Our world is ruled by a theory of money as defined in the aftermath of the Second World War and applied, regulated, and defended by the United States and in particular the "Fed" (ably supported by other junior-partner national banks). The system is structured to make permanent an American advantage, through the US dollar, without having to resort to the destabilizing risk of direct imperialism.
The US Dollar World System boils down to military and money. Most countries are bought into this, preferring the security of the established US-defended system to keep their own power and wealth dynamics safe. Some don't; to varying degrees. China. Russia. Rogue nations (if they're big enough or symbolic enough) are threats to profit, and if there are no existential threats to America itself, the United States and allies aren't shy of violent intervention.
Conformity matters. Stamping on small rogue states is good business, even if it costs lives. The general public laps up national mythology bullshit faster than any momentum for truth, change, or accountability. Peace doesn't stand a chance against a world full of bad guys. Oceania has always been at war with Eurasia.
Projecting American power around the world keeps global confidence in American hegemony with Great Britain and the other "five eyes" (Canada, Australia, New Zealand) tagnutting onto perpetuating this dynamic. It benefits all. It's the white man's burden, neoliberalism style.
The UK in particular, through London, insinuates itself into key stages in the flow of international capital; the most respectable of money laundering black market, common market crossover. Europe is complicit at every level, biding its time, trying not to lose ground in the stacked deck of opportunity, tied to the choices of the 1940s and 1950s.
Global peace is a reality because billions of human lives are committed to, motivated by, conditioned under, and pacified by lifelong pursuit (and value) of money.
- Fed short definition.
- US dollar world reserve currency.
- Quantitative easing.
- Theory of money as applied by the Fed (and other national banks). America's advantage. Military and money. Russia. China. Europe. UK. India.
- Financial Crash 1929
- Great Depression
- FDR New Deal - Glass-Steagall Act of 1933
- Clinton Neoliberalism - Gramm–Leach–Bliley Act 1999
- Financial Crisis 2007-2008
- Moral Hazard
THE FEDERAL RESERVE
The primary declared motivation for creating the Federal Reserve System was to address banking panics. Other purposes are stated in the Federal Reserve Act, such as "to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes". Before the founding of the Federal Reserve System, the United States underwent several financial crises. A particularly severe crisis in 1907 led Congress to enact the Federal Reserve Act in 1913. Today the Federal Reserve System has responsibilities in addition to stabilizing the financial system.
Current functions of the Federal Reserve System include:
- To address the problem of banking panics
- To serve as the central bank for the United States
- To strike a balance between private interests of banks and the centralized responsibility of government
- To supervise and regulate banking institutions
- To protect the credit rights of consumers
- To manage the nation's money supply through monetary policy to achieve the sometimes-conflicting goals of
- maximum employment
- stable prices, including prevention of either inflation or deflation
- moderate long-term interest rates
- To maintain the stability of the financial system and contain systemic risk in financial markets
- To provide financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system
- To facilitate the exchange of payments among regions
- To respond to local liquidity needs
- To strengthen U.S. standing in the world economy
- Addressing the problem of bank panics
Banking institutions in the United States are required to hold reserves—amounts of currency and deposits in other banks—equal to only a fraction of the amount of the bank's deposit liabilities owed to customers. This practice is called fractional-reserve banking. As a result, banks usually invest the majority of the funds received from depositors. On rare occasions, too many of the bank's customers will withdraw their savings and the bank will need help from another institution to continue operating; this is called a bank run. Bank runs can lead to a multitude of social and economic problems. The Federal Reserve System was designed as an attempt to prevent or minimize the occurrence of bank runs, and possibly act as a lender of last resort when a bank run does occur. Many economists, following Nobel laureate Milton Friedman, believe that the Federal Reserve inappropriately refused to lend money to small banks during the bank runs of 1929; Friedman argued that this contributed to the Great Depression.
In the United States, the Federal Reserve serves as the lender of last resort to those institutions that cannot obtain credit elsewhere and the collapse of which would have serious implications for the economy. It took over this role from the private sector "clearing houses" which operated during the Free Banking Era; whether public or private, the availability of liquidity was intended to prevent bank runs.
Through its discount window and credit operations, Reserve Banks provide liquidity to banks to meet short-term needs stemming from seasonal fluctuations in deposits or unexpected withdrawals. Longer-term liquidity may also be provided in exceptional circumstances. The rate the Fed charges banks for these loans is called the discount rate (officially the primary credit rate).
