What is money?
We know people will tell you all kinds of things. Read online and people will give you all different kinds of answers. The reality is that few have any clue even if they think they do.
Do not feel bad. The Fed is in the same situation. Probably the most well known financial institution in the world, the US Federal Reserve, has no idea what money is. Unfortunately, it hasn't in decades.
Say what you want about Alan Greenspan, when you got him away from this Fed talk mode, he was rather blunt with what he stated. That honesty has not been followed up with recent Fed chains. Bernanke was an outright liar, Yellen incompetent, and Powell is behaving like a politician.
For all his mistakes, and there were many, at least Greenspan was forthright at times. Usually you had to sift through pages of FOMC transcripts as he was most likely to be candid there.
Nevertheless, much of what we gleam from him is insightful decades later. Probably the most important is his frankness about money.
Source
Where Is Money
What would you say if you knew the Fed has no idea where money was? Would this alter how you looked at that entity.
We will let Greenspan's own words explain the situation:
The problem is that we cannot extract from our statistical database what is true money conceptually, either in the transactions mode or the store-of-value mode. One of the reasons, obviously, is that the proliferation of products has been so extraordinary that the true underlying mix of money in our money and near money data is continuously changing. As a
consequence, while of necessity it must be the case at the end of the day that inflation has to be a monetary phenomenon, a decision to base policy on measures of money presupposes that we can locate money. And that has become an increasingly dubious proposition.
I would like to highlight this part again:
...a decision to base policy on measures of money presupposes that we can locate money. And that has become an increasingly dubious proposition.
Here is the Chair of the United States Federal Reserve stating in a FOMC meeting that locating money is becoming "an increasingly dubious proposition".
Any why is that?
...the proliferation of products has been so extraordinary
In other words, the banking system has rolled out so many products that it used as money, the Fed was left without much idea what it is.
And here everyone thinks the Fed "prints money". It doesn't even know what it is.
A Collapse Of Economic And Monetary Theories
The sad reality is most people build their economic and monetary theories on sand. Most of it is not truth, just misconceptions spread over the years which people buy into. With the likes of Peter Schiff running around, it is no wonder.
Did you see what was cited above discussed on Bloomberg or CNBC? Did you economics professor in college cover this? Has anyone mentioned it to you before?
Yet here it is, cited from a public document, the transcript of the June 2020 FOMC meeting. Hell the link is to the Federal Reserve website.
Today, we have everyone from politicians to stock market participants calling for the Fed to do something about inflation. After all, they did all this "money printing". If reserves were money, it is safe to bet that Greenspan would have found that. The reality is that reserves are not money, at least not useful money. It is an accounting trick, nothing more.
Another sad fact, for all they do wrong, the Fed isn't responsible for the increase in prices. How can there be too much money chasing too few goods when the Fed doesn't produce money? Bank reserves do not get out into the general economy.
Ironic that most of the people screaming about the Fed is well aware of a thing call supply chain constraints. This is something that is becoming very popular in earnings calls. Many companies are pointing to this as a reason why they are not producing at the levels the market is expecting.
So if the Fed didn't cause it, how are they going to fix it?
Kill Demand
The answer is to kill demand. Since the Fed doesn't do money, and this is a supply shock situation, the Fed can only work with the tools it has.
Since most are not aware of what all this is about, since they think it was money printing, we see they are oblivious to what is coming.
Here is Chairman Powell's own words:
So our tools don’t really work on supply shocks. Our tools
work on demand. And to the extent we can’t affect, really, oil prices or other commodity prices or food prices and things like that, so we can’t affect those. But there’s a job to do on demand. And that—you can see that in the labor market, where demand is substantially in excess of supply of workers. And you can see it in the product markets as well.
In other words, the Chair is saying out tools are worthless against a supply shock since we didn't cause that but since everyone is asking us to fix this, we will do it. Of course, our only course of action is kill demand, code for push the economy down.
