E Federal Reserve Mandates Slow Growth. So Fed Must Finance American Infrastructure

My hope is that you follow this article closely, if you are interested in Federal Reserve matters, because we have uncovered more proof that the Fed will not allow a booming economy, period. So, knowing this we need to take Ellen Brown's article and Bernanke's quotes towards the end of this article seriously, because without sufficient taxation from a booming economy, we will need other means of financing the nation's crumbling infrastructure problem or it will not be financed.

Ellen Brown, recently covered Congress' efforts to use the Federal Reserve to fund the highway bill. In this instance the Congress actually tapped dividends that the Fed pays to member banks.

But there is an even more ambitious way to use the Fed, interest free. Now that the Congress has tapped the Fed there is no reason why the Fed cannot help out America in this time of infrastructure need. The need is widespread, with bridges crumbling, with airports not measuring up to international quality, and with roads and city streets failing to be repaired in a timely fashion.

The Fed alone issues base money, and the banks issue loans based upon the amount of base money in the system. The banks create the money supply but cannot do so without base money. Currently, we are all aware of the massive amounts of base money sitting as excess bank reserves at the Fed. The banks could loan that money out some 2.4 trillion dollars times 10, to get roughly 24 trillion dollars additional money supply into the system.

The Fed fears that the banks could lend so much of the reserves out that the practice would cause inflation or that in an inflationary scenario, the Fed could not raise rates sufficiently enough to stop the outflow of lending by the banks! So, before I continue, this is what I have been writing about, that the Fed predisposes low rates.

 A researcher at the Minneapolis Fed said this:

Banks in the United States have the potential to increase liquidity suddenly and significantly—from $12 trillion to $36 trillion in currency and easily accessed deposits—and could thereby cause sudden inflation. This is possible because the nation’s fractional banking system allows banks to convert excess reserves held at the Federal Reserve into bank loans at about a 10-to-1 ratio. Banks might engage in such conversion if they believe other banks are about to do so, in a manner similar to a bank run that generates a self-fulfilling prophecy.

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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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Comments

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Moon Kil Woong 2 years ago Contributor's comment

Generally, I don't think Fed action or money should be used or spent unless it is used or spent fighting economic contraction in a cyclical downturn. The Fed will already be hard pressed to fight the next downturn without spending money on infrastructure. If the Fed was a body of the government maybe I could see it, but as a independent entity charged with defending our monetary system I don't. Sorry.

Gary Anderson 2 years ago Author's comment

Yes but how can base money issued at zero lower bound hurt? Look, it would be of short duration. It would not be paid for by bonds. It would be base money in the money supply, but the resulting economic activity would be good. It would not require the Fed to buy bonds already in massive demand. Negative rates on bonds, on retail savings accounts and a cashless society, those are the can of worms! Lonergan explains it better than I and I hope you read this: www.talkmarkets.com/.../eric-lonergan-precisely-defines-helicopter-money

Moon Kil Woong 2 years ago Contributor's comment

Sadly with the Federal Reserve nothing is short term and they abuse every power they get. I do agree negative rates are horrible. The Fed needs to eventually get rates back to normal and stop screwing around extending economic cycles which can often lead to horrific crashes.

Gary Anderson 2 years ago Author's comment

They could do the right thing, Moon, and do Helicopter money properly, but I don't think they want to do that when they can get the government to pay interest to their banks.

Moon Kil Woong 2 years ago Contributor's comment

This opens up a can of worms. If used to fund infrastructure it would sooner rather than later be used to fund entitlements, special programs, etc. Also, although the government may take it interest free, it still injects cash into the economy thus stimulating inflation. Last, since our Federal Reserve is owned by the unmentionable who want protecting from being known, those that own the private bank can refuse or even sue for takings. Ergo, the argument for making the Federal Reserve a real government central bank rather than a siphon to certain entitled owners.

Gary Anderson 2 years ago Author's comment

But it isn't part of the money supply. It is base money. Inflation would have to be monitored, but we hardly have that now. The Fed could finally do something for the nation without the treasury paying out interest to get all this fixed. Hasn't the Fed taken enough in the protection of the banks? Isn't it possible it could give back? How about a infrastructure wealth fund of base money that would have to be deposited back into the banking system at some designated date?

Perhaps a close up student of the Fed could comment on this Moon.