By making these loans, the Fed serves as a buffer against unexpected day-to-day fluctuations in reserve demand and supply. This contributes to the effective functioning of the banking system, alleviates pressure in the reserves market and reduces the extent of unexpected movements in the interest rates. For example, on September 16, 2008, the Federal Reserve Board authorized an $85 billion loan to stave off the bankruptcy of international insurance giant American International Group (AIG).
In its role as the central bank of the United States, the Fed serves as a banker's bank and as the government's bank. As the banker's bank, it helps to assure the safety and efficiency of the payments system. As the government's bank or fiscal agent, the Fed processes a variety of financial transactions involving trillions of dollars. Just as an individual might keep an account at a bank, the U.S. Treasury keeps a checking account with the Federal Reserve, through which incoming federal tax deposits and outgoing government payments are handled. As part of this service relationship, the Fed sells and redeems U.S. government securities such as savings bonds and Treasury bills, notes and bonds. It also issues the nation's coin and paper currency. The U.S. Treasury, through its Bureau of the Mint and Bureau of Engraving and Printing, actually produces the nation's cash supply and, in effect, sells the paper currency to the Federal Reserve Banks at manufacturing cost, and the coins at face value. The Federal Reserve Banks then distribute it to other financial institutions in various ways. During the Fiscal Year 2013, the Bureau of Engraving and Printing delivered 6.6 billion notes at an average cost of 5.0 cents per note.
Federal funds are the reserve balances (also called Federal Reserve Deposits) that private banks keep at their local Federal Reserve Bank. These balances are the namesake reserves of the Federal Reserve System. The purpose of keeping funds at a Federal Reserve Bank is to have a mechanism for private banks to lend funds to one another. This market for funds plays an important role in the Federal Reserve System as it is what inspired the name of the system and it is what is used as the basis for monetary policy. Monetary policy is put into effect partly by influencing how much interest the private banks charge each other for the lending of these funds.
Federal reserve accounts contain federal reserve credit, which can be converted into federal reserve notes. Private banks maintain their bank reserves in federal reserve accounts.
The Federal Reserve regulates private banks. The system was designed out of a compromise between the competing philosophies of privatization and government regulation. In 2006 Donald L. Kohn, vice chairman of the board of governors, summarized the history of this compromise: Agrarian and progressive interests, led by William Jennings Bryan, favored a central bank under public, rather than banker, control. But the vast majority of the nation's bankers, concerned about government intervention in the banking business, opposed a central bank structure directed by political appointees. The legislation that Congress ultimately adopted in 1913 reflected a hard-fought battle to balance these two competing views and created the hybrid public-private, centralized-decentralized structure that we have today.
The balance between private interests and government can also be seen in the structure of the system. Private banks elect members of the board of directors at their regional Federal Reserve Bank while the members of the board of governors are selected by the President of the United States and confirmed by the Senate.
Ben Bernanke (lower-right), former chairman of the Federal Reserve Board of Governors, at a House Financial Services Committee hearing on February 10, 2009. Members of the board frequently testify before congressional committees such as this one. The Senate equivalent of the House Financial Services Committee is the Senate Committee on Banking, Housing, and Urban Affairs. The Federal Banking Agency Audit Act, enacted in 1978 as Public Law 95-320 and 31 U.S.C. section 714 establishes that the board of governors of the Federal Reserve System and the Federal Reserve banks may be audited by the Government Accountability Office (GAO).
The GAO has the authority to audit check-processing, currency storage, and shipments, and some regulatory and bank examination functions, however, there are restrictions to what the GAO may audit. Under the Federal Banking Agency Audit Act, 31 U.S.C. section 714(b), audits of the Federal Reserve Board and Federal Reserve banks do not include (1) transactions for or with a foreign central bank or government or non-private international financing organization; (2) deliberations, decisions, or actions on monetary policy matters; (3) transactions made under the direction of the Federal Open Market Committee; or (4) a part of a discussion or communication among or between members of the board of governors and officers and employees of the Federal Reserve System related to items (1), (2), or (3). See Federal Reserve System Audits: Restrictions on GAO's Access (GAO/T-GGD-94-44), statement of Charles A. Bowsher.
