I'm having problems with the charts on this page, there is a link to the .pdf at the bottom.... Here is the Main Point, if it intrigues you, read on…. The current economic environment is such that the economic experiment underway could have very beneficial results to the real wealth of US Citizens. When a government can repay it’s debts using newly decreed money and reap the substantial seignorage benefit available to it while maintaining the relative purchasing power of it’s currency, it should do that. If in the process it inflates asset prices and stimulates economic growth and employment, what is wrong with that? Isn’t that the point of all this mularkey anyway? If you read on, you will find loosely related thoughts which are intended to stimulate thought rather than clarify or develop a coherent point, but hopefully you find it interesting: (This is an evolving note, I welcome your comments. tim@nisland.com)
How do you spell relief? S.E.I.G.N.O.R.A.G.E. Tim Dooling, CFA 3rd of January, 2011 A.D.
A brief perusal of the cyber sphere has conspiracy theories and declarations of the end of the dollar in abundance. Not to worry, as is typical in human behavior we are inclined to make judgments about the future path of reality based on our experience and observation of the past.
In speaking with smart people has it’s advantages, they tend to be succinct, affable and usually pour decent wine during the conversation. Speaking with someone who seems foolish takes a bit longer, because the topic they seem foolish about is generally not their area of expertise, but generally speaking if you persevere past the first glass of vino collapso you can discover an area where the roles begin to reverse. (the one exception being the fool in the office next to me who babbles annoyingly intonated noise into his speakerphone until his tee time arrives…..pretty sure he knows nothing about anything).
Recently it is my observation that both smart and foolish people alike are making significant decisions about their economic futures with startling little attention to the possible range of outcomes. It seems that the tantalizingly populist view of the end of the US Dollar gets quickly taken to it’s extreme and people are making investments based upon it. My fear is that ignoring all other potential outcomes other than a gold-based monetary system is a very dangerous thing to do, and could limit the propagation of ones DNA.
For every player who has boldly pushed their chips ahead and gone “All-in,” there is a dustbin of history full of equally brash former players who have gone home and lived the rest of their days in barren ignominy . Uncompromising belief in one’s viewpoint is a one-way ticket out of the gene pool.
This leads to the question “So what if this all works out?” Certainly all of the folks with gold buried under their doghouse and a cellar full of canned meat can’t be completely prescient? Or can they? With that in mind read on….
I cannot bear the use of the tired acronym for the Quantitative Easing, I’ll substitute “BESTNewDeal” instead (Biggest economic Experiment Since The New Deal). QE2 is one thing only, a large black ship nostalgic of elegance of yesteryear, anyway.
Engaging in conversation about Federal Reserve policy at the moment invariably results in someone spewing soundbytes recently implanted on their frontal lobe by some televised talking head…….”The printing presses are working overtime! eeegaad .. ”Inflation can be the only consequence,” or my favourite “They can’t print gold!” …….all of it is entirely too populist and clearly means that there is far more talking than thinking going on.
Taking these soundbytes in reverse order:
1. Why would the US Government want to print gold even if they could? Fort Knox already has 261,499,000 ounces of the stuff safely inside, which is the biggest hoard of it on the planet Earth. Serving up electronic US Dollar credits is a lot easier, cheaper, and those nasty east-end criminal minds are less likely to hatch a plot to nick it. 2. Inflation is not the only consequence expanding credit, but it would be nice if it was. That would make monetary policy a much easier thing to deal with. 3. No they’re not printing money all night long, it only takes a few seconds. I’m pretty sure that there is an old terminal somewhere with a green screen and a well-worn F9 button which says “Create Credit”. Federal Reserve Banks (all 12 of them) are buying securities and paying for them in real US dollar credits, the exact same kind they always have, utilizing their reserves. (admittedly “utilizing their reserves” is a bit of a euphemism for expanding credit, but my point lies elsewhere so let’s let that dog lie)
Take a look at these charts which identify the main moving parts in the makeup of the Federal Reserve and what drives it’s value. Remember, the Federal Reserve is a “System” and the US Treasury is a “Treasury” i.e. they are different things. The Treasury could care less about price stability and growth, so long as they somehow come up with the dollars required to pay for the budget that gets carted over to them every year.
