This economic plan - pegging to the US dollar - led to large current account deficits.
The only reason why this "worked" was because following the plan imposed by foreign investors (i.e. the IMF) meant that they could secure foreign currency.
This still meant that they were basically swapping hyperinflation for racking up a huge external debt instead, and they were essentially more dependent upon foreign investors. The fact that this 'worked' and didn't lead to disaster was probably due to the fact that oil prices kept creeping up. Currency pegging was used in Venezuela too and that story ended in disaster.
In terms of poverty reduction, Lula's Bolsa Familia program was more effective than this at actually helping people, but foreign investors love the story about how "Brazil was made safe again for foreign investors".
Any time you have an entity that's low on capital but high in potential, it's bound to attract outside investors, which is in turn bound to produce current account deficits. This isn't necessarily a bad thing. Having outside investors provide the capital needed to ramp up your operations, can be a huge win-win for both sides. In fact, this is exactly how most successful startups got to where they are today.
In contrast, I can't think of a single country with hyper-inflation that had a successful economy.
>Any time you have an entity that's low on capital but high in potential, it's bound to attract outside investors, which is in turn bound to produce current account deficits. This isn't necessarily a bad thing.
Taking on large foreign debts has pretty much led to disaster everywhere from Greece to Thailand to Zimbabwe.
Where it's "worked out", it's usually been a way for foreign investors to extract wealth from a country's natural resources.
Any time anybody tells you that the best way to grow a business is to rack up lots of credit card debt, run.
>Having outside investors provide the capital needed to ramp up your operations, can be a huge win-win for both sides.
You have to make sure that the outside investors are put on a leash (as they are in China). If you don't, you end up bringing in lots of capital causing a spike of growth for a while, destroying local businesses (who can't compete with foreign businesses) and then when it ends the economy craters and inflation spikes once again.
>In contrast, I can't think of a single country with hyper-inflation that had a successful economy.
I can't think of a single country with a successful economy that hasn't at hasn't taken the IMF's guidelines and done the exact opposite (contrast South Korea's relative success with Thailand's).
Currency pegging was used in Venezuela too and that story ended in disaster.
Which period are you referring to?
Venezuela's biggest problem right now, besides the drought which has hit their electrical supply, is that the government looted the oil industry instead of maintaining it and taking a sustainable vig from it. I haven't looked at the numbers (but see e.g. this production chart: http://www.tradingeconomics.com/venezuela/crude-oil-producti...), but as I understand it the lower oil prices are secondary to this, although if they'd maintained, let alone expanded production, I suppose the prices would be even lower....
Yeah i found that line about them becoming a big exporter right after the URV was introduced more interesting than trying to get people to think in static URVs than inflating Reals.
And the moment i read "Catholic university" i found myself thinking about the Chicago Boys.
URV was a nice hack, but people overestimate its economic brilliance. To confirm that it was something imposed by foreigners, you just have to take a look at the dates when the Latin America hyperinflation ended in each country:
> The only reason why this "worked" was because following the plan imposed by foreign investors (i.e. the IMF) meant that they could secure foreign currency.
Well, yes, that was the idea.
> This still meant that they were basically swapping hyperinflation for racking up a huge external debt instead, and they were essentially more dependent upon foreign investors. The fact that this 'worked' and didn't lead to disaster was probably due to the fact that oil prices kept creeping up. Currency pegging was used in Venezuela too and that story ended in disaster.
An external debt that was payable and negotiable. And that we were able to pay successfully (though now we have a large internal debt). In any case, having an external debt is not the end of the world. How many countries do it?
> Currency pegging was used in Venezuela too and that story ended in disaster
Right. That was the reason of Venezuela's disaster...
> In terms of poverty reduction, Lula's Bolsa Familia program was more effective than this at actually helping people, but foreign investors love the story about how "Brazil was made safe again for foreign investors".
Do you have any idea how destructive inflation is to a poor household? I'm sorry, this is ridiculous.
And what does Bolsa Família - a program that was actually a merge of several programs from FHC's previous administration, modeled by Ricardo Paes de Barros around Friedman's negative income tax - have to do with this?
People were used to inflation, and prices would go up as a regular practice.
Indexing prices using URV, all prices would increase in a regular pace, all prices together, and inflationary pressure would lose the irregularity (no more uneven increases, that anyone would compensate in the next step).
After a while, just rename this fake money to "real", and you have Brazil with its long-surviving money.
It's saddening the number of national economies that have been destroyed by politicians who don't understand economic fundamentals. When it comes to most matters like the military for the example, we trust our generals to organise and manage the Armed Forces as per their best judgement. And yet, when it comes to economic policy, we persist in thinking that it should be implemented by career politicians and popular opinion. As long as that doesn't change, I think we're doomed to see endless repeats of such rookie mistakes.
That's not "oops". That's not giving two shits about being right because being right doesn't pay the bills. Being wrong does.
If you want to see economic destruction on a wide scale, don't listen to the anti-austerity protests. Don't listen to "populist" politicians. Listen to the 'respectable' economists who have an eye on a well paid job at a corporate think tank like CATO. They truly have nothing but objectivity and your best interests at heart.
Liberals love to push Keynes economic theories and hold him up as some kind of expert. Likewise, Conservatives love to push Friedman's theories on the economy since it fits with their staunch free market ideas.
Even in these circles it would be hard to find someone who's actually objective about what they're seeing.
I wasn't using it as such. If an economist gets the ear of a president, is employed by the ECB (as the above economists were) or a column in the New York Times they're 'respectable'.
>Liberals love to push Keynes economic theories and hold him up as some kind of expert.
Conservatives use his theories too. Republican politicians who fight tooth and nail for military spending in their districts know exactly what they're doing and why.
>Even in these circles it would be hard to find someone who's actually objective about what they're seeing.
A good litmus test of this is to look at their predictions and see how they stack up to reality.
Some predictions are just bad, some are so persistently awful that they indicate that the economist has incentives that lead them to tell flat out lies.
It is completely subjective, but it's also obvious that the Keynesians won that battle a long time ago. Go into any classroom, economics conference, FOMC meeting, etc. Keynesian theories enjoy the status of being unassailable, objective facts. Austrian and other schools of thought are mocked, derided and dismissed wholesale.
If you have actually checked out Steve Keen's presentations and/or writing you would have learned that what is being presented as "Keynesian economics" is more correctly "Samuelsonian economics". This after Paul Samuelson that sat down and basically rewrote everything Keynes to fit it into the very economic models that Keynes was attacking.
Liberals don't push 'Keynes' - they push 'big spending all the time as a means to redistribute wealth' - and use the cover of 'Keynes' as credibility.
'Keynes' advocated for gov. spending in downturns and saving in upturns.
The problem is:
A) Progressives want to spend, infinitely. There is no 'saving period'. Ergo - it's nothing to do with Keynes really.
B) It's really hard to tell what a 'downturn' is. 'Restoring confidence in markets' and picking up some infrastructure spending when industry is in a lull - this is on paper - a great idea. BUT - when a market has undergone a 'secular shift' - meaning that the lost jobs are not due to cyclical issues, but are permanent ... then the government ends up throwing good money after bad.
Put another way: Keynes urged spending in down cycles to level out volatility and stabilize employment. But any given downturn may not be a 'cycle' - with an impending uptick. A 'downturn' may be permanent - like 'lost jobs to China' etc..
The 'solution' to a downturn has to be commensurate with the causes: cyclical shift? Ok, some infrastructure / gov investment might help. Millions of jobs lost to China? Gov. spending will only delay the inevitable. Better to invest in 'retooling' the workforce etc.. But this is not an 'economic' solution - it's a business/strategy solution and it takes intelligence.
Eh, I wouldn't put economists in the same category as generals or engineers. They are more like clergy or court astrologers. Their job is to make the numbers work for the politicians, who in turn work for the bankers.
Yes, the clergy/court astrologer comparison is very apt.
A few are more like engineers (e.g. see Steve Keen's work) but they're not the ones who get the plum jobs in government, powerful NGOs or banks - they tend to be professors in backwater universities.
How many of those 'respectable' economists predicted the 2008 crash? I'm skeptical of the entire ability of the profession to make any large scale policy decisions.
Why is predicting a particular economic event the qualification? Sure, predicting the future is nice, but what I want to know is whether it would have happened under the policies favoured by economists, whether the effects would have been as severe, whether long-term economic growth and stability would be better or worse, whether human welfare would be improved, whether technological advancement would be greater, whether we'd be happier, healthier, safer...
The 2008 crash sucked for a lot of people, but if your economic goal is simply to foresee it or forestall it, you're asking for far too little. It seems a bit like asking why so-called public health experts weren't able to prevent those two cases of Ebola in 2014, while ignoring the 50 000 annual flu+pneumonia deaths and the 600k heart disease deaths--as well as the fact that they stopped ebola infections at two.
Because the ability to predict outcomes is a key validator of any scientific field. If civil engineers couldn't predict if a bridge will hold up or fall then we couldn't and shouldn't rely on huge portions of our transpiration network. Similarly with economists, if the field can't forecast the instability of a major sector of our economy then we shouldn't put a tremendous amount of trust on their field for policy.
And 2008 wasn't just any economic event, it was a major event which nearly took down the world economy because the financial sector hyperextended and intertwined risks. The economic field had no widely accepted or reliable metric to predict that crash.
Public health experts have a very good model for spreads of diseases, models which have been validated many times against real world data, and then therefore can be relied upon to direct resources to help prevent dangerous spreads of disease. Not so with the economic field...
Though I don't know many predictions on 2008, many economists did correctly predict how badly the Eurozone would end up due to the single currency but different fiscally policies.
Germany (basically the strongest eurozone country) has only grown something like 0.7% annually over the past 8 years
Hello, non-US fellow here. Can someone point out to me, why this is not the case - I assume that is the reason this got slightly downvoted - or do people just have different opinions about the meaning of "control"?