The board of governors in the Federal Reserve System has a number of supervisory and regulatory responsibilities in the U.S. banking system, but not complete responsibility. A general description of the types of regulation and supervision involved in the U.S. banking system is given by the Federal Reserve:
The Board also plays a major role in the supervision and regulation of the U.S. banking system. It has supervisory responsibilities for state-chartered banks that are members of the Federal Reserve System, bank holding companies (companies that control banks), the foreign activities of member banks, the U.S. activities of foreign banks, and Edge Act and "agreement corporations" (limited-purpose institutions that engage in a foreign banking business). The Board and, under delegated authority, the Federal Reserve Banks, supervise approximately 900 state member banks and 5,000 bank holding companies. Other federal agencies also serve as the primary federal supervisors of commercial banks; the Office of the Comptroller of the Currency supervises national banks, and the Federal Deposit Insurance Corporation supervises state banks that are not members of the Federal Reserve System.
Some regulations issued by the Board apply to the entire banking industry, whereas others apply only to member banks, that is, state banks that have chosen to join the Federal Reserve System and national banks, which by law must be members of the System. The Board also issues regulations to carry out major federal laws governing consumer credit protection, such as the Truth in Lending, Equal Credit Opportunity, and Home Mortgage Disclosure Acts. Many of these consumer protection regulations apply to various lenders outside the banking industry as well as to banks.
Members of the Board of Governors are in continual contact with other policy makers in government. They frequently testify before congressional committees on the economy, monetary policy, banking supervision and regulation, consumer credit protection, financial markets, and other matters.
The Board has regular contact with members of the President's Council of Economic Advisers and other key economic officials. The Chair also meets from time to time with the President of the United States and has regular meetings with the Secretary of the Treasury. The Chair has formal responsibilities in the international arena as well. The board of directors of each Federal Reserve Bank District also has regulatory and supervisory responsibilities. If the board of directors of a district bank has judged that a member bank is performing or behaving poorly, it will report this to the board of governors.
WORLD RESERVE CURRENCY
The United States dollar has the distinction of being the sole world reserve currency: most trade between nations is conducted in U.S. dollars, most major commodities are priced in U.S. dollars, significant amounts of both public and private international debt are held in U.S. dollars, and currency values fluctuates in relation to the U.S. dollar. As a result, countries around the world build up large reserves of foreign currencies – especially dollars – in their central banks and finance ministries, which allows them to continue to finance trade and maintain their own currencies' values through the buying and selling of U.S. Treasuries, or debt.
This role of the dollar gives the U.S. a special international privilege; despite being the largest debtor in the world, U.S. debt is still among the safest for investors to hold. As a reserve currency, demand is always high for dollars and therefore the United States has been able to continue to run large deficits for decades, relatively free of the fear that investors will lose faith in the currency.
As the centerpiece of the global monetary system, the U.S. dollar – and by extension, the Federal Reserve – wields immense influence over the stability and structure of the global economic order. When interest rates are incredibly low in the U.S. – as they have been for the previous 15 years, and without a single rate raise since 2006 – U.S. dollars are cheap and flow around the world with ease. Through large quantitative easing (QE) programs, the country's central bank purchased trillions of dollars worth of U.S. Treasury debt from banks, asset managers, insurance companies, mutual funds and other investors. Buying U.S. debt kept the currency value low and was supposed to spur investment, job creation and economic growth.
What resulted, however, was something different. As the Fed purchased U.S. debt from financial market players, it effectively pumped trillions of dollars into those markets in what a former banker and manager of the Fed’s QE program called “the greatest backdoor Wall Street bailout of all time.” This money was then channeled by financial markets out of advanced and into emerging market economies, particularly into their corporate sectors. With the global financial crisis of 2007-8, followed by the European debt crisis of 2010, the advanced economies of the world have been slow to recover, and their growth has been minimal and uneven. Instead, it's been the emerging market economies that were the driving engine of global economic growth since the financial crisis.
Having learned the hard lessons of holding large U.S. dollar-denominated debts in the past, the emerging market nations this time have built up significant international currency reserves – and have kept much of their national debt in domestic currencies, making them less susceptible to changes in interest rates enacted by the Federal Reserve and other foreign central banks. But the private, or corporate, sectors of many emerging market nations have meanwhile built up large U.S.-dollar denominated debts, fueled by the massive flood of money from quantitative easing programs of the U.S., UK, European Union and Japan.
