LOAN ACTION OF THE FEDERAL RESERVE
The Federal Reserve System is responsible for controlling the money supply and thereby preventing inflation. One of the anti-inflationary weapons of the Fed is the affecting the loan activity of bankers, in a quantitative sense. The range of loans over which the Fed does and does not have control is vast. The Fed is able to control the quantity of loans through banks by varying the reserve requirement. As an anti-inflationary weapon, however, varying the reserves does not stem inflation if the QUALITY of the loans is counterproductive in nature. Counterproductive loans generate inflation by generating production reduction and subsequent sinflation. As one can see, the Fed really cannot control counterproductive loans. The following quotation touches but the surface of the Fed's sterility in maintaining productive use of the nation's money supply.
Federal money managers will fight the trend, try to discourage banks from lending funds for essentially nonproductive purposes such as takeovers.
Counterproductive loans generate inflation by generating production reduction, if not silent destruction. As one can see, the Fed really cannot control inflation when it only has quantitative control. Luckily, for the present, it does not have qualitative control; the Fed is a repository of more than reserve notes, i.e., necronomists.
While it is quite true that federal expenditures crowd-out the capitalization of private production, the amount of money directly manipulated by the politicians is small compared to the money manipulated by the bankers. The primal and original economic blackhole that drains capital (human resources) from production comes from the private sector, from the private loans of the bankers. The qualitative nature of the banking loans is beyond the control of the Fed as a previous quotation noted. When bankers by choice give loans that are counterproductive, it is only a matter of time before a certain type of loan activity rises from necessity, that is, stress loans.
More Loans, Especially Stress Loans
It is from the private sector that the need for the following kind of loans originated. The government crowding out merely constituted a few straws that have been breaking the camel's back.
"Some Stress Demand for Credit Is Reflected in Big Rise in Business Loans, Economists Say"
This quotation is one of the few times that a necronomist hits the nail on the head. The writer realizes, in part, the role of time. Such quotations should cause everyone to question economic reports that state the health of the economy is good because the demand for business loans is high. If those loans are "stress" loans, the seemingly good news is actually very bad news, e.g., "Loan Demand Continues to Rise"
The Federal Reserve Bank of New York said yesterday that loan demand at the nation's major banks continued to increase last week despite rising interest rates.
In other words, the mere quantity of money transactions should not be taken as a barometer of economic health. Like the stock market figures, such statistic can be delusional.
As an example of a stress loan consider the following.
The problems of Chrysler have over-shadowed the problems in Ford. However, even before the Chrysler problem became full-blown, the head of Chrysler warned that Ford would not be far behind in needing assistance; as a former prospective replacement for Henry Ford II, Lee Iaccoca had seen the books at Ford and knew the inside story. [Regardless of whether management, labor, or government is primarily responsible for the state of the auto industry, everyone in America is going to suffer a loss in product worth as steel, glass, rubber, and other related industries collapse. People are spending too much time placing blame rather than finding problem-solutions.]
Delusional Statistics: Personal Income
Frequently one reads about personal income keeping pace with the rate of inflation. No comfort should be taken in such figures. Such figures do not make a distinction between the production of essential goods and services and the generation of busytime involving the symbols of production: currency, stocks, bonds, lawyers, and banking. One need not look far to see the individuals and industries in these soppy enterprises are having record levels of income. If the average increase in income is about 12% per year and the soppy industries and individuals are having record income, then the non-soppy busynesses must be suffering losses of income. Where are the non-soppy individuals and industries? In basic essential manufacturing and services. An indication of the income loss in these areas is the rising inflation due to corresponding drops in essential production.
The saddest aspect of our imbalanced economy is how the people responsible for it are still in positions of power and responsibility. The modern politicians and contemporary economists still do not make a distinction between inflationary returns and production profits. For them a dollar is a dollar, no matter where it comes from. Consequently, they will continue to give tax-exemptions to the non-producing manipulators of symbols, a "supply-side strategy" that will generate a lot of income, but will produce fewer goods and services.
