Here is a tree rather than trying to comprehend a forest.
For this example, you and your money and your bank are the entire universe.
You have $100 in your checking account. The bank has a $100 bill in the cash drawer. M1 is $200 – your $100 deposit and the banks $100 bill.
At 9 am, you walk into the bank and withdraw your $100 bill. M1 is now only $100.
You walk into Target and ask to buy a $100 gift card. You give up the $100 bill, and get a gift card. Target takes the $100 bill and deposits it in their checking account.
M1 is back to the original $200 – the bank has the $100 bill and Target has $100 in their checking account. The money supply is unchanged…
Except you have a $100 gift card in your pocket. It is every bit as liquid as cash. Target has the ability now to create dollars without any control by the Federal Reserve.
The Federal Reserve web site clearly states that the ability to use monetary policy to influence the economy is no longer a tool that works.
So the fed funds rate was raised today. Nobody who actually works in finance cares. Oil prices continued to slide. Saudi Arabia is forming an Arab army it will lead into battle Now that matters.
Here is an interesting table – it explains the current $59 Trillion in debt – the first half is who owes the debt, the second half is who owns the debt. This is all debt, not just government debt.
http://www.federalreserve.gov/releases/z1/current/accessible/l1.htm
Someone needs to audit the Fed !!!
For next week’s assignment, Brian is going to explain what a “repo” (repurchase agreement) is and how it influences monetary policy and liquidity. Can we handle the truth?
If you want your heads to explode, consider what negative interest rates mean to the entire concept of Repurchase agreements. My head hurts just asking the question.
Hey, I thought you didn’t want the audit. lol
Your example of the gift card is a good one, but it is worse than that. Frequent Flyer miles, loyalty points at Subway sandwich shops and even coupons from the Sunday newspaper do the same. Did I say Sunday paper? I meant to say Groupon. 😉
Insiders made a “mistake” here. Wonder what Ms Martha Steward thinks of this:
from http://www.foxbusiness.com/economy-policy/2015/07/24/fed-forecasts-leaked-5-years-early/
“staff member in the Fed’s congressional liaison office emailed a copy of the potentially market-moving information a day early to about 150 individuals. The recipients included officials at some of the biggest banks and investment firms on Wall Street and congressional staffers.”
Well, I deliberately focused on a tree. Dragging in a discussion of currency arbitrage using three way currency swaps or the IMF issuing its own Special Drawing Rights, essentially creating virtual gold would just spin the discussion off on tangents like Martha Stewart – Comprendo, Amigo?
The issue is 1000x bigger than what the Fed Funds rate is at the discount window. The longest journey starts with a small step. The reality is most people can’t handle the truth.