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November 29, 2019 | Central Banks Create Money out of Nowhere

Is an American author of books and articles on economic and financial subjects. He is the founder and president of Agora Publishing, and author of the daily financial column, Diary of a Rogue Economist.

BALTIMORE, MARYLAND – Last week, while all eyes were on the impeachment show, the feds increased the nation’s debt by about $20 billion.

Who will pay it? When? How? No one asked.

During the British election of 2017, Theresa May famously said “there is no magic money tree.” But both the Federal Reserve and the U.S. government are shaking the hell out of something…

And America’s president thinks they should shake it even harder. He wants “some of that money” too.

Magic Money Tree

We were up in New York for the first part of last week. You need a magic money tree on the Upper East Side. Every time we paid a bill, we were shocked. A modest hotel room for two nights – $1,400. Breakfast for two – $69. A 10-minute cab ride – $29.

This weekend we spent back on the family farm, cutting firewood. We’ve got three old chainsaws. You need three, because two of them usually won’t work. Either the chain hits a stone or it just won’t start. The trouble increases when you’re away for long periods of time; when you get back, you find dead batteries, dull blades, and missing tools.

Our old ’52 Chevy pickup wouldn’t start either. We charged the battery and spun the engine over… but it didn’t seem to be getting any gas.

One of the nice things about these old machines is that you can tinker with them. The truck has been sitting for a long time with its front higher than the rear… most likely, the gas just drained out of the lines. We’re going to turn it around, so the gas can run downhill to the motor. We’ll let you know if that works.

Extreme Greed

As technology advances, it gets further and further beyond our ken. We can take a carburetor apart and usually fix it. We have no idea what to do with an electronic ignition.

But modern technology clearly works, even if we don’t know how. So we’re tempted to think that modern economics works too. And maybe we shouldn’t laugh when we hear that someone is studying “post-structuralist queer theory.”

And maybe, just maybe, there really is a “magic money tree.”

Something is making stocks go up. Despite a vicious fight in Washington for control of the government, an ongoing trade war with China, and increasing signs of an impending economic recession… still, the prices of America’s capital enterprises rise.

How come?

Economist Richard Duncan explains. It’s the “magic money tree”:

On September 17th, overnight interest rates in the Repo Market shot up to 10%, four times higher than they should have been. […]

The Fed responded by urgently injecting money into the financial markets through a series of Repurchase Agreements [“repos”] and by announcing it would resume buying Government Securities, initially at a pace of $60 billion per month. By November 6th, the Fed had created $280 billion. This new money restored calm in the Repo Market and pushed all the major US stock market indices to new record highs.

CNN elaborates:

“Whether it should be considered QE4 or not, in the eyes of the market it’s just semantics,” Peter Boockvar, chief investment officer at Bleakley Advisory Group, wrote in a recent note to clients. “Markets view any increase in the size of the Fed’s balance sheet as QE [quantitative easing] and the $250B increase in just two months is no doubt helping to lift stock prices.”

The Dow has climbed about 1,300 points, or 5%, since the Fed announced on October 11 it would start buying T-bills. The CNN Business Fear & Greed Index of market sentiment recently hit “extreme greed.”

Modern Delusion

Could it be? Yes it could. Something’s happening. Something, well, not so good. David Graeber, writing in The New York Review of Books, offers an insight:

We now live in a different economic universe than we did before the crash. Falling unemployment no longer drives up wages. Printing money does not cause inflation.

There are plenty of magic money trees in Britain, as there are in any developed economy. They are called “banks.” Since modern money is simply credit, banks can and do create money literally out of nothing, simply by making loans. Almost all of the money circulating in Britain at the moment is bank-created in this way. Not only is the public largely unaware of this, but a recent survey by the British research group Positive Money discovered that an astounding 85 percent of members of Parliament had no idea where money really came from (most appeared to be under the impression that it was produced by the Royal Mint).

Perhaps even more amazing is that David Graeber has no idea where money comes from either. After all, he is the author of Debt: The First 5,000 Years, which we reviewed in this space a few years ago.

And the delusion is widely shared. Everyone believes it… even the president of the USA.

Everyone thinks “money” is something the feds or the banks can “create.” And that we’d all be better off if they created more of it.

But is it true? Is there really a magic money tree? Family: tree. Genus: money. Species: magic.

Stay tuned… Tomorrow, we rev up the chainsaw.




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November 29th, 2019

Posted In: Bill Bonner's Diary

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