US Gold Reserves and the Adjusted Monetary Base

Here is the value of the US Gold Reserves in Dollars based on the market price versus the St. Louis Fed's Adjusted Monetary Base.

This chart is from goldchartsrus.com.

Bubble-nomics: The Federal Reserve Balance Sheet and the SP 500

"How could I have done this? I was making a lot of money. I didn’t need the money. Am I a flawed character?

I realized from a very early stage that the financial market is a wholly rigged job. There’s no chance that investors have in this market....It’s unbelievable. Goldman-- no one has any criminal convictions. The whole new regulatory reform is a joke."

Bernie Madoff


"Unfettered capitalism is a revolutionary force that consumes greater and greater numbers of human lives, until it finally consumes itself."

Chris Hedges


"I preyed upon the weak, the harmless and the unsuspecting. This lesson I was taught by others: might makes right."

Carl Panzram, psychopath, serial killer

Not much is going to the real economy and the 99 percent, so it has to be going somewhere.

The creation of financial asset bubbles using the power of selective monetary inflation is 'trickle down' at its finest.

But certain assets may blurt out unpleasant truths, if they are allowed to speak.

This is not sustainable. What are they thinking?

Entitlement, indeed.

Adjusted Monetary Base Is On a Tear Again - Efficient Markets Policy Error

I thought we would drop in at policy central and see what the Fed has been doing with the US money supply using its policy and regulatory powers.

The first chart shows that the Adjusted Monetary Base is growing by leaps and bounds. This is Billions of Dollars in Fed Balance Sheet expansion.

This chart shows the leaps and bounds of monetary base growth a little more clearly, since it is the growth of the base, in Billions of Dollars, but in year over year terms. Those are essentially trillion dollar growth swings.

 

This next chart indexes a number of measures to the economic trough in 2009, for sake of comparison.

It shows the growth in the Fed's monetary base, as well as the excess reserves being held by the Banks.

Below those it shows Wages, Consumer Credit, M2 Money Supply and the Velocity of M2, that is, the rate at which money is being used by the real economy.

We should bear in mind that despite all the hoopla, sturm und drang, and whining by the Wall Street banking elite, the US financial system is still largely unreformed.

This situation brings to mind a quote about economic policy from John Kenneth Galbraith:

“Trickle-down theory represents the less than elegant metaphor that if one feeds the horse enough oats, some will pass through to the road for the sparrows.”

― John Kenneth Galbraith

There wasn't a Fed database entry for the income of the one percent, but if there had been it would be doing very well indeed.

I did not include this in the already busy chart above, but here is Total Assets of All Commercial Banks, using the same indexing method that was used above.  Looking past the rhetoric, the priorities seem fairly clear if you look at the growth trend in assets starting in 2011, and then look at the same time period in the chart above.

This is when the Fed implemented QE2, from Nov 2010 through June 2011, and then began 'Operation Twist' in September 2011.

QE3 started in September 2012 and continues today.

I think that history may view the co-opting of the urge to reform the banking system, and the outrage at the Wall Street bailouts, into the Tea Party's strong popular backing for financial repression of the victims, and the centering of the political debate on throttling government spending for the public good while propagating a financial system that heavily favors and subsidizes the wealthy financiers, to be one of the great propaganda coups of the 21st century.

Almost as good is running a populist presidential candidate, packaged as a progressive reformer and widely denounced by the opposition as a socialist, who in policy practice is the virtual reincarnation of Herbert Hoover, but without his many prior logistical accomplishments.

Federal Reserve Adjusted Monetary Base Watch - What The Financial System Needs Is More Power

Let's see what the new QE does to the Fed's Balance Sheet growth over time.

Although the 'spike' in the post financial collapse recession skews the percentage scale, the growth in the monetary base was fairly strong during the housing bubble expansion post-911.

That third chart might be labeled 'a Decade of Policy Errors.'

There are some who will observe that the third chart shows that Modern Monetary Theory would be a wonderful idea because it takes the monetary policy levers away from the evil Federal Reserve Bank (and the often dodgy sovereign debt markets).

Let us consider what a blessing it would be to put that much discretionary, and apparently almost unrestrained, power to create money, manipulate market prices, and transfer wealth in the hands of those wise and selfless paragons of civic virtue, the professional politicians in the Congress, the Treasury, and the Administration, so they can exploit the monetary power until exhaustion or collapse.

This is not to say that the Fed will not also achieve that end. It does seem to be the historical trend for fiat money. But it very probably is a matter of degree and duration.

The financial system is not broken, distorted, and corrupt. It just needs more power. So let's rewire it...

Adjusted Monetary Base Less Excess Bank Reserves

Thanks to my friend Gary at NowandFutures.com for this chart.

I like to think of the expansion of the monetary base as it has been implemented this time, versus 1933 , as a large animal passing through the body of a python.

Who knows what might come out after the banks are done digesting it.

In the second version of the chart below I have merely added a simple trendline.

Absent lending and a velocity of money the added liquidity at cheap rates, is perhaps little more than a subsidy and crutch to the zombie Wall Street banks.

More simply, the expansion is an artifact of the bank rescue and the assumption of bad debts and others financial obligations at above market prices, and not a program targeting the real economy. It is a variation on the efficient market and trickle down theory. Give the banks plenty of liquidity and they will lend it. No, they will take the Fed's riskless interest for the most of it, and gamble with the rest, demanding more guarantees, subsidies and benefits every step of the way.

Yes, the Fed has a 'blunt instrument,' but it is not as blunt and clumsy as Greenspan put forward, for example. The Fed has been primarily concerned with the banking system and its prosperity, both as monetary policy center and in its key role as regulator, and repeatedly allowed and even led the financially naive into trouble.

And they too often have responded to legitimate criticisms and questions from the Congress and the people with appeals to secrecy and snarky misdirection, abuse of their jargon, and the other things that serve to hide their actions.

So with the Fed inflating selectively on the banking side, without exercising vigorous oversight on the financial system, and the median wage languishing in the real economy, a forecast of stagflation, which is always and everywhere the outcome of policy error or exogenous shock, appears probable.

"Significant changes in the growth rate of money supply, even small ones, impact the financial markets first. Then, they impact changes in the real economy, usually in six to nine months, but in a range of three to 18 months. Usually in about two years in the US, they correlate with changes in the rate of inflation or deflation.

The leads are long and variable, though the more inflation a society has experienced, history shows, the shorter the time lead will be between a change in money supply growth and the subsequent change in inflation."

Milton Friedman

This is much more than a liquidity trap. The financial system is broken. It is corrupted and distorted, and it is acting like a weight on the real economy.  And the banking system has been broken since 1990's.  Perhaps broken is not quite the right word since it implies some accident and not a willful campaign of intent.