You may have heard of the Golden Rule, which usually means "Do unto others as you would have them do unto you." But there's a slightly different version which runs: "He who has the gold makes the rules".
This is the case in funding the US Department of Defense. The overall budget is set by the Congress (and subdivided innumerable times afterwards by the DoD agencies and departments), so saying that civilians control the military in the US is both true in the operational sense (the military is part of the Executive Branch, and thus under the President, a civilian), but also in a financial sense.
More info about the US budget process (which bears a strong resemblance to making sausage..) can be found here:
The military is under civilian control in the sense that oversight is held by civilians giving some guidance/orders to the Joint Chiefs of Staff via the various branch Secretaries and the Secretary of Defense, and is head at the top by the President, but otherwise the military answers to an internal chain of command, where the Secretaries and the President are the only civilians at the top. The word control may not be the best descriptor of this relationship.
I don't mean to nitpick but your explanation is missing a critical detail. The chain of command for operational purposes (military operations) completely bypasses the Joints Chiefs of Staff and goes directly to the Unified Combatant Commands. By design, there is no military leader that has operational control over more than a fraction of US forces at a time, which further improves civilian control over the military.
The JCS have a very important role but their control is mostly administrative (doctrine, assignments, equipment, promotions, etc.).
Citizens have indirect... kinda control... in a way over the military.
The "Commander in Chief" (President) has somewhat wide berth of power over the military and can somewhat do what they want with the military. Congress has some checks for what the Commander in Chief can do, but traditionally the CiC has been able to basically send troops to wherever whenever.
In terms of actual citizen power over the military, no. Everyday citizens have no power or direct say in the military.
What more do you want then? Nearly every country in the world has adopted the US's system of central banking: an unelected, privately owned central bank that creates money through bond purchases or some other mechanism.
In the US this entity is so revered that their policies are rarely even a point of discussion in our extremely partisan politics. Hell, just suggesting that they permit an audit is considered controversial.
As far as I can tell, politicians exert basically zero influence over actual monetary policy. As long as they have a constant supply of new fiat to fund entitlements and other niceties for their constituents they don't rock the boat.
In most countries, the central bank is not privately owned at all. Even the Fed is only partially privately owned, and that's mostly a historical artefact.
Regulatory capture by private banks still tends to be a problem, though.
I'd like the Federal Reserve to control overall fiscal policy as well. The Fed tells Congress exactly how much it can spend each year, and Congress divvies it up however it likes.
Because I think our unelected politicians would do a better job than our elected ones. For one thing, it avoids partisan gridlock. Need I mention how many times Republicans threatened to not raise the debt ceiling and cause default?
And there's a technical reason as well: if the Fed credibly commits to using fiscal policy in a predictable, countercyclical way, then the mere presence of this policy ought to dampen recessions. On the other hand, whether Congress actually passes stimulus spending or not is highly unpredictable and so the markets cannot rely on it.
You have a lot of trust in those unelected politicians.
I imagine their first fiscal decision would be granting themselves the authority to buy corporate debt. Nothing beats acquiring productive, physical assets with infinite fiat currency! What's the term for an economy where the state owns the means of production again?
Buying corporate debt is not a fiscal decision. If the Fed wanted to do that today, there is no law on the books stopping them.
Fiscal policy concerns how much the government spends, and on what.
Furthermore, you only own a company when you own its equity, not its debt.
No offense, but for someone who seems so worked up about what the Fed might do to us, you seem rather uninformed on the basic facts of what it actually does and how.
We've reached the comment limit here, but it is absolutely not agreed that the Fed has legal authority to buy equities.
"Former Fed official Joseph Gagnon has lamented that the Fed’s asset purchase authority “is limited by law to the Treasury, agency, and agency MBS markets plus foreign exchange” (emphasis added), and others agree."
They could attempt to do so with some really creative legal interpretations, but it would probably take an act of Congress to resolve all of the resultant lawsuits.
Yes, but the post generally agrees with my assessment, which is the Fed could go and buy equities or corporate debt if it really wanted to (and other central banks, just as the ECB or JCB, have already done just that, without nationalizing their economies in the process):
"Substantively, the Fed probably enjoys greater discretion in unconventional monetary policy—possibly extending to the purchase of equities—than is commonly assumed."
FYI, you were probably restricted from replying immediately to my post, not because of the comment depth.
That same objection can be raised against technocratic control of monetary policy as well, and in fact, people argued against creating the Fed for exactly this reason.
So what makes fiscal policy so special that we need to keep it out of the Fed's hands?
Monetary and fiscal policy are the two main levers that the government has over the economy, but only giving one of them to the Fed means that the Fed has its hands tied in many circumstances (like today, when rates are persistently low), and requires the Fed to constantly guess what Congress will do and react to it.
Anyway, to answer your question, the Fed would exercise fiscal policy with the same aims and goals by which it uses monetary policy.
"The Federal Reserve System is not "owned" by anyone. Although parts of the Federal Reserve System share some characteristics with private-sector entities, the Federal Reserve was established to serve the public interest."
and also
"The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. In fact, the Reserve Banks are required by law to transfer net earnings to the U.S. Treasury, after providing for all necessary expenses of the Reserve Banks, legally required dividend payments, and maintaining a limited balance in a surplus fund."
The FED is definitely privately owned. It's a private company with a share structure. Most banks in America have a share in it - or rather the regional bank.
" Although parts of the Federal Reserve System share some characteristics with private-sector entities, the Federal Reserve was established to serve the public interest."
Don't be so naive. A private company tells you 'they are to server the public interest' and you believe them?
Listen - I'm not a conspiracy theorist. Generally speaking, the Fed is much like other central banks. But make no mistake - it is not a public entity.
Try this: the US government does not have access to the financial records of the Fed. Congress wanted to do an audit of the Fed - and they were blocked from going back past 2004.
Think about that. The US currency system is controlled by an entity that will not let the public see what's in their records.
That's insane.
My bet is that from 1913 to past the Nixon era there is crazy, crazy stuff on the books, and confidence in the US currency would go crazy if that information got out.
Also - just because it does not generate a profit does not mean that it's not used for the benefit of the banks. They set interest rates that suit their interest, not necessarily the interest of the general public.
Sure, it has private shares, but it was created by an act of Congress, its charter explicitly states its public mission, it doesn't run a profit, its head and a majority of its board is appointed by the President and confirmed by Congress, and its basic functions are interbank clearing and payments.
At this point, it looks so little like any other private entity that treating as such seems silly. If it looks like a central bank, quacks like a central bank, ...
> They set interest rates that suit their interest, not necessarily the interest of the general public.
I call BS. Low rates are almost always punitive to banks' bottom lines, because they make the spread between deposit rates and lending rates; when rates are low, that spread gets compressed to zero. If they only served their bank 'shareholders', how do you explain monetary policy since 2008. Or going further back, the fact that the Fed tried to pop the stock market bubble in '29, even though all the big banks were clearly benefiting from it?
With all due respect, you are if you make these sort of claims without a shred of evidence. The Fed chair + board basically decides the rate policy, and he/she is always a career economist, not from industry. You think really Janet Yellen is secretly taking kickbacks to screw around with rates?
"Those decisions are made by the Federal Open Market Committee, which has a dozen voting members, only five of whom come from the banks. The remaining seven, a voting majority, are the Fed’s Board of Governors who, as mentioned, are appointed by the president."
+ " If it looks like a central bank, quacks like a central bank" - except it's not. It's a privately owned and managed entity.
+ "I call BS. Low rates are almost always punitive to banks' bottom lines" this is completely false.
+ " The Fed chair + board basically decides the rate policy, and he/she is always a career economist, not from industry.". This is utterly, beyond naive. The Fed Chair is an extremely politically driven position - they don't get to this position and do whatever suits them or the economy. They take into account the positions of the companies shareholders - which are the banks. It's beyond reason that the banks act entirely in the public good. They are 'for profit' entities - and absolutely everything they do is 'for profit.
But you missed a key item that throws your argument to the wind: Congress does not have access to the Fed's books. My friend - if you believe for a second that the Fed is acting entirely in the public's interest - then the public should be able to see what's on the Fed's books. You can't. Congress can't. The President of the USA can't. Neither can the CIA, the NSA or the Treasury.
There is some legislation to this effect right now:
It's inconceivably naive to believe that a cabal of bankers - who manage the US currency - and who DO NOT LET US ACCESS THEIR RECORDS - is acting in the best interest of the US.
There is NO COUNTRY IN THE CIVILIZED WORLD where this is the case.
And there's more. Now - this is more public info but it does demonstrate a high degree of cabalism between banks and the Fed - after the 2008 crises, US banks were very 'unhealthy' - this is because they had 'toxic' i.e. worthless mortgages on their balance sheet. So - the Fed - allowed banks to put those mortgages on the banks balance sheet at face value - for a period of time. Ex: ABC banks has a a crap mortgages on a house with a market value of $100K, but the mortgage is for $200K (it's worthless) - they exchange them with the Fed for a full $200K.
The intent of this 'program' was to shore up balance sheets of banks to make them healthy - then while interest rates are low, bring the value of the homes up so those mortgages are not 'underwater' at which point the banks will take them back on their balance sheet. But that may never happen. It it has not happened yet. In a nutshell - the Fed handed $1 to banks for something only worth 50 cents.
This is fraud.
Not only that - this was not a small thing. This was the biggest transfer of assets in world history. Have a look at the Fed's balance sheet recently:
You see that big red are that is how 1/2 of the Fed's balance sheet and didn't exist before: those are bullt, worthless mortgages. 2.5 TRILLLION DOLLARS WORTH.
You know where you don't find that toxic, worthless sludge: on the balance sheets of nationalized banks.
Summary:
A) The Feds transactions are private - and nobody in government can access them.
