Re: Power of the Dollar and US Strategic Interests

[William F Hummel <wfhummel@xxxxxxxxxxx>]

John Gelles wrote:

>William Hummel, in countering Henry Liu's claim
>-- that the popularity of the dollar, among nations,
>industries, firms and individuals, created hegemony
>and near-empire, and that the USA used that hegemony
>against the real interest of most of its fans (just listed)
>-- to repeat, Hummel countered that the USA was
>"not guilty".
>
>            Hummel found the popularity of the
>dollar to be a fact -- not a result of malign design.
>I agreed with Hummel, in my way, and went on to
>discuss the strategic interests of the USA that the
>popularity of the dollar might advance.
>            I included the potential for the USA to
>"monetize" its debt IF (and only IF) it had to.
>
>Hummel interprets "monetization" differently than
>I do.
>            Warren Rudman and I believe we have
>NOT monetized dollar debt when the Treasury sells
>notes and bonds in exchange for US dollars (which
>are largely backed by the collateral and credit-worthi-
>ness of borrowers from banks and other lenders.)

Gelles misunderstands what I said about monetizing debt.  It is the
Fed, not the Treasury, that monetizes debt.  The Treasury balances its
own books on average by selling or redeeming its debt securities.  In
effect, the Treasury simply recycles money.  The Fed adds or drains
banking system reserves through the purchase or sale of Treasury
securities with the public, mainly through short term repurchase
agreements.  That is how the Fed steers the interbank lending rate
(Fed funds rate) to the target set by the FOMC.

As long as the Fed targets the Fed funds rate, it has no discretionary
control of the monetary base.  it must respond to the increasing
demand for currency and/or bank loans by increasing the monetary base
as required to maintain control of the Fed funds rate.  That has been
the basic modus operandi for decades, except for a brief experiment
with monetarism in the early 1980s.  All major central banks now
operate in pretty much the same way.

>            Rudman and I say we only monetize debt IF
>the Treasury spends money it never received by bor-
>rowing (including borrowing from its central bank)
>and/or taxing or other collections.

The problem is that it does not work that way in practice.  As
explained above, Treasury spending is part of a balanced reciprocal
flow of funds with the public.
>
>Ben Bernanke explained one way to monetize
>debt -- the Treasury prints money or spends it
>into circulation, as it did in WW II, against
>FUTURE borrowing or taxing -- that is, the bonds
>it may print are held in vaults and not sold before
>there will be money enough to buy them.

Treasury bonds or Federal Reserve notes have no economic effect until
they have been purchased by the public.  Before that they are simply
paper gathering dust.

The term "printing money" is ambiguous at best.  The only legitimate
meaning is "monetizing debt," in the way described above.  No
responsible government literally prints money to spend.  Federal
Reserve notes are purchased by banks to meet the withdrawal demand of
depositors.  Depositors purchase them with debits against their own
bank deposits.
>
>In effect, such monetization is backed by expected
>growth -- from present production under government
>contract, often a cost-plus contract.

As noted, monetization occurs only when the funds are acquired by the
public.  Bonds and notes in storage are merely pieces of paper.
>
>Hummel said, specifically: "The point here is that
>liquidity is never a problem in a well-managed fiat
>money system.  [Here Hummel is right and Greenspan
>proves it every day. Hummel goes on:]
>
>        "The call for  MORE  money is really a call
>for a more equitable distribution of wealth, which
>is what I believe Gelles has been arguing for.
>            [signed] --  William F Hummel "
>
>Here Hummel misses the point badly:  The call
>for  MORE  spending money for the USA is made
>because without it we are waging war on the cheap
>and waging peace on the cheaper.

What Gelles seems to be advocating is the equivalent of dropping money
from helicopters.  The truth is there is no lack of spending money in
the aggregate.  The problem is the distribution of spending money
amongst the public.  A broad effective consumer demand is critical to
a healthy economy.
>
>I have never wanted or worried about equitable
>distribution of wealth.  Rather I have been pleading
>for a high real minimum income for every American
>-- especially when they work -- with no worry about
>a maximum.

OK, this is a matter of jobs and pay scales.  There is nothing the Fed
can do to solve that problem directly.  It can help create a favorable
environment by maintaining a low Fed funds rate, but that has a lower
bound.  Ultimately the solution is to be found in policies that lead
to real job creation.  Then the amount of spending money will take
care of itself.  Focusing on increasing the money supply won't help,

William F Hummel