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Central Banks Should Stop Paying Interest on Reserves – Article by Brendan Brown

Central Banks Should Stop Paying Interest on Reserves – Article by Brendan Brown

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The New Renaissance Hat
Brendan Brown
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In 2008, the Federal Reserve began paying interest on reserve balances held on deposit at the Fed. It took more than seven decades from the US leaving the gold standard — in 1933 — for the fiat regime to do this and thus revoke a cardinal element of the old gold-based monetary system: the non-payment of any interest on base money.

The academic catalyst to this change came from Milton Friedman’s essay “The Optimum Quantity of Money” where he argued that the opportunity cost of paper money (any foregoing of interest compared to on alternative money-like instruments such as savings deposits) should be equal to its virtually-zero marginal cost of production. Opportunity cost could indeed be brought down to zero if base money (bank reserves, currency) in large part paid interest at the market rate. Under the gold standard, the opportunity cost of holding base money largely in metallic form (gold coin) was indeed typically significant. All forms of base money paid no interest. And the stream of interest income foregone in terms of present value was equal in principle to the marginal cost of gold production (this was equal to the gold price).

Interest on Reserves are Important to Controlling Markets and Imposing Negative Rates
Friedman, however, did not identify the catch-22 of his proposal. If the officials of the fiat money regime indeed take steps to close the gap between the marginal production cost and opportunity cost of base money, with both at zero, then there can be no market mechanism free of official intervention and manipulation for determining interest rates.

That is what we are now finding out in the few years since central banks in the US, Europe, and Japan started paying interest on reserves. (The ECB was authorized to do this since its launch in 1999, while the Fed and BoJ began following the 2008 financial crisis.) Central banks can now bind the invisible hand operating in the interest rate market to an extent almost unprecedented in peacetime. In some cases, central banks have even deployed a negative interest rate “tool” which would have been impossible under the prior status quo where base money paid no interest.

How We Got Here
The signing into law of the Financial Services Regulatory Relief Act in 2006 authorized the Federal Reserve to begin paying interest on reserves held by depository institutions beginning October 1, 2011. On the insistence of then Fed Chief Bernanke, that date was brought forward to October 1, 2008 by the Emergency Economic Stabilization Act. He was in the process of dispensing huge loans to troubled financial institutions but wanted nonetheless to keep interest rates at a positive level (one purpose here was to protect the money market fund industry).

Accordingly, the Federal Reserve Board amended its regulation D so that the interest rate paid on required reserves and on excess reserves would be at levels tied (according to distinct formulas at the start) to market rates. An official communiqué explained that the new procedure would eliminate the opportunity cost of holding required reserves (and thereby “deregulate”) and help to establish a lower limit for the Federal Funds rate, becoming thereby a useful tool of monetary policy.

This was useful indeed from the viewpoint of rate manipulators: by setting the rate on excess reserves the Fed could now determine the path of short-term interest rates and strongly influence longer term rates regardless of how the supply of monetary base was growing relative to trend demand. By contrast, under the gold standard and the subsequent first seven decades of the fiat money regime, interest rates in the money market were determined by forces which brought demand for base money into balance with the path of supply as set by gold mining conditions or by central bank policy decision respectively. A rise in rates meant that the public and the banks would economize on their direct or indirect holdings of base money and conversely.

Back Before the Fed Paid Interest on Reserves
Yes, under the fiat money system the central bank could effectively peg a short-term rate and supply whatever amount of base money was needed to underwrite that — but the consequential growth of supply in base money was a variable which got wide attention and remained an ostensible policy concern. Right up until the Greenspan era, the FOMC implemented policy decisions by directing the New York Fed money desk to increase or reduce the pace of reserve growth and changes in the Fed funds rate occurred ostensibly to accomplish that purpose. This old method of determining money market interest rates under a fiat regime — in which banks’ need for reserves was minute given deposit insurance, a generous lender of last resort, and too-big-to-fail — depended on the banking industry enduring what was essentially a tax on its deposit business, which was then magnified by fairly high legal reserve requirements. Thus, it is not surprising that the original impetus to paying interest on reserves, whether in the US or Europe, came from the banking lobby. There was no such burden under the gold standard even though the yellow metal earned no interest. Banks in honoring their pledge to deposit clients that their funds were convertible into gold had to visibly hold large amounts of the metal in their vaults or at hand in a reserve center. Actual and potential demand for monetary base by the public is more limited under a fiat money regime than under the gold standard as bank notes are hardly such a distinct asset as gold coin from other financial instruments.