You can pour monetary stimulus into this corrupted system as the Fed did in the first decade of this century, and the results will be the same: financial asset bubbles, corruption, fraud, increased public debt, and a widening gap between the wealthy few running the system and the public who are paying for it.  The only thing good about stimulus is that it is better than austerity, if both are intended to sustain the unsustainable. 

Stimulus without reform is a waste, but austerity without reform is insane cruelty.

The message of OccupyWallStreet is fairly clear, but the status quo cannot hear the message: 'The Emperor has no clothes.' And today on Bloomberg the response was, 'They hate us for our prosperity.' What the protesters are saying is that the system is broken, we have lost confidence in it, and we want the change and reform that we voted for in 2008 and were never given.

To paraphrase Tacitus on the status quo of empire, "To ravage, to slaughter, to usurp under false titles, they call freedom; and where they create a desert, they call it prosperity."

Modern Economics: The Money Masters and Modern Economic Theory - Credibility Trap

Yesterday it was Yves Smith who took Paul Krugman to task. And I defended him in that instance in the comments. But now alas it's my turn, and I don't take this up lightly.  So I must think it is important.

And I do.  Because a false premise is being used to justify a false conclusion and by extension a matter of serious public policy in an ongoing debate. And people are in the streets about it.

In a recent op-ed Way Off Base Paul Krugman says:

"I see some commenters reacting to the failure of major inflation to break out by insisting that inflation is defined as an increase in the monetary base — that is, the bank reserves plus currency that are what increases when the Fed “prints money”. As it happens, that’s wrong: very old dictionaries defined inflation as a rise in money and/or credit, but the modern usage is, of course, a rise in prices.

But that’s really a side issue. Nobody would care about the size of the monetary base except for the belief that increasing the base leads to a rise in prices. That’s not a question of definitions, it’s a question of your model of the economy."

For those unfamiliar with measures of money supply and the monetary base, see Money Supply: A Primer.

I don't know who these commenters are, but they *could be* those from the Austrian school, who tend to look to what they call True Money Supply. I would have to read up to find out what the anticipated lag times are between expansion and its aftereffects.  It could also be from those who are forecasting hyperinflation, but those are few and I am not among them.  My forecast has long called for a credit bubble followed by a financial collapse and stagflation as the most like outcome but it is no economic model, more of a judgement call.  The variables are too many and too exogenous for any model that I could possibly devise. . Or the model Paul references could be just a strawman.

Except for the Austrians, and of course perhaps Paul Krugman when it suits him, I don't know of many rational financial people who would look to a very narrow measure of money supply, especially the Monetary Base, and expect a simple causal effect in prices over a short period of time of even a few years, in an ongoing great recession with a very low velocity of money and little lending.  And of course the Fed is taking steps to ring fence their market operations.  And it seems to be working.

I thought the allusion to 'old dictionaries' versus 'new dictionaries' was an appeal to an authority that does not quite work anymore, as if Economics is somehow making steady progress, despite its most recent terrible flop and sometimes scandalous behaviour.   Yes Paul can point to a few timid warnings in old columns, but his models were remarkably silent in predicting the financial credit bubbles and collapse.

The answer of course is-- ta da, better models. And the definition is my shiny new model versus your old outdated model as I choose to define them.  But at the end of the day, the ideal economic model dictates policy with pristine mathematical objectivity.

Adjusted Monetary Base, who could care about it?

Well, the Fed spends quite a bit of time on it, and those who understand anything about economics know that in periods when the financial system breaks down, especially from some excesses promoted by central bank economists, the Fed becomes the 'lender of last resort.' And what they are lending is money they have created by expanding their balance sheet. If they were only providing temporary liquidity the balance sheet would not be expanding in such a parabolic manner and more importantly, remaining there.

In other words, the Fed becomes the 'money creator' and provider of last resort, expending a significant amount of effort to prevent monetary deflation which they find to be against their mandate of what-- a stable money supply and rate of inflation.

The monetary base is a source of money, not broad money in public hands, which the Fed provides under the duress of stressful financial conditions, rather than mere economic cyclical turns.   Which is fine, because that is their job as currently defined. And the Monetary Base is one way of measuring it.

The Monetary Base has a particularly long lead time, or lag as economists call it,  before even large changes appear in the real economy in the form of higher prices and a money supply that is growing in excess of some organic demand.   I am sure Paul is aware of the devaluation of the dollar and the dramatic expansion of the monetary base undertaken in the 1930's by FDR, and the rather dramatic change in trend for consumer prices that followed, albeit not only from that, but other price support programs.

There is definitely a kernel of truth in what Paul says. "By contrast, the model of an economy in a liquidity trap, in which big increases in the monetary base don’t matter, comes through just fine."  And Ben and the Fed are managing their activity with an eye to targeting it to the banking system, and taking steps to keep it from moving into the broader money supplies too quickly.

Adding liquidity from the monetary base in the face of sagging aggregate demand is not having a profound effect on broad prices in the relatively short term. I mean, duh. If the model suggested this it is right.

But that does not imply that some connection is not there, that it is meaningless.  What it means is that so far at least, the Fed is managing their quantitative easing reasonably well.  Unfortunately so well that it is not having the desired effect on the real economy or the banking system for that matter, except that the zombies are still standing.  Just because something is not yet a smoking ruin does not bring cause for celebration.

The Fed is 'bottling up' the expansion of the monetary base in the banks, and quite a bit more of it than we had suspected as eurodollars, money provided to banks overseas.  And they stopped measuring eurodollars a few years ago in one of the broadest money measures, M3. 

The Fed, and I assume Paul Krugman know all this, but believe that they will have the tools, and knowledge, and the latitude to reduce their balance sheet when the time is appropriate and the real economy and banking system recovers. 'Volcker did it.' And so can we, because the models say so.

What the Fed and Paul Krugman are really saying is "Trust us."  And our models.  And don't think that the BLS and the government are tinkering with the econometric measures.  Are you kidding me?   It takes a willful blindness to ignore some of the more egregious tinkering that the government is doing in the name of perception management.

As for the comment about 'printing money,' it was Ben himself that said, 'the Fed owns a printing press.' And he was telling the truth.

I am not a believer in True Money Supply and greatly prefer broader money supply measures. And I know what the Fed is doing is providing an inflation risk that they believe that they know how to handle when the time is right.

And I also know that inflation is starting to pop up in certain sectors and items. And why it is not a broad increase yet, which is what we might call inflation. With most of the increase in money supply flowing to a very few in the form of income, well, this is all understandable.

