Here's What Happened The Last Time The Fed Owned All Outstanding Treasuries

[MachineGhost]

We hear so often that the monetary policy of the Federal Reserve is unprecedented; there is nothing in history with which we can compare QE4. But, the truth is not so simple. There was period in time, during the decade of the 1940s, when the Federal Reserve purchased and held all available short-term U.S. Treasuries and virtually all long-term U.S. Treasuries, a much greater percentage of outstanding securities than what the Fed owns today.

http://seekingalpha.com/article/1321721 ... treasuries

[Benko]

"The point is that without a meaningful economic downturn, the Feds unwinding of their massive Treasury holdings, when they decide the economy is healthy again, will likely stunt economic growth for many years to come"

[doodle]

"The point is that without a meaningful economic downturn, the Feds unwinding of their massive Treasury holdings, when they decide the economy is healthy again, will likely stunt economic growth for many years to come"

Why would it stunt economic growth...and why do they have to unwind anything? Besides, I dont think economic growth really means anything anyways at least in the way that it is measured now.

Grow your own healthy organic food and make a delicious salad = no GDP growth.

Drive your diabetic butt through an hour long traffic jam to buy a Big Mac = GDP growth

[Pointedstick]

"The point is that without a meaningful economic downturn, the Feds unwinding of their massive Treasury holdings, when they decide the economy is healthy again, will likely stunt economic growth for many years to come"

Why would it stunt economic growth...and why do they have to unwind anything? Besides, I dont think economic growth really means anything anyways at least in the way that it is measured now.

Grow your own healthy organic food and make a delicious salad = no GDP growth.

Drive your diabetic butt through an hour long traffic jam to buy a Big Mac = GDP growth

From a philosophical point of view, I tend to agree with you but it's kind of rude to hijack threads like this by declaring that agreed-upon definitions of terms are wrong. Why don't you start another thread about how the definition of GDP growth encourages wasteful consumption?

[Kshartle]

The Fed can never unwind this.

Who will buy what they are selling?

Imagine the losses they will be taking that supposedly will be made up by the treasury.

Imagine the interest rates rising and the hundreds of billions the gubmit will have to pay.

Where will it get the money?

Hah! from the FED of course! Not enough taxes to pay the interest, Social Insecurity and Medicare let alone the Military.

There is no exit strategy that doesn't involve massive inflation or a collapse in the economy.

If the FED just sticks to the 85 billion, it will get the later. It has to increase, probably by year's end to keep the phony baloney "jobless" recovery sham going.

They can't bring enough people on CNBC to promote the recovery.

[doodle]

The Fed can never unwind this.

Who will buy what they are selling?

Imagine the losses they will be taking that supposedly will be made up by the treasury.

Imagine the interest rates rising and the hundreds of billions the gubmit will have to pay.

Where will it get the money?

Hah! from the FED of course! Not enough taxes to pay the interest, Social Insecurity and Medicare let alone the Military.

There is no exit strategy that doesn't involve massive inflation or a collapse in the economy.

If the FED just sticks to the 85 billion, it will get the later. It has to increase, probably by year's end to keep the phony baloney "jobless" recovery sham going.

They can't bring enough people on CNBC to promote the recovery.

Huh? Why does the Fed or the government have to "do" or "exit" anything and why does this have to end in inflation or collapse? That sounds very dire. Why cant everything just work out nicely?

What do you propose that we do when private demand for credit shrinks because of household deleveraging? If the Gov steps out we go into a wicked tailspin as aggregate demand plummets...great depression 2.0.

The bigger question is how can everyone be in so much debt when everyone is working so hard? The government has 100% percent debt to GDP and the private sector is many times more indebted than that. Doesnt it strike you that the system is just all screwball?

[Kshartle]

80% of the Fed budget is basically welfare payments (I.E. vote-buying). The 1940's are pre-welfare state.

The debt is 6.5 times larger than the tax reciepts.

The population is getting older.

The labor force is shrinking and the dependants are growing.

This will end very badly.

His article is full of discussion about cycles that can be proven mathmatically and how the FED can perform magic tricks.

He discuses a lot of nice charts from a country that bears no resembalence to the USA.

Please point out anyone where he actually explains how he thinks the FED can unwind or even stop buying without crashing the economy.

[Kshartle]

The bigger question is how can everyone be in so much debt when everyone is working so hard? The government has 100% percent debt to GDP and the private sector is many times more indebted than that. Doesnt it strike you that the system is just all screwball?

