Elastic Money


QUESTION: Mr. Armstrong; I have not read anywhere else how the money created by the Fed you call elastic will evaporate when the bonds they bought mature. You seem to do much more in-depth research than anyone else who just spins conspiracy theories leaving one question what is real or not. Can you elaborate on this topic a bit more?

Thank you for a most fascinating blog I recommend now to everyone.


ANSWER: Perhaps you are right. Sometimes when you know the topic, you do not explain it in detail because you assume everyone knows the facts as well. Elastic money was a brilliant idea that, if implemented properly, would help to stabilize the economy during economic declines. The problem is that Congress usurped and transformed it into buying government bonds that do not help the economy at all. The original design was to “stimulate” by directly buying corporate paper. The Fed would create money to stimulate, and when the short-term paper was repaid, the “elastic money would expire. Targeting corporate paper funded corporations when banks were not lending, and thus prevented excessive unemployment.

The Fed would expand the money supply during periods of economic decline and it would contract the money supply as the corporate paper was repaid. There was no such authority to perpetually create money at will on some covert perpetual basis. A banking crisis, as we have now in Europe, occurs when banks cannot meet the demand for withdrawals because they lent the money long-term. They would have to sell their portfolios at discounts to raise cash to meet the demands of depositors. Elastic money would meet the demands of depositors without having to liquidate the portfolios.

Elastic money was not some evil conspiracy. It was to keep money flowing when banks were contracting. Keep in mind there was also limitations on banks to regions. The Clintons removed all restraints and allowed interstate banking which siphons money from local regions and deploys it someplace else. If we returned the central bank to perform its original function, then the economy would be much more stable. Our problem is we live in a political economy where politicians just cannot keep their fingers out of everyone’s pockets.