RE: Can the Fed go broke.

From: H M Janoos

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http://www.business-standard.com/india/news/couldus-central-bank-go-broke/121782/on

The answer in a nut shell is; In the worst case it can incur only accounting losses on paper. In reality, never - it has to simply print more money.

It seems that the economy and economics and Wall Street are mere paper tigers. The question is who are the real producers of wealth?

In one movie I saw recently saw (a nice comedy) the mother explains to her daughter sarcastically about the father's job who is a successful banker on Wall St.

He produces nothing, he sells nothing. He is like the man who hands around the cake. He doesn't bake the cake, he doesn't eat it. But he gets to keep the crumbs.

The big money is in the crumbs. It all comes down to the cost / value / price of capital. Capital is expensive. Moreover, trading capital is hard. And heavily regulated to prevent newcomers. And then there is the trust issue. That’s their USP. They can do it. You can’t. Ergo, their insane profits.

 

Also, the question of who are the producers of wealth requires answering the question : “through what processes is wealth created”?.

Wealth is valued in money – in dollars – and wealth involves the notion of ownership of “things”. But what “creates” it – in the sense what creates the capacity to “own”?  Adam Smith gave it a shot almost a 150 years ago and many, famously including Marx, have tried since. I think that wealth creation, especially in a more advanced economy, gets increasingly abstracted. It has – to put it in equally vague terms – got to do with the creation of value – again a highly abstract and subjective concept. “You make money if you do or have something somebody else is willing to give you money for”.

 

Now, the “having” component supposedly is limited, assuming finiteness of material resources. But the “doing” component is potentially unlimited, due to the theoretical infiniteness of human invention.¹ Therefore, the creation of wealth is not about material goods but in value generating action. “Paper money” is not a pejorative – it is still a real kind of money. Money doesn’t have to boil down to a purely material basis (e.g. a gold standard) because matter is mutable – and sometimes the act of mutation has more “value” than the base matter itself (e.g. gold jewelry is more valuable than the gold it is made of).

 

A purely matter backed system – while more secure – is also more primitive. For example, a barter based economy is an easier concept to understand and to implement , but is also far more limiting in how it values wealth and in what it can achieve. You have to make the notional jump to “paper” money to create the  far more creative economies of today.

 

Now, does Wall Street perform value generating action – that is debatable. Most probably much of it is simply rent-seeking behavior. They control a key asset in the modern economy –  capital – and they extort profits by exploiting their position of privilege.

 

¹: It is this potential infinitude that is one argument against wealth redistribution as a social policy. It implies that wealth is fixed and finite and therefore must be taken away from the rich to give to the poor. I feel that redistribution must happen only at the most minimal level – only because of its capacity an enabler of wealth creation, since to make money you need money. But apart from that – if motivated by the canard of “social justice” –  it is an entirely odious proposition.