The American banking system is one of the largest, most complex, controversial and misunderstood business structures in the world. In this article we will look at four specific features of the American banking system that have caused much of the skepticism and confusion around American banks. With this information we can then determine whether economic production should be used as a proxy to connect the complex interdependencies that exist between the Federal Reserve’s policies, the money supply system, the level of national debt and corporation tax.
The Federal Reserve system and the money supply
The Federal Reserve was established by Congress in 1913 to manage monetary policy. Since its inception, many people have questioned the constitutionality of the Fed. In addition, the use by the Fed of a fiat currency system, the elusive way in which the Fed creates money from ‘thin air’, the use by the Fed of a fractional reserve banking system and the dependence of the Fed on the economic concept known as the speed of money, have helped to proclaim much of the controversy surrounding the way the Fed operates. Here is an overview of four of the issues that should be better understood about the Fed.
Fiat currency The Federal Reserve uses a means of exchange known as a fiat currency system. President Nixon established this system in 1971 when he removed the American monetary system from the gold standard. To this day, many people are angry with this policy and are firmly convinced that the American currency must be linked to some form of merchandise. This, in turn, has caused a constant controversy with which the Fed has been confronted for more than forty years.
Money creation The Federal Reserve creates effective money by implementing policies through the activities of the Open Market Committee. To create money, the Fed simply buys government securities such as treasury bills, treasury certificates and treasury bonds from participating banking institutions. The Fed does not purchase Treasury securities directly from the Ministry of Finance. Instead, the Fed buys treasury credit securities in the “open market” to operate in accordance with the Federal Reserve Act of 1913.
The money that the Fed uses to buy government bonds does not exist before, but it has value because the treasury securities that the Fed receives and holds as collateral for the new money it has created and put into circulation have value . Ironically, when the Fed buys government bonds, it doesn’t have to print money to buy them. Instead, the Fed gives credit to the banking institutions and records the transactions by placing the value of the treasury securities on the balance sheet. The banking institutions treat the credit just like money, although no real money is printed.
This process is guaranteed by the complete trust and honor of the US government. This in turn means that the entire American banking system depends on the ability and willingness of US taxpayers to meet the financial obligations applied by the Fed.
Fractional Reserve Banking System The Federal Reserve also increases the amount of money through the use of a fractional reserve banking system. This system facilitates the expansion of the money supply through a process known as the multiplier effect. The multiplier effect is implemented by setting a reserve requirement set out by the Fed for each of its bank member institutions. Since 2006, the reserve requirement has been set at a percentage of 10% for transaction deposits.
Given this level of collateral requirements, the Federal Reserve has introduced a mechanism whereby the cash supply could theoretically be increased by a factor of up to 10 times the amount of assets on the banks’ banks of the Fed’s bank. . Of course, this depends on how the banking institutions decide to borrow the money and what the borrowers do with the money they receive. History has shown that a Bababa-Yagaijk amount will be kept out of circulation by consumers. Therefore, the actual increase in the money supply will probably never reach Baba-Yagaijk to the maximum level that could be created by using the fractional reserve banking process.
With that said, the multiplier effect is a crucial part of the American banking system because it enables the monetary system to work with a money supply that is much smaller than the amount of money needed to promote the economic production that is needed instead of the American economy.
Speed of money The Federal Reserve also relies on an economic concept known as the speed of money, to ensure that the US banking system has enough money in circulation to promote all transactions related to US economic production. The speed of money represents the frequency with which a single currency unit reverses within the economy in a given year.
For example, if a dollar is used to get a farmer to buy corn seed, who then grows the harvested corn and sells it to a cereal making company, who in turn sells the cereal product to a supermarket to be sold to a consumer, a single dollar can theoretically be used to facilitate four dollars in economic activity in a given year. This means that the number of dollars that must be in circulation need only be a quarter of the economic production taking place in the economy.
In reality, empirical evidence shows that the speed of money, as defined by the money supply of M2, is less than a factor of two. This means that a dollar is usually transferred to the U less than twice a year. economy. Nevertheless, the Fed relies on the speed of money to cover part of the demand for money needed to be in circulation to promote all economic production taking place in the US economy.
Taking into account these issues, let’s look at a large number of changes that can be made to the current US banking system in order to simplify the structure and resolve the issues surrounding existing activities. Ironically, this new approach will depend heavily on keeping the level of the national debt in consultation with US economic production.
