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Thread: can the FED ever contract money supply?

  1. #1

    can the FED ever contract money supply?

    Basically, the premise for hyperinflation being inevitable is that once the FED has created all this money, it can never take it back. Is this a true statement? What can and would the FED do in order to contract the money supply?



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  3. #2
    Chester Copperpot
    Member

    the fed can sell govt securities in the open market to contract the money supply.

    It can do other things as well. but this is the main tool they would use.

  4. #3
    They are also raise bank reserve requirements.

  5. #4
    Or raise interest rates they charge banks for borrowing from them. There. I think we have all the basic tools covered now. It is complicated but they have been trying to offset some of their bailout actions in an attempt to counteract some of the potential inflationary factors.

  6. #5
    Quote Originally Posted by sam9657 View Post
    They are also raise bank reserve requirements.
    True, this is a big one. There's a lot of wiggle room between a 10% and 100% requirement ratio.

    Ok, so this should at least temper our fears somewhat. Or is hyperinflation still probable like Schiff, Faber, etc keep saying over and over again?

  7. #6
    Check out Paul Volker's tenure as head of the Fed. Contracting the money supply and stopping inflation is his claim to fame.

    Then Greenbubble comes along and starts the process all over again.


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  8. #7
    Quote Originally Posted by ChooseLiberty View Post
    Check out Paul Volker's tenure as head of the Fed. Contracting the money supply and stopping inflation is his claim to fame.

    Then Greenbubble comes along and starts the process all over again.
    Lather, rinse, repeat.

    Same players, same roles, same policies, same party
    "I'm not just trying to win or get elected. I am trying to change the course of history" - Ron Paul

  9. #8
    Quote Originally Posted by ChooseLiberty View Post
    Check out Paul Volker's tenure as head of the Fed. Contracting the money supply and stopping inflation is his claim to fame.

    Then Greenbubble comes along and starts the process all over again.
    Yes, but the US economy is not the same it was in the 80's when Volcker raised the interest rates, specially because there is a lot more of debt. I keep asking if people think that the US would survive rising the interest rates to 20% like Volcker did this time, but nobody answer.

    I watched a Marc Faber speech to some investors at the end of 2008 and he said it would not.

    Hugo



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  11. #9
    When the rate on an ARM (Adjustable Rate Mortgage) goes up from $500 to $800 a month that is one way.

    If you have a business and the loan goes from a 5.5% from one year to a rate of 7.5% the next year.

    These are the 2 main ways the Federal-Reserve contracts the momey supply.

    Now contracting the money supply when inflation happens is good. 8 out of 10 businesses usually fails within their 1st 2 years of operation. So any banking system would have to find a way to pull out any excess money before all the excess money would become worthless. This is the general idea behind interest rates.

    Think of money in an economy as you would blood-cells in a body. The Federal-Reserve is like the bone marrow. The bone-marrow makes the red-blood-cells for your body to stay oxygenated. While it produces fresh RBCs every 120 days there are enzymes released to destroy the aged RBCs. The Federal Reserve works in pretty much the same way. As an economy grows the FED-REZ prints more money. If many businesses fail the FED-REZ will raise rates with newer businesses opening to take out the excess money left in the economy by the failed businesses.

    Like whenthe drummer from DEF-LEPPARD lost his arm in a car accident. His body cut back on RBC production for the losses incurred.

    What needs to happen is the issuance of debt free currency by the Treasury Department and placing minimal interest rates on businesses to keep inflation down. To keep America's economy healthy all the FED-REZ would have to do is increase the NET money supply each year by 2% across the whole USA economy and quit with these extortional rate mortgages.

  12. #10

  13. #11
    your premise is wrong already

    downstream banks can contract money supply on their own, and people can refuse to use the pumped up money, and it's already happening today.

    The fed CAN print money, AND contract money any day they like, but banks under them can still control their trades, which will ultimately decide our economy. (much harder for downstream to lend money if Fed contracts, but they can always create their own currency as long as it's legal).

  14. #12
    The Federal Reserve has multiple tools to contract the money supply.

    The main tool the Fed uses to control the money supply is the buying and selling of government debt, known as government securities. When it buy securities, it exchanges money for these pieces of paper, increasing the money supply. When it sells securities, it exchanges pieces of paper indicating government debt for money, decreasing the money supply.

    A secondary tool the Fed uses to control the money supply is the discount rate. The discount rate is the interest rate at which the Fed loans money to member banks. If it raises the interest rate, less banks will borrow from the Fed and more will have to pay back what they previously owed to the Fed, causing a contraction in the supply of money.

    Another tool that the Fed has, but rarely uses, is the ability to set reserve requirements. The current reserve requirements are 10% for member banks, but many banks right now hold reserves in excess of 70% because of uncertain lending conditions. When the excess reserves are being lent out, the Fed could raise reserve requirements to 20% or more to prevent significant inflation.

    There are other tools that have never been used before, but the Fed has been thinking about using recently. The Fed has thought about selling its own debt as opposed to government debt. This would have a deflationary effect while at the same time improving the balance sheets of member banks acquiring Fed debt, so it would increase lending at the same time. The Fed could also begin selling all of the mortgage backed securities and commercial paper it has acquired recently. If need be, the Fed could revalue its stock of gold and sell that in order to contract the money supply.

  15. #13
    This was written by an ex-Fed guy:
    "Preemptive Strikes Against Inflation"
    http://american.com/archive/2009/pre...inst-inflation



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