There never really was. It was always a charade. The only real “benefit” of the current system is that seigniorage profits are accrued by primary dealers rather than Treasury.

The seigniorage profits are made by the fed, and mostly paid back to the Treasury. Only a tiny portion is paid out in dividends to member banks who are required by law to own non-voting shares of the regional reserve banks.

the Fed is actually privately owned by a consortium of banks

https://www.globalresearch.ca/who-owns-the-federal-reserve/1...

Usually when we talk about ownership we talk about who makes decision and who gets the profits. The profits from the Fed go to the treasury, and the head of the federal reserve,who is appointed by the president.

So for all intents and purposes the government owns the Fed.

Yes but it gets its monetary authority from the federal government. Without them it is just another bank. So ultimately it answers to the government.

> The Fed generates profits for its shareholders. (from the article)

I wish I had something more articulate to say; this truly boggles my mind how this would benefits the American people. It should benefit us as American's right?

We have the one of the most stable and globally valued currencies in the world. Our inflation rate is steady and well defined. That seems like a pretty enormous benefit to the American people.

The profits go back to the Federal government: https://www.npr.org/2016/04/29/476203984/how-managing-money-...

The "GlobalResearch.ca" website is for conspiracy theories https://en.wikipedia.org/wiki/Michel_Chossudovsky#Centre_for...

That article doesn’t mention how the $100b in profit is distributed back to the Federal government. The profits are retained by the privately owned Federal Reserve and distributed to their secret list of individual owners.

Also, the article says that there is almost no inflation (2016) but there should be inflation. They are using the wrong definition of inflation. The term is actually supposed to refer to inflation of the money supply not inflation of prices. Usually a consequence of inflation of money supply is inflation of prices, but there are other factors which can counter this and reduce prices. But even in 2016 there was inflation of the money supply by definition due to the newly created money by The Federal Reserve. More money means existing money has less purchasing power, so more of it is required to buy the same stuff (Or higher prices).

But why could we have inflated money supply with steady prices? Perhaps because of technology. Tech creates efficiencies which make it cheaper to produce and sell goods and services. I’m sure there are other drivers, but that is a pretty powerful one.

100% of the profits are remitted to the Federal Government: https://www.nytimes.com/2018/01/10/business/fed-profits-trea...

That was true before 1907 as well. While the pound sterling was reserve currency back then, WWI ended that. The combination of massive production and consumption of the US caused it to warn reserve currency contention, and then WWII dominance at Breton Woods cemented it.

Also, inflation was lower before the Fed existed than after it.

No, it was designed to benefit the kind of people who designed it. Namely, bankers and statesmen.

Agreed. Also, contrast the judicial system.

one could argue that it is a scam but so far it has benefited everyone enough so that they don't notice

> benefited everyone

I question that. Go read “The Panic of 1907” and I think you will question it as well.

In the EU at least, monetary policy is a property of the currency (which crosses borders), while fiscal policy is a property of the government (associated with a single administrative country).

If the world evolves further into currency consolidation (which seems to be the direction aspired to by many technologists hoping for Internet money), this distinction will grow in relevance.

I kinda don't think after all this people want to move towards currency consolidation. Isn't the E.U. the only union and non-country to have a singular currency? And isn't that singular monetary policy something that causes a great deal of friction between member states (e.g. Greece and Germany back in '08)? I think if you took another vote among E.U. members to ratify the Maastricht treaty today, you might get a different result.

What us technologists might aspire to is pretty different from the ground truth.

> Isn't the E.U. the only union and non-country to have a singular currency?

No, it isn't. In Africa, there is the West African CFA Franc issued by the West African Economic and Monetary Union, and the Central African CFA Franc issued by the Economic and Monetary Community of Central Africa – both are legacies of French colonialism, in which newly independent states decided to keep the common currency they had under the French colonial empire.

In the Caribbean, there is the East Caribbean Dollar, issued by the Organisation of Eastern Caribbean States. It is used by independent states that were former British colonies, and also by two British overseas territories. Like the CFA Francs, it is a case of newly independent states choosing to retain the common currency they had under British rule.

The idea of a common currency isn't that new. France, Belgium, Italy, Switzerland and Greece had a common currency between 1865 and 1927 (the Latin Monetary Union). Similarly, Sweden, Denmark and Norway had a common currency between 1873 and 1905 (the Scandinavian Monetary Union.)