B) The Fed states that it makes decisions for the benefit of the economy, but what they say is irrelevant: the system is designed first and formost for the benefit of the banks.
C) A 2.5 Trillion dollar 'fraud' (technically, since the banks will 'one day' take those crap mortgages back, it's not fraud - but they haven't and maybe they won't so it's a crime in the making) - or at least a 2.5 Trillion ...
Hm, you simply ignored my points or straight contradicted them without any sources.
> + "I call BS. Low rates are almost always punitive to banks' bottom lines" this is completely false.
Follow the link my friend -- net interest margins are sharply lower when rates are low. If you are going to just flatly disagree, you're entitled to your opinion, but I really don't think you will find accurate data to justify your viewpoint.
> This is utterly, beyond naive. The Fed Chair is an extremely politically driven position - they don't get to this position and do whatever suits them or the economy.
You're trying to have your cake and eat it too. Please make up your mind: either the bankers own the Fed, or politicians do. Also, if you think that the bankers own all the politicians, then nationalizing the Fed wouldn't help anyway, would it?
Also, this bears repeating: THE PRIVATE SHAREHOLDERS OF THE FED DO NOT CONTROL THE FED, BECAUSE THEY ONLY CONTROL A MINORITY OF THE BOARD SEATS.
> My friend - if you believe for a second that the Fed is acting entirely in the public's interest - then the public should be able to see what's on the Fed's books.
This is a classic conspiracy theorist argument. They don't want to show us all their books, so they must be doing something bad and hiding it.
You don't have any evidence of any wrongdoing, you just presume that it exists because of your prior beliefs.
In reality, people don't like politically motivated critics to rummage through their books. Climate scientists don't want their critics access to their e-mails -- does that prove that those scientists were faking climate change?
I wouldn't mind the Fed opening up all its books, but I also don't support a witch hunt.
> the system is designed first and formost for the benefit of the banks
Begging the question. Please show me a credible, historical source that supports your claim. It'd also help if you can explain the long history of Fed actions that would've been against the interests of its private shareholders that you claim completely control it. Let's start with the Crash of '29 and the Fed's efforts to prevent it, for starters.
> or at least a 2.5 Trillion dollar 'gift' to private banks by the central bank is only to the 'benefit' of the people of the US to the extent that the entire banking system doesn't come down and crash - but in a real capitalist system - most of those banks should have had 100% of their shareholder value wiped out.
I agree there are issues regarding moral hazard and who should be paying for the mess the bankers got us all in. But do you really think that the optimal solution is for the US to nationalize every insolvent bank, and that they could've done it without causing market panic and worsening the crisis in the process?
Anyway, the Fed could be explicitly nationalized without any real-world effect, precisely because it has been the textbook example of how to run a central bank for the last 60 years. You seem to think that all other countries' run their central banks better, but the truth is that those banks look to the Fed for leadership and guidance.
> So - the Fed - allowed banks to put those mortgages on the banks balance sheet at _face value_ - for a period of time. Ex: ABC banks has a a crap mortgages on a house with a market value of $100K, but the mortgage is for $200K (it's worthless) - they exchange them with the Fed for a full $200K.
Really doubt that--credible source please? Open Market Operations by definition are done at market prices; the Fed does not buy assets for twice their market value. I agree it would be pretty criminal if they did, but it would also be blindingly easy to find the evidence: just look at the free money flowing into each bank's balance sheets and cashflow statements.
If you think the Fed did this, and then everyone conspired to hide the evidence, then we...
DUDE. WHY WOULD BANKS EXCHANGE $X IN ASSETS FOR $X IN CASH FROM THE FED. THAT WOULD BE POINTLESS. IT WOULD NOT CHANGE THEIR BALANCE SHEET MATERIALLY?
The reason they did it - is because they were exchanging $X in assets for NX$ in cash.
If they weren't getting 'better than market prices' - the transactions would not have occurred. The 'big red' area on the Fed's balance sheet would have no financial reason to exist.
It's very existence implies the banks were getting a 'better than market deal'.
Forbes - not exactly a conspiracy outfit - refers to it as "MONEY LAUNDERING" and makes a direct comparison to organized crime.
From the article:
"After the Fed buys (at face value) and resells (at pennies on the dollar) the bad mortgage-backed securities with newly minted electronic digits that it places into the banks’ Federal Reserve accounts, it then sterilizes the entire operation to prevent the new money from transmitting the dread inflation virus. The Fed does so by, in effect, quarantining inside the banking system the new toxic money used to launder the dirty loans."
There have been $9 TRILLION dollars in off balance sheet* transactions that the Fed refuses to disclose. (!!!!).
You say: "Open Market Operations by definition are done at market prices"
Prove it! Where is your evidence these transactions are done at 'Market Value'??
-----> The burden of proof is on you <------
You can't prove it because those records are not available.
Ask yourself: WHY are those records not available? Because in every other country they are.
"The Fed refuses to provide any information on how it priced individual securities bought with TALF funds."
The Fed's primary objective is to keep the banks healthy.
'Would I rather see banks fail'
'Banks look to the Fed for leadership'.
It's all irrelevant. The banks shareholders should have been wiped out. Then we can see some degree of financial packages and stimulus with full transparency and accountability.
Dude - you are defending an opaque institution - that has issued 2.5 Trillion dollars - without Congressional approval or oversight - and without providing financial records!
> DUDE. WHY WOULD BANKS EXCHANGE $X IN ASSETS FOR $X IN CASH FROM THE FED. THAT WOULD BE POINTLESS. IT WOULD NOT CHANGE THEIR BALANCE SHEET MATERIALLY?
Actually, that's precisely what the Fed normally does. Banks need to maintain cash on their balance sheet to meet reserve ratios; being able to trade their assets in for cash at market price allows them to do precisely that.
Or to put it another way, OMO shouldn't not magically increase a bank's assets (which is what would happen if you took a $1 bond and gave it $2 in cash), but it should increase the amount of cash. It is not 'pointless' -- trading cash for assets, at the market price, is precisely how monetary policy works.
"The Desk initiates this process by announcing the OMO through an electronic auction system called FedTrade, inviting dealers to submit bids or offers as appropriate ... The dealers' propositions are evaluated on a competitive best-price basis"
It's by definition a market price because the transactions are done via open auction to anyone on the Street.
Btw, your source is an op-ed contributor whose main thesis is that the Fed is up to no good, and also doesn't provide any references. He basically assumes that all the assets the Fed purchased are bad assets, without any proof. I took a look at those charts you shared and looked back and the Fed balance sheet. The vast majority of assets are T-bills, T-bonds, MBSes, e.g. NOT crap assets.
> -----> The burden of proof is on you <------
I don't really agree. We have two differing points of view -- why do you automatically get presumed to be correct? This is a forum discussion, not a trial. But if it were, I think the burden of proof falls onto the person alleging wrongdoing, like you're doing here.
> You can't win this one.
What makes you think this is about winning? I like to share why I hold my opinion and also see where other people are coming from, but frankly, you seem to be turning this into a personal pissing contest.
It's pretty obvious you made up your mind, and no amount of reasoning or evidence from me is going to sway you. Given that that we can't even agree on very basic facts, like how the Fed goes about its normal daily business, or its governance structure, which are all pretty easily verifiable on Wikipedia or mainstream news sources, I'm not sure what value there is to continuing to discuss this other than getting us both worked up into a lather.
There seem some unnecessary austerity policies out there. I think that stuff could be done by professionals instructed to maximise national well being than the politicians.
Anyone creates "money" every time they lend. Banks do a lot of lending, so they're definitely involved. But even opening a bar tab creates "money" (more accurately, "credit").
> Anyone creates "money" every time they lend. Banks do a lot of lending, so they're definitely involved. But even opening a bar tab creates "money" (more accurately, "credit").
I believe that's only partially true. If your definition of money is a piece of paper (e.g. a bar tab), than yes anyone can create money. However, if your definition of money is the U.S. dollar (e.g. paper or electronic versions) than there are only two entities that can create it: the federal reserve via open market operations and banks via lending.
My question to digi_owl was whether he was making a distinction of what limits credit creation from banks. The reserve requirement has very little to do with it.[1][2]
If you deposit X to the bank, and the reserve requirement is R (say R=0.1), then the bank can loan out X(1-R) to someone else, who can deposit that money. Then on the basis of that deposit, they can loan out X(1-R)(1-R), and so on. The geometric series says that a deposit of X becomes bank-created money in circulation of up to X/R. With a reserve of 10%, $100,000 can become $1,000,000.
That legal fractional reserve requirement acts like a powerful lever on how much money banks can create.
I don't see how those links back up that assertion. The second one gives a more detailed explanation of the mechanism I outlined. If you're saying the market always checks excessive leverage by pricing risk fairly, we saw how well that worked in 2008!
This might interest you. It shows the impact of recent increases in capital reserve requirements on corporate lending.
> The ongoing impact of post-crash banking regulation on corporate lending is a case in point. Thanks to reforms such as Basel III, banks must now hold a far greater portion of their capital in reserve.Some banks may face even stricter requirements in future; only this month Sir John Vickers called for UK banks to be forced to shore up their financial buffers further in the face of renewed market volatility.
> These measures are primarily motivated by a desire to make the overall system more stable, to ensure adequate reserves and liquidity in the case of another major shock. But part and parcel of this is the fact that it is now far harder and less profitable for banks to lend to a range of businesses.
> As a result, banks have been steadily withdrawing from large areas of corporate lending as they look to reorient their focus to key relationships and diversifying risk. This has left a gap in the market: many corporates are finding it near impossible to get the level of financing from banks that they previously relied upon.
Here are some references to my main assertion that reserve requirements don't limit a bank's ability to loan, instead capital requirements are the limiting factor.
"Nearly every country in the world has adopted the US's system of central banking: an unelected, privately owned central bank that creates money through bond purchases or some other mechanism."
