed doing something significant-- changing one of the main "prices of money"-- constitutes “good cause” to ignore the APA, but the EPA, for example, taking actions to save our air, water, food, and climate  does not? I would argue that the EPA has just as important of a role in determining our quality of life as the Fed, and rightfully must follow the public notice-and-comment process set forth in the APA. Somehow the Fed does not. 

This loophole should be the focus of any Fed reform efforts in the 115th Congress. Like it or not, the FOMC still has significant influence over the economic affairs of our country. So instead of trying to "audit the Fed" or change its structure, large strides could be made by simply forcing the Fed to take public comments on its important monetary policy actions. This would give labor groups and progressive economic think tanks a chance to make their ideas and opinions known to the otherwise cloistered FOMC. While I hope the day never comes, if the Fed does eventually decide to raise interest rates, it should hear from We the People first. 

Via WSJ- Is the Fed finally getting smarter at lending control?

Some good news coming from Pedro da Costa at the WSJ today. Apparently the Fed is now saying publicly that they prefer using their regulatory and supervisory tools to control bank lending than the traditional interest rate/monetary policy tools. 

This is something that WM/MMT has been advocating for a while, since monetary policy can wreak enormous collateral damage on the economy. Capital regulation and supervision on the other hand, are much more precise tools that central banks can use to control lending, so its good to see the Fed moving in this direction. 

From the article:

“Efforts to promote financial stability through adjustments in interest rates would increase the volatility of inflation and employment,” Fed Chairwoman Janet Yellen said in a July speech. “As a result, I believe a macroprudential approach to supervision and regulation needs to play the primary role.”

If I'm reading this correctly, this statement could hint at a paradigm shift at the Federal Reserve Board. For the past several decades we've been stuck in the Miltie Freidman QTM world where interest rate management is a panacea. I've always thought that trying to control bank lending via interest rates is like trying to weed your lawn with a machine gun. So hearing the Fed chair describe supervision and regulation as a new "primary" tool is a welcome sign that the QTM era may be finally coming to an end in the US. 

The article also revealed the cluelessness of the BIS. According to their Chief Economist (and Princeton econ prof): 

"Monetary policy works by either bringing spending forward, deferring spending—and you can bring spending forward by taking on more credit. So expansive monetary policy is pretty much synonymous” with looser financial conditions."

Its good to see that  our central bank is at least marginally more intelligent than the BIS!

House markup of Regulation D (reserve requirements) Study Act set for tomorrow

The House Financial Services Committee will begin a markup of the Regulation D Study Act (H.R. 3240) Tuesday. Full disclosure, this bill is supported by my employer. 

If the bill passes, (imagine, something remotely sane coming out of the House!)  it would require the GAO, in consultation with credit unions and community banks, to study the Federal Reserve's Regulation D minimum reserve requirements.

  
The bill calls for the study to report: 

• A review of how the Fed has used reserve requirements to conduct U.S. monetary policy;


• The impact of the maintenance of reserves on depository institutions;


• The impact upon consumers in managing their accounts; and


• Alternatives available to the Federal Reserve Board to maintain reserves to effect monetary policy

It will be interesting to see what might come of this. It would be nice to have the Fed admit openly to what is has already implicitly admitted through establishment of the new Excess Balance Accounts (IOER) and Term Deposit Facility- namely, that reserve requirements are an old vestige of the gold standard era and should be eliminated. The current structure of Reg D prevents consumers from making savings account withdrawals more than 6 times a month, which in the era of "soft currency" is no longer a necessary protection to a bank and annoying/costly for consumers. If this happens, maybe we can finally catch up to what Canada, the UK, New Zealand, Australia and Sweden have already acknowledged. 

The markup is scheduled to begin at 10 a.m. (ET) Tuesday in the Rayburn House Office Building, and I'll try to attend. 

Update on Term Deposit facility

Its been a few months since my earlier post discussing the Fed's new Term Deposit Facility. Since then, the scope of this program has grown significantly, with auctions growing from around $25 billion per week, to a massive $125 billion in last week's auction.

