The government can never run out of money.

Kalecki's Fable

Michal Kalecki, a pioneer in the study of business cycles, related a story about his partner Ludwik Landau. In the mid-thirties, Landau was summoned by one of the colonels governing Poland's fascist government. Landau explained at length the principles of effective demand and credit cycles underlying levels of output and employment at any one time. The colonel had evident difficulty in grasping this. So, finally, Landau explained by telling the following story:

There is a lot of power and truth in this story. Note that nothing changed in the objective conditions of the village. The only thing that changed was the network of social obligation.

Debt is primarily a social obligation.

Money is a veil. Circuits and flows in the money economy mimic circuits and flows in the real economy...but imperfectly.

The real economy and the money economy are different entities.

 

I can't define free market at all. For someone would mark the product with your label and have dried crap in it because it is cheaper to produce and no one can see what is inside.

 

No one can. No market is free except in a relative sense. Market-based economies developed a legal infrastructure over hundreds of years to govern financial and equity markets. These markets co-evolved with their respective cultures, and could not exist outside of a specific legal and regulatory environment. As a matter of inevitable necessity, corporations attempt to gain advantage through political manipulation of these markets.

In such an environment, the closest we can get to a "free" market is a closely regulated market free from manipulation and inside information, or as free as we can possibly make it. The libertarian notion that a free market = an unregulated market is conceptually impossible.

 

In other words...more fantasy conservative economic theory

 

Looks like Jdog, after accusing me of being a liar, cut-n-ran when I told him I'd give him proof if he'd man-up and apologize for calling me a liar if I did so.

Can't say I'm surprised.

 

I've previously shown your intellectually dishonest accusation that my data was "dishonest" because it was from 2011 is completely bogus, as multiple source demonstrates that bank/dealer holding of US debt has remained consistent at the 3-4% of outstanding debt level.

Nothing in the article you cited is inconsistent with what I have stated or the multiple sources I've cited showing that banks/dealers are brokers that resell the US debt and end up holding only a very small percentage of outstanding US debt (3-4%).

These results suggest that dealers buy Treasuries during auction weeks when prices are depressed and then sell these securities sometime later after prices have recovered.

The predominant market makers are the primary government securities dealers. Primary dealers are banks and securities broker-dealers that trade with the Federal Reserve Bank of New York in the course of its open market operations. The dealers also buy securities at auction, make markets for their customers, and take positions for hedging and speculative purposes.

Dealers execute trades by notifying brokers (by phone, and lately electronically), who then post the resulting trade price and size. The IDBs thus match buyers and sellers while ensuring anonymity, even after a trade.

Dealers can consolidate advance customer orders and act as a broker for customer orders at auction. However, Treasury dealers are also expected to place competitive bids for their own account, and they are encouraged to submit bids at a range of prices to ensure that the entire issue is sold at a reasonable price.

Dealers can hedge the risk of new inventory acquired at auction by selling Treasuries prior to the auction in the when-issued market, selling after the auction in the secondary 6 market, or taking offsetting positions in other Treasury securities or derivatives markets. Alternatively, a dealer can reduce its offer price for the newly auctioned security to increase the likelihood that another customer will buy it, i.e., quote shading as discussed in Ho and Stoll (1981).

Another role of dealers is to make secondary markets, meeting the transaction needs of customers and other dealers by buying and selling securities for their own account. Until 1992, the primary dealers were required to maintain a 1% share of total customer activity reported by all primary dealers. Since then, making markets to customers has not been a criterion for being a primary dealer, but the dealers are nonetheless still the predominant market makers.

To the extent that dealers have a perceived informational advantage over other market participants, they may take on or maintain interest rate exposure by initiating transactions or by opportunistically hedging positions acquired through market making. For example, a dealer that expects interest rates to fall in the near future
might accumulate a long Treasury securities position. If interest rates do indeed fall, the dealer can sell the securities at a higher price.