This is false.
A) 'Central Banks' existed long before the US Fed.
B) The FED is totally unique in the world in that it is 'privately owned/managed' - most Central Banks of the world are nationalized, and managed indirectly by the governing apparatus. The more advanced the state, the more it is independent.
Nobody is copying the US system - that said - the US system is 'de facto' pretty close to Bank of England, Canada, the ECB etc. in the sense that though the Fed is technically a private entity - the way it is managed is pretty close to how most good central banks are managed.
Hyperinflation always has the same causes:
+ Governments printing money to pay off debts
+ Governments grabbing private property causing a capital flight.
I'm not sure when hyperinflation entered the discussion, but it'd be more accurate to say that hyperinflation has historically been caused by those two factors.
We're in completely uncharted economic waters with QE/ZIRP, and I can think of several scenarios where increasingly more insane central bank intervention decimates the value of currency:
-The decision is made to monetize the debt
-Another 2008-scenario prompts helicopter money
-A large enough minority of people simply lose faith in the monetary system and rapidly spend their dollars
All that being said, I don't think we're anywhere close to a hyperinflationary environment, and you can definitely have a problem with the Fed and our system of money sans hyperinflation worries.
I can't see how we can go from near-deflation to hyperinflation without passing through some period of normal inflation during which policy will be adjusted. Especially in the dollar, reserve currency of the world. The wealth has to flee to somewhere.
There's another classic reason for hyperinflation, which is a collapse of export industries causing a trade balance collapse. You can't print foreign currency.
Why else would the US go to such extreme lengths (Iraq, Libya) to protect the petro-dollar? Without near infinite global demand for dollars we would be completely crushed under our own debt.
It doesn't work that way though - stability breeds stability; the US is second only to Switzerland in stability and has a much larger float. In some ways the huge number of outstanding T-bills is an advantage, as it keeps the liquidity high and volatility low.
It's rather like the old joke about "I don't have to outrun the bear, I just have to outrun you": the US is only in trouble if its real economy falls behind.
(I'm not convinced of the importance of the petrodollar argument, especially given how spectacularly expensive the Iraq war was; it looks more like Cold War "sphere of influence" politics to me.)
"Why else would the US go to such extreme lengths (Iraq, Libya) to protect the petro-dollar? Without near infinite global demand for dollars we would be completely crushed under our own debt."
This position conspiratorial and non-factual and has no sound logical basis.
Yes - the US does use some geopolitical muscle to protect the 'petrodollar' but there are clear and unambiguous facts that fly in the face of the notion that Iraq/Libya were petrodollar issues.
1) The petrodollar is important, but not an existential issue for the US. The USD is so deeply entrenched as a global currency, the transactional amount for USD for Oil is relatively small in comparison, moreover, nobody needs to hold dollars to buy Oil, they just need it to transact. The statement 'near infinite amount of demand' isn't remotely true.
2) The US can easily use basic diplomatic pressure to keep Saudi Arabia, Kuwait, and Norway in line. Outside of that - there is no real control. Iran, Russia et. al. can do as they please today.
3) Your argument is a little upside down: the US Fed is fighting deflation not inflation - meaning that the US would love to have some softening of the currency overall.
4) The US is not carrying debt anything like most unstable countries. People loan to the US not because they have faith in the petrodollar, but because they have faith that the US Gov will pay them back - which is ultimately a function of the health of the economy - and relatively speaking, it's good. Or at least compared to most places.
Your position takes a simple thing and turns it into the extreme: 'Because the US has a petrodollar - all it's wars and geostrategy revolve around this'. It's like saying 'look at the bad cop on the news' and surmising all cops are bad.
US, Canada, UK, ECB, Norway, Aussie, Sweden - do not print money to pay bills, as you find in Brazil, Venezuela, China, every African state, and a good chunk of the rest of the world.
The US certainly prints money to pay its bills. The fed prints money and introduces it into the economy by purchasing treasuries. It's exactly the same thing.
Not the same thing at all. In fact - your very statement clearly indicates that it's not the same thing.
The US 'gets money' by taxation - and by selling bonds. Some of those bonds are later purchased by the Fed, using money printed by the Fed. That's how money gets into circulation.
In short: US currency is backed by US Government bonds. That's the 'asset' that backs US currency.
It's not 'money printing' - because the US Government has to issue debt in this case. Someone - somewhere - in the USA, Japan, China etc. has to actually lend the US money - at a certain interest rate in order for the transaction to happen.
So the US government does not print money. It just issues debt. The Fed's actions are a totally separate process.
Now - when Venezuela 'prints money' - it just does that. It literally just issues currency to itself to pay it's bills.
That is completely crazy. And that causes hyperinflation.
Nope. You would be surprised, but it is indeed the same thing. See e.g. Sec. 29-2 in [1] (or any other undergraduate econ 101 textbook, for that matter).
Not believing that there is any sound economic principle to validate your position, I checked your reference:
Your reference says nothing other than a few, very basic things about how the Fed is structured. It says absolutely nothing about the difference between 'raising debt + open market bond purchases' (how the fed does it) - vs. the hyperinflationairy issues related to governments that influence their central banks and basically print money.
So not only are you wrong - but your borderline lying by posting references that have nothing to do with anything.
In summary: aside from taxation, the US government generally can only raise money by issuing debt. They cannot print money willy nilly as they do in places like Brazil.
We're in a political era where people get excited about dismantling any institution. You can have the chair of a science committee bring a snowball in for show and tell, and it's considered a hilarious rebuke to scientists who are trying to explain climate models.
There is way to much partisan political medalling with the Fed. [1] If you're an economist at the Fed you can hardly ever be on the record about anything, or even donate time to nonprofits. Why? There is too much danger that someone will willfully misinterpret a complex statement, and use it to undermine everything the Fed does to keep the economy stable.
It would be great if most of the electorate had taken classes through intermediate macroeconomics. Then they might understand that an economics book they picked up in the nonfiction section of their bookstore almost always has an agenda outside of the mainstream, which doesn't mean that it is wrong necessarily, but that if it gets anything right it is likely a refinement of the past couple hundred years of scholarship or discussing a model that operates in an economy with different preconditions.
Calls to audit the Fed are about sincere an effort to improve its function, as Congress's use of its subpoena powers are about fing the truth rather than an opportunity to grandstand.
[1] As well as the Treasury too, but that's a whole different issue.
The Fed is already thoroughly audited in the usual sense, by an independent
inspector general and by an outside accounting firm (currently, Deloitte and
Touche), and the resulting financial reports are made public online. Every
security owned by the Fed, up to the detail of the identifying CUSIP number, is
also available online. Moreover, the Government Accountability Office (GAO),
which does in-depth reviews and analyses (“audits” of a different type) of
government activities at the request of Congress, has wide latitude to review
Fed operations, including supervision and regulation as well as other functions.
For example, as required by the Dodd-Frank Act of 2010, the GAO conducted
reviews of the Fed’s emergency lending programs during the crisis and of the
Fed’s governance structure. Since the financial crisis, the GAO has done some
70 reviews of aspects of Fed operations.
You're right that they are unconstrained by politics, and are free to act how they think is best. But they do explain their thinking and operate very transparently.
Federal Reserve "audits" omit everything interesting.
I want an audit with teeth, that audits the things that Americans should be interested in: the activities of their central bank and their motivations. I want an audit that doesn't require the explicit permission of the subject of the audit.
In 2010, Ron Paul introduced a bill with simple text. In part:
Subsection (b) of section 714 of title 31, United States Code, is amended by striking all after “shall audit an agency” and inserting a period.
The area of law that would be modified by his bill:
(b) Under regulations of the Comptroller General, the Comptroller General shall audit an agency, but may carry out an onsite examination of an open insured bank or bank holding company only if the appropriate agency has consented in writing. Audits of the Board and Federal reserve banks may not include-
(1) transactions for or with a foreign central bank, government of a foreign country, or nonprivate international financing organization;
(2) deliberations, decisions, or actions on monetary policy matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, and open market operations;
(3) transactions made under the direction of the Federal Open Market Committee; or
(4) a part of a discussion or communication among or between members of the Board and officers and employees of the Federal Reserve System related to clauses (1)–(3) of this subsection.
"And yet, when it comes to economic policy, we persist in thinking that it should be implemented by career politicians and popular opinion"
Do you mean as opposed to policies implemented by unelected people with their own agenda?
Money it's fundamentally a political creation. You can't get rid of politics because however control money control the country. And we all know where that 'people don't know what they need' attitude finish.
Presumably they could've also gone back to a gold and silver standard. (This would be a terrible idea for other reasons, but it wouldn't inflate, right?)
Argentina did something similar in the 90s. Not with precious metals, but with a strong currency (the dollar). It did stop inflation, but, after a decade, it had to be abandoned, because it was too restrictive. Of course, if politicians would have been less corrupt, or better at making decisions, maybe it would have worked longer.
Yep. And Argentina did the same in the 90's and they made 1 Peso = 1 USD. And it stopped hyperinflation.
What screwed up Argentina (big big time) was having state size go completely out of control and grow and grow until deficit couldn't be grown anymore and debt either.
After that crisis (2001) 5 presidents in 1 week, currency devaluation and a populist new president took office, then his wife (the Kirchners) and they almost became what Venezuela is today.
The article says: "And, basically, inflation did end, and the country's economy turned around. "
This is Brazil GDP per capita: (1)
It falls in 1992 (they forget to tell us that), exactly with the intervention that the article mentions.
Then it goes up, then down and then kick off spectacularly in 2002 (the year that lefty Lula Da Silva wins the election, by the way)
the article says:
"Brazil became a major exporter, and 20 million people rose out of poverty." and finish with "Everybody was very happy."
This is Brazil poverty headcount ratio: (2)
We can see an amazing trend down from, again, 2002.
