January 2012

From Chess on iBC

My questions to you are: Is the current stock market climbing a bullish “Wall of Worry”? Alternatively, are we simply getting sucked into a massive trap that bears have set before they roll this market back over?

Also, consider the following (admittedly just one isolated poll) bull/bear sentiment data from forexpros.com before you ask, “everyone is bullish, so how can there be a wall of worry?”

This is a topic that I mention in this week’s newsletter which is now available, and will be e-mailed out to subscribers. Essentially there is a significant concern that the market is over-extended, which drives bearish sentiment.

Which is why a consistent methodology is required if you are participating in the market. Not necessarily that you will always be correct, only that you have a plan for managing that risk that must be assumed. This constitutes the ‘optional’ part of the newsletter, I provide a hybrid strategy for managing that risk.

The primary function of the newsletter however is to provide a quantitative signal based on market data that carries far higher probabilities of being correct, as opposed to sentiment based indicators, polls, etc.

Look at the results. Even if you go back to a period prior to the newsletter, viz. August/September lows, you can see that I have maintained the correct posture for the last 6mths. The last 5 weeks, obviously are fully documented and verified.

Therefore if you are interested in having the signal, based on fairly transparent analysis, and/or the option of a fully developed risk management methodology, then $10 for the newsletter is cheap, about the cost of placing a trade.


The newsletter has been profitable for 5 weeks out of 5 weeks, which is the entire lifespan of the newsletter so far. I promised some transparency, and this will be a regular feature week-in-week-out. Transparency means that you can realistically assess the value of the newsletter based on verifiable results. Therefore each week, when I post the previous week’s newsletter, so that non-subscribers can follow and assess for themselves the value provided, I shall post these screenshots to aid in that assessment.

Current position:

As can be seen 50% of the available capital is in cash, 50% in the SPY ETF. So the 6.96% return is based on a 50% cash position. This will change over time, as I am running a hybrid strategy that can be followed via the newsletter at the subscribers option.

This next screenshot is of all the trades made as of inception at 21 December 2011.

As can be seen, the position was purchased on 21 December 2011, and no further trades to date have been executed. This is entirely consistent with the newsletter that has recommended ‘Hold Long’ for the last 5 weeks.

Next you will be able to track the profitability of the two strategies that run in the newsletter: the data will indicate profitable trades, at the moment, both strategies are long, and there have been no trades, so it’s a little difficult to show how this will work in the future, all will become clearer.

The graph illustrates the relative return against the benchmark, which in this case is obviously the S&P500. Currently, as I am 50% in cash, relative returns lag the index. There is a method behind this, and over time I will significantly outperform the benchmark. For the moment however, it-is-what-it-is.

I will from this week add another market, which will be Gold. I’ll probably add silver at a later date.

Some that I will be watching for the portfolio: X, VLO I’d like a pullback in this one so as to re-enter the name.

Well the report goes 5/5.

I’ll have up over the weekend an analysis of the 5’th report, screenshots from the positions so that full transparency is maintained. More to the point, where to next week. I am as we speak, currently working on the 6’th report, which will be available Sunday US eastern time.

I’ve been working on the Gold & Silver markets, one, or both of them will be included in this weeks report. With Bernanke and the Fed reporting during the week, the precious metals market may be coming back to life.

Long post from ZeroHedge on Gold Bonds:

Written by and © by Keith Weiner

Gold Bonds: Averting Financial Armageddon

After the near-collapse of the financial system in 2008, a growing number of people have come to realize that our monetary disease is terminal. It is that group to whom I address this paper. I sincerely hope that this group includes leaders in business, finance, and government.

I do not believe that my proposal herein is necessarily “realistic” (i.e. pragmatic). There are many interest groups that may oppose it for various reasons, based on their short-sighted desire to try to continue the status quo yet a while longer. Nevertheless, I feel that I must write and publish this paper. To say nothing in the face of the greatest financial calamity would go against everything I believe.