This friction as you call it, is happening again during the current crisis, again between southern european countries and mostly Netherlands and Germany, specifically on the topic of coronabonds which has been widely debated and made lots of headlines. The way the euro works the main direct benefits go to the largest exporting economies, with the weaker ones pretty much losing out. Then the idea is that this is offset by the stronger economies helping the weaker ones in the form of EU grants but there's always a big push back as these direct funds are seen as handouts while the benefits of the common currency are dismissed. This pressure is seen clearly in demands for harsher and harsher austerity. It doesn't help that some officials from northern economies keep showing how they really feel about the situation, going as far as providing quotes like southern countries "spending all their money on women and wine" and the whole PIIGs designation. It's a tough thing to try and rationalise for someone who largely believes in the EU project but who is originally from one of these southern countries and has felt the direct effects of the whole post-2008 period.

I think the narrative has changed quite a bit since the initial austerity policies of the 2009 crisis. Arguably some of the enforced changes were long overdue, while others went far beyond the reasonable. But it's also how they were implemented that mattered.

Portugal was under the troika but efficiently implemented things and quickly got out of it. Greek and Cypriot governments tried to game the system again and again, e.g. the troika imposed on Greece (or rather agreed with Greece, there's some nuance) an obligation to reduce it's overblown public sector by reducing the number of public servants. They did make a mistake though as they did not specify which public servants.

What does the Greek government do? They massively reduce the number of teachers, then turn around and ask the European social fund for money to cover annual replacement teacher contracts.

But the overblown administration has not shrunk much (and each time the government changes they do as before and rehire their allies...). Instead everyone curses the EU/troika/Germany/... for 'imposing' these cuts when the cuts per se are often not the issue, but rather the implementation.

You can also see why countries like Germany are scared of mutualised debt: Since the introduction of the euro, Italian debt has increased massively because it was so cheap. Easier to loan money and serve a few favors when the government will anyway change in 2 years and the current one doesn't have to bear responsibility for the long-term damage. It's of course a much more complex story, but there's no denying that irresponsible government spending is part of it. Italy is desperately hoping for inflation to shrink the debt:GDP ratio as it's become pretty impossible to pay it back anyway...

> Isn't the E.U. the only union and non-country to have a singular currency?

I guess there is also, at least, the good ol' african "Franc CFA"

I think the idea is more like something along the lines of Bitcoin or similar digital currency with well known and defined rules about supply that serves as the defacto reserve currency but each country or region still has a local currency. Gives the benefits of a single easy to transact in currency while avoiding the disagreements that arise like in the EU.

Why do you call the EU a non-country? They clearly share sovereignty with their member states in much the same way the federal government of the United States shares sovereignty with its member states.

I have a pretty good understanding of how the Fed and Treasury work together to implement both fiscal and monetary policy in the USA. Recent events have shown that the MMT claim that we can model them as a single entity has been observably proved beyond all doubt. However, my knowledge of the operational, rather than theoretical, realities of the Eurozone is threadbare at best. In my conceptual model the member states have theoretically given up monetary sovereignty, but in reality it appears that at least some are still able to browbeat the ECB into funding their deficits. I'd love it if someone who has a deep understanding of how monetary and fiscal policy are coordinated in the Eurozone could chime in, but I expect the answer is rather long since every member state has somewhat different circumstances.

Is the US effectively pushing their dept to other nations? Unlike any other currencies were it would just inflate it appears the rest of the world's central banks keep buying more and more dollars to keep the exchange rates stable enogh against their own.

At the enormous amount of money being created I would assume Simbabwe or German like inflation but I don't see it happening. Exchange rates are more or less the same as a year ago.

> Is the US effectively pushing their dept to other nations?

It's actually the exact opposite of this. Other nations, such as Germany, are hungry to run an export surplus. Since the USA is only willing to buy foreign goods with dollars, this means that Germany must accumulate dollars as a result of its export driven economy.

The whole notion that being a net exporter is virtuous and being a net importer is reproachable is obvious nonsense. Everyone can't be a net exporter after all, a counterparty is required. That said I find the notion that a nation could grow its GDP by "exporting" in the form of producing goods and then launching them into space comical, to say the least.

If inflation rises, there needs to be a mechanism to have it paid back. All the Fed QE at least theoretically goes back into the bank once markets recover and the assets purchased can be sold to make that so.

Who is going to buy individual loans which are never repaid if inflation starts to rise?

You've got the causality backwards. It's the writing-off that causes inflation (because now you have all that extra cash out in the economy that never comes back to the Fed in the form of loan repayment), not the other way around.

Only if they continue to buy.

As shown in 2018, the fed has the power to massively deflate the currency simply by indicating that they might want to unwind or reduce stimulus.

