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Friday, March 27, 2020

This may work out better than we'd imagined

The God-Emperor may - I stress MAY - have already nationalized the Federal Reserve, if these complaints from Bloomberg are on point:
The economic debate of the day centers on whether the cure of an economic shutdown is worse than the disease of the virus.  Similarly, we need to ask if the cure of the Federal Reserve getting so deeply into corporate bonds, asset-backed securities, commercial paper, and exchange-traded funds is worse than the disease seizing financial markets. It may be....

To put it bluntly, the Fed isn’t allowed to do any of this. The central bank is only allowed to purchase or lend against securities that have government guarantee. This includes Treasury securities, agency mortgage-backed securities and the debt issued by Fannie Mae and Freddie Mac. An argument can be made that can also include municipal securities, but nothing in the laundry list above.

So how can they do this? The Fed will finance a special purpose vehicle (SPV) for each acronym to conduct these operations. The Treasury, using the Exchange Stabilization Fund, will make an equity investment in each SPV and be in a “first loss” position. What does this mean? In essence, the Treasury, not the Fed, is buying all these securities and backstopping of loans; the Fed is acting as banker and providing financing. The Fed hired BlackRock Inc. to purchase these securities and handle the administration of the SPVs on behalf of the owner, the Treasury.

In other words, the federal government is nationalizing large swaths of the financial markets. The Fed is providing the money to do it. BlackRock will be doing the trades.

This scheme essentially merges the Fed and Treasury into one organization. So, meet your new Fed chairman, Donald J. Trump. [emphasis added - VD]

In 2008 when something similar was done, it was on a smaller scale. Since few understood it, the Bush and Obama administrations ceded total control of those acronym programs to then-Fed Chairman Ben Bernanke. He unwound them at the first available opportunity. But now, 12 years later, we have a much better understanding of how they work. And we have a president who has made it very clear how displeased he is that central bankers haven’t used their considerable power to force the Dow Jones Industrial Average at least 10,000 points higher, something he has complained about many times before the pandemic hit.

When the Fed was rightly alarmed by the current dysfunction in the fixed-income markets, they felt they needed to act. This was the correct thought. But, to get the authority to stabilize these “private” markets, central bankers needed the Treasury to agree to nationalize (own) them so they could provide the funds to do it.

In effect, the Fed is giving the Treasury access to its printing press. This means that, in the extreme, the administration would be free to use its control, not the Fed’s control, of these SPVs to instruct the Fed to print more money so it could buy securities and hand out loans in an effort to ramp financial markets higher going into the election. Why stop there?
The concerns about inflation - which as a deflationista I don't take very seriously anyhow - are obviously far less important than the potential prospect of the USA taking control of its own money supply again.

Labels: ,

93 Comments:

Blogger [Redacted] March 27, 2020 7:16 PM  

If true, Trump will almost surpass Andrew Jackson and become the greatest US president in history. If only he were to offer a debt jubilee, and to share a massive wedge of cheese with the American people...

Blogger weka March 27, 2020 7:17 PM  

I want to bathe in the tears of the usurious bankers.

Multinational currencies are a mistake. That is why we have Gold.

Blogger Crew March 27, 2020 7:21 PM  

And then there is this:

EO to Order the Selected Reserve and Certain Members of the Individual Ready Reserve of the Armed Forces to Active Duty

Blogger nordicthunder March 27, 2020 7:23 PM  

hmmm, wonder if this would give treasury debt forgiveness
abilities as well

Blogger Crew March 27, 2020 7:30 PM  

The God Emperor can think more steps ahead than others can!

Blogger Crush Limbraw March 27, 2020 7:36 PM  

Maybe you can decipher this, Vox - https://www.unz.com/mwhitney/the-senates-coronavirus-relief-package-must-be-stopped/ - it's way above my pay grade!

Blogger SDH March 27, 2020 7:39 PM  

Never let a crisis go to waste.

Blogger Damelon Brinn March 27, 2020 7:40 PM  

Saw this on /pol/ earlier and didn't know what to make of it. Lots of blackpillers swarmed to insist it means the opposite, though, so that's a good sign.

Blogger Sam Gem March 27, 2020 7:41 PM  

The Art of the Deal: God Mode

The deep state gets the Kennedy Center, Trump gets the Federal Reserve.

Thanks corona-chan!

Blogger Lazarus March 27, 2020 7:42 PM  

The God Emperor is a SNEAKY bastard. The bad guys set the precedent, he makes it work for good.

Blogger Diogenes March 27, 2020 7:43 PM  

IF this means the Fed is finally subservient to the Treasury, that can only be a good thing, right?

Blogger Johnny B March 27, 2020 7:45 PM  

Hey Vox, can we please do a Stupid Question Day entirely devoted to economics. I have a lot to learn (and unlearn).

Blogger AT March 27, 2020 7:48 PM  

Since I'm not a deflationista this is why I'm sextupling my on-hand supply of non-perishable consumables.

Blogger tuberman March 27, 2020 8:03 PM  

Cool!

Blogger Brett baker March 27, 2020 8:07 PM  

"Count of the Sacred Largesses Mnuichin" sounds glorious!