Fed's Response to Loan Situation
If the reader understands how loans affect the money supply and create inflation by what production is stimulated or depressed, then the reader should be aware of the actions of the Federal Reserve System to the various kinds of loans in the system of production. These areas are private, public, and international.
The reader will recall that private loans are supposedly one of the weapons that the Fed has for controlling the money supply and inflation. By its capacity to control the amount of money that banks must hold in reserve (a portion of the money on deposit from checking and savings) the Fed can control how many dollars can be loaned out. If the reserve is 100% of savings, then no money can be lent out; if the reserve requirement is 50% then more money can be lent than if the reserve is set at 100% or 75%. The reserve requirement is usually 15% in America. (In the Euromart, the reserve has been estimated to be as low as one or two percent, thus the reason that Eurobond loans grow at a faster rate than the domestic money supply.)
The Fed can also increase the money supply by lending money to the banks through the so-called discount window. If a bank is short of cash, it can borrow freshly printed money from the Fed. The bad thing about the discount money is that the fee charged by the Fed is always below the prime rate. In other words, banks can cheaply borrow money from the Fed, tack on a handling charge of their making or choosing before lending it to you, John Q. Public.
Volcker and the Discount Window
In light of how the bankers are pretty much always guaranteed an income from handling the nation's money supply, the meaning the expression "discount window" should be expanded. Does the "window" mean the figurative sense of going to a teller's window to borrow money? Or, does window more accurately convey the gambler's heaven? A gambler's heaven is when the spread between the odds at different points is great enough that a window has open in which no one can lose, provided they have the connections to play the spread. As a later chapter argues, the latter sense of window is the more apt application. Support for how bankers have an "edge" comes from the following quotation. Please keep in mind that the United States is the only nation in which its central bank--the Fed--maintains a discount rate below the nation's prime interest rate.
In October 1979, when Mr. Volcker announced the central bank's new operating techniques, he said the discount rate, the fee charged on loans to banks, would be allowed to fluctuate more often so that it would remain close to the market. Thereupon the system kept the rate completely unchanged for more than four months while market rates soared far higher. Even after the latest increases the discount rate still is a bargain, and the banks know it.
What has the window or "spread" been for the bankers? When the prime rate hit 21%, the discount rate was only 13%. In other words, bank's could borrow money that belonged to the nation and make an 8% return, better than most production businesses this year. Something is wrong when such transactions are possible. The wrong shows up when the youth forgo pursuit of income from new production for the federally-subsidized activity of manipulating symbols of production. The bankers readily criticize government subsidies of others, but do they turn the same criticism upon themselves? Since the inception of the Federal Reserve System in 1913, banks have been subsidized through their monopoly on the expansion of the money supply by use of the discount window.
Even more questionable than the spread between the discount rate and the prime is the spread between the discount and the Treasury bills. When the Treasury bills were hitting record rates of 17%, the discount was low enough that a bank could borrow freshly printed money from one branch of the government to lend to another branch and have a four percent return. Can you do that? Do you smell a fish? How about a confederacy of dunces?
Some people are concerned with how freely theFed discounts its freshly printed money. At a Congressional hearing on the subject, certain responses were given by the Fed's Chairman that bespeak of double-talk, or worse, double-thought.
"Mr Volcker appeared to be saying that the more the banks borrowed the greater was the Fed's degree of restraint. But interpret his words any way you choose:
In other words,
Now relatively little murdering doesn't exert much restraint. Relatively large murdering exerts a lot of restraint. We now have--are back in the position of having a relatively large amount of murdering, and there is a lot of restraint on the part of the murdering population.
To draw a parallel, Volcker is saying that murder should be restrained and that probably mass murderers have a greater sense of restraint than people who have never committed a murder. In terms of borrowing money from the Fed, which exhibits the most restraint: the bank that never borrows or the one that borrows the most? Which would Volcker say to be the paragon of restraint?
