Here's Denninger mouthing off:
I have repeatedly and very publicly held that Mr. Paul has no clue what the hell he's talking about when it comes to these matters...To those who have supported Mr. Paul all these years, you've now seen his true colors. Will you be man (or woman) enough to admit that he never actually understood what the hell he was screaming about, nor did he ever have an actual intent of restoring "sound money" to America?
What is his proof? Congressman Paul's calling on the Treasury to halt payments to the Federal Reserve on Treasury securities the Fed owns. I reported on this a week ago:
During an interview with Iowa radio host Jan Mickelson, Ron Paul called for the Treasury to stop making payments on Treasury securities held by the Federal Reserve. Congressman Paul pointed out that the Fed simply prints up new money when they buy Treasury securities, so there is no obligation to payback the Fed. He pointed out that through taxes, Americans are paying the interest on the Treasury securities owned by the Fed and this should also stop. As part of its $2.8 trillion balance sheet, the Federal Reserves holds $1.6 trillion in Treasury securities.
What's Denninger's problem with this? Denninger says it is inflationary. He writes:
So let's think through Mr. Paul's "creative" solution. Destroying the bonds The Fed holds while leaving the "excess reserves" that are on deposit, which The Fed creates with a push of a button to pay for those bonds, is in fact exactly identical to unbacked emission of currency. That is, raw printing of money.Well not exactly. If banks are holding funds as excess reserves, those funds aren't in the system. They are back at the Fed. As I have been pointing out for more than a year, these excess reserves are extremely dangerous because, if banks start putting them into the system, they become part of the money supply and it would be difficult for the Fed to soak them up without creating a huge spike in interest rates and other distortions in the economy. But if the Treasury simply defaults on the obligations held by the Fed, this means there is $1.6 trillion less that the Treasury needs to raise in the markets and thus creates huge downward pressure on interest rates and makes it much easier for the Fed to make counter-moves to halt the excess reserves from entering the system. There are many possible ways to do this. The text book way, that any student who has taken a Macroecnomics 101 course should be aware of, is for the Fed to simply raise the reserve requirement. Raising the reserve requirement would prevent any of the excess reserves from hitting the system.
Denninger just doesn't get Macro 101. Further he has a bit of a comprehension problem when the entire concept of raising the reserve requirement is explained to him. How so?
When Denninger quotes Ron Paul's idea of stopping payments on Treasury securities held by the Fed, he quotes Dean Baker reporting the news. But look here as to what else Baker says in the same post that Denninger links to:
However, at some point the economy will presumably recover and inflation will be a risk. This is why the Fed intends to sell off its bonds in future years. Doing so would reduce the reserves of the banking system, thereby limiting lending and preventing inflation. If the Fed doesn’t have the bonds, however, then it can’t sell them off to soak up reserves.In short, Denninger doesn't understand the very article he links to, which explains how the Federal Reserve has tools, specifically the reserve requirement , to deal with the excess reserves.
But as it turns out, there are other mechanisms for restricting lending, most obviously raising the reserve requirements for banks. If banks are forced to keep a larger share of their deposits on reserve (rather than lend them out), it has the same effect as reducing the amount of reserves. To take a simple arithmetic example, if the reserve requirement is 10 percent and banks have $1 trillion in reserves, the system will support the same amount of lending as when the reserve requirement is 20 percent and the banks have $2 trillion in reserves. In principle, the Fed can reach any target for lending limits by raising reserve requirements rather than reducing reserves.
If it weren't so crude, I might say about Denninger:
I have repeatedly and very publicly held that Mr. Denninger has no clue what the hell he's talking about when it comes to these matters...To those who have supported Mr. Denninger all these years, you've now seen his true colors. Will you be man (or woman) enough to admit that he never actually understood what the hell he was screaming about, nor did he ever have an actual intent of restoring "sound money" to America?(Thanks2KeithKelly)