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The Fed engineers a slow inflation every year via interest rate control and gives the benefit of the newly created money to banks, the loan borrowers, and asset

by ww520 11y ago

The Fed engineers a slow inflation every year via interest rate control and gives the benefit of the newly created money to banks, the loan borrowers, and asset holders as rates lower than keeping inflation at zero. Since the money supply increases anyway, might as well give the new money as basic income to ALL people. At least the money will be spent directly by the people for economic activities, instead of indirectly via the loans and asset inflation. The Fed can raise interest rate to shrink the money supply for banks and borrowers while give more direct cash to expand the money supply via basic income. This can be in addition to the government's budget spending on basic income. An interesting outcome is the deflation of the asset bubble as rate increases. The money supply expansion via direct cash counters the deflation in economy. This should reverse the trend of the great wealth transfer to the asset holders in the last 20 years.

jfaucett 11y ago
i agree with you, but am doubtful as to whether they'll do it. The gov't and its nearest banking buddies benefit enormously from the new money before it inflates outward across the economy and devalues.
ChrisLomont 11y ago
The benefit is not given to the banks - the money is added through asset purchases on open market sales. The Fed owns more assets (usually Treasuries) and the bank has cash. If you want to get in on it, buy Treasuries. Next, the Fed avoid targeting zero inflation, because it's currently impossible to hit that number so exactly, and they desire to avoid deflationary spirals. The past 150 years has shown across hundreds of countries that the current solution is vastly better than the boom and bust cycles previous, and has also demonstrated the benefit of fiat over commodity (like gold). There are ample papers showing this in the econ literature, and is the primary reason not a single country tries to use previous methods. Next, new money is added through asset purchases, not giveaways, so it's erroneous to think this money can just be handed to individuals as cash, unless perhaps those individuals were selling assets to the Fed of equal value. Next, the target is usually around 2%, and the money supply is around 2T, resulting in 400B a year, or, 2K a year per adult, which is nice, but hardly a basic income. It's more like a tax break. It's hardly going to change wealth transfers, since most people will just consume it, and the wealth would go back to companies, mostly the ones you decry above. Finally, when the Fed targets low inflation, that would dry up the basic income, and I don't think giving people such a variable and uncertain income would do well for planning and stability. Soon people would clamor and elect politicians that guaranteed the Fed would pay X per year, defeating the entire mechanism the Fed uses to stabilize markets.
- ww520 11y ago
  Good point you raised about FOMC directly injecting money. That's another case how the Fed benefits the banks and the Have's directly. Fed buys and sells treasury to create and destroy money but with more money created over time to encourage inflation. The extra money created are given to the treasury sellers with better pricing over time. The people without treasury are left out of the new money created. Of course the banks benefited from the extra money; FOMC only deals with the 22 big banks and the primary bond traders. Besides FOMC, loan is a bigger money creation mechanism. With 10% fractional reserve, the banks can lend out 10X of what they have. In that case interest rate dictates how much loan actually lent out and how much money actually created. By raising or lowering interest rate, the Fed increases or decreases the overall loan amount. Lowered interest rate encourages bigger loan amount, vastly increases the money supply for assets, leading to the current asset bubble. Basic income can become another mechanism for the Fed to inject money. The Fed can buy less treasury, raise rate, and give out more in basic income. People spending the extra money and companies earning them are good. Companies earning money via products and services are good. This encourages more products and services, and more employment. Instead the new money created now are given to the asset holders and locked up in assets. Edit: QE was another money creation mechanism and it hugely benefited the banks. The Fed bought assets at inflated price from the banks with created money.
  - ChrisLomont 11y ago
    >The people without treasury are left out of the new money created Everybody in the US has treasuries. SS is the biggest holder of them, so when their value goes up, everyone with a SS account benefits. Next, most pension/retirement plans give another large class of adults benefits (50%+ of adults hold such plans). Remember, Fed buys from the Open Market (the "OM" in "FOMC"), which has an effect on pricing for all. > With 10% fractional reserve, the banks can lend out 10X of what they have And they also have an offsetting 10X in liabilities. It's not some free money giveaway any more than lending money to my friend does not create new money - it gives him more cash and an exact same amount of debt. Plus, if you think fractional reserve creates money (in the sense that the gain is not balanced by a matching debt), then paying it back "destroys" the exact same amount. Fractional reserve is zero sum. >Basic income can become another mechanism for the Fed to inject money. All other Fed injection mechanisms swap assets. And the amount needed for even a tiny UBI is massive compared to any other amounts added. This is not even remotely plausible.
MicroBerto 11y ago
Regarding inflation... if everyone instantly has $X now, doesn't $X become worthless? For instance, why would landlords not raise rents knowing that everyone now has this cash?
- ww520 11y ago
  The problem is not inflation. It happens already. The problem is the new money created causing the inflation is given to the asset holders and banks, not to everyone. Rent increases now, due to inflation. The general public have to give more despite not getting the created money. Landlords got the benefit of rising rent due to inflation and rising housing price due to lower interest rate to create more money. Basic income just shifts the inflated money to everyone instead of just the asset holders.
  - MicroBerto 11y ago
    OK, so then when you give more to the lower class, and landlords increase rent.... guess who gets the majority of that newly printed income? The asset holders once again!! I don't see how basic income doesn't create more unforeseen problems than it solves unless there are some serious strings attached to that money.
    - ww520 11y ago
      At least the money has gone to encourage economic activities, i.e. housing service. Increased rent leads to more housing development as more people piled in to take advantage of the increased return, which can lower the rent as more housing capacity comes online.
  - Cshelton 11y ago
    "new money" is not, or ever, given to anyone. Banks included. The U.S. gov basically sells promissory notes (treasuries) to an independent, non governmental organization (The Federal reserve...which is not "federal" in the least bit..) on behalf of the American people. Although the fed is more or less offering a note at x price and the U.S. Treasury just buys it... Anybody is allowed to buy bonds from the U.S. Treasury. In exchange, you get the "new money" as you call it. At no one point is anything given to the banks or asset holders. The interest rate is determined by the rate the fed sets and buys these notes from the US T. This is the key and primary tool at which a PRIVATE, non-governmental organization, determines interest rates. However..you can also buy these notes directly from the Fed. China does all the time along with many other countries. Yes...other countries hold the "debt" of the American people... If that's not crazy enough...it gets better. This organization..the Fed...gets to tell banks how much to hold in required reserves. Another primary tool they use to control inflation.

