What is the Objectivist alternative to the Federal Reserve?

[Wolf DeVoon]

Wolf, what are "Federal Reserve liabilities" that cannot be met by making more dollars--that are true liabilities?

 

Paper money (notes) in circulation are liabilities (promises to pay), shown below.

Next is a 2012 snapshot, kinda hard to read. Paper money in circulation is covered by Treasury bonds. But commercial bank

reserves (deposits) rather unconvincingly backed by Fannie and Freddie (agency bonds) and Maiden Lane distressed MBS.

Slightly hysterical discussion of Fed repos, reverse repos, and "excess" reserves at Casey Research.

Notes in circulation haven't grown much. Today 3/4 of Fed liabilities are bank reserves shown below.

[Brant Gaede]

The real dollar liabilities of the Federal Government are zero. Dollars are made out of paper and ink and electronic entries. The "liabilities" are paid off in the same coin. Dollars chase dollars around in an invirtuous circle. When Argentina borrowed dollars it played the fool; it can't print them to pay off the debt. Sovereign countries should only have debt in their own currencies. Argentina has the real liaibility, the United States does not, no how many dollars it "owes."

--Brant

as the biggest-strongest-baddest country on earth, American financial judgment day is a ways away and is being sublimated by the slow but inexorable destruction of its middle class and (exported) capital

[Wolf DeVoon]

The real dollar liabilities of the Federal Government are zero. Dollars are made out of paper and ink and electronic entries. The "liabilities" are paid off in the same coin. Dollars chase dollars around in an invirtuous circle. When Argentina borrowed dollars it played the fool; it can't print them to pay off the debt. Sovereign countries should only have debt in their own currencies. Argentina has the real liaibility, the United States does not, no how many dollars it "owes."

--Brant

as the biggest-strongest-baddest country on earth, American financial judgment day is a ways away and is being sublimated by the slow but inexorable destruction of its middle class and (exported) capital

I guess we have to agree to disagree. The real dollar liabilities of the Federal Government are estimated at $200-something trillion, of which the smallest part is Federal Reserve currency notes. The biggest chunk is unfunded SS, Medicare/Medicaid, federal pensions and various FHA-FNM-SLM guarantees. We only owe about $4 trillion to foreigners - backed by future taxation, discounted by future inflation.

I don't see any capital being exported. Foreign banks are depositing funds at the Fed, and foreigners are buying U.S. real estate, equities, HY corporate bonds, and mineral rights. The U.S. economy is "the cleanest dirty shirt" and dollars are seen as the strongest currency, second only to the Swiss franc (which the Swiss are frantic to devalue).

EDIT: ...not sure about "biggest-strongest-baddest" any more. Russia has more nukes deployed, produces more oil, has a monopoly on space launch rocket motors, which we buy from them. China has population and steepest real growth. Russia+China is the 'A Team.'

[Brant Gaede]

Ah, facts. It's interesting how they push aside analysis.

--Brant

[Wolf DeVoon]

Ah, facts. It's interesting how they push aside analysis.

 

--Brant

 

??

 

 

 

[Brant Gaede]

Like I said.

--Brant

[Wolf DeVoon]

I'd like to return to the initial question posed on this thread: an Objectivist alternative to the Federal Reserve.

 

Rand was ambivalent about government funding (she mentioned a lottery) and was somewhat innocent about the philosophy of law. If we suppose that there's a well-equipped military for national defense, plus a system of courts and cops, funding such "public goods" can't be left to games of chance. Is it necessary to have a central bank to finance government?

 

The short answer is no. If government runs a deficit during wartime, they can sell securities like any other company. National defense carries a lot of moral suasion. Hollywood pitched Liberty Bond sales of $21 billion for World War I, $185 billion during WWII, and...

[moralist]

A telling pictogram, Wolf...

America has truly degenerated into a nation of unproductive parasites.

Greg

[Jules Troy]

So here we are doing bomb runs in Syria against IS. Iran has a pact with Syria and both Russia and China are in bed with Iran... Anyone else smell WWlll coming?

[Brant Gaede]

So here we are doing bomb runs in Syria against IS. Iran has a pact with Syria and both Russia and China are in bed with Iran... Anyone else smell WWlll coming?

