What is money?

We know people will tell you all kinds of things. Read online and people will give you all different kinds of answers. The reality is that few have any clue even if they think they do.

Do not feel bad. The Fed is in the same situation. Probably the most well known financial institution in the world, the US Federal Reserve, has no idea what money is. Unfortunately, it hasn't in decades.

Say what you want about Alan Greenspan, when you got him away from this Fed talk mode, he was rather blunt with what he stated. That honesty has not been followed up with recent Fed chains. Bernanke was an outright liar, Yellen incompetent, and Powell is behaving like a politician.

For all his mistakes, and there were many, at least Greenspan was forthright at times. Usually you had to sift through pages of FOMC transcripts as he was most likely to be candid there.

Nevertheless, much of what we gleam from him is insightful decades later. Probably the most important is his frankness about money.

Where Is Money

What would you say if you knew the Fed has no idea where money was? Would this alter how you looked at that entity.

We will let Greenspan's own words explain the situation:

The problem is that we cannot extract from our statistical database what is true money conceptually, either in the transactions mode or the store-of-value mode. One of the reasons, obviously, is that the proliferation of products has been so extraordinary that the true underlying mix of money in our money and near money data is continuously changing. As a consequence, while of necessity it must be the case at the end of the day that inflation has to be a monetary phenomenon, a decision to base policy on measures of money presupposes that we can locate money. And that has become an increasingly dubious proposition.

Source pg. 82

I would like to highlight this part again:

...a decision to base policy on measures of money presupposes that we can locate money. And that has become an increasingly dubious proposition.

Here is the Chair of the United States Federal Reserve stating in a FOMC meeting that locating money is becoming "an increasingly dubious proposition".

Any why is that?

...the proliferation of products has been so extraordinary

In other words, the banking system has rolled out so many products that it used as money, the Fed was left without much idea what it is.

And here everyone thinks the Fed "prints money". It doesn't even know what it is.

A Collapse Of Economic And Monetary Theories

The sad reality is most people build their economic and monetary theories on sand. Most of it is not truth, just misconceptions spread over the years which people buy into. With the likes of Peter Schiff running around, it is no wonder.

Did you see what was cited above discussed on Bloomberg or CNBC? Did you economics professor in college cover this? Has anyone mentioned it to you before?

Yet here it is, cited from a public document, the transcript of the June 2020 FOMC meeting. Hell the link is to the Federal Reserve website.

Today, we have everyone from politicians to stock market participants calling for the Fed to do something about inflation. After all, they did all this "money printing". If reserves were money, it is safe to bet that Greenspan would have found that. The reality is that reserves are not money, at least not useful money. It is an accounting trick, nothing more.

Another sad fact, for all they do wrong, the Fed isn't responsible for the increase in prices. How can there be too much money chasing too few goods when the Fed doesn't produce money? Bank reserves do not get out into the general economy.

Ironic that most of the people screaming about the Fed is well aware of a thing call supply chain constraints. This is something that is becoming very popular in earnings calls. Many companies are pointing to this as a reason why they are not producing at the levels the market is expecting.

So if the Fed didn't cause it, how are they going to fix it?

Kill Demand

The answer is to kill demand. Since the Fed doesn't do money, and this is a supply shock situation, the Fed can only work with the tools it has.

Since most are not aware of what all this is about, since they think it was money printing, we see they are oblivious to what is coming.

Here is Chairman Powell's own words:

So our tools don’t really work on supply shocks. Our tools work on demand. And to the extent we can’t affect, really, oil prices or other commodity prices or food prices and things like that, so we can’t affect those. But there’s a job to do on demand. And that—you can see that in the labor market, where demand is substantially in excess of supply of workers. And you can see it in the product markets as well.

Source Pg. 11

In other words, the Chair is saying out tools are worthless against a supply shock since we didn't cause that but since everyone is asking us to fix this, we will do it. Of course, our only course of action is kill demand, code for push the economy down.

So yeah, the Fed Chair is saying it needs to step on the throat of the economy, have people lose jobs, so that buying pressure stops. Even if the supply chain issues aren't resolved, destroy the economy and it won't matter.

This is exactly what happens when people are running screaming without understanding what actually takes place.

Amazing what you can garner by reading the words the Fed Chair actually says and the transcripts of their FOMC meetings and interviews given.

Keep all this in mind the next time you encounter someone in cryptocurrency on Twitter espousing about all the money printing by the Fed.

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