So yeah, the Fed Chair is saying it needs to step on the throat of the economy, have people lose jobs, so that buying pressure stops. Even if the supply chain issues aren't resolved, destroy the economy and it won't matter.
This is exactly what happens when people are running screaming without understanding what actually takes place.
Amazing what you can garner by reading the words the Fed Chair actually says and the transcripts of their FOMC meetings and interviews given.
Keep all this in mind the next time you encounter someone in cryptocurrency on Twitter espousing about all the money printing by the Fed.
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I see a bad situation here in Europe too. Next winter a disaster is expected for now… maybe we won't even have the gas to heat the houses and petrol who knows how much it will cost. Meanwhile, some companies are closing due to too high fixed costs.
Yep. And if you have gas and petrol, it will be at such a high price, it will affect business operations.
No matter what the Fed, or ECB, does is going to get more oil or gas out of the ground.
Hence the crux of the matter.
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I think that so many people, as we know, have no idea what the fed does. They just hear people say "the fed needs to fix it" so they hop on board. Rinse and repeat and then they are trying to force the hand of the fed. Is that a problem-reaction-solution scenario unfolding? Likely I think so, albeit maybe not in the manner they had planned but it's still unfolding.
This market is going to certainly be something, I wonder what it will look like on the other end is all I'm wondering. We are usually worse off after these things.
agree and they have too much power in this finance section
It is going to be very interesting to watch how markets react. There are sectors, such as retail, already being hit. Is that enough to drive the market down?
My guess is that, much like 2018, the Fed reverses course very quickly. They will get their June rate hike in but I would call August a coin toss.
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Definitely and for the future, the best option is to keep our money in Cryptocurrencies. The different crises that many economies are going through worldwide makes me think that, although we have also faced some problems in recent days, it seems to be the best thing for us.
Well it is vital that we learn from what is taking place in the existing market that will allow us to develop proper cryptocurrency markets.
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well I believe money is an asset that people believe in having worth so they trade goods for it
The same goes for crypto if we all stop believing in it it has no value
I agree with you on this. As long as we believe money and crypto has value then they will continue to be worth something.
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that the concept of money take Diament for example it's just a hard stone but we use it and is rare so it has a valve
Oh, you mean diamond :) Yes, very true.
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Fascinating view of how they think and what they present now vs. then.
Things are about to get interesting
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Oh they keep up the charade, that is for show. That is why Powell is taking on inflation knowing the Fed had nothing to do with it.
If the public realized that reserves are not USD, much of the Fed's manipulation would cease to exist.
As long as the public foolishly believes in the Money Printer Go Brrr, the Fed is still able to brainwash the masses.
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So hard to feel like a person has a good understanding of how it all works.
Keep telling us, I guess it will sink in eventually.
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It's amazing how they see and understand money. Obviously it seems that they do not understand that, in the way they manage and create it, they can only generate more and more inflation and more and more need to generate more money. Very interesting your post. Greetings.
Who is they?
The Fed doesnt so money nor can it create inflation.
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Who are they?
I'm talking about the FED. So you say that the Federal Reserve doesn't create money, so it can't create inflation. Well, maybe that it's politics right now, but they usually do the opposite. Of course, the Fed is not solely responsible for generating money, since so are the Treasury Department and Congress jointly. Wrong monetary policy is what generates inflation; and the worst thing is that it is a wheel that must be in constant circulation, because, if they do not generate more money, then there will be no inflation, but the economic growth of the country will be reduced (which is is equal to recession).
And another thing, if the Federal Reserve is not responsible for the indiscriminate issuance of money, who is? because as far as is known it is the main entity responsible for such a matter. And if we understand that they have no idea exactly what the amount of money supply in circulation is, the matter is even more serious. I may be wrong about this, but in my opinion, if this is so, the matter is even more serious; because it means that they are tasked with printing money, knowing that there will be a glut because they have no idea how to locate or the exact amount of money in circulation that is in one form or another.
