The Fed Is Powerless
Brian Maher

We are told the time has come for the Federal Reserve to wield its ax… and cut its target rate.

We are further told that prevailing conditions may demand multiple axings.

And that these adjustments to the overnight lending rate will work healthful impacts.

They will invigorate the guttering economy with fresh gusts. They will soothe the nerve-wracked stock market.

They will, in brief, pour down oil upon disturbed waters.

We are not half so convinced it is true.

We do not believe the Federal Reserve commands the power most believe it commands.

You must first realize the Federal Reserve cannot even define the thing it supposedly kings — the dollar itself.

The dollar was once defined by standards of measure.

That is, as 416 grains of a silver coin. Or as 1/20th of one gold ounce.

Perhaps the dollar can be defined as 100 cents. Well then, what is a cent? The answer is 1/100th of a dollar.

Yet what — again — is a dollar?

Thus you embark upon a merry and infinite chasing of your tail.

Imagine a butcher who cannot measure a pound. Imagine a mapmaker who cannot measure a mile.

It is as if 2.54 centimeters no longer define an inch but a foot.

As if 12 inches no longer defined a foot — but an inch.

Or that three feet no longer defined a yard… but a mile.

We must conclude that today’s dollar is largely an abstraction.

It is as wispy as gossamer, as slippery as eels, as elusive as quicksilver.

Thus the Federal Reserve steers by the swaying and erratic lights of varying money supplies.

These include M0, M1, M2, MZM, etc.

Here we have money, near money, money at second and third remove, money somewhere in the ghostly ether.

And so the monetary authority stumbles along in pitch darkness.

But do not rely upon our slanted and cynical word.

Rely instead upon the authority of the “maestro” himself — Mr. Alan Greenspan — who conceded long ago that:

The problem is that we cannot extract from our statistical database what is true money conceptually…

One of the reasons [is] that the true underlying mix of money in our money and near money data is continuously changing…

A decision to base policy on measures of money presupposes that we can locate money. And that has become an increasingly dubious proposition.

They cannot even locate money!

It is as absent as caviar from a Donald Trump campaign rally… or sagacity from Kamala Harris’ skull.

Thus we arrive at this arresting conclusion, the Federal Reserve’s deepest secret:

The Federal Reserve exerts little actual control upon the monetary system.

No money stands beneath it, behind it, beside it.

Who then actually controls monetary policy today?

As we have argued before: The answer lies hidden in the “shadows.”

Read on to see why central banks do not truly matter.

Central Banks Don’t Matter

Here moneyman par excellence Jeffrey Snider — he of Alhambra Investments — rams a very sharp stake through the heart of the monetary myth:

Monetary policy has been quite intentionally stripped of money. Banks evolved and there was really no easy way to define money beyond a certain point (in the ’60s), so economists just gave up trying…

When the Federal Reserve… act[s] on monetary measures, they seek not to increase the supply of money to the economy but rather the supply of credit… Monetary policy in the modern sense of the word actually has little to do with money. Instead, it is always and everywhere about credit and debt…

All money is credit in today’s lunatic and preposterous world. That is, all money is disguised debt.

The dollar in your wallet you consider an asset. But only someone else’s previous debt conjured it into existence.

Technically it is a Federal Reserve note. A note is a debt instrument.

Here this Snider commits perhaps the grandest heresy in the universes of economics and finance:

That the Federal Reserve and all central banks are largely impotencies…

The Central Bank Is Not Central

They are merely men behind curtains… irrelevancies. The emperor in fact dons no garments.

Here Snider strips the fraud bare:

The Fed is, largely outside of temporary sentiment, irrelevant. The central bank is not central… The thing people have the most trouble with is the idea that central banks are not central.

It flies in the face of everything you have been taught and told your whole life. The media still give these guys every benefit of every doubt, and central bankers (ab)use that privileged platform to perpetuate their myth.

Central banks are not central? The Federal Reserve is irrelevant?

As well argue that gravity is a hellacious fiction, that 2 and 2 is 11, that Washington could not tell a lie.

Snider further argues that the federal funds rate — the subject of so many babblings today — is likewise an irrelevancy:

There is absolutely no legitimate reason why anyone should [notice federal funds.] The federal funds market is a nonentity… pocket change… It is the sparest of spare liquidity… Today, federal funds are nothing, an extraneous anachronism.

