Our monetary system is insane

Cigarlover said:

... Why do we need to borrow currency and pay interest on it? The government clearly has the power to print all it wants without restrictions. There is no limited supply of currency as was the case with gold and silver, thus, no real reason for the federal reserve or taxation anymore.

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pmbug said:

How the Fed broke Silicon Valley Bank

The Fed's anti-inflation measures had to hurt someone.

reason.com

"working as designed" - at a software company. The term is used when a client/user reports an issue that is not really a bug but is an issue that was not accounted for in the original programming

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pmbug said:

There is a practical market based limit on the Fed's money printing. The dollar wouldn't be a global reserve currency if the Treasuries market didn't exist.

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Buck said:

do you have any idea what that number might be?
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pmbug said:

The dollar wouldn't be a global reserve currency if the Treasuries market didn't exist.

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Cigarlover said:

I'm ok with that.

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pmbug said:

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... Bloomberg reported that "US officials are studying ways they might temporarily expand Federal Deposit Insurance Corp. coverage to all deposits, a move sought by a coalition of banks arguing that it’s needed to head off a potential financial crisis." ...

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With the world beguiled by the predicament of the Federal Reserve — whether to raise interest rates to fight inflation or lower them to ease the banking crisis — this is a moment to reprise why Congress created the central bank in the first place. Monetary sage Edwin Vieira, Jr., reminds us that the Fed was formed at the acme of the Progressive Era to rationalize finance and prevent banking crises. Just like the one we have today.
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The most striking development in respect of the Fed this week isn't todays quarter-point interest rate hike, but the awakening in Congress to the possibility that the Fed itself is at the root of today's crises. ...

We don't want to overstate the level of support for efforts to reform America's central bank -- or understate the scale of the work that will be required to restore an honest dollar after our half-century experiment with fiat currency. Yet it’s encouraging to see Politico report that "anti-Fed sentiment" has returned to the halls of Congress after "a rare period of political insulation" during the last several years.
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Digital Future​

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From the mid‐1980s through to the mid‐2000s, Fed policy was generally considered to be good. Academics and Fed officials alike credited good monetary policy with keeping the economy stable during this period (often called the “Great Moderation”). In my working paper, I show that the Fed was much more likely to follow a rules‐based approach during this period as compared to after the financial crisis. In fact, every successive Fed chair since Paul Volcker has deviated further from the rules‐based policymaking that helped the Fed be successful in the first place. Just one fact from the paper: the correlation between the good policy rule of the Fed and their actual policy fell from 75% under Bernanke, to 17% under Yellen, to -2% under Powell.
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With all eyes on the Federal Reserve and whether it will be forced to hike one more time this year due to high inflation numbers, Lyn Alden, Founder of Lyn Alden Investment Strategy, points to the opaque process of setting monetary policy and the 12 unelected individuals calling all the shots.

The Fed has a tremendous impact domestically and globally, but its policy is far from transparent or accountable, Alden told Michelle Makori, Lead Anchor and Editor-in-Chief at Kitco News, on the sidelines of the Pacific Bitcoin Festival.

"Interest rates and balance sheet size affect the price of money," Alden said. "And if you look in most markets, price controls are not historically effective. But in this current era, we have price controls for the price of money, or specifically the price of credit."

Instead of letting the market determine an appropriate price of credit, the central bank is in charge, Alden pointed out.

"Various parts of the interest rate pricing mechanism are heavily set by the centralized group. And it's literally 12 people that decide. It's seven members of the board of governors, and then it's a revolving set of other central bank heads," she said.

And none of them are elected, Alden added. "It's almost like a council of elders deciding this is the price of money today. And then, they divine the tea leaves, and every six weeks, everybody tunes in to see what color smoke's going to come out of the group of 12 people sitting around the table to decide."

The Federal Reserve also has a massive influence globally since it's the ledger that almost every country ties into by owning U.S. reserves as assets, according to Alden. "[We have] hundreds of millions of people domestically, billions of people globally, and there are 12 people that can decide, should interest rates be 2%, 3%, 5%, 7%, should we expand or decrease the base layer of money?"

Alden described the Fed as the fourth branch of the U.S. government, which often ends up putting out fires that it itself started. ...

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End Fiat Money, End Forever Wars​

Is high debt constraining monetary policy?​

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Does higher debt make it more difficult to contain inflation? In principle, various mechanisms through which this could be the case are conceivable. For example, monetary policymakers may be (seen as) hesitant to raise interest rates as much as needed to reduce inflation because this boosts borrowing costs for governments. Central banks may also worry about the impact of rising rates on their own net income if they pay banks interest on excess reserves. Moreover, bonds previously bought by central banks drop in value when interest rates rise, which means that central banks may avoid raising rates and thereby losses. In extreme cases, people may even believe that the central bank could try to inflate away part of the debt or "print money" to pay for future deficits.
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The paper finds that debt surprises raise long-term inflation expectations in emerging market economies in a persistent way, but not in advanced economies. The effects are stronger when initial debt levels are already high, when inflation levels are initially elevated, and when sovereign debt is denominated to a significant extent in dollars. By contrast, debt surprises have only modest effects in countries with inflation targeting regimes. ...

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Klaas Knot - President of the Netherlands Bank said:

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To date, this 'quantitative tightening' has been smooth and well-absorbed by financial markets. This is similar to what we see from our international peers, who – in fact – are reducing their balance sheet at a relatively faster pace.

That brings me to the challenge. While, clearly, the current balance sheet has to shrink, our future balance sheet size may need to be larger than it was before the Global Financial crisis. The reason is that structural changes in financial markets, including a higher demand for liquidity, will call for a larger central bank reserves in the future. ...

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... Monetary policy design has traditionally taken aggregate productivity as given. In the workhorse model of monetary policy – the New Keynesian model – the central bank faces a trade-off between stabilising inflation and reducing the short-term deviations of output from its potential level. If monetary policy can affect misallocation and TFP, the central bank should also ponder how its decisions will impact the supply side of the economy in the medium term. Such considerations may be of relevance in phases of very active monetary policy, such as in the current inflationary environment.

This paper seeks to shed light on the interaction between monetary policy and capital misallocation and its implications for optimal monetary policy. ...

Our model predicts that an expansionary monetary policy shock improves capital allocation and thus raises TFP. We call this effect "the capital misallocation channel of monetary policy". We present empirical evidence supporting this prediction: expansionary policy induces high-productivity firms to increase their investment more than it does for low-productivity firms. The central bank has an incentive to exploit the capital misallocation channel, by engineering a temporary economic expansion to increase TFP at the cost of some inflation. ...

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Fed groupthink on the Phillips Curve, QE, and Inflation Expectations are three prime examples of Fed belief in ridiculous models led to the Fed’s current hellish dilemma.
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pmbug said:

More:

Biden Pressures the Allegedly Independent Fed to Stop Rate Hikes

It’s a “living hell” for the Fed says a respected analyst that I follow.

mishtalk.com

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pmbug said:

Another episode in the "centrally planned fiat monetary system is awesome" series:

Firm heterogeneity, capital misallocation and optimal monetary policy

This paper analyzes the link between monetary policy and capital misallocation in a New Keynesian model with heterogeneous firms and financial frictions. In the model, firms with a high return to capital increase their investment more strongly in response to a monetary policy expansion, thus...

www.bis.org

TFP = total factor productivity

117 page PDF paper at the link above if you suffer from insomnia

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pmbug said:

There is a practical market based limit on the Fed's money printing. The dollar wouldn't be a global reserve currency if the Treasuries market didn't exist.

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