A lump-sum payment in digital dollars for all Americans during a recession or to raise inflation, as an alternative to QE and negative interest rates, which have failed.
By Wolf Richter. This is the transcript of my podcast last Sunday, THE WOLF STREET REPORT. You can listen to it on YouTube or download it wherever you get your podcasts.
There is a lot of discussion suddenly about a Federal Reserve project to make direct payments to households during an economic crisis. In March, legislation was proposed in the House and in the Senate to authorize the Fed to do this.
At the beginning of August, two former Fed officials floated a trial balloon of this type of operation with some specifics as to how it would work and how it would be accounted for on the Fed’s balance sheet.
And now, the president of the Federal Reserve Bank of Cleveland, Loretta Mester, gave a speech on the modernization of the decades-old, slow, and cumbersome payment systems we have in the United States. The Fed has been working on this modernization since long before the Pandemic. And near the end of that speech, she said that the Fed was looking into ways in which it could make direct and instant payments to every American, even those that don’t have bank accounts.
So free money for all Americans. This is very different from the stimulus checks because the government had to borrow the money that it sent to consumers. The Fed would just create the money and send it to consumers. And this is getting pretty serious now.
What is particularly interesting is that by making this proposal, the Fed essentially agrees that the trillions of dollars of asset purchases by the Fed have not been successful in shifting funds to the majority of households, where they’re needed the most in a recession, since consumer spending is 70% of the economy.
Nor have asset purchases been successful in creating consumer price inflation, though they have created asset price inflation, and a situation where even during the Good Times, the Fed cannot raise interest rates enough and cannot steepen the yield curve enough because there isn’t enough inflation to do so. And when the recession comes, there isn’t a whole lot left that monetary policy can accomplish, in terms of the real economy, consumer demand, and inflation.
These proposals show that the Fed is trying to avoid negative interest rates and is working on alternatives, such as sending money directly to consumers, which would boost actual consumer demand, and consumer price inflation.
A higher rate of inflation would allow for the Fed’s policy rates to remain above zero, but far below the rate of inflation. Hence, big negative real interest rates, while maintaining positive policy rates.
So sending money directly to consumers may be lining up as a replacement for QE and negative interest rates.
What the Fed has been doing in this crisis, and during the Financial Crisis, and for years afterwards, is buying large amounts of assets, such as Treasury securities, mortgage-backed-securities, and now other assets, such as corporate bonds, including junk bonds, bond ETFs, and junk bond ETFs, to drive up the prices of these assets.
These price increases then transfer to related assets. For example, the purchases of mortgage-backed securities drove up prices of mortgage-backed securities, thereby driving down their yields, which pushed down mortgage rates to record lows, and this in part triggered the gigantic land rush we’re now seeing, along with home price increases, despite the worst unemployment crisis in a lifetime.
The stated purpose of driving up asset prices used to be called the “Wealth Effect.” Even Yellen, when she was still at the San Francisco Fed, used the term. It’s designed to bail out asset holders, and the biggest asset holders – meaning the richest people – get bailed out the most, and become even wealthier. A billionaire might gain a billion dollars in net worth during this asset purchase frenzy, while the lower 60% of households gain relatively little or nothing, because they have relatively few or no assets, thereby massively widening by totally artificial means the already horrendous wealth inequality.
Fed chair Jerome Powell has come under fire for being at least in part responsible for increasing by a huge amount the already horrid wealth inequality.
The thing that is most destructive to the economy, and to society, and to the spirit of the American economy is the Fed’s policy of asset purchases. It’s the most terrible thing the Fed can do.
So now the Fed is struggling with alternatives to these policies – namely sending money directly to all Americans during a crisis so that they can spend it and crank up demand, and crank up the economy and inflation, even if they lost their jobs.
And however terrible of an idea that may be, it’s a lot less terrible than asset purchases and a lot less terrible than negative interest rates.
So on September 23rd, Cleveland Fed president Loretta Mester, in a speech, discussed the effects of the Pandemic on the U.S. payments system – which includes a variety of payment methods, such as checks and the ACH payment system with which payroll is direct-deposited into employees’ bank accounts, and which is used for direct payments between companies and between the government, companies, and consumers.
For example, many people have direct credit and debit set up with the IRS via this ACH system, to where the IRS can directly deposit tax refunds into their bank account, or withdraw taxes-owed from their bank account. The connection between people’s brokerage account and bank account works the same way.
The millions of people who had this ACH setup with the IRS received their stimulus payments via direct deposit right away in April. People who didn’t have that set up received their payments via check weeks or months later. And some people are still waiting for their payments because the IRS doesn’t know where to send them to.
But the ACH system is decades old, slow, and cumbersome. It doesn’t allow for instant payments. The Fed, which is at the core of these payment systems, has been working to come up with a modern replacement where payments are instantly available at a low cost or at no cost for all transfers – companies, individuals, and governments alike.
So Mester said, “The pandemic has underscored the need to ensure that during a crisis, payments can flow quickly and to everyone: those with and those without a bank account.” She said that the target release date for the new system is in 2023 or 2024.
I’m not sure why this modernization hasn’t happened years ago. Payment systems that produce instant transfers have been available for years, but they’re not universal and so are of only limited utility.
But at the end of her speech was this bit about how the Fed could send payments directly and instantly to all Americans during a crisis – and the technology needed to do this.
This technology would be a digital dollar – or more broadly, a “central bank digital currency,” as it’s called. These direct payments would require authorization from Congress. And Mester says, there is already some proposed legislation, perhaps making reference to the legislation proposed in March.
Under this system, each American would have an account at the Fed in which these digital dollars could be deposited.
When the recession hits, the Fed could just create a certain amount of digital dollars and deposit them into these accounts, and a minute later, you could transfer this money to your bank or spend it via an app or whatever.
And she outlined who at the Fed is already working on it, including the Fed Board of Governors’ technology lab with staff from several of the Federal Reserve Banks, along with software developers; the Boston Fed in a partnership with MIT; and the New York Fed in a partnership with the Bank for International Settlements.
But nothing has been decided yet, and lots of work remains to be done. And she said that all kinds of risks need to be studied and understood, etc., etc., the usual disclaimers, and she said that these efforts do not signal any decision by the Fed to adopt a digital currency.
In early August, two former Fed officials – one from the New York Fed, the other from the Fed’s Board of Governors – outlined their proposal to Bloomberg News for a mechanism by which the Fed would send a lump-sum payment directly to all American citizens and green-card holders. They talked in greater detail than Mester’s brief mention.
The amount could be set at a certain percentage of GDP, divided by the number of recipients. Each would get the same amount. And the thing would also be available on an app. In other words, this would even reach people who don’t have bank accounts.
And it would happen instantaneously, they said, without the clunky mechanisms that Congress has to go through to send stimulus payments to consumers, some of whom still haven’t received them.
On the Fed’s balance sheet, the amount in freshly created digital cash sent to consumers would be carried as a liability, same as currency in circulation which is the paper money wadded up in your pocket.
The counter-entry on the Fed’s balance sheet would be on the asset side in form of freshly created securities they call “recession insurance bonds.” In other words, the Fed would create equal entries on both sides of the balance sheet, and so the balance sheet would remain in balance.
They said that it would be “most efficient from a macroeconomic standpoint in supporting spending and confidence.”
They said that by “getting money to consumers you can limit the depth and duration of a recession.”
They said, “you could actually generate real inflation.”
They said, “it could be beneficial for not only avoiding negative rates but creating a more healthy interest-rate market, a more healthy yield curve.” Meaning higher long-term interest rates.
Higher inflation would make possible a steeper yield curve, and higher long-term rates, and even higher short-term rates during the Good Times, that would allow the Fed to drop rates more drastically during a recession without having to go negative.
There are about 210 million adults in the US. If the Fed decided to throw $3 trillion not at the markets as it has done since March, but at Americans directly, it would translate into a lump-sum payment of about $14,000 for each adult. So a household of two adults would get $28,000, whether this household is made up of a couple living in a tent or a couple shuttling between their mansions with billions of dollars in assets.
The relatively small percentage of wealthy people wouldn’t spend a dime of this money, but the lower 60% or 70% or 80% on the income scale would likely spend most or all of it over time, thereby creating demand for goods and services and pressure on consumer prices.
Asset purchases are the most horrible thing the Fed can do because all they accomplish is further widening the wealth inequality while screwing up the economy and investment decisions. And imposing negative interest rates is the second most horrible thing the Fed can do.
