08-02-2011, 05:55 PM
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The People's Post
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Join Date: Dec 2008
Location: invisible 7-11
Posts: 64,328
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Quote:
Originally Posted by marketsmart
i know you are smarter than this..
the fed is an evil monster...
if you cant kill it, wound it... 
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it's not an either or proposition eh.
i don't claim to be an economist like ron paul does, but these guys are economists and here is their view on this brainiac plan:
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According to Congressman Paul, to deal with the debt-ceiling impasse, we should tell the Federal Reserve to destroy its vast holding of government bonds.
Because the Fed might have planned on selling those bonds in open-market operations to drain the banking system of the currently high level of excess reserves, the Fed should (according to Baker) substantially increase reserve requirements.
This would be a great exam question: What are the effects of this policy? Who wins and who loses if this proposal is adopted?
Part 1 is just an accounting gimmick. Since the Fed is really part of the government, the bonds it holds are liabilities the government owes to itself. Destroying the bonds has no direct economic effect. It is just like an increase in the debt ceiling, without any other policy changes attached.
Part 2 is a form of financial repression. Assuming the Fed does not pay market interest rates on those newly required reserves, it is like a tax on bank financing. The initial impact is on those small businesses that rely on banks to raise funds for investment. The policy will therefore impede the financial system's ability to intermediate between savers and investors. As a result, the economy's capital stock will be allocated less efficiently. In the long run, there will be lower growth in productivity and real wages.
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Now, after Republicans spent years warning us about the (then nonexistent) possibility of hyperinflation, Ron Paul comes out and suggests a policy that would be a huge step toward hyperinflation.
Specifically, Ron Paul wants to have the Fed destroy its holdings of U.S. Treasury bonds. This would be retroactive seigniorage; it would mean that the money that the Fed printed in the past to buy those Treasury bonds was actually printed to pay off the U.S.'s sovereign debt.
As any Econ 101 student knows, large-scale sustained seigniorage is what causes hyperinflation. Now, the Fed doing a one-off round of retroactive seigniorage would not be enough by itself to push us into Weimar Republic territory - in particular, because the money has already been printed. But it would also send a signal that the Fed is no longer an independent central bank, and that Congress feels free to strong-arm the Fed into paying off U.S. sovereign debt with printed money at any time in the future. That would be a signal that much more seignorage is on the way, which would push us into hyperinflation. (Tyler Cowen sees this possibility, but rather euphemistically labels the future seigniorage "QEIII".)
So what the heck is Ron Paul thinking? Paul is a well-known supporter of the gold standard, which policy-wise is the exact opposite of hyperinflation. Is he simply betting that we'd decide to go back on the gold standard after we got tired of pushing around wheelbarrows full of billion-dollar bills? Or does he just know absolutely nothing about economics?
More generally, what is with the Republicans trying to push us into the very doomsday scenarios that they've always warned us about? Hyperinflation and sovereign default are basically THE worst self-inflicted disasters that we have ever seen befall a modern rich economy. And the only reason that there is any worry, whatsoever, that either of these things might happen to the U.S. is that the Republican Party seems to be flirting with the idea of intentionally causing them. The GOP seems to no longer be the "party of business", but a mad-dog populist gang that is running around chucking sticks of dynamite in all directions.
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