Everyone isn't working hard. Very few are. That's the problem. The nation is colletively living off savings and borrowed money for consumption. Eventually the savings and credit will all be used up. Then the FED can print all it want but it won't be able to create purchasing power. The longer then engage in stimulus the more people will exhaust their meager savings (because it's losing value) and the more they will go into debt to finance consumption, then neccessity. You have to believe the world will vendor finance the US forever to keep this going. They send us stuff and get paper in return. We get stuff....they get inflation when they print to keep their currencies from rising.

You cannot print purchasing power. They are creating an enormous mess by distorting savings and consumption. Americans and the government are loaded up with debt because of the cheap rates. Like a drug user who is getting free samples. Either they put us through withdrawl or give us an overdose. No idea how much longer it will last but my God the central banks are going berserk. Japan is commiting Hari-Kari and Draghi said they will create as much money as it takes to survive.

They are playing the strong dollar line right now and it's in a bear market rally. They trot out so called hawks who hint at cutting off the flow. If they were honest about how they can't stop the party would be over.

[Kshartle]

What do you propose that we do when private demand for credit shrinks because of household deleveraging?

Let human beings save their money if that's what they want to do. What do you think happens to savings? It goes into investments and banks where it causes interest rates to fall. That makes business projects that previously might have been unprofitable profitable.

Instead of phony government nonsense waste projects that indebt people against their will we would actually have people borrowing money for projects with profit potential.

great depression 2.0? That die is already cast. How do you want it? 20 years plus like Japan or 18 months of clearing out the bad debts and taking the pain, and re-building from a solid foundation of savings and profitable economic activity.

Having the government steal from savers by printing and sending the welfare checks isn't working. Welfare rolls doubled in 4 years. Anyone think they can't double again in 4-6 more?
Economies grow because of savings, not spending.

[clacy]

We're in a period of financial repression. Check out Ken Rogoff's book "This Time Is Different".

Despite what all the MMT'ers want to believe, we're not in uncharted waters. There is no miricle cure here and the Central Banks can only hope to smooth out the pain.

[Kshartle]

Hey guys I hope I don't sound like a jerk. I think about this stuff quite a bit and I'm very confident of my assesment of the situation. I would like to be proved wrong. I would even like to see the FED announce they were done tampering (looting) the economy tomorrow. Best to me would be if they flood the market with treasuries and the government doesn't put in price controls so everything can drop like a rock. I think we'd be out it all in less than 2 years. 2 sucky years. I say this all the while knowing my portfolio would get killed as it's about 35% gold and silver and 65% stocks (heavy in energy, mining and emerging).

I welcome other opinions though as long as they are well-reasoned and not calling each other dooty-heads.

To me the problems are all "stimulus based". Tech bubble. housing bubble. Bond bubble?

[D1984]

What do you propose that we do when private demand for credit shrinks because of household deleveraging?

Let human beings save their money if that's what they want to do. What do you think happens to savings? It goes into investments and banks where it causes interest rates to fall. That makes business projects that previously might have been unprofitable profitable.

But interest rates can only fall to zero so long as there is such a thing as physical money (when I say "physical money" I'm not even talking about gold...even physical paper money will do the trick) because no one will lend money out at a negative nominal rate when they can just sit in paper cash and earn 0%. What is supposed to happen when desired savings at any one time are greater than desired investment and you are still at the zero lower bound?

[Kshartle]

BTW Kshartle, are you referring to the Federal Reserve or the federal government when you use all cap FED?

As an objectivist, which makes a person an anarchist, I don't recognize either the government or the FED as we refer to them as truly existing. Humans exist. Groups of humans are just an idea. The group of humans called the fed control the fiat currency of the humans occupying the land claimed by the humans calling themselselves the US govt. This second group claims the right and responsibility of using violence to acheive whatever they or the stupid masses considers just.

For simplicity it's safe to lump them together. They are masters of this land whether they are called the FED or govt.

[Kshartle]

But interest rates can only fall to zero so long as there is such a thing as physical money (when I say "physical money" I'm not even talking about gold...even physical paper money will do the trick) because no one will lend money out at a negative nominal rate when they can just sit in paper cash and earn 0%. What is supposed to happen when desired savings at any one time are greater than desired investment and you are still at the zero lower bound?

Please restate this. I think there is a real question dying to get out but it's cloaked in nonsense that I can't understand. I might be too dumb.

[Kshartle]

I'm not entirely convinced that a world without the Fed would have been any better in that doomsday scenario since a problem of that magnitude is a problem with the citizenry, and not blamable on any market intervention.

This is not evidence of anything. It's just an observation. HB...I've read everything....even how to sell everything (or whatever), everything else, .......the webssite dedicated to his simple person's investment strategy.....is completly taken over by Keynseianes. To the point where they defend his inventment ideas by saying the exact OPPOSITE of everything he wrote. It's wierd to me. I thought this place would be full of rational people not people who belived in magical printing presses.