Blogger Nihil Dicit March 27, 2020 8:10 PM  

then-Fed Chairman Ben Bernanke. He unwound them at the first available opportunity

Bollix. He just swapped the flow from the money faucet to different buckets, still all under the auspices of the banksters.

This means that, in the extreme, the administration would be free to use its control, not the Fed’s control, of these SPVs to instruct the Fed to print more money so it could buy securities and hand out loans in an effort to ramp financial markets higher

"He's cutting us out as middle men! HOW ARE WE SUPPOSED TO CHISEL NOW?!?!?!?!?!?"

Blogger peacefulposter March 27, 2020 8:23 PM  

instruct the Fed to print more money so it could buy securities and hand out loans

Neither of these measures is very effective.

Buying securities is simply an asset swap and doesn't increase the net worth, or even expand the balance sheet, of the private sector.

Handing out loans doesn't increase the net worth of the private sector either given that the increase in assets is matched by an equal increase in liabilities. However, at least the balance sheet is expanded.

Blogger James Dixon March 27, 2020 8:28 PM  

> IF this means the Fed is finally subservient to the Treasury, that can only be a good thing, right?

Yes. Well, at least IMO.

Blogger Silly but True March 27, 2020 8:30 PM  

So for naysayers, there’s already precedent going back two Presidents.

Too bad. So sad.

Where was all the whiners bitching about nationalists Obama & Bush?

Blogger Jose Miguel March 27, 2020 8:45 PM  

Amen! If the God-Emperor kills the IMF too, he will be remembered by history world-wide as a type of Christ in casting out the moneychangers and loansharks in the temple.

Blogger Doktor Jeep March 27, 2020 8:48 PM  

Meanwhile, the president is calling up the Inactive Ready Reserves, and the department of labor is suspending affirmative action guidelines, probably because the gov is looking to buy masks and someone is pushing that "it must be from a minority owned company" garbage.
When Trump says "invisible enemy", he's not kidding. But knowing what we are dealing with, escalation is their course. Already leftist controlled areas are wanting extended lockdowns. What was the modus operandi of communists in the early 20th century? Take over infrastructure.
On an additional note, after years of libertarian begging for a fed audit, look at what we have now. Libertarianism cannot be achieved with libertarianism. That's a fact.

Blogger Silent Draco March 27, 2020 8:51 PM  

Let me think on it for the 2-3 days needed. The tell will be just how much screaming happens on the Sunday morning propaganda shows.

The U.S Treasury as "first loss", or first creditor served.
Calling up a million men from Reserves and National Guard.

My guess is the NG for CA, NY, MD/VA, and PA will be the first Federalized.

Blogger Newscaper312 March 27, 2020 8:53 PM  

@few
Supposedly that Reserves call up is for various kinds of medically trained personnel, not something more general.
But it does not specifically limit it to that.

Blogger tublecane March 27, 2020 8:54 PM  

I don't find it necessary for anyone to be in control of the money supply, and we were better off between the fall of the Second Bank of the U.S. and the ascendance of the Fed Cartel.

However, it is important that no one else be in control of our money supply. How we ever let a private banking cartel maintain control for so long is beyond me.

@11- Well, it is a lot of the same people at Treasury and in the Fed system. They're both run by the Managerial State. It's not as though Hank Paulson threatening Martial Law if he didn't get his way wasn't in the interest of Ben Bernanke.

The question is whether politicians matter, and sometimes they do. Politicians have little to no sway over the banksters on bankster turf like the Fed. (Though admittedly they have some.) They have more over Treasury, which is theoretically answerable to the Congress and the White House.

With a Strongman President like Trump, I imagine there could only be an upside. With a president like Obama or Bush, the difference would probably be nil.

Blogger Stilicho March 27, 2020 9:05 PM  

I had not considered it in this fashion. When I saw the Treasury statement earlier, I thought it was just backstopping the Fed and didn't consider the potential breadth of using the SPVs across the equity markets and beyond (into hard assets as well). This will effectively back the dollar (at least partially) with various assets purchased via the SPVs. Very interesting. TGE is not one to let a tool go to waste if he thinks he can use it to achieve his goals.

Blogger Crew March 27, 2020 9:24 PM  

The God Emperor now has $Trillions, Troops, support in the Senate and a crisis.

Is the Storm upon us now?

Blogger Weak March 27, 2020 9:43 PM  

It looks like this is a vehicle whereby a debt jubilee could be enacted. A SPV to make the Fed buy up student loans or other private debt classes.

Blogger Jack Amok March 27, 2020 9:43 PM  

Already leftist controlled areas are wanting extended lockdowns.

And look in admiration at what Trump is doing - he's creating guidelines that will say whether or not those extended lockdowns are sensible or not - so local officials who want to keep things locked down when the data says no need will be exposed. And not only that, it's county-by-county, so you can't use NYC's chaos to justify emergencies in upstate NY.

Blogger Johnny March 27, 2020 9:43 PM  

There used to be a thing called the business cycle. It is still around in reduced form. In yea olden day it was a bigger deal than now. Actually, it was a credit cycle. When loans seldom went bad, banks would loan money more easily. It produced an accumulating trend toward easy credit. Often it would last about thirty years. Credit got easier and easier until some group or industry would upchuck and not pay the bank back for its loan. Routinely some banks would tighten up credit, not make loans. Other banks would fail completely and the economy would slow a lot. A recession or depression followed. Not documented with empirical evidence because they were lax about keeping records prior to the twentieth century.

