Two Trillion and Counting: The Fed and the Magma Chart
The “magma chart” is the name that, according to a post on the New York Times’s Economix blog, is being given to a chart on the Web site of the Federal Reserve Bank of Cleveland that shows the Federal Reserve’s balance sheet growing to about $2 trillion from less than $1 trillion before the economic crisis.
The name probably refers to the shape of the chart, which looks something like a wall of magma or lava flowing downhill (President Obama, with his Hawaii background, should be able to relate). The striations indicating the various asset classes also look a little like one of those images in an Earth Science textbook showing the layers of the earth’s crust and core.
The "magma chart" (NY Times)
But so long as we are talking about molten rock, to me the real significance of the chart (along with the downward stock index charts since the Fed’s statement Tuesday afternoon) is the potentially volcanic political impact. Think of it — $2 trillion in government money, more than the entire annual spending of the entire federal government in 2001 — thoroughly insulated from the control of elected officials. The Fed is not funded by Congress, and its governors are not elected by the public. Rather, they are appointed for 14-year terms, during which they “may not be removed from office for their policy views.” The governors almost all have advanced degrees from fancy colleges; Chairman Ben Bernanke is a summa cum laude graduate of Harvard who got his Ph.D. at MIT and was a professor at Princeton (along with Nobel laureate Paul Krugman).
About time this Site finds its Cajones.
This article starts to touch upon serious underlying causes of the Nations situation; there is no control by the US govt over its own Economy. The Fed is an autonomous entity managed by European Banking families, the same group that receives massive interest payments on loans the Fed makes to the US government.
Add that the Fed refuses to allow the US government to review the books, audit, inspect, or otherwise supervise Federal Reserve ledgers, accounts, transfers, loan arrangements, or any of its records…who is actually making decisions for the central banking system of the United States?
The only thing you forgot to mention was that the Fed was foisted upon this nation by progressives….
The Fed was really hatched by Rockefeller along with income tax. Those people were not progressives but they knew how to make sure no one else would ever be given the chance to control the entire economy except them and their friends.
The Fed was the creation of a small group of Wall Street bankers, and a sympathetic US Senator. I call it the money trust, since they control our money.
Did you know that the Federal Reserve Bank of New York holds more gold than Fort Knox supposedly does (who knows if it’s still there; it’s been twenty years or more since anyone checked)?
Interestingly, John Keynes and his pal, Soviet agent Harry Dexter White tried to get Congress to nationalize the Fed in the late 30′s, but failed.
What they did come up with though was the IMF and World Bank. My sense is that was, from their perspective, even better. They do sort of what the Fed does, but don’t report to anyone, and don’t even really have a nation, as I understand it.
“This article starts to touch upon serious underlying causes of the Nations situation; there is no control by the US govt over its own Economy.”
What are you talking about!? The government shouldn’t control the economy.
Check the sentence following for context: He’s saying representative control in a system that is by design, managed.
Of course, but don’t imply that the Fed should.
I haven’t implied that, and the Fed doesn’t. Congress can move the money–and more importanly should control spending–starting anytime.
The Fed can’t say, “Don’t spit.”
The Fed doesn’t have the explicit right to control the economy via its monetary policy? Then why does it exist?
It is the creation of Congress, the Fed exists solely as a derivative of the Congress’ powers.
I’m not sure what you think different, but your hystrionics tell me you think something else.
Then feel entirely free to return us to earth, Tom.
As I’m sure you will in another two sentences or less.
What Alex said. THIS is the topic that should concern a nation of people ostensibly wanting to regain their liberties.
The problem isn’t the two party system; the problem is the one party system and that one party system runs not on idealogical left versus right differences but on the tremendous power invested in the single engine of State statism. Obama is merely the latest tool in a long line of compliant tools.
The US economy, such as it is, is upside down at least some two hundred trillion dollars in debt and obligations — the $13T number is a joke. We’re beyond broke and it’s not going away. When the crash comes will the cry be for yet more authoritarianism? See the new powers recently invested in the Fed in reply to the monetary crisis when that Fed that in effect created the monetary crisis. We get hit with demands for austerity while the machinery clunks along as before, enriching DC and the central banksters with the power of the biggest special interest in the world.
