|
"Give me the place to stand, and I shall move the earth."
This is the translation from the Greek of what Archimedes is quoted as saying about the power of the lever. (Pappus of Alexandria, Synagoge, Book VIII, c. AD 340; Chiliades (12th century) by John Tzetzes, II.130.)
Since 2008 the predictions of doom by the goldistas have all been wrong. There has been no hyperinflation among any of the countries whose currencies can be cleared in large amounts through the central banks of the world. Gold has proven to be no more reliable a "store of value" than any other investment, even if you go all the way back to Nixon's cutting the last feeble fetter in 1971. (Yes, over that 4+decades gold ownership has been wonderfully rewarding for those early investors but no more so than ownership of the shares of Philip Morris, for example. As in the past tobacco has proven to be a more than adequate pseudo-money.)
The best explanation for why fiat money has not utterly failed is the simplest: currency itself no longer counts towards leverage. In a U.S. banking system with nearly 3 Trillion $ in "excess" reserves, vault cash on hand has become a footnote to any reserve accounting. Even the amount of money in circulation in the country becomes an inert variable compared to the volume of credit card transactions. (One suspects that even the traditional #1 users of dollar bills - those in the U.S. illegal drug trade - have moved on the debit cards.) So, we are in a new world where John Law's experiment has succeeded, where credit is the means for all transactions and the form of all savings. Law's system failed because gold was still the ultimate unit of account, and foreign exchange dealings remained in private hands. The livre could be traded for coin, and the governments, for all of their monarchical tyrannies, lacked the mechanisms to prevent people from taking their specie and running over the border. But, in the new world of central bank mercantilism, that is not a problem; the players at the table cannot cash in their chips. They can only exchange them for a differently colored legal tender IOU.
"Monetary policy" has been based on the assumptions that (1) banks wanted to lend to consumers for transactions and real estate asset purchases, (2) consumers wanted to borrow to buy now and would pay for the privilege, and (3) interest rates would control how much lending took place. But what if the consumers decide that they, too, want to hold "excess" reserves in the credit system? In a world of debit cards both consumers and banks may have discovered that they have less need or use for hassle of short-term leverage. The Fed has already hinted that it will be frowning on the uses of credit that are not "investments" - i.e. loans to existing members of the Fed club. "(W)e will use the rate of interest paid on excess reserves (IOER) as our primary tool to move the federal funds rate into the target range. This action should encourage banks not to lend to any private counterparty at a rate lower than the rate they can earn on balances maintained at the Fed, which should put upward pressure on a range of short-term interest rates."
If the Fed is going to keep its promise to draw down the assets on its balance sheet while tugging upward on the IOER, won't its interest rate policies necessarily be drawing private credit balances from consumption to savings? How else can they help create the necessary customers for the issuances of fresh Treasury paper; there has to be someone out there to do the buying so that the Treasury can actually send principal back to its best old customer. There are only two alternatives to that dreadful scenario of higher interest rates and lower consumer spending: (1) the Fed continues to be the Treasury's best new customer, or (2) the U.S. Treasury issues further regulations under the Trading with the Enemy Act outlawing "private counterparty" (sic) interest-bearing bank accounts.
But who can imagine the Fed breaking its word or the U.S. Treasury outlawing the private holding of money - er, credit?
Source: Daily Speculations
| 