That was part of what the 1929 stock market crash was. People buying stock on margin that had to sell because of the margin. As margin is just a word used to buy stock on credit, it was excess borrowing. I think it was around the 1880's that they had a machine tool blowup. Excess borrowing on the hot industry of the day, machine tools. Andrew Jackson caused a big recession or depression in his day also. It was collateral damage from his bankrupting the national bank. Excess debt on western land speculation was the financial weakness. Land values went down and numerous eastern banks went bust.

By one device or another the modern system is for the Federal Government to pick up the expense of loans that go bad. I don’t follow it close enough to know all the details, but I believe it can be a direct bailout, or some federal agency buying marketable loan products at full face value when the loan product would be discounted sold to a private party owning to risk. It commonly bails out the bank that held the loans, but covertly enough that the public doesn't quite get it.

I would imagine the current maneuver in your article is the same thing. They say cranking up the printing press, but that is not actually what happens. What happens is the government or the fed or somebody borrows money based on its good credit, and then uses the funds to buy up loans that do not have a good credit rating.

If your teenage son wanted to buy a car and lacked credit, but got the loan because you cosigned it for him, it would be the same thing. You using your good credit rating to cover for the poor credit rating of your son. And of course, if your son doesn't pay up, you take the hit.

The good part is we don't get a recession or depression, the bad part is that excessive debt is encouraged. The debt growth is global in part because we subsidize reckless borrowing. We are financially weak owing to all the outstanding debt. Let some of that debt go bad and the economy would crash.

If you want to do your student loan forgiveness, the only workable way without shutting down the financial system would be to have somebody or some thing pick up the loan. Federal Reserve, Treasury, any other agent of the federal government; all the same thing. Directly or indirectly it would be the government picking up the outstanding debt.

This stuff could get fixed, but it is not going to get fixed, not unless Congress quits spending money (fat chance of that), or we have the mother of all financial blowups. A true debt jubilee would terminate our industrial economy.

Blogger Fozzy Bear March 27, 2020 9:51 PM  

The way I read it, the Treasury is scooping up $2.5T in equity, at depression-reduced prices, and even then only at 10c to the dollar. Not a bad basis for a new dollar, especially if the Fed implodes and Treasury is left holding the assets. If they wipe out the China debt for reparations, they could buy another $10T or so of depressed stocks, and have a truly massive sovereign wealth fund, and with a ban on stock-buybacks, Treasury would be raking in the dividends.

Blogger John Rockwell March 27, 2020 10:00 PM  

@weka

No more money for pizzagate activities. Ohhh nooooo.

Blogger CanticBear March 27, 2020 10:01 PM  

:WAR CASTLES.-

Blogger Weak March 27, 2020 10:34 PM  

Oh, that's an interesting angle Fozzy. That this could be used to nullify all the debt China is holding.

Blogger Barbarossa March 27, 2020 11:26 PM  

@23 Since the entire combined size of the Selected Reserve isn't even 800K including the National Guard (Army and Air) as of DOD reporting (Feb 2020), a million man callup is definitely signaling much more than "we need medics!" Plus recalling reserve medical personnel is to shuffle around deck chairs. It's not like these folks are Navy dentist one weekend a month, two weeks a year, and bar bouncer or Walmart greeter the rest of the time.

Additionally, the million man marker on the table tells us that the president is prepared to dip into both the IRR and Retired Reserve to make up not only the nominal 200K deficit but the actual much greater figure once key personnel in civilian jobs, single moms and the physically disqualified are removed.

Blogger Ominous Cowherd March 28, 2020 12:59 AM  

Barbarossa wrote:@23 Since the entire combined size of the Selected Reserve isn't even 800K including the National Guard (Army and Air) as of DOD reporting (Feb 2020), a million man callup is definitely signaling much more than "we need medics!"
It's ``not to exceed 1,000,000.'' The NTE number is usually set high enough there is no danger of bumping into it.

Blogger map March 28, 2020 1:02 AM  

The Fed really has nothing to do since we got off the gold standard. The Feds job since it was established was to maintain the gold standard...under the Bretton Woods system at $35/oz. Without the gold standard, the Fed has been flailing around causing damage left and right. Bringing this entity under control of the treasury is a good idea.

But...VOX...you do not want to be a deflationista. Deflations are horribly bad. A stable monetary system is what you want. The whole purpose of a gold standard is to prevent inflationary and deflationary errors.

Deflations are bad because they hurt debtors and help creditors. The nominal value of loans do not change but they are paid in more expensive currency over time. Deflations, in fact, are what led to the creation of the Federal Reserve because so many farmers were hurt by the deflation caused by America's switch to a full-blown gold standard. Deflation was the basis of the 1896 presidential election.

Blogger xevious2030 March 28, 2020 1:04 AM  

No recorded vote on the $2 trillion deal. No Presidential seal on the podium to make Trump a lackey to either part of Congress. He was supposed to fail, oops.

Blogger Ska_Boss March 28, 2020 1:29 AM  

Huge if true. Notice the shilling against Mnuchin?

Blogger Bobiojimbo March 28, 2020 1:45 AM  

Cool. We really are living in interesting times.