Fiat reserve economies always fail. The question is who holds the reins when they do.
As Alex iterates, the Fed has more allegiance to international central banks than to the US economy. Our wealth is being siphoned and hoarded while our economy is purposely being driven off the cliff. Obama is the puppet for these globalists intent on installing a New World Order of communitarianism–(“The Third Way”) which will ultimately result in worldwide wealth redistribution and global governance.
Government money?
How, exactly, do we differentiate between government money and taxpayer money?
It’s all government money. Money as Debt.
Tom Perkins;
Article one, section 8 of the Constitution in particular apply to this situation. Congress has abrogated its role as specified in the Constitution and allowed a Private entity, (The Federal Reserve), to issue FRN, (Federal Reserve Notes), created out of thin air. There is nothing backing FRN, except promised future tax receipts.
The power to COIN ( mint out of tangible gold / silver, assets with intrinsic value) money, regulate it, and circulate into the Nations economy was given to Congress. This is what the Constitution specifically empowers congress, and Congress Alone, with.
Congress has given that power to the Federal Reserve in 1913, then Nixon took the US dollar off the gold standard and replaced it with Petro Dollars in early 70′s. These events set the stage for complete control of the nation’s economy to the private group, federal reserve.
The US taxpayer is collateral used by the Federal reserve to issue FRN’s.
Think about this; The Federal Reserve loans money to the US govt, using US taxpayers as collateral. The US govt then issued credit, based on this DEBT, created by a group of European Banking families. Then we pay hundreds of billions each year in interest to pay off loans to same banking family that created DEBT out of thin air in the first place.
There is NOTHING backing loans made to the US govt by the Federal Reserve. It is ledger accounts that Feds simply adds zeros too. Then we pay Massive Interest to the same group that controls Interest rates and manages / controls the nations central Banking system.
This Site is starting to hit upon what truly ails the Nation, but we keep debating this is a Liberal / Conservative manner.
This is like the crew of the titanic debating who was supposed to be on watch as they bear down on the iceberg…who cares? Turn the ship and Avoid the iceberg.
There has NEVER been an economic problem solved by Politics. Unless and until enough people realize the Government has abandoned their constitutional obligation(s) and handed control to European bankers, The Nation will continue to spiral down at faster speed with each passing loan, deficit, and transfer of accounts to Europe.
The Feds are becoming the largest buyers of Treasury bills. This is when the emperor is truly seen without clothes; the Feds are buying treasuries ( debt ), with Loans ( Debt ) in order to supply credit ( debt) to the US economy.
It is why Gold is over 1,000 an ounce, the currency system is beginning to see the house of cards it is built upon. When it comes crashing down, and it will without immediate intervention, the depression will be mild by comparison.
Y’know, you could reply to what I wrote, not what you seem to think I wrote/
Bernanke did the right thing in the fall of ’08 when he printed up almost a trillion dollars. By doubling M1 and investing it into the infusion of banks with liquidity he prevented a run on the banks. He printed the money at the perfect time to stave of a deflation cycle (this is a de facto truth because how else can you double the money supply without taking on any inflation). Anyway, it was a brilliant move and likely saved the economy from a full blown depression. Now those investments are being repaid and it seems now are being invested in Treasuries. I’m not sure exactly how this math works but it is good for our government because it will keep the interest we pay on public debt as a country down. If that interest goes up we’re screwed.
Many delicate balancing acts going on now because our public policy sucks so badly and is hindering economic recovery. Obama, Pelosi and Reid… in promise and in practice have scared the crap out of main-street and until they are stopped from reinventing America in their image I don’t see things recovering at all.
People really need to relax about this. I have my own problems with the Fed, but people who look at the “magma chart” and start jabbering about “hyperinflation” or the like simply don’t understand how the Fed works. That Trillion dollars in assets is not really “money” in the same sense that most people think of it. The Fed, as a central bank, maintains account for commercial banks and other central banks. Those accounts are what is used to clear payments in the dollar economy. Since 1971, they have not been convertible to anything else (except cash, which is just another form of the same thing) – not gold, and not any fixed amount of another currency. These are literally just numbers on the Fed’s spreadsheet, which it can change at will.