It seems self-evident. The government can debase the currency and thereby be able to pay off its astronomical debt in cheaper dollars. But as I will explain below, things don’t work that way. In order to use the debasement of paper currencies to repay the debt more easily, governments will need to issue and use the gold bond.(Wherever I refer to gold, I also mean silver. For the sake of brevity and readability I will only say gold in most cases.

I give credit for the basic idea of using gold bonds to solve the debt problem to Professor Antal Fekete, as proposed in his paper: “Cut the Gordian Knot: Resurrect the Latin Monetary Union” (http://www.professorfekete.com/articles/AEFCutTheGordianKnot.pdf). My paper covers different ground than Fekete’s, and my proposal is different as well. I encourage readers to read both papers.

The paper currencies will not survive too much longer. Most governments now owe as much or more than the annual GDPs of their nations (typically far more, under GAAP accounting). But the total liabilities in the system are much larger.

Even worse, in the formal and shadow banking system, derivative exposure is estimated to be more than 700 trillion dollars. Many are quick to insist that this is the “gross” exposure, and the “net” is much smaller as these positions are typically hedged. But the real exposure is close to the “gross” exposure in a crisis. While each party may be “hedged” by having a long leg and a balancing short leg, these will not “net out”. This is because in times of stress the bid (but not the offer) is withdrawn. To close the long leg of an arbitrage, one must sell on the bid (which could be zero). To close the short leg, one must buy at the offer (which will still be high). When the bid-ask spread widens that way, it will be for good reason and it does not do to be an armchair philosopher and argue that it “should not” occur. Lots of things will occur that should not occur.

For example, gold should not go into backwardation. This is another big (if not widely appreciated) piece of evidence that confidence in the ability of debtors to pay is waning. Gold and silver went into backwardation in 2008 and have been flitting in and out of backwardation since then. Backwardation develops when traders refuse to take a “risk free” profit. That is, the trade is free from all risks except the risk of default and losing one’s metal in exchange for a defaulted futures contract. See my paper (http://keithweiner.posterous.com/61392399) for a full treatment of this topic.

The root cause of our monetary disease has its origins in the creation of the Fed and other central banks prior to World War I, and in the insane treaty signed in 1944 at Bretton Woods in which many nations agreed for their central banks to use the US dollar as if it were gold, and this paved the way for President Nixon to pound in the final nail in the coffin. He repudiated the gold obligations of the US government in 1971, thereby plunging the whole world into the regime of irredeemable paper.

The US dollar game is a check-kiting scheme. The Fed issues the dollar, which is its liability. The Fed buys the US Treasury bond, which is the asset to balance the liability. The only problem is that the bonds are payable only in the central bank’s paper scrip! Meanwhile, per Bretton Woods, the rest of the world’s central banks use the dollar as if it were gold. It is their reserve asset, and they pyramid credit in their local currencies on top of it.

It is not a bug, but a feature, that debt in this system must grow exponentially. There is no ultimate extinguisher of debt. In my paper on Inflation (http://keithweiner.posterous.com/inflation-an-expansion-of-counterfeit-c…), I define inflation as an expansion of counterfeit credit. I define deflation as a forcible contraction of counterfeit credit, and the inevitable consequence of inflation. Well, we have had many decades of rampant expansion of counterfeit credit. Now we will have deflation, and the harder the central banks try to fight it by forcing yet more expansion of counterfeit credit, the worse the problem becomes. With leverage everywhere in the system, it would not take many defaults to wipe out every financial institution. And there will be many defaults. One default will beget another and once it really begins in earnest there will be no stopping the cascade.

Another key problem is duration mismatch. Today, every bank and financial institution borrows short to lend long, many corporations borrow short to finance long-term projects, and every government is borrowing short to fund perpetual debts. Duration mismatch can cause runs on the banks and market crashes, because when depositors demand their money, banks must desperately sell any asset they can into a market that is suddenly “no bid”. In two papers (http://keithweiner.posterous.com/fractional-reserve-is-not-the-problem and http://keithweiner.posterous.com/falling-interest-rates-and-duration-mis…), I cover duration mismatch in banks and corporations in more depth.