The analogy is similar to how the supply-siders argue that you can balance the budget by cutting taxes, even though the latter increases the deficit. The analogy is similar to Treasury Secretary Regan (i) saying that the thrifts, e.g., Savings and Loans, can be saved by eliminating interest rate ceilings and bringing interest rates down. In all the above cases, illogical trains of thought are portrayed as the complexity of organization rather the complexity of disorganization, that the opposite actually in not opposite, that black and white are not different.
Public Loans: Support the Speculators
There is a vast range of public loans in which people can convert their excess disposable assets. Previous comment has been made on the nature of them, on the concern for them, and on how they negatively affect production. Of import in this section of the paper is whether the Federal Reserve System serves an anti-inflationary role within the growth of these public loans, especially the National Debt.
As the following quotations show, the Fed fuels inflation through the public loans. The men in the Fed either permit private capital to be collected in these non-productive enterprises, or permit the freshly printed money to finance these loans, so-called monetization of the loan debts, both public and private.
Interest rates fell in money and credit markets because of surprise purchase of Treasury bills by the Fed.
Why does the Fed purchase the Treasury bill, that is, why does the Fed monetize the National Debt by purchasing Treasury issues that compose most of the national debt? Because the speculators won't purchase them unless the interest rates are sky-high. In other words, when the speculators won't buy at a reasonable rate, then the Fed has to buy using money run off the printing presses. This process of fueling the National Debt through the money presses is called monetizing the National Debt. As of 1980, the Federal Reserve System had purchased approximately 150 billion worth of Treasury notes.
When does the Fed not have to monetize the National Debt? When the following occurs.
Specialists say traders are switching from gold and other commodities to fixed-income securities because of their currently attractive returns.
The gist of these quotes is that the speculators can play any field that they want without producing any goods or service. If the Fed won't let them have their record rates for Treasury bills, then the speculators will take their marbles elsewhere.
There is a lot of currency sloshing destructively around within our economic vessel, with increasing momentum that will capsize our ship of state. A lot of this soppy activity within our economy involves speculators rushing their liquidity back and forth between public and private loan programs that generate paper returns to the detriment of production profits in goods and services. Uncorrected and unstopped, America will increasingly become a poor nation of computer-assisted money-changers, symbol-manipulators.
"International Banking Facilities"
The trend to more various opportunities for speculating in the manipulation of soppy symbols of production, e.g., stocks, bonds, currencies, loans, is not going to stop under the present zeitgeist in government. What are the top economists and politicians in government doing in the face of the Euromart? Are they going to institute productive monetarism to end the counter-productive nature of economic monetarism? Or, are the policy makers going to further burden the producers with inflation and unemployment by increasing the attractiveness of paper returns over production profits? The following quotation provides another example of how the necronomists try to fight inflation with inflationary returns, not with production profits.
A banking proposal backed by the Fed would enable U.S. banks to set up "international banking facilities" free domestic reserve rules and international rate controls. The proposal is designed to help domestic banks compete for international business in the U.S.
There is nothing "positive" in this development. What products do we want? More scribbled-on paper products? What kind of producers do we want? More "banking employment"? Such developments will only increase the expansion rate of counterfeiting currency, accelerating the rate of inflation and unemployment.
Ah, what a confederacy of dunces, a collection of clowns!
What Products, What Production with Human Resources
The loan action of the Federal Reserve System is mainly one of controlling the quantity of loans, an action which it fails at by looking at not only the general state of the economy and the money supply figures, but the criticism of certain board members of the Fed. Even if it could quantitatively control the money supply by its own definitions, it could not control inflation for it exerts no control on the qualitative nature of the loans in the nation. The Fed could reduce the money supply and inflation would be rampant if all the loans, though fewer in number, went solely to counterproductive busynesses, e.g., speculators or gamblers. Until some popular control (democratic tuning) is exacted upon the loans made in America, fewer and fewer loans will have positive quality, that is, positively increase production per capita. Only when the people directly control their savings will loans have a productive quality. Then inflation will be a thing of the past. For when democratic tuning of funds becomes a reality, then the people affected by the loans will determine "what products, what production."