Unfortunately I can't find the data from 1992 but that would be interesting in order to check the "everybody happy" thing.
Only pointing how easy is to create the appearance of causality.
Is Brazil broken? I didn't realize, let's check those graphs again.
And, are not trying to attribute the current problems in the economy of Brazil to a party instead of the current world economy. But, I bet, you think that the previous boom have nothing to do with that party. That was only the world economy.
I think public confidence is not as important as the denomination inwhich taxes must be payed...and inflation was happening because they had limited domestic production capacity and could not afford to buy foreign goods.
Sorry, but this story gets nowhere near the real reasons for the inflation reduction.
The major and most important change on the Brazilian government to achieve this was the LRF - Lei da Responsabilidade Fiscal, "Fiscal Responsibility Law" in English (free translation).
With these law, federal, state and municipal governments, which added much more oversight and control to public spending, requiring budget increases to go through congress, forbidding "money printing" practices and also requiring detailed accounting records to be submitted to a branch of the judiciary (TCU) for approval.
I could go on and write a huge document here, there's a lot of historical questions involved too. If anyone is interested in more details please let me know.
Pretty much. What the URV system did was get rid of the "inertial" inflation that was left over after they finally managed to get the government accounts in order.
Yes there were policies that augmented the recovery but the article hits upon a key point: you need the people of a government to trust the government for it to succeed.
The entire economic system is based upon trust. Trust that you can pay back a debt, you can take out a loan, you will get paid and the money will hold its value, the government will honor and stand behind it currency. This trust is lost when a government defaults on its debt, which was the case in Brazil and much of South America.
The real created an illusion of trust by listing prices in a phantom currency.
To a certain extent I disagree. As long as you have to pay your taxes in the sovereign's currency, and failure to pay those taxes has real consequences, there will be demand for that currency...
Public spending is never the underlying reason for hyper inflation. Usually there are other circumstances like supply problems. Money chasing too few resources. If resources and production kept up with money supply increase, then there would be no problem. Deficit spending is necessary if you want private sector to have savings.
For example, look at Japan. Central Bank tried for over 25 years to increase inflation without success. It's actually not very easy to do.
I agree. Most historical cases of hyperinflation had major structural/sytemic issues limiting production capacity relative to demand. Currency creation is only a problem relative to the capacity to produce.
If the government spends in excess and prints money to cover the costs, that means an increase in money supply. Which leads to inflation. Indeed, the spending alone would not be a problem if it was properly managed.
This is wrong. Actually, the LRF was only sanctioned in 2000, when inflation was already at 5.97% yearly.
The main factor behind reducing the inflation was not the URV hack, but the government's fulfilled commitment to markets to keep inflation low at all costs: through skyrocketing interest rates [around 25%], for instance (thus reducing credit -> reducing consumption -> reducing prices); or by binding it to the US Dollar and bankrupting many national industries.
How is this "fake money" more fake than the fiat currencies we use every single day, everywhere? It always simply comes down to the credibility of the issuance rules and the issuing entity.
I remember thinking as a kid: "It's been a while since we last changed currencies". And also wondering how long the USA were using dollars and things like that. Took me some time to realize that changing currency is not something that countries do every other year.
I lived in Brazil from 1989 to 1992 and while I was there, the money changed 3 times (I think cruzero, cruzado, cruzado novo). I was just a kid but I remember the price of drinks at the local shopping strip raising extremely quickly. I really think the mind game to trick the economy into a stable currency was amazing.
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[ 3.7 ms ] story [ 160 ms ] threadhttps://news.ycombinator.com/item?id=9617710
The only reason why this "worked" was because following the plan imposed by foreign investors (i.e. the IMF) meant that they could secure foreign currency.
This still meant that they were basically swapping hyperinflation for racking up a huge external debt instead, and they were essentially more dependent upon foreign investors. The fact that this 'worked' and didn't lead to disaster was probably due to the fact that oil prices kept creeping up. Currency pegging was used in Venezuela too and that story ended in disaster.
In terms of poverty reduction, Lula's Bolsa Familia program was more effective than this at actually helping people, but foreign investors love the story about how "Brazil was made safe again for foreign investors".
In contrast, I can't think of a single country with hyper-inflation that had a successful economy.
Taking on large foreign debts has pretty much led to disaster everywhere from Greece to Thailand to Zimbabwe.
Where it's "worked out", it's usually been a way for foreign investors to extract wealth from a country's natural resources.
Any time anybody tells you that the best way to grow a business is to rack up lots of credit card debt, run.
>Having outside investors provide the capital needed to ramp up your operations, can be a huge win-win for both sides.
You have to make sure that the outside investors are put on a leash (as they are in China). If you don't, you end up bringing in lots of capital causing a spike of growth for a while, destroying local businesses (who can't compete with foreign businesses) and then when it ends the economy craters and inflation spikes once again.
>In contrast, I can't think of a single country with hyper-inflation that had a successful economy.
I can't think of a single country with a successful economy that hasn't at hasn't taken the IMF's guidelines and done the exact opposite (contrast South Korea's relative success with Thailand's).
Which period are you referring to?
Venezuela's biggest problem right now, besides the drought which has hit their electrical supply, is that the government looted the oil industry instead of maintaining it and taking a sustainable vig from it. I haven't looked at the numbers (but see e.g. this production chart: http://www.tradingeconomics.com/venezuela/crude-oil-producti...), but as I understand it the lower oil prices are secondary to this, although if they'd maintained, let alone expanded production, I suppose the prices would be even lower....
And the moment i read "Catholic university" i found myself thinking about the Chicago Boys.
https://en.wikipedia.org/wiki/Chicago_Boys
This is extremely misleading.
There is absolutely no need for a country to be borrowing at such large rages.
Your statement seems to imply that countries should get money for free from outside entities.
Yes - if your finances are a mess - you're going to have crazy books - hyperinflation or massive debt - pick your poison.
The 'fix' is not to change the numbers around, it's to solve the underlying fiscal and investment problems.
URV was a nice hack, but people overestimate its economic brilliance. To confirm that it was something imposed by foreigners, you just have to take a look at the dates when the Latin America hyperinflation ended in each country:
Mar. 1990 Brazil
Mar. 1990 Argentina
Aug. 1990 Peru
Mar. 1991 Nicaragua
You can see a compiled hyperinflation rates in a table in this paper: http://object.cato.org/sites/cato.org/files/pubs/pdf/working...
Till today Brazil suffers with a overvalued money. The medium class loves it, because they can travel abroad cheaply and buy imported goods.
You should take a look at this Wikipedia page: https://en.wikipedia.org/wiki/Washington_Consensus
Doesn't Brasil have an import tax of 60%?
Well, yes, that was the idea.
> This still meant that they were basically swapping hyperinflation for racking up a huge external debt instead, and they were essentially more dependent upon foreign investors. The fact that this 'worked' and didn't lead to disaster was probably due to the fact that oil prices kept creeping up. Currency pegging was used in Venezuela too and that story ended in disaster.
An external debt that was payable and negotiable. And that we were able to pay successfully (though now we have a large internal debt). In any case, having an external debt is not the end of the world. How many countries do it?
> Currency pegging was used in Venezuela too and that story ended in disaster
Right. That was the reason of Venezuela's disaster...
> In terms of poverty reduction, Lula's Bolsa Familia program was more effective than this at actually helping people, but foreign investors love the story about how "Brazil was made safe again for foreign investors".
Do you have any idea how destructive inflation is to a poor household? I'm sorry, this is ridiculous.
And what does Bolsa Família - a program that was actually a merge of several programs from FHC's previous administration, modeled by Ricardo Paes de Barros around Friedman's negative income tax - have to do with this?
Indexing prices using URV, all prices would increase in a regular pace, all prices together, and inflationary pressure would lose the irregularity (no more uneven increases, that anyone would compensate in the next step).
After a while, just rename this fake money to "real", and you have Brazil with its long-surviving money.
This is what economists do when they think we're not paying attention:
http://z822j1x8tde3wuovlgo7ue15.wpengine.netdna-cdn.com/wp-c...
That's not "oops". That's not giving two shits about being right because being right doesn't pay the bills. Being wrong does.
If you want to see economic destruction on a wide scale, don't listen to the anti-austerity protests. Don't listen to "populist" politicians. Listen to the 'respectable' economists who have an eye on a well paid job at a corporate think tank like CATO. They truly have nothing but objectivity and your best interests at heart.
Isn't that kind of a subjective opinion?
Liberals love to push Keynes economic theories and hold him up as some kind of expert. Likewise, Conservatives love to push Friedman's theories on the economy since it fits with their staunch free market ideas.
Even in these circles it would be hard to find someone who's actually objective about what they're seeing.
I wasn't using it as such. If an economist gets the ear of a president, is employed by the ECB (as the above economists were) or a column in the New York Times they're 'respectable'.
>Liberals love to push Keynes economic theories and hold him up as some kind of expert.
Conservatives use his theories too. Republican politicians who fight tooth and nail for military spending in their districts know exactly what they're doing and why.
>Even in these circles it would be hard to find someone who's actually objective about what they're seeing.
A good litmus test of this is to look at their predictions and see how they stack up to reality.
Some predictions are just bad, some are so persistently awful that they indicate that the economist has incentives that lead them to tell flat out lies.
The above graph is a good example of that.
'Keynes' advocated for gov. spending in downturns and saving in upturns.
The problem is:
A) Progressives want to spend, infinitely. There is no 'saving period'. Ergo - it's nothing to do with Keynes really.
B) It's really hard to tell what a 'downturn' is. 'Restoring confidence in markets' and picking up some infrastructure spending when industry is in a lull - this is on paper - a great idea. BUT - when a market has undergone a 'secular shift' - meaning that the lost jobs are not due to cyclical issues, but are permanent ... then the government ends up throwing good money after bad.
