Ex Nihilo

When the economy gets so bad that interest rates get near zero, like we have now, the Federal Reserve Bank creates new money "out of nothing."

Keep in mind that the concept of "nothing" is really something subsequent to a large quantity of illiquidity (overconsolidated capital at a low rate of interest). It is an ex-post-facto quantity to accommodate growth with the consolidation of the value. The Federal Reserve Bank can, for example, buy long-term bonds from the Treasury Department. The demand for the bonds lowers long-term interest rates (inflates their price) to support the rate of inflation and resist a deflationary trend. Treasury resells the bonds to finance the public debt at a low rate of interest (at the highest possible price).

According to the Fed's chief financial engineer, Chairman Bernanke, it is necessary to support long-term bond prices in order to get investors interested in economic growth. Buying long-term bonds will counter the strong deflationary trend (the illiquidity of consolidated capital) by causing inflation. The lower long-term rate will make short-term borrowing more expensive. As it is now, the interest rate is so low, near zero (at a deflationary level), that money is being borrowed at cheap, short-term rates and being invested in commodities for a short-term capital gain. Not only does that support the deflationary trend, but contrary to economic theory, the added investment does not add supply to disinflate commodity prices. Instead, the investment inflates commodity prices, reducing consumer discretionary spending (final demand and employment) even more than it already is, consolidating the capital (and wealth) even more, which is the source of the problem to be solved (a lack of income due to consolidation).

Since the capital has been converted into wealth (cash, for example, gold, or some other commodity) it is no longer capital (the illiquidity or the "nothingness" part of the equation). To provide the missing liquidity (demand), the capital (the "somethingness" part of the equation) is then, subsequently, borrowed from the wealth at the highest possible price to finance the debt created by the new money. The value of the high price (the low interest rate) is quickly and easily realized by going short the long bond as the core CPI increases, which the Fed has stated to be its current objective.

The reason the quantity of value the debt represents (the consolidated capital) is said to have been created "out of nothing" is because the capital is not supposed to consolidate in a free market, but recirculate. It needs to appear that the "creation" of the new money is not "caused" by the consolidation, giving empirical value (liquidity) to the quantity of nothing (illiquidity). The implication, of course, is that there is no free-market need for the added liquidity--it is disfunctional (and that is essentially correct--there is less need if it is a free market). The added liquidity defeats the purpose of illiquidity--deflation (what the Fed is entrusted to prevent). The expected effect of deflation is consolidation--a market that is less free (the missing value the Fed is entrusted to add, ensuring open markets, by committee, of course).

The missing value of liquidity is provided through the Treasury Department's Bureau of Debt Management and the Federal Reserve Bank, converting wealth back into capital by renting it (the rate of interest). Theoretically, if the rent (the price) gets too high, then there is less "interest" in buying the debt and more interest in-vesting growth to pay it. In practice, however, like we have now, the rent keeps rising (deflation due to consolidation).

In order to gain interest in growth (to increase long-term lending rather than short-term borrowing), the Fed plans to buy (subsidize) treasury bonds to drive down (quantitatively ease) the rate of interest for debt. Raising the rent (the price) reduces the demand for short-term gain. Falling rents (a higher inflation rate and higher yields) indicates a recovery (liquidity) to spur even more investment (even higher yields), assuring deflation has been stopped and reversed. (Notice how this is a series of large, easily detectable, quantitative signals to modify--or increase the probability of--behavior. The inversion of price to yield, for example, indicates a probability of risk with an expected behavioral value, or incentive, to project economic stability.)

Since borrowing your way out of debt creates more debt to be paid (the detectable quantity being the size of the public debt, and monetary policy engineered to cause inflation to pay for it), the result is slow to negative growth...tending to zero, or nothing.

Creating money "ex nihilo," as monetarists refer to it when describing "quantitative easing," is a highly controversial means of finance because it incurs a public debt and is administered by a central banking authority. It is the perfect model of trickle-down economics as Alexander Hamilton envisioned it, giving money to wealthy bankers who are entrusted to create the wealth. Immediately we see a fatal flaw.