The danger of Russia is from Ukraine. Nobody is going to break a lance for Iran, but for now it's Iran's interest to lie low and let Sunni (and the US) belt Sunni.

The problem is my country is run by a moron. Morons will start WWIII.

--Brant

[Jules Troy]

So here we are doing bomb runs in Syria against IS. Iran has a pact with Syria and both Russia and China are in bed with Iran... Anyone else smell WWlll coming?

The danger of Russia is from Ukraine. Nobody is going to break a lance for Iran, but for now it's Iran's interest to lie low and let Sunni (and the US) belt Sunni.

The problem is my country is run by a moron. Morons will start WWIII.

--Brant

[Jules Troy]

Can't argue with that!

[Frediano]

Well, there is no doubt (IMO) that looking back at our history, central banking was like a gateway drug to socialism.

But my point was, there is nothing fundamental, as in, inherent in the mechanics of what a central bank is if it functions under restrictions, that perverts value-for-value economies.

It is not the mechanical fact of a central bank that is 'socialism.' It is the unattended faulty functioning of it -- the violation of the required non-participator principles-- that is 'socialism.' The abuse of the concept of a central bank. And in reality, if it is the nature of tribal human nature not to be able to resist the urge to abuse it, then it is more that a gateway drug to socialism, it is the one-way on ramp with the anti-backup spikes, because parasitic tribal power does not relinquish parasitic power willingly.

The on ramp is abetted by the following problem: by what Magic is deferred spending, current value, converted into an actual future value?

And its corollary: do we believe, as an act of faith, that there is an actual present value in the promise of a future value?

If we believe that personally, than we personally accept a promise of a future value as an actual present value. But this is not only an accounting transaction; it is an (not 'the')actual means of converting a present value into an actual future value.

It is not 'the money' that is key to this alchemy of current to future value; it is the value.

You create present value. You consume present value. If you end up with excess , deferred present value, then depending on the nature of that value, most value loses value over time. The Universe has rigged that game. That Chevy IROC-Z is going to rust out. That extra loaf of bread is going to rot. That Resort in the poconos that looked so bright and shiny in the 80s is going to look kind of dated 30 years later. That CP/M How To book you offered in 1981 doesn't quite have the same value today. If you -do nothing- with that deferred consumpition present value to -preserve- it, it will be lost over time. It was of value at the time and in the context you created it; the world has moved on. The Universe has exacted its entropic toll on the toll road into the future.

So you get the great idea, "I will sell my excess present value and convert it into cash!"

Great, now you have cash. So put it under the mattress for 30 yrs, and then go out into the future economies and find value for that case. Where does that future value come from? Your original deferred value has long left the economies. Deteriorated, depreciated, consumed. You have in your hand the heating value of the notes in your hand.

But wait; you say, why not certificates 'backed by Gold.' You mean to say, way back when, when you created your excess value, someone took your excess value and handed you over certificates backed by Gold or some other commodity that itself is an actual value of some kind? You could have exchanged your excess present value for the Gold itself, and then just hung onto the Gold for 30 yrs, and then, in 30 yrs...you'd have your Gold. Then, in 30 yrs, you look around for someone in thise new present economies with excess value they want to sell, and you hand them the Gold. Or, as a convenience, Gold certificates, and lather, rinse repeat.

OK, so this alchemy, under this model, depends on the total amount of Gold reserves in someone's hands at any given moment. The entire market for this alchemy consists of retired Gold miners who want something you might have. Or, who have exchanged that Gold with the issuers of Gold backed certificates at some rate.

So, where the future value comes from is clear; it comes from someone who has created excess value in the future who is willing to exchange that excess value for the certificates in your hand. Where the initial value of the Gold came from was from its intrinsic value as a durable desired scarce commodity that is difficult to find and mine and requires effort to bring into a form usable for its desired purpose. And, as well, an initial sign of socialism was the attempt to artificially dictate the value of that commodity and control it's 'price' independent of market supply and demand.

Gradients drive everything. Populations might grow, but economies limited by the supply of Gold as backing for deferred future value will have gears grinding, straining to move forward.

There would be incentive for folks to 'invest' in commodities other than Gold, with their commensurate risk. Even, in the promises of others to create value in the future. Ie, to accept debt-- real debt, backed by a real promise to create value in the future. And our economies evolved many forms of that transaction, and where it was transparent, so that the underlying risk was asessable even if not ultimately knowable, individuals have accepted that risk and that debt as an actual present value in exchange for present value.