Blogger Jack Amok March 28, 2020 2:00 AM  

But...VOX...you do not want to be a deflationista. Deflations are horribly bad.

It's not football game where you pick a side to root for. You either think deflation is the likely outcome, or you don't. What anyone wishes for is immaterial at this point, the crash is on autopilot now.

And on top of that, you're wrong about deflation being bad. In our current system, it would be excellent. It would hammer asset values and reward people who work for a living vs. collect rent for a living. In a society where a handful of phony, connected "elites" used their access to the money spigot to buy up a bunch of assets, gutting the asset values is the best medicine.

But regardless, it's not a popularity contest. The system will collapse how it collapses. Of course stable money would be better, but that's not a realistic outcome given the current system.

Blogger Mathias March 28, 2020 2:50 AM  

@ map,

You have it backwards, deflation is good because it disincentivizes borrowing, depressing prices across a market, making property cheap enough to obtain without debt in the first place. The issue of the negative effects on current debt holders can be resolved with a combination of jubilee and and sovereign refusal to enforce recourse to persons on usurious loans.

Blogger Azure Amaranthine March 28, 2020 2:51 AM  

"I don't find it necessary for anyone to be in control of the money supply, and we were better off between the fall of the Second Bank of the U.S. and the ascendance of the Fed Cartel."

The problem being that someone is going to take control of it by hook or by crook eventually. If it isn't someone whose name and bed location you know, it'll be someone you don't know either thing about.

"you do not want to be a deflationista. Deflations are horribly bad. A stable monetary system is what you want.

At this point we can't get to that without massive deflation. Anyway, you're the last person who should be economically advising anyone else, since:

"Deflations are bad because they hurt debtors and help creditors."

You're not even aware that debt is the source of most inflation. Debtors paying back creditors? Causes deflation with how our system works.

"No recorded vote on the $2 trillion deal. No Presidential seal on the podium to make Trump a lackey to either part of Congress. He was supposed to fail, oops."

Epic if he just ignored the whole bullshitshow and this is him yanking their chairs out.

Blogger VFM #7634 March 28, 2020 4:23 AM  

“If you owe the bank a million dollars, you’re in trouble, and the bank owns you.

If you owe the bank a billion dollars, the bank’s in trouble, and you own the bank.”

And guess who actually originated this saying...

Blogger Grooveware March 28, 2020 4:29 AM  

Thank God we come into money last year instead of buying fancy pants and lollipops we paid of the mortgage and other debts, today have no money but debt free for the first time in our lives and keeping it that way.

Blogger Gettimothy March 28, 2020 4:50 AM  

To put it bluntly, the Fed isn’t allowed to do any of this.

Muh principles. Hurrumph!



When the Fed was rightly alarmed by the current dysfunction in the fixed-income markets, they felt they needed to act. This was the correct thought.

Pilpul is muh other principle.




Blogger Brett baker March 28, 2020 6:44 AM  

The real problem is the rise in unemployment as people don't buy as they think things will be cheaper. Also, under a TRUE deflationary climate, wages also fall. Way too many gold bugs think, "Martha and I will make $60,000 a year, while bread falls to a nickel a loaf, gas a dime a gallon, and a house will cost $2,500!". No, more like you'll make $1,500 a year if prices fall that low.

Blogger Franz Lyonheart March 28, 2020 7:00 AM  

Crush

Maybe you can decipher this, Vox

It means exactly the same that Vox reported. He simply interprets it differently, or rather, that the benefits of US Treasury control over the Federal Reserve, which this arrangement "MAY" bring, if utilised correctly, will outweigh the potential downsides of debt expansion followed by inflation of the dollar.

I also have a question for Vox - I'm not entirely sure what you mean by "nationalising the Fed". I interpret it as putting the FRB directly under the control of the US government,as perhaps a department of the Treasury. I also understand that in conventional economics, the independence of the central bank from the government's finance ministry is considered a "good thing". E.g., independence of the Bundesbank from the German government, and (introduced by Gordon Brown iirc) the independence of the Bank of England from the UK government. Is the Fed/Washington arrangement similar in nature? Or is it fundamentally different from these European counterparts? Where could I read up on this topic, to educate myself better about how "central banking" works for different countries?

Blogger VD March 28, 2020 8:09 AM  

I also understand that in conventional economics, the independence of the central bank from the government's finance ministry is considered a "good thing".

Yes. And conventional economics also states that it doesn't matter how much domestic debt exists, or who owes whom. Conventional economics is completely wrong. There is zero advantage to an independent privately-owned bank pursuing its own interests rather than that of the nation whose money supply it controls... except for the owners of that bank and their friends.

Blogger VD March 28, 2020 8:11 AM  

But...VOX...you do not want to be a deflationista. Deflations are horribly bad.

Who said anything about "wanting" anything? Deflation is coming. Get your head out of your theoretical idealism and pay attention to what is actually happening.

No one, least of all the global economy, cares what you or I want.

Blogger Mathias March 28, 2020 8:25 AM  

@ Brett Baker

Think again, in an inflationary climate, people are chasing real goods in preference to money, because money loses value over time. This generally means that prices of goods rise before wages do, hurting the wage earner. In a deflationary environment, this still holds true, but in the opposite direction. The prices of goods lowers before wages do, gaining a benefit to the wage earner. Also note that no matter how deflationary things get, people still have to eat and maintain their homesteads and vehicles, so there is always money being spent, no matter how valuable it is to hold onto it.