Put another way: Keynes urged spending in down cycles to level out volatility and stabilize employment. But any given downturn may not be a 'cycle' - with an impending uptick. A 'downturn' may be permanent - like 'lost jobs to China' etc..
The 'solution' to a downturn has to be commensurate with the causes: cyclical shift? Ok, some infrastructure / gov investment might help. Millions of jobs lost to China? Gov. spending will only delay the inevitable. Better to invest in 'retooling' the workforce etc.. But this is not an 'economic' solution - it's a business/strategy solution and it takes intelligence.
A few are more like engineers (e.g. see Steve Keen's work) but they're not the ones who get the plum jobs in government, powerful NGOs or banks - they tend to be professors in backwater universities.
The 2008 crash sucked for a lot of people, but if your economic goal is simply to foresee it or forestall it, you're asking for far too little. It seems a bit like asking why so-called public health experts weren't able to prevent those two cases of Ebola in 2014, while ignoring the 50 000 annual flu+pneumonia deaths and the 600k heart disease deaths--as well as the fact that they stopped ebola infections at two.
And 2008 wasn't just any economic event, it was a major event which nearly took down the world economy because the financial sector hyperextended and intertwined risks. The economic field had no widely accepted or reliable metric to predict that crash.
Public health experts have a very good model for spreads of diseases, models which have been validated many times against real world data, and then therefore can be relied upon to direct resources to help prevent dangerous spreads of disease. Not so with the economic field...
Germany (basically the strongest eurozone country) has only grown something like 0.7% annually over the past 8 years
This is the case in funding the US Department of Defense. The overall budget is set by the Congress (and subdivided innumerable times afterwards by the DoD agencies and departments), so saying that civilians control the military in the US is both true in the operational sense (the military is part of the Executive Branch, and thus under the President, a civilian), but also in a financial sense.
More info about the US budget process (which bears a strong resemblance to making sausage..) can be found here:
http://budget.house.gov/budgetprocess/
The JCS have a very important role but their control is mostly administrative (doctrine, assignments, equipment, promotions, etc.).
The "Commander in Chief" (President) has somewhat wide berth of power over the military and can somewhat do what they want with the military. Congress has some checks for what the Commander in Chief can do, but traditionally the CiC has been able to basically send troops to wherever whenever.
In terms of actual citizen power over the military, no. Everyday citizens have no power or direct say in the military.
In the US this entity is so revered that their policies are rarely even a point of discussion in our extremely partisan politics. Hell, just suggesting that they permit an audit is considered controversial.
As far as I can tell, politicians exert basically zero influence over actual monetary policy. As long as they have a constant supply of new fiat to fund entitlements and other niceties for their constituents they don't rock the boat.
Regulatory capture by private banks still tends to be a problem, though.
I'd like the Federal Reserve to control overall fiscal policy as well. The Fed tells Congress exactly how much it can spend each year, and Congress divvies it up however it likes.
And there's a technical reason as well: if the Fed credibly commits to using fiscal policy in a predictable, countercyclical way, then the mere presence of this policy ought to dampen recessions. On the other hand, whether Congress actually passes stimulus spending or not is highly unpredictable and so the markets cannot rely on it.
I imagine their first fiscal decision would be granting themselves the authority to buy corporate debt. Nothing beats acquiring productive, physical assets with infinite fiat currency! What's the term for an economy where the state owns the means of production again?
Fiscal policy concerns how much the government spends, and on what.
Furthermore, you only own a company when you own its equity, not its debt.
No offense, but for someone who seems so worked up about what the Fed might do to us, you seem rather uninformed on the basic facts of what it actually does and how.
"Former Fed official Joseph Gagnon has lamented that the Fed’s asset purchase authority “is limited by law to the Treasury, agency, and agency MBS markets plus foreign exchange” (emphasis added), and others agree."
http://blog.supplysideliberal.com/post/114021461013/greg-shi...
They could attempt to do so with some really creative legal interpretations, but it would probably take an act of Congress to resolve all of the resultant lawsuits.
"Substantively, the Fed probably enjoys greater discretion in unconventional monetary policy—possibly extending to the purchase of equities—than is commonly assumed."
FYI, you were probably restricted from replying immediately to my post, not because of the comment depth.
So what makes fiscal policy so special that we need to keep it out of the Fed's hands?
Monetary and fiscal policy are the two main levers that the government has over the economy, but only giving one of them to the Fed means that the Fed has its hands tied in many circumstances (like today, when rates are persistently low), and requires the Fed to constantly guess what Congress will do and react to it.
Anyway, to answer your question, the Fed would exercise fiscal policy with the same aims and goals by which it uses monetary policy.
Then we are so screwed.
This is beyond irresponsible.
The Fed is a bank (and privately owned) - not an apparatus designed to manage the state.
They have absolutely no businesses determining fiscal policy.
We elect people to manage our finances, maybe what we need is 'better democracy'.
Not true: https://www.federalreserve.gov/faqs/about_14986.htm
"The Federal Reserve System is not "owned" by anyone. Although parts of the Federal Reserve System share some characteristics with private-sector entities, the Federal Reserve was established to serve the public interest."
and also
"The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. In fact, the Reserve Banks are required by law to transfer net earnings to the U.S. Treasury, after providing for all necessary expenses of the Reserve Banks, legally required dividend payments, and maintaining a limited balance in a surplus fund."
" Although parts of the Federal Reserve System share some characteristics with private-sector entities, the Federal Reserve was established to serve the public interest."
Don't be so naive. A private company tells you 'they are to server the public interest' and you believe them?
Listen - I'm not a conspiracy theorist. Generally speaking, the Fed is much like other central banks. But make no mistake - it is not a public entity.
Try this: the US government does not have access to the financial records of the Fed. Congress wanted to do an audit of the Fed - and they were blocked from going back past 2004.
Think about that. The US currency system is controlled by an entity that will not let the public see what's in their records.
That's insane.
My bet is that from 1913 to past the Nixon era there is crazy, crazy stuff on the books, and confidence in the US currency would go crazy if that information got out.
Also - just because it does not generate a profit does not mean that it's not used for the benefit of the banks. They set interest rates that suit their interest, not necessarily the interest of the general public.
The Fed should definitely be nationalized.
Sure, it has private shares, but it was created by an act of Congress, its charter explicitly states its public mission, it doesn't run a profit, its head and a majority of its board is appointed by the President and confirmed by Congress, and its basic functions are interbank clearing and payments.
At this point, it looks so little like any other private entity that treating as such seems silly. If it looks like a central bank, quacks like a central bank, ...
> They set interest rates that suit their interest, not necessarily the interest of the general public.
I call BS. Low rates are almost always punitive to banks' bottom lines, because they make the spread between deposit rates and lending rates; when rates are low, that spread gets compressed to zero. If they only served their bank 'shareholders', how do you explain monetary policy since 2008. Or going further back, the fact that the Fed tried to pop the stock market bubble in '29, even though all the big banks were clearly benefiting from it?
https://www.stlouisfed.org/on-the-economy/2016/may/banks-mor...
> Listen - I'm not a conspiracy theorist
With all due respect, you are if you make these sort of claims without a shred of evidence. The Fed chair + board basically decides the rate policy, and he/she is always a career economist, not from industry. You think really Janet Yellen is secretly taking kickbacks to screw around with rates?
And for your reference: http://www.factcheck.org/2008/03/federal-reserve-bank-owners...
"Those decisions are made by the Federal Open Market Committee, which has a dozen voting members, only five of whom come from the banks. The remaining seven, a voting majority, are the Fed’s Board of Governors who, as mentioned, are appointed by the president."
+ " If it looks like a central bank, quacks like a central bank" - except it's not. It's a privately owned and managed entity.
+ "I call BS. Low rates are almost always punitive to banks' bottom lines" this is completely false.
+ " The Fed chair + board basically decides the rate policy, and he/she is always a career economist, not from industry.". This is utterly, beyond naive. The Fed Chair is an extremely politically driven position - they don't get to this position and do whatever suits them or the economy. They take into account the positions of the companies shareholders - which are the banks. It's beyond reason that the banks act entirely in the public good. They are 'for profit' entities - and absolutely everything they do is 'for profit.
But you missed a key item that throws your argument to the wind: Congress does not have access to the Fed's books. My friend - if you believe for a second that the Fed is acting entirely in the public's interest - then the public should be able to see what's on the Fed's books. You can't. Congress can't. The President of the USA can't. Neither can the CIA, the NSA or the Treasury.
There is some legislation to this effect right now:
https://oversight.house.gov/wp-content/uploads/2016/05/H.R.2...
It's inconceivably naive to believe that a cabal of bankers - who manage the US currency - and who DO NOT LET US ACCESS THEIR RECORDS - is acting in the best interest of the US.
There is NO COUNTRY IN THE CIVILIZED WORLD where this is the case.
And there's more. Now - this is more public info but it does demonstrate a high degree of cabalism between banks and the Fed - after the 2008 crises, US banks were very 'unhealthy' - this is because they had 'toxic' i.e. worthless mortgages on their balance sheet. So - the Fed - allowed banks to put those mortgages on the banks balance sheet at face value - for a period of time. Ex: ABC banks has a a crap mortgages on a house with a market value of $100K, but the mortgage is for $200K (it's worthless) - they exchange them with the Fed for a full $200K.
The intent of this 'program' was to shore up balance sheets of banks to make them healthy - then while interest rates are low, bring the value of the homes up so those mortgages are not 'underwater' at which point the banks will take them back on their balance sheet. But that may never happen. It it has not happened yet. In a nutshell - the Fed handed $1 to banks for something only worth 50 cents.
This is fraud.
Not only that - this was not a small thing. This was the biggest transfer of assets in world history. Have a look at the Fed's balance sheet recently:
http://mengercenter.org/surprise-surprise-the-feds-never-shr...