These term deposits are simply one-week CD's offered by the Fed. Participating depository institutions have their reserve accounts debited, and then re-credited 7 days later, plus the small, but free amount of interest. While each institution can only tender a maximum of $10 billion, the amount of participating institutions has more than doubled since March of this year-- from 27 to 58. Not surprisingly, this growth in participation follows the Fed's gradual raising of the rates it will pay, from 26 basis points in March, to 30bp just today. Not surprisingly, the 26bp auctions had fewer participants than the 29 bp auction, since many institutions likely figured that getting a one-basis point spread over what they receive on their excess balance accounts (25bp) was not worth the trouble. For now, the Fed has stated that 30 basis points will be the ceiling for this round of term deposit auctions, with the first 30bp auction set to go off today.

The size of this latest auction demonstrates the ease to which the Fed can drain reserves if it chooses to. It simply states the rate that it will pay on term deposits,  and accepts bids. Last week in a matter of hours, the Fed was able to drain $125 billion in reserves from the banking system, with no problems. It will be interesting to see how much higher the Fed may decide to pay on its Term Deposits, and how large these auctions may become as a result. Unfortunately, the Fed states on multiple TDF related pages that the auctions "are a matter of prudent planning and have no implications for the near-term conduct of monetary policy."

It remains to be seen if this statement holds true in the future, since it seems to me that these term deposits are an easier way of raising rates if the Fed needs to, as opposed to trying to sell off their securities portfolio and expose themselves to potential losses. From a political standpoint, it will certainly be easier to expand the TDF than to try and "unwind QE", as many analysts put it.

1959 US Fed Review Of 1957 UK Radcliff Committee Report On Monetarism vs Fiat Currency Operations. Fascinating reading.

   (Commentary posted by Roger Erickson)

Board of Governors of the Federal Reserve System, Division of International Finance, Review of Foreign Developments, Nov 3, 1959, "Radcliffe Report: Monetary Policy and Debt Management Reconciled?" - Samuel I. Katz

Interesting parts commence half way down page 2, with curiously emphasized statements about what "the American, for example, KNOWS ... ."

There is far too much to comment on, so feel free to discuss. To me, the overall point seems to be that the presumptive rule of monetarism - and importance of bankers & plutocrats of the day - was abjectly disproved by experiences during the WWII years, then began to mount a furious backlash ... and is now once again seemingly dead & relegated to the second-level bleachers, even if it's defendants refuse to recognize that it no longer commands or deserves a 1st-class ticket at the policy-development forum. In fact, the banking & economic professions need to get the heck out of the way.

Closest parallel I can immediately think of in biology is oxygen tension across the capillary/tissue gradient in all parts of the body. Yes, oxygen tension affects oxygen diffusion & utilization, but appropriate countermeasures (capillary size, permeability, various "globin" molecules as transport & storage carriers [even fetal/adult subtypes of hemoglobin], and various tissue-specific catalyst factors that affect oxygen release from carrier molecules) .... all serve to allow oxygen demand (credit?) to smooth out & buffer the absolute magnitude of the "price" of delivering oxygen to different tissues.

In any system, if a given process is necessary, even if not sufficient, for aggregate system function & evolution .....then marginal return on process execution is a secondary - NOT a primary - factor for system operation. A way will be found, regardless of price.

Nevertheless, it's as if we have a irrelevant argument between bankers (the lungs) & other citizens (the other tissue types) over who "runs" the circulatory system, and entire physiology.  I've got news for the "banker-lungs" ..... there's this overwhelming concept, labelled "necessary but not sufficient" ..... . 

So the bankers claim of taking on godlike importance is grossly oversold. Careful, or we'll just replace you with a mobile phone app. The other humans are getting impatient. Banking functions may be necessary, but bankers as is sure as hell aren't sufficient anymore.

Kathy Lien, another high paid analyst who doesn't know what the hell she's talking about

Kathy Lien is head of currency strategy with BK Asset Management. (I wouldn't want her giving me strategy. Kathy should take my course!)

Anyway, in this video on CNBC (where else) she is bleating about how the Janet Yellen should reconsider "taper" given the mixed economic data.

It's pretty clear right here that she's another one of these analysts who doesn't know what she's talking about. (However, that doesn't stop BK from paying her a multi-million dollar annual salary.)

Hey, Kathy, taper or its inverse, QE, are just asset swaps: reserves are swapped for reserve equivalents or vice-versa. They do nothing for demand and, therefore, nothing for the economy.

Even worse than Lien is the guy interviewing her (a CNBC host, what did you expect?) who says, "Well, at least the Fed will get some help with interest rates because now that the government deficit has shrunk so much the Treasury will not have to issue so much supply and that will keep rates low.