by ww520 11y ago

jfaucett 11y ago

i agree with you, but am doubtful as to whether they'll do it. The gov't and its nearest banking buddies benefit enormously from the new money before it inflates outward across the economy and devalues.

ChrisLomont 11y ago

The benefit is not given to the banks - the money is added through asset purchases on open market sales. The Fed owns more assets (usually Treasuries) and the bank has cash. If you want to get in on it, buy Treasuries. Next, the Fed avoid targeting zero inflation, because it's currently impossible to hit that number so exactly, and they desire to avoid deflationary spirals. The past 150 years has shown across hundreds of countries that the current solution is vastly better than the boom and bust cycles previous, and has also demonstrated the benefit of fiat over commodity (like gold). There are ample papers showing this in the econ literature, and is the primary reason not a single country tries to use previous methods. Next, new money is added through asset purchases, not giveaways, so it's erroneous to think this money can just be handed to individuals as cash, unless perhaps those individuals were selling assets to the Fed of equal value. Next, the target is usually around 2%, and the money supply is around 2T, resulting in 400B a year, or, 2K a year per adult, which is nice, but hardly a basic income. It's more like a tax break. It's hardly going to change wealth transfers, since most people will just consume it, and the wealth would go back to companies, mostly the ones you decry above. Finally, when the Fed targets low inflation, that would dry up the basic income, and I don't think giving people such a variable and uncertain income would do well for planning and stability. Soon people would clamor and elect politicians that guaranteed the Fed would pay X per year, defeating the entire mechanism the Fed uses to stabilize markets.