So, in my humble opinion, replacing those two horrible policies with a policy of sending money directly to consumers, with each American, rich or poor, getting the same amount would be an improvement,
There would be costs and there would be risks, but at least all Americans would benefit the same – not just the wealthy.
This will take time to implement. But the folks at the Fed are thinking about it, and they’re working on it, and they’re seriously trying to figure it out.
With these efforts, the Fed is admitting that asset purchases and negative interest rates aren’t working in stimulating the economy, and that they create asset price inflation, instead of consumer price inflation, when the Fed really-really wants to create consumer price inflation more than anything. And sending freshly created money instantly to all consumers would do that trick. You can listen and subscribe to THE WOLF STREET REPORT on YouTube or download it wherever you get your podcasts.
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The more the system gets out of balance the more convoluted the policy implemented in order to restore stability. Just a thought shouldn’t payments based on GDP be made inversely. Lower GDP, higher payments?
Pretty straightforward so far. The Fed inflates Jeff Bezos to quarter Trillion dollars. He in turn hires entire United States Postal Service to deliver chotchkies to Amazon junkies faster than priority mail (incl Sat/Sun). It just works.
I’ve always thought of Bezos as a glorified middle man. Didn’t he earn most of his money the way Elon did? That is, tapping the debt markets.
Agree, Elon is more talented con man.
Actually, most of Amazon’s profits are generated through it cloud computing business, Amazon Computing Services.
The Fed thinks the US$-Reserve Currency is Superman-bullet proof! Fed $$$ printing is the US$-Reserve Currency self inflicted kryptonite!
In addition to economic activity from increased spending, many people would use the money to reduce debt or replenish savings to a reasonable level.
Reducing debt levels would help restore the economy to a healthier balance.
Unfortunately it can’t fix corporate debt … for that you’d really have to change the regulatory and incentive structure, such as outlawing share buybacks and leveraged buyouts. We’d see a lot less corporate bankruptcies if companies weren’t so strongly dis-incentivized from having low debt burdens or holding liquid capital.
You can tell we are in the fourth quarter of the financial system game when they need to say we will do whatever it takes. Policy ideas just become more extreme. They could make things better by giving us all $10 million, but I want mine first.
Distributing money to people will naturally increase the prices and when we have spent our free money in a few months the new prices will be even more difficult to buy … you cannot cure a dead person with morphine! end of story sorry … Léon
Will not the net result – asset inflation – remain, as the recipients funnel their money in the stock market casino
Wolf addressed that. If the transfers were done judiciously in times of actual crisis, the majority of recipients wouldn’t put their payments into the stock market because they’d need the money.
Actually, one could gauge the stock market reaction to assess how much stimulus had gotten to be “too much”.
The problem with this whole idea though is that it’s a huge slippery slope. Everyone would want a Fed stimpack all the time! But the bankers get that now, and Wolf’s 100% right that everyone should be treated equally.
Except that’s another slippery slope – Congress could easily direct the Fed to steer the payments to whatever population was favored at the time. Need to rejuvenate decimated inner cities? Just stimpack those ZIP codes!
But Congress already has that power anyway.
Nah. No “slippery slope”….
Hah! Over Niagara Falls in a barrel!!!! LOL!
What’s not to like?
No more recessions….American Pie every night!!
“See the USA in your Chevrolet”…………
And all that!!
This was mostly pre-ordained after not wanting to take any medicine in ’08-09!
What a clusterphuc!!
The slippery slope is much worse for the current policy of asset purchases, because the Wall Street crowd has outsized influence over policy makers.
If the fed could give money to individuals, the wealthy would tend to discourage this because it would transfer money away from them by raising the CPI instead of their asset values.
I have an idea. Let the bankers support the government that they own and control, and leave us working stiffs with all our earnings to use as we find necessary. Much more efficient and cost effective. We could even abandon their fiat currency and return to a Constitutional money system.
So that sounds great… relatively speaking. Why didn’t they legalize/do that in the first place?
Was it the stigma against printing and mailing money? These days, it can’t look any worse than the alternative. Or maybe it was the worry of individuals abusing the system?
Probably because they wanted to make sure the wealthy had enough before debasing the currency by handing it out to the paupers. Essentially the Cantillon effect.
Because it’s not about saving the economy. It’s about maintain control.
“And however terrible of an idea that may be, it’s a lot less terrible than asset purchases and a lot less terrible than negative interest rates.”
Thank you, this sums it up beautifully.
“There would be costs and there would be risks, but at least all Americans would benefit the same – not just the wealthy.”
I tend to disagree with this though. Apart from the ‘same money for everyone’ principle, this still is an expansion of the money supply, so it will give an advantage to debtors of long duration and a disadvantage to creditors of long duration. I’m not sure what the effect on wealth equality effect will be, given that many high value individuals also have a large liability portion on their balance sheet, while lower middle class may suffer from having a good part of their social security claims against the government wiped out.
There’s no evidence other than wishful thinking that payments would be made “equally to all Americans”. History suggests otherwise. Even the most recent government stimulus didn’t go to everyone who was impacted, only to those below certain income thresholds.
Do you include criminals? If so, which ones?
And do you include noncitizens? If so, which ones?
Do you make payments for children? How do you keep track of that?
And how do you exclude dead people? How do you make sure people cannot fraudulently open multiple accounts? (We can’t even track this for voting yet, and the temptations surrounding free money will be infinitely greater!)
What about the significant minority of people who live in unsafe environments and are behaviorally adapted to avoid accumulating any visible wealth, lest it be forcibly extracted from them?
The FED is stuck in a permanent expansionary policy. Peter Schiff calls it a monetary roach motel.
“And however terrible of an idea that may be, it’s a lot less terrible than asset purchases and a lot less terrible than negative interest rates.”
Thank you, this sums it up beautifully.
Yes you deserve all “continentals: as in :”not worth a continental,”
As a dog returns to its vomit, so fools repeat their folly.
In 1770 under British tyranny taxes where around 3%
yes, you deserve all taxes with represetation.
Why not just lower taxes? Wouldn’t that accomplish the same thing, with the added bonus of restoring some of the capitalist dream to those who produce? BTW, there was no mention of taxes in this plan. So, yes, the government will giveth, but then the government will take the away again, just at a proportionally even higher level than currently because taxes are inflation blind. The “underprivileged” will realize the full (though declining) value of their freebies because they don’t pay taxes. Working people will see inflation get a big share of their new “wealth”, and taxes will eat the rest. Many will wind up even worse off. Stock up on PM’s, instead.
Freebies don’t truly exist. Mr. Richter coined the catchphrase: if the **** is free you are the product.
Federal Reserve =\= Government
Good idea, distributing money to people will naturally increase the prices and when we have spent our free money in a few months the new prices will be even more difficult to buy … you cannot cure a dead person with morphine! end of story sorry …
A quick trip down memory lane.Yellin said recessions are a thing of history. Big Ben now at money vacuum pump Citadel is raking in millions front running the Fed said to the world a decade ago that the Fed was going to normalize rates and their policy was temporary. The present Fed says “free” be-basement fiat cash to the people via direct payments. Is it possible they are just making this shit up as part of Extend and Pretend and they are clueless?
“Is it possible they are just making this shit up as part of Extend and Pretend and they are clueless?”
It’s possible. Or it could be a well planned heist.
This whole idea of sending free money to people (MMT) , while less bad that the alternatives which have been implemented, is another bad idea which ignores the real problem and will never work. I’m surprised that Wolf has put out such a piece.
Most Americans are living way beyond their means and have to reduce their standard of living and start to pay down the debts that have been accumulated by themselves and the government. That’s the only way to exit from this mess that we are in. No politician has the guts to say this but I will.
Credit hard debt is stable and down per capita since GFC. Only debts that are up are housing, student loans and medical. But you are right in america it is living beyond your mean if you think you should be able to have shelter, have access to education and medical care. I think we should come and say this: “those of you in bottom 60% are peasants and it mathematically impossible for you to have these things. Stay in your lane! Also we will lend you money and charge crazy fees and interest when you do try to get any of these services. Cheers, losers, system works as intended.”
Well after all Chillbro they can’t let a majority starve and freeze. The peasants would certainly get out of line. One possibility is to house them in reeducation camps with factories and farms attached, but this could be an unstable situation. I think Elon Musk has the right idea. When the earth has been terminally pillaged the Owners should colonize Mars.
just you watch. a bunch of starving AND freezing poors are the least of their worries.
Yes you are correct.
“Not Worth a Continental,”
“This whole idea of sending free money to people (MMT)”
Which of course isn’t MMT at all – as any fool knows.