These people are like the quack "physicians" of the 19th century. Their diagnoses and snake oil remedies can kill.

Somebody shoot me, please!!!

What NON Sense! Precisely Calculating The Culmination Of Another Flawed Concept.

Commentary by Roger Erickson

In yet another breathtaking display of clueless cunning, another wit has precisely calculated the culmination of another flawed concept.

"Indeed, the invisible ruler of the Federal Reserve is the market’s future expectations of inflation."

You don't say!

There's a flaw here, of course. What part of FIAT don't these people understand? It's been 80 years now, since fiat currency and inflation fears have been officially & absolutely decoupled even from fiat interest rates. You'd think they'd catch on.

Yes, it may still be a fiat policy to pay an interest rate on our every fiat fiscal policy decision ... but, like all fiat, that swings on a whim. You'd think we'd have more interest in our group survival than in our nominal currency interest rate, but people obviously get confused about these concepts, and refuse to sort them out.

Our bigger fiat problem is our fiat expression of fiat ignorance. Namely, our fiat insistence on fiat NON context-awareness.

This is an oxymoron, of course. To adequately close off all emerging avenues of context awareness denotes an ability to detect said avenues, in order to close them!!!

This is getting interesting, from a pathologists point of view. What do we call pathologists who study and treat cultures, not just individual physiologies? Sentient citizens? Do we have enough of those to matter?

Leaving that issue aside, let's ask some more diagnostic questions, in the interim. How do culture-wide oxymorons propagate? By some inverse cultural-prion disease, where malformed memes act as the prion? Seems backwards, but complicated things happen in complex systems.

However this willful group ignorance occurs, we're left with the curious phenomenon of an entire electorate afraid to acknowledge all aspects of the image bouncing back from it's own operational mirror. Such selective sensory filtration - willfully feigned partial blindness - is called Munchausen by Proxy syndrome in other settings. We have it on a cultural scale.

This is curious beyond rational belief. Being our own bully and stealing our own lunch doesn't sound so bad, in theory. In practice, however, if our lunch currency is only stuffed into bulging cultural-cheek-pouches (purely nominal banking reserves), and never reaches the Middle Class cultural stomach, can we still truthfully tell ourselves that we're even eating our own lunch?

You'd have to ask the Lunch Havers, or their proxies.

Our culture needs MORE than just an advanced semantic immune system (to help select adaptive memes faster). It needs an effective ParadigmAntic immune system, to accelerate discrimination of self-paradigms (that aid survival) and non-self-paradigms (that lead to dead ends, i.e., to us dead).

Without more collective deliberation, we're running around randomly, in the process of dissociating, not coordinating.

Icing on the cake...Obama will nominate Summers for Fed chair

We've been hearing these rumors for a while now and perhaps many of us thought it was just a bad joke. The fact that Obama was even considering Larry Summers to run the Fed seemed unconscionable given his unbelievably destructive history. But leave it to Obama, once again, to smash the hopes, needs and spirits of his supporters and those who fight for equality and progressive causes everywhere.

This is the icing on the cake. The fact that Obama is going to nominate Summers--one of the chief architects of financial sector deregulation that ultimately led to the crisis--as Fed Chairman solidifies his presidency as one of the worst and certainly the most deceitful in history.

Not only did Obama fail to deliver on all the promises he made to millions who voted for him and support him, but he put in place a policy team that has led to the fastest and most extreme rise in income inequality ever seen in this country, not to mention all the other things he did like NDAA, trillions to the banks, Obamacare, expanding wars, keeping Guantanamo open, not standing up for workers when he said he would, "grand bargains," austerity, etc, etc.

Liars are despicable, but political leaders who are liars are the worst. Go to hell, Mr. President!

The Fed Needs More Fiat Currency From Banks ... So It Can Afford To Regulate The Banks It Provides Unlimited Currency To, On Demand ? ??

Commentary by Roger Erickson

More stuff is piling up in the "does not compute" departments.

How many $Billions did the Fed just return to the US Treasury?

Nevertheless, Fed to Collect $440 Million From 70 Banks for Regulatory Costs.

"The Federal Reserve issued a final rule that will require 70 financial companies to pay a combined total of $440 million for the cost of expanded Fed supervision."