More Problems with Friedmanite “Solutions”
Friedman, when he advocated eliminating the opportunity cost of base money under a fiat regime, hypothesized that this could occur under a long-run declining trend of prices rather than by the payment of interest. The real rate of return on base money could then be in line with the equilibrium real interest rate. This proposal for perpetually declining prices would also have been problematic, though. The interest rate would fluctuate, and in boom times be well above the rate of price decline. In any case, the rate of price decline would surely vary (sometimes into positive territory) in a well-functioning economy even when the long-run trend was constant (downward). The equilibrium real interest rate would be below the rate of price decline sometimes (for example, during business downturns), meaning that market rates even at zero would be too high. That situation did not occur often under the gold standard where prices were expected to be on a flat trend from a very long-run perspective and move pro-cyclically (falling to a low-point in the recession from which they were expected to rise in the subsequent business expansion, meaning that real interest rates would then be negative).

What Can Be Done?
So what is to be done to escape the curse? A starting point in the US would be for Congress to ban the payment of interest on bank reserves. And the US should use its financial power with respect to the IMF to argue that Japan and Europe act similarly within a spirit of G-7 coordination such as to combat monetary instability. We have seen in recent years how rate manipulation and negative rates are made possible by the payment of interest on reserves, and are potent weapons of currency warfare. Yes, the ban in the immediate would force the Federal Reserve to slim down its balance sheet so that supply and demand for base money would balance at a low positive level of interest rates. The Fed might have to swap its holdings of long-maturity debt for T-bills at the Treasury window so as to avoid any dislocation of the long-term interest rate market in consequence. That, not the Yellen-Fischer “rate lift off day and beyond,” is the road back to monetary normalcy.

Brendan Brown is an associated scholar of the Mises Institute and is author of Euro Crash: How Asset Price Inflation Destroys the Wealth of Nations and The Global Curse of the Federal Reserve: Manifesto for a Second Monetarist Revolution. See Brendan Brown’s article archives.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Will Seizure of Russian Assets Hasten Dollar Decline? – Article by Ron Paul

Will Seizure of Russian Assets Hasten Dollar Decline? – Article by Ron Paul

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The New Renaissance HatRon Paul
June 23, 2015
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While much of the world focused last week on whether or not the Federal Reserve was going to raise interest rates, or whether the Greek debt crisis would bring Europe to a crisis, the Permanent Court of Arbitration in The Hague awarded a $50 billion judgment to shareholders of the former oil company Yukos in their case against the Russian government. The governments of Belgium and France moved immediately to freeze Russian state assets in their countries, naturally provoking the anger of the Russian government.

The timing of these actions is quite curious, coming as the Greek crisis in the EU seems to be reaching a tipping point and Greece, having perhaps abandoned the possibility of rapprochement with Europe, has been making overtures to Russia to help bail it out of its mess. And with the IMF’s recent statement pledging its full and unconditional support to Ukraine, it has become even more clear that the IMF and other major multilateral institutions are not blindly technical organizations, but rather are totally subservient lackeys to the foreign policy agenda emanating from Washington. Toe the DC party line and the internationalists will bail you out regardless of how badly you mess up, but if you even think about talking to Russia you will face serious consequences.

The United States government is desperately trying to cling to the notion of a unipolar world, with the United States at its center dictating foreign affairs and monetary policy while its client states dutifully carry out instructions. But the world order is not unipolar, and the existence of Russia and China is a stark reminder of that. For decades, the United States has benefited as the creator and defender of the world’s reserve currency, the dollar. This has enabled Americans to live beyond their means as foreign goods are imported to the US while increasingly worthless dollars are sent abroad. But is it any wonder after 70-plus years of a depreciating dollar that the rest of the world is rebelling against this massive transfer of wealth?

The Europeans tried to form their own competitor to the dollar, and the resulting euro is collapsing around them as you read this. But the European Union was never considered much of a threat by the United States, existing as it does within Washington’s orbit. Russia and China, on the other hand, pose a far more credible threat to the dollar, as they have both the means and the motivation to form a gold-backed alternative monetary system to compete against the dollar. That is what the US government fears, and that is why President Obama and his Western allies are risking a cataclysmic war by goading Russia with these politically motivated asset seizures. Having run out of carrots, the US is resorting to the stick.

