explanation of Fed Reserve decisions by husband's office financial mgrs

I love this place!

Like Brit4RonPaul said there are two types of money. There’s the money the Fed creates called the “monetary base” ……or M1 and on top of that there’s the money the commercial banks creates in our fractional reserve banking system…called M3,broadest money measure .

Go and look at this chart from shadowstats.com

http://www.shadowstats.com/alternate_data/money-supply

The gray line is the monetary base…or M1. What I refer to as the “first derivative of inflation”. This is the money the Fed is creating out of nothing. This is the money the Fed is creating to buy up all those worthless assets from the banking system. The blue line is M-3 ……this line depicts the so-called “velocity of money” or the “second derivative of inflation”. This represents the multiple times the monetary bases get re-loaned out in a fractional reserve banking system. As you can see, it has crashed because of the bad loans. This represents the worhless assets. What your financial consultant is saying to you is that the Fed “in all their infinite wisdom” will know when to start selling those worthless assets back to the banking system thereby draining the monetary base before it can multiple into credit inflation. But why would anyone buy back a worhless assets? The Fed is hoping these bad assets will have recovered by then. Do you believe that? And can the Fed get it done? If not, maybe it’s time to find a new financial consultant.

The Velocity of Money is a term that is used to describe how fast money changes hands. It is an indicator of gross demand.

If money is changing hands quickly then goods and services in the economy are being consumed quickly. If production cannot meed demand then prices are driven up, that fuels more production, which creates more jobs, etc.

If money is changing hands slowly then goods and services in the economy are being consumed less quickly. If production exceeds demand then prices are driven down, that depresses production, people get laid off.

If you have a high Velocity of Money, and your economy has relatively stable prices, then it is producing a lot of stuff to contend with the high demand, if suddenly everyone gets scared, and the velocity of money drops precipitously overnight then there will be a lot of excess production that needs to be cut.

Now, what the Fed has done in order to counteract this phenomenon is inject a LOT of money into the system in return for assets that people thought were overvalued.

The logic behind this is fairly simple, many of the organizations holding the junk assets needed to exchange them for cash to cover losses they made on bets.

No one really wanted the assets, so the Organizations caught holding them had to suck up their losses and tighten their belts, Banks owned many of these junk assets. As they took losses they had less and less money to lend out to others the Velocity of Money began to decline. When the Velocity of Money declined stopped being a factor that was driving up prices.

The politicians and the federal reserve do not want the economy to adjust to lower prices, as that would result in an economy that (at least in the short term) produced less (decrease in taxes), and some folks would lose their jobs (angry voters). The massive infusion of cash is meant to A. get the junk assets out of the system, because they're a live grenade, and B. restart some inflation to simulate some of the price increases that a high Velocity of Money might cause. This will buy some time and delay the contraction of the economy. Eventually people will hopefully snap out of it and go back to what they were doing, and the Federal Reserve will be able to unwind its new 'Junk Asset' positions as the Velocity of Money returns to what it was.

Now here are the problem. Because the Fed has put so much new money into the system, if and when the Velocity of Money increases just a little bit it will cause a lot more inflation than it would have before. If people get out there and start spending money like its 2007 then we could end up with runaway inflation. The in order to stop this the Federal Reserve has to sell assets for cash, and basically burn the cash. Currently they're holding a lot of junk assets that they over paid for if they can't sell those junk assets back for at least what they paid for them, then they've permanently increased the money supply in the system.

Basically they've bet the farm that the stuff that killed all the banks will increase in value so that they can get back what they paid for it.

Lastly, as to whether the FR is 'extending credit' or 'printing money' here is what I would ask: What sort of Reserves does the Federal Reserve have to have in order to issue credit? I'm fairly sure the answer is it has no minimum reserve requirement. IE they can issue loans backed by nothing. Essentially an unlimited supply of credit, the worth of which is backed up by government.

Whether or not its money, or credit that was issued is irrelevant. The allocation of the cash was made on a political basis, just because it has to eventually get paid back doesn't make it fair that it was given in the first place.