In MMT you have to sell something real (spare labour hours) to get any money – otherwise you cause hyperinflation by failing to address the supply side impact.
there is already enough productive capacity, it is just not being used due to lack of demand, hence this is MMT pure and simple. Great to see the FED eventually fessing up to the fact that it can print as much money as it wants to do with whatever it wants and does not need taxation, banks or the bond market in order to do it. The cat is well and truly out of the bag.
MMT isn’t new. The theory was described over 100 years ago. Argentina has been on the same MMT page for decades. Their central bank is part of the Ministry of Finance. It just printed money to pay for government outlays.
In 2000, the peso was worth US$1. Now it takes 150 ARS to buy US$1 … ah yes, on the black market, because a mess like that comes with currency controls. In other words, a peso is worth a fraction of 1 cent.
So over a 20-year period, the peso has lost 99.x% of its value against the USD. What did it? Rampant inflation. Not hyperinflation, just rampant inflation in the 30% to 50% range, thanks to MMT.
What you’re looking at is the result of MMT: the total destruction of a currency, thanks to your strategy, that Argentina has come to master.
What happens when your currency collapses is that people hate that currency and refuse to price anything in it or hold it. So if you rent an apartment in Buenos Aires, you will see USD in your lease, with the rent being payable in ARS at the exchange rate at the time of payment. That’s the system you are promoting.
I know MMTers, such as you, refuse to look at the consequences of MMT. But MMT is old, and it has been practiced many times, and the consequences are very visible. You can just keep being willfully blind and continue promoting this fiasco, or you can look at it where it is being practiced and see what it actually does, not in theory, but in real life.
MMT is very different when you do it with the worlds reserve currency (never done before) v Argentina(many times with currency destruction). This will go on unabated until the USD is replaced by something else. And also when there is globally coordinated MMT by all the central banks. This can and will go on for decades more
This is just a recipe for shrinking the economy. Unhelpful.
what do you think of Richard Werner’s work? (princes of the yen fame). he has long suggested that the goal of the central banks is to be the only game in town. that the plan, or trend at least, is to get everyone an account at the fed (or ecb or cboj or whatever) and decimate or eliminate or absorb our smaller banking system. ‘never let a good crisis go to waste’ perhaps?
the more the fed enters the public’s consciousness and daily lives the more hated an institution it becomes. watch.
End the Fed
I will second that thought
too funny, hadn’t thought about that since meeting 200 or so people before tarp in front of SF fed, mostly middle aged people who saw wanted the banks to take some pain….you could see what was coming back then….
most debt sheep were too wrapped into housing, Vegas, Partying, bling at that time….
debtpushers make drugpushers look like puppies….
Maybe giving rich people a bunch of money makes sense if you actually believe in trickle-down voodoo economics?
So we are all socialists now. About freaking time.
There we go. Socialism for all us, instead of just for the bankers and the asset-holders.
What they are really worried about is the velocity of money is crashing to a halt. Been going down ever since 2008 as the top .1 got EVERYTHING, then sat on it.
Read somewhere that when the carousel stopped during the GFC, and the banks stopped lending to each other, and froze out Lehman, the Fed found out there was actually NO money in their vaults. Everybody only wanted cash at that point. (meaning the velocity of money was zero)
To get the engine of the economy going again, the FED desperately went to the Colombian cartels for $31 billion in cash to start things up again.
Wonder what kind of rate the coke kings got for that deal. Probably better than the standard 11% the bank usually give for laundering money.
What the Fed is saying is they don’t trust their own banks to do the right thing economically.
The source of that article was I.P Freely. Well known among journalists who have made the blooper reel.
Don’t be absurd. Treasury/FRB went to Congress requesting a bill for $750-odd billion in new credit. Massive phone and email to congressfolks resulted in the bill not passing. Next day Treasury/FRB went back to Congress and explained that the sky was falling. Congress passed the funding bill. Paulson/Geithner called in the big banks on a Sunday and forced them to accept additional reserves, needed or not. And we were off to the races. No one won as they continue to move the finish line.
As long as no one expects me to work, I’m OK with that, and I could use the digital money.
yes free digital currency gifts sound great until a hundred million people are dead. then it doesn’t sound so great anymore.
Why are you alright with that ? Is money everything ? Don’t you have dreams and goals to achieve? How sad that sounds honestly
My dreams and goals have already been achieved. I’m 77 and retired and TIRED! I worked hard and paid taxes for 53 years. I’m done. The only real goal I have left is to die a painless death. That’s why I have a 9 mm in the dresser drawer if things don’t go so well.
You younger folks here have to get this government mess straightened out or you are all going to end up like the working class masses in China, unless you are in the 1% at the top of the chain.
Anthony I’m 66 with a new wife and a new life so I’m not where you are but I’m beginning to understand you better with what’s going on in the world lately
I don’t understand you Fred. For those of us with dreams and goals the need to work for money is a terrible obstacle. Please send me money. And if it crashes the present economy that is a wonderful bonus.
hyperinflation is where socialism dies. americas socialism will be dead on arrival.
if we americans spend the free money they way we currently do, it will quickly get into the usual hands and therefore drive up asset prices accordingly. give the poors a nice bender to forget about their plight, and make the usual suspects wait a week or two for the socialism they have become so accustomed to over the past decades. finally, indeed.
1) To deflate Reagan & gov Wilson voters, who escaped CA madness, sold their prop #13 houses and settled elsewhere, with their large bank accounts.
2) To deflate gov support to the chronic unemployed, children without fathers, and the elderly on monthly SS.
3) To inflate the value of delinquent owners of houses, who kick down,
because there is no penalty for NPL, ==> to save the banks & FHA.
4) To save the energy sector, because without higher WTI, the energy
whales will go bust.
Sounds like the Fed wants to implement something like Bitcoin.
FedCoin? FedBits? AmeriCoin? BitDollars?
Yup exactly what Aaron Russo warned us about decades ago is coming true Total control isn’t what this is all about If people accept this nonsense we will all live to regret it
“Sounds like the Fed wants to implement something like Bitcoin.”
I have always considered bitcoin as a trial balloon for national banks. Otherwise it would have been shut down as competing with the fed.
5) To let voters know where the money is coming from : directly from Trump Fed to the voters, bypassing the Dem states gov, who mailed checks late, and states nonpayments to some.
6) Fed on Ted : if Trump muzzle himself, the main street media will
get a heart attack.
Since all policies lead to the same end, they are functionally equivalent. The only benefit I think is that you get to the end quicker with helicopter money.
Have to say it: as far as I know I’m the first person to say ‘just deposit direct’. About 2 years ago on WS. No doubt I’m not actually the first, just the first I’ve read.
This was in response to the idea of ‘helicopter money’ and a practical way of putting money in at the bottom of the pyramid instead of at the top and hoping for trickle down.
I’m going to give myself a credit, although maybe not as much as my Oct. 2018 piece on WS predicting the crash of cannabis stocks, Canada’s especially.
Corollary: “Just withdraw direct”.
Bail ins, wealth taxes, negative interest rates, penalties, fees, emergency taxes, overpayments, all can be withdrawn from your accounts, so long as there is no option to use that dirty, filthy, disease spreading covid cash.
The cash free society-for your own good, whether you like it or not.
Yes, while this is better than the now provenly stupid idea of the wealth effect, and I am glad the fed appears to be interested in a more balanced macroeconomic approach. We still have a system where this amounts to handing people consumption credits where in large chunks of the monopolized economy they get to choose which corporation to donate the money to (as a thick profit margin). The money will still quickly end up in the already bloated accounts of the plutocrats who will use it to buy more assets. The bigger sustainability issue is unaddressed as the money does not adequately flow back and forth via income streams between all socioeconomic classes. Lower classes do more proportional spending so the net money flows are not in their favor. The money piles up somewhere else and it becomes inherently deflationary as the lower classes are perpetually running out of money to keep up consumer demand (when consumers can’t afford to pay, at some point you have to lower prices or simply not make the sale right?). If direct ghost money payments are their best solution to deflation, then this is just going to be another failure for real economic growth. Of course they can also just play their old trick of understating inflation. Problem solved…
Wealth effect for little people?
Yep in my uneducated opinion I wouldn’t be surprised at all to see this *still* fail to raise inflation, since all that money would immediately go to chain stores and landlords and Amazon. It all gets funneled up the chain to the rich one way or another, per the whole CCPP (commonize costs, privatize profits) approach that everyone’s forced to take in the competitive economy now days. And in the end it gets dumped into assets and we’re back where we started, just with a little detour.