You see that big red are that is how 1/2 of the Fed's balance sheet and didn't exist before: those are bullt, worthless mortgages. 2.5 TRILLLION DOLLARS WORTH.
You know where you don't find that toxic, worthless sludge: on the balance sheets of nationalized banks.
Summary:
A) The Feds transactions are private - and nobody in government can access them.
B) The Fed states that it makes decisions for the benefit of the economy, but what they say is irrelevant: the system is designed first and formost for the benefit of the banks.
C) A 2.5 Trillion dollar 'fraud' (technically, since the banks will 'one day' take those crap mortgages back, it's not fraud - but they haven't and maybe they won't so it's a crime in the making) - or at least a 2.5 Trillion ...
> + "I call BS. Low rates are almost always punitive to banks' bottom lines" this is completely false.
Follow the link my friend -- net interest margins are sharply lower when rates are low. If you are going to just flatly disagree, you're entitled to your opinion, but I really don't think you will find accurate data to justify your viewpoint.
> This is utterly, beyond naive. The Fed Chair is an extremely politically driven position - they don't get to this position and do whatever suits them or the economy.
You're trying to have your cake and eat it too. Please make up your mind: either the bankers own the Fed, or politicians do. Also, if you think that the bankers own all the politicians, then nationalizing the Fed wouldn't help anyway, would it?
Also, this bears repeating: THE PRIVATE SHAREHOLDERS OF THE FED DO NOT CONTROL THE FED, BECAUSE THEY ONLY CONTROL A MINORITY OF THE BOARD SEATS.
> My friend - if you believe for a second that the Fed is acting entirely in the public's interest - then the public should be able to see what's on the Fed's books.
This is a classic conspiracy theorist argument. They don't want to show us all their books, so they must be doing something bad and hiding it.
You don't have any evidence of any wrongdoing, you just presume that it exists because of your prior beliefs.
In reality, people don't like politically motivated critics to rummage through their books. Climate scientists don't want their critics access to their e-mails -- does that prove that those scientists were faking climate change?
I wouldn't mind the Fed opening up all its books, but I also don't support a witch hunt.
> the system is designed first and formost for the benefit of the banks
Begging the question. Please show me a credible, historical source that supports your claim. It'd also help if you can explain the long history of Fed actions that would've been against the interests of its private shareholders that you claim completely control it. Let's start with the Crash of '29 and the Fed's efforts to prevent it, for starters.
> or at least a 2.5 Trillion dollar 'gift' to private banks by the central bank is only to the 'benefit' of the people of the US to the extent that the entire banking system doesn't come down and crash - but in a real capitalist system - most of those banks should have had 100% of their shareholder value wiped out.
I agree there are issues regarding moral hazard and who should be paying for the mess the bankers got us all in. But do you really think that the optimal solution is for the US to nationalize every insolvent bank, and that they could've done it without causing market panic and worsening the crisis in the process?
Anyway, the Fed could be explicitly nationalized without any real-world effect, precisely because it has been the textbook example of how to run a central bank for the last 60 years. You seem to think that all other countries' run their central banks better, but the truth is that those banks look to the Fed for leadership and guidance.
> So - the Fed - allowed banks to put those mortgages on the banks balance sheet at _face value_ - for a period of time. Ex: ABC banks has a a crap mortgages on a house with a market value of $100K, but the mortgage is for $200K (it's worthless) - they exchange them with the Fed for a full $200K.
Really doubt that--credible source please? Open Market Operations by definition are done at market prices; the Fed does not buy assets for twice their market value. I agree it would be pretty criminal if they did, but it would also be blindingly easy to find the evidence: just look at the free money flowing into each bank's balance sheets and cashflow statements.
If you think the Fed did this, and then everyone conspired to hide the evidence, then we...
The reason they did it - is because they were exchanging $X in assets for NX$ in cash.
If they weren't getting 'better than market prices' - the transactions would not have occurred. The 'big red' area on the Fed's balance sheet would have no financial reason to exist.
It's very existence implies the banks were getting a 'better than market deal'.
Here is Forbes on exactly this transaction:
http://www.forbes.com/sites/lawrencehunter/2012/10/29/are-fe...
Forbes - not exactly a conspiracy outfit - refers to it as "MONEY LAUNDERING" and makes a direct comparison to organized crime.
From the article:
"After the Fed buys (at face value) and resells (at pennies on the dollar) the bad mortgage-backed securities with newly minted electronic digits that it places into the banks’ Federal Reserve accounts, it then sterilizes the entire operation to prevent the new money from transmitting the dread inflation virus. The Fed does so by, in effect, quarantining inside the banking system the new toxic money used to launder the dirty loans."
There have been $9 TRILLION dollars in off balance sheet* transactions that the Fed refuses to disclose. (!!!!).
You say: "Open Market Operations by definition are done at market prices"
Prove it! Where is your evidence these transactions are done at 'Market Value'??
-----> The burden of proof is on you <------
You can't prove it because those records are not available.
Ask yourself: WHY are those records not available? Because in every other country they are.
Have a read:
https://en.wikipedia.org/wiki/Term_Asset-Backed_Securities_L...
"The Fed refuses to provide any information on how it priced individual securities bought with TALF funds."
The Fed's primary objective is to keep the banks healthy.
'Would I rather see banks fail'
'Banks look to the Fed for leadership'.
It's all irrelevant. The banks shareholders should have been wiped out. Then we can see some degree of financial packages and stimulus with full transparency and accountability.
Dude - you are defending an opaque institution - that has issued 2.5 Trillion dollars - without Congressional approval or oversight - and without providing financial records!
You can't win this one.
Actually, that's precisely what the Fed normally does. Banks need to maintain cash on their balance sheet to meet reserve ratios; being able to trade their assets in for cash at market price allows them to do precisely that.
https://en.wikipedia.org/wiki/Open_market_operation
Or to put it another way, OMO shouldn't not magically increase a bank's assets (which is what would happen if you took a $1 bond and gave it $2 in cash), but it should increase the amount of cash. It is not 'pointless' -- trading cash for assets, at the market price, is precisely how monetary policy works.
https://www.newyorkfed.org/aboutthefed/fedpoint/fed32.html
"The Desk initiates this process by announcing the OMO through an electronic auction system called FedTrade, inviting dealers to submit bids or offers as appropriate ... The dealers' propositions are evaluated on a competitive best-price basis"
It's by definition a market price because the transactions are done via open auction to anyone on the Street.
Btw, your source is an op-ed contributor whose main thesis is that the Fed is up to no good, and also doesn't provide any references. He basically assumes that all the assets the Fed purchased are bad assets, without any proof. I took a look at those charts you shared and looked back and the Fed balance sheet. The vast majority of assets are T-bills, T-bonds, MBSes, e.g. NOT crap assets.
> -----> The burden of proof is on you <------
I don't really agree. We have two differing points of view -- why do you automatically get presumed to be correct? This is a forum discussion, not a trial. But if it were, I think the burden of proof falls onto the person alleging wrongdoing, like you're doing here.
> You can't win this one.
What makes you think this is about winning? I like to share why I hold my opinion and also see where other people are coming from, but frankly, you seem to be turning this into a personal pissing contest.
It's pretty obvious you made up your mind, and no amount of reasoning or evidence from me is going to sway you. Given that that we can't even agree on very basic facts, like how the Fed goes about its normal daily business, or its governance structure, which are all pretty easily verifiable on Wikipedia or mainstream news sources, I'm not sure what value there is to continuing to discuss this other than getting us both worked up into a lather.
Anyway, thanks for sharing :)
Do you mean that money creation has little to do with the reserve requirement?
Here's a great video by famous investor Ray Dalio about this concept: https://www.youtube.com/watch?v=PHe0bXAIuk0
I believe that's only partially true. If your definition of money is a piece of paper (e.g. a bar tab), than yes anyone can create money. However, if your definition of money is the U.S. dollar (e.g. paper or electronic versions) than there are only two entities that can create it: the federal reserve via open market operations and banks via lending.
My question to digi_owl was whether he was making a distinction of what limits credit creation from banks. The reserve requirement has very little to do with it.[1][2]
[1] http://www.cnbc.com/id/100880857 [2] http://www.cnbc.com/id/100497710
I appreciate the link to the video, I'll check it out.
M0 - Currency in Circulation, physical coins and notes in public circulation.
MB - Monetary Base, M0 + physical coins and notes held in bank vaults.
M1 - Money, M0 + checking accounts (excludes bank vaults).
M2 - Money and Close Substitutes, M1 + time deposits (CDs, bonds, etc.)
M3 - Broad Money, M2 + money market funds, repurchase agreements, other wacky shit.
Wikipedia has more detail: https://en.wikipedia.org/wiki/Money_supply
Here's a graph of different monies over time: https://upload.wikimedia.org/wikipedia/en/5/58/MB,_M1_and_M2...
On the other hand, credit is very difficult to measure since people borrow and lend from each other all the time.
Interestingly, M2 is larger now than before the 2008 crash, but money+credit is smaller than it had been.
http://www.bankofengland.co.uk/publications/Documents/quarte...
If you deposit X to the bank, and the reserve requirement is R (say R=0.1), then the bank can loan out X(1-R) to someone else, who can deposit that money. Then on the basis of that deposit, they can loan out X(1-R)(1-R), and so on. The geometric series says that a deposit of X becomes bank-created money in circulation of up to X/R. With a reserve of 10%, $100,000 can become $1,000,000.
That legal fractional reserve requirement acts like a powerful lever on how much money banks can create.
With respect that is not accurate. [1][2]
[1] http://www.cnbc.com/id/100880857 [2] http://www.cnbc.com/id/100497710
This might interest you. It shows the impact of recent increases in capital reserve requirements on corporate lending.
https://www.financedigest.com/post-crash-banking-regulation-...
