Wednesday, September 26, 2012

Federal Reserve

Central banking enabled the advent of total war.
"If every American taxpayer had to submit an extra five or ten thousand dollars to the IRS this April to pay for the war, I'm quite certain it would end very quickly. The problem is that government finances war by borrowing and printing money, rather than presenting a bill directly in the form of higher taxes. When the costs are obscured, the question of whether any war is worth it becomes distorted."
No doubt.

President of the Philadelphia Fed warns of significant inflation.
""I don't think it would occur immediately," he said. "Inflation is going to occur when excess reserves of this huge balance sheet begin to flow outside into the real economy. I can't tell you when that's going to happen."
"When that does begin if we don't engage in a fairly aggressive and effective policy of preventing that from happening, there's no question in my mind that that will lead to lots of inflation."
Bernanke and other Fed officials have often said that the Fed will be able to contain the outflow of reserves into the economy and thereby limit wage-price pressures by raising the rate of interest it pays on excess reserves. But Plosser said the IOER [interest rate on excess reserves] and reserve draining tools cannot be relied upon.
"How fast will we have to do that (raise the IOER)?" he asked. "How rapid will it have to go up? We don't have a clue. Raising the IOER where you have a trillion and half or two trillion dollars in
reserves, we have absolutely zero experience with it."

"We have the tools to do it, but we don't know the consequences of the tools," Plosser said.
"If the IOER doesn't work and we have to sell assets, MBS, how will that affect housing?" he asked. "Will we be able to unwind from this at a pace that doesn't disrupt the economy?""
They can't stop it.
"As Plosser points out, there is approximately $1.5 trillion in excess reserves, given that the multiplier for reserves and money supply (M2) is now roughly 100, there is no way the Fed can allow that amount of excess reserves to get into the system. It would mean an increase in M2 of $150 trillion! On a current base of only $10 trillion. The Fed would have to fight such an outflow very aggressively, and that would mean much higher rates."
Wow. That's crazy.

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