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Thread: Don't Call It Capitalism: The Fed's $8 Trillion Hoard of Financial Assets

  1. #1

    Don't Call It Capitalism: The Fed's $8 Trillion Hoard of Financial Assets

    Don't Call It Capitalism: The Fed's $8 Trillion Hoard of Financial Assets
    By Ryan McMaken - 01/19/2023

    It’s a sure bet that as the economy worsens, unemployment surges, foreclosures rise, defaults climb, and economic misery ensues, we’ll be told it’s all capitalism’s fault. The question one must ask, however, is, “What capitalism?”

    The claim that “too much” capitalism drives every economic calamity is standard among anticapitalists on both the left and the right. They have many bullet points claiming government programs and government spending are everywhere retreating while free-market capitalism is experiencing a resurgence. This can be easily shown to be empirically false. Evidence can be found in everything from the continual flood of government regulations to rising per capita taxation and spending to the growing army of government employees. That’s all in the United States, mind you, the supposed headquarters of “free-market capitalism.” We might also point to how the US welfare state, including the immense amounts of government spending on healthcare and pensions, is on a par with European welfare states in terms of size. The supposed lack of social benefits programs in the US has long been a myth. The trend in spending, taxation, and regulation is unambiguously upward.

    In recent years, though, one additional indictor of just how little capitalism is actually going on has surfaced: central banks around the world are buying up huge amounts of financial assets in order to subsidize certain industries, inflate prices, and generally manipulate the economy. This is certainly true of the American central bank, the Federal Reserve.

    How the Federal Reserve Came to Dominate Financial Asset Markets

    While the Fed has long bought government debt in its so-called open-market operations to manipulate the interest rate, wholesale buying of financial assets began in 2008. This included both US government Treasurys and—in a new development—private-sector mortgage-backed securities (MBSs). This was done to prop up banks and other firms that had bet on the lie that “home prices always go up.” The value of mortgage-backed securities was falling fast, so beginning in 2008, the Fed bought up MBSs to the tune of $1.7 trillion. That was all before covid.
    ...
    ... in 2020: the federal government began a spree of deficit spending, and the Federal Reserve hoarded even larger amounts of assets, bringing totals to new record-breaking highs.

    The MBS portfolio climbed to $2.7 trillion.

    These sorts of volumes of assets are not an insignificant part of the overall market, either. Since 2020, the Fed’s MBS stockpile has equaled at least 20 percent of all the household mortgage debt in the United States. In early 2022, Fed-held MBS assets peaked at 24 percent of all US mortgage debt, but they still made up over 20 percent of the market as of late 2022.
    One can only speculate as to the full extent to which markets are distorted by the central bank holding one-fifth of mortgage debt, but one thing is for sure: one cannot say that this is any sort of “capitalism” at work.

    The story is similar with Treasury debt, and the timeline is largely the same as with the MBS assets. The Fed bought up about $2.5 trillion in US government bonds from 2008 to 2015. An attempt at scaling this back was aborted when the economy proved to be too fragile in late 2019. Then, the Fed gorged on Treasury debt in 2020 and 2021, bringing its government bonds total to nearly $6 trillion.

    As a percentage, the Fed’s share of all Treasury debt has totaled more than 15 percent since 2020. It peaked at 19 percent in 2021. All foreign holders combined hold 33 percent of Treasury debt. This makes the Fed, by far, the largest domestic holder of US government debt: the Fed holds nearly 40 percent of all domestically held Treasury debt, putting it far ahead of entire sectors, such as mutual funds, which hold “only” around 22 percent of this debt.
    ...
    Of course, it would be absurd to call this situation anything resembling even “mostly” laissez-faire, let alone a free market. Imagine if a federal government agency—which is all the Fed is—owned 10 percent of all supermarkets or 10 percent of all Wal-Marts or 10 percent of all stocks. We would say that the agency in question possessed an enormous amount of power to move and manipulate markets as it willed.
    ...
    More: https://mises.org/wire/dont-call-it-...nancial-assets
    "Foreign aid is taking money from the poor people of a rich country, and giving it to the rich people of a poor country." - Ron Paul
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    The views and opinions expressed here are solely my own, and do not represent this forum or any other entities or persons.



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  3. #2
    I see that this author has a nontrivial problem with his understanding of capitalism.

    Capitalism is everywhere in America. It is, indeed, all over the world. Presence of capitalism is not the issue, but rather the ways in which it is being made use or manipulated, mainly by "government".

