Money

[James Baird]

> 
> Why does the Fed control the price of credit money
> rather than its
> quantity?  The answer is that all past attempts to
> directly control the
> money supply have resulted in unacceptably wide
> fluctuations in its
> price.
> 

This is a crucial point.  Despite all the talk about
the fed "controling the money supply", the fact is
that it's like a man holding a St. Bernard on a leash:
he can pull hard enough to slow it down, he can ease
up to allow it to speed up, but if the dog sits down
in the middle of the road and refuses to move, there
ain't a whole lot he can do.  Japan has been sitting
in the road for a few years now, and the U.S. is
currently sniffing around looking for a cozy spot.

> The Fiscal Circuit
> 
> The way the fiscal circuit relates to inflation is
> rather indirect.  It
> does not involve an excess of money, but rather an
> increase in its
> velocity.  As noted, any increase in funds spent by
> the government are
> always returned through increased taxes and/or bond
> sales.  

At the risk being labeled a crank (and I figure what
the hell, anyone who posts on this list is probably
considered a crank by the larger world...) I would
like to attempt once again to point out how crucial
this "reverse flow" is to understanding governemt
finance.  Money is created when the gov spends it; it
is destroyed when it is returned in taxes or in bond
sales.  Why does this matter?  It matters because bond
sales are done only to manage interest rates by
controlling the money in circulation - they are NOT
done to "finance" government spending (which has
already happened by that point, otherwise there would
be no money to buy the bonds)  The conventional view
is that the government goes, hat in hand, to the bond
market begging them to favor it with nickles and dimes
for the poor widows and orphans.  That's what Bob
Rubin (who, as a bond trader, had a typically inflated
veiw of his own power) convinced Clinton was the case:
"You must bow down before the almighty bond market! 
You must cut the deficit, or it will be displeased and
refuse to finance all your mad liberal schemes!"

But in reality, the government couldn't care less
whether or not anyone wants to buy its bonds.  It
already has the money.  All that's happening is that
people are exchanging a government obligation that
doesn't pay interest (money) for one that does
(bonds).  If people would rather hold onto
non-interest bearing cash, why should the government
care?    

Jim Baird

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