A collection of essays and articles of (varying lengths and rigour) looking at the shadowy Fed system: what it is, what it does, and generally, why it is surprisingly outrageous, unjust, and abominable. Once one looks at the facts and the structure of the system, there is little to debate. So this collection of articles and essays should leave little doubt that the system needs to be totally reformed, if not done away with. Incidentally, we recommend hard money and free banking.
—Aaron Krowne, October 12, 2006 (updated Dec. 6, 2007)
M3 (and other key statistics) ("bart") - This page has a reconstructed M3 (broad) money supply figure, the official version of which was officially discontinued by the Fed in the spring of 2006 (creating an opportunity to inflate money supply and credit behind-the-scenes; more details in many of the writings below).
The Gerbino Principle of Liquidity (Kenneth J. Gerbino) - An LA money manager outlines a framework that explains modern fiat money liquidity crisis; most notably, why the "cure" of more liquidity just makes things worse, which is probably the terminal flaw of the system. Also helps us understand a number of other phenomenon, such as why the system is inflationary in terms of CPI, yet various financial asset classes can be going through "deflation" at the same time.
The Fed and Its Lies (Anthony Gregory at LewRockwell.com) - The last great myth behind the Fed is that it leads to stability. Well, for the power elite, perhaps, but not for the country or international economy as a whole. At the center of this myth is the idea that the Fed keeps inflation in check, which is like saying the Pentagon wages peace. In fact, the Fed’s operations are inflation. That’s what it does. It has caused prices to increases virtually every year since 1913, simply by increasing the money supply.
Immoral Hazard (Jeremy Grantham via Barry Ritholtz) - This piece discusses the Greenspan legacy, placing it in historical context, particularly of political cycles. In sum: Greenspan over-stimulated, causing election-year economic catastrophes (as per usual we have to wonder if this was due to intention rather than ineptitude).
Greenspan's Long-Lost Thesis (Jim McTague via Barry Ritholtz) - In this follow up to the next item, we finally see why Greenspan's thesis was shrouded in so much secrecy: he discussed housing bubbles in it! This makes it rather difficult to plausibly deny recognizing the one which is now collapsing.
Dr. Greenspan's Amazing Invisible Thesis (Jim McTague) - Barron's article on how Greenspan's PhD is probably a sham—no one is permitted to see his thesis. It was somehow produced in a hasty few months in 1977, 27 years after he had earned his master's, and after he had already served as the chair of the Council of Economic Advisors. Perhaps at this point it was deemed embarassing for such a central economic bureaucrat to not have a PhD, so one was engineered.
Breaking Through the Official Fluff (Richard K. Brawn) - Ignore the contrarian-esque title: this piece is actually a well thought out rebuttal of the Federal Reserve financial system and its role in the genesis of the current US credit crisis (which Brawn might call a "fictitious collateral crisis". A key quote from the article:
When the FRB cut their lending rates below what holders of real capital would lend at, the Bank made honest profit impossible. What was traded and packaged was false capital; an illusion created by multiple transactions and complexity. An illusion of profit was created by people who needed to keep their jobs.
Alan, We Hardly Knew Ye (Fred Sheehan) - Think Alan Greenspan was "the Maestro"? Only if not held to any meaningful standard of performance. His nomination to the office of Fed chief was almost derailed by his abysmal track record. Luckily, results are not anything of concern to our government, so the nomination prevailed. Once he became Fed Chairman, he simply coasted by stoking a massive credit bubble.
Inflation, Dow 13K and the Second Great Depression (Michael Nystrom) - Look up there; is it a bird? Nope—maybe a plane? Nope—it's the Dow shooting up in nominal value for no real reason; just another nasty side effect of the Fed's inflationary policies.
The Land of Credit (Succo) - Succo discusses the mechanics of how money/credit creation works in the Fed system. As he points out, based on the data the Fed itself releases, there is a 100:1 pyramiding effect of Fed credit creation on the wider credit market. And this is just the beginning, as these stats don't measure the "non-traditional" derivatives market, which may lever up by another factor of 100 or so.
How Debt Money Goes Broke (Lachance) - A short and sweet piece on how our fiat system is based on "debt", not "money" in the sense of anything with real value, and how this is unsustainable when debt grows faster than the economy. Lachance throws Government-Sponsored Enterprises (GSEs) into the mix along with the Fed (though I think he underestimates the Fed's role, as the low reserve requirement dramatically multiplies the effect of Fed credit in the banking system; see the above article).
US Mint Criminalizes Melting Pennies and Nickels (me) - What the Fed's pathetic record on inflation hath wrought: now pennies and nickels are worth more as melt than as legal tender. Of course, the mint outlawing this activity (or even exporting more than $5 in pennies and nickels!) puts the blame on the citizenry for the government's irresponsibility: the Mint is now wasting tens of millions of dollars per year by minting these coins below-cost.
The FDIC: Worse Than Useless (me) - How the FDIC lends the illusion of soundness to the largely reserves-free banking system, allowing it to become even more unsound than it would otherwise. The FDIC thus acts a foil for the Fed's dangerous system.
