- Here. Buy my bond for 1000 bucks. At the end of the year I will give you 900 bucks. Isn't that a great idea?!!
Who wold fall for that? Besides the author of the Economist article does not mention that quantitative easing which it portrays as a brilliant idea is nothing more than monetizing debt. In any other normal country where the central bank s part of the government and hence belongs to the people of the country, so that it is the people who have the right of printing money, the process is more direct and the treasury does not have to pay interest to monetize its debt. Plus one other way the Fed monetizes debt is by giving almost free money to private banks through the discount window which in turn is used by banks to buy treasury securities. In this process banks make the spread between the discount window and the treasuries. This is part of the reason of the outrage in the congress and parts of media that led to the surprise hike in the discount rate to decrease the free money banks are given just to hide the fact that the Fed is monetizing the debt using the private banks and paying them commission to do this. China called this "stealth monetization of debt" recently. Like I said earlier in normal countries the process does not work like this as the people of the country do not need a private organization owned by banks to monetize debt. The people of those other countries do not need to pay interest to the central bank nor to the private banks. Even if they paid interest to the central bank, since it is owned by the government, the money stays within the government and does not get transfered corruptly to the private banks.
The Fed has issued stock and owners of the banks -that is private banks- own this stock. You and I are not allowed to buy this stock. The banks that own this stock get 6% dividends. Why on earth is a central bank paying dividends to private banks??? Besides why is it an outrageous 6% when the longest term yield on treasury securities is around 4.5%??? Is the CDS on the Fed worse than the CDS for Greece? Apparently so. If you consider that that dividend is annual, the correct measure is the one year treasury bond. The yield on the one year treasury note is 0.35%. That makes the CDS on the Fed stock 565 bps.
This is a ridiculous situation and part of the reason why the sovereignty of money needs to be returned to the people from private hands by way of shut down of the Fed. The fact that magazines such as the Economist defend institutions like this and their corrupt ideas as innovative ideas is the reason why I think they are politicized and have ulterior motives and readers should not believe everything they read.
Here is the article:
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Rethinking economics
Radical thoughts on 19th Street
A higher inflation target for central banks would be a bad idea
Feb 18th 2010 | From The Economist print edition
EVEN in economics, the guardians of orthodoxy are not given to capricious changes of mind. So when economists at the IMF question received wisdom and the fund’s established views twice in a week, it is no small matter. Two new papers have done exactly that. The first reversal, on inflation targets, makes less sense than the second, on capital controls.
The initial firecracker came on February 12th, with an analysis of the lessons of the financial crisis for macroeconomic policy, led by Olivier Blanchard, the IMF’s chief economist. The report called for several bold innovations. The most radical of these is that central banks should raise their inflation targets—perhaps to 4% from the standard 2% or so.
The logic is seductive. Because inflation and interest rates were low when the crisis hit, central banks had little room to cut rates to cushion the economic blow. Once their policy rates were down to almost zero, the world’s big central banks had to turn to untested tools, such as quantitative easing. Politicians had to boost enfeebled monetary policy by loosening their budgets generously. Had inflation and interest rates been higher, policymakers would have had more room to cut rates. That gain, Mr Blanchard argues, might outweigh the small distortions from modestly higher inflation, especially if countries reformed their tax systems to make them inflation-neutral.
Were central banks starting from scratch, such a cost-benefit analysis would indeed be the right way to set an inflation target. Even then, Mr Blanchard might be wrong. He may be understating the costs of higher inflation. Many studies suggest that inflation of 4% would do little, if any, harm to economic growth, but others reckon that the threshold at which distortions kick in is lower. And since higher inflation tends to mean more volatile prices, the risks increase as the target rate rises.
Nor is it obvious that starting with interest rates so low was either a crippling constraint on central banks’ actions or the main reason for the weakness of monetary policy. Central banks showed plenty of ingenuity with quantitative easing. Other tools, such as negative interest rates, could also be developed if need be. And with the financial system in crisis and debt-ridden consumers unwilling to borrow, monetary loosening might have been a feeble source of stimulus even if inflation had started higher.
A question of credibility
Yet the biggest problem with Mr Blanchard’s idea is that central banks are not starting from scratch. They have spent two decades convincing the public that they are committed to price stability and, rightly or wrongly, have equated this with inflation of around 2%. The stabilisation of expectations has been remarkably successful—and it allowed policymakers to cut rates as fiercely as they did. But it cannot be taken for granted, especially when some rich countries’ budget deficits are so vast. It would disappear fast if central bankers suddenly said that inflation of 4% was just fine after all. How could they convince investors that the change was intended to make policy more flexible, rather than to inflate away the state’s debts? With their credibility undermined, the next crisis would be much harder to fight. As an intellectual exercise, Mr Blanchard’s idea is intriguing. As a policy proposal, it is reckless.
That is not true of the IMF’s second piece of revisionism. A note to be published on February 19th acknowledges that controls on capital inflows can be a useful tool for countries facing a surge of foreign funds (see article). For an organisation that has long focused on the distortions such controls create, the shift is significant. It is also timely. With rich-world interest rates at rock bottom, emerging economies are likely to face continuing surges of foreign capital. Until now, the IMF has sniffed in disapproval when countries have introduced controls. It would be more useful if it helped countries decide when such controls might work and designed them to do the most good and least harm. The new paper makes it easier for the fund’s economists to get on with this. It may be less exciting intellectually than rewriting central banks’ rule-books. But it is probably more useful and certainly less dangerous.
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