When interest rates rise, corporate downsizing, bankruptcies and layoffs will spread, and these countries will have to make some important decisions. The resulting economic and financial crises, growing unemployment and social unrest will force governments and their central banks to decide whether or not to provide stimulus spending or bail out certain industries and financial markets, which will in turn further build up their national debts. The combination of severe crises in private sector markets and growing national debts will likely increase the hesitation and "disciplinary" reactions of financial markets. Central banks in emerging market nations, with some exceptions, would be forced to increase their interest rates in order to attract capital to those countries, but this would also likely exacerbate unemployment and put a strain on the countries' debt payments, which are denominated in their own currencies.
While large reserves can hold back the storm for some time, a prolonged period of higher interest rates (or even the prospect of higher rates to come) could exhaust most national reserves, which are already dwindling at a faster pace than at any time since the global financial crisis. Further, countries will be slower to accumulate new reserves, since they were largely built up due to years of trade surpluses in which emerging markets experienced immense economic growth from exports of commodities to developed and other emerging market nations, notably China.
China’s economy, as we're by now aware, has been slowing down and facing increased instability. Its technocrats are hurriedly trying to restructure the economy from export-dependent to increasingly domestic- and consumer-dependent, bringing it more into line with the other large advanced economies. But the slowdown and instability has now spread to other emerging market nations, with China’s demand for foreign commodities decreasing, leading to a collapse in trade-related revenue for other export-dependent nations.
The collapse of commodity and oil prices has already resulted in large strains on emerging economies. Increased interest rates will exacerbate these problems, as money will flow out of emerging economies and into the United States as well as other advanced economies. Many countries will face pressure to increase their own rates to keep their currencies valued closely to the U.S. dollar, or possibly increase quantitative easing programs (mass debt purchases) in order to counter deflationary pressures.
The traditional central banking tool of fighting high inflation by increasing interest rates is being considered at a time when inflation is already dangerously low in advanced economies, threatening to push them into a deep recession or depression. In the European Union and Japan, the central banks are undertaking large QE programs partly in an attempt to increase inflation. Increased U.S. rates could further strain these efforts, and the result could well be another major global economic crisis, with increased risk of recession and depression in the advanced economies as export industries collapse, unemployment grows, debt payments rise, defaults occur, and financial crisis looms. Emerging markets could very well be pushed into major internal and regional economic and financial crises of their own, drawn out over many years and spilling over into advanced economies, with banks and other financial institutions heavily exposed to the contagion.
Higher interest rates in the U.S., like in the past, may still function as a disciplinary mechanism. Emerging markets, the driving force of global economic growth for the past decade, could be pushed back down to a more manageable size for the U.S. and other advanced economies to dictate terms to. While the advanced economies will no doubt suffer a great deal, the effects of the coming financial crises are likely to be greater in emerging and developing societies. Between 2004 and 2014, the advanced economies moved from holding the majority share of global GDP wealth to the developing and emerging economies holding the majority of that wealth. A new financial crisis could flip the scales once again, giving the advanced economies increased leverage in international economic institutions and diplomatic circles like the International Monetary Fund and the Group of 20 (G-20). Since the IMF will likely play an important role in the response to international economic crises to come, it can again dictate the terms to countries around the world in need of loans. Those conditions will still largely be defined by the U.S. and other advanced economies.
Without a doubt, the terms and conditions will be directed toward "restructuring" the economies of nations in need, furthering their transformation into modern market economies while advancing the interests of financial and corporate power. Austerity and "structural reforms" will be demanded by those who hold the purse strings; as we've learned in the past, the disciplinary effect of increased interest rates is often used to advance the spread and influence of market economies, banks and corporations. But with the interdependence of advanced and emerging economies growing to unprecedented levels, a large crisis in emerging markets will likely have significant spillover effects in advanced economies.
The consequences are anyone’s guess, but if the history of financial and debt crises over the past three decades has taught us anything, it’s that when the U.S. Federal Reserve increases interest rates, much of the world suffers. The largest creditors – whether nations, banks, asset managers, insurance giants or central banks – have a lot of money to make in terms of receiving larger interest payments. Debtors, on the other hand – whether households, companies or entire countries – find themselves at increased risk of crisis and default. But such crises will spread back to the creditors with their large liabilities in the form of defunct loans. Financial crises, bailouts and debt crises in advanced economies could result, with a profoundly destabilizing effect on the global economy. Financial crises tend to get bigger and meaner each time they come around. There’s no reason to think the next time will be any different.