Instead of recirculating, or recycling, the supply of old money, new money--owned by the public in the form of public debt--is added for investment. Once the new money is invested and the new debt is incurred, the old, consolidated money is at less risk to finance government stimulus programs, for example, which is a counter-cyclical measure. Since the cyclical trend provides a net benefit to the wealthy, it is only natural for the wealthy to resist financing policies and programs that counter the trend. Even with the added money, however, the net benefit is secured in the form of public debt (at falling prices with increasing yields) rather than privately enterprised, which would mean adding GDP.

Adding GDP is disinflationary (what Bernanke says he wants to avoid in a deflationary environment by stimulating inflation) and results in a declining rate of profit (a stronger currency and, for example, lower energy and food prices which are not components of core CPI). As consumer prices decline, there is less credit risk (more available capital), and thus more demand for credit (willingness to borrow and lend) at lower rates without a quantitative subsidy on the rent (a price support that is a public debt and a tax liability). Disinflation does not result in less capital, but it does result in less consolidation of the capital and less need for debt (less probability for crises).

According to the Federal Open Market Committee of the Federal Reserve Bank, the first application of quantitative easing in 2009 was a success (despite a yield curve that indicates crises) by narrowing the long-short spread. Since unemployment is projected to remain high long term, the Committee said however, inflation will still be too low. To prevent deflation, another round of easing is necessary to invert the yield (a price support for the long bond to be borrowed by consumers at a lower rate). This not only means that high unemployment is an expected value, but gains support with higher consumer prices (increasing equity values as the long bond goes short). In other words, prices will rise while average incomes are falling (falling prices with increasing yields).

The austerity being commanded--technically engineered--to keep the rich rich at the expense of everybody else perfectly fits the Hamiltonian model of political-economy. The probability of a deepening crisis is not an unreasonable projection of the FOMC's assessment of the risk and the quantitative easing it says will be extended.

The model of finance ex nihilo is immediately flawed because you can't get something from nothing. It would be nice if one dollar added produced one dollar of GDP, resulting in rising incomes at full employment with low inflation, but that does not happen if average incomes must sacrifice more than a dollar to get one back.

Adding supply (low prices) requires less of trying to create something from nothing which, of course, can't be done, and more of what can be--financing the recovery from the accumulation, adding more supply rather than adding more debt and unemployment.

As we keep adding to the money supply, and the public debt becomes an ever-larger proportion of GDP, the fatal flaw of Hamiltonian modeling becomes evermore apparent. The essential values of the model--maintenance of debt through a regressive burden--must be reversed if we want to avoid crises.

Given the current mode of technical engineering, reducing the rate of interest in short-term debt increases the rate of interest in long-term investment. Sounds simple enough, but in practice, because it is debtor-financed, we are always trying to produce something by trying to reduce others to nothing. Quick foreclosure and mass consolidation (trying to get nothing from something), despite what big bankers might say, does not hasten prosperity. By the time a recovery is fully indicated (at low investment prices and peak yield), inflation will be high enough for bankers to raise interest rates, and we're back to trying to get something by reducing it as close as possible to a zero rate of interest (high investment prices at low yield, or a declining rate of profit that indicates crises).

The macro-political-economic model is engineered to continuously cycle confirmation of social status as an empirical measure of income (the ability to enjoy falling prices at increasing yields). The lower the income (the more rent you have to pay), the higher the frequency, as well as the probability, of being positioned into a zero-sum detriment (rising prices at low yields).

While it isn't possible to create something from nothing, it is possible to create a zero-sum and progressively transfer the risk of doing so to the future. (Remember, creating risk and shifting it to the future is a leveraging strategy, borrowing the reward from the future to gain, accumulate, and consolidate present value. The risk--the detriment--is borne by those who have the greatest credit risk, who are then forced to take the risk due to insufficient funds. The strategy effectively hedges the risk by causing it and distributing it based on income.) Eventually, however, the zero-sum hypothesis of general welfare becomes so absurd--so obviously, empirically, disconfirmed--that creating a dollar out of thin air is not an added dollar of risk, but the opportunity of a peaceful and prosperous pluralism monetized and multiplied into the commonwealth.