When done 'right' -- this is not only acceptable risk, but the required means of turning present value into future value.

There is no future value without future creation of value. There is no future creation of value without the future means of creating that value. And there is no future means of creating future value without investment in the means of creating that future value.

When that alchemy is managed correctly, present value is actually converted into actual future value. (Or, the alternative is to shine our Gold in the future. If Gold is the only value we ever seek, then totally not a problem. Is that the case?)

When we are young, we have no area under the curve. We have no accumulated wealth, the passage of time and our efforts and accumulation of deferred consumption. But what we do have is a future at risk and the potential to create future value. We have the abililty to promise to create future value.

When we are middle aged, we have not only some area under the curve, but are creating excess value beyond present needs. We have the means as well as the need to defer present value into future value. One way (not 'the' way) to do that is to accept the debt of those with the ability to promse to create future value(as their only current asset.) So there is a market, and it is met, with suppliers and consumers of debt.

When we are old, we have more area under the curve, but are in a position of cashing ids,n on old deferred value. DO we eat our Gold? or do we consume new present value? From where? Created by whom?

When this alchemy is managed reasonably, it is win-win all around, at every stage. it is why it works.

But here is the God awful truth; this complex scheme of alchemy can be abused at every turn by every player, especially by our tribal machinery ever searching for 'resources.'

And it has be, to the point that we might have broken it.

regards,

Fred

[Wolf DeVoon]

regards,

Fred

F

[Brant Gaede]

"Faith" is what justifies the current setup but the promulgators don't say that, they say Keynesian science. Keynes was something of a genius whose ideas were absorbed by statists to justify things he never actually advocated--that is, he was in favor of turning the juice on and off, but today nobody's taking away the punch bowl. It's gotten so bad taking it away now a la Volker would result in a world-wide calamity. The Central banks are "all in."

The problem of central banking is the market doesn't set the price of money (debt-credit) causing mal-investments. There were problems before the Federal Reserve was set up through most of the 19th C and the panic of 1907. In that instance JP Morgan effectively did what Alan Greenspan did in 1987--he (and his close at hand associates) was the de facto central bank (they had to stop the panic and make a stand with one NY bank out of two available. They found one could not be saved but the other could so they saved it--I think they literally removed its assets to collateralize a massive loan to it).

Why are the prices of goods and services in a (relatively) free economy what they are? The free market prices them. The Federal Reserve plays pin the tail on the donkey and even when the tail goes on right there is no pricing feedback to speak of so it knows it did it right.

Free market "faith" only means how hard it is to know the future, but you're going to have to let it happen. (Statism thinks it knows the future and is going to deliver it good and hard by statist geniuses pulling and pushing the levers available to them--the little man behind the curtain.) That's why futures' prices go up and down from contango to normal backwardation. It's hard to make money by projecting what the future will be, but that's the nature of all businesses including financial speculation in bonds and equities and those dog-gone futures' contracts.

--Brant

[Wolf DeVoon]

...[Keynes] was in favor of turning the juice on and off, but today nobody's taking away the punch bowl. It's gotten so bad taking it away now a la Volker would result in a world-wide calamity. The Central banks are "all in."

...The problem of central banking is the market doesn't set the price of money [e.g., panic of 1907]...

...Statism thinks it knows the future and is going to deliver it good and hard by statist geniuses pulling and pushing the levers available to them...

It always takes a long while to unpack the complexity and depth of your thoughtful remarks, received gratefully.

I agree with the first proposition, that the central banks are "all in." But we need to explain that Keynes did not invent anything. Keynes formalized Bagehot's 1873 observation that in times of financial distress it was important for the Bank of England to lend freely, or else an initially small contraction of credit would spiral in a cascade of depositor withdrawls, distressed sales to raise cash, and bank closures.

Contrary to your view, the market does indeed set the price of money (which is: availability of credit, the willingness to lend).

A brief review of the Panic of 1907 shows that excessive, irrational speculation in company shares, like the Dot Com frenzy of 1999, as well as last year's Russell 2000 P/E of 86 (10 yr avg = 16) cannot be bid higher and higher to infinity -- and certainly not in a recession.

