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Trading Lessons

A Game Of Chess And The Source Of The Federal Reserve’s Power

Interest-Rates / US Federal Reserve Bank Feb 20, 2017 - 09:19 AM GMT

By: Kelsey_Williams

Interest-Rates

We have become pawns in the game of Chess being played by the Federal Reserve Bank.  Who is their opponent?  Anybody else who makes a move.

Week in, week out, everyone’s eyes and ears seem fixed on what the Federal Reserve Board will say or do.  Mostly, it is about what they say. That’s because they can’t really do much of anything.

Except inflate the supply of money and credit.  Which they have been doing for over one hundred years.  And they are good at it, too.  The historic erosion in value of the US dollar should merit more acclaim – or outrage.  Unfortunately, the Fed is good at shifting the focus of concern to their opponent(s).


In their various statements, members of the Federal Reserve Bank often refer to their policies, decisions, and efforts in ways that make them sound sincere about their attempt to “manage the economy”.  And, admittedly, they are sincere in that attempt.  The trouble is, it is an impossible task.

The US Federal Reserve has led us down a primrose path by virtue of their self-proclaimed intention to manage and modify the stages of the economic cycle (prosperity, inflation, recession, depression).

Federal Reserve Bank policies are a repudiation of fundamental economic principles. The consequences of those policies and actions are evident in the historical results and the final resolution will be ugly.

On the face of it, that should be enough to discourage anyone from taking upon themselves such a hopeless task.  But the problem is much worse than that. The inflation created by the Federal Reserve is intentional. And their efforts have brought about a ninety-eight percent decline in the value of our money.

The cumulative effects of their ‘success’ have made their job even more difficult.  Now their efforts are almost solely focused on containing the effects of their own inflation.  The stages of the economic cycle mentioned above are skewed in ways which alter their duration and hugely increase their volatility.

So why does the Fed do the things they do?  For that matter, why does the Federal Reserve Bank even exist?

From my article, The Federal Reserve And Interest Rates – Definitely Not What You Think:

In addition, the Federal Reserve Bank is also charged with ensuring the financial operation of the US Government. Or, in other words, maintaining their (the US Government’s) ability to borrow money by issuing more and more debt in the form of Treasury securities. In my opinion, this is the sole and overriding purpose behind the existence of the Federal Reserve. And it drives every decision they make. It is not about the economic effects of their policies on US citizens (individually or collectively). It is ALL ABOUT KEEPING THE US GOVERNMENT SOLVENT. The US Government is not solvent, of course, but maintaining and reinforcing the confidence in their financial viability is absolutely essential. And nothing else takes precedence.

Alan Greenspan was noted for his verbiage.  Other Federal Reserve Board chairs and members make frequent comments about various things related to the economy and financial matters.  And the official reports and statements given for public consumption are usually crammed with facts and figures deemed to be part of a credible basis for the decisions and actions taken.

But, whereas there is a great deal of information related, you won’t hear anything referring to the above reason for the existence of the US Federal Reserve Bank.

The responsibility of “keeping the US Government solvent” may sound ‘laudable’ to some. I certainly would prefer that the US Government be able to return to solvency and maintain it. But something seems amiss.

It isn’t so much about keeping the government solvent as it is facilitating the government’s ability to borrow more and more money.  This is done  by issuing more and more Treasury bills, notes, and bonds.  When the US Government needs money, the Federal Reserve creates deposits of Treasury securities in the accounts of certain ‘primary’ banks/dealers. Those institutions are then responsible for placing the securities with numerous other dealers and so on, down the line.

The largest amounts are sold to foreign governments and (very) large investors.  Some are held by dealers as part of their investment inventory and some by banks who hold them as part of their reserves.  The proceeds of those placements, of course, flow back to the US Treasury.

Acting for and in behalf of the US Government in the placement of US Treasury securities is the primary role of the Federal Reserve Bank.  And it is the source of their power.

Buying from and selling to certain primary dealers in Treasury securities is an ongoing function of the Fed.  It is done for the purpose of expanding and contracting the supply of money and credit already in the system.  Which is an active way for the Fed to execute their mandate to “manage the economic cycles”  and ‘hopefully’ ensure that economic conditions and operation of the financial system allow for continued issuance of more and more debt by the US Government (i.e., more US Treasury Bonds).

This has supposedly worked reasonably well for several decades. But since the supply of money and credit is always expanding, the value (purchasing power) of the US dollar continues to suffer. Which is precisely why “a dollar today doesn’t buy what it used to” or “doesn’t go as far”.

And therein lies the rub.  Confidence in the dollar is critical to the US Government.  If that confidence is not sustained, then all bets are off.

The US Government must be able to sell enough Treasury securities. Otherwise, they will not have enough money to operate.  If they don’t have the money to operate, they lose control – and power.  And they will do whatever they can to avoid that outcome.

Any policy or ‘action’ by the Fed is always taken with this objective in mind:  Maintain the viability of the market for US Treasury Securities.  This enables the ongoing operation and function of the US Government.

As long as people continue to “look to the Fed” for direction, then they are demonstrating a degree of confidence that keeps things from unraveling.  And it helps the Fed maintain a semblance of status quo.  Which in turn benefits the US Government.

The Fed’s power lies in their manipulation and ongoing expansion of the supply of money and credit.

Unfortunately, expecting, wishing, and hoping that an isolated few individuals can control, avert, or stop the economic consequences that have been brought to bear on their own citizens and the rest of the world is a pipe dream.

Sooner or later, the dam will burst.

By Kelsey Williams

http://www.kelseywilliamsgold.com

Kelsey Williams is a retired financial professional living in Southern Utah.  His website, Kelsey’s Gold Facts, contains self-authored articles written for the purpose of educating others about Gold within an historical context.

© 2017 Copyright Kelsey Williams - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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