Wednesday, July 18, 2012 – A Primer on Money

A Primer on Money
– by Sinclair Noe

DOW + 103 = 12,908
SPX + 9 = 1372
NAS + 32 = 2942
10 YR YLD -.02 = 1.48%
OIL +.72 = 90.26
GOLD – 8.90- = 1574.50
SILV -.13 = 27.28
PLAT – 12.00 = 1412.00

It’s earnings reporting season: Ebay profit more than doubles. IBM profit was up and they raised their outlook. American Express profit came in flat. I don’t think earnings have as much impact as they once did. 

Treasury Secretary Tim Geithner was speaking at a conference in New York. Geithner says the economy is definitely slower than we’d all like it to be. He cited 3 reasons: “It’s slower mostly because of the trauma from Europe, the after effects of the rise in oil prices earlier this year, and because government spending is actually falling now quite significantly. Those three things are a pretty significant drag on a recovery.”

Geithner also defended his response, or lack thereof, to the Libor rate rigging scandal: “We acted very early in response to the concerns that the processes to set this rate were impaired and flawed, and vulnerable to misrepresentation,” he said. “The U.S., to its credit, set in motion at that stage a very, very powerful enforcement response, the first results of which we have now seen,” and “There is more to come,” he added, but provided no details. 

Four years after the fact, Barclays is fined; finally an investigation starts; maybe something will happen, wow, that was soooo powerful. Apparently Geithner never heard the phrase, justice delayed is justice denied.

The Federal Reserve surveys its 12 district banks for anecdotal analysis of economic conditions; the results are published in the Beige Book, which the Fed published today. Here is the abridged version: Overall economic activity continued to expand at a modest to moderate pace in June and early July…Retail sales increased slightly…most noted strength in auto sales…All district housing market reports were largely positive…Rental markets continued to strengthen…Manufacturing activity continued to expand slowly in most Districts…Demand for loans grew modestly in most Districts…All Districts conveyed that input prices had stabilized…Wage pressures remained modest, except for highly skilled workers in IT, health care, transportation and manufacturing…Employment levels improved at a tepid pace for most Districts…Overall, Districts reported that their contacts remained cautiously optimistic about future business conditions.

Fed Head Bernanke is on Capitol Hill. The banks are trying to figure out when they’ll get free money. There is quite a bit of discussion on when the Fed will embark on QE3. As an example, from Goldman Sachs yesterday: 
While we think that a modest easing step is a strong possibility at the August or September meeting, we suspect that a large move is more likely to come after the election or in early 2013, barring rapid further deterioration in the already-cautious near term Fed economic outlook.

And from Merrill Lynch this morning: 
We expect that, as the data continue to soften, the Fed will undershoot its own forecasts and thus respond with further easing. We expect the Fed to push out its forward guidance until at least mid-2015, perhaps at the August 1 FOMC meeting, and to launch a $500bn QE3 asset purchase plan by the September 13 meeting.

Of course, yesterday, Fed Chairman Bernanke went to Capitol Hill to deliver testimony and take questions. Senator  Chuck Schumer pushed Bernanke on further stimulus as expected, telling the Fed head that Congress will not be able to get its act together. With lawmakers hopelessly deadlocked, Schumer urged Bernanke to take whatever action he thinks necessary. “Get to work, Mr. Chairman,” he said. 

Today, Bernanke talked to the House side. Still no indication he’ll actually do anything. Bernanke maintains that the first two rounds of Quantitative Easing did help, but concedes: “Monetary policy is not a panacea. It is not the ideal tool. I’d like to see other parts of the government play their roles.”

The most interesting part of the Humphrey Hawkins testimony is that this was Ron Paul’s last hearing with Bernanke. In response to a question about Ron Paul’s audit-the-Fed bill, Bernanke said: “I agree absolutely with Dr. Paul that the Federal Reserve needs to be transparent and it needs to be accountable.” BUT, the Fed is already very transparent, so no need for an audit. Pay no attention to the smoke and mirrors. 

Ron Paul gets the floor and doesn’t like Bernanke’s beefs with his bill. Dr. Paul says:  “When the Fed talks about independence, what they’re really talking about is secrecy and not transparency.” The GAO can’t look at agreements with foreign central banks, FOMC transactions and other issues. “If we protect this amount of secrecy, it is not good policy and it is not good economics at all and it is very unfair.”

He asks Bernanke: “Whose responsibility is it under the Constitution to manage monetary policy?”

Bernanke says Congress has that power, and Congress handed it to the Federal Reserve. Bernanke, on further questioning, notes that Congress also has control of oversight. “There’s no constitutional reason why Congress couldn’t just take over monetary policy … but it wouldn’t be very good from an economic-policy point of view,” he says.

Dr. Paul is getting fired up, ready to go off. He says Congress should demand to know more about the Fed and how it operates. He says the crisis “is in its early stages. We’re in deep doldrums … and we never challenge anything.”  You know, stuff like wars, deficits, spending. 

Paul was granted some extra time from another representative and he asked about inflation and deflation and then Paul asks: Can you foresee any kind of crisis in which you’ll reassess your assumptions about monetary policy?

Bernanke says yes, he makes evidence based judgments and could do that. And then time ran out, so we may never know if Bernanke has the same nightmares as Dr. Paul. 

 And then Representative Paul, at least in my imagination, he wandered down to the Wright Patman Memorial Lunchroom to re-read a dog-eared old copy of  “A Primer on Money”.

“When our Federal Government, that has the exclusive power to create money, creates that money and then goes into the open market and borrows it and pays interest for the use of its own money, it occurs to me that that is going too far. I have never yet had anyone who could, through the use of logic and reason, justify the Federal Government borrowing the use of its own money… I am saying to you in all sincerity, and with all the earnestness that I possess, it is absolutely wrong for the Government to issue interest-bearing obligations. It is not only wrong: it is extravagant. It is not only extravagant, it is wasteful. It is absolutely unnecessary.

The Constitution of the United States does not give the banks the power to create money. The Constitution says that Congress shall have the power to create money, but now, under our system, we will sell bonds to commercial banks and obtain credit from those banks.

We have what is known as the Federal Reserve Bank System. That system is not owned by the Government. Many people think that it is, because it says `Federal Reserve’. It belongs to the private banks, private corporations. So we have farmed out to the Federal Reserve Banking System that is owned exclusively, wholly, 100 percent by the private banks — we have farmed out to them the privilege of issuing the Government’s money.
Who has the right to create money in the United States? Under the Constitution, it is the right and duty of Congress to create money. It is left entirely to Congress.

To whom has the Congress delegated this money-creating right?  To the banking system, that is, to the Federal Reserve System and to the commercial banks of the country.

If the Government can issue bonds, why can’t it issue money, and save the interest?  Thomas Edison stated the matter this way: If our Nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good also. It is absurd to say that our country can issue $30 million in bonds, and not $30 million in currency. Both are promises to pay: but one promise fattens the usurer, and the other helps the people.

There will be a vote next week on Ron Paul’s audit-the-Fed bill. It probably won’t pass.

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