"The shock that set in motion the events to create the Panic of 1907 was the earthquake in San Francisco in 1906. The devastation of that city drew gold out of the world's major money centers. This created a liquidity crunch that created a recession starting in June of 1907." [source] That was a classic Bagehot example of financial distress: natural disaster. How Morgan responded to the panic, by making huge loans to shore up New York money center banks was exactly in step with Bagehot's cure and had nothing to do with any argument in favor of government central banking.

Tragically, the Federal Reserve Act was a conspiracy of lesser New York bankers who resented their responsibility for sound principles of banking and despised J.P. Morgan's role as banker of last resort. "Money-center bankers drafted the initial reform legislation and funded an expensive public relations campaign aimed at securing mass support and the approval of Congress... Paul Warburg (Kuhn, Loeb & Co.), Frank Vanderlip (National City Bank), Henry Davison (Bankers Trust Company), Charles Norton (First National Bank), A. Piatt Andrew (Harvard economist), and Senator Nelson Aldrich (Rhode Island) ... produced a plan that served as the blueprint for the Federal Reserve Act." [source] Not much has changed since then. New York bankers call the tune and the Fed responds accordingly with bailouts.

Profits are privatized and losses are socialized. It's a racket, like all government.

[Brant Gaede]

Your stuff was better and more detailed than mine, Wolf, but I still take exception about the setting of interest rates. Availability of credit and willingness to learn, though, is we are both right as those metrics are all mixed up with each other. Interest rate on a loan is a risk calculation against the lender's cost of what is being loaned. When that is close to zip it becomes credit-worthiness only, but that ignores the classic banking problem or risk of borrowing short and lending long. If the buyer is credit-worthy and the cost of his loan low he--over the whole of the economy--cannot calculate the real loan-going into or expanding business--his business--properly and might borrow too much to do things that cannot be sustained by business cash flow from operations and profits. This can also have devastating consumer consequences as people who should not be buying houses drove up house prices to their max in the first half of this decade. In that case it wasn't merely interest rates but momentum investing with "liar loans"--as is going on with used car loans right now--with the buyers on the margin expecting to be bailed out by inexorable and unstoppable capital appreciation with the Federal Reserve pumping in massive amounts of liquidity continually lowering what interest rates it directly controlled.

--Brant

[moralist]

Contrary to your view, the market does indeed set the price of money (which is: availability of credit, the willingness to lend).

An economy based upon the "availability of credit and a willingness to lend" can only create a credit/debt based boom/bust economy... instead of a stable capital based economy.

Credit and debt are not capital. They are only a lack of capital. Just like darkness is only a lack of light. This is why the gamblers in the credit/debt casino will always eventually screw themselves over trying to get something for nothing, because there is always a Day of Reckoning...

...and the next one will fall on September 13, 2015.

Greg

[galtgulch]

I just want to take advantage of the opportunity to recommend a book about the Federal Reserve which also presents the history of central banking in America:

G. Edward Griffin's The Creature From Jekyll Island

In case anyone reading this is unaware, there was a secret meeting at J.P. Morgan's lodge in 1910 at which the Federal Reserve Act was written and subsequently passed into law in 1913.

Another revealing book discusses the relevant nine supreme court cases which turned the Constitution on its head regarding money.

Richard H. Timberlake : Constitutional Money: A Review of Supreme Court Monetary Decisions

I own them both but surely they would be available at your local library.

gg

[Wolf DeVoon]

...the classic banking problem or risk of borrowing short and lending long...

 

...might borrow too much to do things that cannot be sustained by business cash flow from operations and profits...

 

...momentum investing with "liar loans"--as is going on with used car loans right now--with the buyers on the margin expecting to be bailed out by inexorable and unstoppable capital appreciation with the Federal Reserve pumping in massive amounts of liquidity continually lowering what interest rates it directly controlled.

 

 

Big picture: We're in a "zero growth" economy (stagnant income, declining employment and hours worked).

 

Rolling unpaid car debt into bigger car debt is the only way to move cars. GM in particular has a lot of unsold inventory.

 

 

 

No problem floating 90-day paper. Profitable companies don't borrow to fund capex. But junk is screeching to a halt.

 

 

Banks aren't borrowing short and lending long. US stuck in financial repression and reduced bank lending (excess reserves).