Most banks and economists have supported a policy of falling interest rates since they began to fall in 1981. But falling interest rates destroy capital, as I explain in that last paper, linked above. As the rate of interest falls, the real burden of the debt, incurred at higher rates, increases.

Related to this phenomenon is the fact that the average duration of bonds at every level has been falling for a long time (US Treasury duration began increasing post 2008, but I think this is an artifact of the Fed’s purchases in their so-called “Quantitative Easing”). Declining duration is an inevitable consequence of the need to constantly “roll” debts. Debts are never repaid, the debtor merely pays the interest and rolls the principal when due. As the duration gets shorter and shorter, the noose gets tighter and tighter. If there is to be a real payback of debt, even in nominal terms, we need to buy more time. At the US Treasury level, average duration is about 5 years. I doubt that’s long enough.

And of course the motivation for building this broken system in the first place is the desire by nearly everyone to have a welfare state, without the corresponding crippling taxation. It has been long believed by most people a central bank is just the right kind of magic to let one have this cake and eat it too, without consequences. Well, the consequences are now becoming visible. See my papers (http://keithweiner.posterous.com/the-laffer-curve-and-austrian-economics and http://keithweiner.posterous.com/a-politically-incorrect-look-at-margina…) discussing what raising taxes will do, especially in the bust phase like we have now.

In reality, stripped of the fancy nomenclature and the abstraction of a monetary system, the picture is as simple as it is bleak. Normally, people produce more than they consume. They save. A frontier farmer in the 19th century, for example, would dedicate some work to clearing a new field, or building a smokehouse, or putting a wall around a pasture so he could add to his herd. But for the past several decades, people have been tricked by distorted price signals (including bond prices, i.e. interest rates) into consuming more than they produce.

In any case, it is not possible to save in an irredeemable paper currency. Depositing money in a bank will just result in more buying of government bonds. Capital accumulation has long since turned to capital decumulation.

This would be bad enough, as capital is the leverage on human effort that allows us to have the present standard of living. We don’t work any harder than early people did 10,000 years ago, and yet we are vastly more productive due to our accumulated capital.

Now much of the capital is gone, and it cannot be brought back. It will soon be impossible to continue to paper over the losses. The purpose of this piece is not to propose how to save the dollar or the other paper currencies. They are past the point where saving them is possible. This paper is directed to avoiding the collapse of our civilization.

If we stay on the present course, I think the outcome will look more like 472 AD than 1929. We must solve three problems to avoid that kind of collapse:

Repayment of all debts in nominal terms
Keep bank accounts, pensions, annuities, corporate payrolls, annuities, etc. solvent, in nominal terms
Begin circulation of a proper currency before the collapse of the paper currencies, so that people have something they can use when paper no longer works
I propose a few simple steps first, and then a simple solution. All of this is designed to get gold to circulate once again as money. Today, we have gold “souvenir coins”. They are readily available, and have been for many years, but they do not circulate.

A gold standard is like a living organism. While having the right elements present and arranged in the right way is necessary, it is not sufficient. It must also be in constant motion. Gold, under the gold standard, was always flowing. Once the motion is stopped, restarting it is not easy. This applies to a corpse of a man as well as of a gold standard.

The first steps are:

Eliminate all capital “gains” taxes on gold and silver
Repeal all legal tender laws that force creditors to accept paper
Also repeal laws that nullify gold clauses in contracts
Open the mint to the (seigniorage) free coinage of gold and silver; let people bring in their metal and receive back an equal amount in coin form. These coins should not be denominated in paper currency units, but merely ounces or grams
Each of these items removes one obstacle for gold to circulate as money, along side the paper currencies. The capital “gains” tax will do its worst damage precisely when people need gold the most. At that point, the nominal price of gold in the paper currencies will be rising very rapidly. Any sale of bullion will result in a tax of virtually the entire amount, as the cost basis from even a few weeks prior will be much lower than the current price. This amounts, in the US, to a 28% confiscation of gold. This tax will force people to keep gold underground and not bring it to market. It will contribute to the acceleration of permanent backwardation.