The US government knows that Russia will not blithely accept Washington’s dictates, yet it still reacts like a petulant child flying into a tantrum whenever Russia dares to exert its sovereignty. The existence of a country that won’t kowtow to Washington’s demands is an unforgivable sin, to be punished with economic sanctions, attempting to freeze Russia out of world financial markets; veiled threats to strip Russia’s hosting of the 2018 World Cup; and now the seizure of Russian state assets.

Thus far the Russian response has been incredibly restrained, but that may not last forever. Continued economic pressure from the West may very well necessitate a Sino-Russian monetary arrangement that will eventually dethrone the dollar. The end result of this needless bullying by the United States will hasten the one thing Washington fears the most: a world monetary system in which the US has no say and the dollar is relegated to playing second fiddle.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

Repeal, Don’t Reform the IMF! – Article by Ron Paul

Repeal, Don’t Reform the IMF! – Article by Ron Paul

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The New Renaissance Hat
Ron Paul
April 5, 2015
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A responsible financial institution would not extend a new loan of between 17 and 40 billion dollars to a borrower already struggling to pay back an existing multi-billion dollar loan. Yet that is just what the International Monetary Fund (IMF) did last month when it extended a new loan to the government of Ukraine. This new loan may not make much economic sense, but propping up the existing Ukrainian government serves the foreign policy agenda of the US government.

Since the IMF receives most of its funding from the United States, it is hardly surprising that it would tailor its actions to advance the US government’s foreign-policy goals. The IMF also has a history of using the funds provided to it by the American taxpayer to prop up dictatorial regimes and support unsound economic policies.

Some may claim the IMF does promote free markets by requiring that countries receiving IMF loans implement some positive economic reforms, such as reducing government spending. However, other conditions imposed by the IMF, such as that the country receiving the loan deflate its currency and implement an industrial policy promoting exports, do not seem designed to promote a true free market, much less improve the people’s living standards by giving them greater economic opportunities.

The problem with the IMF cannot be fixed by changing the conditions attached to IMF loans. The fundamental problem with the IMF is that it is funded by resources taken forcibly from the private sector. By taking resources out of private hands and giving them to IMF bureaucrats, the US federal government distorts the marketplace, harming both American taxpayers and the citizens of the countries receiving the IMF loans. The idea that the IMF is somehow better able to allocate capital than are private investors is just as flawed as every other form of central planning. The IMF must be repealed, not reformed.

The IMF is not the only US institution that manipulates the global economy. Over the past several years, a mysterious buyer, identified only as “Belgium,” so named because the buyer acts through a Belgian-domiciled account, has become the third-largest holder of Treasury securities. Belgium’s large purchases always occur at opportune times for the US government, such as when a foreign country sells a large amount of Treasuries. “Belgium” also made large purchases in the months just after the Fed launched the quantitative easing program. While there is no evidence this buyer is working directly with the US government, the timing of these purchases does raise suspicions.

It is not out of the realm of possibility that the Federal Reserve is involved in these purchases. The limited audit of the Federal Reserve’s actions during the financial crisis that was authorized by the Dodd-Frank Act revealed that the Fed actively intervenes in global markets.

What other deals with foreign governments is the Fed making? Is the Fed, like the IMF, working to bail out Greece and other EU countries? Is the Fed working secretly to aid US foreign policy as it did in the early 1980s, when it financed loans to then-US ally Saddam Hussein? The lack of transparency about the Fed’s dealings with overseas central banks and foreign governments is one more reason why Congress needs to pass the audit the fed bill.

By taking money from American taxpayers to support economically weak and oftentimes corrupt governments, the IMF distorts the market, enriches corrupt governments, and harms both the American taxpayer and the residents of the counties receiving IMF “aid.” It is past time to end the IMF along with all instruments of American interventionist foreign policy.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

Military Conscription Shows the Evil of Ukraine’s Government – Article by G. Stolyarov II

Military Conscription Shows the Evil of Ukraine’s Government – Article by G. Stolyarov II

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The New Renaissance Hat
G. Stolyarov II
May 1, 2014
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I have, in the past, expressed ambivalence regarding the government of Oleksandr Turchynov and Arseniy Yatseniuk in Ukraine, but that government’s decision on May 1, 2014, to impose military conscription for men aged 18 to 25 clearly reveals it to be evil and unworthy of even verbal support, not to mention the material assistance and economic bailouts currently lavished on it by Western governments and the International Monetary Fund.