They "need" the funds from those fees ... to regulate the banks they weren't regulating? Why do then need those funds? Because the Fed is running out of fiat currency? I need to sit down .. and pick my jaw up off the floor, yet again.

Does ... not ... compute .... brain overload ... insufficient or contradictory data ... raising bullshit shields ... shutting down all propaganda feeds.

This isn't right, it isn't even wrong ... it's just, well, bizarre,
regardless of the need for more bank regulation.

Do You Get The Impression That Some Groups Are Pushing A Propaganda Myth?

Commentary by Roger Erickson

That is, that political economy outcomes are the Fed's - or the finance industry's - to determine?

Can The Fed Prevent The Next Recession?

Are they implying that us simpletons in the Middle Class are supposed to sit back and leave Class War to the Finance Generals? Isn't every process too important to leave to the presumed process owners? Isn't that last lesson what every economic, political or any other "system" means?

"MIT economics professor Rudiger Dornbusch famously observed in 1997 -

'None of the U.S. expansions of the past 40 years died in bed of old age. Every one was murdered by the Federal Reserve.'......"
 ...

Famously observed? Famously? How about "stupidly opined?" Stupidly? Or cleverly, for reasons tangential to the assertion itself? Clever like a fox, raiding a hen-house?

What happened to Ye Olde Scientific Methode ? i.e., "let's find out" which unpredictable combination of old+new methods will work next, for a growing ensemble traversing unpredictably changing contexts?

500 years after the Scientific Revolution, why are we still caught in this useless clash of superficial opinions - on center policy stage no less? Such clashes offer easy diversion, but only serve to divide & conquer people who ALWAYS have the most to gain by ALL working together - sharing & combining all available feedback into newly adaptive policy paths?

Who could the responsible group be? Oh lets see, the idiotic institutional momentum of aristocracy and class? Personally often innocent through ignorance or stupidity, but institutionally guilty as hell. A divine right? Or a mundane wrong?

Remind me please, the many reasons We the People wrote a Constitution? Surely one was to remind ourselves to listen less to megalomaniacs spouting ideology, and more to the sum of diverse, operational feedback?

All this lingering propaganda, despite what we're supposedly taught about democracy, eventually makes sane people wonder whether there aren't whole classes of people who think small is beautiful, simply because it's a pie that's easier for their limited intellects to steal bigger proportions from.

Finally, why on earth would We the People preferentially select people from the Small-Pie-is-Beautiful crowd to represent a democracy of Americans who like big and bigger things?

They still haven't learned a thing

With MMT really breaking out into the mainstream now and dispelling many of the popular myths about economics you'd think some of the more educated and otherwise informed economic pundits and market mavens would stop with their misguided pronouncements and pleadings.(I stopped 11 years ago, when I met Warren Mosler.)

Barry Ritholtz is probably one of the most widely followed market mavens around and he's certainly very smart and seemingly rational as well. That's why it's hard to fathom why he continues droning on with his false understanding of the Fed and monetary policy. (It's not that hard, Barry!)

In this video he talks about why rising rates are "inevitable." He even agrees with the dim-witted Yahoo! Finance host that the Fed "can't continue to buy Treasury securities forever." You can even discern a noticeable amount of frustration in their pleadings as in, "How has this been going on for this long??"

Well, Barry, if you understood MMT you'd know that the central bank can buy government securities in unlimited quantities for as long as it wants. Moreover, the central bank is the rate setter and often uses asset purchases to set the rate or whatever it wants and keep it there for as long as it wants.

This is all due to the fact that a sovereign currency issuing country, with its central bank as agent, is a monopolist in its own money. And anyone who studied monopolies in Econ 101 (chapter 1) probably knows that a monopolist can charge any price it wants.

The very fact that the US/Treasury/Fed pays any interest at all is superfluous. It needn't pay anything for use of its own fiat.

Really, it's not that hard, bro.

Fed arrest man plotting attack on NY Fed

Probably a Peter Schiff follower or some other Austrian nut job.

http://www.zerohedge.com/news/2012-10-17/feds-arrest-man-plotting-attack-new-york-fed

Is That It? Is That the Best We Can Do?

Dollar pressured on rising speculation of US easing
The dollar fell to a one-month low against the yen on Monday after ... speculation the Federal Reserve may launch another round of quantitative easing.