> The ongoing impact of post-crash banking regulation on corporate lending is a case in point. Thanks to reforms such as Basel III, banks must now hold a far greater portion of their capital in reserve.Some banks may face even stricter requirements in future; only this month Sir John Vickers called for UK banks to be forced to shore up their financial buffers further in the face of renewed market volatility.
> These measures are primarily motivated by a desire to make the overall system more stable, to ensure adequate reserves and liquidity in the case of another major shock. But part and parcel of this is the fact that it is now far harder and less profitable for banks to lend to a range of businesses.
> As a result, banks have been steadily withdrawing from large areas of corporate lending as they look to reorient their focus to key relationships and diversifying risk. This has left a gap in the market: many corporates are finding it near impossible to get the level of financing from banks that they previously relied upon.
Another good source from digi_owl: http://www.bankofengland.co.uk/publications/Documents/quarte...
Also this: https://www.newyorkfed.org/medialibrary/media/research/epr/0...
and this: http://www.economonitor.com/lrwray/2013/08/15/banks-dont-len...
and finally this: http://www.forbes.com/sites/francescoppola/2014/01/21/banks-...
This is false.
A) 'Central Banks' existed long before the US Fed.
B) The FED is totally unique in the world in that it is 'privately owned/managed' - most Central Banks of the world are nationalized, and managed indirectly by the governing apparatus. The more advanced the state, the more it is independent.
Nobody is copying the US system - that said - the US system is 'de facto' pretty close to Bank of England, Canada, the ECB etc. in the sense that though the Fed is technically a private entity - the way it is managed is pretty close to how most good central banks are managed.
Hyperinflation always has the same causes:
+ Governments printing money to pay off debts
+ Governments grabbing private property causing a capital flight.
That's it, there's no magic to it.
We're in completely uncharted economic waters with QE/ZIRP, and I can think of several scenarios where increasingly more insane central bank intervention decimates the value of currency:
-The decision is made to monetize the debt
-Another 2008-scenario prompts helicopter money
-A large enough minority of people simply lose faith in the monetary system and rapidly spend their dollars
All that being said, I don't think we're anywhere close to a hyperinflationary environment, and you can definitely have a problem with the Fed and our system of money sans hyperinflation worries.
There's another classic reason for hyperinflation, which is a collapse of export industries causing a trade balance collapse. You can't print foreign currency.
It's rather like the old joke about "I don't have to outrun the bear, I just have to outrun you": the US is only in trouble if its real economy falls behind.
(I'm not convinced of the importance of the petrodollar argument, especially given how spectacularly expensive the Iraq war was; it looks more like Cold War "sphere of influence" politics to me.)
This position conspiratorial and non-factual and has no sound logical basis.
Yes - the US does use some geopolitical muscle to protect the 'petrodollar' but there are clear and unambiguous facts that fly in the face of the notion that Iraq/Libya were petrodollar issues.
1) The petrodollar is important, but not an existential issue for the US. The USD is so deeply entrenched as a global currency, the transactional amount for USD for Oil is relatively small in comparison, moreover, nobody needs to hold dollars to buy Oil, they just need it to transact. The statement 'near infinite amount of demand' isn't remotely true.
2) The US can easily use basic diplomatic pressure to keep Saudi Arabia, Kuwait, and Norway in line. Outside of that - there is no real control. Iran, Russia et. al. can do as they please today.
3) Your argument is a little upside down: the US Fed is fighting deflation not inflation - meaning that the US would love to have some softening of the currency overall.
4) The US is not carrying debt anything like most unstable countries. People loan to the US not because they have faith in the petrodollar, but because they have faith that the US Gov will pay them back - which is ultimately a function of the health of the economy - and relatively speaking, it's good. Or at least compared to most places.
Your position takes a simple thing and turns it into the extreme: 'Because the US has a petrodollar - all it's wars and geostrategy revolve around this'. It's like saying 'look at the bad cop on the news' and surmising all cops are bad.
err, ok...
US, Canada, UK, ECB, Norway, Aussie, Sweden - do not print money to pay bills, as you find in Brazil, Venezuela, China, every African state, and a good chunk of the rest of the world.
Not the same thing at all. In fact - your very statement clearly indicates that it's not the same thing.
The US 'gets money' by taxation - and by selling bonds. Some of those bonds are later purchased by the Fed, using money printed by the Fed. That's how money gets into circulation.
In short: US currency is backed by US Government bonds. That's the 'asset' that backs US currency.
It's not 'money printing' - because the US Government has to issue debt in this case. Someone - somewhere - in the USA, Japan, China etc. has to actually lend the US money - at a certain interest rate in order for the transaction to happen.
So the US government does not print money. It just issues debt. The Fed's actions are a totally separate process.
Now - when Venezuela 'prints money' - it just does that. It literally just issues currency to itself to pay it's bills.
That is completely crazy. And that causes hyperinflation.
[1] https://books.google.com/books?id=K-jKAgAAQBAJ
Not believing that there is any sound economic principle to validate your position, I checked your reference:
Your reference says nothing other than a few, very basic things about how the Fed is structured. It says absolutely nothing about the difference between 'raising debt + open market bond purchases' (how the fed does it) - vs. the hyperinflationairy issues related to governments that influence their central banks and basically print money.
So not only are you wrong - but your borderline lying by posting references that have nothing to do with anything.
In summary: aside from taxation, the US government generally can only raise money by issuing debt. They cannot print money willy nilly as they do in places like Brazil.
I see. Nevermind.
There is way to much partisan political medalling with the Fed. [1] If you're an economist at the Fed you can hardly ever be on the record about anything, or even donate time to nonprofits. Why? There is too much danger that someone will willfully misinterpret a complex statement, and use it to undermine everything the Fed does to keep the economy stable.
It would be great if most of the electorate had taken classes through intermediate macroeconomics. Then they might understand that an economics book they picked up in the nonfiction section of their bookstore almost always has an agenda outside of the mainstream, which doesn't mean that it is wrong necessarily, but that if it gets anything right it is likely a refinement of the past couple hundred years of scholarship or discussing a model that operates in an economy with different preconditions.
Calls to audit the Fed are about sincere an effort to improve its function, as Congress's use of its subpoena powers are about fing the truth rather than an opportunity to grandstand.
[1] As well as the Treasury too, but that's a whole different issue.
I want an audit with teeth, that audits the things that Americans should be interested in: the activities of their central bank and their motivations. I want an audit that doesn't require the explicit permission of the subject of the audit.
In 2010, Ron Paul introduced a bill with simple text. In part:
The area of law that would be modified by his bill: edit: formatting.Do you mean as opposed to policies implemented by unelected people with their own agenda?
Money it's fundamentally a political creation. You can't get rid of politics because however control money control the country. And we all know where that 'people don't know what they need' attitude finish.
https://en.wikipedia.org/wiki/Currency_substitution
I can't find non-biased studies, but I believe it was mostly positive:
http://www.cato.org/blog/dollarization-hurting-ecuador-dont-...
What screwed up Argentina (big big time) was having state size go completely out of control and grow and grow until deficit couldn't be grown anymore and debt either.
After that crisis (2001) 5 presidents in 1 week, currency devaluation and a populist new president took office, then his wife (the Kirchners) and they almost became what Venezuela is today.
The article says: "And, basically, inflation did end, and the country's economy turned around. "
This is Brazil GDP per capita: (1)
It falls in 1992 (they forget to tell us that), exactly with the intervention that the article mentions.
Then it goes up, then down and then kick off spectacularly in 2002 (the year that lefty Lula Da Silva wins the election, by the way)
the article says: "Brazil became a major exporter, and 20 million people rose out of poverty." and finish with "Everybody was very happy."
This is Brazil poverty headcount ratio: (2)
We can see an amazing trend down from, again, 2002. Unfortunately I can't find the data from 1992 but that would be interesting in order to check the "everybody happy" thing.
(1): https://www.google.es/publicdata/explore?ds=d5bncppjof8f9_&m...
(2): https://www.google.es/publicdata/explore?ds=d5bncppjof8f9_&m...
Only pointing how easy is to create the appearance of causality.
Is Brazil broken? I didn't realize, let's check those graphs again.
And, are not trying to attribute the current problems in the economy of Brazil to a party instead of the current world economy. But, I bet, you think that the previous boom have nothing to do with that party. That was only the world economy.
That said, it would seem that this was not a 'fake currency' -rather the introduction of a more sound system that people actually did trust.
In a way, simply implementing good financial policy.
But the details of it are pretty neat :)
Some countries (Iran) want to change to euros. [1]
[1] http://www.globalresearch.ca/currency-war-escalation-iran-wa...
Come to think of it, Libya was in the process of creating a gold-backed currency when the US went to war with them! Hm...
The major and most important change on the Brazilian government to achieve this was the LRF - Lei da Responsabilidade Fiscal, "Fiscal Responsibility Law" in English (free translation).
With these law, federal, state and municipal governments, which added much more oversight and control to public spending, requiring budget increases to go through congress, forbidding "money printing" practices and also requiring detailed accounting records to be submitted to a branch of the judiciary (TCU) for approval.
I could go on and write a huge document here, there's a lot of historical questions involved too. If anyone is interested in more details please let me know.
The entire economic system is based upon trust. Trust that you can pay back a debt, you can take out a loan, you will get paid and the money will hold its value, the government will honor and stand behind it currency. This trust is lost when a government defaults on its debt, which was the case in Brazil and much of South America.
The real created an illusion of trust by listing prices in a phantom currency.
If you have any pointers on English language material (books, news articles) regarding the subject, that'd be interesting as well!
For example, look at Japan. Central Bank tried for over 25 years to increase inflation without success. It's actually not very easy to do.
The main factor behind reducing the inflation was not the URV hack, but the government's fulfilled commitment to markets to keep inflation low at all costs: through skyrocketing interest rates [around 25%], for instance (thus reducing credit -> reducing consumption -> reducing prices); or by binding it to the US Dollar and bankrupting many national industries.