Printing up digital coins and handing them out like emojis won’t solve the real problem.
Until the flows are rebalanced, it won’t really matter where you put the spigot. The wealth will still flow to the skimmers.
A gold standard, for all its faults, made the inequities of the skimming a lot more obvious.
When one guy has all the coins and everyone else has none, the solution is to tax the guy with the coins while fixing the broken system which led to the inequality…
@ Rhodium and Matt –
This will be like a Mack Truck hurtling down the road and hits a very, very large oil slick…………….
It will eventually be out of control……….with no recovery.
Stick around; this is gonna be a doozzeeeeee!
In my opinion (haven’t read article yet), this is the bribery, con, to get people accept digital, cashless society. Who will say no to free money. So no resistance. But consequences will be horrible. Final enslavement. No more privacy. Every transaction is being recorded. And taxed. Plus run on banks is avoided. Huge negative rates on savings will be imposed over time.
Later down the road, when we are all totally enslaved and tied to this cashless system, they can lover negative rates so much, average person will be forced to use this cashless ‘money’ as soon as possible. Also, there are planes for timed cash, that expires after a while, if not used.
Means, most will be forced to use their income as soon as possible. There will be no savings for low and middle class. (super rich don’t have wealth in cash anyway)
Which mean, if you will want to buy something bigger, you will be forced to always take a credit. Basically, system is being put in place that you will always need to keep paying off for something, and you will never have any savings. Savings is freedom, payments is enslavement.
Plus, out of this electronic system trades will become a felonies. Since, if you trade some goods for something else, it can’t be tracked. Crime! You exchange few silver coins for something? Crime!
It is coming, it is just a matter of time. I may not live to see it… but it is coming
Innumerable musings from economists and CB strategic thinkers over the last few years do indicate that they tend to view savings in an entirely negative light -as, more or less, a kind of economic subversion.
Unrealised consumption: ‘dead money.’
And, above all, they are horrified by savings that can actually be withdrawn from the banking system as a result of rational assessmentsces and choi made by individuals.
Savings, reserves: the foundation stone -with security of property and personal liberty – of capitalist civilization (see Renaissance Italy, one of the glories of the world, 17th c Holland, 18th England, the great German merchant cities, etc).
But now sinful, subversive, destabilising…..
Yes, the trends are very clear, the old system is dead, and a new one arising – and, in desperation, people will most probably clutch at what they propose if it means they can eat and be sheltered.
If the existential crisis is deep enough, slavery is not rejected or even resented.
Further, it is not even recognised for what it is.
Some tribes committed suicide en masse rather than be enslaved by Rome – but most did not…….
This system will lead to total enslavement. Real interest rates can be made as deeply negative as they want. And they can can put an expiry date on the money, like a pre-paid phone balance. Saving will disappear. For anything big, you can only use credit and be their bitch.
Good luck to them enforcing such nonsense Andby the way according to the Constitution only Gold and Silver is money
Frederick, by the time this system of digital money is in place, the Constitution will be a distant memory.
Only if we allow it Anthony I reject it with every part of my being I know where this nonsense is headed and it’s nowhere good
it’s normal for people to change the rules. they do it all the time. as a fellow conservative i urge you to step back from this ‘only gold and silver’ are money line. it isn’t true. probably never even was true because banking has always meant credit, which is a short position on gold. when everyone stops following the rules they get changed. simple as that.
your reply to former could equally be applied to a proponent of the gold standard: “good luck enforcing that nonsense”
Credit is a reasonable tool in many cases, bungee, if outstanding credit is kept in line on aggregate with reliable outlooks of future deliverable energy and resources.
The problem is that since around about when we reached peak conventional oil we have become ever less able to live up to our snowballing growth in future promises of deliverables, hence why the exponential rise of debt we have experienced over past decades has needed to be created to compensate for the ever growing actual shortfall in ability to repay already existing debts, with the credit assets over time being ever more concentrated in the hands of those who can be trusted not to convert them into actual consumption of energy and resources.
The current system is a ponzi scheme, concentrating wealth in the hands of earlier participants, and it will have bad outcomes for most people when it eventually comes undone. A new monetary system will be required, and in the meantime, holding non taxable liquid reserves outside the current monetary system may very well prove fortuitous.
@ saltcreep –
credit might be a reasonable tool when actual savings are loaned.
when funny money is created to be loaned, that extended credit is theft.
everything you say is true. buy physical gold because our monetary system is gonna change and gold’s going to the moon. but that doesn’t make it money and money wont be backed by gold. THAT is the flaw in Frederick’s thinking.
one nit i have to pick though:
“…ever less able to live up to our snowballing growth in future promises of deliverables”
no problem here. its called print, baby print! payment cannot be forced in terms of real goods and services. only in nominal terms. everyone will be papered over. all the complaining in the mean time is just that. watch.
the interesting thing to observe is who buys our debt as we do this. Wolf does a good job chronicling that saga, though i believe the story is deeper.
“… i urge you to step back from this ‘only gold and silver’ are money line. it isn’t true. probably never even was true because banking has always meant credit, which is a short position on gold. ”
Gresham’s law says bad money drives out good. That is why people hoard gold and silver and spend the “credit” money. Gold and silver are good money and you can see it. Bank credit is bad money and you cannot see it or hold it in your hand.
The bankers can simply buy everything “with the stroke of a pen”. We have given them this power. We need to take it away from them.
Silver is not a monetary metal. The silver bugs like to think it’s gold lite or something. Yes it is a semi-precious metal. Palladium is MUCH more precious but it is not a monetary metal.
In the London warehouses there are stacks of gold bars and countries can settle debts by moving the bars around. This is done physically.
There is no equivalent for silver. Some is warehoused, as is copper but it’s not used to settle international accounts. It could be, but only by special agreement: as a form of barter.
No such special agreement is necessary for gold.
It is always acceptable, and so it is money.
But can I go into store and buy a big TV with an ounce? No. Nor can you with a one of the large denomination US bank notes of the past. In Canada the $1000 C is no longer legal tender. Of course it’s still money you just have to arrange to have it exchanged. This will take longer than it would to have an ounce of gold converted to bills you could use to buy the TV.
Frederick, I like PMs as much or more than most. Unfortunately, no one is using PMs as money. Money is now what traders use to facilitate trade. Somehow the concept of money as a store of value has all but disappeared. It used to be one (just one) of the characteristics defining money. This will not end well.
Totally what this is about “ former” and I for one will not accept any of it. I live very comfortably and have no needs or desires that I can’t fulfill with my own resources
Total control of the population is their goal no doubt
This is once again going to be a massive wealth transfer from the poor to the rich.
Giving money in equal amounts to everybody sounds nice, but the whole point of this is to generate inflation, which is the main vehicle by which wealth transfer from the poor to the rich always take place.
Think about it: a billionaire like Trump is $430 million in debt. That means that every 1% inflation is an annual subsidy of $4.3 million to him, which comes out of the savings of wage earners who are trying to save for a deposit to buy a house sometime in their lives, but cannot keep up because inflation, or people who worked hard and lived within their means, in order to save money for their pensions, which get hollowed out by rampant inflation.
However, I’m afraid many people will fall for this con. “Hey look! I’m getting free money!” And giving everybody the same amount looks like it is a fair deal. But it really isn’t if you look at the overall effect of such a policy.
ANY policy that is inflationary benefits the rich (who have massive debts against assets) at the expense of the poorer part of the population.
@ YuShan –
The correct approach is for every individual to have the right to sell their spare labour hours to the Fed for $15 per hour up to a set number per week (say 35).
If the Fed truly believes in their magical power to set an interest rate that ensures full employment then once the current systemic underpricing of labour is resolved there should never be any takers…
Agreed That’s why I’m buying real estate outside the US and precious metals
The wealthy will spend this money just like they spend everything else that’s been handed to them.
Rich people to not “spend”. The wealthy will “spend” the money on bidding up the price of assets. Just like the Fed has been doing sine 1980s. They won’t buy anything that leads to jobs.
Major league sports franchises, “art”, Ferraris, jets, yachts, buildings, entire islands, reservations to mars, hedge funds and the political campaigns to keep it all going – just to name a few. Not big job creators for sure but they do employ underpaid and undocumented household staff.
it has been proven firmly that money given to Rich Vs money given to poor, poor people tend to circulate the money better in the economy.
Rich people tend to rise up the various asset classes.