It is important to realize that gold is not “going up”. Paper is going down. There is no gain for the holder of gold; he has simply not lost wealth due to the debasement of paper.

Current law forces creditors to accept paper as payment in full for all debts, and there are also laws that nullify gold clauses in contracts. Repeal them, and let creditors and borrowers negotiate something mutually agreeable.

Finally, the bid-ask spread on gold bullion coins such as the US gold eagle or the South African krugerrand is too wide. If the mint provided seigniorage-free coinage service, then people would bring in gold bars and other forms of bullion until the bid-ask spread narrowed appropriately. One of the attributes that gives gold its “moneyness” is its tight spread (even today, it is 10 to 30 cents per $1600 ounce!) But currently, this tight spread only applies to large bullion bars traded by the bullion banks and other sophisticated traders. This spread must be available to the average person.

As I said earlier, these steps are necessary. Gold certainly will not circulate under the current leftover regime from Roosevelt and Nixon. But it is not sufficient to address the debt problem.

Accordingly, I propose a simple additional step. The government should sell gold bonds. By this, I do not mean gold “backed” paper bonds. I mean bonds denominated in ounces of gold, which pay their coupon in ounces of gold and pay the principal amount in ounces of gold. Below, I explain how this will solve the three problems I described above.

Mechanically, it is straightforward. The government should set a rule that, to buy a gold bond, one does not bid dollars. One bids paper bonds! So to buy a 100-ounce gold bond, then one could bid for example $160,000 worth of paper bonds (assuming the price of gold is $1600 per ounce). The government retires the paper bond and in exchange replaces it with a newly-issued gold bond.

The government should start with a small tender, to ensure a high bid to cover ratio. And a series of small auctions will give the market time to accept the idea. It will also allow the development of gold bond market makers.

With gold bonds, it would be possible to sell long durations. With paper, there is no good reason to buy a 30-year bond (except to speculate on the next move by the central bank). The dollar is expected to fall considerably over a 30-year period. But with gold, there is no such debasement. The government could therefore exchange short-duration debt for long-duration debt.

At first, the price of the gold bonds would likely be set as a straight conversion of the gold price, perhaps adjusted for differing durations. For example, a 100 ounce gold bond of 30 years duration might be bid at $160,000 worth of 30-year paper bond.

But I think that the bid on gold bonds will rise far above “par”, for several reasons I will discuss below.

The nature of the dynamic will become clear to more and more people in due course. In the present regime, there is a common misconception that the yield on a bond is set by the market’s expectation of how much consumer prices will rise (the crude proxy for the loss of value for the dollar). But this is not true. Unlike in a gold standard, in an irredeemable paper standard, people are disenfranchised. They have no say over the rate of interest. The dollar system is a closed loop, and if you sell a bond then you either hold cash in a bank, which means the bank will buy a bond. Or you buy another asset. In which case the seller of that asset holds cash in a bank or buys a bond. This is one of the reasons why the rate of interest has been falling for 30 years despite huge debasement. All dollars eventually go into the Treasury bond.

The price of the paper bond today is set by a combination of central bank buying, and structural distortions in the system. But it is a self-referential price, in a game between the Treasury and the Fed. The price of the bond does not really come from the market. And this impacts every other bond in the universe, which all trade at varying spreads to the Treasury.

An alternative to paper bonds would be very attractive to those who want to save and earn income for the long term, pension funds, annuities, etc. Not only will the price of gold continue to rise (i.e. the value of the paper currency will continue to fall towards zero), but also a premium for gold bonds would develop and grow. The quality asset will be recognized to be worth more, and at the least people would price in whatever rate of the price of gold they expect to occur over the duration of the bond.

