Armstrong Economics Blog/Central Banks Re-Posted Jan 13, 2023 by Martin Armstrong

COMMENT: The Fed….why would anyone put a greedy fox in charge of the hen house. Mr. Armstrong, you, of all people have more than a passing acquaintance with the corruption of the big banks. And these are the kindly gentlemen that have been appointed to “guide” monetary policy for our greater good. Simply don’t understand why you continue to extend respect & credibility, to a gang of thieves.

HS

REPLY: There is a HUGE difference between the New York Bankers and the Federal Reserve. In fact, I am in favor of barring CEOs from Goldman Sachs to head the Fed, Treasury, or any government agency. The Fed has its own agenda and it is not to flood the economy with money for Biden. Powell has said the Fed will not be into the climate change business which is the opposite of ECM and Christine Lagarde, who is a politician, and why the ECB cannot survive. The Feb may have bankers, but their self-interest is against that of the politicians. Additionally, do not paint all the bankers with the same brush as Goldman Sacks which I agree is a giant squid and I believe is a major threat to the world economy.

The Fed was originally intended to be a private bailout entity to replace J.P. Morgan and what he did during the Panic of 1907. Stimulation occurred through buying corporate paper – not government!

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. Elasticmoney would meet the demands of depositors without having to liquidate the portfolios.

Elastic money was not some evil conspiracy. It was to keep money flowing when banks were contracting. Keep in mind there were also limitations on banks to regions. The Clintons removed all restraints and allowed interstate banking which siphons money from local regions and deploys it someplace else. If we returned the central bank to performing 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.

There have been such shortages of cash even during Fed expansion policies because people will hoard their cash in times of economic uncertainty. This is why there are still hoards of Roman coins discovered. Human nature has not changed. During the Great Depression, over 200 cities issued their own money because there was such a shortage commerce could not continue.

We have exchanges even issuing Depression scrip backed by the financial markets. There just was not enough money to facilitate the economy. That is why the Federal Reserve has the authority to create money – not the treasury. We even have the first appearance of such private money that took place in 1815 thanks to the War of 1812, but then to the eruption of Mount Tambora which resulted in the Year without a Summer – 1816.

Here is a private note from 1837 due to the Panic and the resulting shortage of money then as well. The entire ability of the Fed to have the power of elastic money was to be able to create money is times of distress. People have focused on the Fed’s balance sheet and spun all sorts of conspiracy theories. What they do not address is what I was warning the Fed about buying in the 30-year bonds was NOT increasing the domestic money supply because the sellers were mainly China. The money was going outside the USA. This confusion led to others claiming MMT is now the economic theory because increasing the money supply failed to produce inflation. Once again, these ideas were entirely based on a domestic fish bowl economic model. We live in a globalized economy and the expansion of the money supply has no real bearing on anything because those theories assumed the money remains domestically – which has not been the case.

When WWI came, Congress ordered the Fed to buy government paper; not corporate. They never returned it to its original design. When Great Depression came, Congress at the direction of FDR usurped all branches and established a single national interest rate and the board was to be appointed by the President. They ordered the Fed to support U.S. debt at par during WWII to prevent interest rates from rising.

As World War II approached, politics took control of the Fed. Once again the Fed was ordered to support US government bonds at par. This decree was not lifted until 1951. The Fed remained fairly independent thereafter until the Vietnam War. Politicians viewed its authority to increase the money supply on an elastic basis as meant that inflation was their problem, not Congress’. Politicians began to spend whatever they wanted to win elections and criticized the Fed if inflation appeared when they had no control over the fiscal spending of Congress.

The is independent and it has been at war with Congress before. The elastic money power is necessary because the Fed has expanded and then contracted the money supply. I would stress that the Fed returns to its original design and it should buy ONLY private paper – not government. The Fed is stimulating the government under the orders from WWI to buy government paper. It should no longer buy government paper – PERIOD!