The secret to getting ultra-rich is being in the position to spend someone else’s money to collect for yourself. Y’all too late (thinking politicians care about) you to catch on.
Completely agree with “former.” While I understand and agree with Wolf’s points about equal money to all being both “fairer” and far better for the economy, let’s recall who the Fed really is. Private banks. They are not ever on the side of the “little guy” aka average tax paying muppet. As “former” says, this will end all privacy. We will all become little robot things irrevocably hooked to the sugar.
For me – no thanks. I’d rather starve. The whole liberty or death thingee. With respect to Wolf, the criminal class, I mean the bankers, just paid a $billion or so chump change for fixing precious metals markets for decades, fixing Libor for decades. We’re supposed to trust them? What happened to the Treasury? Not that I think Mr. Ally Bank Munchkin is much better.
Agree with everything you wrote and NO Munchkin is definitely no better than any of them that’s for sure He’s vampire squid alumni after all right?
@ Wolf –
I called out Munchkin and several others for the scum they are. You deleted. Have you no stomach for the documented and obvious? Why the edit?
I don’t allow name calling, including of politicians, regardless of political direction. Commenting guideline #7:
@ Wolf –
Thanks. However, I must protest that I was accurately describing and not calling names. Can you honestly say my descriptors were not accurate? Also, politicians from both parties were named as well as other people, mostly from the dubious FED/Banker class. No political leanings.
and we should not let vermin escape from the descriptors that they deserve.
Right now the Speaker is negotiating with the Treasury secretary over the stimulus bill? These are strange times
The White House could have had trillions more being spent into the economy all summer, with support lasting through the election, and they didn’t take the offer from Democrats.
Whoa, lenert. That sentence is a verbatim quote of Joe Weisenthal on twitter.
I have to admit I’m NOT a big fan at all of Joe Weisenthal. If JW ruled, there would be unlimited money-printing until labor was worth ZERO.
haha. you busted him! good job, NAR!
link to twitter comment
unless you happen to actually BE joe weisenthal… try not to be such a parrot, lenert. your comments are from now on TOTALLY suspect.
My apologies for missing the attribution. I am in no way an original thinker – when I see things I make copies.
Don’t worry. Always good to mention where something came from. But here in the comments, our standards for typos, grammar, punctuation, attribution, etc. are somewhat loosey-goosey, as you can see. This is not a vigorous academic environment here, thank goodness ?
Jebus, I hate politics.
@lenert – Get a new keyboard with quotation marks. Look up the definition of attribution.
“spent into the economy”. That rubbish expression gave it away. Joe Weisenthal is a braindead debt-monger bought and paid for by Wall St, IMO.
I received a $20 bill the other day with smiling Steve Mnunskin’s signature. Makes me proud to see to where this country has risen. E Pluribus Unum – One from DAM many.
Asset inflation is nothing but human devaluation and labor deflation.
Maybe it’s the accumulation of cash flows directed by law or regulation towards ownership. I.e, rich people trading against themselves with all the extra money they’ve been granted from the government through privatization and regressive taxation.
Oh, and speaking of human devaluation, someone who doesn’t believe in Socialism is about to get tens of thousands of dollars in public healthcare for which he only paid 750 bucks.
Between quoting other peoples work, perhaps you should read complete articles and learn what alternative minimum tax means. Millions is more than 750.
Also, you might think about what part of socialism he doesn’t believe in.
Look up the definition of loss-carry-forward.
1) It’s Fri. 2PM : bad news day / the markets are up !
2) QQQ : long legged doji, x3 times the size of the previous bar, on lower vol, with a large selling tail.
3) SPY : x2 times the size / half vol.
4) IWM : HQ bar at 2PM, Harami candle, on falling vol.
5) QQQ, SPY, IWM are waiting for another opium hypodermic needle
under the skin.
Interesting info. Feels like a living game of Monopoly now. Not sure if I want to buy Park Place and Boardwalk, or will I have to settle for Baltic and Mediterranean?
OH, forgot to add…but every time I pass go, the fed will E-deposit a check !!!!
At this time the Baltics are doing better than the Boardwalks, especially the ones in HK.
Electric company Take it or leave it
You have to get past Mayfair and Park Lane with a hotel on each first. Risky. If you land on it, you’re gonna pray for helicopter money!
Nope not much will change for me I will still have my avocados, bananas, citrus and chickens
@F – What! No goats? ;-)
This less terrible economic solution may end up having quite negative structural/political implications for American society.
It is possible to argue that the Federal Reserve system has become or is gradually becoming (through accelerating financial crises of various sorts) the key entity for the management of the U.S. and international economy.
In other words, possibly 12 individuals on the Federal Open Market Committee will now have the capability of initiating direct monetary injections into the economy not only through government budgets but directly via households with no debt liabilities attached.
If additional “reforms” are also implemented, such as removing the ability of commercial banks to create money via credit origination (as advocated by some MMT proponents) then an apparatus will have been created that will be largely free of any democratic checks and balances.
You talk in the future tense. I think it has already become what you describe.
Only a neoliberal would call the market “democratic”.
CrytoFed Wish List:
1. “recession insurance bonds” are sold to Americans that make less than $400,000 per year and carry a 4-5% yield. I feel for those over 60 as you either gamble in the markets for yield with the chance of not being able to recover, of you eat your seed corn. We need higher rate “Fed CDs”, at least for those over 60 year of age…
2. Fed buys American based stocks and gives all Americans a tiny percent of each company, and in 50 yearss Americans will own no more than 49% of SP500, etc shares. This could be a way to have companies designn their policy around real people and not just executives, yet a very slow process…
3. Govt does not get involved with CrytoFed policies. Yeah, I know, not likely…
Honesty the CryptoFed is the best looking horse in the glue factory. Until something “less bad” comes along, better than the trickle down BS policies we currently have tried for the past 40 years…
Amazing how many fed-worshippers there are in comments on this website.
True it takes Moar abuse evidently for them to wake the hell up
Frederick, what would you have us do? Empty bellies have started more revolutions than high falutin words. There is no way for this to end well. You will get your wish, and then you will wish you didn’t.
This discussion needs to be elevated and simplified also so that the average person understands what is going on. The most frustrating part is that if the average person did understand it there would be riots and they couldn’t get away with it but most people all believe that “those super smart finance guys” have it all understood.
When it’s put before them, the people will almost always vote for an increase in the minimum wage but it’s hardly ever on the ballot. Weird huh?
To make sure that people remain in “stand by” mode.
Otherwise, things can get hairy real fast.
All just more nonsense from the Fed.
Inflation will always be under-reported, Treasury will insist on it. Fed has no say in the matter, unless they somehow wrest control of that responsibility from the BLS.
This is merely another attempt to do away with paper currency. Just say ‘No’.
I say end the fed, auditing the Fed is pointless
But I will point out here, that this scheme is beautiful from the Fed’s point of view, because they are never audited. This program would be another way for them to reward their friends, for example they would announce $100,000 for every American, but their cousins & cronies and the cousins and cronies of the Fed’s owners secretly get extra accounts or $1,000,000,000 in their account etc. No one except the recipient and one or two people at the Fed would ever know.
Hello Wolf, I am a long time reader but first time writing.
Giving money for doing nothing is a bad a idea. It is better give that money for any kind of useful objective.
For example infrastructure, or cleaning the pollution in rivers or beaches. Or paying young ones to learn practical skills or anything else, but never for doing nothing.
The “useful objective” here is consumption. Immediate consumption to pull the economy out of a recession and bring up inflation. That’s why the Fed is even considering it. We’ve seen how fast consumers spend stimulus money. Give it to consumers, and they’ll consume right away. Once consumers create demand, economic activity follows, businesses produce and invest and hire, etc., and the recovery starts. That’s the theory.
It takes years to plan a highway and get all the approvals, etc., before construction even starts. And the process won’t do much for the economy until construction starts. So building infrastructure and similar long-term projects are not an immediate tool to deal with an economic shock.
Inflation is a horrible thing. It’s just continuous theft.
Just let prices fall. Low prices are good for the consumer.
I’d normally agree with you, but the Fed has created a world where savings is discouraged and debt is encouraged. Most people have no savings and those with savings have it constantly eaten away by inflation.
Not at all. Indlation is the natural recognition that all human deeds depreciate with time. What an adolescent conceit to believe otherwise!
There is no guarantee the FED’s latest money printing scheme will create consumption or the type of consumption defined in the deeply flawed CPI formula. Demand destruction has taken place on an epic scale. That is the problem.
