Ep. 192 Your Deepest Questions About the Fed Answered

7 June 2019     |     Tom Woods     |     4

We do another Q&A episode this week, a good portion of which revolve around the Federal Reserve: the best ways to undermine it, how we might transition away from it, whether a reckoning has to come even if the Fed never raises interest rates, and a lot more. Plus: would we rather debate ten duck-sized Krugmans or one Krugman-sized duck?

Articles Mentioned

How to Return to Gold,” by Tom Woods

George Selgin on Private Money

Jeff Herbener’s Congressional Testimony

Videos Mentioned

Scale Your Business With Bitcoin

Tom Woods Show Episode

Ep. 269 End the Fed, Then What?

Need More Episodes?

Tom and Bob have their own podcasts! Check out the Tom Woods Show, the Bob Murphy Show, and the Lara-Murphy Report.

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  • Lysander Spooner

    It would have to be ten duck sized Krugmans. You couldn’t debate with a duck, whatever size it was. Ducks can’t speak or write.

  • martinbrock

    The Fed/Treasury raises the interest rate on a Treasury bond (six month maturity say) by selling the bonds below the current, market price. The Fed can only do so until it runs out of bonds to sell, but just as the Fed can create as many dollars as it likes to buy bonds, the Treasury can create as many bonds as it likes to exchange for dollars. The Treasury can always create bonds and sell them below the market to raise the interest rate, and the Fed can always create dollars and buy the bonds above the market to lower the rate.

    So the interest rate on Treasuries is simply a choice of the Fed/Treasury. Lowering interest rates increases the entitlement of bond holders, outside of the Fed/Treasury, to principal and interest payments. Capitalists choose between holding Treasury bonds and other “investments”, so making Treasuries more attractive by raising the rate is a choice by the Fed/Treasury to discourage capitalists from holding other capital generating income (or private bonds secured by these activities), like land growing corn or factories producing cars. Treasuries are a welfare program for capitalists. Raising the interest rate pays more capitalists not to produce, thus “slowing the economy”.

    [To be clear, I ordinarily refuse to call Treasuries “investments”, but they are “investments” in common parlance.]

    Of course, if Treasury bonds are so “attractive” that all capitalists prefer holding them over every productive activity, the economy ceases to produce anything, and everyone dies of starvation in a stagflationary collapse. In this imaginary extreme, the state is forcing subjects to obtain dollars to pay taxes and only permitting them to obtain the dollars by holding its bonds. Obviously, no real state could behave this way.

    That’s an MMT explanation of the process, and it makes perfect sense to me. Note that Mosler advocates a policy wherein the Fed/Treasury may only sell/buy Treasury bonds at a zero percent interest rate, effectively entitling savers to a nominally riskless savings account paying no interest and requiring anyone wanting a positive yield to invest in the real economy.

  • Maxwell Bliss

    High interest rates are inflationary because the gov is a net payer of interest. Money is printed when that happens and is destroyed when rates are negative.

    • martinbrock

      Interest on Treasury securities can be paid from tax revenue rather than monetary expansion, so money need not be printed; however, high interest rates can be inflationary regardless, for the same reason that generous welfare benefits can be inflationary. Why take entrepreneurial risks by organizing real capital, to produce goods for sale (hopefully) at a profit, when the state will simply tax its subjects and hand the revenue to you? This inflationary occurs on the supply side, not the demand side. Capitalists holding too many Treasuries produce too few goods.