Blogger Johnny March 28, 2020 8:32 AM  

When we were on the gold standard, private banks printed their own currency. Legally if a customer came in with thirty two dollars of paper script, the bank was required to give the customer an ounce of gold. Enforcement was weak, but the standard worked. Throughout the nineteenth century the dollar tracked gold and the two remained stable in value. Remarkably stable for a currency.

Back then, because transportation and communication were poor, a big part of the economy was local. When a city was small enough that it had only one bank, the local economy would run on that bank. The depression was often local if the bank failed. For reasons I won't go into, the gold standard made even well run banks weak and potentially unstable. The upside was a stable dollar value, the downside was numerous local depressions. Banking worked well enough in New England, the industrial center, and badly everywhere else. Lots of bank blow ups and local depressions.

Blogger Newscaper312 March 28, 2020 8:35 AM  

A slow motion deflation would ultimately be a good thing. It would tend to discourage people going into as much debt in the first place, or for shorter terms at least. It would make foregoing debt easier to do with lower prices.
And given actual technological progress' productivity gains (where not eaten by increased regulation) some deflation should be an entirely natural outcome.
Ultimately you will make less money too, but what you make will be worth more.

Blogger Avalanche March 28, 2020 8:39 AM  

@33 " That this could be used to nullify all the debt China is holding."

And one of the things they teach in sea rescue is: stay as far away as you can from the drowning man, so he doesn't pull YOU under the surface in his panic! Push him a life-ring if you've got one, but don't drown yourself trying to buoy up someone else!

Blogger Avalanche March 28, 2020 8:45 AM  

@42 "I don't find it necessary for anyone to be in control of the money supply, and we were better off between the fall of the Second Bank of the U.S. and the ascendance of the Fed Cartel."

The problem being that someone is going to take control of it by hook or by crook eventually. If it isn't someone whose name and bed location you know, it'll be someone you don't know either thing about."


Who do we know who says that any corporation or organization that is NOT immediately and forcibly guarded against SJW entry WILL end up converged? Why are we mostly members only on YT chat?

Blogger Avalanche March 28, 2020 8:48 AM  

@46 "people don't buy as they think things will be cheaper."

Because they are good little "homo economicus" who make entirely rational decision about money? Not the people *I* know!

Blogger Johnny March 28, 2020 8:52 AM  

The trigger for the 1929 stock market crash was stocks purchased on margin. The stock buyer would give money to a brokerage house. The broker would borrow money to the investor, and used the combined funds to buy a stocks. If the stock went down enough that the broker's loan was at risk of default, you got a margin call. Add money to the account or we sell the stock. Don't take the call and the stock was sold anyway.

What caused the '29 crash was lots of stock bought on margin. Stock prices started to fall, lots of margin calls, and lots of stocks sold to cover the loans. The whole thing snowballed into a huge decline owing to the forced selling of stock. A hundred put into the market pre-crash, at the bottom a few years later, was worth around twelve dollars.

Laws were passed to limit the margin buying of stock, but they don't apply to institutions. Right now we have companies to get funds by selling their stock, the usual thing, also borrow money, and buy stock. Commonly the name of the company is the kind of stock it buys. If it is called, say, the Dow Fund, likely they buy stocks in the Dow Jones Industrial Index. Or whatever. Anyway, the stock market is down enough that some of these companies are close to getting the functional equivalent of a margin call, followed by the forced selling of stock with the stock holders in the parent company losing most or all of their money. Going broke, to say it that way. Or to sum it up, we are very close to getting a stock market crash of the 1929 sort. And the usual, excess borrowing.

I think Trump is looking kind of tired and stressed, and it is no wonder. Got to get the CoronaVirus thing settled and the economy going again.

Blogger RC March 28, 2020 10:34 AM  

@Johnny: I guess you know what you know, but the Depression's causes were much more complex than the simple margin call canard.

And the gold that was in circulation in America was $20 an ounce, see the $20 Saint Gaudens gold coin, minted until FDR outlawed gold ownership via executive fiat EO6102. Only after the gold was confiscated from Americans under threat of severe penalty did FDR adjust the gold price to $35/ounce.

Blogger Pratisara March 28, 2020 10:56 AM  

Deflation works well for those who have saved money. Which demographic has the largest savings in America?

Boomers.

They strike again. Benefitted from inflation when young. Will benefit from deflation when old.

Blogger John Regan March 28, 2020 11:07 AM  

I think this might be another "money quote" from that Yahoo article:

"At this rate, the Fed will own two-thirds of the Treasury market in a year."

It's been a while since I made a study of this subject, but if I'm remembering correctly the primary mechanism the Fed uses to control - they used to say "influence" - interest rates is the purchase of government securities on the "open market" through "open market operations" that are conducted through the NY Fed branch, which is by far the largest branch. Basically the only one that matters, because all monetary "policy" is implemented through the NY Fed.

Explaining a little further the theory here, the government offers its securities for sale at "auctions" in NYC that a few big players attend, and of course the Fed is one of the players. If the players aren't buying at the interest rate the government is offering, the government has to offer higher interest to sell the securities. Then a lot of other bank interest rates are pegged to this interest rate so it proliferates throughout the economy.

