classical economics
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$480 Bill Tax on Savings

Federal Reserve Goes All In for its Owners
By Wayne Jett © September 14, 2012

      The Federal Reserve announces its intent to create $40 billion monthly at the expense of existing savings and pay it to the big banks for mortgage-backed securities. This outrageous looting evokes what response? Applause, of course, and a little intellectual hand-wringing gives just the right tint of fair debate.

     Who continues to assign any credibility to the Federal Reserve’s announced policies, objectives and motives? No informed person, except those beholden to big banks (the Fed’s controlling shareholders), including financial sector players, academics and media.

                                                                             Where New Money Gets Value

     Readers here already know how money newly created by the Fed gets its value. New dollars enter the pool of existing dollars, and every dollar moves to a new equilibrium value – all the same – in their purchasing power relative to the total supply of goods, services and assets. Since the Fed’s action adds no new goods, services or assets, all value absorbed by the new dollars is sucked out of existing dollars saved and held by others.

     So the Fed’s creation of new currency in excess of growth in economic output is, by its very nature, a direct tax on existing savings. The tax is created and collected instantaneously. No need for a vote of Congress or signature by the president. No reason to file a tax return. Excess money creation by the central bank is the ideal tax. Maximum feathers plucked from the goose with zero hissing and pecking. No one realizes taxation is occurring, and the Fed is actually showered with praise for its heroic efforts to revive the drowning economy.

     Per its September 13 statement, the Fed will suck $40 billion monthly out of the existing value of savings. This stolen value will be inserted magically into new paper money and used to buy mortgage-backed securities (MBS) in the market. This amounts to $480 billion annually of direct taxation on savings taken from those who earned their money. How on Earth is that to be interpreted as a “stimulus” beneficial to honest producers?

                                                                      Remember That “Housing Bubble” Story?

       For the last four years, financial media insistently advised that the Fed’s excessive money creation during the years after 2001 created a “bubble” in housing, both in units produced and in prices. Too many people got houses they couldn’t afford and didn’t deserve. Then the bubble inevitably burst. That has been the financial media’s story.

      Here is a great irony of the Fed’s latest move to “revive the economy.” During the time the “housing bubble” was allegedly created by excessive new money supply, the Fed never added more than $40 billion in an entire year. Now the Fed intends to create new money at a rate more than 12 times higher than in any year of the so-called excessive money creation years.

    Another important element makes clearer just how the Fed’s current money creation is extreme dollar devaluation, in contrast to the years before the housing crash of 2007-2008. After cuts in income tax rates in May, 2003, productive output surged to mid-single-digits rate of growth. So new money creation equal to increased output was entirely appropriate during that period to accommodate the growth and avoid deflation.

     That growth period contrasts with the present, when we have no – or negative – economic growth. Beginning in 2008, the Fed has created hundreds of billions of new monetary base yearly. From about $845 billion in mid-2008, the U. S. monetary base has soared to $2,867 billion this month – a rise of about $500 billion annually during the past four years.
     Now the Fed says it will continue that rate of growth in monetary base indefinitely – with no economic growth to justify it – in order to achieve economic growth. Who thinks adding monetary base (above the value of economic growth) will achieve economic growth in years ahead when doing the same in past years has not? No reason at all to think so.

   The Fed argues, through its mouthpiece chairman, this innovative use of the new money to buy mortgage-based securities will do the trick – will re-invigorate home building, home buying and job creation. This use of funds was unprecedented in 2008, but the Fed now carries $844 billion of MBS on its financial statements, all bought since 2008. The only trick involved has been fooling some into thinking the MBS-buying was motivated by something other than bailing out big banks which own and control the Fed.

    The new money pumps up prices of energy, food and corporate shares, but does not provide incentive for higher production in the long term. Why not? Because the Fed's new money does not reward producers for producing. It flows to financial insiders positioned for this Fed move.

    As to stimulating housing and mortgages with money creation, both of those industries were strong and growing in late 2005. In January, 2006, the Fed cut off money growth completely, cold-turkey, without a word to the public. This does not make me feel warm and fuzzy about prospects the Fed will do the right thing this time.

Whip Joblessness Now!

     One more item about the Fed’s MBS-buying. Get over the idea that job creation motivates at the Fed, any more than it motivates the White House. If more jobs were its true objective, the Fed could forget the new $40 billion monthly and simply revoke its private, implicit warnings to regional and community banks against lending to mid-sized and small business. Those businesses provide the jobs, and they are still shrinking, not growing. Since bank reserves still fill the Fed at levels many times higher than in 2008, presumably jobs are not the point.

    Putting more billions into the pockets of the big banks, without such folderol as consumer protections, is the point. Chairman Bernanke is innovative in this line of work, so he may hold his office long-term. ~