P.S. I could go into more detail as to why the manner in which they injected cash into the system was fundamentally unfair but I'm tired and this post is long enough as it is. Feel free to harass me for clarifications / more information. I'll do my best to provide it, but I'm still learning a lot of this stuff myself.

Do they really believe in what they are saying? Whatever they are telling you to do, do the opposite. They do not understand the Fed.

Smoke and mirrors, you are being lied too. Invest your money with Peter Schiff's company.

http://en.wikipedia.org/wiki/Open_market_operations

Under "normal circumstances", the Fed sets interest rates by "buying" and "selling" financial instruments from commercial banks.

The Fed "buys" assets by crediting the sellers account with money. This is money creation "ex nihilo" (out of nothing).

The Fed "sells" assets by debiting money from the buyers account. This effectively destroys money (cue giant sucking noise).

The collapse of the current credit bubble is seen as an extraordinary occurrence at the Fed. They have already used open market operations to lower the interest rate to minimal levels in a vain attempt to re-inflate the credit bubble. Now they are "quantitative easing" instead.

Quantitative easing means trying to hit money supply targets rather than interest rate targets. The Fed is buying assets like there is no tomorrow with money created from thin air.

It is important to distinguish between two types of "money supply".

1. Central bank money. This is the one being inflated like crazy right now.

2. Credit. Under the fractional reserve system, commercial banks can create "new money" in the form of credit. For every expansion of credit, there is a bust. We are in the mother of all busts right now.

The reference to the "velocity of money" in that report is Chicago School economics. Shame it wasn't Austrian school economics - the kind that Ron Paul and Peter Schiff use.

"Fascism should more properly be called corporatism because it is the merger of state and corporate power." - Benito Mussolini.

That has already happened and will continue to happen. Higher prices are the result of inflation. That's what's coming.

Nobody's too big to fail ~ Peter Schiff, Jim Rogers, Marc Faber

oney trail. They made all that money originating these risky loans and sold them off to other banks, mortgage companies, etc. These banks go belly up and the Fed prints its own money to bail out it's banks and buy up all the little ones that bought their terrible loans at fire sale prices. So they made money off the first loans, sold them, and buy them back with our money by scooping up the banks for pennies on the dollar. The Fed owns your car, your house, your credit cards, and recieves your income tax dollars. I have to say it, the Fed is evil.

How would things be different if they did not lend the money?

Maybe borrowers would be desperate enough to borrow from us, our savings accounts and 401k's at higher interest.

Maybe the borrowers would not be able to spend money for goods in competition with us.

Maybe the borrowers would lay people off, who would cut back on spending, and make every dollar more precious.

IMissLiberty

bookmarked for further study. The way I see it the Fed is pumping air in a balloon that has a hole in it. When they stop pumping air the balloon will collapse. Just my take on it.

Extending credit does not literally print money, but it does expand the money supply. That makes sense, right? Because if you borrow money from someone it's in two places - the person who borrowed the money's hands and the ledger in the old account. We live in a fractional reserve regime, because I could withdraw the money out of my savings account even though the bank has it lended out to someone. You can see how this could be very dangerous.

Of course when that credit is all amortized there's deflation. It's not clear if we are setting ourselves up for hyperdeflation (when all this credit gets paid off without the expansion of new lines of credit) or hyperinflation (when the devaluation of the dollar catches up with us and the market is flooded with dollars).

Either way it's going to be ugly.

In the current system money doesn't exist until it is lent/borrowed. The Fed themselves state that if all debts were paid in full not one dollar would be in circulation. It's a tough concept to grasp but once you see it things are much clearer.
But what they're saying is not false, all the credit/money that's being created is canceling out all the credit/money being destroyed by defaults and bankruptcies. This is why inflation has such unpredictable consequences. Home prices can go down while energy prices skyrocket.
The credit/money being destroyed is affecting the average person, while the credit/money being created is going to the bankers/large corps/super-rich. This will cause great disconnects, longer term investment assets like stocks and bonds are mostly purchased by the bankers/large corps/super-rich (hence the huge rally), while homes and everyday goods are purchased by all (hence price stability or declines). Eventually (who knows when) the credit/money will make it down to us peasants and prices will explode.