So what was the point of Paul bringing all this up? It was this.

"Here are the data — I’ve included commodity prices (IMF index) as well as consumer prices for the people who believe that the BLS is hiding true inflation (which it isn’t)"

Let's see. The BLS is not distorting inflation measures because the model is working, and we know the model is working because of the BLS inflation measures.  That seems a little shaky to me.  Especially in light of the other data that shows that certain price sensitive assets are rising in price, and sharply, in response to negative real interest rates, as some other models and theories would hold.

Yes the US is in a liquidity trap.  And yes, the actions of the Fed so far have not triggered a broad monetary inflation because of the slack demand, and the consequent lack of lending and real economic growth.

And yes some well targeted stimulus could help to break this self-perpetuating situation. 

And anything that does not agree with my model is a bubble, and anomaly, or someone else's fault.

The root causes of the problems in the real economy have not yet been changed, and the system has not been reformed.  And the model which Paul points to is really only one correlation in a broader model that has failed, and badly, because it is an abstraction that only has a tenuous relationship with reality.

It is not so much that Paul Krugman is wrong.  There are others who are much, much worse, the purveyors of austerity, and efficient market based deregulation, and supply side economics.  

But Krugman is swinging open the door for the Modern Monetary Theory crowd whether he realizes it or not, by going a bridge too far in his misplaced conclusions and triumphalism.  Extremism in defense of stimulus is no vice, but it is an offense to reason. 

Hey, we haven't blown up the economy lately, so why worry?

Don't get me wrong.  I wish Keynes was still alive, so Keynesian economics could evolve based on new data, which I am quite sure it would.  In response to new data, JMK changed his mind.  And I am sure he would do so again.  I find myself at odds with almost every economic school because I am not an economist by training, and their dogmas and models grate on rational minds.

I liked Roosevelt, because as a non-economist he was open to trying things, but changing them if they didn't work.  If he would have had a model, he would have beaten the country to death with it.  That was the difference between Hoover and Roosevelt, the lack of intellectual pretension.

Well, if we only had more stimulus it would have worked.  Yes that is a thought, except the system is BROKEN.  The only thing we are stimulating is more money for the wealthy, more jobs for China, and more debt for the people.  Yes I think there is some short term benefit for those in the most distress in some of the programs, and that is a good thing.   But pouring stimulus into a broken system is only going to mask the rot, and hasten the final reckoning.  I thought this is what Greenspan tried after the tech bubble collapse.  And here we are again.

Better for the Fed and the economists to proceed in fear and trembling, showing their work clearly, and engaging in honest and open discussion, than risk the final, utter and total repudiation of their profession when 'trust us' fails again.

And I think it is incredibly naive to make that case that since the Fed has not blown the economy up yet, that all is well, and that printing money in whatever amounts has no significant consequences.  No one believes that except a few economists who frighten me in their slavery to their models, and I would hope that you are not one of them.

Perhaps the most useful thing that Paul Krugman could do is go join Occupy Wall Street, and demand the Congress and the President take some serious action in reforming the system, because that is the only thing that is going to provide a sustainable recovery.

"Economic models are no more, or less, than potentially illuminating abstractions...The belief that models are not just useful tools but also are capable of yielding comprehensive and universal descriptions of the world has blinded its proponents to realities that have been staring them in the face. That blindness was an element in our present crisis, and conditions our still ineffectual responses.

Economists – in government agencies as well as universities – were obsessively playing Grand Theft Auto while the world around them was falling apart."

John Kay, An Essay on the State of Economics

and the associated essay of mine, The Seduction of Science in the Service of Power

Paul Krugman has been good at calling Obama and his advisors on their financial policy errors, and was roundly and unjustly criticized for it. I link to his columns frequently, because he is good at what he does, and he often speaks his mind with honest authority.  And compared to many others in his profession he has been a paragon of virtue. But when it comes to their models, most economists have a fatal attraction that leads them astray.

As in all discredited professions, even if it has been due to the actions of a minority, the others must be beyond reproach, and take special care in choosing their words and their arguments.  I am sorry to say that is the case with other professions now, and it is also the case with economists.

As a great economist once said, "Economics is extremely useful as a form of employment for economists." As for the rest of it, well, they have their place. They just get giddy sometimes, especially when exposed to real power, and fawn all over it.

But don't most people. They just do it with a little more humility, and with more sense of uncertainty and attention to the downsides of risk, the so-called 'black swans' that economists' models do not describe or permit, and sometimes do not even acknowledge until face meets dirt.

Obama is failing, but the alternatives are worse. Small consolation. I think the US can do better.

A great leader in a similar crisis said,

"Confidence...thrives on honesty, on honor, on the sacredness of obligations, on faithful protection and on unselfish performance. Without them it cannot live."

If most leaders in Congress and the Administration stood up and said that today, the audience would be rolling in the aisles with laughter. And if anyone from the financial sector said that, well, I would not wish to be in the radius of a lightning strike, God's work notwithstanding.

And that points to the heart of the problem. We are caught in a credibility trap, in which the leaders are so complicit in the abuse and corruption of the system that they cannot even begin to speak to it honestly and plainly, with their pockets weighted down with corporate money.   And they are teaching the rest of us by their example.

October 7, 2011, 3:15 pm
Way Off Base
By Paul Krugman

I see some commenters reacting to the failure of major inflation to break out by insisting that inflation is defined as an increase in the monetary base — that is, the bank reserves plus currency that are what increases when the Fed “prints money”. As it happens, that’s wrong: very old dictionaries defined inflation as a rise in money and/or credit, but the modern usage is, of course, a rise in prices.

But that’s really a side issue. Nobody would care about the size of the monetary base except for the belief that increasing the base leads to a rise in prices. That’s not a question of definitions, it’s a question of your model of the economy. The underlying belief of all the people accusing Ben Bernanke of doing something dastardly is that “printing money” has caused or will cause high inflation in the ordinary sense.

The thing is, of course, that the past three years — the post-Lehman era during which the Fed presided over a tripling of the monetary base — have been an excellent test of that model, which has failed with flying colors. Here are the data — I’ve included commodity prices (IMF index) as well as consumer prices for the people who believe that the BLS is hiding true inflation (which it isn’t):

A couple of notes: for the commodity prices it matters which month you start, because they dropped sharply between August and September 2008. I use the IMF index for convenience– easy to download. (Thomson Reuters I use when I just want to snatch a picture from Bloomberg). But none of this should matter: when you triple the monetary base, the resulting inflation shouldn’t be something that depends on the fine details — unless the model is completely wrong.

