by Sean Kelly
We would like to thank Federal Reserve Chairman Jerome Powell for doing our work for us Sunday night on the CBS program 60 Minutes (5/17/20).
A good deal of our day has to do with discussing the US dollar and our monetary system. It is no surprise that so few American understand how it works. The schools don’t really deal much with it. And frankly, parts of the monetary system were designed to shroud the sketchiest parts of the operation.
We don’t blame people for not knowing more about it: how dollars are created and what gives them value. People have families to provide for and work responsibilities that demand their attention. A good mechanic knows more about our cars than we will ever learn. A pharmacist has a dizzying array of medicines to counsel customers about.
Individual areas of expertise like that don’t leave people a lot of extra time to pay attention to arcane monetary issues like debt monetization or liquidity operations.
But Chairman Powell pulled the curtain back on what the Fed really does in his interview with Scott Pelley.
And that’s a big help! Because in talking to our friends and clients about the importance of gold in their retirement accounts and financial portfolios, the subject almost always comes up. And once they understand the way the Fed makes money out of nothing, money that gets stovepiped to bailout reckless banks or to crony companies and even foreign governments, the gold story starts to become more clear.
And when they learn that dollars created out of nothing take on value to the degree they dilute the value of the dollars they have been saving, the reasons to own gold come into sharp focus.
So what did Chairman Powell say that helps make much of this clear? Just the truth.
Discussing the Fed’s response to the COVID-19 shutdown, the interviewer asked if the Fed has just flooded the country with money.
Here’s a partial transcript:
Reporter: “Fair to say you simply flooded the system with money?”
Fed Chairman: “Yes. We did. That’s another way to think about it. We did.”
Reporter: “Where does it come from? Do you just print it?”
Fed Chairman: “We print it digitally. So as a central bank, we have the ability to create money digitally. And we do that by buying Treasury Bills or bonds for other government guaranteed securities. And that actually increases the money supply. We also print actual currency and we distribute that through the Federal Reserve banks.”
Reporter: “In terms of size, Mr. Chairman, how does what the Fed is doing right now compare to the unprecedented action it took in 2008?”
Fed Chairman: “So the things we’re doing now are substantially larger. The asset purchases that we’re doing are a multiple of the programs that were done during the last crisis. . .”
Bear in mind that when the Chairman says the Fed buys assets in the afternoon, it is doing so with money that didn’t exist in the morning. It didn’t exist until somebody hit “enter” on a computer keyboard. And made it up.
You might think that creating “money” that isn’t backed by anything is like writing a check on an account with no deposits, or even like counterfeiting. You would be right.
It is like counterfeiting. But it is legal counterfeiting.
So, our hat is off to Powell. Other Fed chairman have been obfuscatory about what they do, and for good reason. Most people work too hard to believe that real wealth is created out of thin air. And once they learn that there is no discipline on government spending and no limit on the dollars the Fed can create, they begin to see gold in a new light.
Actually, we shouldn’t say new light, because gold has been the shining and enduring money of the ages for thousands of years and in the far-flung corners of the earth. People turn to gold for both protection and for profit when the authorities start doing things like making “money” out of nothing at all.
So, thank you Chairman Powell for helping us out.
For today, our work here is done.
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