The Federal Reserve Needs More Money

December 30, 2009 – The Federal Reserve needs more money to continue purchasing US government debt, the aggregate amount of which is soaring because of ballooning deficits.  But the Fed has a problem.

The US government doesn’t pay its bills with ‘cash currency’, the green paper Americans carry around in their pocket.  So the Fed cannot crank up the printing press like central banks did in Weimar Germany in the 1920s, or in recent years, in Zimbabwe.

The US government needs ‘deposit currency’ – or ‘electronic’ currency, to put it into Mr. Bernanke’s terms – so that it can pay its bills by check or wire transfer.  Payment for goods and services by deposit currency are made through the banking system, and nearly all commerce in the United States is conducted in this way.  So where will the Federal Reserve get enough deposit currency to enable it to continue purchasing US government debt?

I noted in my recent article that explained the cause of hyperinflation that “huge bank excess reserves…have funded the Fed’s purchase of US government debt, putting…the US dollar on the road to hyperinflation.”  But these huge reserves are not providing enough deposit currency, given the massive, ongoing deficits being racked-up by the US government.  In short, the Federal Reserve needs more money.

So the Federal Reserve is proposing a regulatory change that would allow banks to deposit money with it and earn interest income on those deposits.  These deposits will be separate and distinct from the reserves that banks leave at the Fed.  They would be time deposits, in contrast to the overnight tenor of reserves, and therefore would earn the banks a higher rate of interest.  Even their name is different.  They are not reserves, but a “term deposit facility”.

It has been evident for some time that the Fed would require new gimmicks to come up with the deposit currency it needs to fund its growing purchases of US government paper.  This point is neatly captured by Reuters announcing this new Fed facility: “At the height of last year’s financial meltdown, the Fed had been discussing going to Congress to request the authority to issue its own bills. The term deposit facility achieves a similar purpose, but can be undertaken within the Fed’s existing authority and does not require congressional approval.”

Side-stepping congressional authority like this is further evidence that the Federal Reserve sees itself as unaccountable to the general public – as if not identifying who received the Federal bailout money was not enough proof of this point already.  But the Fed’s devious maneuver here illustrates something much more important, namely, the reason the Federal Reserve exists.

Despite what Fed officials may declare in testimony before Congress, the Federal Reserve does not exist to fight inflation, provide full employment or achieve any of the other laudable goals attributed to it.  The Federal Reserve exists solely to provide the US government with all the dollars it wants to spend, even if it has to side-step congressional authority to do it.

There is of course a biting irony in that conclusion, given that Congress is part of the US government.  And Congress is as much to blame for the government’s horrific deficits and fiscal madness as the president or anyone else in Washington.  So why would the Fed need to side-step Congress?

It is because central banks like to operate in the dark.  That is why they meet behind closed doors and resist public scrutiny, as evident from their current effort to stop Ron Paul’s bill to audit the Fed.  But we shouldn’t be surprised by the Federal Reserve’s conduct.  After all, I have already explained why central banks are a barbarous relic.