And the model is completely wrong. You don’t get more conclusive tests than this in economics. By contrast, the model of an economy in a liquidity trap, in which big increases in the monetary base don’t matter, comes through just fine.

And this in turn tells you something about the people pushing this stuff. They had a model; it made predictions; the predictions were utterly, totally wrong; and they have just dug in further.

I do not know who 'the people pushing this stuff' are, but that last sentence applies to almost every economist and financial pundit that I can think of, with only a few notable exceptions.

A great economist would come up with something new from this, some variation on a theme, would have LEARNED something. The original thinkers are often geniuses, but their adherents are too often true believers and interpreters of doctrine. My graduate academic experience with economists of some years ago is that they lag reality, and especially the sea changes, by quite a few years, always making plans for the last war and crushing the data to fit their abstractions.

And this sadly is what may have brought the Austrian, Classical, Marxist and Keynesian schools into a type of relative stagnation, with a lack of original thought and an adherence to learned models and learned dogma.  Monetarism seems to be waning as well into an American obsession with statistics, often for hire.   Each of the schools have something to contribute.  I have long been convinced however, that out of this new experience we are having that a new school of economic thought would rise out of the ashes.    So far it is not apparent, just attempts to revive the old ideas.

Perhaps this 'digging in' is the natural reaction to a crisis. Who has the presence of mind to 'think differently.' But it is killing off the ability of the country to move forward, especially given the media's penchant for airing an issue for the public by bringing out two professional 'strategists' who throw lies and distortions and cartoon examples at one another for ten minutes, and then call it a discussion. Ok, time to vote.

No wonder the people are confused and afraid. And beginning to take to the streets. And I shudder to forecast the outcome.

By the way, Robert Reich has a nice description that touches on the credibility trap in Occupiers of Wall Street and the Democratic Party.

And Michael Hudson does a fine job describing the heart of the Occupy Wall Street phenomenon and their desire for reform and their resistance to being used and diverted as has happened to the Tea Party. As he goes into his own economic prescriptions, I obviously do not agree with all his views, but he certainly makes some interesting points.

The system is broken. It needs to be reformed. People are tired of being used and lied to. They voted for change and were ignored when they expressed their views and quite strongly. And when they complain, they are ridiculed. And now they are getting really angry. And the powers-that-be are trying to figure out how to play them for their own ends.

As Dr. Zoidberg would say, 'Wow, the President is gagging on my gas bladder. What an honor.'

Monetary Aggregates - Dude, Where's My Deflation? Better Yet, My Job, Savings, Economy?

Plenty of money printing, and therefore money supply growth, but little of it is from organic expansion. Printing money in low growth environments creates asset bubbles and a top down wealth effect for the upper crust. It also facilitates speculation and fuels soft frauds.

The US economy is a broken machine, burdened by an oversized financial sector and policy failures abounding in taxation, trade, and regulation.

Unfortunately the governance failures have their roots in crony capitalism and a variety of white collar crimes, disinformation campaigns, and public ignorance, so they are going to be difficult to surmount.

The recurrence of evil, whether it be in physical or economic privation, never fails to surprise one with its lack of originality, if not its sheer banality. It is rarely elegant or complex, but merely dull and ignorant, a brutish force, self-centered, animalistic, and cruel. Beneath the surface the madness lurks, in dark places and hardened hearts, awaiting its hour to rise once again.

"The receptivity of the masses to information is very limited, their intelligence is small, but their power of forgetting is enormous. In consequence of these facts, all effective propaganda must be limited to a very few points and must repeat these until the lowest member of the public understands what you want him to understand by your slogans...The law of selection justifies this incessant struggle, by allowing the survival of the fittest. Christianity is a rebellion against natural law, a protest against nature. Taken to its logical extreme, Christianity would mean the systematic cultivation of the human failure."

Adolf Hitler

Modern Monetary Theory: The Sophistry of the US Dollar

soph·is·try (s f -str ). n. pl. soph·is·tries. 1. Plausible but fallacious argumentation. 2. A plausible but misleading or fallacious argument.

This is a very well written and important piece by Mr. Cullen Roche at his site Pragmatic Capitalism.   It does a good job of capturing the essence of modern monetary theory that I like to think of as post-Nixonian fiat, gaining its realization and fruition in Reaganomics and the Greenspan Fed.

Sophistry does not refer to the author or his argument who I assume believes exactly what he is saying, and of which reasonable people can make what they will.  And he is certainly not alone in his thinking.  More recently thought leaders have said the very same thing, and sometimes couched as an attack on anything else to stand up to the value-is-whatever-we-say-it-is crew of central planners and their financial engineers. 

I have done him the courtesy of including the entire piece with a link, with my comments in italics along the way.  I dislike it when someone 'cherry picks' something I have written, setting up a silly strawman argument and a false premise, and then attacking it often in a clumsy manner.  And I think this argument of Mr. Roche is well said, and worth considering seriously.  He might be right. 

But I do not think so.  I think his reason jumps the tracks at a key juncture and runs into the weeds thereafter. I fear this is a system that requires an exponentially greater reach of control and misdirection to keep working as in a late stage ponzi scheme.  And that is what makes it especially dangerous, because it must at some point silence all dissent, and promote its provisions and arrangements amongst the unwilling, or fail.

So as I said, he does a very good job of explaining it well, and many intelligent and people with weighty credentials and position seem to agree.  But many of these same people also said they ardently believed in the efficient market theory and the benefits of deregulation, and we see how quickly that belief system has collapsed under the weight of the financial crisis, although its remnant echoes are continually reappearing in various places and policies.  Old ideas die more slowly than old soldiers, especially when they continue to enrich a powerful status quo.

Rather, the sophistry is in the evolving nature of US dollar and its role as the world's reserve currency, and too often the discussions that surround it.   Perhaps rationalization would be a better word, but sophistry captures the intent of it I think.

As you may recall, the basis for the unilateral departure of the US from the Bretton Woods regime and the gold standard under Nixon was that the full faith and credit of the US Treasury, with an independent Fed as guardian of the realm, would force the Dollar to act as though it were still externally constrained, as in the case of a gold standard.   As Greenspan said, the dollar works as long as it acts as though it were on a gold standard.

This is why, as I recall, the Fed is prohibited by statute and custom from buying debt directly from the Treasury.  It must first pass through the public markets at auction, in the belief that market discipline will prevent excess money creation by legitimate price discovery and higher interest rates as required.

It might be useful to consider at this time a different definition for monetization, that is not the archaic 'printing of money.'  Monetization might best be described as those actions which consciously misprice the decreasing value and prospects of money, normally a currency, and by corollary the associated risk and returns.  As you can see this includes the debasement of specie money through various means, but also the more modern method of egregiously tinkering with interest rates beyond merely policy rate adjustments.

