President Jackson Demoted

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Here’s what they *should* say why President Andrew Jackson, the seventh President of the United States, was bumped to the backside of the $20 bill:

He was moved to the back of the Twenty because he paid off the national debt…(Yes, you read that right).

As counter-intuitive as it sounds, paying off the national debt, running federal gov’t budget surpluses, a spending sequester, are all glaring examples of why that federal-gov’t-is-the-same-as-a-household groupthink has it all backwards. To pay off the national debt, President Jackson’s administration ran sustained budget surpluses for 7 straight years (meaning sustained public sector deficits was replaced with sustained private sector deficits)…

Two years later, the Panic of 1837, the U.S. economy went into a depression, banks became insolvent, business failures rose, cotton prices dropped, and unemployment dramatically increased…

That depression lasted for four years until 1841 when, the national debt went back to increasing again (meaning private sector deficits switched back to private sector surpluses), and the economy began to rebound…

Not convinced? Take a look at these dates:

1817-1821

1829-1836

1852-1857

1867-1873

1880-1893

1920-1930

These dates above were the 6 periods in American history when the US federal gov’t had substantial yearly budget surpluses meaning, at the very same time, and by accounting identity, the non-federal-gov’t (everybody else) was being subjected to ‘savings deficits’. Next look at these dates:

1819

1837

1857

1873

1893

1929

These dates above were the starting years of all six economic depressions in U.S. history. Now let’s put all the dates together:

1817-1821 federal gov’t surpluses and the 1819 Depression

1829-1836 federal gov’t surpluses and then the 1837 Depression

1852-1857 federal gov’t surpluses and then the 1857 Depression

1867-1873 federal gov’t surpluses and then the 1873 Depression

1880-1893 federal gov’t surpluses and then the 1893 Depression

1920-1930 federal gov’t surpluses and then the 1929 Great Depression

Coincidence?

Here’s another example of federal gov’t surpluses having its fingerprints on economic downturns: The 2001 recession was also preceded by federal gov’t budget surpluses. The ‘Bush recession’ was triggered by the ‘Clinton surpluses’. In my opinion however, the economy was very strong during Clinton’s second term, not to mention that dot com internet stock hysteria was reaching full ‘silly-crazy’ stage, so in that particular case, those short-lived surpluses were justified, because they were analogous to tapping the brakes. Masterfully, that 2001 recession was a mild one because Clinton’s successor, incoming President George W. Bush, with both the Congress and the Fed Chair Alan Greenspan’s blessings, quickly resumed federal budget deficits with tax cuts passed on June 7, 2001 (a rare example of both monetary and fiscal policymakers being in sync and turning their launch keys at the same time)…

Alexander Hamilton, the first United States Secretary of the Treasury, who, it was also announced today, will remain on the front of the $10 bill, said in 1790, “A national debt, if it is not excessive, will be to us a national blessing.” (No mention of paying it off, in fact, he argued for the usefulness of safe, easily traded federal debt, that would provide a store of value, as collateral for deals, as a lubricant for business activity, making the economy more productive, which he predicted would help our new nation someday surpass England as a world power)…

Unless you truly need to slam the brakes on growth, and you actually want to slow down the velocity of those twenty dollar bills, sustained and prolonged federal gov’t surpluses throughout American history are a fiscal policymaking case study of What Not To Do.

 

 

Eddie D  <eddiedelz@gmail.com>

April 15th Tax Day is the “Big blind”