There is no guarantee the FEDs free printed fiat will have the desired effect of creating the type of consumption it measures: the CPI and its deeply flawed formula. Talk about outdated. To illustrate- you can’t create consumption unless you recognize what the demand is. And demand destruction has occurred on an epic scale- at least pre Covid demand. What should we buy? More Amazon? I quit buying make up. Why should I? I have to wear a mask. Cosmetics is over. I guess people can pay rent with their fiat, but there again, it goes straight back to the elites pockets. What else is there? We can’t fly, I mean we can but it’s so inconvenient and people are afraid. Groceries? Ok. Have you even seen NYC lately? It’s deserted. I mean it is deserted. Nobody is going there- everyone has left or is leaving. All the restaurants are closed and/or closing.
Thanks for your explanation Wolf. You are right.
Thanks for clearing my ideas, I appreciate a lot your answer, and that your opinion is always data driven .
Once you mentioned that your barber had cancer and you would continue with him until he couldn’t hold the clippers. “” That’s loyalty””
It touched me.
Keep the good job.
Greetings from Cuba.
I’m now cutting my own hair… my barber has moved on.
Greetings to Cuba. Glad to know that someone in Cuba is reading Wolf Street and posting comments too!!
True but it doesn’t take years to get fat slobs off their couches to clean up the highways, etc Giving people free money is just absurd Just leads to more disfunction down the road and we sure don’t need nor want that What we need is a type of Work fare to be instituted
How about less concentrated wealth, power and ownership. That’s been a root of free money for some time.
And workfare has been with us for some time. There is a fair portion of jobs out there that exist to buy or as p ayment for political votes.
so we now see that the fed can create money out of nothing and spend it. It doesn’t need to tax to do it and it will obviously be very effective. You may not want to call it MMT, why not call it functional finance if that sounds better to you. Whatever you call it, it is the way to go and will change everything.
I know this makes more intellectual sense than pumping up asset prices when trying to revive the economy. But I can’t help but see it as a last ditch attempt to keep the economy from collapsing. Kind of like the sodbusters on the prairie burning the furniture and eating the dairy cow to survive the winter. It may stave off the grim reaper for a while, but I don’t see any way to come back from it.
Thank you for stating the obvious Most are in denial and it will indeed backfire Of this I have no doubt
Sure, like shooting yourself in the foot makes more sense than shooting yourself in the heart. But stupid is still stupid. And corrupt.
Creating inflation is theft from one class to the benefit of another. The root problem is the existence of the FED.
Don’t our elected officials have something to say about this plan to send out free money? Or can the Fed send money to anyone for any reason?
I assume we will have an SPV for direct payouts if the Fed’s actions don’t fit the letter of the law.
Congress will have to pass legislation and the President will have to sign it into law authorizing the Fed to do this. I have no doubt they will if asked. They’re never opposed to money-printing once they’re in power.
Im not convinced the CPI formula is as precise as it should or could be re: prices, weighting, time period covered, et cet. to wit inflation is probably higher than the CPI suggests leaving the FED vulnerable to another policy “mishap”. Inflation could easily slip out of the FED’s control.
Even tho helicopter money isn’t as terrible as QE, it still harms the labor force. Someone on livewire said one time “the west has to take its medicine. . .” I agree, but at this point it’s probably too late so commence with the helicopter money- the last salvo before the dark winter arrives.
On a side note, Pelosi promised the airlines a trillion dollar bail out today. It appears the printer still has ink but the question is whether this temporary fix will cause more harm than the temporary fix was worth. The demand is not there anymore and nobody knows when it’s coming back.
“I’m not sure why this modernization hasn’t happened years ago.”
Maybe 40 years of banking deregulation and consolidation incented bankers to give themselves ginormous, lightly taxed compensation instead of investing in innovation, infrastructure and process control to improve their business?
Those cagey dogs at the Fed actually attempted the Fed coin already but it failed because their systems are way too slow. Funny though when it them they can still manage to use back office wire system to transfer funds same day. But its VERY expensive. Their whole is criminal and outdated and needs to the way of the dinosaur.
We need gold backed or hard backed currency and we would have it already if “Gold safe” was true we simply revalue gold to debt and bam we the people have money instead of worthless backed by nothing fiat
problem is we the people would actually have to be forced into using a gold backed currency. we like credit. a gold backed currency only benefits savers. but there is an entire debt market that will never be restrained. attempting to do so means imposing terrible hardship on people in debt who must pay in gold. when they cant pay, they burn the place down.
as savers today, we dont need to force a new rule on anyone because we can just go and buy the gold. it really is that simple. theyre going to trash this dollar like its ikea furniture on moving day… so its a good day to save in gold.
It’s always been a good day to save in gold if you look at the long term price Buying the lows, even better of course if you’re that lucky Intelligence has little to do with it with the blatant manipulation going on
Ugh with the gold. Midas found out it’s not the answer to everything.
The world is a big place. Man is limited on time and power. Most days man wakes up, does trivial things and goes to bed. Rinse and repeat until he dies.
How did we get here? Our country started out so great. We had independence from a king. Now our independence is gone. Corporations own the news and presttitutes have replaced journalists. When times get tough we demand the government save us. Our military has grown so large and manipulative we should have listened to Eisenhower’s warning. But the greatest enemy of the people rose in 1913 and in August 1971 when Nixon removed gold from backing of the world’s reserve currency the end of the financial system fuse was lit. He said it would only be temporary but he lied. Now the world is run by the Eccles building and their minions of central banks. The game is over and it will soon be time to pick up the pieces and start again. Maybe this time men will wake up and collectively play a bigger role in the world we live and play in. Maybe.
“when Nixon removed gold from backing” — I hear this again and again and have my doubts. I was there and as I remember at the time it was said that De Gaulle did it. Nixon was having to pay for a war at the time and was doing it with dollars. De Gaulle started to convert dollars to gold and Nixon had no choice but to close the gold window.
Well, Nixon could have kept the promise and sent the gold to France. He could have raised tariffs on French products so the US would send fewer dollars to France. Nixon could have required Americans to eat only Freedom Fries. Decoupling gold was a global economic move, not simply a US move.
You’re right, of course, and it was Jimmy Carter, a man who was not a big spender, who was turned out of office due to rampant inflation during his administration thanks to LBJ’s Great Society deficit spending on top of Vietnam War deficit spending. But the national debt even then was a tiny fraction of what it has exploded into today, and the Fed is not going to be able to even pretend inflation’s anything like the 2% it has been blowing smoke about. I do not envy aging, sclerotic Joe trying to deal with the mess that will have become literally putrid when he takes office in 4 months.
The part about ‘recession insurance bonds’ leaves me confused as to what the Fed is saying. Would these payments to individuals be completely free money? Or are the bonds some kind of zero interest loans that have to be paid back if you use the money they deposit in your account? If it is free money and not loans how could that balance out on their balance sheet?
These bonds are just a creation to put something of equal value on the other side of the balance sheet, because a balance sheet must always balance. So if the Fed creates and sends out $1 trillion in digital dollars to consumers, it will have an additional liability of $1 trillion on its balance sheet. So now it needs to create $1 trillion in assets to balance this. So it creates these bonds that pay no interest and are never due. And they’re the asset on its balance sheet.
In other words, the Fed creates $1 trillion in digital dollars (liability) and it creates $1 trillion in zero-coupon perpetual bonds (asset).
The modern double-entry accounting system is somewhat inconvenient when it comes to accounting for money printing. But as you can see, there are neato ways around it:-]
The spice must always flow…
Well it’s time for a new paradigm or in the parlance of Silicon Valley, disruption.
Well, isn’t that special?
“these bonds that pay no interest and are never due” — How is that distinguished from a Federal Reserve Note?
Well, they’re on the opposite side of the balance sheet. The federal reserve notes are liabilities, like the digital dollars will be. These zero-coupon perpetual bonds will be assets. When the Fed sells federal reserve notes to the banks for them to distribute, it gets paid in Treasury securities from the banks in return, and those Treasuries are the assets, like these zero-coupon perpetual bonds.
Notes are always just receipts for liabilities on some balance sheet somewhere. Liabilities that are discounted against some asset held on that balance sheet (including notional ones).
It’s explicit on older central bank notes, like a UK £20 note for example, where it says on the face “I promise to pay the bearer on demand the sum of £20”.
Notes aren’t money. They are receipts for money.