As I have pointed out previously, to circumvent market discipline merely requires a Fed with the will to do it, and a few complicit primary dealer banks to play along with it.  This can work well as long as no one with sufficient sovereign standing calls them on it, or the people who are the users of the currency rise up en masse against it.  This is convenient arrangement amongst regulators and market fixers is merely an impasse, and is not sustainable in a floating exchange rate system.  The arrangement requires ever increasing duplicity and threat of force. After these many years, the dollar is now literally hanging on to its value with its reserve currency nails.

And so I think a collapse of the dollar is more possible now than at any time in the past.  It is only sustained by the trauma which the decline of such a large economy would cause on the world markets and those central banks unfortunate enough to hold its debt.  This is the best case one can make to explain a hyperinflation

Pragmatic Capitalism
The Fed Is Not Monetizing U.S. Government Debt
By Cullen Roche
February 9, 2011

The Fed’s purchases of Treasuries continue to attract a huge amount of attention. Despite solid evidence that the program is failing to have any real fundamental economic impact, there are other worries about the program. None has been more apparent in recent weeks than the Fed’s supposed monetization of the US government’s debt. These fears of monetization are unfounded due to the various myths that are perpetually touted by the mainstream media, supposed experts on the US monetary system and even Fed officials. (Quite a collection of the mistaken, certainly not the hoi polloi and not so easily dismissed, but let's read on.  I have to add though that flags get raised in my mind whenever I pick up this tone in an argument early on. - Jesse)

In an article Monday, Bloomberg reported that the Fed has been buying an exorbitant proportion of the recently issued Treasury debt:

More than 40 percent of the government bonds the Fed bought in January for its so-called quantitative easing were auctioned in the previous 90 days, up from 20 percent in December and 15 percent in November, according to Bank of America Merrill Lynch. The central bank is concentrating on newer securities as its $600 billion program depletes primary dealers’ holdings of Treasuries to the lowest since November 2009.

Why does this matter? Because it gives the appearance that the US government is directly funding itself via the Fed’s purchases. This would be nefarious if it were true and would give credence to the endless complaints about the high rate of inflation in the USA (which is currently running at a staggering 1.5%-2.25% depending on the source). Fortunately, the concerns are unfounded.  (Unfortunately they are not, but read on. - Jesse)

The issuance of bonds continues to this day due to Congressional mandate. In reality, our bond market funds nothing and serves only as a reserve drain which helps the Fed maintain its overnight target interest rate. It has nothing to do with funding the government.  (It would be interesting to test this theory.  For example, if the US were to have a failed bond auction this year. - Jesse)  When the US government wants to spend money they do not call China and ask for a line of credit. They do not count tax receipts. And they most certainly do not call the Fed to ensure that we have any money left. No, the truth is that the USA never really has nor doesn’t have any money. So the entire implication that the Fed is helping to fund US government expenditures is entirely inaccurate and anyone who implies as much is still working under the now defunct gold standard model and clearly doesn’t understand the workings of the modern monetary system. 

(This is the heart of the sophistry.  For the theory as it stood for many years was that market discipline and an independent Fed would take the place of the gold standard in placing some constraint on the value of the bond and the dollar.   Otherwise why would the Treasury simply not create the bonds to satisfy its obligations and place them on the Fed's balance sheet?  Or better yet, just issue currency and skip the interest?  Because the theory is that by using interest rates as a governing mechanism and forces the debt to be placed through an open system of auction, the efficiency in valuation of the market would act as a standard and as a restraint. - Jesse)

When the US government was working under the gold standard the US Treasury would literally print up certificates to purchase gold from the gold mines. These gold bars would be delivered to the government and the Treasury would issue a check to the miner. This new money would end up at the Federal Reserve Bank in the form of deposits. This would naturally increase the money supply. An increase in the money supply is scary for obvious reasons. So, the term debt monetization has its origins in the days of the gold standard, but persists to this day despite the fact that we are no longer on a gold standard. Not surprisingly, the term is still used today despite the fact that the US government can’t monetize its debt via Fed purchases (I elaborate below). 

(This description of the gold standard is regrettably cartoon-like, and completely ignores the role it played as a market force in international trade.  Most of the gold volume was related to the exchange of goods in trade, and not through the purchase of new supply from miners.  In a situation where a nation consumed more than it produced, the decline of its gold holdings would weaken its currency, forcing a unit devaluation vis a vis gold.  And vice versa with those countries with a mercantilist bent.  Since actual gold was changing hands, and a relatively modest increase is added each year to total supply, it was difficult to game the system.  Monetary policy in the form of devaluation was still very possible, but a bit awkward if one used actual specie instead of certificates. But it was enforceable and transparent. I am on the record as not favoring a return to the gold standard in the US at this time, because its financial system is too unstable and corrupted.  But gold and silver represent a major attraction for international trade in some manner, for the reasons outlined above.  The US dollar was purported to serve this purpose as the world's reserve currency post 1971, but it has failed in the exact manner predicted by those who said it could not work because of the vagaries of human weakness and the corruptibility of policy. - Jesse)

This issue was magnified yesterday when Richard Fisher of the Dallas Fed invoked the evil “debt monetization” term in his speech:

The FOMC collectively decided in November to temporarily undertake a program to purchase U.S. Treasuries that, when added to previous policy initiatives, roughly means we will be purchasing the equivalent of all newly issued Treasury debt through June. By this action, we have run the risk of being viewed as an accomplice to Congress’ fiscal nonfeasance. To avoid that perception, we must vigilantly protect the integrity of our delicate franchise. There are limits to what we can do on the monetary front to provide the bridge financing to fiscal sanity. The head of the European Central Bank, Jean-Claude Trichet, said it best recently while speaking in Germany: “Monetary policy responsibility cannot substitute for government irresponsibility.”

The entire FOMC knows the history and the ruinous fate that is meted out to countries whose central banks take to regularly monetizing government debt. Barring some unexpected shock to the economy or financial system, I think we are pushing the envelope with the current round of Treasury purchases. I would be very wary of expanding our balance sheet further; indeed, given current economic and financial conditions, it is hard for me to envision a scenario where I would not use my voting position this year to formally dissent should the FOMC recommend another tranche of monetary accommodation. And I expect I will be at the forefront of the effort to trim back our Treasury holdings and tighten policy at the earliest sign that inflationary pressures are moving beyond the commodity markets and into the general price stream. I am a veteran of the Carter administration and know how easily prices can spin out of control and how cruelly markets can exact their revenge. I would not want to relive that experience.”