Look at the comment above. This guy wants to blame people for...I guess not making the same decision he would have. The Central bank should have total military authority I guess to carry out it's nonsense.

[Kshartle]

What is supposed to happen when desired savings at any one time are greater than desired investment and you are still at the zero lower bound?

What are desired savings?

[Pointedstick]

the webssite dedicated to his simple person's investment strategy.....is completly taken over by Keynseianes. To the point where they defend his inventment ideas by saying the exact OPPOSITE of everything he wrote. It's wierd to me. I thought this place would be full of rational people not people who belived in magical printing presses.

I used to think like you do, Kshartle, but unfortunately you're the irrational one. Understanding in detail the way the monetary system works is not the same as approving of it. Until you can coldly, rationally understand its cogs and workings, you will continue to fear it as you clearly fear the Fed, worry about inflation, and think bonds are ready to tank.

Only once you know how the system works, then you truly decide whether you believe it is a moral system or not without the bias of fear and ignorance. Personally, I have decided that it is not, but my decision stems not from fear and ignorance but from understanding. Others here who understand the system have decided that it's the best we can do with what we have, which IMHO is a perfectly reasonable position even if I disagree with it. But you really have to understand it first. Otherwise you're going to see inflation demons around every corner and scare yourself whenever the Fed does anything at all, which is no way to live because neither of us are going to ever see a wholly voluntary society.

[AgAuMoney]

But interest rates can only fall to zero so long as there is such a thing as physical money (when I say "physical money" I'm not even talking about gold...even physical paper money will do the trick) because no one will lend money out at a negative nominal rate when they can just sit in paper cash and earn 0%. What is supposed to happen when desired savings at any one time are greater than desired investment and you are still at the zero lower bound?

Ever heard of asset confiscation?

In 1933 it was done by forcing everyone to turn in their gold for $20.67/oz and then repricing the dollar from 1/20oz to 1/35oz of gold.

Next time it will probably be something different.  Maybe:

01Feb2000: When you look at the mistakes of the 1920s and 1930s, they were clearly amateurish. It is hard to imagine that happen
ing again - we understand the business cycle much better.
19Apr2009: With unemployment rising and the financial system in shambles, it's hard not to feel negative about the economy right now... Why not lower the target interest rate to, say, negative 3%? At that interest rate, you could borrow and spend $100 and repay $97 next year... The problem with negative interest rates, however, is quickly apparent: nobody would lend on those terms. Rather than giving your money to a borrower who promises a negative return, it would be better to stick the cash in your mattress. Because holding money promises a return of exactly zero, lenders cannot offer less. Unless, that is, we figure out a way to make holding money less attractive. At one of my recent Harvard seminars, a graduate student proposed a clever scheme to do exactly that. Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10%. That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3%, since losing 3% is better than losing 10%.

[MachineGhost]

This is not evidence of anything. It's just an observation. HB...I've read everything....even how to sell everything (or whatever), everything else, .......the webssite dedicated to his simple person's investment strategy.....is completly taken over by Keynseianes. To the point where they defend his inventment ideas by saying the exact OPPOSITE of everything he wrote. It's wierd to me. I thought this place would be full of rational people not people who belived in magical printing presses.

It's not taken over by Keynesians, but for what its worth, its Neo-Keynesian ideals that you'll come across on here as part of Monetary Realism that describes how our monetary system works in reality.  To many of us that used to be in your diehard, gold-bug, Austrian/Monetarist theoretician shoes, you're the one that needs to evolve.  If Gumby wasn't preoccupied with destressing his adrenals, I'm sure he would have ripped you a new one long by now.

You can still be an anti-government anarchist and recognize objective reality.  What's far more damaging is letting your political beliefs distort your perceptions of reality.

[melveyr]

Yes, you can be a libertarian and understand MMR/MMT. If government is your chosen enemy, it would simply be understanding your enemy. It would be simply understanding what they can and can't do. Besides, if you listen to the last HB money show John Chandler sounds like the Austrian and HB sounds like the MMT guy. At the very least he had a subtle understanding of why the trade deficit isn't a total disaster.

Right now you think your enemy has less control than they really do, so strategically I think you are making a mistake. If anything, people usually make the opposite assumption out of prudence. In war you usually assume the enemy has more capability than they really do so that you are more fully prepared. Additionally, most strong persuaders make assumptions that make their life harder not easier. So, if you can understand all of the MMT/MMR topics and say but, and then make your argument you will cause quite a stir and people from both sides would listen because it would be something factual, fresh, and original.

