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Quote of the Day: Fiat Money
No, not THAT Fiat!
The title of the article in Friday’s Wall Street Journal is “Fed Begins Shrinking $8.9 Trillion Portfolio.” The article is a series of questions and answers about how the Federal Reserve will shrink its portfolio of mortgage-backed securities it bought in 2020 “to stabilize dysfunctional markets.” This particular section was quite enlightening:
Q: What does the Fed do with the money it gets from the payment of principal on its holdings?
A: The Fed essentially created money out of thin air to buy the bonds. Now, it will destroy the money in the same way.
When private investors buy bonds, they use cash, borrow funds or sell assets to raise the money to make that purchase. The Fed is different. It doesn’t have to do any of those things because it can electronically credit money to the accounts of bond dealers who sell mortgage-backed securities or Treasurys.
When the Fed purchases a security, it creates a bank deposit known as a reserve that shows up in the account of the seller. When the process is reversed, instead of reinvesting the proceeds of maturing bonds, the Fed erases them electronically. It doesn’t print currency to purchase the bonds, and so it won’t be destroying any paper currency. The electronic money essentially vanishes from the financial system.
The New York Fed provides a detailed breakdown of the accounting on its Liberty Street Economics blog.
If you really think this through, it can be horrifying. The Fed waves its magic wand and “money” appears. It waves the magic wand again, and “money” disappears. To me, this is the best argument against the “cashless” society, since the government can make money disappear in an instant if it wishes. It also tells me that the Fed is backed by, essentially, nothing. If the government can create and destroy money, then none of the public’s funds are secure for a moment.
Published in Economics
The Fed should be abolished at once, and Janet Yellen fired and sent to Econ Class.
Learning the basics of how money is created and destroyed by the Fed and by commercial banks is an essential first step in ending economic ignorance in this country, and the ensuing gullibility of American voters that allows the power of the administrative state to grow without limit.
I am gratified to see the WSJ published this article, and happy to see that at least one person on Ricochet took the time to read it. Good on ya!
I have been an Economics buff since 1991, when I took my first Econ classes at community college. I already had a Masters degree, but had never studied any of the stuff you need for a business degree (AA in Purchasing Management). I learned more about human behavior in my Micro Econ class than in 6 years of psychology. I did very well, and had a minor crush on the instructor. I often visited him in his office to chat about the day’s lesson, and I actually argued with him about an answer on a multiple-choice exam, and won. However, for my Macro class I had a teacher who was a socialist (I still can’t understand how socialists exist, since their ideas are contrary to reality), and we disagreed about almost everything.
Oh, I thought you meant “Fiat money” as a reference to the Italian car brand Fiat and thus the [now obsolete] Italian lira. A consumer needed hundreds of thousands of lire to buy daily stuff, which seems to be where the U.S. dollar is heading due to inflation. :)
Not a surprise.
Not a surprise.
I will agree to this deal with the government. They can do the Italy thing. They can declare that next Tuesday, the price of everything is 100,000 times as many dollars. Or they can call them US lira if they prefer.
In return, they will never again confiscate or try to manipulate the value of our money unit, or attempt to control what we use for money, with the death penalty for any politician who violates the new law.
None of us would gain or lose anything, except for some temporary costs for printing new paper money, coins, price stickers, catalogs, and accounting records, software, and other administrivia.
And we would be liberated from financial slavery.
And we wonder why cryptocurrency, with all its risks and peculiarities, is gaining traction? Of course there’s this:
Long ago, I had the chance to buy one of THESE Fiats, for about $800 as I recall. I probably should have.
After a 8 years of infatuation with motoring from the British Isle, we thought we try an offering from the weakest link in the Axis alliance with something from old socialist organization of Fiat. This was the replacement for the wife’s TR4.
It was certainly more civilized than the TR’s with the single motion roof and better sealing and heater. Handling & suspension was also a leg up on the 15 year earlier technology. It still had it mechanical reliability issues, but the biggest challenge was the seating’s long arms to very short legs aspect ratio. I always felt like I was driving in a partial lotus position. Arms fully extended while my knees were splayed to the sides.
Its demise was from that relentless devil, rust. With a unibody chassis that was the kiss of death.
Yes, I tried the Spider and several other cars – including Alfa Romeo GTV6 and Mazda RX-7 – before finally settling on the TR8. I think I made the right choice.
If the average American actually understood how our financial system works, there would be a revolution.
This is funny.
Driving a Fiat is like having your grandma breathing on the back of your legs.
The 131’s were sweet.
I put the American version of that engine into my TR6.
The Rover V8 came from the GM Aluminum 215 CID developed in the early 50’s and found its way into select Olds (62′ to 63′ F85) and Buicks (61′ to 63′ Special). GM sold the tooling to British Leland around 1965, and they managed to use that basic block with displacements ranging from 3.5 L up to 5 L, and I think it managed to survive in the Rover line up to the mid 2000’s, which at that point the ability to meet emission standards was too difficult for the 50 year old basic design.
Yes, it was called the Olds Jetfire as I recall. It was a great engine. Maybe just too small for what US people wanted in the 50s and 60s.