Fisher’s implication is that the Fed is directly helping to fund the US government’s spending. After all, if they’re buying the debt then they’re obviously funding the spending, right? Wrong. As regular readers know, the US government is never constrained in its ability to spend. Our monetary system underwent a dramatic change when Richard Nixon closed the gold window. It removed any constraint on the US government’s ability to spend. Nonetheless, the operating structure of the gold standard (issuing bonds, etc) still largely remained intact.

(The constraint is softer, and more pernicious than when the US was on a gold standard. The constraint is now the external valuation of the bond in the generic sense, and the dollar, which is a bond of zero duration. During the Carter administration, for example, the dollar was constrained by monetary inflation, the decreasing valuation placed on the bond and dollar by the rest of the world. A gold standard acts as a hard restraint, stopping the monetary authority from debasing the currency early on. Without that constraint perception make the process non-linear. Rather than a hard stop, with a transparent and visible devaluation process, the value can erode slowly over time until it reaches a tipping point, and a more precipitous slide into a collapse. The Fed is confident they can stop this based on the Volcker experience. This remains to be seen. They have no prove of it in theory because it involves human behaviour and significant, if not critical, international exogenous variables. - Jesse)

For a brief instant, Mr. Fisher appears as though he is on the verge of understanding the system he now heavily influences as a new voting member of the FOMC. Mr. Fisher says that the spending effectively comes first:

But here is the essential fact I want to emphasize and have you think about today: The Fed could not monetize the debt if the debt were not being created by Congress in the first place….The Fed does not create government debt; Congress does.

Lights should be going off in Mr. Fisher’s head at this point as he says this. This is important because Mr. Fisher is essentially acknowledging that the Fed is not the entity that actually conducts helicopter drops. Of course, spending comes before debt issuance. It can be no other way in a monetary system such as ours. The Fed’s role in this process is purely monetary. It has nothing to do with the fiscal side. The Fed does not “print money”. Congress is the entity that prints money via deficit spending.  (And the Fed is supposedly the independent constraint on this, and of course the printing of money that occurs in the private banks and the shadow banking system. - Jesse)  And they always decide how much to spend before considering any potential constraint from taxes or bond issuance. Unlike a household or state the US government does not need money before it spends. (The Fed is the only relatively unrestrained source, as well as being the regulator, the governor if you will.  Because the US must issue a bond at some point to cover its spending. This is not a mere detail.  It is a rhetorical device to argue the timing, for it is implicit in the process of governance..  But only the Fed can expand its balance sheet ex nihilo, from nothing.  - Jesse)  From a common sense perspective, you would think that this would set alarms off in most people’s heads, however, it does not. The idea that the US government is never revenue constrained is so foreign to most people that their minds repel it. (And rightfully so, since such an outlook is a tenet of the Robert Mugabe School of Business, University of Zimbabwe - Jesse)

By now you might be thinking that this is all semantics. Who cares if the Fed isn’t helping to fund the spending? They’re still buying the bonds and the spending is occurring regardless of the Fed’s actions. Well, it’s important for several reasons:

1.  Someone who understands the modern monetary system understands that a sovereign government with monopoly supply of currency in a floating exchange rate system has no solvency issue. Therefore, it should not be treated as if it is a household, business or state. (This sounds as though it could be  the motto of the Weimar school of modern monetary economics.  What is missing is that for this to be correct that monopoly must be comprehensive, ie, there must be some force that cause the misallocation of wealth in the world from a central planning commission, and a mispricing of risk.  In other words, its necessary to be the world's reserve currency and to own the ratings agencies. Otherwise the only floating that gets done is the value of a currency printed ad infinitum down the drain.  The value of a fiat currency is tenuously based on the belief that the monetary authority will not assume it has no solvency issue because it owns a printing press and is willing to use it recklessly, that the currency retains some stable relationship to some useful goods.- Jesse).

2.  If solvency is not a concern (and here reason departs from reality, especially given the many serious instances of high inflation experienced by countries not on a gold standard since the end of World War II.  Technically Russia was not insolvent when the Soviet Empire collapsed. It merely re-issued a 'new ruble' after knocking a few zeros off the old one.  Tell the good news to those whose life savings were destroyed. - Jesse)  then clearly the concern is inflation or potential hyperinflation. But as we’ve seen over the last few years the Fed has not succeeded at creating inflation anywhere close to the historical average and certainly not dangerously high levels of inflation. To someone who understands how the modern monetary system functions it not surprising then, that the Fed has been unable to generate inflation during a balance sheet recession. (Inflation is how one measures it.  I would submit that the Fed is quite expert at generating asset inflation in things like financial assets and housing, having done it quite well a few times now.  But I would agree that this is not sustainable, for the reasons noted by Jefferson so many years ago, that this printed money is used for merely speculative as in gambling, not adding the 'mass' of the economy but merely serving as a subtle means of wealth transferal.  For fiat money is not wealth, but merely the means of allocation and transference. - Jesse)

3.  Fear mongerers want you to believe that the Fed is the evil entity that “prints money”. The truth is that the Fed can do no such thing. Only Congress can print money and it’s clear that their actions in recent years have failed to generate significant inflation. This is a sign that the government’s spending has been ineffective and misguided. Although I acknowledge that the US Congress is never constrained in its ability to spend this by no means implies that the US Congress should spend beyond its means. To do so can possibly result in malinvestment or very high inflation.  (As a general rule of thumb, name calling, also known as poisoning the well of a counter argument, often introduces and highlights the weakest points in a discussion. Having said that, in a fiat system the interest rates are a key bellwether and governing mechanism to the money supply and the expansion of credit which is the source of money. To this extent to say that the Fed is not involved is to use the same defense that the Wall Street banks used in the subprime mortgage crisis.  They did not originate the loan. They merely bundled them, helped to misprice them, and then sold them to the unsuspecting, the marks in this great con game. - Jesse)

4.  The idea that the Fed is buying government debt might imply that there are is a shortage of buyers of US debt. This is impossible as government debt issuance serves only as a reserve drain. Auctions are designed around calculated reserves and are carefully designed so as not to fail.  (There are a shortage of buyers at certain prices, so the Fed steps in to buy them in the act of mispricing of risk. - Jesse)

5.  Voting members of the FOMC do not understand the actual workings of the Federal Reserve System and the US monetary system and have played a direct role in the misguided policy response in recent years. Of course, this is nothing new. This problem has persisted throughout the entirety of the last 40 years and is largely to blame for the structural flaws in the US economy currently. (If those voting members included Greenspan and Bernanke and I would most heartily agree, but I do not think that is what Mr. Roche intends. - Jesse)

6.  The overwhelming majority of US citizens have no idea how the US monetary system actually functions and therefore are reluctant or unable to force any sort of real change. (As I recall those same citizens rose up almost en masse and besieged their Congressmen to vote against TARP.  They were ignored by the Congress which has been inundated by money from the banking lobby. The desire for change is clearly there.  What is lacking is choice, and I think it is fraud with intent. - Jesse) Those with political or monetary motivations tend to invoke fearful language that incites anger and in truth only adds to the problems in the US economy by driving the voter base to react to their emotions and not their knowledge of the system in which they reside.

