Monetary Policy

We cannot have a strong country without a strong monetary system. As of now, we don’t have a strong monetary system. The below chart shows the tremendous growth of money and debt in recent years up until 2015.

Recent growth of the debt and money creation by the Fed follow:

For those knowledgeable about monetary policy, the attached article sums up my concerns, except it does not mention how the federal government’s growing debt is part of the problem:  Grant article re Jerome Powell WSJ June 29 2020 The following article includes an excellent analysis of how the Fed’s recent actions are impacting investments. WSJ article on real bond yields and market moves Sept 14 2020

The following August 13, 2020 letter to the editor explains how the Fed’s printing negatively impacts middle class seniors:  Letter to editor AJC Aug 13 2020

The Fed’s powers are virtually unlimited. Under section 225a of Title 12 of the U.S. Code, the Fed is supposed to “promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” The objective of maintaining moderate long-term interest rates has been largely neglected by the Fed. Letter to the Editor of WSJ about Fed Powers Sep 23 2019 (PDF) (While I agree with Ms. Shelton on this point, I would not have supported her nomination.)  While the Fed did a good job of preventing things from getting worse in 2008 and 2009, it was largely responsible for the boom and bust in the first decade of this century. It should have taken rates back up to more normal rates beginning in 2002.  And, by not taking its rate back up to a more normal rate after 2011 (i.e. post-Great Recession), it substantially subsidized deficit spending from 2012 – 2019.  In other words, in those years, it failed us.  As noted in the attached article, with a low fed rate, its recession-fighting powers are weaker than they were in the past. WSJ article Jan 6 2020 (PDF). This deficiency creates the need for more deficit spending than would ordinarily be undertaken. There is no coincidence here.  Treasury rates track the Fed rate.  Again, the Fed’s actions have supported the huge and constantly growing debt. 

Under Article I, Section 8, of the U.S. Constitution, Congress has the power to tax and to regulate the value of currency. It has turned over some of these significant powers to the Fed.

The growing debt leads to a major concern about tremendous money printing (Quantitative Easing – QE, etc.), with the money used to buy Treasury securities, thereby reducing interest rates while substantively reducing interest expense and debt, with significant inflation being the fallout. Additional talk of placing limits on Treasury yields is taking place. WSJ article on the Fed limiting Treasury yields (PDF).

There is nothing “behind” our currency (i.e. no gold, etc.). The attached materials help explain why printing of money is generally bad, and also explain monetary policy in general and things like quantitative easing (QE).  Two articles on money printing (PDF) | Article Who Prints Money in the U.S. (PDF) In January of 2020, there was $1.75 trillion of cash outstanding.  As of late April of 2020, the Fed had created $1.6 trillion of funds through QE in 2020, to purchase Treasury Securities. The following article, although long, provides an excellent easy-to-read explanation of QE, MMT, inflation and deflation: Alden article on QE, MMT and Inflation and Deflation June 5 2020

The attached document from the Committee for a Responsible Federal Budget shows financial impacts of federal actions through April 23, 2020. COVID-19 tracker from crfb (PDF) Note on page 6 while the Fed originally announced on March 12th that it would purchase $60 billion of Treasury Securities over the next month, ten days later it changed its position and said it would buy $75 billion per day. It has since slowed the purchase rate.

A lot more QE will occur in 2020. What is it? Substantively, it is printing of money. Technically, it is making credits to banks’ accounts in exchange for some asset—generally Treasury debts. So, money is created and the Fed takes over the asset. The Fed will say this is done to reduce bond yields (which it has done, but probably cannot do now) and make more money available for banks to lend (which many did not lend out when QE was very active from 2008 to 2014). It also pushed up stock market values, as investors moved money there for better returns. What you don’t hear much about is much of the real reason: To reduce federal debt and interest. In 2017, Michael Hüther (an economist then working at Stanford) said: “A government loses its democratic legitimacy if it start[s] paying a too-high share of its tax income on interest.” When the Fed receives interest payments, it basically sends them back to the Treasury, reducing net interest expense. In the end, we have more money—that ordinarily leads to inflation. And, inflation is a tax on savers. Individuals should be able to invest in CDs without needing to worry about losing purchasing power due to inflation. The inflation risk for 2021 is covered in the attached article:  Get Ready for the Return of Inflation WSJ Apr 24 2020 (PDF)  A contrary article is here:  Greg Ip Low Rates Take Sting Out of a Big Deficit Apr 24 2020 (PDF)  A very interesting article suggesting bond investors see a gloomy economic outlook largely due to the low rates (perhaps “Japanification”) is here:   WSJ article on bond market’s stall May 21 2020 (PDF) 

Note that the huge federal debt is, and has for over a decade been, driving monetary policy. A good summary of the dangers of the current unending QE policies is here: Ruchir Sharma article The Rescues Ruining Capitalism Jul 24 2020

In its Spring 2017 edition, The International Economy asked 37 economic and financial experts from around the world the following question: “Has the World Been Fitted with a Debt Straightjacket?” Most said yes, or essentially yes. A few said “absolutely not.” Other answers were more muddled. Thomas Mayer, Founding Director of the Flossbach von Storch Research Institute, and former chief economist for Deutsche Bank, said:

It seems Japan’s experience of the last three decades has been replicated on a global scale. . . . As long as there is no exogenous shock to inflation, the fragile equilibrium will continue. Inflation has been very low on trend in Japan since the early 1990s and it has been low in other industrialized countries since the financial crisis of 2007. But the fragile equilibrium will break apart when inflation eventually rises. Then, central banks will be confronted with the choice of either raising interest rates at the risk of triggering a wave of defaults by over-indebted entities, or keeping rates low at the risk of loss of credibility and mass flight out of paper money. Having to choose between pestilence and cholera, they will most likely go for cholera and keep rates down. The consequence would be the long-awaited surge in inflation, which could turn into a collapse of the paper (or “fiat”) money system.

Many of the other experts had somewhat similar views, although perhaps not as bold.  The following articles also discuss the important matter: Undercut The Economist Apr 25 2020 (PDF); and The Federal Reserve Is Changing What It Means to Be a Central Bank WSJ Apr 27 2020 (PDF)  The second article notes the tremendous growth and anticipated growth of the Fed’s balance sheet in 2020, and also notes Janet Yallen’s statement that the Fed will “win out” on the matter (whatever that means).

Instead of simply accepting the status quo, the role of the Fed and its powers need to be thoroughly examined for beneficial change, including express limits on money creation ability (i.e. QE).