When I test-drove the Alfa Romeo, it was at Ron Tonkin Gran Turismo in Portland. And the dealer person who accompanied me was Ron Tonkin himself! I guess everyone else was busy… I didn’t miss the opportunity to thank him for sponsoring Sinister Cinema on KATU Channel 2, I think it was.
Ron Tonkin had several other dealerships in the Portland area, his Gran Turismo also sold Ferrari and Lamborghini and a few other elites. I got to see a Countach up close, they’re smaller than people think.
I wound up buying the TR8 from Monte Shelton’s dealership also in Portland, Shelton was an award-winning circle-track racer in England. The TR8 had been slightly modified with a lowered suspension and more open exhaust system. (The TR8 used AC-Delco components for the air conditioning, so I sometimes got it serviced at a Chevy dealership in Salem where I lived at that time. When I drove it into the shop, the guys working on Corvettes and Camaros would look around, wondering where that rumble was coming from…)
Shelton’s dealership also sold Saab, Rolls Royce…
Mebbe I am just a pea brain, but can y’all esplain to me how the FED is going to shrink it’s “$8.9 Trillion dollar Portfolio” when I do believe we are running $2 Trillion plus dollar deficit this year ( who knows exactly with this administration)? The problem being is I don’t believe we can sell enough Treasury bonds to cover those deficits so I do believe besides all the brave talk of “QT” the FED is still going to have to print more money, adding to, not shrinking it’s “Asset Portfolio” particularly when we are heading into what could be a very nasty recession, which historically if it is like other recessions, has driven up the Federal Deficit in a big way.
All they have to do is declare that one NuDollar is equal to 100 OldDollars and poof! The debt is reduced by 99%.
When central banks do anything except back up the financial system in a punitive way, that’s when the trouble starts.
I’m pretty sure the root of it is, you have to be able to switch to an inflationist posture for militaristic purposes. You can’t win wars with a deflationary currency. Everybody knows this. So big countries have to have irresponsible inflationist systems. Then it becomes unmanageable every witch way, which is what we are living through now. 12 straight months of -3.8 wage growth. Real genius. The central planners are terrified of the asset bubble, so what do you think is going to happen to this?
The idiots that voted for Biden supported Biden nominating people that want to force the whole country to have checking accounts at the Federal Reserve. They literally would put money in whatever account they want and then control win this money gets destroyed or not. This literally happened in congressional testimony.
A good explanation of all of this is the interview of Mike Green at Gestalt University. There is a transcript. He favors Democrat solutions, but in other interviews he admits that we are to corrupt and stupid to do it.
Like I said, the route of this is militarism.
Excellent post, thanks for pointing this out. (I went looking for the article, and apparently the WSJ has changed its name: Federal Reserve’s Portfolio Runoff Has Begun.)
Question:
The interest does go poof!
Little known fact. The Fed gives that money back to the US treasury. I think right now it’s about 9% of the budget. A 9% cushion from nowhere. Another reason they can’t reduce the balance sheet. Most of Congress has no idea..
The other thing is, two more points on the five-year bond and the whole West goes broke. They are very limited in what they can do except that, given all of the global chaos there is demand four dollars.
Central planning is a proven stupid idea and we did it anyway.
Chris,
Here is the answer:
For the latest audited year, $86.9 B in net earnings was paid to Treasury ($0 in Capital Surplus). The highest payment to Treasury in recent years was $117 B in 2015, which included $19.3 B in Capital Surplus.
DISCUSS!
Don’t make the money go “poof.” Give it to me . . .
In 1974 I bought a Fiat 128. From the sound of the Fed’s money policy, they might have designed the brakes for that car. There was a long not very steep hill on Madison street in Seattle as it approached Lake Washington. I had to go down that hill to get to my home on McGilvra Blvd East. I remember driving home from work one afternoon, and as I approached the left turn I applied the brakes to slow down. Like the money the Fed makes vanish, so went my brakes, right to the floor without noticeable effect. Fortunately, the handbrake was attached to the rear brakes via a cable. They worked, and by pumping I was able to reinflate the master cylinder and get the brake pedal back up. Maybe the Fed needs a cable wrapped around the necks of its leaders to insure that they don’t cause our money to disappear. Or maybe we just need to hire a new president whose brain isn’t in the same condition as most of the parts on that old Fiat 128.
I highly recommend the Kellyanne Conway interview on Newt Gingrich. She was talking about how 41 got rid of all of Reagan’s people. Why would you get rid of Paul Volker?. That is ground zero.
Rufus: I highly recommend the Kellyanne Conway interview on Newt Gingrich. She was talking about how 41 got rid of all of Reagan’s people. Why would you get rid of Paul Volker?. That is ground zero.
41 was the originator of a lot of our current intractable problems: selling out to China, a government run by the Elites, our current near bankruptcy, and giving away so much power to those behind the Great Reset, etc.
In 1974 it shouldn’t have already been old, but yeah.
Thanks for pointing out an important issue and starting a good conversation.
******
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Funny. The predominance of the evidence is that 41 was CIA. He’s never admitted it, that I know of.
You mean other than being DCI for almost a year from 1976 to 1977?