Today, in the post-gold-standard era, and especially on tax day April 15 (April 18 this year because of the Emancipation Day holiday in Washington, D.C.), the present narrative that the US federal government must collect federal taxes in order to finance it, is analogous to the federal government saying that it must hitch horses to its brand-new 2016 Ford Pickup in order to pull it.
Here’s another analogy regarding those federal taxes for Texas hold ’em poker fans:
Imagine a casino, not your ordinary casino, but one with the most action in the history of mankind, with many poker tables inside, and each of the separate poker tables are just like a separate local and state gov’t inside that casino, the federal gov’t. Then picture local and state taxes being like the “Rake”; and federal taxes being like the “Ante”, or more precisely, the federal taxes are like the “Small blind” and the “Big blind”. The players pay all rakes and blinds (federal, state & local taxes) with casino-issued chips (federal, state & local tax credits)…
The blinds are different from the rake. The blinds (the federal taxes) paid before dealing each new hand do not finance that poker table; instead, the rake (local & state tax) confiscated from the winning pot finances that poker table. This is because the casino (the federal gov’t) is the issuer of chips, while each of the poker tables throughout the casino (the state & local gov’t) are not the issuers of chips. The poker tables and the poker players are the users of chips…
The casino never worries about getting chips. Only the tables and the players worry about getting chips, while the casino has other, much more important things to worry about. The casino doesn’t get their chips from players from China, from Japan, not from anyone. Unlike the tables or the players, the casino issues the chips by fiat. The casino is who first enters the chips into existence. The tables get their chips from the casino. The players get their chips from the tables…
Rather than funding the poker table or the casino, those blinds prevent all poker players in the casino from just waiting to be dealt pocket aces, or never risking their chips unless they get a royal flush on the river card. The blinds are just making sure that all players, especially those few players with a lot of chips can’t just sit there, hoarding their chips, never calling a bet, and never slide anything into the middle of the table…
The rake ‘funds’ the tables, while the blinds ‘facilitate’ the tables. Local and state gov’t finances itself by raking some of your chips, but unlike that rake, the purpose of the blinds is not to finance anyone. That Big blind (that federal tax) players must pay once every round (every April 15th) is an imposed redistribution of chips. In addition, both those small and big blinds speed up the game, they increase chip velocity, by creating an urgency to play because those blinds remind the players that they will bleed their chips away if they stop trying to win more chips…
Most important, the rake and the blinds must be paid for, can only be paid for, with just those casino-issued chips (those federal, state & local tax credits). Throughout the casino, no matter which table you play on, you can only spend those casino-issued chips, which gives full monopoly control of the flow of those chips, full power over the entire chip dominion, to the casino, the sovereign issuer…
The users of chips, the local & state gov’t, as well as all the players, stay focused on either breaking even or winning. Meanwhile the issuer of chips, the federal gov’t, stays focused on growing the action, improving the casino, adding gaming diversity to the floor, or upgrading the facilities, which gins up enthusiasm for more people to play. The federal gov’t is also that ‘eye in the sky’ that watches for cheats or other criminal activity to make players feel secure…
In the post-gold-standard, modern monetary system, it’s important to understand the dynamics between the rake (collected by the non-sovereigns) and the blinds (imposed by the monetary sovereign). The purpose of the rake is to fund that table (local & state gov’t); and the purpose of the blinds is for the casino (federal gov’t) to create your need to keep trying to get more of those chips, which leads to more consumption using those chips, in a perpetual pursuit of profit and/or happiness…
It’s not those chips that the federal government needs from you today, it’s your work at the tables, your interactions with the players, and your spending of those chips that it always only needs.
Many happy (federal) returns,
eddie d  <eddiedelz@gmail.com>

All About That Base

Going back to the start of the Large Scale Asset Purchase (LSAP) program right after the Lehman bankruptcy on September 15, 2008…

 

The reason why those bond ‘kings’ and hedge fund ‘stars’ predicted that ‘quantitative easing’ (QE), QEII, III, etc., would cause massive hyperinflation and sky-high interest rates were so wrong, was because as we (hopefully) now know, there’s a difference between the newly ‘printed’ dollars that finance deficit spending that add net financial assets into the banking system; and the newly ‘printed’ dollars that financed LSAP that do not add any net financial assets to the banking system. The reason why LSAP was not an increase of dollars in the banking system, why it had nothing to do with the money supply at all, and why it had no inflationary bias whatsoever, was simple: The Fed was only swapping newly ‘printed’ dollars (a.k.a. reserves) going into the monetary base (not part of the money supply), for the exact same amount of bonds (also not part of the money supply), that were ‘unprinted’ out from the secondary bond market. If you just understood that, then consider yourself ahead of 98% of the population, ahead of Nobel-laureate economists, ahead of all policymakers, and especially ahead of the Very Smart People in the mainstream media that constantly bark fake narratives relying on outdated, gold-standard-era mentality over the airwaves today.

 

There are three scenarios where the present balance of reserves that were newly created by the Fed to be paid to the banks to buy Treasury bonds and mortgage backed securities (MBS) from banks during LSAP could be reduced. In the first scenario, banks in aggregate can reduce their reserves only to the extent that they initiate new lending and the public demands more physical currency (cash) that flow into the economy as new banknotes.

