QUESTION: Mr. Armstrong; I have not read anywhere else how the money created by the Fed you call elastic will evaporate when the bonds they bought mature. You seem to do much more in-depth research than anyone else who just spins conspiracy theories leaving one question what is real or not. Can you elaborate on this topic a bit more?

Thank you for a most fascinating blog I recommend now to everyone.

UT

ANSWER: Perhaps you are right. Sometimes when you know the topic, you do not explain it in detail because you assume everyone knows the facts as well. Elastic money was a brilliant idea that, if implemented properly, would help to stabilize the economy during economic declines. The problem is that Congress usurped and transformed it into buying government bonds that do not help the economy at all. The original design was to “stimulate” by directly buying corporate paper. The Fed would create money to stimulate, and when the short-term paper was repaid, the “elastic money would expire. Targeting corporate paper funded corporations when banks were not lending, and thus prevented excessive unemployment.

The Fed would expand the money supply during periods of economic decline and it would contract the money supply as the corporate paper was repaid. There was no such authority to perpetually create money at will on some covert perpetual basis. A banking crisis, as we have now in Europe, occurs when banks cannot meet the demand for withdrawals because they lent the money long-term. They would have to sell their portfolios at discounts to raise cash to meet the demands of depositors. Elastic money would meet the demands of depositors without having to liquidate the portfolios.

Elastic money was not some evil conspiracy. If we returned the central bank to perform its original function, then the economy would be much more stable. Our problem is we live in a political economy where politicians just cannot keep their fingers out of everyone’s pockets.

Advice for Europeans. You should open an account in the United States as your hedge against European banking madness. Europeans can still open in the USA. Americans cannot open in Europe. This should be the best bet until 2020. Switzerland still has approved bail-ins. Canada is not altogether great either. In Britain, the currency is in a bear market and Cameron has lost his mind. So the best bet for now is a US bank account until the cycle reverses probably as we near 2020.

QUESTION: Hi Martin,

How long has the central banking era been going and will it come to an end? How many central banks create liquidity for governments by buying their bonds?

Cheers

SL

ANSWER: I understand that central banks have been demonized and the great conspiracy centers around their ability to create money. Creating money is not really the issue for the amount they have created is peanuts compared to the continued debt created by politicians. Congress just created $1 trillion plus in December 2015 and nobody noticed.

We need central banks as the clearing mechanism and to maintain reserves of member banks. The problem is that central banks are not all created the same. Jackson destroyed the Bank of the United States which did not engage in quantitative easing and had no such power to create elastic money. They simply lent money to Jackson’s opponents. The destruction of the central bank resulted in the Panic of 1837 and the Sovereign Defaults of the states during the 1840s after States had issued debt trying to bailout state banks, which went nuts without a central bank to control anything.

This constant attack on central banks is really hiding what the problem truly is – government. When the Fed was created, it “stimulated” by purchasing corporate paper. It was NEVER intended to buy government bonds. The politicians did that for World War I and then never returned it to its purpose. The FDR grabbed it and ordered the Fed to buy government bonds at PAR which was not removed until 1951.

The problem is always politicians. We need to ELIMINATE public debt and outlaw the federal government from borrowing anyway since it never pays anything back. The Fed’s ability to create money to help the economy in a crisis was limited by itys design to short-term corporate paper. Private sector has to pay its debts. So the right to “create” temporary money made sense for it was eliminated when the corporate paper was redeemed. This was short-term paper.

Even today, the Fed has all this government debt it bought under Quantitative Easing. It too will be reversed, but they bought long-term debt. That increase in the money supply will contract upon expiration of the debt. When the debt expires, it is technically repaid, and the money created by the fed will vanish. That is still elastic money.

It is not eliminating the central banks that will save our future. That would push us over the edge as did Jackson. We need to eliminate government debt and return the Fed to its original design and not off this political manipulation of the Fed to political gain.

Make no mistake about it; the Fed stating interest rates MUST be normalized is not going to help Fiscal Policy. This is a war now or integrity and we should stop bashing the Fed and yell at the real culprits.

As far as when will the central banks come to an end? Well from a clearing perspective – hopefully never. From a government tool to manipulate society – their days are numbered and 2020 looks like a good place to start. If the debt collapses, then the central banks can be returned to their original function. Those who want to shut the Federal Reserve would only destroy the economy exactly as did Andrew Jackson.