It is true that the traditional banking system with its credit policy is also responsible for the amount of money in circulation being imprecisely defined, but I believe that it is complex and impossible to remove all responsibility from the FED in this matter of the indiscriminate issuance of money. , as if they were innocent children who have no idea what they are doing and only act according to the circumstances.
In short, this is certainly a complex issue and we cannot say that it is easy to solve. When so many analysts, economists and experts who have been in charge of the matter over the years have not been able to come up with precise solutions to the problem of inflation-recession and the cycles of money issuance, it means that it is something truly complex for thousands of reasons, some of which are beyond the understanding of many.
I always like to talk about these topics because they are truly enriching, and because there are truly things that I understand perfectly about the subject, and many others that I still cannot understand no matter how much I think about them; that's where I'm open to learning about it every day. Your post is great. Continue writing on this topic another time.Greetings!
The Fed is worthless and their influence is on the short end of the curve and it's all speculation. At this point, I wonder if listening to them really matters but I guess them having an effect on the short-term bonds is an issue.
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I agree. There is some influence on the short end simply because it is more affected but their ability to do anything to the long end is zilch.
So they dont do money nor do they control interest rates...so what do they do?
Back to the first 4 words of your comment.
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It's one thing the feds too, try to create a situation that returns back dependence of the people on them regarding money. I like to see how this issue with short term bond goes.
Eventually if people lose jobs and buying pressure stops will that be considered an overall win? I think not. It's crazy.
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TBills are going at a higher rate on the Repo market because the ROI is not important, the need for collateral is the criteria.
Each time we see a premium like this, you know there is a liquidity crisis.
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It's absolutely crazy, liquidity crises seems like one the worst and I don't know if they're even considering the consequences
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I'm not sure why everyone expects the Fed to fix inflation. There are so many variables... and high inflation often fixes itself with demand destruction (ie, people buy less when prices are high, especially when wages don't keep up) so adding interest rate hikes on top of demand destruction could very well send the US into recession causing people to lose their jobs.
The thing is, there are tools that the government has that could assist with inflation that don't require any action from the Fed. They could relax or change specific regulations on imports, tax particular high earning groups, spend more on infrastructure, etc. There's so many more things that can be done than just raising interest rates (which the Fed is doing while still adding to it's balance sheet?).
The Fed's balance sheet is flat and they laid out a plan to unwind. It is going to start, I believe, with $30 billion per month.
You are right there are other things. However, politicians tend to listen to the Economists who simply spew the same misguided nonsense.
In the end, we are seeing the demand destruction start in discretionary spending. Both Target and Walmart reported the same thing; higher costs of necessities means that other products, higher margin, were bypassed.
Target took a 25% hit in its stock price.
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Data point confirming this: Last year I did some GrubHub driving when the pay got really high, so I belong to the Facebook groups even though I don't do it anymore. This past weekend everyone was complaining that it was dead. Like falling off a cliff dead, all over the country. These delivery services are a luxury item that average people use, so I think it's a decent bellwether for general consumer sentiment. Spiking fuel prices are probably at the top of the list of whys. I remember after hurricane Katrina, higher fuel prices from the collapse in refinery capacity seemed to be one catalyst that started the cracks to form that ultimately led to the mortgage implosion. When you're on the edge financially, that one cost variation can throw your whole life into chaos. If you have the choice between paying for food and gasoline to get to work, or paying your mortgage, which are you going to do? You're going to buy food and gas of course and tell the bank to shove it. This seems to be happening again, and we already had astronomical food prices beforehand. How many months of default before we see a rise in foreclosures and panic starts to set into the general financial markets? Took a few years last time, but I think it happens quicker this time because of the magnitude of the supply chain issues. They are legion when compared to the Katrina fuel supply issues and they've been ongoing for a couple years now. This is just pouring gasoline on that raging inferno.