Why should the Fed have to follow rule of law?
The dollar is on track for a severe impact. The world’s confidence in the Federal Reserve’s ability to make good on its obligations is shrinking. Why? It’s because the world is coming to recognize that Fed is actually insolvent. “Insolvent” means that it no longer has sufficient income to repay even the interest on its obligations, now totaling over 17 trillion dollars.
It’s really not complex at all! Americans are smarter than the Fed estimates.
Information about the Federal Reserve’s management of our currency and economy is presented to the public in mystical and magical ways, but the smoke screen cannot last forever. The public is told that a central bank cannot afford to be restrained by principle, and that the manipulation of the economy is a complex and necessary operation which none but the financial elite are capable of understanding. But it’s actually simple.
Government finances work exactly like individual finances.
We all know what happens to individuals when they spend more than their income can bear. They become insolvent. When an individual’s credit limit is raised beyond levels that should be reasonably risked, a point of no return can be reached. When income becomes insufficient to pay obligations, something has to give. The individual must either find a way to settle up, or be excused from the whole mess by going bankrupt. Of course bankruptcy is not really fair to creditors, but in the big picture the effects of a few cases of bankruptcy aren’t big enough to make a dent in the banking or small business economy.
Why should central banks behave differently from individuals?
They should NOT! What makes the financial rules that apply to a central bank any different from the financial rules that apply to an individual? Nothing does! A properly managed central bank would operate under principled guidelines for self regulation. After all, individuals are obliged to do so in order to avoid personal bankruptcy.
But listen to what former Fed chairman Alan Greenspan had to say about that in a 2008 interview: When asked if Treasury Bonds are still a safe investment, he says “This is not an issue of credit rating. The United States can always pay any debt it has because …we can always print money.” Listen to the video here (and watch for the camera panning to incredulous look on the face of one of the participants in this Meet the Press discussion!).
The Federal Reserve puts itself above financial regulation and law. No system is in place to check their actions. The only system of credit rating the Fed has to deal with is a foggy one – namely, the willingness of investors to buy T-bills and bonds. Until recently the Fed enjoyed an artificially high credit rating which enabled it to continue growing its obligations through the worldwide sale of Treasury bonds. This has enabled the injection of currency from other markets into the US system. But investors are no longer as trusting as they were seven years ago. Decreasing confidence has translated into a lower Federal Reserve Bank credit rating.
This 2010 article sheds some light on how this vaguely defined credit rating is measured and what that means to the US economy, but in a nutshell it means that it’s becoming harder for the Fed to inject currency into the US system by borrowing it.
Putting this into context,
even though the Fed is in a condition of insolvency, its ability to sell more bonds and T-bills is restricted only by market conditions. It’s insolvent, yet nothing prevents it from simply borrowing as much money as it can get its hands on to pay its obligations.
An individual in a state of insolvency gets his credit cut off, no questions asked. An insolvent individual cannot further compound his own financial problems by simply borrowing more to pay his debts.
The Fed is in a condition of insolvency, so when it needs more cash it fires up the money printing presses. In theory there is some link between the amount of cash that’s printed and the amount of new currency that’s injected into the system through bond sales. But there are no hard and fast rules. The Fed can do whatever it wishes.
An individual in a state of insolvency who has to make a mortgage payment is in trouble. He can’t go to the garage and fire up his money printing press to pay his debts. If he does, he might find himself under arrest. The Fed, however, exercises this counterfeiting option freely. The only real difference between the Fed and a criminal counterfeiter is that the Fed’s counterfeiting activity is sanctioned by the government. In both cases, the currency is backed by nothing.
It’s really not hard to understand
Smokescreens of excuses painting the financial mismanagement of our currency system as necessary to ensure monetary stability are pure politics. It’s never too late for the Fed to change bad habits, but with interest obligations too far out of control, a solution is no longer going to result from spending cutbacks alone.
Because the concept of bankruptcy is a pill larger than any central bank is willing to swallow, the United States WILL make good on its obligations, period. Unfortunately, after the dollar takes its last breath, payment of US debt is most likely going to end up coming from the creation of even more fiat currency coming from the world’s super central bank known as the International Monetary Fund (IMF).
At this time the Fed’s biggest problem is saving face. Stopping its enormous borrowing and spending methods would at the very least be unpopular. However, informed Americans understand that a central bank that directs the economy of perhaps the most influential nation in the world must operate under a principled and responsible rule of law.
It’s time to end the Fed’s operation as we know it.