This dynamic—a rising price of gold, and a rising exchange value of gold bonds for paper bonds—will allow governments and other debtors to use the devaluation of paper as a means to repay their debts in nominal terms, but affordably in real terms.

This is impossible under paper bonds! This is because the process of debasement is a process of the Treasury borrowing more money. Debt goes up to debase the dollar. This path leads not to repayment of the debt cheaply, but to exponentially growing debt until a total default.

So we have solved problem number one. With a rising gold price, and a rising exchange rate of gold bonds for paper bonds, we have set up a dynamic whereby every paper obligation can be met in nominal terms. Of course, the value of that paper will be vastly lower than it is today. This is the only way that the immense amounts of debt outstanding can possibly be honored.

This also solves problem number two. If every financial institution is repaid every nominal dollar it is owed, then they will remain solvent. To be sure, pension payments, bank accounts, corporate payroll, and annuities etc. will be of much lower real value. But there is a critical difference between smoothly losing value vs. abruptly losing everything, along with catastrophic failure of the financial system.

I want to address what could be a misconception at this point. Does this work only for governments that have gold reserves in the vaults? No, this is not about gold reserves. While that may help accelerate a gold bond program, the essential is not gold stocks but gold flows. The government issuer of gold bonds must have a gold income (or a credible plan to develop one quickly).

And this leads to problem number three. Gold does not circulate today. Who has a gold income? That is where we must look to begin the loop. There is one kind of participant today who has a gold income: the gold miner. Beset by environmentalist lawsuits, regulations, permits, impact studies, fees, labor law, confiscatory taxes, and other obstacles created by government, these companies still manage to extract gold out of the ground.

The gold miners are the group to which we must turn to help solve the catch-22 of getting gold to circulate from the current state where it does not. I think there is a simple win-win proposition to offer them. In exchange for exemptions from the various taxes, regulations, environmentalism, etc. they have a choice to pay a tax in gold bullion.

There are other kinds of entities to consider taxing, but the problem is that they all would need to buy gold in the open market in order to pay the tax. As the price begins to rise exponentially, this will be certain bankruptcy for anyone but a gold miner.

And now, look at the progress we’ve made on the problem of getting gold to circulate. We have gold miners paying tax in gold to governments who are making bond coupon payments in gold to investors who now have a gold income. We can see how gold bond market makers will enter the scene, and earn a gold income to provide liquidity for bonds that are not “on the run”. These bond market makers could pay a tax in gold also.

And we have released other creditors from any restriction in lending and demanding repayment in gold. And anyone else in a position to sign a long-term agreement involving a stream of payments over a long period of time, such as landlords, can incorporate gold clauses in their contracts. And if the tenant has a gold income, perhaps from owning a gold bond, he can manage his cash flows and confidently sign such a lease.

Note that the lender, unlike the employee, the restaurant, or most other economic actors, is in a position to demand gold. While everyone else would like to be paid in gold, they haven’t got the pricing power to demand it. The lender can say: “if you want my capital, you must repay it in gold!”

If enough gold bonds are issued soon enough, we may reverse the one-way flow of gold from the markets into private hiding, that is inexorably leading to inevitable permanent backwardation and the withdrawal of all gold from the system.

One of the key points in my backwardation paper is that the value of the dollar collapses to zero not as a consequence of the quantity of dollars rising to infinity, but because of the desire of some dollar holders to get gold. If they cannot trade paper for gold, then they will trade paper for commodities without regard to price and trade those commodities for gold. This will cause the price of the commodities in dollar terms to rise to levels that make the dollar useless in trade (and collapse the price of commodities in gold terms).

If we reverse the flow of gold out of the markets, we may be able to prevent this disaster from occurring. The dollar will then continue to lose value in a continuous (if accelerating) manner, as people migrate to gold.