Fleming (2007) reports that dealers buy an average 74% share of bill issues at auction and an average 60% share of coupon issues. A comparison of these figures with our issuance coefficients suggests that at the end of the auction week, dealers retain about 40% of the position exposure taken on through their auction purchases. 18 That is, dealers sell, or hedge with other spot sales, roughly 60% of the Treasuries they buy at auction in the same week.

We now use our data on Treasury dealer positions, Treasury issuance, and Treasury returns to examine asset pricing effects related to dealer inventory management. In their underwriting and market-making roles, dealers accumulate undesired inventory. This inventory is costly to dealers, because it generates both inventory risk and asymmetric information risk.

The negative relationship is consistent with dealers accumulating positions during the week of an auction when the new supply also causes prices to decline.
Looking at what happens the subsequent week, we see that the excess inventory taken on by dealers at auction tends to appreciate. The coefficients on the
previous week’s position changes due to issuance are thus positive for all five securities and statistically significant for all three notes. Taken together, the results suggest that dealers receive compensation for intertemporally intermediating issuance by buying when prices are low and selling when prices are high.

In sum, we uncover evidence that dealers are compensated for inventory risk associated with Treasury supply changes via return reversals. Despite the Treasury market’s liquidity, new Treasury issues are large enough to temporarily depress prices. Dealers mitigate price disruptions by buying securities at auction and selling them to other market participants over time.

Consistent with what I've said all along, dealers that buy US Treasuries either do so as a broker for a third party buyer, or for their own account which they resell later at generally higher prices.

The end result is that banks end up holding only a fraction of US Treasury securities, and thus only a fraction (3-4%) of US Treasury debt issuance can be considered loans from bank which expand deposits and thus the money supply.

Government borrowing is ultimately about 3-4% to banks (which expands deposit money) and currently about 14% to the Fed (which expands the base money supply). The other 82% ends up in the hands of individuals or entities which has no effect on the money supply.

 

Looks like the dog cut-n-ran rather than being willing to man-up and apologize for calling me a liar if I proved his bogus "Creature Feature" claim about the Fed having never been audited was wrong.

Can't say I'm surprised.

The really funny thing is that just yesterday he wrote this:

And here in this thread he did the exact same thing using the "Creature Feature" conspiracy meme, and cannot provide any facts or even muster a effective provable point, and he just uses the low life scumbag tactics of calling me a liar.

Could the pot be calling the kettle any more black?

 

IOW, if we can just find enough cigar smoking pious Polish Jews to sit on the Fed board we are in the clear.

 

Good man.

This from a thread I started a few years back:

+++

If you've followed financial posts here at all, you've no doubt seen the many posts claiming the Fed has never been audited, or (once they've been educated a bit) that the Fed isn't "really" audited or comprehensively audited.

These claims inevitably come from sources of demographer politicians (like Ron Paul) who regularly bash the Fed for political purposes, or internet whacko videos like "Creature from Jeckyll Island" and other internet hucksters that feed the gullible.

This month, the Government Accountability Office (GAO), a government entity responsible for auditing government (and quasi-government) operations, released an exhaustive, comprehensive, 266 page report that details the Fed's operations generally, and its operations to avert a disaster in the 2008 credit collapse more specifically.

You can find the report here:

http://sanders.senate.gov/imo/media/doc/GAO Fed Investigation.pdf

As to the Fed's operations and its "never been audited" aspects, the GAO report comprehensively reviewed the numerous, mulitple, internal and external layers of audits and controls to which the Fed is subjected on a regular basis.

Summary of some of the findings are presented below.

---

Page 38:

The Federal Reserve System and Its Emergency Activities Were Subject to Multiple Audits and Reviews


The Emergency Programs Have All Been Subject to Audits and Reviews

The Federal Reserve Act requires the Federal Reserve Board to order an
annual independent audit of the financial statements of each of the 12
Reserve Banks.57 Each Reserve Bank prepares annual financial
statements that reflect its financial position as of the end of the calendar
year and its related income and expenses for the year. The Federal
Reserve Board also prepares combined financial statements of the
Reserve Banks, which include the accounts and results of operations of
the 12 Reserve Banks. As shown in figure 2, the loans and other financial
assistance provided through the Federal Reserve’s emergency programs
are recorded in the Reserve Banks’ publicly reported financial statements.