But the Fed QE from '08 didn't make it back if I understand it correctl...I think we managed to unwound about a quarter or a third (?) of the outstanding debt before this crisis hit and the Fed had to issue new QE all over again.

I'm not sure I understand what's stopping the Fed from buying back these loans that it issued? If it can't for some reason, what's stopping Congress or the states from creating "banks" to buy it back?

Didn't people say before '08 that inflation was caused by the money supply, and then we did QE, and inflation didn't happen? So now they're saying inflation is tied to velocity, or M1 vs. M2?

> But the Fed QE from '08 didn't make it back if I understand it correctl...I think we managed to unwound about a quarter or a third (?) of the outstanding debt before this crisis hit and the Fed had to issue new QE all over again.

I disagree. We never unwound and all that stimulus did come back, but only in things that people wanted: healthcare, education, real estate, and stock prices.

Things that were discretionary like air travel and electronics were stuck and have generally stayed there in nominal dollars.

We will see this again. The best lie the Fed ever created was to convince people that you have to see inflation everywhere for it to be real inflation. It would be very hard to achieve the sort of 1930s German inflation, or a Zimbawean scenario. What you'll see is that your food costs 50% of your income and rent is the other 50%. Social programs will either be cut or become ineffective, as more of the government's budget is devoted to servicing debt.

Given how little labour goes into making food (~3% of the population feeds the other 97%), and how low the margins on farming and food distribution are, inflation or not, your food will not start costing 50% of your income.

What's actually going to happen is that food, air travel, and cars will remain cheap, while investments, like stocks, houses, etc, will rise in price. That's the direct consequence of QE.

There is. When the Fed buys bonds they get the coupon payments for those bonds and they can wipe the money off the books then if they want. They can also sell the underlying bond if they want to remove the cash from the economy immediately. And--since they got a good deal by buying when the market was down--they can afford to sell a little below what the same bond would currently trade at and fixed income investors will line up around the block to buy

> since they got a good deal by buying when the market was down

Assuming the price goes back up later, you mean. But if that were guaranteed then the price wouldn't have been down much in the first place. It could stay down, or even go lower, in which case the Fed will lose money when they go to sell.

I would make the loan repayment conditional in a similar way to Lambda school: borrowers that go on to earn a high enough income have to make payments, but nobody else does. Then investors can make bets on who will make enough money to pay the loans back. They won't pay full price, but they'll pay something, and that will hold back inflation a bit.

So, move the income tax over to the Fed as well?

Don't give them ideas...

https://en.wikipedia.org/wiki/Constant_purchasing_power_acco...

This seems interesting but is surprisingly dense for wikipedia. Can you explain how this works?

You have a "virtual" unit of account which has an exchange rate to the local currency. The value is updated daily and is tied to the consumer price index, basically it gets inflation adjusted.

Whenever you take out a loan, at the moment of signing the contract the value is converted from the local currency to the unit of account. Loan payments are then made in the unit of account, every month this fixed value is converted back to the local currency according to the current exchange rate. This way loan payments get inflation adjusted.

The idea is that banks and foreign investors have no inflation risk, companies and consumers take all risk.

Thanks....Is this setup still actively used? I'd think that the Loan payments are then made in the unit of account aspect would make it fairly obvious to consumers that their payments could increase suddenly.

Yes, I live in a country were we have such a system but as far as I know there are some others with similar systems.

Loan payments increase every month, also some other services like insurances are charged this way. But of course your salary is paid in the local currency and doesn't get adjusted at all. The problem is that it is all we have access to, every loan in the country works this way. So there is not much the consumer can do, people want houses, people need to pay for college, people need a car.

In most countries inflation works in your favor, here it works in the banks favor.

Wow that doesn't seem very fair unless the banks themselves are exposed to major risks, mind saying which country?

On the other hand, sounds like a possible major opportunity if you provide a solution that is better for the people.

Chile

Regulations probably prohibit anything else but I haven't looked into it.

The Federal Reserve operates like any other bank with the exception that there is no regulatory limit on how big it’s balance sheet can get relative to the capital invested. In this case the capital comes from the member banks which are required to deposit 1/2 of their investment and make the other half available in case it is called. The banks are guaranteed 8% return on the total amount.

The large balance sheet and small reserves means that the Federal Reserve is thinly capitalized relative to other banks. Forgiving or writing off a loan would result in a loss which should result in the member banks taking a loss. To many losses and Congress would need to chip in to cover losses.

In practice the Treasury will allow the Fed to take a bit of interest from other investment to offset losses. This doesn’t make congress happy because it is effectively redistribution of taxpayer money outside of Congress. Taken to an extreme the Treasury could direct billions of dollars of taxpayer money through bailouts to connected individuals by paying above market prices for assets.

