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jp6

Helicopter Ben

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man in control at the Fed he should know that the Fed is the supplier of reserves to the banking system. This is not a small power to harness. It is a colossal power. But Dr. Bernanke does not understand the depth of his own powers. You see, as the supplier of reserves the Fed can control the yield curve. That’s right. There are no bond vigilantes in the USA. There is no time when the Fed has to buckle to the demands of the bond markets. If the Fed wants to set rates across the entire curve they will simply say so. They could buy back every outstanding bond there is at a specific rate of 0%. This would essentially flatten the curve. You could bet against the Fed’s actions, but as the supplier of reserves the Fed will never lose this fight to a bunch of arrogant Wall Streeters. After all, the bankers are currency users. The Fed is part of the currency issuer.

 

Now, some will say that the Fed will have to raise rates when we become insolvent or when inflation surges. This is true, but only to a certain degree. An autonomous currency issuer like the USA cannot “run out” of money. The USA has a printing press. As long as our debts are denominated in the currency we can print at will it is silly to worry about us defaulting on our debts (assuming our politicians don’t choose to default!). Dr. Bernanke alludes to Europe in this case, but the European nations are all currency users. They do not create the currency their debts are denominated in. So his analogy displays a clear misunderstanding).

 

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