Friday, 1 March 2013


"27 FEBRUARY 2013

Here Is Something To Think About With Regard to Money

Here is something to think about as the Fed continues to expand its Balance Sheet by buying Treasury (and mortgage debt), with an emphasis on systemic limitations that become a little more apparent at the ZIRP boundary where organic money growth is stultified.

As you may recall, the Fed refunds all profit it makes, that is revenue in excess of expenses, back to the US Treasury. And that includes all the interest collected on the bonds its holds.

So as the Fed buys Treasury debt, and holds it to expiration, it refunds all of the interest payments back to the Treasury, less their expenses.

As long as there is at least one Primary Dealer available to make a market in Treasury debt, the Fed, which is technically prohibited from buying the bonds directly from the Treasury, there is a fairly strong measure of control over both the interest paid and the amount of debt which can be issued.

As a thought experiment, what would it be like if the Fed expressed a willingness to buy ALL outstanding Treasury debt at a set schedule of prices? What are the limiting factors? What happens to the debt payments of the Treasury?

Now what would happen if the Bank of England or the European Central Bank stated the same policy for all the relevant sovereign debt? Would it be the same? Or why would it be different?

At the end of the day, the value of a fiat currency is intimately involved in confidence in the mature judgement and trustworthiness of the parties involved in its issuance.

This is why, although it was superficially 'clever,' the platinum coin was such a dodgy idea to resolve what was essentially a financing disagreement.

As I have said, at the end of the day, the only limiting factor on the Fed and the Treasury is the value at market of the currency, especially with regard to international transactions.

Isn't fiat currency grand?

Here are two very simple models of currency supply 'management.' The 'considerations' could be thought of as degrees of freedom.

I could have added a significant amount of detail to both pictures, but I wanted to capture the 'essence' of the system in each.

In the Tripartite Market System "



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No Banksters  were harmed in the production of this blog.


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