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Message 435
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| Subject: | [socialcredit] clever propaganda | | Date: | Saturday, January 1, 2005 13:53:58 (-0800) | | From: | william_b_ryan <william_b_ryan @.....com>
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When a government receives money loaned to
it by its central bank, it proceeds to
spend...
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[REPLY] The Government of the United States
does not borrow directly from any lender,
but auctions its securities through the so-
called "open market." The purchasers are
mostly banks and large institutional
investors from throughout the world. The
securities have a face value, being the
amount the government will pay at
redemption. They are sold at discount off
face value, which determines the effective
interest rate the government pays over their
term.
The Federal Reserve purchases and sells
securities from its portfolio through about
twenty-five "primary" dealers.
The Federal Reserve holds about ten percent
of the Federal Debt. Other financial
institutions, foreign and domestic, hold the
rest.
-
Moreover, a government in debt to its
central bank is effectively not in debt at
all.
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[REPLY] But the Government of the United
States conducts itself as if it were in
debt, because it is in debt. When the
Government spends, it matches its spending
dollar-for-dollar from tax collections plus
what it receives from the sale of securities
through the auctions, only about ten percent
of which being acquired by the Federal
Reserve.
-
Central-bank profit obtained from interest
income always returns to Treasury.
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[REPLY] Perhaps. But even if this were
true literally, it would represent at most a
ten percent discount on the carrying charge
on the totality of the Government's debt to
the financial sector, which includes the
Federal Reserve. The identifiably foreign
sector owns more Federal debt than does the
Federal Reserve. The private domestic
financial sector holds the rest. Regardless
whether foreign, domestic or "Federal," the
whole thing is definitely supranational in
terms of sovereignty, if we regard
"sovereignty" as representing the will of
the people of a particular nation-state.
But - and this is a very big but indeed - it
ISN'T true literally. In no way is it even
close to being true literally. To the
extent it might be argued that it is true,
it has only been true since 1948, when the
Federal Reserve announced that henceforth it
was "voluntarily" rebating ninety-five
percent of its interest income to the
Government of the United States. What is
less recognized is the reality that the
Federal Reserve is more than making up that
"expense" or "lost income" to Wall Street by
churning its portfolio (something it didn't
do before - certainly not during the
immediately preceding war years when the
interest rate was "pegged") generating
compensatory income to the "primary" dealers
for the "service" they are providing, who
are large banks and consortiums of banks, in
one form or another. That sop to Wall
Street is effectively interest. The
rationale is they have to "fine tune" for
monetary stability.
I'm afraid you are the victim of some very
clever propaganda, John.
-
F-A-I-R U-S-E C-L-A-I-M-E-D
Copyright 1981 Newsweek
Newsweek
August 31, 1981, UNITED STATES EDITION
SECTION: THE COLUMNISTS; THE COLUMNISTS; MILTON
FRIEDMAN; Pg. 43
LENGTH: 762 words
HEADLINE: Churning at the Fed
BYLINE: MILTON FRIEDMAN
BODY:
Churning" a customer's stock-market account--that is,
engaging in much trading as a means of generating
commissions--is regarded as a serious offense, and
any "customer's man" who engages in the practice is
subject to severe penalties.
What then are we to make of the churning engaged in
by the U.S. Government's banker--the Federal Reserve
System? In 1980 the manager of the Federal open-
market account at the Federal Reserve Bank of New
York (the system's "customer's man") made purchases
and sales of U.S. Government and Federal-agency
securities totaling nearly $2 trillion. The net
change in its holdings was $4.5 billion--which means
that the system engaged in more than $350 of gross
transactions for each dollar of net purchases. These
transactions accounted for one-quarter to one-half of
all the transactions of dealers in U. S. Government
securities other than the Fed itself. That is
churning with a vengeance.
Fine Tuning:
The Fed engages in this churning because of the
operating procedures that it uses in conducting
monetary policy. Before October 1979 the churning was
produced by the fine tuning required to peg the
Federal-funds interest rate, which it took as its
direct operating guide. Since then, the Fed no longer
pegs the Federal-funds rate. Instead, it now seeks to
fine-tune the amount of "nonborrowed reserves" it
makes available to banks, selling securities whenever
nonborrowed reserves, as estimated most imperfectly
from day to day, exceed its target and buying
securities whenever nonborrowed reserves fall short
of its target. In the process of its fine tuning, it
manufactures all sorts of ingenious short-term
contracts out of longer-term government securities:
matched purchases and sales, for instance, and
repurchase agreements, or "repos."
In my opinion, this fine tuning, and the churning
that accompanies it, not only is unnecessary but
actually reduces both the predictability and
effectiveness of monetary policy. The churning serves
only to muddy the waters, introduce uncertainty and
speculation and waste the taxpayers' money.
Suppose, for example, that in 1980 the Fed had
produced the same net change in its portfolio ($4.497
billion) by buying every Monday morning $86.48
million of securities (plus whatever exchanges or
purchases were required to replace maturing
securities). I submit that monetary growth during the
year would have been decidedly stabler, and that so
would interest rates and the economy.* We have an
enormously sophisticated and efficient private
financial structure. It can be counted on to smooth
random week-to-week fluctuations and systematic
seasonal movements in reserves, the demand and supply
of credit, monetary aggregates and the like at least
as well as the experts at the open-market desk. And
its task would be far easier if it knew precisely
what the Federal Reserve was doing than it is in the
present state of uncertainty, where high-powered
financial experts specialize in trying to read the
Federal Reserve tea leaves.
* See Anatol B. Balback, "How Controllable Is Money
Growth?" Federal Reserve Bank of St. Louis Review,
April 1981, for examination of a much less drastic
change in this direction.
Changing the Tune: Eliminating the churning will not
be easy. The officials on the desk, who are engaged
in buying and selling billions of dollars of
securities every week, who are subject to pressure
and influence from important people and are resisting
that pressure--how can they fail to be impressed by
the importance of what they are doing? Can they
believe it is "full of sound and fury, signifying
nothing"? And, needless to say, neither the handful
of securities dealers who earn millions of dollars of
commissions each year through the churning nor the
Board of Governors of the Federal Reserve System, who
ultimately guide the churning, can be expected to
welcome its elimination.
Yet the case is not hopeless. The same situation
existed for many years in the foreign-exchange
market, with the Federal Reserve and the Treasury
engaging in day to-day intervention (speculation) in
a vain attempt to control exchange rates. Recently,
the Fed and the Treasury jointly announced the
termination of such intervention except under
"extreme circumstances"--producing howls of
disapproval from other central banks but no other
untoward consequences. It also produced the
resignation of the able public servant who had been
in charge of such foreign-exchange operations. He has
moved to greener pastures, where his ability can be
constructively employed.
--
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