And so I reiterate that in a purely fiat currency, the money supply is indeed fiat, by command.
People like to make arguments about this or that, about how so and so has proved that the Fed does not or cannot do this or that, that banks really create money only by borrowing, that borrowing must precede this or that. It's mostly based on a fundamental misunderstanding of what money is all about, with a laser beam focus on hair-splitting technical definitions and loquacious arguments more confusing than illuminating, lost in details. In a simple word, rubbish.
Absent some external standard or compulsion, the only limiting factor on the creation of a fiat currency is the value at exchange of the issuers bonds and notes, and currency which is nothing more than a note of zero duration without coupon.
If I had control of the Fed, unless someone stopped me, I could deliver to you hyperinflation or deflation without all that much difficulty from a technical standpoint. The policy reaction of those who might be in a position to fire or lynch me is another matter. The Fed not only has the power to influence money creation in the private banking system. It has the ability to expand its balance sheet and take on existing debt of almost any type at will and at any price it chooses.
But that is the case as long as the Fed has at least one willing partner in the primary dealers, and the Treasury is in agreement. And even that requirement for a primary dealer is not all that much of an issue given the amounts of existing sovereign and private debts of which the Fed might avail itself for the forseeable future.
It is economic suicide for a net debtor to willingly engage in deflation when they have other options at their disposal, and especially when those decisions involve people outside the system.
So it is really about making the best choice amongst bad choices. This is why governments choose to devalue their currency, either with quantitative easing, or explicitly against some external standard as the US did in 1933. Because when the debt is unpayable, it must be liquidated, and the pain will be distributed in a way that best preserves the status quo.
Hyperinflation and a protracted deflation are both very destructive choices. No rational government will choose either option. They 'could' have those choices imposed upon them, either by military force, political force, or by economic force. Economic force is almost always the cause of hyperinflation. So you can see why a 'managed inflation' is the most likely outcome at least in the US. The mechanism has been in place and performing this function for the last 100 years.
The problem or twist this time around comes when the monetary stimulus does not increase jobs and the median wages, because of some inherent and unreformed tendency in the economy to focus money creation and its benefits to a narrow portion of the populace. The result of this is stagflation which although not indefinitely sustainable can be maintained for decades.
Most third world countries are like this. A vibrant and resilient middle class is sine qua non for a successful democratic republic, and this has strong implications for the median wage. The benefits and the risks of growth and productivity must be spread widely amongst the participants. Oligarchies tend to spread only the risks, keeping most of the benefits to themselves.
This is essentially the reasoning that occurred to me when I looked at the US economy and monetary system in the year 2000.
The one point I remain a little unclear on is how 'hard' the law is regarding the direct monetization of debt issued by the Treasury. I am not an attorney, but I am informed by those familiar with federal statutes that this is a gray area in the existing law but currently prohibited. But it is easily overcome as I said with the inclusion of one or two amiable primary dealers who will allow the debt issued by Treasury to 'pass through' their hands in the market, on its way to the Fed at a subsidized rate. For this reason, and for purposes of policy matters, and occasional economic warfare, countries may tolerate TBTF financial institutions with whom they have 'an understanding.'
Absent new data the dollar will continue to depreciate, and gold and silver and harder currencies appreciate, until the fundamental situation changes and the US economic system is reformed, with or without benefit of soft bankruptcy.
I think there are other outcomes that involve world government and a currency war, and this also is playing out pretty much as I expected. Fiat currency can take on the characteristics of a Ponzi scheme, whose survival is only possible by continuing growth until all resistance is overcome.
This is the conclusion I came to in 2000. I admit I was surprised by the Fed's willingness to create a massive housing bubble, and the willingness of the US government to whore out the middle class in their deals with mercantilist nations — their hypocrisy knows no bounds."
Jesse, Deflation, Hyperinflation and Stagflation, 19 April 2011
The political structure of society is shaping a number of economic results, and has a profound effect on the relationship of real growth and the value of the currency.
The Fed is only faux-independent, since it is a creature of the Banks and Wall Street.
This is why Greenspan's theory that the Fed can simulate the rigor of an external standard like gold is nonsensical economic theology. And he knew this.
Stocks were off a bit today.
There is going to be a correction. Once it gets rolling it could gain some serious downside momentum.
Gold and silver took the usual post Comex option expiration hit.
Why? When you hold a call option that is 'in the money' you are rewarded with new long futures contracts.
And typically based on the numbers those new holders of contracts get a serious gut check before the market normalizes.
VIX is low again, and is certainly mispricing risk in my judgement.
The Dollar is still doing the sideways chop. The DXY is heavily weighted to the euro, and the European leadership is hapless.
Speaking of which, have you noticed how so many Western leaders have abysmal approval ratings?
I have included a chart of this below.
Let's see what happens.
Have a pleasant evening.