The Fed’s Target Audience: You

Why then does the Federal Reserve target the fed funds rates?

Because it wants you to believe that it bosses the markets, that its false fireworks are real:

What was decided, essentially, was to keep federal funds as the primary monetary policy focus. The reason? You.

Monetary policy contains no money; it runs entirely on expectations. Therefore, according to this view, what ultimately matters is how you perceive monetary policy…

So the FOMC decided that for the public they would still use federal funds to signal to you their intentions… There is no money in monetary policy; it is entirely psychology.

What about quantitative easing, Mr. Snider? Was it not about “printing money”?

QE accomplished next to nothing… QE’s real purpose was… in trying to manage expectations which central bankers were more than happy to let you believe this was all money printing…

Then you might act in anticipating all that “money printing” was going to have stimulative and even sharp inflationary effects. You might then pull forward purchasing activity, or, if a business, hiring and production, before the expected higher costs arrived.

Blasphemy mounts upon blasphemy!

But if not the central banks running monetary policy… who… or what… is central?

The Shadow Banking System

You will find the answer in the shadows, says Snider — the shadow banking system.

The shadow banking system?

That is the deeply interconnected network of banking institutions that operate outside direct control of central banks.

They include the large banks and their offshore units.

This shadow banking system extends through Europe, the Caribbean and Asia, the world over.

In 2017, the Bank for International Settlements — the central bank of central banks — estimated $13–14 trillion dwell within the shadow system.

But this shadow banking system is invisible.

It hides in shadow, leaving only traces of its activity… as a thief leaves traces of his crime.

Only a properly trained sleuth can sniff them out:

No one can directly observe this global [shadow banking] system, what is actually the world’s reserve currency. First of all, it is primarily based offshore from everywhere, therefore outside of official recognition. There are no direct statistics. The term “shadow” is, in this case, perfectly appropriate.

The United States dollar is the coin of this realm.

The shadow system first took shape in the 1950s and ’60s after Bretton Woods placed the dollar at the center of the international monetary system.

It expanded through the 1980s, ’90s… into the early aughts.

And beneath notice, the shadow banking system shouldered the central banks out of the international monetary system. Snider:

The global money system moved on without central banks bothering to notice.

Did the Shadow Banking System Cause the Great Financial Crisis?

These shadow banks traded heavily in derivatives and other risky instruments. All without oversight.

Where do asset bubbles come from, asks Snider? “They came from the shadows” is his answer — including the U.S. housing bubble:

Especially from the 1960s forward, and particularly in the 1990s forward, was that as the [shadow banking system] replaced other forms of mediation in global trade what actually happened was it became a parallel banking system unto itself… not so much that a company in Japan could import goods from Sweden.

But so that the banks in Japan or Sweden or Switzerland or anywhere around the world could participate in this [shadow banking] system that at the time was stoking a U.S. housing bubble, while at the same time creating vast bubbles in emerging market[s]…

So what we’re describing here is almost an entire massive complete system… that existed offshore and wholesale, in the shadows, because there was no regulatory authority… no government authority over the conduct of this system. It was essentially a self-contained system that operated beyond the reach of everybody.

Can you expect the Federal Reserve to patch the system, to wrest some order from this lawless jungle?

The Federal Reserve has no idea what it takes to fix the broken monetary system (they can’t even get the simplest part right)… All these central bankers did was prove they had, and have, no answers.

What then is the answer?

We’re kind of stuck in this disinflationary depression condition… Unless the monetary system is substantially reformed, I don’t think this will change… [The present system] is in fact heading in the wrong direction and the political and social order is slowly being taken down with it…

There has to be a breaking point where either the political system realizes the dangers inherent in that condition and actually responds favorably by taking hold of the [shadow banking] system [or] actually reforming it…

Will the shadow monetary system be substantially reformed?

Hell will first become an ice sheet…

 

 

Brian Maher is the Daily Reckoning’s Managing Editor. Before signing on to Agora Financial, he was an independent researcher and writer who covered economics, politics and international affairs. His work has appeared in the Asia Times and other news outlets around the world. He holds a Master’s degree in Defense & Strategic Studies.

 

 

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