The Reserve Banks have voluntarily adopted the internal control reporting
requirements of the Sarbanes-Oxley Act of 200260 and provide an
assessment of the effectiveness of their internal control over financial
reporting annually to their boards of directors.61 Internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the entity;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with accounting principles, and that receipts and expenditures of the
entity are being made only in accordance with authorizations of
management and directors; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use,
or disposition of the entity’s assets that could have a material effect on
the financial statements.

...

Since 2007, Deloitte has been the independent external auditor for the
Federal Reserve System. Accordingly, Deloitte performs the audits of the
individual and combined financial statements of the Reserve Banks and
those of the consolidated LLCs. Deloitte also provides opinions on the
effectiveness of each Reserve Bank’s internal control over financial
reporting. In 2009, Deloitte began providing opinions on the effectiveness
of each LLC’s internal control over financial reporting. 63 To help ensure
auditor independence, the Federal Reserve Board requires that its
external auditor be independent in all matters relating to the audits.
Specifically, Deloitte may not perform services for the Reserve Banks or
others that would place it in a position of auditing its own work, making
management decisions on behalf of the Reserve Banks, or in any other
way impairing its audit independence.

FRBNY management also engaged external firms to review certain
aspects of the emergency programs. For example, FRBNY engaged the
auditing firm KPMG LLP (KPMG) to assist FRBNY in developing a conflict
of interest inspection and fraud-review program for certain programs
created in response to the financial crisis. In 2009 and 2010, KPMG
executed reviews of vendors and agents supporting the Agency MBS
program, Maiden Lane LLC, Maiden Lane II LLC, Maiden Lane III LLC,
TALF, and CPFF. The scope of this work covered an evaluation of the
vendors’ and agents’ adherence to their own conflict of interest policies
and more program-specific provisions contained within their engagement
agreement with FRBNY. These reviews are discussed in greater detail
later in this report. In 2009, FRBNY contracted with a management
consulting firm, Oliver Wyman, to conduct an independent review of the
governance and management infrastructure surrounding its new market
facilities and emergency programs created throughout 2008. This review
was specifically focused on the three Maiden Lane LLCs, CPFF, and
MMIFF and included an examination of internal reporting and
management updates, business and strategic plans for relevant Reserve
Bank functions, internal risk assessments, Reserve Bank policies and
procedures, committee charters, and organizational summaries.

In addition to external audits and reviews, the Federal Reserve System
has a number of internal entities that conduct audits and reviews of the
Reserve Banks, including the emergency programs. For example, each
Reserve Bank has an internal audit function that conducts audits and
other reviews to evaluate the adequacy of the Reserve Bank’s internal
controls, the extent of compliance with established procedures and
regulations, and the effectiveness of the Reserve Bank’s operations. The
internal audit function conducts audits in accordance with the
International Standards for the Professional Practice of Internal Auditing
and maintains organizational independence from management by
reporting directly to the audit committee of the Reserve Bank’s board of
directors.64 During the period from 2008 through 2010, FRBNY’s internal
audit function conducted audits pertaining to the Agency MBS program,
TSLF, Swap Lines, TAF, CPFF, TALF, and PDCF, as well as the three
Maiden Lane LLCs.

...

The OIG also conducts audits, reviews, and investigations related to the
Federal Reserve Board’s programs and operations, including those
programs and operations that have been delegated to the Reserve Banks
by the Federal Reserve Board. The OIG is required to submit a
semiannual report to the Chairman of the Federal Reserve Board and to
Congress. In November 2010, the OIG reported on its review of six of the
emergency programs: TSLF, PDCF, MMIFF, TALF, CPFF, and AMLF.
The OIG stated that the purpose of its review was to determine the
function and status of these programs and to identify risks in each of the
programs to assist the Federal Reserve Board in its general supervision
and oversight of the Reserve Banks.