7.  Quantitative easing does not increase the money supply and is therefore not inflationary. (Apparently the Adjusted Monetary Base escapes his attention, in addition to the Fed's role as 'the standard in proxy' acting in lieu of an external standard such as gold or a peg to a hard currency - Jesse) Although this operation can have significant psychological impacts (such as inducing undue speculation)  (You bet your ass it does, and it is doing it right now - Jesse) QE can only work in the same manner that traditional monetary policy is implemented at the short-end of the curve. This occurs by setting a target rate and by being a willing buyer of any size at that rate. This is NOT how the current policy is designed. The current structure of QE leaves interest rates entirely controlled by the marketplace and not the Fed. Therefore, the mixed results should come as no surprise to anyone as the policy was poorly designed to begin with and is likely doing little more than contributing to excessive speculation and promoting the continued financialization of the US economy. The Fed’s implementation of such policies (such as QE) and complete misunderstanding of such policies does nothing but help create disequilibrium in the marketplace and increase the odds of future instability. (What Mr. Roche seems to be saying is that the Fed should just set rates across the curve, and chuck the marketplace.  Now THAT's bare-knuckled monetization.  It might work if the Fed could also set a price for oil, food, gold and silver, and make that stick for example.  They are trying with gold, and silver with less success, but not even that much for the others. - Jesse)

8.  Monetization is achieved by act of Congress via deficit spending and is independent of the Fed’s monetary policy. Anyone who uses the term in the context of the Fed’s contribution of government spending does not understand how the modern monetary system works. In a strict technical sense, monetization is always

(This ignores the role of private banks in creating credit which becomes money. Certainly the Congress plays a key role in the creation of money through government spending and the issuance of debt. But the private banking system plays a key role as well. And the gatekeeper for all this is the Fed.   This also ignores the Fed's new ability to buy purely private debt and mortgage obligations. Indeed, as I recall in those distant days when there was a misplaced fear that with its illusory surplus the Fed might run out of sovereign debt to buy, the Fed reassured us that it could buy debt from many other sources. They can do it, and they are doing it. - Jesse)

End Note: It is disappointing to find that these types of discussions too quickly devolve into name calling and sloganeering for one's team, to little benefit except for page clicks and crowd persuasion, which faux reasoning seems to drive too much of the financial reporting today.

Indeed, there seems to be little actual investigative reporting in general being done anymore in the states. And we are seeing far too little reasoning being done from those quarters from which we might expect better. It is too often talking head versus talking head in the staged manner of professional wrestling.  And conspicuous in this deficiency is the economics profession, which too often become a pliable mouthpiece for this or that well-heeled constituency. But it is as one might suppose it to be. There is nothing so corrosive to intellectual integrity as the cover up of a well-intentioned but artificial and inherently deceptive scheme gone badly, and one is caught in a credibility trap.  And of course a status quo based on position and privilege always has its allures.

Many people have raised a voice about the frauds at the center of the financial collapse, and we are at the point where this type of discussion does not matter overmuch; people are going to believe what they wish to believe based on self-interest and the principle of relativism and expediency. Chartalism holds wonderful rewards for those that can pull the levers, and punishment for those who step out of line. 

The problem with these sorts of central command and control constructs is that they assume that men can act with a wonderful enlightment, with the wisdom and selflessness of angels.  Unfortunately they do not often do this.  Such a system is the preferred tool of autocrats, and is inherently inimical to openness and democracy, always requiring secrecy and unilateral power.

“The Constitution is not an instrument for the government to restrain the people, it is an instrument for the people to restrain the government - lest it come to dominate our lives and our interests.” Patrick Henry

One can rationalize almost anything in the service of the power that sets all value and serves none other.  It becomes a matter of duty, of merely following orders.  As an official of another empire destined to its decline once asked, "What is truth?" and then turned and washed his hands of it, which was the expedient thing to do.  Truth is what the few say it is, when the hubris of the will to power is at its zenith. And then it consumes all, for the will to power serves none but itself.

I think there will be a tipping point, some catalyzing event which will spark an unavoidable reaction in the public, in which the people will finally stand and demand justice.  And then some change will come, for good or ill. We are seeing the early stages of that in the world today and in many places where the people are suffering.

The Monetary Base During the Great Depression and Today

Economic commentator Marty Weiss has put out this chart with the somewhat florid headline, Bernanke Running Amuck

"Fed Chairman Bernanke is running amok, and for the first time since the birth of the U.S. dollar, our government is egregiously abusing its power to print money.

Specifically, from September 10, 2008 to March 10 of this year, he has increased the nation’s monetary base from $850 billion to $2.1 trillion — an irresponsible, irrational and insane increase of 2.5 times in just 18 months.

It is, by far, the greatest monetary expansion in U.S. history. And you must not underestimate its sweeping historical significance."

This chart with its editorial commentary are from Marty Weiss.



Here is a closer look at this monetary expansion, without the editorial comment



Is it without historical precedent? I wondered.

Let's take a look again at a prior period of dollar devaluation and monetary expansion in a period of deep recession, the period in the 1930's in which the US departed from specie currency to facilitate the radical expansion of the monetary base.



As you can see, the Federal Reserve increased the monetary base in several steps, resulting in an aggregate increase of about 155% in four years. In this chart above one can also nicely see the contraction in the monetary base, the tightening, that caused a dip again into recession in 1937.

It is also good to note that the recession ended and the economy was in recovery prior to the start of WW II, which I would tend to mark from Hitler's invasion of Poland in August, 1939. There was a military buildup in Britain before then, but I believe that the common assumption that only the World War could have ended the Great Depression was mistaken.

If real GDP is any indication, the recovery of the economy was underway, but somewhat anemic compared to its prior levels, reflected in a slow decline in unemployment. It is absolutely essential to remember that the US had become a major exporting power in the aftermath of the first World War. The decline therefore of world trade with the onset of the Depression hit the US particularly hard. But the recovery was underway, until the Fed dampened it with a premature monetary contraction that brought the country back into recession, a full eight years after the great crash. Such is the power of economic bubbles to distort the productive economy and foster pernicious malinvestment.