So if the interest rates are rising because the buyers don't like the securities at a low interest rate, the Fed steps in and starts buying even at lower and lower rates to drive interest rates down.

If memory serves this almost never happened from 1913, when the Fed was created, until the turn of the century. Then after the dot com bubble burst it was done on a limited basis, people in the know remarked about it and its implications, one of which was that gold had a big run-up in price.

Also if memory serves, the Fed started to do it more and more and then went all in after the 2008 fiasco. And ever since then it's been SOP.

The more the Fed does this, the more "money" the Treasury gets from the Fed, but of course it's technically a "loan", so the more the deficit formally rises.

The problem with the Fed doing this, and the reason they never did it until this century, is that it sets up a monetary circle jerk where the Treasury is basically selling bonds to its own creature - the Fed - that invents the "money" to buy the bonds in the first place. If we get to the point where the Fed has essentially cornered the U.S. government securities market in this fashion, what does this imply about the "dollar"?

The other thing the article is alluding to is that in theory the Fed can invent money to buy anything on the "open market": real estate, stock, corporate bonds, mutual funds, etc.

I could be wrong but I don't think up until now they've ever done this. It was discussed as being theoretically possible after the 2008 debacle, I think referred to as "extraordinary measures".

The difficulty with the Fed doing this is that they could wind up owning a lot of the country and its industry. Another difficulty with it, from the banksters point of view, is that this would be the Fed creating money to buy hard assets that would be disbursed out to people not as loans that would be owed back into the banking system, which is the mechanism that actually controls the money supply; instead, money would be created by the Fed to buy real things and the created money would not be owed back in but rather given outright to the owners of whatever real things were purchased.

I think I've outlined the basic idea correctly here, but it's an outline. The details from there I'm not too sure about, and I'm also not sure what the implications of this are, or will be.

Blogger John Regan March 28, 2020 11:12 AM  

See, here's what the author of that article says:

"To put it bluntly, the Fed isn’t allowed to do any of this. The central bank is only allowed to purchase or lend against securities that have government guarantee. This includes Treasury securities, agency mortgage-backed securities and the debt issued by Fannie Mae and Freddie Mac. An argument can be made that can also include municipal securities, but nothing in the laundry list above."

I don't think he's right that the Fed isn't allowed to do any of this. They have made a practice of not doing it for pretty sound reasons, but there have been allusions to this "extraordinary measures" for quite a while, certainly at least since the Bernanke years.

Blogger Timmy3 March 28, 2020 11:20 AM  

I really don’t want more government debt. If mishandled, it means more deficits, more inflation, weaker dollar, more unemployment, and more people on the dole. I’m already expecting $2900 from the $2 Trillion Wuhan Virus Stimulus. My stocks and 401K was already saved from further decrease. I will cash out when stocks reach a certain point in a year or two. We will never pay off this debt.

Blogger Ominous Cowherd March 28, 2020 1:07 PM  

Timmy3 wrote:We will never pay off this debt.
We passed that point long ago.

Blogger Brick Hardslab March 28, 2020 1:11 PM  

How will deflation hit rural folks vs City people?

Blogger Zeroh Tollrants March 28, 2020 2:22 PM  

Almost. Let's not get carried away here. There's been no modern day Trail Of Tears.

Blogger John Regan March 28, 2020 2:38 PM  

Another little tidbit of important information. The treasury auctions can only be attended by "primary dealers" approved by the Fed.

You can follow the link and check out the list of primary dealers there if you're interested. You should be interested.

They - the "primary dealers", that is - are "expected" to bid in all Treasury auctions "at reasonably competitive prices".

Of course, they do get a few things in return for meeting these expectations.

Blogger Zeroh Tollrants March 28, 2020 2:41 PM  

It was obviously written by someone who knows nothing of non-white time preferences.

Blogger Zeroh Tollrants March 28, 2020 2:43 PM  

None of it is going to be paid off. You need to stop fixating on it and accept that.

Blogger Jeroth March 28, 2020 3:07 PM  

I actually mentioned this possibility a few days ago in the comments here. Not that anyone noticed.

Blogger phil g March 28, 2020 3:16 PM  

First I'd seize all these endowment funds, then I'd force all the education institutions and banks to eat all or a portion of these loans over some period of time. I'd also mean test who gets loan forgiveness and how much. For those who paid off their loans, sorry, life isn't always fair. Going forward, at least public colleges could not charge more then some average wages of those who graduated in that major. Maybe 1 avg salary would be the total cost of that degree or category of degree. I would also put strict caps on admin to teacher ratios and capital spending. I'd also cap tuition cost for high paying majors so they wouldn't game STEM majors. They wouldn't be able to afford all these worthless political propaganda majors pretending to be liberal arts. Private schools would mostly have to fall in line or die. Also all land grant state universities should have to enroll a minimum amount of in state students, like 90%. End the foreign exchange student scam.

Blogger Nathan Hornok March 28, 2020 4:04 PM  

So the Treasury now owns more of the bad debt. What will they do when the debtors default, just let it slide? Is this the beginnings of a practical debt jubilee?