But before you start screaming about the New World Order, just what is the Fed doing here? Is it diluting the money supply, spending like a drunken sailor, setting us up for the big “H”? No. It is buying financial assets from the private sector, adding them to it’s balance sheet, and paying for them with money it creates from thin air.
But how can that not be inflationary, you reasonably ask? Because the Fed, in these operations, is not changing the total amount of assets in the private sector. It is substituting one form of asset for another, changing the composition of private sector assets, but not their quantity. It is not, in fact, adding any “money” (a very slippery term in a floating rate regime) to the system at all. All it is doing – all it ever does – is changing the term structure of interest rates. That’s all Quantitative Easing (the source of this asset increase) is. Normally, the Fed buys and sells short-term government paper in order to control short-term interest rates. But once they went to 0 on the short term rate, the only thing they could do was try to reduce long term rates, through QE.
Will it work? No, I don’t think so – in fact, I think it’s overall deflationary, since it removes interest income from the private sector. But since policymakers in general have been so trained to think that interest rates can do anything, it’s the hammer and they keep looking for more nails.
Jim Baird
moslereconomics.com
Thats all well and good but much like the stock market, economics is as much based on riot dynamics as much as pure science…
If enough ppl see a problem even if their is “none” you cause panic which in turn causing everything to explode. This is one of the reasons why the econ sucks now… because everything see all this crap flowing from DC and they are worried its going to explode… at this point its not known if it will or not but the threat of it will greatly help the chance that it really will.
The problem with arguments like your is they assume the world is static… one little nudge and your whole plan goes to hell and makes everything worse by 10x what would have happened if you had just left it alone.
In the end run the fed really really needs to just be removed and wiped clean… as to getting our money back… probably won’t get it all back but we could get alot back by simply enforcing the natural born requirement to be president… would fix alot of these problems.
I have read Jim Baird’s posting, desperately hoping to understand even a half-token of it, and got to the end more hungry than I was at the beginning. Of course, it’s almost lunch time in my neck of the woods, but can anyone point to some document written in plain English somewhere in cyberland or elsewhere, that would illuminate these arcane considerations, or are they meant to be unfathomable? If that’s the intent, they are masterful indeed.
Baird, like Whitehall further down the thread, have a facility with Fed operations that apparently prevents them from framing the rather dire situation in anything more than a brief view of how the Fed operates in a fairly small bubble (no pun).
What their comments lack is a broader perspective on the nature of money.
They’re adjusting governors on an automobile about to leap off a cliff, confident that since their having adjusted governors a mile back didn’t produce a catastrophe, doing the same indefinitely will ensure safety.
To both I’d point to this piece and challenge either to refute it, especially when all associated evidence says it’s the trajectory we’re on.
The next person to explain how, in a system where money is debt, spiraling interest on that debt can be paid (much less its principal) will be the first. The system cannot be balanced. It must and it will default.
Japan, years and decades into zero percentage central banking, now has debt at 200% of its GDP. These systems depend on increasing debts and no reconciliation, all the while putting the disenfranchised voter citizen at enormous risk, even as we see today.
Ten, Thanks for the two links. It now seems to me that the creation of new money is alright as long as those who create new value can keep up with it. This is not so complicated after all: Don’t let anyone invent new excuses for lending money to those who do not have a reasonable chance to pay it back.
By the same token (not a pun), let’s not lend more trust to the government than it deserves: We The People are the only ones who possess the privilege to grant trust to whomever we elect, literally! If it’s not a fair transaction, let’s not enter into it! Let’s remember that we produce the money, and the government consumes some fraction of it. There may exist a reasonable proportion to that, but it cannot obtain by default.
It is now becoming widely apparent that government employees are better compensated than productive workers. Why should not we help the government employees find more productive careers? The mindless dispensation of unwarranted largesses is not doing anyone any favor, because bribery is an insult to personal dignity.
Ten –
The problem with all of the analyses of debt based money melting down because of cumulative interest is that they neglect a major component: bank spending.