Notes are of course currency, Only Gold is money Physical gold which has no counter party risk
Mr. Richter, interesting and informative to say the least. Let’s see if I can sum this up. The “inflated asset holders” are looking at forbearance, cash flow, solvency, etc. so they need the Federal Reserve to step in and maintain their cash flow in the form of digital money being given to “the indebted” so they can keep the “inflated asset holders” solvent. The Federal Reserve has proven that you can inflate an asset but if it is not generating a source of income then the only other way is to sell it for a capital gain, which in this current market would have potentially deflationary effects. So, the Federal Reserve must keep the circular money flow going so that the “inflated asset holders” can take their cut out of the process and maintain their status in the economic community.
I just got a headache from reading this, but I think you nailed it ?
The whole idea of QE through asset purchases is to make sure the money printing does not course immediate spike in inflation, but rather cause asset inflation (Wealth Effect) that would trickle down to consumers. Basically, the monetary base grows, but the money velocity slows. The prices will rise eventually such as rent that reflects the inflated value of real estate. But the aggregate demand will not grow immediately, but rather over time. What you cannot do is to allow the asset bubble to deflate, as that would destroy most of the freshly printed money and you have to print again on a much larger scale. This is because there is going to an effect opposite to Wealth Effect.
What is overlooked, is where the consumer money go. And that money, to the extent spend on goods, rather than invested or used to repay debt, are used to buy imports. In the last recession, the Chinese Hard currency reserves increased by the same amount as Fed’s balance sheet. It looks like the history repeats itself with the US trade balace hitting all time high of 82 billion a month and that is almost a trillion if projected for a year.
At that speed most of the money already disbursed to consumers will be spent on imports within months. Some, if not most of that money could be expected, under normal circumstances, to be reinvested in the US assets, again inflating them further. But what happens, if foreign buyers start dumping US assets instead to take profit and to fund their own stimulus programs. If the supply of assets for sale grows, either asset prices should fall or someone like Fed should buy them at inflated prices printing still more money.
The previous rounds of money printing pretty much killed US manufacturing, except for a few sectors. More money printing will finish the job, especially given that many of the surviving sectors such as aircraft and car manufacturing have been hit hard by coronacrisis. There is little incentive to invest in capital-intensive manufacturing, if you can buy cheap imports with freshly printed Dollars. The goal of reindustrialization is simply not realistic.
So, if Fed makes direct payments and not buying assets, it would have to accept the risk that asset prices, the backbone of America’s miracle economy, would collapse, should investors rush to cash in, while asset prices are still high. So Fed puts itself totally at the mercy of foreign holders of US assets. This is a very serious risk, as US economy has been very dependent on capital inflows for quite a while and if foreign holders sense that Fed is no longer supporting asset prices, they will start moving their capital to less risky assets.
Another undeclared goal of such direct payments is to keep the budget deficit from balooning to extremes. That is not going to help – the government will still be overspending massively.
Bottom line – Fed will still have to support asset prices, leaving little if any room for consumer support.
Instead of considering direct payments, they would be better advised to look at stimulus programs of other countries, which offered certificates for hardest-hit sectors such restaurants, hotels, arlirline tickets, tours, etc. and pay-outs to families with children. But that should be somewhat complicated for “sofisticated” US system.
“… that pay no interest and are never due” sounds like the “savings” accounts at my bank.
At any bank these days!
Help out the savers and give a time 50% interest rate payout to make up for all the lost interest over the last 10 years of CD rates below 3%. This will help savers spend their money on cars, fixing up homes, buying other stuff they need and want.
The Fed actions are “mildly” “very energetic” yet “moderately” “fatigued”, so the Fed needs an “experimental cocktail”…
Yeah, like Hemlock , Was that politically incorrect ? I thought so
‘When the recession hits, the Fed could just create a certain amount of digital dollars and deposit them into these accounts, and a minute later, you could transfer this money to your bank or spend it via an app or whatever’
Recession proof Economy to infinity!
What are they smoking?
I asked Jay for a sample. Still waiting ?
Consumers will repay their debts to try avoiding homelessness: the Fed’s plan won’t work.
Anything left over will be spent back to the banks. At the end of the day the consumers will be just a broke as they were when this program begins.
How true: those who run the system don’t understand basic concepts and motivations such as ‘the need to have a roof over one’s head’, as they have always had such.
Third generation lawyers are like that.
SPX & IWM : NR.
lol any intervention FRB’s do is fraught with moral hazard and will have adverse non-linear effects that I’m sure they’ll try to paper over with another idea full of this hubris: FRB’s are the only ones who can understand and can control how resources are allocated in a society
Spray and Pray with “recession insurance bonds”, like they’ve been doing with asset “purchases” (more like asset swaps) since 2008… lol what a joke
I’ve been reading Wolfstreet for a few years and this is the first time that I am commenting.
An infusion of money doesn’t solve the real issues that the country is experiencing. People need jobs with livable salaries. With money being injected at random points it doesn’t allow a person to budget their expenses. This will create a society that is dependent on handouts.
However, I do not believe that the Fed should have created the bubbles that we are experiencing. Direct monetary deposits are just a temporary adjustment to their mistakes. I don’t believe that the Fed has any idea how to correct the inequality and jobs problem that they helped to institute.
Hi Karen, thanks for going public :-]
There is at least one more “Karen” here (whose articles you might have seen). So this gets confusing. Could you add a number or letter to “Karen” in the future to distinguish it from the other Karens? Thanks!
I used to date a Karen long before “ Karen’s” became so famous
Karen was the bane of the 2nd half of my life. But I’m getting better now.
Haha, Karen is my real name. After all of the hoopla I am uping my tactics of KILL THEM WITH KINDNESS.
Seems to be working so far?
Will Karen S. Work?
Oops on my name comment. It’s obviously singular-tactic, not tactics. Could I somehow change that?
Concerning “Karen S”: Yes!!
Concerning “tactics” v. “tactic”: if I read it correctly, it seems your use of “tactics” was OK the first time:
Excerpt from my digital Random House Webster’s Unabridged Dictionary:
1. (usually used with a sing. v.) the art or science of disposing military or naval forces for battle and maneuvering them in battle.
2. (used with a pl. v.) the maneuvers themselves.
3. (used with a sing. v.) any mode of procedure for gaining advantage or success…
The problem is concentrated ownership, wealth and power, which the FED has aided and abetted. There will be no voluntary pullback by that concentrated wealth and power, and their accomplices.
Well said, Karen. Nice way to begin posting.
Please just gather up a few of those gold bars in Fort Knox and send them to me. I’ll call us even.
You are assuming those gold bars are there Or that they aren’t just gold plated Tungsten I’m not so sure Have no evidence other than Munchkins trophy wife telling me everything is there That’s reason enough for me to be doubtful
Stupid question. I get why asset inflation is bad, and negative interest rates. I understand positive yields are desireable. But how is consumer inflation a good thing? Doesn’t it put more pressure on CPI which drives govt payments higher? Doesn’t it reduce lower and middle income purchasing power?
The question you have to ask is this: WHO is inflation good for? Inflation means price increases. Who benefits from price increases? (that was a rhetorical question)
Well, one answer is that inflation is good for debtors.
Only for corporate debtors who can raise their prices (consumer price inflation);
Not for many households who have to pay these higher prices but may not see their incomes rise (wage inflation).
Thise past generations sure got the prayers wrong. Should be “If I die before I awake, won’t have to worry that my money is fake.”
bye-bye banks…state or federal chartered, poof. Alligator tears…
Wolf, you give a lot of detail to think about. My thoughts are this is very close to the M.M.T. economy, only the Fed. is spending into the economy with no liability to pay back. How is this differant then the M.M.T. proposal that sovereign dollars don’t need to be paid back by those who create them? Again thanks for your diligence.
Agree. This is not classic MMT.
ZeroHedge article 10/3/20 Dept of Labor bouncing Unemployment Checks Virgin Islands ?
Just someone goofed. Happens. From the DOL:
“There were reports of a timing issue, with the settlement of the draw made by V.I.D.O.L. and the transmission of funds to the bank, that affected the clearing process. Some checks deposited from banks other than Banco Popular may have incurred some issues.”
“How is this differant then the M.M.T. proposal that sovereign dollars don’t need to be paid back by those who create them?”
That’s not an MMT proposal.
MMT just explains how a modern monetary system works. All payments and banking works by creating an asset and balancing liability and then the liability changes hands. The act of liabilities changing hands is “payment”.
The same happens at government level. They create an asset and liability (bank reserves) and then the liability changes hands from Treasury to one of the commercial banks. Who then credits an account somewhere. That’s government spending. The liability changes hands multiple times over time between the commercial banks (at the behest of the underlying account holders) creating transactions and taxation. The taxation is transferred back to Treasury. Run that sequence out and you’ll find government spending is always matched by taxation for any positive tax rate. The only question is when – because what slows it down is people not spending – aka saving.