I think you need to actually, like really really, read the literature. You will learn a ton and you will end up with a much better tool kit to make your arguments. It's really not that political of a topic it is more factual. But by misunderstanding the facts your political arguments will never work on someone who has educated themselves about fiat money.

[Pointedstick]

melveyr is absolutely right, as usual.

And besides, you don't have to discard all your Austrian beliefs. My eBook library includes practically everything ever offered by the Mises Institute. I got a ton out out of it… but it's important not to fall in love with any single theory because no one has all the answers. There's nothing dirty about picking and choosing from several schools of thought to find what you consider to be the best from each. That's how new schools of thought got their start to begin with!

IMHO Austrian economics has a great grasp of micro and presents an extremely strong and compelling moral argument in favor of trade, cooperation, and voluntarism, but it's unsatisfyingly hand-wavey about environmental externalities, and falls apart at descriptive macro, reverting to idealized Robinson-Crusoe anecdotes that don't really describe any modern human society. So you just need to know what kinds of questions you can answer using Austrian economics and what kinds of questions are better answered with other ways of looking at the situation.

[Benko]

Related to politics and monetary realism, isn't it a convenience that monetary realism states that basically one can spend an infinite amount of money on whatever, which is a liberals wet dream?

What were the politics of the person who came up with monetary realism e.g. Krugman or follower?

[Pointedstick]

Related to politics and monetary realism, isn't it a convenience that monetary realism states that basically one can spend an infinite amount of money on whatever, which is a liberals wet dream?

What were the politics of the person who came up with monetary realism e.g. Krugman or follower?

No. It doesn't say that. In a nutshell, it says that the amount of money that can be spent is highly cyclical and limited by inflation and the underlying productive capacity of the society itself. MR'ers do not support destroying society's productive capacity through the over-regulation that many liberals favor since they understand that it reduces the amount of money that the government can spend. A real MR follower would favor an extremely strong and robust private sector that throws off enough prosperity to support a large activist government.

Furthermore, this is something that I perceive to be a weakness in MR; namely, that takes an overly mechanistic view of the economy that discounts culture, mass emotions, the weight of history, and therefore subtly encourages the notion that a sufficiently smart person could simply figure out which levers to pull and guide the economy to perfect prosperity. It turns off people with central-planning-itis and attracts fools who believe themselves smart enough to use that tempting monetary control panel.

[melveyr]

Related to politics and monetary realism, isn't it a convenience that monetary realism states that basically one can spend an infinite amount of money on whatever, which is a liberals wet dream?

What were the politics of the person who came up with monetary realism e.g. Krugman or follower?

MMT/MR propenents say that governments can spend as much money as the like operationally, but once resources are fully employed there will be inflation if the government keeps spending. I never understood why that was so controversial or hard to understand. If the government spent an infinite amount of money there would obviously be a hyperinflation. Please actually read the literature. MMT/MR is too good of material to demonize and misrepresent.

I feel like you are turning MMT/MR into a sponge that represents everything that you hate. Krugman hates it too and he is not a proponent of MMT/MR. Furthermore, I have never seen a democratic candidate who expressed an understanding of MMT/MR. The world is far more complicated than left versus right.

[doodle]

Related to politics and monetary realism, isn't it a convenience that monetary realism states that basically one can spend an infinite amount of money on whatever, which is a liberals wet dream?

What were the politics of the person who came up with monetary realism e.g. Krugman or follower?

MMT/MR propenents say that governments can spend as much money as the like operationally, but once resources are fully employed there will be inflation if the government keeps spending. I never understood why that was so controversial or hard to understand. If the government spent an infinite amount of money there would obviously be a hyperinflation. Please actually read the literature. MMT/MR is too good of material to demonize and misrepresent.

I feel like you are turning MMT/MR into a sponge that represents everything that you hate. Krugman hates it too and he is not a proponent of MMT/MR. Furthermore, I have never seen a democratic candidate who expressed an understanding of MMT/MR. The world is far more complicated than left versus right.

I second all of this. I was an extreme anti government libertarian throughout college and I fully bought into the Austrian explanation of the economy. Over the last five years, my understanding of the world has evolved. MR / MMT was a revelation for me and though there are many aspects and details of it that I dont understand yet, Ive come to realize that the Peter Schiffs of the world dont have a firm grasp of the mechanics of our system when they start spouting off about hyperinflation.

I actually dont see money and the state as antagonists anymore. Im coming to the belief that money cant exist without the presence of the state.

I find this fellows conclusions pretty persuasive.

http://www.youtube.com/watch?v=PjkeW44oLLg&sns=em