We're disproving the old adage:
..Fool me once, shame on you.
..Fool me twice, shame on me.
..Fool us thrice .... (must we go there? again? no term limits on our own stupidity?)

The message being? "We're gonna do nothing ... again, and see if it works this time. Now don't everyone run for the exits all at ... [where'd everyone go?]"

Keep saying nothing until it stops working? 

Weepin Buddha on an incline!

  Is that the best we can do?

Cue palm slap here.

Why can't the Treasury borrow directly from the Fed

Hat tip to Scott Fullwiler.

Marriner Eccles, Chairman of the Board of Governors of the Federal Reserve System 1947:

There was a feeling that this [Fed overdrafts to the Treasury's General Account] left the door wide open to the Government to borrow directly from the Federal Reserve bank all that was necessary to finance the Government deficit, and that took off any restraint toward getting a balanced budget. Of course, in my opinion, that really had no relationship to budgetary deficits, for the reason that it is the Congress which decides on the deficits or the surpluses, and not the Treasury. If Congress appropriates more money than Congress levies taxes to pay, then, there is naturally a deficit, and the Treasury is obligated to borrow. The fact that they cannot go directly to the Federal Reserve bank to borrow does not mean that they cannot go indirectly to the Federal Reserve bank, for the very reason that there is no limit to the amount that the Federal Reserve System can buy in the market. That is the way the war was financed.

Therefore, if the Treasury has to finance a heavy deficit, the Reserve System creates the condition in the money market to enable the borrowing to be done, so that, in effect, the Reserve System indirectly finances the Treasury through the money market, and that is how the interest rates were stabilized as they were during the war, and as they will have to continue to be in the future. So it is an illusion to think that to eliminate or to restrict the direct borrowing privilege reduces the amount of deficit financing. Or that the market controls the interest rate. Neither is true.

*****

It boggles the mind to see yet another reminder of how thoroughly this was understood 60 years ago. It's not feasible to imagine that later Fed staff, economists and financiers didn't know this. Most had to consciously choose to not believe it, and therefore to not teach the truth to later students.

Four score years ago, our forefathers set up a workable fiat currency system, with much trivia modified unchanged from the shambles of the failed gold-std. It is our job to see that monetary policy of the people, by the people and for the people does not vanish from the face of the earth?

CNBC's Brian Sullivan: "Does the ECB have enough money?"

Just listening to CNBC anchor Brian Sullivan questioning whether or not the ECB "has enough money" to help Spain. Still a shocking degree of ignorance from the media when it comes to these very simple concepts. The ECB, as the currency issuer of the Eurozone, can never run out of euros. The other day I heard Bob Froehlich, Chief Investment Strategist at The Hartford, say that the Fed "doesn't have any money to conduct QE3." It's really bad journalism that this continues to go on. It just perpetuates all the ignorance and fallacies.

Keystone Cops at the Fed!

Just reported on CNBC that the Fed is running out of short-term securities to sell.

As you know, the Fed has been selling short-term securities as part of Operation Twist (and buying long-term securities).

Where does the Fed get short term securities in the first place?

It gets them when the Treasury sells T-Bills every week. Then the Fed goes and buys back those same bills from the public as part of their normal monetary operations/interest rate setting activity.

Actually, the purchase of T-bills by the Fed is the same thing as the government having never sold them in the first place. (Think about it…the government sells them, then the Fed buys them. It's like the gov't never sold them in the first place.)

Anyway, if the Fed runs out of short-term securities it could just very easily step aside and let the Treasury sell the bills and not worry about it. It’s the exact same thing as the Treasury first selling them, followed by the Fed buying them, followed by the Fed selling them AGAIN. (It’s even simpler, right?)

But, no, they don’t want to do it that way because of the PERCEPTION that if the Fed only bought long-term securities and didn’t sell short-term securities, then somehow that would constitute “printing money” and everyone would jump all over them for that.

In other words they either can’t or are AFRAID to explain the simple mechanics of what is going on. They prefer to go through this whole exercise in obfuscation and I wouldn’t be surprised if they actually even create some new “Fed bond” which will cause the whole world to wonder what is going on, in order for them to avoid having to explain to people how the whole system works.

It’s the Keystone Cops…literally.

If it were not for the fact that these people are in charge of our economy, the whole thing would be hilarious. Instead, it’s just pathetic!