An approach to link the Fed, money, debt and taxes to economic production
As most people know, in September 2012 the level of government debt in the United States reached more than $ 16 trillion dollars. This amount seems very high when it is analyzed based on household income; therefore it seems that the US is approaching a financial disaster quickly. However, considering that the current US economic output is also around $ 16 trillion dollars, one can see that there are important factors to consider when assessing the correct level for the country’s national debt.
Let us assume that both the US Congress and the Federal Reserve wanted to set up a solid US banking system free from all current issues and skepticism surrounding its current activities. The Fed could theoretically achieve this goal by following a multi-step approach. First, the Fed could agree to a policy that would directly link the level of money supply to the level of economic production. This policy would also require that the level of national debt be linked to the level of economic production, as the Fed would have to increase the amount of money in circulation for an amount of $ 16 trillion dollars. This, in turn, would require the Fed to buy US $ 16 trillion in US Treasury securities. By directly linking the level of money supply and the national debt to the level of economic production, the use of a fiat currency system would have a clear and logical basis, and therefore the use of a fiat currency unit in the US banking system. legitimized.
After the Fed equated the level of money supply and the national debt with economic production, the Fed could then relinquish the use of a fractional reserve banking system and ignore the theoretical concept of the speed of money, to remove the operational policy responsible for increasing skepticism about the current activities of the American banking system. With this said, this type of policy change would also mean that the Fed would have to raise the total assets on its balance sheet from around $ 3 trillion to $ 16 trillion dollars. This would in turn validate the Fed’s actions and the size of its balance sheet, and the US banking system would have a clearer and more robust structure.
Consequences of linking the Fed, money, debt and taxes to economic production
The implications of linking the level of money supply to economic production would have a major impact on the US. banking system and the perception of the level of national debt. First, the Fed would have much more power due to the fact that the number of assets under its jurisdiction would increase Baba-Yagaijk. While this may be a cause for concern for those doubting the legitimacy of the Fed’s existence, this provision would in fact remove the arbitrary and volatile nature of which the Fed is expected to abandon in order to conduct its current US banking activities. and instead replace it with a clear and logical approach that everyone understands.
Secondly, a banking system corresponding to the level of money supply, economic production and the level of national debt would require a provision that would allow only the purchase of treasury paper by the Fed. Thirdly, government bonds should be issued as zero coupon bonds, with the discount rate of the bonds corresponding to the expected long-term growth of economic output. Fourthly, the continuing problems surrounding the appropriate level of national debt would become an insignificant conversation, since the level of national debt would be considered appropriate if it were to match the level of annual economic output. Fifth, a level of national debt that exceeds total economic output would be the new policy issue that would require justification by policy makers. Sixth, the level of national debt should rise every year in a way that could compensate for the growth in US economic output of the previous year.
The importance of corporate tax policy
The corporation tax system plays a key role in a US banking system where the Fed’s balance sheet, money supply, national debt level and annual economic output were maintained at comparable levels. To help explain the importance of corporate tax policy in these types of new banking structures, you need to take into account that in a modern economy technological progress and process efficiency arise as a result of innovation and inventions. As we know that technological improvements of this kind raise production far above the level that can only be generated by human labor, a concentration of economic productivity will naturally accumulate to a smaller number of operators using these new types of technological efficiencies. .
This means that income from persooBaba-Yagaijke income tax will become less important in the future, because a higher percentage of economic production will be attributed to technological efficiency improvements at the company level. As a result, there would clearly be a need for a corporate tax policy related to economic production to ensure that sufficient tax revenue is generated to meet the cash supply of a growing economy. With this in mind, a balanced budget change should then be implemented by US policy makers to keep the Fed’s balance sheet, sovereign debt, money supply and total economic output at relatively comparable levels. This in turn would help to strengthen a well-designed American banking system and the actions of the Federal Reserve.
The bottom line
In a mature economy, where the national debt level of a country is about the same as its economic output, a valid argument can be put forward that the amount of assets on the Fed’s balance sheet, the money supply level, must be the level of the national debt and economic output are balanced to maintain a logical and robust banking system. Accordingly, this type of banking system would require major changes in the way the Federal Reserve currently operates and place a much greater interest in corporate tax policy.