As I wrote in 2008 in “Why Freedom is Free and Rights Are Right: The Case Against Conscription, Compulsion, and Confiscation”, conscription is murder by lottery: “By fielding an army of conscripts, a government necessarily guarantees that some of those conscripts will be killed – although nobody knows in advance who will die. In effect, this is no different from selecting a large number of fit young men, assigning numbers to each of them, and picking a few of the numbers out of a hat – whereafter those whose numbers have been picked will be shot. Conscription is just such a murder by lottery – except that the picking of numbers is performed by the vicissitudes of the battlefield rather than the luck of a draw. The responsibility for the deaths of millions of young men from conscripted armies throughout world history lies solely on the shoulders of the governments who conscripted them. The enemy soldiers who killed them were mere instruments of murder; they were likely only following orders – and were likely themselves under compulsion to do so. The government officials who drafted the men, however, did so of their own free will and even with enthusiasm.”

It would be a complete contradiction of the principles of liberty and peace to support any government that conscripts its young men to become cannon fodder – disposable pawns in the power struggles of older, powerful leaders who will not themselves bear the physical costs of their desires to dominate over one group of people or another. Vladimir Putin’s regime is evil, too, and so are many of the militants aligned with it, as I have acknowledged previously. But supporting one evil just because it is arrayed against another is neither moral nor effective. American foreign policy engages in this support for the “enemy of the enemy” at almost every available opportunity, and this always comes back to hurt Americans in both the long and the not-so-long term.

Ironically, it was the overthrown Viktor Yanukovych who had abolished conscription in 2013 – perhaps the only good and liberty-friendly decision he made. Yanukovych deserved to be overthrown for instigating the killings of his own people, but this new government of thugs is no better. Indeed, it has managed to undo the one good legacy of Yanukovych’s reign! And yes, it is a government of thugs. This March 5 article from Channel 4 News in the United Kingdom – no Putin mouthpiece! – explains how many of the top posts in the Ukrainian government are occupied by leaders of Svoboda and Right Sector, two ultra-nationalist groups that grew out of explicitly fascist movements that use explicit Nazi symbols such as the Wolfsangel. Here are two images: at the top, Svoboda’s Oleh Tyahnybok delivers a Nazi salute; at the bottom, he poses with arch-interventionist and neoconservative warmonger John McCain. Right Sector’s leader Dmytro Yarosh is Ukraine’s Deputy Secretary of National Security – security, that is, for those who meet Yarosh’s standards of ethnic and linguistic “purity”.

Neither side in the conflict in Eastern Ukraine is just or right, or anything but destructive to the interests of the only innocent parties in the mix – civilians who seek to live and work in peace. No principle, no signal, no feverish nationalistic pride, no set of lines drawn on a map is worth the life of a single human being. As Voltaire poignantly and perceptively expressed it in his Philosophical Dictionary, “It needs twenty years to lead man from the plant state in which he is within his mother’s womb, and the pure animal state which is the lot of his early childhood, to the state when the maturity of the reason begins to appear. It has needed thirty centuries to learn a little about his structure. It would need eternity to learn something about his soul. It takes an instant to kill him.” No worthless, ephemeral power struggles and posturing can ever justify sacrificing the existence of the rich individual universe – the incomparably intricate and sophisticated mind and body – of any actual human being.

The Ukrainian government is forcing young men to kill their fellow Ukrainian and Russian young men, against whom they have no individual grievances. This is vile and reprehensible, and the Ukrainian government deserves to fall. It would be easy for it to fall and would not require active external intervention; the West would just need to withdraw its support and let the situation unfold as it would with only the involvement of local actors. If the West continues to prop it up with aid, this would only prolong the spree of destruction engaged in by people who should never have had a chance at high office in any civilized society, who should have been marginalized much like the Ku Klux Klan and various neo-Nazi parties are treated in the United States today. No government that uses its own people as cannon fodder against their will deserves to exist; no country whose “territorial integrity” must be maintained by a conscript army deserves for its territory to remain intact.