The Fed is the most heavily audited entity in the world, probably.

---

Results of the numerous external, internal, and government audits:

Page 46:

Audits and Reviews Have Not Identified Significant Accounting or Financial
Reporting Internal Control Issues Concerning the Emergency Programs

The Reserve Banks and LLCs Received “Clean” Opinions on their Financial Statements

Deloitte rendered unqualified (clean) opinions on the individual and
combined Reserve Banks’ financial statements for the years 2007, 2008,
2009, and 2010. As described earlier in this report, the Reserve Banks’
financial statements include the activity pertaining to the emergency
programs, including the accounts and operations of the LLCs, which are
consolidated into FRBNY’s financial statements. Deloitte also has
rendered clean opinions on the financial statements of each LLC
beginning with the creation of Maiden Lane LLC in 2008. A clean opinion
indicates that the financial statements prepared by management are free
of material misstatements and are presented fairly in accordance with
U.S. generally accepted accounting principles (GAAP) or, in the case of
the Reserve Banks, accounting principles established by the Federal
Reserve Board, which is a comprehensive basis of accounting other than
GAAP.

The independent external auditor conducted its financial statement audits
of the Reserve Banks and LLCs in accordance with U.S. generally
accepted auditing standards as established by the Auditing Standards
Board and in accordance with the auditing standards of the Public
Company Accounting Oversight Board.67 These standards require that
the auditor plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement
and whether effective internal control over financial reporting was
maintained in all material respects. The audits of the Reserve Banks’ and
LLCs’ financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement
presentation.

Since the development and implementation of the emergency programs,
the independent external auditor’s internal control opinions related to the
Reserve Banks and LLCs have all been clean, indicating that these
entities have maintained, in all material respects, effective internal control
over financial reporting.

As mentioned in the previous section, in addition to the independent
external auditor, the Reserve Banks’ internal audit function, RBOPS, and
the OIG performed audits and reviews of the emergency programs.
Similar to the external audits, the audits and reviews conducted by these
other groups did not report any significant accounting or financial
reporting internal control issues.

---

As the comprehensive GAO review and audit proves, the Fed has been audited up the ying yang but multiple, numerous entities, both external and internal, non-government and government, and every audit found that there were no significant mis-statements or control issues the Fed's reports or financial statements both in terms of its normal operations and its emergency actions in conjunction with mitigating the financial collapse that was threatened in the great recession.

---

Here are the independent auditor reports and opinions:

2009: http://www.federalreserve.gov/monetarypolicy/files/BSTcombinedfinstmt2009.pdf
2010: http://www.federalreserve.gov/monetarypolicy/files/BSTcombinedfinstmt2010.pdf
2011: http://www.federalreserve.gov/monetarypolicy/files/BSTcombinedfinstmt2011.pdf
2012: http://www.federalreserve.gov/monetarypolicy/files/BSTcombinedfinstmt2012.pdf
2013: http://www.federalreserve.gov/monetarypolicy/files/BSTcombinedfinstmt2013.pdf
2014: http://www.federalreserve.gov/monetarypolicy/files/BSTcombinedfinstmt2014.pdf


Other GAO audit reports:

http://www.gao.gov/assets/670/669468.pdf
http://www.gao.gov/new.items/d09722r.pdf

 

The hysterically urgent calls to audit the fed seem to me reflective of a general opposition to the fed role in the economy... A wish to return to some halcyon golden hued past where fiat money did not exist... Where people used REAL MONEY--- gold. Where fractional banking was unknown. .

