QUESTION: Sir,
Thank you so much for sharing your insights via your website. I only recently discovered it and devour the writings daily. In the interest of full disclosure, I am not an economist nor do I pretend to be intelligent enough to portray any deep knowledge on the subject. I do however enjoy watching trends among groups of people and trying to predict outcomes. A hobby. I too was of the opinion that we most likely were looking at a hyperinflation scenario without fully understanding just what deflation was. Now, after reading your works, it all seems obvious.
I understand that one of the USFED purpose was to try to create inflation with its QE programs. We all know how that turned out, but my question to you is; would things have turned out differently if the FED had sent the billions directly to the people instead of the banks. I understand that they had hoped that the banks would have loaned it out and kick started the economy but in my opinion, it would have been better to have put it in the hands at the bottom rungs of society to trickle up as it were.
Your thoughts on this please.
Thank you again,
S
ANSWER: The policy failed because
- (1) the USA is the reserve currency and the money was absorbed externally.
- (2) the policy was indirect. Buying in 30 year bonds ASSUMED they would create demand for long-term and thus support the mortgage market. That failed to materialize because more than 30% of the debt is held externally and China sold to them their 30 year bonds and move their duration window under 10 years.
The idea of QE1 to 2 was totally misguided buying in government paper. The idea this would help banks failed for the banks really did not benefit from that program when anyone holding US debt could sell it to them regardless where they were – i.e. China. Under QE-3 when they began to buy bad mortgage paper that was domestic in its focus and did help the banks. The main bailout was the $750 billion check Hank Paulson (ex-Goldman Sachs) wrote to save his buddies.
The original design of the Fed was correct and would be beneficial if the politicians had been prohibited from borrowing money. The Fed was originally set up with 12 branches all independent with different interest rates targeted to their local economy rather than the one-size-fits-all. To “stimulate” the Fed would buy corporate paper and that would provide capital to sure up the foundation of the economy and prevent surges in unemployment.
This was called the elastic ability to create money which would contract as they resold the paper or it was redeemed. This made complete sense and it mimicked what J.P. Morgan did in supporting the economy during the Panic of 1907.
When World War I came, the politicians decreed that the Fed should buy THEIR government paper and not corporate. From there on, the purpose of the Fed and its structural designed was forever altered. Suddenly, central banks can now monetize whenever the public decides they do not want to buy government debt. The German central bank just bought more than 50% of the government’s debt because there was no bid. The elastic money supply now supports government instead of the economy.
We need a structural reorganization of central banks. We MUST prohibit government from borrowing and that will return banking to banking. We must end proprietary trading of banks and if they want to do that, they should be hedge funds not banks.
If we separate the central banks from supporting government and realign them bank to supporting the economy, then yes, this would have been substantially different. But government debt is money that pays interest since 70% of the accumulated debt is previous interest expenditures. The Fed cannot directly impact the economy in its present structure for everything it does in indirect based upon assumptions that constructed upon the theory they are operating in a fish bowl economy that is entirely domestic. They ignore international capital flows and cannot grasp that capital can jump from one bowl to the next like fish.