In essence, it stated that: because most of the money that the FR has injected into the system is not going anywhere or is offsetting the loss of credit in the money market and capital markets we will not experience inflation of any deleterious amount.

True, as it stands... the money is actually going to bail out wall street. It is being used to purchase bad debt. That in itself will not cause inflation... it it just stayed that way. However, bad debt has to go somewhere...

It then goes on to say that slowly and eventually the velocity of money will recover and the Fed will slowly and gradually sell its assets (eg exchange paper for cash) to reduce the monetary base.

Is a crock. The ~assets~ being purchased are inflated numbers on paper.. the majority are not tangible assets at all. What is left is assets that are a magnitude lower in value than the price they were purchased at... so selling them is not going to help. What it will do, however, is inflate when they sell, since the money used to purchase the assets is made up money. You will still be left with a huge sucking hole of debt that you and I right now are required to pay later. Paying it later means higher taxes, which means less discretionary income, which means less purchases, which means less employment, which means less consumer spending... see where I'm going with this.. ;)

It also talks about the Velocity of Money, and it's precipitous drop (40%) here in the US economy. It explains that it's this VM drop that required the Fed to compensate by expanding the monetary base to offset this decline.

This is incorrect... it dropped because of 2 bubbles bursting, people's 201K's losing half of thier value and rising joblessness. You're not going to spend your unemployment check on that bigscreen that will not fit in the cardboard box you are now living in, for example. So what they are saying is that the transfer of money slowed, so they are going to fix it by extending more credit. Not gonna work this time.

What they fail to mention is that an increased money supply will indeed cause inflation. Since that's exactly what it is. Yes, VM is slower now... so the results of trillions of dollars eventually finding thier way into the mainstream will take more time. When it does, however, you're going to have inflation.

Another note.. the Fed right now is PRAYING for inflation.. they need it to pay off overseas debt. So that's going to happen... indeed, it is rigged that way now.

In big bold letters it states: It is important to understand that what the FR is currently doing is extending credit and not literally printing money.

Technically, the Fed doesn't have to print money now.. the 4 cents a bill is costly when you are doing a bunch of them! So now, they sit in front of a computer, open an account, type in a 1 and a bunch of zeros... then there is money! Like a virtual money tree.. great, isn't it?

It doesn't matter if they print it or not. It will go into circulation eventually. And then we will see inflation like never before.

They're simply adding some zeroes to their pals accounts, and debiting you, the taxpayer.

is BOHICA.

http://www.urbandictionary.com/define.php?term=B.O.H.I.C.A

If there isn't monetary inflation (causing the monetary distortion of price inflation), then why haven't the prices of finished goods decreased? If there isn't price inflation then why are gas prices going up? If there isn't going to be more price inflation, then why has the dollar index fallen through its 200 day moving average?

http://quotes.ino.com/chart/?s=NYBOT_DX&v=d12&w=1&t=f&a=200

He also fails to mention that extending credit is how new "money" is created.

Really, haven't you had enough "advice" from financial "managers?"
Don't fall for the ruse.

A free market will never exist as long as there is monopoly control over the money supply.

IS printing money just in a more complex way so as to dupe the less intellectually rigorous.

Especially in a fractional reserve lending system, every dollar given to banks in the form of potential reserves can be turned into 10 dollars of loaned funds (or more) and where do you suppose this new money comes from? Yes, it is credit, but the credit is manifested as MONEY. So by extending credit, they are in fact printing money.

Anyone who would try to tell you extending credit by central writ is not printing money in our current system is either a fool or a liar. Either way, that is not good.

One problem of our centrally expandable credit and currency system is that over time wealth is shifted to those who have the backing of the central authority. Is this really fair, just or righteous? Obviously it is not Constitutional.

Basically, the Fed's moves, while they rationalize them as "saving the system" are really just moves to bail out connected cronies. They try to convince people they are one of the connected cronies who are being helped, but you are not. They would sell you out for a dollar of false profits if they believed that was in their interest.

_________________________________

My liberty-minded home base of thought:

www.ponderthis.net