Banks are, after all, businesses like any other. They take in revenue (mostly in the form of interest), and pay out expenses (salaries and overhead) and profits to the owners. That money is in turn spent into the economy or deposited elsewhere, exactly balancing the interest charged by the bank. Increased interest can change the distribution of wealth (bankers can end up with a disproportionate share), and that can cause a crisis as the people who owe the loans no longer have the income to support them, but there’s no mathematical law that prevents debt, plus interest, from getting paid.
Jim, the country is over two hundred trillion — some quarter quadrillion dollars — upside down. Let that sink in.
Prof. Guvinoff:
Here is a good introduction to how this (and a lot of other stuff) all works, written in mostly plain english:
http://moslerforsenate.com/wp-content/uploads/2010/06/7DIF.pdf
I undertook to read the document. One does not need to read the whole thing to recognize that it’s like mathematics in reverse, with a surplus of axioms and a deficit of theorems. It amuses, but does not convince. It’s always about prices, and never about values, which is precisely how the cynics look at the world. I have never received money from a customer who did not value my product. The notion that the economy would run away, out of control if the government did not collect taxes smells like a bovine product of some fertilizing value, I suppose, but which does not command a high price, at least I hope not. But who knows? Perhaps it is traded on the commodities exchange market in Chicago, and avidly argued in the corridors of Washington? Good luck at the polls!
Jim Baird wrote:
Is it diluting the money supply, spending like a drunken sailor, setting us up for the big “H”? No. . . Because the Fed, in these operations, is not changing the total amount of assets in the private sector. It is substituting one form of asset for another, changing the composition of private sector assets, but not their quantity.
But Jim, what I think you are missing is the fact that when a bank sells a security like a Treasury bill to the Fed for printed-out-of-thin-air cash, the bank can then loan that cash out and — thanks to the magic of fractional reserve banking — it can leverage that cash 25 – 1 or more in loans, resulting in a big expansion of credit.
Right now, there is little demand for loans, so not much new credit is being extended. But if the economy ever does pick up and the demand for loans rises, THEN you will see the creation of a great deal of inflationary new money in the form of fiduciary media.
Micheal, what you are talking about is the “money multiplier”. It doesn’t exist. (Neither does “fractional reserve banking”, at least in the way most people think of it.)
The fact, is our system banks are not reserve constrained, and never have been. A bank can always loan any amount to any creditworthy borrower it wants, up to the limit of it’s capital base (which is a very different number than it’s reserves), by expanding both sides of it’s balance sheet (i.e., loans create deposits) . Any reserve requirements can then be easily made up for either on the open market or by borrowing directly from the Fed. Reserve requirements themselves, as with many other things in our banking system, are a holdover from the days of the gold standard, when they at least had some meaning. Other countries, such as Canada, have gotten along quite nicely for years with no reserve requirements.
Here is a more in depth analysis of the problems with the money multiplier concept: http://bilbo.economicoutlook.net/blog/?p=10733
To come to Jim Baird’s defense-not that it’s needed; money isn’t printed “out of thin air.” Neither gold, silver, copper, wampum or tulips are necessary for the existence of money. We create money anytime we do work others find valuable enough to pay for. The government just prints up chits to facilitate our exchanging our work for that of others.
Money is created everyday, in amazingly huge amounts, by the fact that we each work at what we do best. The other half of that equation is that someone is willing to pay for that work, and our banking system does an excellent job of fairly keeping track of those weekly / monthly transactions (depending on how often you get paid).
It really is a very transparent system (here in the USA). I have issues with the Fed, but to believe that money cannot exist without commodity backing just ignores the work of every American who doesn’t mine gold. Labor is real, and is much more valuable than the commodities that support it.
QE means nothing? I am sure that the poor chumps in Zimbabwe will be glad to hear that! Ironically I have heard that the dollar is the de facto currency there.
