Saturday, May 23, 2020

Yes, Virginia, there is a Santa Claus, and Money Grows on Trees

    By Rudy Barnes,Jr.    

What an absurd title for a commentary on monetary policy--or is it?  Unemployment in America will soon match that of the Great Depression.  Congress has appropriated over $2 Trillion in financial aid and there’s a House bill for another $3 Trillion; and the Federal Reserve has assured investors that it will continue to provide Wall Street with cheap money.  The stock market is booming again while much of America remains out of work.

Is our national debt really a debt, or does money grow on Fed trees?  We are told that America need not be concerned with a default on its debt since it can create new money to pay it.  American monetary policy has produced a dysfunctional form of capitalism.  The stock market is no longer a barometer of the American economy but of the wealth and power of crony capitalism on Wall Street.  

Congress is polarized by partisan politics, but both parties support more spending to stimulate the economy. The Fed has acknowledged that the economy is in bad shape, but has predicted a full recovery in a year or two, and in spite of dire economic predictions has assured investors a high return on overpriced stock with a continuing flow of cheap money to Wall Street,   

What’s going on?  Is America facing a pandemic recession or just a pause in its booming economy?  Economists have mixed opinions.  The Fed’s monetary policy remains a mysterious source of new dollars while Congress has run up a national debt approaching $30 Trillion.       

Since 2008 the Fed has kept interest rates low to encourage borrowing and spending to stimulate what was a booming economy--until the pandemic hit.   Artificially low interest rates have discouraged CDs and savings accounts, leaving the stock market the only place to find a decent return on savings, with negative interest rates now a real possibility. 

The illicit partnership between the Fed and Wall Street is increasing disparities in wealth that are undermining the middle class.  While the Fed continues to provide cheap money to sustain mega-corporations during the pandemic, small businesses that aren’t beneficiaries of such Fed largess but that have provided the competition needed for a healthy economy continue to fail.
The crony capitalism that now pervades U.S. politics is the product of monetary policy that lacks public understanding and accountability.  It will be difficult to regulate the partnership between the Fed and the mega-corporations that control most of the means of production and political power in America, with their king in the White House and a Congress beholden to them.  

Yes, Virginia, there is a Santa Claus, and money grows on trees in the never-never land of the Fed.  The problem is that only the rich are getting the goodies, leaving an astronomical national debt to encumber America’s future.  In the real world of democratic politics, voters must reform the Scrooge of crony capitalism to make things right.        


Brent Schrotenboer has described the process used by the Federal Reserve in “printing” money to save the economy, and noted that some wonder how far it can go.  “In its frantic scramble to save the American economy, the central bank of the United States seems to have the ultimate superpower. It works like magic. With a few strokes on a computer, the Federal Reserve can create dollars out of nothing, virtually "printing" money and injecting it into the commercial banking system, much like an electronic deposit. By the end of the year, the Fed is projected to have purchased $3.5 trillion in government securities with these newly created dollars, one of many tools it is using to help prop up the ailing economy during the COVID-19 pandemic, according to Oxford Economics.  “The way you and I have checking accounts in our banks, that’s how all these other banks have accounts at the Fed,” said Pavlina Tcherneva, an economist at Bard College in New York. ‘All the Fed does is literally credit them. They just type it in.’”  See

Fed minutes show fears of ‘extraordinary amount of uncertainty and considerable risks.  See

The Fed is sending mixed messages on its monetary policies.  
On one hand, “Fed Chairman Jay Powell told investors that the central bank’s checkbook remains wide open, strongly hinting that more monetary policy stimulus is on the way.”  See  

On the other hand, the Fed has warned investors, “the Fed aims, among other things, to make clear that when you put money into the market, you risk losing that money. There is no explicit Fed backstop in the equity market.  ...Since late March, volatility has come down, but remains elevated relative to historical norms, and liquidity remains poor,” the Fed said.  In other words, the stock market continues to be risky.  And this commentary in part seems aimed at addressing the idea that the Fed is basically guaranteeing to investors that stock prices will continue to rise.  The message from the Fed is clear: no promises.”  See

Marketwatch reports Kenneth Rogoff, former IMF chief economist, saying Fed’s bond buying is smoke and mirrors and doesn’t solve U.S. debt problems.  See

While the Fed is providing more cheap money to mega-corporations, Trump has announced an executive order “suspending” regulations impeding U.S. economy.  That’s another dimension of crony capitalism.

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