The Federal Reserve on the other hand cares a lot about price stability and growth, but is 95% owned by the US Treasury….hmmmm… The Fed also serves as banker to the Treasury….sort of reminiscent of the cozy relationships which led us here…..hmmmm.
When congress chartered the fed back around 1913, the point was to create an institution which would provide emergency liquidity in times of stress. And providith they have:
So what’s the problem? They are doing what they were chartered to do, and have done it in spades. The US Dollar has remained the central reserve currency of the world, and the last few years have even perversely bolstered this status. (Much to the chagrin of the Germans)
The Point is Here: This might just work out, rather than comparing the US to Weismar Germany, or the fall of Rome, imagine if the baby boomers worked a few extra years and consumed services along the way. Imagine if the economy started to accelerate, imagine if the FOMC began to sell treasuries. Imagine if the pristine F11 got hit on the fabled green machine. Yes, it may all very well end in tears, but you might want to check the expiry date on the canned meat in the cellar.
This brings me to an often misspelled and even more often forgotten concept of Seignorage. Without Seignorage there would be no counterfeiting. Fortunately counterfitting US currency continues, so thankfully Seignorage is available. Better yet, creating a billion new US Dollars at a Federal Reserve bank can be accomplished with a few keystrokes and costs very little. A reasonably informed person, with rational expectations somewhere on the internet will accept these new dollars in exchange for their precious treasury bonds which they have paid so much to own. The point being that Seignorage refers essentially to the benefit available to the man with the printing press, where the value received in exchange for the new demand notes (or Fed Credits either way) exceeds the cost of producing those notes. The Federal Reserve’s negligible cost of creating a currency unit must be very irritating to the persevering Russian counterfeiters who once offered me a suitcase with a million funny-smelling dollars in exchange for ten thousand dollars with a proper pedigree.)
It is currently 2011 A.D. The state of the world is such that the second of two previous convocations in Bretton Woods has created a currency which stores it’s value via fiat, or something like a Fiat……wait….do Fiat’s store value? Not mine….dang eyesore according to the neighbor. Oooh, fiat (not capitalized….got it, that would be an order or decree, or just “Because we Said So”..i.e. B.S.) Also here in 2011 AD, the Dollars which have been decreed to exist and hold value by the United States Government are widely believed to do this by all the main central banks around the world. This is evidenced by the fact that they have chosen to hold them in reserve. This is to say that they anticipate that they will be able to exchange them in the future for their own currency in case it needs support.
There is a price for this perception of security, a very high one in fact….almost infinity to be honest. Yes, it is true, debt yield expresses price inversely; hence as yields approach zero, it implies that the price (or value of holding the credit) of the credit approaches infinity (although the time period is finite, resulting in a par payment). This would only happen if there is some attribute to holding the debt of value in excess of the yield. (according to Tim’s Commandment #4 which proclaims that you Can’t Get Something for Nothing. (www.nisland.com) Taking this concept one step further, if someone is willing to hold your debt upon which you pay almost nothing, it implies that the buyer is placing a nearly infinite price on your currency as a store of value……
Soooo…..if the US Government were a lemonade stand, and someone would offer an infinite amount of money for lemonade that cost almost nothing to produce, would they:
a) Say, oh thanks for the kind offer of nearly infinite value, but in the interest of price stability for sugar and lemons, we do not want to produce any more lemonade right now. b) Start a war. c) Unload as much lemonade as that guy wants……suuukah!
The point is here: If we fanaticize that the US Government becomes a corporation owned by it’s taxpayers, we would be appalled at the quality of the management team, and the utter lack of profitability. We would see a company that had wonderful products in 1945, and had matured since the glory days. Upon further analysis we would find an asset deep in the vaults of the Federal Reserve System, where a man sits at the old terminal with the green screen. We would reboot that sucker, give it Windows 7, drag the mouse over all the obligations of the corporation, “select all” and hit F9. Poof, all the assets of the US Government become unencumbered property of the equity holders, the citizenry of the US. Imagine a new management, a benevolent dictator, or a house of commons……imagine the fantasy……
Seems like a nice place to insert my commandments…..
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