Blogger SemiSpook37 March 28, 2020 4:20 PM  

One of the "proofs" going around the Q channels these days is the fact that the gold fringe is missing from the US flags in Trump's presence, which dealt with maritime/admiralty laws. The fact that it's not there implies that Trump is back in control of the US as a sovereign nation, NOT the Corporation that's been in place since the late 1800s. Time will tell here, but it makes sense and feeds into the notion Vox posited with his original posting.

Blogger cyrus83 March 28, 2020 4:54 PM  

If true, it will be highly amusing to watch the lamentations of the usurers.

This is Team Trump using the deep state's own game against it. The only reason the "stimulus" came about is because the press whipped people into a panic about a pandemic and got politicians to shut down large chunks of the economy. Meanwhile, the usual powers that be were so focused on getting their pork out of this pig of a bill and hiding it from the public until the last minute, this language slipped by.

If Trump has a mind to destroy the Fed, have it buy up all the student loans and all other federally-backed loans and treasuries, then announce forgiveness of the loans and default on the Fed-held bonds leaving the Fed holding the bag of worthless debt while announcing a new currency backed by gold.

Blogger John Regan March 28, 2020 5:55 PM  

@70 I think it could be Nathan. You know, never let a good crisis go to waste kind of thing.

Blogger map March 28, 2020 6:32 PM  

VD wrote:But...VOX...you do not want to be a deflationista. Deflations are horribly bad.

Who said anything about "wanting" anything? Deflation is coming. Get your head out of your theoretical idealism and pay attention to what is actually happening.

No one, least of all the global economy, cares what you or I want.


I just took this to mean that you supported deflations as a matter of policy. If they happen, then they happen, but, all I am saying is, you don't want to support deflation as a matter of policy.

I took it that you identified as a supporter of deflation and that it should be promoted.

I like stable gold standards.

Blogger map March 28, 2020 6:43 PM  

Jack Amok wrote:And on top of that, you're wrong about deflation being bad. In our current system, it would be excellent. It would hammer asset values and reward people who work for a living vs. collect rent for a living.

This is exactly wrong. Yes, deflations are great if you keep your job. Companies, however, cannot make money in deflationary conditions, so you will lose your job. Then, you will not get a job at the same salary. Then, your rent will go up because debts are paid with more and more expensive dollars, to the point where you will not be able to afford where you live.

Farmers and manufacturers will be destroyed. Farmers are especially sensitive because commodities closely follow inflation/deflation, so that means falling farm prices.

No...deflations are disasters. We've never really been through one to really undersatd it.

Blogger map March 28, 2020 7:26 PM  

Azure Amaranthine wrote:"Deflations are bad because they hurt debtors and help creditors."

You're not even aware that debt is the source of most inflation. Debtors paying back creditors? Causes deflation with how our system works.


No, inflation/deflation is a monetary phenomenon. It has nothing to do with the issuance of debt.

Blogger map March 28, 2020 7:30 PM  

Johnny wrote:The trigger for the 1929 stock market crash was stocks purchased on margin. The stock buyer would give money to a brokerage house. The broker would borrow money to the investor, and used the combined funds to buy a stocks.

No, the cause of the '29 crash was American being the world's biggest creditor.

Blogger James Dixon March 28, 2020 9:03 PM  

> Yes, deflations are great if you keep your job. Companies, however, cannot make money in deflationary conditions, so you will lose your job.

An over generalization at best. Completely wrong at worst.

> Then, you will not get a job at the same salary.

And? Your new salary will still buy the same things your old salary did.

> Then, your rent will go up because debts are paid with more and more expensive dollars, to the point where you will not be able to afford where you live.

Why do you think your rent automatically depends on some debt payment?

> Farmers and manufacturers will be destroyed. Farmers are especially sensitive because commodities closely follow inflation/deflation, so that means falling farm prices.

Again, and? What part of the money is going up in value are you having problems understanding? Yes, prices go down. But the money you get is more valuable.

> No...deflations are disasters. We've never really been through one to really undersatd it.

Anyone much over 80 has. Anyone who is over 60 will have heard the stories from their parents.

> No, inflation/deflation is a monetary phenomenon. It has nothing to do with the issuance of debt.

Our money is debt based. So yes, it does.

Blogger Ominous Cowherd March 28, 2020 9:33 PM  

Map, one could get a pretty good education by going with the exact opposite of whatever you write on economics.

Blogger Akulkis March 28, 2020 10:00 PM  

"No, inflation/deflation is a monetary phenomenon. It has nothing to do with the issuance of debt."

When a bank creates a debt, it CREATES MONEY, therefore debt is a monetary problem. It is the mechanism by which the money supply is inflated in fractional reserve banking systems.

Blogger Newscaper312 March 28, 2020 10:03 PM  

@76
Wrong. Issuance of loans courtesy of fractional reserve banking where you van loan out money bank does not have, is main driver of money supply growth, which causes inflation when it outpaces growth in actual economic activity. Printing more dollars up front is old school.

@77 Half right.
Bubble bursting on margin based speculation was the initial fire.

Then US banks stupidly following govts encouragement to loan money to the devastated Germans they could make payments on the stupidly high reparations forced on them in the Versailles Treaty poured gas on the fire in the US when the Germans massively defaulted. Think I first read this angle from Rothbard.