    Capitalism is not a political system, the contrary belief being one of the central errors of the "economics" of the left. Capitalism is a tool, nothing more. It is a vastly powerful tool. If it were it a political system, then communist China would be capitalist China, but it is not. It remains communist China, who has hypocritically made use of the very tool against which it has ranted and raved. Communist China is a totalitarian state, the "government" of which has cleverly adapted the use of capitalism to make itself powerful. How could that have happened, if capitalism were an actual political system that in its very fabric could not live on the same planet as communism. But being a tool, capitalism is perfectly compatible in some way and degree with even the rot of communist authoritarians. A communist can use a gun or a hammer just as can a Freeman. A communist cannnot, however, be a communist and a Freeman at the same time, just as cannot an abject chattel slave.

    Plenty of capitalism. Most of it, however, is being applied toward what I will confidently call evil ends, which I believe is the point the author is trying to make, but fails to tie it all up due to his misunderstanding. This is a readily reparable flaw and I will give credit where due: the spirit of his view is well taken.
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  4. #3
    In order of best to worst:

    --Free market banking system as opposed to the centrally planned one we have now (Federal Reserve)

    --Federal Reserve that uses a redeemable commodity like gold to back its notes

    --Federal Reserve that uses unredeemable financial assets to back its notes

    and by far the worst, the one that puts you on the path to third world hyperinflation:

    --Federal Reserve that uses government debt to back its notes.

    I don't think it gets mentioned enough how much worse that last one is. The problem with using government debt to back notes is that it's simultaneously an asset and a liability so it's worthless and it makes it impossible to ever take dollars out of circulation. At least with financial assets the fed can sell them (although at a loss) and get rid of some of the dollars. And I'm pretty sure the tiny amount of QT they've done so far is all in financial assets, NOT in government debt so the fed's holdings are getting more concentrated in worthless government debt.

  5. #4
    Quote Originally Posted by Madison320 View Post
    The problem with using government debt to back notes is that it's simultaneously an asset and a liability so it's worthless and it makes it impossible to ever take dollars out of circulation. At least with financial assets the fed can sell them (although at a loss) and get rid of some of the dollars. And I'm pretty sure the tiny amount of QT they've done so far is all in financial assets, NOT in government debt so the fed's holdings are getting more concentrated in worthless government debt.
    I don't know how to frame this so it doesn't sound a bit tongue-in-cheek - but it's just a question I don't have a great answer to:

    What is bad about it owning all debt? What happens? Fed collapses? (darn) But then I assume then the federal government would eventually collapse? If that's right, people who work for the government would be hit hard and of course the country would be vulnerable to aggressive superpowers. What affect would this have on a person who doesn't get a tax return and lives in a peaceful neighborhood in Kansas or something?
    Last edited by jbnevin; 01-24-2023 at 01:15 PM.

  6. #5
    Quote Originally Posted by jbnevin View Post
    I don't know how to frame this so it doesn't sound a bit tongue-in-cheek - but it's just a question I don't have a great answer to:

    What is bad about it owning all debt? What happens? Fed collapses? (darn) But then I assume then the federal government would eventually collapse? If that's right, people who work for the government would be hit hard and of course the country would be vulnerable to aggressive superpowers. What affect would this have on a person who doesn't get a tax return and lives in a peaceful neighborhood in Kansas or something?
    As Ron Paul would say, one problem is malinvestment. It is a moral hazard to have debt that no cares if it gets repaid. In a free market economy, rates charged for debt go up based upon risk. The Fed purchasing all debt artificially reduces the cost of debt, and reduces the return for those who would "lend" money in the form of bonds and CDs.

    And the resulting inflation is a tax upon us all.
    Last edited by Brian4Liberty; 01-24-2023 at 02:29 PM.
    "Foreign aid is taking money from the poor people of a rich country, and giving it to the rich people of a poor country." - Ron Paul
    "Beware the Military-Industrial-Financial-Pharma-Corporate-Internet-Media-Government Complex." - B4L update of General Dwight D. Eisenhower
    "Debt is the drug, Wall St. Banksters are the dealers, and politicians are the addicts." - B4L
    "Totally free immigration? I've never taken that position. I believe in national sovereignty." - Ron Paul

    Proponent of real science.
    The views and opinions expressed here are solely my own, and do not represent this forum or any other entities or persons.

  7. #6
    Quote Originally Posted by jbnevin View Post
    I don't know how to frame this so it doesn't sound a bit tongue-in-cheek - but it's just a question I don't have a great answer to:

    What is bad about it owning all debt? What happens? Fed collapses? (darn) But then I assume then the federal government would eventually collapse? If that's right, people who work for the government would be hit hard and of course the country would be vulnerable to aggressive superpowers. What affect would this have on a person who doesn't get a tax return and lives in a peaceful neighborhood in Kansas or something?
    It would almost guarantee hyperinflation.

    Having the Fed printing money and buying debt is the logical equivalent of the government printing money whenever it wanted to. There'd be no check on government spending, if the government wants to spend it just prints the money. There'd be no taxpayers to piss off.



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