28 July 2014

What Is the Effective Limitation on the Fed's Ability to 'Print Money?'

"There is felt today very widely the inconsistency in this condition of political democracy and industrial absolutism. The people are beginning to doubt whether in the long run democracy and absolutism can coexist in the same community; beginning to doubt whether there is a justification for the great inequalities in the distribution of wealth, for the rapid creation of fortunes, more mysterious than the deeds of Aladdin’s lamp."

Louis D. Brandeis, Speech to Harvard Ethical Society, May 4, 1905

In a purely fiat monetary system the effective limitation on the Fed is the acceptance of the dollar and the bond at value in objective, non-coercive market transactions.

Since the value of a currency can be viewed as 'relative' to other currencies, if one ignores the values of other goods, there is some thought that a group devaluation of money can be accomplished if all the issuing entities devalue at the same time, so that the average person will not notice it.  As if.

When such frauds fail, then there is the result to force.  There are numerous examples of non-objective market transactions being used by failing monetary regimes, where they are guided by a central bank or directly by politicians.

Most recently in the case of satellites of the former Soviet Union,  there was an increasing divergence between an 'official exchange rate' versus a 'black market' exchange rate, even in Russia itself as the old rouble failed.  The bad money crowded out the good,  the good which became the new benchmark of value. 

The notion that a sovereign government issuing their own currency and debt cannot fail flies in the face of history, if not common sense.   The ability of the government to enforce an increasingly arbitrary valuation ultimately comes down to a measure of the oppressive power and reach of the regime.   Therefore the failures tend to begin at the edges, where arbitrary force does not reach as effectively.

This is not to say that the US is at that point. But to say we are not yet at that point is like the drunk who says he has not crashed his car into a brick wall yet.  It is to say that the idea that money can be created endlessly without engaging powerful forces of political and financial hazard is nonsense. It requires increasing amounts of official fraud, fear, and force to maintain, until the system ultimately collapses. I have seen this first hand, and have listed numerous examples of it on this site in prior posts.

One of the reasons that this current scheme of the Fed seems to be succeeding is that instead of increasing the overall money supply by distributing it freely 'out of helicopters' and stimulating aggregate demand to the objective of stimulating a recovery,  they are printing loads of money and then carefully handing it to their cronies in the Banks and other private multinational corporations.

And since they are dealing with the world's reserve currency, the base of their Ponzi scheme is very broad in its number of potential contributors.

The notion is that they will be forced to do productive and constructive things with it, and prosperity will 'trickle down.'  Rather, they prefer to use that money to further enrich themselves, to acquire productive assets, rentals, establish new frauds and rig more markets, and buy other companies to establish monopolies, and to put themselves increasingly above the law.

The resulting distortion does not yet result in a general inflation, but certainly facilitates and promotes a bubble in certain financial paper, and a massive wealth transfer from the public to the privileged in a corrupt and systematized plunder.

This system will not cohere.  But it has become very profitable for the status quo, if one ignores the consequences.  It results in a society turned upside down, a bizarro world where nothing makes sense.

Wars have been fought to sustain such looting, and to distract the people from their misery.  It always ends badly, in social disruption and worse.