Fed And Exec Move to Formally Eliminate Reserve Requirements (me) - Thanks to a recent executive order, the Fed can totally eliminate reserve requirements at its option. Thus, much of what has already beeen going on has received the rubber-stamp of approval at the highest levels, and will be allowed to go to its logical extreme (infinite money and credit relative to reserves). Of course, since we already have upwards of $370 trillion in derivatives, it seems financial innovation has in all practicality already left the reserves ratio in the dust.
Social Security Is A Near Term Problem (me) - Social Security begins to fall short of revenues in 2012. As the only "money" held by the trust fund is in the form of Treasury Securities (IOUs from the government to itself), at this point inflationary pressures will start to rise big-time.
Whatever Happened to War Bonds? (me) - How our system evolved from one in which bonds were used only periodically and sparingly to raise money in emergencies, to one in which public bonds became a structural feature of the government and economy, leading to easier deficits, ever-expanding credit and debt, and ultimately much greater inflation.
Superstition and the Fed (Hussman) - On how the Fed's open market maneuvers actually do nothing, and the waning regulatory of the Fed in general.
The Fed's Open Market Operations Do Nothing (me) - Expansion of this core observation by noting that even "illiquid" securities behave like liquid money these days, and hence are the stuff of bubble-blowing mania.
Why the Federal Reserve is Irrelevant (Hussman) - Focus mainly on the Fed's near-elimination of reserve requirements in the early 90s and how it undermines the Fed's "restraint" role.
What (Really) Happened in 1995 (me) - My take on the above, looking more at the markets and world in general (I espouse the theories of a "gamed Japan" and "gold neutral rate" here).
This Is Not The Same Bond Market That Existed Before 1995 (me) - My analysis of the bond market's behavior (in specific, foreign official purchases of US official securities) in recent history, noting that in 1995 the behavior seems to have inverted and otherwise changed qualitatively, such that more speculative inflation of the private securities markets happens. The culprit? Probably a handful of innocuous changes in Fed policy, but most centrally (and counter-intuitively), transparency!
The Fed's Watching What?! (me) - A critical look at the Fed's favored inflation metric, the core PCE (not the CPI). The short of it is that the PCE subverts true inflation even more than the CPI.
Will The Real Inflation Please Stand Up? (me) - An attempt to figure out what inflation really is (in the real goods and services sense). Using postal rates, I discover that inflation looks suspiciously like M1, which suggests that either the Post Office or the BLS is lying (one government bureau against the other! Let's have a cage match...)
The Bunkness of NAIRU (me) - Some comments on NAIRU, the debunked (but still in vogue in Fed and Wall Street quarters) theory that unemployment should be kept artificially high to keep inflation low. I add the point that NAIRU suspiciously seems to not apply in sound-money regimes.
Is the Prime Rate a Scam? (Steve Waldman) - "..the spread between the Federal funds (and Treasury bill) rate and the prime rate widened from 1 1/2% to 3% in 1991. That was Greenspan's gift to the banking sector to insure that major banks would not fail. You may recall at the time that rumors were rife -- including some repeated on the floor of the House -- that Citibank was about to go under. By doubling the margin between the prime and the funds rate -- and essentially increasing the profitability fourfold after taking into consideration the costs of processing loans -- an inverted yield spread lost all its meaning. And it will never return." -- Mmm, the removal of key "financial moral hazards" in the core functioning of banking--that'll make things more sound! The yield spread point is important: it means the bond market is really no longer even in principle an indicator of inflation expectations.
Why The Long Bond Was Killed (And Why It's Back) (Me, JF@housingpanic, Adam Hamilton) - Three delicious layers of commentary on the Fed's shadow stimulus move of killing the 30-year bond in 2001. The upshot: large-scale buyers of US Treasury securities were forced into 10-year bonds, which happen to be the basis of mortgages, hence dramatically bidding down their yields.
How the Fed failed to prevent the housing bubble (Kurt Richebächer) - General indictment of the Fed for not stopping the housing bubble, by pulling its old liquidity tricks and allowing "exotic" lending.
What's Happened To M3? (David Chapman) - A look at what M3 (as well as M1 and M2 are), the Fed's discontinuation of M3, and what it bodes for the monetary system.
Good as Gold (Donald Luskin) - An attempt to explain what Greenspan did right--and wrong--in terms of a hypothetical strategy of shadowing the long-term gold price with policy interest rates. I build upon this theory in my "What (really) Happened in 1995?" essay above. I now think this "shadowing" was likely unintentional (Greenspan didn't "stop doing it" in 1995), and the Fed didn't realize that its changes in the banking system, combined with "shorting" its gold holdings and Japan's ZIRP had changed the rules of the game.
The Issing Link (Economist) - A now classic (in my book) Economist article looking at the ECB's stance on inflation. Unlike the US Fed, the ECB targets broad money growth. The US Fed, by contrast, ignores it, and to show its contempt, even discontinued the M3 series (see above). There's a chart in this article which compares broad money growth with long term inflation for a large number of countries, and the results are pretty clear: broad money growth ultimately ends up as inflation.
Debtor Nations Dream of Deflation (Eric Janszen) - On the "bubble chain" in the US since the 1970s--tipped off by the Nixon gold-backing cut and the collapse of Bretton-Woods, but increasingly perpetuated by the Fed. We are now coming over the hump of the fourth bubble in this series. He also outlines his "Ka-Poom" theory on how the situation is likely to wind up. Unlike Eric, however, I don't think a "non-hyperinflationary" soft-landing is possible.
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