Zimbabwe never did any QE. WHat they did do is drive the white farmers off the land and destroy their industrial base, causeing the economy to massively contract while keeping government spending constant. Japan has been engaging in QE for the last 20 years, on and off, and has continued to suffer from deflation, for the same reason we are flirting with inflation: QE is deflationary (or at least, it’s not very stimulative…)
Oops – make that “flirting with deflation”, not inflation, above…
“$2 trillion in government money, more than the entire annual spending of the entire federal government in 2001 — thoroughly insulated from the control of elected officials.”
Considering our elected officials’ financial track record, I’m not sure this is necessarily a bad thing.
I am begging for, craving, some deflation. The more, the better. PILE IT ON.
My wife and I did not go ape-$hit borrowing, moving into a huge house, etc. over the last 10 years. We saved and deferred spending. Deflation and lower interest rates would REWARD US by letting us buy a much bigger house for the same money.
Half the price at half the interest rate; sounds good to me!
We were RIGHT over the last few years; WE are the people who should be reaping the rewards, by God, not goofballs who WAY overpaid for everything.
Amen, Chester
Milton Freedman wrote a book critical of the Federal Reserve Bank for NOT expanding the money supply as a pre-condition to the Great Depression. In fact, the Fed at the time CONTRACTED the money supply as the first banks began to fail during the Hoover Administration. Popular histories, movies, and songs of the Depression are full of laments of “no money.” Even my father told me of his time on the family farm in Indiana during this period – no cash to be had.
The Fed did the right thing in pumping dollars into the system with the collapse of Lehman and AIG because those events CONTRACTED the money supply, just like bank runs and failures during the Depression. As to “assets with intrinsic value” like gold and silver, they really have little intrinsic value and the move AWAY from the gold standard was overdue. Attempts by the Bank of England to restore the sterling on the gold standard contributed to the Depression in Freedman’s view and I think he made a good case.
That’s not to say that species (gold and silver) are worthless. They do have a marketplace value and so the relative price of the dollar and an ounce of gold does flucuate. It is just that a gold standard is too constricting to economic growth that outpaces the rate of extraction from the earth.
I’ve come the view the Fed’s responses were mostly correct so far as monetary policy. The problem is the politicians and fiscal policy. Congress and the Democratic Party have exploited the upsets as chances for theft, extortion, corruption, and destruction.
Benancke has recently publicly and verbally parted company with Congressional fiscal policy and their destructive spending spree. Yet the Fed is now buying Treasury notes, in effect “printing money” to allow the Democrats to buy power with what will be inflated currency.
But yes, the problem remains, once we have the political conditions allowing economic expansion, how will we realign the recently expanded money supply with “normality”? I don’t see how that can happen without inflation.
Remember former Chairman Burns’ great observation about the Fed? “The job of the Federal Reserve is to take away the punch bowl just as the party gets started.” He meant the business community but now the problem is Congress. STOPPING the monetarization of the federal deficit spending will be what is needed. I speculate that Benancke will use that power somewhere down the line.
The Fed being private is a feature, not a bug.
I disagree that is a feature. Their is NO Federal oversight. The Fed was the ones who started the whole derivitives that helped fuel this recession. They Federal Reserve Act was started in 1913, and in less than 20 years, they had us in a depression. The only saving grace (unfortunately) was WWII.
Alex Jones says it best
http://www.infowars.com/review-the-obama-deception-by-alex-jones.
Watch thwe video, do your own research, don’t rely on anyone else’s ‘facts’ and learn the truth!
Proponents of managed central economies, and therefore tacitly of fiat money and reserve banking, assume a static condition against which central bank action constitutes equilibrium-seeking (among ever-inflating currencies). Naturally, this is not the case. The system has a finite lifespan before it rockets off that cliff. The numbers simply don’t balance.
The Funeral Of Keynesian Theory points to the inevitable endpoint where the last in an unending system of stimuli — that being the central bank’s very cause and legacy within these monetary systems — ceases to produce the desired effect.
It turns out the system was in decline from its first day, even as the note in question was heading from 100% value to worthlessness.
“Whether it’s a federal judge declaring there exists no rational opposition to same-sex marriage.”
The people voted to take individual rights away from other people. Thus, why a judge was needed. Now if the judge was extending rights to gays that heteros don’t have I could see your point. Sorry, but I don’t see your point.
