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The FED was using "quantitative easing" to drive down interest rates.  The Republicans are using the "debt limit" law to prevent this.  The overriding objective of the Republicans is to make rich people more rich.  And rich people are those that "have all the money".  Any deterioration in the VALUE of money will be bad for the rich.

Those are not guesses.  Those are facts. But what is not understood or appreciated is the actual meaning of the word "value" as that term applies to money itself.  The measure of wealth in this capitalistic society is the capacity to command the labor of others.  Those with gobs of money can purchase or command the labor of those who have only enough money to live hand to mouth.  The Republicans believe that rich people are the representatives of God.  If God had not meant them to control the lives of others then God would not have made them rich.  These idiocies must be recognized and dealt with in order to properly evaluate the actions of the FED in serving its DUAL role in regard to money.

In the current economy the real measure of VALUE is obvious.  So too is the logic and rationale behind the charter of the FED in stabilizing the VALUE of the currency.  It is increasingly obvious that the VALUE of the dollar is too strong in that those who must actually work for a living are suffering under the controlling hand of the rich (those who control money).  So the question arises as to what the FED should do regarding the VALUE of money.  And the answer is that the FED must reduce the VALUE of money.  And part of the mechanism to do this was put forward by Ron Paul, the Republican/Libertarian.  The FED, said Paul, should burn its Treasuries in a furnace and thus reduce the national debt so that the "debt limit" is not reached.  That would allow the FED to continue its quantitative easing program.  And this is the same thing as "printing money".  The FED got the money to purchase the T-Bills and T-Bonds on its books from the money fairy as duly blessed. authorized, and enforced by the United States government i.e. it "printed" the money.  As the debt instruments were purchased, money was thus blown into the economy so as to reduce the value of the circulating money.  There was a fig leaf covering this operation.  It was said that the FED would. in the future, sell these bonds back into the market when inflation reared its ugly head.  As such, the FED was engaged in managing the money supply in order to manage the value of dollars.  Later, when the FED sold the T-Bills and T-Bonds it would be sucking the money back out of the economy.  And just as the money was "printed" to buy the bonds, then so too would the money be extinguished as the bonds were sold back into the market.

What the FED is doing now is to sell the treasuries in bought in QE2 (short term bills and bonds) in order to purchase long term (30 year) bonds.  This does not involve the money fairy nor does it add to the national debt.  One debt instrument is supposedly being traded for another.  At the same time, the FED is holding on to its mortgage instruments that it said it would sell when the housing market and the general economy recovered.  


Let us consider the price at which these transactions take place:  In QE2 the FED had to pay slightly more than the "value" of the treasuries in order to take possession of them.  If the FED had not bid up the price then the bonds would still be in the hands of the securities dealers that held them.  Now, as the FED sells these instruments to finance the purchase of 30 year instruments the FED must again offer to beat the "value" of the money held by the folks who swapped t-bills for money in the QE2.  And having thus recaptured the funds, the FED can now use these recaptured funds to acquire the 30 year bonds.  But the FED must again offer slightly more then the value of the 30 year instruments held by the private sector or no trades will take place.  In all, the FED conducted 3 trades and suffered a loss on each trade.  And the total of those 3 losses is the amount of money that has been printed and irrevocably injected into the economy.  Each FED loss is a private sector gain.  

Essentially, the FED holds assets that it paid higher then market to acquire.  To the extent that the FED "paid too much" or "sold to cheaply"  there is a increase in the amount of liquid dollars.  While the FED is not burning the assets in a furnace, the FED is creating additional liquidity by virtue of its "losing" transactions.  As the FED takes the loss, the private sector takes the gains.  On a quantitative monetary  basis this is the same as burning some of the FED assets in a furnace.  The difference is in WHO gets the money.

If the FED burns its assets in the furnace while continuing to buy these assets on the open market and the elected government blows more bonds  into the economy via infrastructure development then the additional money goes through the hands of the worker bees as well as the banks.  The transactions are that the elected government sells T-notes to the private sector so as to build the roads as the FED buys the T-notes from the private sector calling it "quantitative easing".   The point is that without the infrastructure spending the QE does no real good.  The people who had all the money in the first place, still have all the money.  The swelling of the accounts of the rich  applies only to the current operations of the FED. Taxation can be used to recover the money come what may.  But that is (like infrastructure), fiscal policy as opposed to monetary.

Unfortunately, increasing the amount of money in the hands of the banksters and the rich is not going to help the economy.  This is entirely obvious to any person that allows himself or herself to think about it.  By increasing the amount of money in the hands of those who already have all the excess money we merely increase the power of these people over those who have little or no money and who must have money and spend money so as to live. Those who have little or no money must LABOR for their daily bread. And this is what the FED must address if the FED is to own up to its actual charter.

It stands to reason that the purchase of mortgages or the purchase of old cars would provide a better method of quantitative easing.  If the FED did that instead of buying treasury notes from the rich people then the economy would get a real boost.  If the FED can buy toxic paper that was backed by mortgages, then it seems to some of us that the FED can also buy the mortgages themselves more directly.  The attempt at reducing interest rates on 30 year bonds so as to reduce the interest rates on 30 year mortgages seems to be a circuitous way of accomplishing what needs to be done.

If the FED can create eight point five to eleven trillion dollars to bail out Wall Street, then the FED can also create the money and loan guarantees necessary to "bail out" Fannie Mae and to re-capitalize those mortgages and create new mortgages.  Reducing the interest rates on 30 year mortgages or controlling the variable interest rates on residential real estate improvements at very low levels will allow the housing market to recover very quickly.  We do not necessarily need a lot of new McMansions, but we do need some relief on the debt servicing costs of the current housing stock.  That is a demand side injection that taxes the rich on behalf of the middle.  And it WILL cause some inflation.   The problem that most people seem to have is a ridiculous aversion to inflation as that term has been demonized by the rich.

Originally posted to TruthMerchant on Thu Sep 29, 2011 at 09:34 AM PDT.

Also republished by Money and Public Purpose.

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