It is a source of a bit of–I guess I will use the word sorrow, as a way of mourning what could have been and was not–that Milton Friedman and the Monetarists asked so few questions about the validity of a monetary system in which money could be created at will by a small power elite, one completely unchecked by any regulatory process, or answerable in any way to the American people. The project he assigned himself was asking how the system worked, and where it had gone wrong. He did not ask the fundamental question: if the Federal Reserve had the power to create the Great Depression, why do we still entrust that power to bankd who benefit from that power?
Despite QE1 and QE2, we still have low interest rates. All along, I have been skeptical that we would see hyperinflation. Hyperinflation is a way for governments to print their way out of fiscal trouble, over a relatively short period of time. Our government is not empowered to print money. A small cabal of banks is. And they don’t benefit from hyperinflation. Their seizure of our national wealth is a gradualistic enterprise, and they have NO interest in giving anyone any reason to look harder at it, at least at this point.
They benefited from the inflation in 1970’s that they seem to have caused very consciously by increasing the M1 supply (I have not studied this extensively, but that is my conclusion based on perhaps two hours research and an understanding of the system). They did this to get more power. Until 1980, if memory serves, their Open Market Operations were limited to the purchase of Treasury Bonds. A law was passed in 1979-80, as a “solution” to the stagflation facing the nation, which gave them the power to buy substantially any security, anywhere, with fiat money. They literally write the check, then own the security, where no money existed before they wrote the check. It also gave them control over most of the nations banks.
Keep in mind here that the Federal Reserve is OOMPOSED of banks, very large, mainly Wall Street banks, so it is the case that small banks are being regulated by their competitors, at least as I understand the matter.
What I am choosing to call primary inflation is the initial creation of money. Relative to Quantitative Easing, it is (we are told: we have no way of knowing for sure; the value of our money is quite literally beyond the reach of the democratic process) the purchase of Treasury bonds held by Reserve members with money created for the purpose.
What do they want to do with this money? Loan it to someone at interest. What is likely happening at this moment is that more optimistic economies around the world are borrowing that money. JP Morgan is making record profits. Why shouldn’t they? They play a role both in creating the money, and deciding who it goes to. They literally create money for themselves at the Federal Reserve, then make profits with it. If you ponder this for a moment it should become clear how monumentally stupid you have to be to go belly up once you are incorporated into this very cozy arrangement (think Lehman Brothers and Bear Stearns).
If they loan it within the US, though, it goes into our fractional reserve banking system. In theory, the bsnk can loan out 90% of every dollar it borrows.
(How the money is borrowed, I don’t know. JP Morgan and others could buy up stock in the banks, or they could “overnight” the money using the Federal Funds system. How exactly they benefit from a 0% target, I also don’t know).
Anyway, a 10% reserve requirement means that they can “clone” the money theoretically in the vault, and send it back into circulation. Since it should have been in the vault, since it should not be travelling around, competing with other dollars, it is inflationary.
Let us assume confidence in the future [which would include a non-Socialist President, and fiscal responsibility in Washington, as well as repealing Obamacare, and many of the other regulations passed in recent years. These things would constitute a cessation of our downhill slide. They would not improve things, but rather stop them from getting worse. If your head hurts because you are banding it against the wall, step one in curing your headache is to stop banging your head.]: the dollar is borrowed by somone to build or buy something.
That one dollar created by the Fed and given to one of its members and sent out into the world to make its way is now $9. And that money gets loaned, say, to a builder, who puts it in his bank. He owes it to Bank one, but Bank two now has real money in his account. That bank now has 90% of the first dollar, and can now loan it out. So the money gets cloned again. 81 cents is created and sent out into the world.
And oh, it gets deposited, and Bank 3 can now loan out 73 cents.
This process I label Secondary Inflation. By far, this is the most important element of inflation. Over and above the monetary policies pursued by the Fed in the late 1920’s and early 1930’s, the money supply will contract if nobody is borrowing money.
That is the condition we are in now. People are holding back. They are not borrowing money. So Bernanke’s Quantaitive Easing won’t even approach relevance until people start inflating our currency by borrowing again. What has happened, though, is that he has planted something like a trillion dollar seeds among very large private banks, who are poised to in effect seize large sections of our economy, when it recovers.
There is more I could say on this, but that will do for now.