What’s this – an intelligent thread on a right wing blog site? Is it the End of Days or such?
I’m not at all fond of what that chart actually shows: our economy — actually the world economy — has now firmly the characteristics of complex numbers, that good old “a+bi” stuff from college math, with “a” being the real component, and bi the imaginary part. Normally complex numbers can be rather handy in the intermediate stage of problem solving, especially in engineering, or in creating a wicked cool looking formula, but you usually don’t want the final result to be a complex number if solving for a physical, tangible system. But in the case of modern finance, the imaginary components are constantly being traded and leveraged for real components as though the i can be added and discarded at will. Derivatives are the most obvious imaginary numbers at play, but they can be applied to anything that has trade worth far, far exceeding its physical worth.
While I do think the government actually did circumvent a full blown depression by keeping the imaginary part of the economy from completely falling — think of a juggler with 10 balls up in the air but with only the one he has in his hand at a given moment being the “real” ball — things are still a long way from being stable. It took better than a decade to build up this mess and might take just as long, if not longer, to put things back to a more real state, and there will be a lot of pressure from well-connected financiers to leave things just as they are, since trading imaginary value for real has been very, very good to them.
We got rid of the old National Bank for a reason and did without ANY form of federal government bank or means of controlling the economy for over 70 years. Strange that the Nation went from a relatively minor power to laying the foundations to be a major power in those decades without federal ‘help’ in the economy.
Now, of course, we have far more power vested in GSEs than was ever dreamt of for the old National Bank… and yet the threats they all pose is just the same.
The Fed solicits Congress’s approval whenever it changes the interest rate? Given that Greenspan is universally regarded as inducing the liquidity that led to the monetary crisis, I’d like to see where Congress wrote those quarterly instructions.
So, histrionics, Tom? I agree; you’ve lost whatever argument you thought you were making.
2 trillion of $1 bills laid end to end would stretch from the earth to the sun and back again. Light takes over 16 minutes to make that trip. By the same measure, a lifetime of wages for an average person would stretch from Boston to Washington DC. But don’t worry, those guys are smarter than you and I.
BC – Do share the ‘intelligent left leaning sites’ you espouse when discussing AGW, the administration’s ‘wise decisions’ on ‘rules of engagement’, Obama’s ‘closing’ Gitmo, ending tribunals, Obama ‘The Great Uniter, etc.,
‘Cause I sure loves me some of that huffingtonpost and environmental ‘think tank’ sites begging for dem Government dollas!
BC – The Government ‘circumvented’ a depression? The Government CREATED the recession. Psst – don’t tell.. the machine which greatly contributed to the bubble building and bursting 2 years ago was President Carter’s CRA. You know, encouraging (strong arming) banks to make loans they otherwise wouldn’t have made to low qualified/unqualified recipients.
In ’95, Slick Willy EXTENDED, the CRA. In essence, CRA on steroids years prior to the bubble bursting.
The problem has occurred far longer than the, ‘..better than a decade..’.
Heck, even Juan McCain and others were in chambers some 3 years prior to forewarn of this outcome.
Now, NOW we have Maxine Waters’ husband’s bank, getting ‘stimulus’ dollars, even when Mr. Waters’ bank had only ‘Tier 1 Capital’ value. Oh, my bad. It’s a minority-owned internet bank whose wife is a California pol.. all’s ‘fair’. Carry on!
As for your ‘things are a long way from being stable’ rabble. Take a look at Germany’s economic growth. You know, the Germany which DIDN’T heed to Obama’s ‘stimulus’ plan..
Your wunder-boy Obama has done next to nothing for the private sector. You know, the essence of what our economy is built upon..
I’ve linked my name to a series of short essays on the nature of money, the Federal Reserve and–most importantly–to a proposal for fixing our financial system, regardless of how much damage Obama does.
Since posting this I have added clarifications, and realized I misrepresented the Prime Rate, but overall I think it’s accurate and–importantly–useful.
Please read it, and if you want to comment shoot me an email at bearachtraining@yahoo.com or post here. I’m busy, but I’ll try to remember to check back.