No Way Out for Fed
Robert Murphy explains why the Fed cannot extricate itself from the money creation mess it initiated. Here is a brief comment from the article:
The M1 measure of the money stock is currently $1.9 trillion, meaning that even if the Fed stopped inflating tomorrow, the banking system would have the potential to increase the money stock by a factor of six. Even if the demand for dollars remained constant in such an environment (which it wouldn’t), that could mean oil prices above $600 a barrel.
Mr. Murphy provides the answer to a question asked by many:
I’m often asked whether Bernanke will be able to “pull this off.” Specifically, can the Fed gracefully exit from the huge hole it has dug for itself?
Unfortunately my answer is no. In the present article I’ll go over three possible exit options, and explain the flaws in each.
david yard
RICHARD RALPH ROEHL
Syrin
On 10/08/2010, there was a post on this site “Gold at $8,250? http://www.economicnoise.com/2010/10/08/gold-at-8250/
Would a revaluation by the Fed to gold at $8,250 a troy ounce be another option in addition to the three options in Robert P. Murphy’s article that is linked above? Is it correct that such a revaluation would have the effect of a substantial reduction in the real value of banks excess reserves in Robert Murphy’s Option #3? Hey, too bad if the banks can’t take a joke on them like the taxpayers had to suffer the joke on them when the banks were bailed out.
Based on the formula in the quotes below, the revaluation price will vary based on the total money stock and total ounces of gold.
If the Fed did revalue to $8,250, that would represent a loss in purchasing power of 83%; ( 1.00-{$1412 (@05:17 AM New York Time) divided by $8,250 } ). Anyone holding dollars would suffer a huge instant loss in purchasing power. That would be extremely painful, but it would be a quick end instead of a long ending of the monetary madness. In return for the quick end, there must be overwhelming demand by the vast majority of Americans that fiscal madness must end before, upon, or within a week after the revaluation. Would the nation’s economy be able to recover after the revaluation if it adopted and obeyed the economic principles of the Austrian School of Economics? In addition for the pain inflicted on Americans, the Federal Reserve must be dissolved to prevent any further manipulation of our currency by government interference.
Here are a few quotes from the “Gold at $8,250?” article:
“As you may recall, we developed a Shadow Gold Price (SGP) a few years ago that borrows from the Bretton Woods formula for valuing money in a gold-exchange regime (i.e. the fixed value of a currency equals its outstanding monetary base divided by official gold holdings). Under this formula the exchange rate of the US dollar to an ounce of gold would be about $8,250 presently, a figure that reflects the amount of monetary base inflation already engineered by the Fed. (The US monetary base approximated $2.15 trillion in September and reported official US gold holdings have remained relatively constant at about 8,133.5 metric tons or about 261.5 million ounces.) We approached the SGP from another angle last month and came away with a policy action we believe the markets will begin to discount.”
“The Fed has the freedom to unilaterally redefine monetary terms. It can claim gold from the Treasury with which to reconcile past monetary base inflation and it can fully-reserve dollar-denominated debt merely by re-pricing the gold on its balance sheet.”
“This matters. The Fed cannot go bankrupt despite whatever dubious debt it assumes on its balance sheet (such as toxic mortgages). Further, it can revalue gold higher in US dollar terms to adjust for bad debt within the banking system – even if all of it were re-marked to zero. With the Gold Certificate Account, the potential aggregate value of the Fed’s assets is sufficient to pare-off against all systemic dollar-denominated debt. The Fed may unilaterally de-lever the US economy and re-gain control of global monetary policy anytime it wishes.”
“We expect that at some point the Fed will devalue the dollar vis-à-vis gold and then begin conducting open market operations that targets a dollar/gold exchange ratio.”
“Should the Fed wish to stimulate the economy under a dollar/gold-exchange system, it would enter the market as a net buyer of gold, thereby expanding the monetary base. Or, it could restrict growth by selling its gold. Each ounce purchased from the Fed would expand [sic. Should it read "reduce" instead of "expand?"] the monetary base by $8250 and vice versa. Holders of gold at that point would presumably be wealth preservationists (i.e. savers). Alternatively, holders of gold at today’s nominal valuation around $1,300/oz would clearly receive an unencumbered windfall in purchasing power (and are thus investors).”