In a pinch the Federal Reserve could also re-value its gold reserves to balance its books and make up for losses. Or it could simply never recognize the losses. For example making a 100 year loan with no interest to the state of Illinois.

Crossing some of these lines would quickly (if not already) trigger a collapse in the currency or a Congressional showdown.

Thanks for this clear explanation, I enjoyed reading it!

If UBI was to come into effect, and that's a separate discussion, I'd definitely prefer using government debt rather than revaluing the very notion of the U.S. dollar to do so. Much safer.

Very true and no one should be surprised that the Fed is stepping in as buyer of last resort. It is one of their roles.

I'd argue that the more important part of monetary policy is the rate setting and I think that is quite different than fiscal policy. In my opinion, fiscal policy should be employed if we can get a greater percentage of return on GDP than the yield on the treasury note. In this case, the government is getting free money.

> if we can get a greater percentage of return on GDP than the yield on the treasury note. In this case, the government is getting free money.

Can you explain this?

GDP is the total aggregate of all receipts in the economy. The government typically only gets a percentage of this in revenues.

There are smarter economists than can probably explain it better than me. Keep in mind that if we spend $500B on notes, the increase on GDP is much larger than on just this new spend. The hope is that we are spending this on projects that are economy enablers that have a compounding effect. Meaning that we just need to recover the say 3% of the $500B over a 10 year period. This spending is best spent on infrastructure and technology. Even if we don't get the full return, keep in mind that most notes get spent on non-GDP increasing projects making break even a good deal. (Sorry, I still don't have the best ways to explain this, I need to find some writing that is clearer.)

Piggybacking on this:

What stops the Fed from doing something like this and then subsidizing it with negative rates on traditional notes?

Disclaimer: not an economist. This could be a really, really stupid idea, and it would clearly only work with literally the strongest world economies that are capable of charging entities to hold their money for them. But it could work well as a crisis basic income solution when everyone else moves to park their cash.

The parent's proposal would cause a great deal of inflation, which would diminish demand for negative-rate notes.

If someone wants to print money, they should just print money, not try to cover it up, as that will just prolong and worsen the eventual pain.

I think that's yingw787's point. That as we get deeper into this crisis, the Fed's actions start to look more and more like "printing money", but with a veneer of fiscal^H^H^H^H^H^H monetary policy. The $2,001 notes at 0% is the absurd extreme of this path.

(EDIT: Yeah, I meant monetary)

Sorry if I’m slow, but, if true, I wish that point had been make explicit. That’s actually a good argument.

As it stands now, that comment looks more like yet-another-pro-UBI post with a bizarre fantasy about the Fed breaking the law to make it happen, and I downvoted it on that basis.

Edit: And I think you meant "veneer of monetary policy"? The argument would be that it's being framed as monetary policy even though it's substantively a fiscal policy, something the Fed is supposed to stay away from.

> Edit: And I think you meant "veneer of monetary policy"? The argument would be that it's being framed as monetary policy even though it's substantively a fiscal policy, something the Fed is supposed to stay away from.

That's exactly what I meant. Fixed my comment, thanks.

And that goes against the HN guidelines for down voting comments.

You're just suppressing someone else's opinion because you don't agree with it, not because it is wrong or inappropriate smh

No, downvote for disagree is within the guidelines [1].

Even so, I try to instead use the standard of "does not contribute to the discussion", which I think this qualifies as (under my earlier understanding of the comment) because it's off-topic hobby-horsing, made worse by proposing a bizarre mechanism without acknowledging the illegality.

[1] https://news.ycombinator.com/item?id=11649750

So...if nobody but the Fed or some other govt construct demands these notes...are we good...if the market says so...?

I'm not saying this isn't insane, it is, but I don't think it's that much more insane than what's going on.

Also for an explanation of QE I like this guy's video: https://vimeo.com/2606496

> - Give everyone in the U.S. a guaranteed loan for $2,001, 0% interest, payable at the end of the month

> - Before you "default", enter in a "negotiation" where the Fed can buy back the security from you for $1, writing off "the losses"

But still impacting individuals credit scores?

If everyone's in on it...would it impact credit scores? My impression of credit scores is they're a metric for a bank or a financial institution to determine credibility for a loan. If everybody knows you'll default on said debt because it's "meant" to be defaulted on, how would that impact the bank's assessment for whether you need a mortgage?

Medical debt that gets written off doesn't impact credit scores. There's no reason that this would need to either.

Really? TIL.

Although I was under the impression it was still massively stressful.