FDR got in and made things worse by ever changng heavy handed interventions that hamstrung business from the normal recovery process. He should have limited things to relief and some make work jobs. See Amity Schlaes on this.

Blogger Jack Amok March 29, 2020 12:19 AM  

map, just stop. You are out of your depth. Deflation will devalue existing assets and allow people who create actual value - by working - to capture the value of their work because deflation will break the ability of banksters to skim their vig off the top as they distribute new money into the system.

And nobody serious thinks bitcoin is anything but a stupid idea. If you think bit-effing-coin has anything to do with the argument, you're smoking crack.

Blogger Snidely Whiplash March 29, 2020 12:47 AM  

The primary problem of deflation, from a certain perspective, is that it discourages borrowing. Why borrow to by now, when the price is going down? Instead save up and buy at the lower price.
There's no way to skim off of deflation, and that is why it's not allowed. they will spin the presses full time to prevent it, no matter the damage to the economy or even to themselves.

Blogger Azure Amaranthine March 29, 2020 6:17 AM  

"but, all I am saying is, you don't want to support deflation as a matter of policy."

Here is a very accurate non-analogy: Inflation is increased substance dose to keep getting the same high, and deflation is withdrawal with its according symptoms.

Not only do I want to support it in pursuit of long term economic health, but it's necessarily going to happen at some point anyway.

Now map, you should refrain from taking part in economic discussions, because you're reliably wrong.

"Companies, however, cannot make money in deflationary conditions, so you will lose your job."

False.

"No, inflation/deflation is a monetary phenomenon. It has nothing to do with the issuance of debt."

False.

Seriously, you are the reason we can't have nice things. Be polite and plug your bullshit cannon.

"Some of you are doubting what I am writing here, but, almost to the day two years ago, I submitted an email to Vox that got published in an article on a similar topic."

That's nice? Also neither here nor there.

"When a bank creates a debt, it CREATES MONEY, therefore debt is a monetary problem."

Actually more fundamental than that. Our entire dollar is based on issuance and purchase of bonds, securities, and the like. If we had no debt, not a single USD would exist. When the sophistication is all squeezed out, the Fed works the same way in producing the Dollar that banks do... it's ledger entries all the way down.

Blogger Joe Smith March 29, 2020 11:49 AM  

it's ledger entries all the way down.

This is something that didn't click for me until just recently. I couldn't figure out how anyone could believe deflation was coming over inflation. If the Fed is continually making money out of nothing, then why wouldn't the dollar become totally worthless eventually? But that's the trick: the Fed isn't printing for example $2T in this instance, it's just ledger entries. Eventually cash becomes valuable because it's actually rare, and no one has any faith in the electronic crap.

Blogger Ominous Cowherd March 29, 2020 12:56 PM  

Joe Smith wrote:Eventually cash becomes valuable because it's actually rare, and no one has any faith in the electronic crap.
That's a point I hadn't thought of. A pile of hundreds outweighs a checkbook even in good times, let alone when the banks are shuttered and you don't think you can deposit the check.

Still, if I can't trust the ledger entries, I'm going to worry about the long term viability of the paper stuff too. I'd rather have some other commodity than paper - maybe .22 cartridges or silver. Even today, I'm open to trades when I'm wheeling and dealing.

Blogger James Dixon March 29, 2020 1:22 PM  

> Some of you are doubting what I am writing here...

Some of us only think you have absolutely no idea what you're talking about. The rest of us know it.

Blogger Akulkis March 30, 2020 6:50 AM  

"It is simply not true that "debt CREATES money."

It absolutely does in every fractional reserve system, you moron.

Blogger VD March 30, 2020 7:11 AM  

You guys are completely wrong because you don't understand how the Fed works. It is simply not true that "debt CREATES money."

You're banned for a) stupidity, b) economic ignorance, and c) learning absolutely nothing here.

The Banks do not, themselves, "create" money by making loans. That is just absurd.

You are a complete idiot whose understanding how modern money works is literally CENTURIES out of date. Don't try to comment here again.

Blogger VD March 30, 2020 7:35 AM  

Money today is a form of debt, but a special kind of debt that is accepted as the medium of exchange in the economy.
- The Bank of England, 2014

Blogger VD March 30, 2020 7:42 AM  

No, inflation/deflation is a monetary phenomenon. It has nothing to do with the issuance of debt.

You are ludicrously ignorant. You have no understanding of modern economics at all. This statement alone is sufficient cause to ban you from commenting here again.

Blogger Johnny March 31, 2020 11:25 PM  

>The Fed hired BlackRock Inc. to purchase these securities and handle the administration of the SPVs on behalf of the owner, the Treasury.

BlackRock's CEO Larry Fink is the guy leading BlackRock into "instituting potentially the most aggressive diversity program in Corporate America". (((Fink))) said that they're " "putting the pieces in place so that five years from now we’ll have a more diverse (company) not just a bunch of white men." Not sure why he cares so much about diversity when the entire board is Jewish.

I hope this deal didn't give BlackRock too much power. It gave them a lot of cash.

Blogger Mark V April 02, 2020 8:42 PM  

What is the chance of the USD losing status as the world reserve currency? What would happen to the value of the USD if there is a race for other currencies to be backed by gold in order to become the reserve currency?

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