 

If they were so great they would have kept the gold standard. But virtually every government has dropped the gold standard, because of the problems it causes. Among them are the fact that there is no power to expand or contract the money supply to respond to economic contingencies, it makes a currency susceptible to pressures by speculators, gold supply can be erratic, and it puts our currency at the mercy of action by gold producers and other nations with gold reserves.

 

Yes, i absolutely agree
Although gold has a long history of being functionally used as money....
That does not make it to be money.
Any more than diamonds are money

If gold did not exist, would there be no money
If one person or corporation became so wealthy that they bought up all the gold
Would the world then have no money?

Gold is a commodity, like copper, or oil
It can be used as money, or a storehouse of value
And anyone who prefers to do this today is free to do so

 

Of course governments can manufacture all the currency they want but the value of the money can come completely detached from the numbers on the currency. Government's never need to run out of currency but they can and have been reduced to helpless fiscal basket cases.

Now an odd thing that I have noticed is that when DC folks want to spend, they assure us we can't run out of money. But when there is a threat to tax revenue streams then they turn into deficit hawks shrieking in fear, suddenly believing that the government could run out of money. So I think what they believe is that the government can spend pretty much forever with very little relationship to the money coming in.

Now this in practice is a vast explosion of government power. If the government is kept in budget, the people rule the State. Politicians have to be honest about costs and benefits. New spending must be matched by a tax increase/cuts to existing programs/or sale of government assets. Budgets makes politicians our servants; irresponsible deficits make them our masters, leaving them free to make promises and provisions that supposedly no one pays for. The ultimate perpetual motion machine.

Is anyone really falling for that?

 

Excellent story Zorroaster.... but do you know what ties the real economy and the money economy together? Information. Take the Colonel and the inn-keeper - they both had the same information about where the $100 note came from, and yet the Colonel knew something was fishy and evidently the inn-keeper did not (or did he? Let's not forget this whole thing started with the inn-keeper effectively stealing the $100 note from the safe). Let's say the inn-keeper told the butcher about how the Jew didn't come back for the $100 note and the butcher was just as suspicious a man as the Colonel....do you think he would have accepted the note at face value? Probably not. But the butcher has a nagging wife he needs to bring money home to, so he strikes a deal with the inn-keeper that values the note at $60. And on it goes. The key to the value of the note is how much information each player has.

So given the amount of information we have about the Federal Reserve's massive accumulation of debt, just how suspicious should the credit markets be when they start getting sold off?

 

The Federal Reserve could do that too.

 

Would you continue to shop at a retailer that had misleading labeling?

 

I strongly suggest everyone on this thread go to this site and download the ppt on fiat money...it is a fabulous description of reality not mythology.

http://jdalt.com/book/the-millennials-money/

Once you truly grasp fiat money, you will soon see that our most common misconceptions about money, deficits, wealth, savings and so on are dominated by a discarded system of currency called the gold standard. We no longer have any real constraint upon the supply of money...in essence, we can let the government create as much money as we need in order to maintain the level of prosperity we demand of it. Go look at the slide show, it will shock you how warped our common view is when compared to the reality of fiat money.

 

In point of fact you didn't dispute the statutory laws at all in the prior thread.

Julliard v Greenman established that "legal tender currency" was Constitutional based upon the Congressional authority of Article I Section 8 Clause 1 "To borrow Money on the credit of the United States" and also referenced the fact that gold and silver coins were lawful "money" authorized by Article I Section 8 Clause 4 that establishes the Constitutional authority of Congress to "To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;"

The difference between the two is that "legal tender currency" (Federal Reserve "notes") are "notes" promising payment while "legal tender money" (American Eagle coins) don't promise anything.

Statutory law reflects this because Federal Reserve notes are redeemable in "lawful money" on demand under our statutory laws while American Eagle coins aren't redeemable in anything under the law.