 

In the second scenario, a bank, not on its own volition (like during any Open Market Operations done pre-LSAP), purchases (is ‘assigned’) bonds presently impounded at the Fed that were bought during LSAP. This would be the exact opposite of what the Fed did during LSAP (the Fed would “unwind” the initial trade by ‘unprinting’ reserves and ‘printing’ those bonds held on their balance sheet back into the secondary market). Those bonds would be paid for by that bank’s reserves held at the Fed (meaning the Fed’s balance of reserves are reduced). This has not happened, nor will it ever, unless the Fed decides to more aggressively reduce reserves (if there is a sudden, unexpected US economic boom that is so strong that the Fed needs to slam on the brakes and quickly ‘unprint’ reserves to drive interest rates higher).

 

In the third scenario, the Fed reduces the amount of reserves (Fed liabilities on its balance sheet) by reducing the amount of bonds held (Fed assets on its balance sheet). As per the 09/20/17 FOMC statement, the Fed will start a reduction to “perhaps $1T in the coming years”. This Fed “normalization” will be done slowly (only $10B every month at first) by reducing the amount of maturing securities held on its balance sheet that the Fed reinvests (NOT by selling bonds from the Fed’s balance sheet directly to banks as in the second scenario). Going forward, the amounts that the Fed receives from maturing securities will cancel out the same amount of Fed’s liabilities.

 

As of today (the end of Q3 of FY2017), right before the start of Fed ‘normalization’, most of the Fed’s assets are those $4.2T in Treasury bonds and MBS securities bought during LSAP. The other side of the Fed’s balance sheet, most of the Fed’s liabilities include $2.178T of formal bank reserves (deposits held by depository institutions) presently earning 1.25% (the FFR ‘ceiling’); $0.455T of non formal bank reserves (reverse repurchase agreements) earning 1.00% (the FFR ‘floor’); and $1.533T cash dollars in circulation (Federal Reserve notes outstanding).

 

Here are the running balances since the credit crisis started:

 

Total Liabilities of the Federal Reserve Bank Balance Sheet  
DATE FORMAL BANK RESERVES NON FORMAL BANK RESERVES DOLLARS
now earning 1.25% (the FFR ‘ceiling’) now earning 1.00% (the FFR ‘floor’) (cash in circulation)
9/28/2017 2.178T 0.455T 1.533T
6/30/2017 2.118T 0.504T 1.512T
3/30/2017 2.270T 0.511T 1.490T
12/31/2016 1.943T 0.574T 1.463T
9/30/2016 2.085T 0.515T 1.424T
6/30/2016 2.199T 0.404T 1.417T
3/30/2016 2.336T 0.370T 1.398T
12/30/2015 2.209T 0.499T 1.381T
9/23/2015 2.602T 0.304T 1.340T
6/24/2015 2.494T 0.289T 1.320T
3/25/2015 2.738T 0.279T 1.313T
12/24/2014 2.610T 0.299T 1.294T
9/24/2014 2.707T 0.262T 1.245T
6/25/2014 2.628T 0.223T 1.236T
3/27/2014 2.611T 0.198T 1.225T
12/25/2013 2.451T 0.151T 1.195T
9/25/2013 2.307T 0.103T 1.163T
6/26/2013 2.018T 0.089T 1.150T
3/27/2013 1.830T 0.093T 1.135T
12/26/2012 1.533T 0.100T 1.125T
9/26/2012 1.471T 0.090T 1.086T
6/28/2012 1.492T 0.084T 1.258T
3/29/2012 1.565T 0.083T 1.234T
12/28/2011 1.569T 0.089T 1.035T
9/28/2011 1.609T 0.083T 0.996T
6/30/2011 1.622T 0.067T 0.986T
3/31/2011 1.458T 0.066T 1.118T
12/30/2010 1.021T 0.059T 1.123T
9/30/2010 .984T 0.067T 0.914T
6/24/2010 1.062T 0.060T 1.094T
3/25/2010 1.148T 0.055T 0.893T
12/31/2009 1.025T 0.070T 0.890T
9/24/2009 0.903T 0.071T 0.872T
6/25/2009 0.745T 0.072T 0.867T
3/26/2009 0.822T 0.066T 1.044T
12/29/2008 0.819T 0.088T 1.025T
9/25/2008 0.095T 0.091T 0.990T
6/26/2008 0.013T 0.042T 0.989T

Thanks for reading,

 

Eddie D

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* (Note: This is an updated version of the original post from April 2016)