As to the young Ukrainian men about to suffer under the yoke of military conscription, my advice to them can be found in my poem “The Draft Dodger”, written in 2004 but still just as relevant ten years later. As one who proudly escaped Alexander Lukashenko’s Belrusian military conscription myself (I have subsequently become a US citizen – so I am thankfully safe from that particular tyranny), I wish these innocent young men all the best in finding peaceful, prosperous lives outside the heinous havoc which they did not create.

The Draft Dodger (2004)
G. Stolyarov II

I have been sentenced to a war.
And my offense? Naught but my age.
I’ll suffer pestilence and gore,
And die upon a foreign stage.
The verdict has been passed by those
Who wish to equal me to rags,
Plug sand into a breathing nose,
Borrow my life, return dog-tags.

They tell me, “Freedom is not free,”
And thus they seek mine to deprive.
But no! I’ll courage have to flee,
To choose to prosper and survive!
The right that mine was from the womb,
That I had bought with Reason’s gold,
I shall not lay before a tomb,
But will Self’s Shrine from robbers hold.

I claim no more than what is mine;
To rise each morning when I will,
To build, compose, create, refine,
And heed no Congressman’s dread bill,
Whose parasitic voting bloc
My soul as spoils of war would claim,
No noble war of awe and shock,
But rabble-rousers’ power game.

When nations seek me for their slave,
Their cause, their plight shall pass in vain.
Let no man give but what he gave,
Of his own will, for his own gain.
Freedom can’t stand on sacrifice;
With blood and bones I shan’t it craft.
I shall not offer prey to vice,
And, proudly, I shall dodge this draft!

Gold is Good Money – Article by Ron Paul

Gold is Good Money – Article by Ron Paul

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The New Renaissance Hat
Ron Paul
October 1, 2012
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Last year the Chairman of the Federal Reserve told me that gold is not money, a position which central banks, national governments, and mainstream economists have claimed is the consensus for decades.  But lately there have been some high-profile defections from that consensus.  As Forbes recently reported, the president of the Bundesbank (Germany’s central bank) and two highly respected analysts at Deutsche Bank have praised gold as good money.

Why is gold good money?  Because it possesses all the monetary properties that the market demands: it is divisible, portable, recognizable and, most importantly, scarce – making it a stable store of value. It is all things the market needs good money to be and has been recognized as such throughout history.  Gold rose to nearly $1800 an ounce after the Fed’s most recent round of quantitative easing because the people know that gold is money when fiat money fails.

Central bankers recognize this too, even if they officially deny it.  Some analysts have speculated that the International Monetary Fund’s real clout is due to its large holdings of gold.  And central banks around the world have increased their gold holdings over the last year, especially in emerging market economies trying to protect themselves from the collapse of Western fiat currencies.

Fiat money is not good money because it can be issued without limit and therefore cannot act as a stable store of value. A fiat monetary system gives complete discretion to those who run the printing press, allowing national governments to spend money without having to suffer the political consequences of raising taxes.  Fiat money benefits those who create it and receive it first, enriching national governments and their cronies.  And the negative effects of fiat money are disguised so that people do not realize that money the Fed creates today is the reason for the busts, rising prices and unemployment, and diminished standard of living tomorrow.

This is why it is so important to allow people the freedom to choose stable money.  Earlier this Congress I introduced the Free Competition in Currency Act (H.R. 1098) to permit people to use gold as money again. By eliminating taxes on gold and other precious metals and repealing legal tender laws, people are given the option between using good money or fiat money. If the federal government persists in debasing the dollar – as money monopolists have always done – then the people would be able to protect themselves by using alternatives such as gold that are both sound and stable.

As the fiat money pyramid crumbles, gold retains its luster.  Rather than being the barbarous relic Keynesians have tried to lead us to believe it is, gold is, as the Bundesbank president put it, “a timeless classic.”  The defamation of gold wrought by central banks and national governments is because gold exposes the devaluation of fiat currencies and the flawed policies of the national government.  National governments hate gold because the people cannot be fooled by it.

Representative Ron Paul (R – TX), MD, was a three-time Republican candidate for U. S. President. See his Congressional webpage and his official campaign website. 

This article has been released by Dr. Paul into the public domain and may be republished by anyone in any manner.