This is the best outcome that could possibly be hoped for. If it occurs along with a reduction in spending so that spending does not exceed (tax) revenues, we will avert Armageddon and be on the path to a proper and real recovery. To be clear, times will be hard and the average standard of living will decline precipitously.

But this is infinitely preferable to total collapse.

It is now up to farsighted leaders, especially in government, to take the first concrete steps towards saving Western Civilization

Sold VLO. Not because I don’t want to hold it, only that I had run up some 14% in returns, so lock them in, and try to rebuy on any retracement, the risk being that it is only a shallow pullback, and then the stock runs higher.

Mosler, the guru of MMT.

The Fed again deserves low marks for another year of being part of the problem rather than part of the answer.

Well I can certainly agree with that statement. The expansion of money and credit underwritten by the Federal Reserve, the whipping boy of Federal Government, via the massive expansion of credit via fractional reserve lending through commercial banks and the government entities led to the huge property bubble and financial over-leveraging that created this crisis. The Fed’s answer, more of the same.

For 2011 the Fed has again failed to address the interest income side of its policies.

Oh. That’s what you’re talking about. Well no. The ‘interest income’ is really a minor unimportant point in the scheme of things when talking about the Fed.

For example, the Fed turned over approximately $80 billion last year to the Treasury, and probably a lot more this year with its larger portfolio, with no mention that the same $80 billion would have otherwise added that much to the income of the rest of the economy.

That $80 billion is arrived at in this manner:

When the Federal Reserve monetizes the governments debt, and that includes government entities like Fannie Mae and Freddie Mac, the interest paid comes from the government, and is then simply returned to it as ‘profit’ via the Federal Reserve. Certainly the reduction of a ‘real interest cost’ is valuable to government, but they are only stealing it from you the taxpayer.

It would serve public purpose if the Fed made it clear that in today’s rate environment, what’s called ‘quantitative easing’ in fact removes interest income from the private sector, thereby functioning much like a tax and a source of what’s called fiscal drag, as it takes net dollars out of the economy as it reduces the federal deficit.

Partly true. It is a tax on the private sector. It does not however reduce net dollars in the economy, far from it, it expands the money supply, it is inherently inflationary, that’s why it is a tax on the private sector.

Furthermore, all the evidence so far indicates this source of fiscal drag may be at least offsetting any positive effects of lower interest rates on aggregate demand.

Mosler simply is ignorant of the difference between the market rate of interest and the natural rate of interest, which is driven by the time preferences of individuals. In an increasing tax environment, time preferences move higher, thus natural rates of interest rise, productivity falls. This is the current reality.

This brings up my second criticism with regards to the interest income channel. Lowering rates in general in the first instance merely shifts interest income from ‘savers’ to borrowers. And with the federal government a net payer of interest to the economy, lowering rates reduces interest income for the economy.

This is exactly the same criticism as the first, just worded a little differently. Essentially, holders of ‘Treasury debt’ are being paid zero or less in real terms on their Treasury paper. Thus the transfer of wealth from creditors to debtors. The government being the largest debtor in the economy. Government spending has run out of control, hence the requirement to arrogate ever increasing resources from the productive community. Government is a huge parasite living off of the productive capability of the free economy.

The only way a rate cut could add to aggregate demand would be if, in aggregate, the propensities to consume of borrowers was higher than savers. But fed studies have shown the propensities are about the same, and, again, so does the actual empirical evidence of the last several years.

I see Mosler is straying into a little Keynesian ‘aggregate’ and ‘propensity’ smokescreen. This is a pure nonsense when you consider that the market rate of interest is fixed by the largest ‘borrower’ of all, the government. For indeed, the governments propensity to consume far exceeds by many multiples the propensity to save. That is precisely why the government has to resort to the printing of money.

