We have too much money. Should we burn it? The Federal Reserve said yes. Most “explanations” were gibberish, so here is a crash course on money (as a change from the elections).
The Fed is America’s “central bank,” meaning it is the bankers’ bank, meaning it clears checks and electronic money transfers between banks. Note the word “electronic.” The Fed also manages the money supply. Money is no longer gold found haphazardly during gold rushes. It is now electrons, as opposed to atoms (of gold). America’s money is electrons blessed by the Fed.
Basically, the Fed takes a sheet of paper, says it is worth, oh, $3.6 trillion and pays it into the U.S. Treasury. Uncle Sam’s computer credits the Fed’s account with $3.6 trillion worth of the very finest electrons. The Fed can spend this to buy government bonds (Sam’s IOUs) to “finance the deficit” and to buy bonds from banks to regulate interest rates (“open market operations”).
This black magic (“printing money”) increases the money supply (“quantitative easing”). As further magic, commercial bankers lend out far more money than they have on hand. This is the “creation of credit.” Most money in circulation started out as credit. The Fed and other banking regulators (yours truly was one) work to keep the system safe and sound (buy me a beer sometime).
This financial wizardry is far better than the gold standard with its regular booms and busts. It started in 17th century Sweden. Every country now uses this system (“fractional reserve banking”). People trust its “fiat money” (fiat: Latin for “let it be”) even though, like electricity, few people understand it. Like electricity, it is essential. There is physically not enough gold in the world to power today’s economies. Hence, America was forced to abandon gold (in 1971) as the brilliant economist John Keynes had predicted in 1944.
So, money is basically zeroes and ones in computers, in banks regulated by the Fed, which had babies called credit. Your paycheck is basically zeroes and ones that wend their merry way into your bank account. To buy stuff, you can push them around with checks, debit cards or fancy paper (“Federal Reserve Notes,” a.k.a. dollar bills). Or you can use credit cards, repaid with electrons from your bank’s computer, when you order it to do so online.
The Fed’s third job is to clean up disasters created by Republicans.
“Conservatives” pushed hard for financial deregulation. This produced Wall Street’s “derivatives” (insanely complex investments). These “instruments of mass financial destruction” (Warren Buffett) then led to the 2008 crash, as Democrats had predicted, sending the entire global economy into a severe recession.
In October 2008, Congressional Democrats and President George Bush Junior allowed the Treasury to buy Wall Street’s “toxic assets” (worthless derivatives) via the Troubled Asset Relief Program. Banks did not fall like dominoes as they did in the 1930s, but still remained weak. Far worse, the economy still kept crashing.
Democrats therefore rushed an economic stimulus bill to President Barack Obama in February 2009 for the Treasury to borrow $790 billion using government bonds. Next, the Fed electronically conjured up $3.6 trillion of new money. Next, the Fed bought those bonds using this brand-new money (since nobody else could). Next, Uncle Sam used his clout as spender of last resort to revive the economy. Finally, the Fed bought more toxic assets to rescue the insolvent financial industry.
Republicans obstructed all this moronically, of course, but it squeaked through the Senate courtesy of two “moderates” with brains. It pulled the economy out of its nosedive caused by “conservative” (?) policies. The economic stimulus should have been bigger (Buffett called it “half a Viagra”) but it revived the economy. Republicans, take note! This is why we were not all starving outside soup kitchens in 2009.
Was this socialism for Wall Street and the wealthy? It certainly was. Welcome to America, the land of morons. We are too stupid to copy Sweden’s “democratic socialism,” where insolvent banks were nationalized, turned around, then privatized for profit, benefiting everyone.
Today, there is no need for the Fed to keep its big stash. It served its purpose of reviving the economy. Should the Fed sit on the money from the bonds as they mature or what?
The Fed has decided to “shrink its balance sheet.” The Fed can create money and the Fed can destroy money. It will not hoard the money from the bonds. The unnecessary money in the vault will be burnt, as it were. This means that all that money (all those electrons) will be zeroed out. Goodbye, little electrons, you did your job nicely.
Should we change paper money to state “In electrons we trust” in place of “In God we trust”? I leave this to you.