 

[Wolf DeVoon]

An economy based upon the "availability of credit and a willingness to lend" can only create a credit/debt based boom/bust economy.

 

Dear Electrical Person,

 

No one has said, or intimated, or otherwise suggested that the US economy was or is based on credit. Aside from that, you are an idiot.

I regret that you're an idiot but nothing can be done about it. You are not lending to yourself. You are not a bank. You are a tradesman.

If you don't want to use credit cards, fine. Makes booking an airline ticket or renting a car more difficult, but that's your decision.

 

The rest of us are happy to use financial institutions, mortgages, and simple shit like credit cards.

 

U.S. Household Assets $83.9 trillion, minus Liabilities (debt) $12.9 trillion = U.S. Household Net Worth $71 trillion (2013)

[moralist]

An economy based upon the "availability of credit and a willingness to lend" can only create a credit/debt based boom/bust economy.

Dear Electrical Person,

No one has said, or intimated, or otherwise suggested that the US economy was or is based on credit.

Correct. I'm the only one here who has said the US economy is based on credit/debt... because it is. I even have a name for it:

Creditism

It's sort of like Capitalism... except without the capital. Capitalism runs on capital.... while Creditism runs on debt. Many people fantasize themselves to be Capitalists, when in reality, they're actually Creditists.

That's how you get the wild boom/bust cycles. The economy cyclicly gets all pumped up on debt until the bubble pops, then as it deflates it takes all of the something-for-nothing suckers down along with it.

Aside from that, you are an idiot. I regret that you're an idiot but nothing can be done about it. You are not lending to yourself. You are not a bank.

Correct.

I'm certainly not a bank to you or to anyone else. Only to myself. And I'm not just a bank. I'm also a developer and a builder. The government can't tax the financial transactions I make with myself to fund my ventures. My bank funded the building of two homes with zero interest loans. And the homes were never actually sold, because I hired myself as the developer and builder. So because I'm the one who produced the homes as well as the customer who enjoys them, the property tax basis remains at the developer's wholesale assessment level. Being my own bank, real estate developer, and builder saves me almost $5,000 every year in property taxes alone. Yeah, I'm an idiot all right...

And that's why I'm not the least bit offended by you calling me an idiot, Wolf, because I'm a responsible productive solvent idiot who knows exactly how to manage my own finances...

...and I laugh all the way to my bank.

You are a tradesman.

...and an entrepreneur, and a developer, and a builder, and a bank.

The rest of us are happy to use financial institutions, mortgages, and simple shit like credit cards.

You only think you're using them...

...they're actually using you... sucker.

Greg

[Brant Gaede]

Credit is okay if used carefully. Pay it off ASAP. Savings are better for you're less likely to over-spend. Having sweated buckets to save it up you'll sweat buckets before you spend it. The economy is geared to living beyond your means and excessive use of credit is how this is done.

Banks want your perpetual debt enslavement. They'll offer you zero interest for a year and hope you can't pay it off so they can slap your balances with 18-24% interest rates. As you bump along with maxed out credit and some missed payments the sharks will knock on your back door with offers of another line of credit--a very small amount--so they can set another hook in your mouth. Once you enter the world of default and start missing payments they'll add on every fee and bump the interest rate up as high as possible hoping you'll hold on as long as possible so the balance will inflate even more. Al those extra charges are not even money the bank had ever lent to you; they're just electronic entries pushing up the debt as high as possible to max out on the huge tax write offs they'll take, after you go bust, after selling the debt. When it's all added up the bank may not have lost any of the money it originally gave you and you are left naked and bleeding, and I hope drunk, in the street we call the American economy.

--Brant

that was fun writing that

[Jules Troy]

I use them for buying photography equipment with a card in my company name so I can prove come tax time that they were bought by the company. I pay the transaction off before accruing interest charges though, Good write off, I get money back for shit I would have bought anyway..well I get to keep a little more that they have stolen from me I mean...

[Wolf DeVoon]

Credit is okay if used carefully. Pay it off ASAP.

I have very high credit rating, high card limits, pay off the balance to zero every month, no car note. Socking away every dollar we can.

The next thing I want to attack is discretionary spending. No more nonprofit book projects

Speaking of which, I'm going to sign off for several months, starting Wednesday, to work full-time on a showbiz project.