What prolonged the Depression in the US was the Federal Reserve's preoccupation with inflation that caused it to prematurely contract the money supply. In addition, the Supreme Court overturned most of the New Deal employment programs before the economy had fully recovered from the shock of the Crash of 1929, and the severe damage inflicted by liquidationism on the financial system and the real economy. One can hardly appreciate today the impact of repeated banking failures, with no recourse or insurance, on the public confidence.

It is instructive to look at the Consumer Price Index for that period of time to see what was motivating the Fed.



It is fair to say that the Fed made several policy errors out of a fear of inflation. Keep in mind that it was only 1933 that the Fed had been freed of the gold standard, and there was tremendous pressure from the monied interests to maintain a strong currency, as we can see, to a fault. The public interest was sacrificed to protect the pre-Crash gains of the wealthy.

The US economy had a more difficult time adjusting to the collapse and the Depression because it had been a net exporting nation in the 1920's. The decline in markets for its exports, and the constrictions in international trade symbolized in the US by the Smoot-Hawley tariffs, affected it much more than other nations that had been net importers, and which exited the Depression earlier.

With the collapse of its export business, the US would have been well-advised to stimulate its domestic markets, to help take up the slack and help to rebalance its productive capacity. In this case, domestic liquidationism was exactly the wrong thing to do. This, by the way, is why the Wall Street money men starting looking at foreign direct investments in the domestic production of recovering economies such as Germany and Italy in the late 1930's. Indeed, the search for profit was so compelling that several of the money houses, and famous men, did not stop investing with the Nazis until they were prosecuted under the Trading with the Enemy laws.

This provides an instructive example to the exporters German and China in this modern crisis perhaps. Now is the time for them to stimulate domestic markets. China must create internal markets, and Germany best try and hold the EU together and keep it healthy.

Japan is in a much more difficult circumstance because of its particular demographics and cultural homogeneity. I see no way out for them in the short term.

Here is what the monetary base did during World War II. As one can easily see, war is bad for people but good for industrial output and monetary expansion.



Expansion of the monetary base during the war was nothing short of astonishing, if one forgets that there was a significant monetization of war debts occurring, and there was less opportunity for inflation because of rationing and wage and price controls. But inflation there was, and it gained a significant leg up after the War.



Here is our real GDP chart extended through the War so one can more easily see the build up and then the flattening of growth post War.



Where Do We Go From Here?

The status quo has failed in its own imbalances and artificial distortions. But while avoiding bubbles in the first place through fiscal responsibility and restraint is certainly the right thing to do, plunging a country which is in the aftermath of a bubble collapse into a hard regime, such as the liquidationists might prescribe, is somewhat like taking a patient which has just had a heart attack and throwing them on a rigorous treadmill regimen. After all, running is good for them and if they had run in the first place they might not have had a heart attack, so let's have them run off that heart disease right now. Seems like common sense, but common sense does not apply to dogmatically inclined schools of thought.

What the US needs to do now is reform its financial system and balance its economy, which means shrinking the financial sector significantly as compared to its real productive economy. This is going to be difficult to do because it will require rebuilding the industrial base and repairing infrastructure, and increasing the median wage.

The US needs to relinquish the greater part of its 720 military bases overseas, which are a tremendous cash drain. It needs to turn its vision inward, to its own people, who have been sorely neglected. This is not a call to isolationism, but rather the need to rethink and reorder ones priorities after a serious setback. Continuing on as before, which is what the US has been trying to so since the tech bubble crash, obviously is not working.

The oligarchies and corporate trusts must be broken down to restore competition in a number of areas from production to finance to the media, and some more even measure of wealth distribution to provide a sustainable equilibrium. A nation cannot endure, half slave and half free. And it surely cannot endure with two percent of the people monopolizing fifty percent of the capital. I am not saying it is good or bad. What I am saying is that historically it leads to abuse, repression, stagnation, reaction, revolution, renewal or collapse. All very painful and disruptive to progress. Societies are complex and interdependent, seeking their own balance in an ebb and flow of centralization and decentralization of power, the rise and fall of the individual. Some societies rise to great heights, and suffer great falls, never to return. Where is the glory that was Greece, the grandeur that was Rome?

The lesser concern for the US now is globalization, new trade agreements, and its debt, which is largely held by foreigners who have provided vendor financing while using exports to build their own economies. The mercantilists are addicted to exports because it provides them the means to bring in national wealth for the benefit of a narrow elite, without empowering the masses and allowing them a greater measure of say in their government, with only a modestly improved standard of living.

This Will Not Be Your Father's Inflation

Why is this important? Because as I think is apparent in the stunning chart contained in Debt Saturation in the US Dollar Economy, the US dollar is already entering an inflationary spiral that will lead to its destruction and reissuance.



Although as you know I always allow that deflation and inflation are policy decisions, at some point a threshold can be passed, and the likelihood of one event or the other becomes more compelling. The US is at that crossroads wherein it must change, or go down the painful path of selective monetary default, of a degree different than a hyperinflation, more similar to that which was seen in the former Soviet Union, than the monetary implosion of a Weimar.

One can watch the growth of the traditional or even innovative money supply figures, and be reassured at their nominal levels, only to misunderstand that money has a character and quantity of backing, that can erode as surely as the supply of money can increase, to produce a type of inflation that comes upon a nation quickly, like a thief in the night. It will bear the appearance of stagflation, because it is caused by a degeneration of the productive economy coupled with a disproportionately increasing money supply.

A transactional economy can have all the appearance of vital growth and activity, when in fact it may be an increasingly hollow shell, a Ponzi scheme, and prone to unexpected collapse. Such a systemic collapse was almost witnessed when the US financial system was threatened by the fall of Lehman Brothers. That event was averted. But the system still remains in a precarious, unreformed state of imbalance.

What does a country have to providing a backing to its money, except its natural resources, its productive labor, and the ability to create products of value? Some countries, or more properly empires, may provide the backing for their currency through force and fraud, and a sort of indirect or de facto taxation on the many. These types of arrangements can last many years, but can disappear quickly, based as they are on conditional situations, subject to relatively sudden change.

Cutting expenses to reduce deficits is a weak attempt to reform. One does not starve themselves back to health. What is needed is growth, savings and investment, the reallocation of capital and true valuation of goods and services. The productive economy must come back into balance with the administrative sectors, those being finance and government.

At the end of the day, some of the greatest impediments to economic recovery reside in the selfish and fearful desire for control and power in rather narrow oligarchies, both in the East and the West. They were the primary beneficiaries of the status quo, and they will seek to maintain and even recreate it, even though it has proven to be unsustainable.