And further detail on this interest income channel shows that while income for savers dropped by nearly the full amount of the rate cuts, costs for borrowers haven’t fallen that much, with the difference going to net interest margins of lenders. And with lenders having a near zero propensity to consume from interest income, versus savers who have a much higher propensity to consume, this particular aspect of the institutional structure has caused rate reductions to be a contractionary and deflationary bias.

Like Keynes, Mosler seems to couch his arguments in gobblegook. So lets translate this paragraph to English and see what is actually being said:

[i] interest income for ‘savers’ has fallen
[ii] the reason it fell is that interest rates were lowered by monetary policy
[iii] interest rate costs for ‘borrowers’ haven’t fallen
[iv] the ‘difference’ has gone to the margins of ‘lenders’.
[v] ‘lenders’ have close to zero propensity to consume
[vi] ‘savers’ have a high propensity to consume
[vii] has caused the rate reductions to be ‘contractionary and deflationary’.

So according to Mosler: the ‘savers’ now receive less income from their new savings at the reduced interest rates, while the costs of borrowing for new ‘borrowers’ hasn’t fallen. First off we have the lack of a definition with regard to timeframes. If I loaned money say 8yrs ago, on a 10yr Note, then the interest that I would receive would be that contracted rate, and in the interim, the capital value of the principal would have risen to reflect that higher rate in the current market rate for debt. Therefore we have to define the time period we are talking about. Mosler chooses not to.

Then we get some waffle about this alleged ‘difference’ flowing to the ‘lenders’ via margin expansion. Well the ‘lenders’ are the ‘savers’ unless of course we are talking about the Federal Reserve as the ‘lender’. Mosler fails to elucidate exactly who he is talking about when he refers to ‘lenders’ and ‘savers’, who of course are the same by definition, but could be very different when talking about specific entities.

‘Savers’ have a high propensity to consume. Do they? Who are they? Where is your data? If of course the ‘saver’ is the Federal Reserve, what is their propensity to ‘consume’? Salaries, perks, expenses and what else? As they are a government puppet, of course their propensity to consume is actually the government propensity to consume, which is of course unquenchable.

Then the contradiction: ‘lenders have close to zero propensity to consume’. ‘Savers and lenders’ are the same [by definition] and he has just stated that ‘savers’ have a high propensity to ‘consume’. Either Mosler is seriously confused, or simply trying to slip a big lie past readers, we have a serious contradiction here. Again if the ‘lender’ is the Federal Reserve, after costs, technically, the Federal Reserve doesn’t consume, they remit their ‘profits’ to government, who consume. But really it’s just all semantics. That is the problem with MMT, it’s all just semantics, intellectual wanking.

The Fed should know this. There is a very high quality research paper by DC Fed officer Seth Carpenter spelling outmuch of this in detail for the FOMC, as well as research papers from the NY Fed on the same subject.

Well if that is true, I guess he should lose his job. Of course he is simply a technocrat, providing, in the most mathematically obscure way possible, justification for the Federal Reserve to continue their expropriation of the taxpayer as governments pet poodle.

There is no question in my mind that the Fed has ample evidence to question their presumption that given today’s institutional structure lowering rates and quantitative easing may have been counter productive and made things worse as per the interest income channels.

Of course the Federal Reserve have in a secular time frame aggravated the situation. They have created a further credit expansion, which has further devalued the money system, which makes economic calculation, calculated in money terms, increasingly unreliable, thus leading to further malinvestments.

Yet they continue to unconditionally voice the opinion that they have been ‘easing’ with those ‘accommodative’ policies, to the point of promising more of same as additional tools to support aggregate demand.

Well Bernanke is a pet poodle, gutless, unethical and the entire Federal Reserve Central Banking system should be rolled up and ended.

(Read more from Mosler at MoslerEconomics.com. To find out more about Mosler’s background, click here.)

Warren Mosler is one of the founder fathers of Modern Monetary Theory, a heterodox school of economic thinking the breaks from both classical and standard Keynesian economics. This is the first of a three part series by Mosler looking at the Fed from an MMT perspective


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