There’s then an elaborate dance where the savings are swapped for Treasury Bonds which eliminates the original balance sheet expansion. And then we start again.
The Treasury Bonds are just savings. When the savings are spent they trigger the delayed spend/tax/income cycle and that generates the taxation necessary to “pay off” the bond.
The fuss over “paying off” the debt makes no sense because Treasury Bonds are essentially a “store of taxation” as well as value.
The expand and contract dynamic flow is how a monetary system handles a growing economy. It can expand and not shrink back as much.
Under MMT this proposal would be to purchase all spare labour – since that targets the money automatically temporally (it backs off as spare labour is rehired) and spatially (less goes to boom areas, more to depressed), and ensures the output gap goes to those most in need.
So if you’re too old, retired, disabled, etc., or otherwise don’t have any “spare labor” you don’t get any?
MMT -> MoreMoneyToday.
Pensions for such as old age and disability are orthogonal to the Job Guarantee. The pensions’ eligibility and payment criteria must be determined and enacted, and probably revised as political and other needs compel, by some body or other.
The JG has no user adjustable parts, so to speak. The JG pay rate is the same minimum wage as the rest of the labor market. Consider it a replacement for the present unemployment insurance and state job corkboard systems, at least in part.
i find MMT very difficult to follow. your explanation no less so. but the important point is this: “MMT just explains how a modern monetary system works”
mmt’rs claim they are just explaining ourselves to ourselves. where i THINK (hard to even understand them) they are blind is with regards to the trade deficit. the US has had a 40+ year trade deficit. MMT has accepted this as like, a natural and permanent state of affairs. the only way one can come to the conclusion that deficits dont matter is if that continues perpetually. but it wont. everything ultimately comes down to real stuff.
Isn’t high CPI the last thing unemployed, underemployed, or underpaid people want?
You just end up paying people to consume and your currency becomes worthless over time.
Since most consuming stuff comes from China, or naff infrastructure services (SF power grid as an example), then inflation will be two fold.
Salaries will never rise fast enough to compensate for demand driven price rises and currency driven price rises.
What our dear leaders need to do is invest this debt they’re creating in the futures of the citizens.
Roads, railways, industrial base, comms.
Why not create thousands of well paid jobs for local people and local (not multinational) contractors to improve the efficiency of their economies, and something they can see that will benefit their children who will ultimately pay for this debt?
Local gov and communities probably know how to spend this money to improve their lot, so let them.
Do they want opportunity to be productive, or to buy a big Telly or new car from China?
The USA is screwed if it wants the latter.
want nice red car from japan pleeze send big money thanks
You can buy that red Japanese car in Alabama where they are assembled. Note I said assembled.
Those cagey dogs at the Fed actually attempted the Fed coin already but it failed because their systems are way too slow. Funny though when it them they can still manage to use back office wire system to transfer funds same day. But its VERY expensive. Their whole is criminal and outdated and needs to the way of the dinosaur.
We need gold backed or hard backed currency and we would have it already if “Gold safe” was true we simply revalue gold to debt and bam we the people have money instead of worthless backed by nothing fiat
FYI Dept of Labor has been bouncing Unemployment checks in the Virgin Islands in ZeroHedge (Oct 3) it’s for real…is the ponzi over ?
$3 trillion, that’s real money! Isn’t the United States repeating Germany’s mistakes in the 1920s: trying to get out of its misery through money creation? What would happen to the dollar – one of the American Empire pillars? See where the price of gold is going. What would happen to the United States’ credit rating (assuming credit agencies are allowed to do their job properly)? Wouldn’t China – supposedly America’s archenemy – richly benefit from this scheme though additional exports? Come on Wolf, you can do better than that!
Every thing the Fed does, it does to further the agenda of world banks.
The agenda of the world banks for the past 70 years is to gain control over all the governments and nations of the world.
As David Rockefeller said, “The supranational sovereignty of an intellectual elite and world bankers is surely preferable to the national auto-determination practiced in past centuries.”
When you want to control others, dependency is a very powerful tool…..
I won’t turn it down, but this is cake when we need bread.
A sugar high from cake is going to accentuate inequality and hone pitchforks and torches. Food prices are climbing fast. As is the cost of shelter in places outside NYC and SF.
Bread is enough housing, food and medical care. Maybe some infrastructure repair as well, wouldn’t that be nice?
If they really wanted to save the economy they’d be pumping the system to build more housing specifically to sell or rent for less. Stiffly fining owners of residential units that stay empty. Creating a national healthcare system that doesn’t necessitate selling one’s home when one gets sick. Those would be more permanent solutions. Those would directly treat an ill economy.
They have already inflated us into multiple crises, even before the virus. We need deflation. Let the billionaire risk takers own their risks.
At least digital currency will prevent bank runs.
Why would it? If Bank A suddenly jacked up the rate it paid savers from 0.1% APR to 0.15% APR, why would Bank B customers not digitally transfer all their money to Bank A?
But on a less abstract note, the same sucking sound that H. Ross Perot once said (correctly) about NAFTA’s effect on jobs fleeing the U.S. is also true regarding national currencies. The question that is never asked these trillion-dollar-deficit-days is “what did there used to be a gold standard? A silver standard? A cowrie shell standard? In a nutshell: to keep people honest. Now if China, or even Russia, where just a few generations ago Lenin said that all gold was good for was lining urinals, were to issue something that said (as the $USD did till FDR got his hands on it) “payable to the bearer x grams of gold on demand” do you not think that thousands- maybe millions- would not lock to get their hands on it?
Instead, there will be crypto currency exchange runs and crashes…
All crypto currencies still need an exchange, which is the choke and failure point. Just as stocks and bonds need their exchanges to be traded on, and fiat currency needs banks. There is no escaping an exchange of some sort.
Also, the most important issues with digital currency is their loss of privacy and economic freedom. Any government crypto currency will be tracked and controlled. Just like your credit and debit cards are now. They are already digital currency, just not a crypto currency…
I read a good comment on an article describing this new “miracle” financial system. I guy wrote: “We have tried heroin and found it really helps against depression!”
That is a good description. You try a dose once and will need it all the time and more and more each time.
If I were a central banker, Chinese or other, I would start dumping US bnd right away, as soon as I hear something like this being discussed.
That’s a very valid and real point, and China has already been dumping their US bonds for several years, and will probably dump the rest ASAP.
They already threatened to dump the rest of their US bonds if there is any military aggression against them. They have also been stock piling gold for several years too, so they obviously see what’s coming, and are preparing…
Fed mails money to everyone.
Lather. Rinse. Repeat.
Where is Andrew Yang, now that we need him?
Arrogant, insane, suicidal, desperate or all four???! The end is near for the Imperial nation and its fake fiat currency!
Now isn’t this exact thing I’ve been talking about here. A currency reset is coming. Bitcoin was a test. Fiat is coming to a end. This digital dollar is gonna be crypto. Call it what you like but that’s what it’s going to be. And Congress has mulled this over several times. The first Cares act had a digital dollar clause in it they took out. And the next crisis lol. All these crisis are caused by the Fed in the first place. Including this fake pandemic one. It’s no coincidence the repo market was in trouble a year ago. This fake pandemic was just a planned action to get hold of the inevitable. And that was the monetary system was in trouble. And everybody got there pacifier of a measly $1200 which was just yours in the first place anyhow. Stolen from you from taxation. But the real bucks went to wall street. And that $1200 will just be ate up in inflation. Apparently nobody has been to a grocery store because inflation is running rampant there.
And nobody actually owns real estate in this country. It a illusion. Example my grand parents bought property in florida on a pristine lake and built a house in the 50’s. Total price was $10,000. By the time they died they had spent over $100,000 in taxes for that real estate. Now sure that house sold for $150,000. But they also had insurance expenses, maintenance such as several roofs in its lifetime, plus lots more. And all the time the value of the dollar had less purchasing power. Now tell me again how that “asset” gained in value. Don’t pay your taxes and watch how fast they take your house. Nobody owns real estate in this country. You rent it from the government.
One final note.
The Fed is juicing the markets like a Heroin pusher and the markets are junkies. Constantly needing that next fix or withdrawal syndrome sets in. The heroin is getting cut more and more making them junkies needing more to catch the dragon. Is the market gonna OD or is the heroin gonna become worthless junk.