The only problem we have is that the Federal Reserve banks and the US Treasury refuse to redeem Federal Reserve notes in "lawful money" as specified under the law and will only replace Federal Reserve notes with other promissory notes. For some bazaar reason the US Supreme Court agreed with the Federal Reserve and the US Treasury and refused the enforce the law requiring redemption of Federal Reserve notes on demand in lawful money and allowed one promissory note to replace another promissory note so that the "promise of payment" in "lawful money" is never fulfilled. I can't explain that decision.

Of interest I've always wonder what would happen if a State Treasurer demanded redemption in American Eagle coins from the US Treasury or the Federal Reserve so that the State could meet it's Constitutional mandate to pay it's debts in gold or silver as required by Article I Section 10. I'd have to assume that the Supreme Court would require the redemption so that the provisions of Article I Section 10 could be fulfilled by the State. A state like California could literally wipe out the entire gold reserves of the United States based upon the value assigned to gold coins in 1985 under the Gold Bullion Coin Act. Congress would have to change the value of the gold coins to meet the Constitutional requirement to replace the Federal Reserve notes with gold coins based upon the denomination of the Federal Reserve notes and the denomination of the gold coins that establishes the legal exchange rate. An interesting proposition......

In any case I'd highly recommend reading Article I and Julliard v Greenman because obviously people are relatively ignorant of both.

http://constitution.findlaw.com/article1.html

http://caselaw.findlaw.com/us-supreme-court/110/421.html

 

I'll refer anyone who is interested to my posts in this thread: http://www.politicalforum.com/curre...-fed-gave-16-trillion-emergency-loans-27.html

Rather than regurgitating them here.

 

Well, I see jdog has been on line and made a bunch of posts, but he totally ignored this one. He has not disputed my evidence or even acknowledged it, much less manning up and apologizing for falsely calling me a liar.

Can't say I'm surprised.

 

Your kidding right? This is a report, it is based on disclosures by the FED and INTERNAL audits done by the people they hired.

Now if the IRS decides to audit me, do you think they are going to take the work of my CPA?
No they are going to want to do their own audit. Why do you think the Fed refuses to allow Congress to audit them? By what power vested by the Constitution do they have the right to refuse a Congressional audit?

Man this is really pathetic. You are technically right that they have been audited, but like I said, provide an "independent audit". You failed to do so. You provided internal audits paid for by the Federal Reserve. Perhaps you do not know the difference. They will only consent to audits by their own paid people and everyone with any semblance of intelligence knows you cannot put a pennies worth of faith in any internal audit. It will say whatever you are paying for it to say.

On top of that the Audits paid for by the Fed were done by and accounting firm of questionable ethics Deloitte & Touche .

The Public Company Accounting Oversight Board released a report in 2012 inspection of Deloitte & Touche LLP, indicating that it found problems in 12 of the 51 audits performed by the firm that it inspected. They are up to their eyeballs in Wall St corruption and cooked books.

Nice try, I can tell you put some work into that post, but in the end it fails because you cannot provide proof of something that does not exist, namely and independent audit.

I am afraid you will have to wait for that apology until you can provide the proof I asked for.... I will not however hold my breath.....

 

You didn't even read my post did you?

Otherwise you would not have written what you did when I listed the independent auditor reports by Deloitte for each of the past 6 years.

Not to mentioned the regular audits done by the OIG and the GAO in addition to their internal audits.

I have proved your "Creature Feature" claim that the Fed "has never been audited" is false seven different ways, including independent audit reports.

The Fed reports to Congress regularly. Congress doesn't audit them because Congress is not an auditor. That is what the Office of Inspector General and the Government Accountability Office are for, both of which regularly audit the Fed as well.

I've demonstrated that the Fed is probably the most audited entity in the world, quite the contrary to your silly claim.

But I never expected you to man up and apologize for falsely calling me a liar.

 

No I stick to my original statement. You are.

 

Now there's a real shocker.

Thank you for the opportunity to demonstrate your "integrity" to the board.

 

LOL from the guy who supports the Federal Reserve and "government integrity". You must really think the board is as brainless as you pretend to be.....