ww520 11y ago
Good point you raised about FOMC directly injecting money. That's another case how the Fed benefits the banks and the Have's directly. Fed buys and sells treasury to create and destroy money but with more money created over time to encourage inflation. The extra money created are given to the treasury sellers with better pricing over time. The people without treasury are left out of the new money created. Of course the banks benefited from the extra money; FOMC only deals with the 22 big banks and the primary bond traders. Besides FOMC, loan is a bigger money creation mechanism. With 10% fractional reserve, the banks can lend out 10X of what they have. In that case interest rate dictates how much loan actually lent out and how much money actually created. By raising or lowering interest rate, the Fed increases or decreases the overall loan amount. Lowered interest rate encourages bigger loan amount, vastly increases the money supply for assets, leading to the current asset bubble. Basic income can become another mechanism for the Fed to inject money. The Fed can buy less treasury, raise rate, and give out more in basic income. People spending the extra money and companies earning them are good. Companies earning money via products and services are good. This encourages more products and services, and more employment. Instead the new money created now are given to the asset holders and locked up in assets. Edit: QE was another money creation mechanism and it hugely benefited the banks. The Fed bought assets at inflated price from the banks with created money.
- ChrisLomont 11y ago
  >The people without treasury are left out of the new money created Everybody in the US has treasuries. SS is the biggest holder of them, so when their value goes up, everyone with a SS account benefits. Next, most pension/retirement plans give another large class of adults benefits (50%+ of adults hold such plans). Remember, Fed buys from the Open Market (the "OM" in "FOMC"), which has an effect on pricing for all. > With 10% fractional reserve, the banks can lend out 10X of what they have And they also have an offsetting 10X in liabilities. It's not some free money giveaway any more than lending money to my friend does not create new money - it gives him more cash and an exact same amount of debt. Plus, if you think fractional reserve creates money (in the sense that the gain is not balanced by a matching debt), then paying it back "destroys" the exact same amount. Fractional reserve is zero sum. >Basic income can become another mechanism for the Fed to inject money. All other Fed injection mechanisms swap assets. And the amount needed for even a tiny UBI is massive compared to any other amounts added. This is not even remotely plausible.

MicroBerto 11y ago

Regarding inflation... if everyone instantly has $X now, doesn't $X become worthless? For instance, why would landlords not raise rents knowing that everyone now has this cash?

ww520 11y ago
The problem is not inflation. It happens already. The problem is the new money created causing the inflation is given to the asset holders and banks, not to everyone. Rent increases now, due to inflation. The general public have to give more despite not getting the created money. Landlords got the benefit of rising rent due to inflation and rising housing price due to lower interest rate to create more money. Basic income just shifts the inflated money to everyone instead of just the asset holders.
- MicroBerto 11y ago
  OK, so then when you give more to the lower class, and landlords increase rent.... guess who gets the majority of that newly printed income? The asset holders once again!! I don't see how basic income doesn't create more unforeseen problems than it solves unless there are some serious strings attached to that money.
  - ww520 11y ago
    At least the money has gone to encourage economic activities, i.e. housing service. Increased rent leads to more housing development as more people piled in to take advantage of the increased return, which can lower the rent as more housing capacity comes online.
- Cshelton 11y ago
  "new money" is not, or ever, given to anyone. Banks included. The U.S. gov basically sells promissory notes (treasuries) to an independent, non governmental organization (The Federal reserve...which is not "federal" in the least bit..) on behalf of the American people. Although the fed is more or less offering a note at x price and the U.S. Treasury just buys it... Anybody is allowed to buy bonds from the U.S. Treasury. In exchange, you get the "new money" as you call it. At no one point is anything given to the banks or asset holders. The interest rate is determined by the rate the fed sets and buys these notes from the US T. This is the key and primary tool at which a PRIVATE, non-governmental organization, determines interest rates. However..you can also buy these notes directly from the Fed. China does all the time along with many other countries. Yes...other countries hold the "debt" of the American people... If that's not crazy enough...it gets better. This organization..the Fed...gets to tell banks how much to hold in required reserves. Another primary tool they use to control inflation.