Open market operations and inflation

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fsk replied on Thu, Aug 6 2009 12:58 PM

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When the Federal Reserve conducts its Open Market Operations, it is literally printing and lending brand new money.  It is 100% inflationary.

The newly printed money is in the hands of financial industry insiders.  There's a time delay between when new money is printed and when prices rise.  Also, prices don't rise uniformly.  This allows the effects of inflation to be covered up.

Printing new money redistributes wealth.  It steals from people who actually work for their money, and gives to the people who print and spend the brand new money.

If there is economic growth, then more money can be printed without causing inflation.  For example, if real economic growth is 5%, then 5% more money can be printed without causing inflation.  It's still stealing.  If new money were not printed, then everyone else would see prices drop by 5% as the economy grows.

In reality, the economy is shrinking and not growing.

I wrote a post on "Monetizing the Debt".

When the government taxes and spending equals tax revenue, that is neither inflationary nor deflationary.  When the government runs a deficit, that is inflationary.  When the government runs a surplus, that is deflationary.

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Esuric replied on Thu, Aug 6 2009 2:02 PM

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fsk:

When the Federal Reserve conducts its Open Market Operations, it is literally printing and lending brand new money.  It is 100% inflationary.

The newly printed money is in the hands of financial industry insiders.  There's a time delay between when new money is printed and when prices rise.  Also, prices don't rise uniformly.  This allows the effects of inflation to be covered up.

Printing new money redistributes wealth.  It steals from people who actually work for their money, and gives to the people who print and spend the brand new money.

If there is economic growth, then more money can be printed without causing inflation.  For example, if real economic growth is 5%, then 5% more money can be printed without causing inflation.  It's still stealing.  If new money were not printed, then everyone else would see prices drop by 5% as the economy grows.

In reality, the economy is shrinking and not growing.

I wrote a post on "Monetizing the Debt".

When the government taxes and spending equals tax revenue, that is neither inflationary nor deflationary.  When the government runs a deficit, that is inflationary.  When the government runs a surplus, that is deflationary.

Wouldn't the government need to run constant deficits in order for it to be inflationary? Couldn't they just cut total government expenditure during the next fiscal year? By the way, are you Serbian?

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fsk replied on Thu, Aug 6 2009 2:50 PM

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No, I'm not Serbian.

No, there can be inflation even when the Federal budget is balanced.

In the USA monetary system, money-creation power lies with the banksters and not the Federal government.

Whenever a bank issues a fractional reserve loan, new money is created.  Via open market operations, the Federal reserve creates enough new reserves to keep the Fed Funds Rate at the target (currently 0%-0.25%).

If the Federal budget is balanced, but private banks issue more new loans than loans are repaid, then there will be inflation.

If private banks stop issuing loans, due to a recession/depression, then the Federal government can create new money by deficit spending.

Technically, when there is deficit spending, the Federal government does not create new money.  The Federal government creates new bonds to finance this deficit spending.  These bonds are sold to the financial industry.  Approximately 10% of all Treasury bonds are owned by the Federal Reserve.  Via 10:1 reserve ratio fractional reserve banking, the financial industry creates the remaining 90% of the money required to purchase new Treasury debt.

The Federal government does *NOT* have the power to print new money.  The Federal government only has the power to print new bonds.  These bonds are then purchased by the financial industry and (indirectly) the Federal Reserve.

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Esuric replied on Thu, Aug 6 2009 3:25 PM

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So essentially, the FED puts money into private banks via open market operations causing an artificial shift to the right in the supply of savings, and thus lowering the rate of interest. The banks, through FRB, pyramid debt on top of these newly created reserves causing even more inflation. This process literally increases the supply of money and the velocity of circulation.

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fsk replied on Thu, Aug 6 2009 4:10 PM

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The important point is "Money is printed by the government!" is an illusion.  Physical Federal Reserve Notes are printed by the Treasury department.  They are then sold to the Federal Reserve for the printing cost and not the face amount.  The vast majority of money is created electronically anyway.

The profit gained by printing and spending new money is known as "seignorage".  In the US monetary system, seignorage profit accrues mostly to the banksters.  Via deficit spending, politicians also claim a slice of this profit.

The cost of inflation is paid by everyone else.  The banksters get a $1 trillion bailout.  The money in your checking account loses its value due to inflation.  The banksters get to print new money borrowing at the Fed Funds Rate of 0.25% and lending it out at 6% via mortgages.  They profit while you suffer inflation.

You might say "Well, then I'll borrow as much as I can and take my fair share!  I'll buy the biggest house I can and take out the biggest mortgage I can!"  The fallacy is that, during the next recession/depression, you might lose your job and be unable to repay your mortgage.  Then, you'll lose your house and your savings.  You lose your house, but the banksters are "too big to fail" and qualify for a bailout.  There's no way for a non-insider to win.  The best you can do is refuse to play.

Because inflation is so high, there's no incentive to save money.  If inflation is 20%-30% or more and your bank is giving you 1% interest, then what incentive is there for you to save?

As long as you use slave points as money, you're subsidizing the looting of the banksters.  The only way out is to boycott the Federal Reserve.  The IRS demands that income taxes be paid in Federal Reserve Notes.  According to IRS bureaucrats, income taxes must be paid on *ALL* work.  If you want to boycott the Federal Reserve, you have to also boycott the income tax.

The best way to protect your savings from theft via inflation is to buy gold or silver or other tangible assets.