A system of production cannot be described in terms of anything other than products, production, and producers. The three are synonymous, one cannot be without the other two, a veritable trinity. They amount to what people will do with their time within the system of production. They determine what products will multiply, what production will boom, and what kind of producers will reproduce. The nature of loans determines what products, what producers, and what production. The Fed does not control the nature of the loans, nor do the savers who are the ultimate source of the funds. The nature of the loans are controlled by a few who make money on the frequency of loans moreso than the qualitative nature of the loan.
Contemporary economics--necronomics--clearly is fails in describing the ills and prescribing the cures. Witness the rising dissolflation:
a disease of the sol due to inflation,
Only a new conceptualization rooted in the relationship of products to production to producers will cure the symptoms and the disease that is spreading each day. The system of description and prescription which corresponds to the system of production is
productionism (ecos nomos).
The principles of productionism are not grounded in pursuit of hogging products, corralling production, or enslaving producers. Rather, the principles of human productivity emanate from a more eternal set of principles,
Humanity thrives when it saves and creates time using time, humanity dies when it wastes and destroys time by misusing time. Necronomists filling the chairs of the financial centers merely manipulate and multiply the symbols of time--currency, stocks, bonds--without regard to their effect on real time. Necronomists ignore whether their busyness practice increased or decreased production time--productive or destructive loan transactions. Rather, they merely pursue dollar returns.
Busytime Today Affects Currency Tomorrow
The last four chapters on the nature of private, public, and international loans has pointed up to the central question of whether humanity produces or reduces the time which it has. In other words, that question is
what should people do
What products do we want people to be producing and in what quantity? How people are organized determines what production will multiply and what production will collapse. The nature of how people are directed within the system of production will show up in whether the official public currency suffers currency instability. Rising inflation and unemployment are indications that the whole system of production is being mis-policied, that the chief policy makers are allowing some production to multiply at the expense of other, more essential production. Nowhere is this blind misdirection of human resources more obvious than in the stimulation of soppy buysnesses:
busynesses that produce or handle scribbled-on paper products which are mere symbols of production.
The following sections of this chapter point up to how the chief policy makers of America--the modern politicians--are mispolicing human resources away from more essential production. The following examples give a human dimension to the concept of "crowding out."
When capital (human time) is allowed to gravitate toward non-productive busynesses, the crowding out is not merely of the scribbled-on paper products. Rather, the essential busynesses are being crowded out of capitalizing upon the available human resources.
Of course we are busy,
Loans, like Currency, Are Human Products
A commonality between an official currency and a loan is how both are products of human time. Both require a certain amount of human time in order to be made. Both are supposed to fulfill a function to facilitate the system of production. Clearly, counterproductive loans fail as catalysts to progressing production. The important question is how to have loans that are productive, that is, always a stimulus to a better system of production, always a means to a better standard of living in a system of production.
The answer to the latter question is simple. The answer involves that the basic producer realizing that they cannot expect or trust other people to pool and handle their capital in ways that are optimally beneficial to the producer. The basic producer produces all the wealth. He cannot expect people that were trained and educated to merely handle and manipulate the symbols of production. Bankers measure productivity in dollars, not cheaper products. When producers allow non-producers to direct the pool capital, the producers should not expect cheaper products in the next year, in the next decade, or when they retire. Why? Because frequently bankers and stockbrokers can make more dollars by lending capital to speculators (land, commodities, and stocks) than they can to people wanting to capitalize new production to produce a good or service cheaper. The frequency of these speculative inflationary loans is on the rise. Look at the loans cited in the Wall Street Journal.
The only way that prices are going to fall is for the productive individual
to organize money pools, and direct the loans to cause the product worth
of money to rise, not fall. Only with "democratic tuning" will the havoc
of inflation cease destroying paychecks and retirements.
If you have questions or comments, you can democratize them at On-Line Forum as well as review others' input.
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