Common Cents

New Money - Old Debt

Ralph Murphy

(12/20/2019) Former Federal Reserve Chairman Paul Volcker passed away in New York City early this month at the age of 92. Best known for his monetary policies that choked out double digit inflation of the Carter era his teams policies also overcharged the presumed need with locked investments of hyper interest rates leading to a severe recession in the first Reagan administration. There have been closed door understandings between monetary officials and the commercial or private sector banking groups that had broken down by policy usurp during President Obama, then return to relative control under the newer executive policies. Guild law or understandings have to be better replaced by formal and convincing. controls as well as enforcement and can be in the emerging work environment.

Money’s only base use is to facilitate commercial transactions but reflects a symbolic store of value that can be manipulated as can the ownership flows associated with the medium of exchange. Generally when there’s accord on the presumed value of a unit of currency it is considered optimal to maintain that rate. If the economy is stagnant or static that is easily done. Most developing countries are however subject to some growth variance which requires simple application of consistent monetary tools to maintain changes in currency levels. If not reflective of the production or sales changes the money can change in value as well. Money supply change must move in tandem with production or output changes and there have been three primary policy options by the federal reserve and other central banks to do so.

Open market operations or the buying and selling of government securities is one option. Others were manipulating the federal funds rate or an interbank lending rate on loans between commercial banks. It was initially used to meet reserve requirements on overnight loans subject to federal regulatory control but expanded to longer term lending and was under President Obama run by the bankers themselves if the transactions were reported at all. That’s been stopped since recent enforcement changes. A third and troubling unregulated option was borrowing from regional federal reserve banks serving American control areas and territories that use the dollar known as the discount rate. It was brokered by an interest rate determined initially by the regional boards of governors linked to commercial bankers or institutional investors who had that type access.

The discount rate was consistently higher than the interbank federal funds rate until very recently where they seem to have relatively merged. Most but not all banks are federal reserve members but it is required to borrow new money from them through that method. The objective of monetary policy should simply be provision of currency and predictable value since no single private sector group can or will do it in a competitive environment with equity or fairness for all. Speculative groups have had undue influence over those policy tools and make money if the value variance between depreciation of overprinting or appreciation of holdings with under supply given demand pressures. Nominal value and debt would reflect a payment commitment made by repayment for the exact amount of an accord with the understanding the currency unit value would be the same at payment. Obviously with depreciation it wouldn't be the case. Real value or debt repayment reflects monetary control that recognizes, respects and adapts to supply and demand pressures and matches the money to the change.

The point is there are very simple lending tools that have taken on complex and confusing speculative and politicized policy manipulation features and there can be more consistent application of them if brought under more predictable legal and control administration. In basic economic text books and a consistent source of real mental anxiety for the serious undergraduate involves the blithe claim of open market operations or the buying and selling of government securities like treasury bills, notes, or bonds to control the money supply through an interest rate broker. Treasury or T bills are a " debt instrument" which means they draw money from the economy which would lead to contraction of the money supply and increase the outstanding currency value if supply and demand pressures were the same. One can’t use a debt instrument to introduce new cash and for some reason the text books rarely if ever point that out.

Very broadly the Federal Open Market Committee of the Federal Reserve meet or announce changes linked to bulk buying and selling of those securities eight times a year, but the interest or federal funds rate announced at the same time seems almost a policy diversion statement as it is now determined by the market forces. These are better addressed by regulatory enforcement, also a federal reserve prerogative. What is needed is a Treasury credit regimen and from what I can infer from the news or policy concerns officials don’t want government control groups to handle equity or value backed assets created by private sector commercial standard buying and selling.

There is a point of intersection between large institutional investors as banks and monetary officials who are involved with an expanding demand and appropriate supply need which seemed able to work out non market or interest rate brokered introduction of currency for growth but were unreported provisions. That is the presumed buying of securities that introduces new money but again is itself a bulk concept and not the surgical fund withdrawal associated with interest rates of government securities. T-bills draw money from the economy, any quote of them presumes contraction and are seldom justified by market growth requirements or spending need as sales taxes cover them.

The discount rate could be used for regional banks if no other funding was available through regulated interbank lending and growth pressures are apparent. It would have be a very large enterprise on the point of expansion to find that type level of constriction as caused by simple lack of money to provide an exchange medium. I was thinking it possible to use the federal reserve as a treasury bill creditor but was then reminded they’d be lending almost valueless paper for equity backed interest and principle repayment so had to drop the idea. What stands out as possible remains allowing the larger private sector groups with that type expansion need to provide collateral that would cover failure fallout of lost investment at that level, but otherwise receive government credit or transaction support without further obligation in the understanding it is simply to cover new growth, subject to regulatory scrutiny, and not used for other purposes. They could be administered by federal reserve regional banks given the regulatory understandings and enforcement by that group and federal legal authority. As a frame of reference it would be optimal to recognize the guild failures and security redress has led to more overt federal legal control amid gross theft and unrestricted access.

Larger investment banks are not always able to fund genuinely profitable new or expanding market opportunities by money available from other banks or lenders. Banking should optimally be as close to their investors or depositors as possible, and lower tier groups that realize investment failure are subject to closures or penalty but the assets are generally recoverable. For growth that pierces the whole range of the economy it does take unusual savvy and size with risk mitigated by the collateral but can go forward if regulatory officials are convinced the investment group can succeed.

Interbank lending as brokered by market interest rates can be tolerated with regulatory approval but does presume reach beyond the actual depositor groups commercial or other private sector operating in their area. It’s a risky stretch of competence in that sense, but there may be an opportunity that just requires financing so shouldn’t be banned outright. The discount window or rate was too easily accessed by any level bank. It changed complexion dramatically during the Obama administration from overnight to longer term lender but seemed arbitrary to administrative control. The basic objectives of monetary policy are to maintain needed currency levels and value amid dynamic growth changes in the economy. Growth beyond two or three percent in a developed country is fairly rare and transaction or exchange needs should closely reflect the industries that introduce the changes. Smaller banks can make do with commercial fund sourcing, the larger likely need the government credit and proven performers and policy should reflect that reality.