Green Shoots and Greenbacks

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“And I don’t give a damn about a greenback dollar. Spend it as fast as I can.”
~ Hoyt Axton and Ken Ramsey, 1962

Each January,
the American Dialect Society meets to vote on the media’s most widely
used word or phrase during the previous year. Last January, they voted
on 2008’s most used word: “bailout.” ( It
is hard to argue against that choice.

I submit my candidate for 2009: “green shoots.” That was Chairman Ben Bernanke’s coined phrase.

In the first televised interview by any Federal Reserve Board Chairman in two decades, Bernanke on March 15, 2009 appeared on 60 Minutes.
Asked if he’s seeing any progress, Bernanke said, “I think all of our efforts, so far, have produced results. We’re buying about $500 billion in mortgages, in package and securities by the G.S.E.s, Fannie Mae and Freddie Mac. And that seems to have brought down mortgage rates significantly. It allows people to refinance. To get out of high rate mortgages. We are seeing progress in the money market mutual funds, and in the business lending area. And I think as those green shoots begin to appear in different markets and as some confidence begins to come back that will begin the positive dynamic that brings our economy back.”

“Do you see green shoots?” Pelley asked.

“I do. I do see green shoots. And not everywhere, but certainly in some of the markets that we’ve been functioning in. And we’ve seen some improvement in the banks, as well, certainly in some key cases,” Bernanke said.

The problem with his vision of green shoots was his description of what constituted the Federal Reserve System’s successful plan of action.
We’re buying about $500 billion in mortgages, in package and securities by the G.S.E.s, Fannie Mae and Freddie Mac.

This meant that the Federal Reserve System had created digital money out of nothing in order to purchase at face value the sharply discounted assets of two formerly private organizations that had been nationalized unilaterally by the former Secretary of the Treasury, Henry Paulson, the previous September. Let me translate Bernanke’s words into a description of what really happened.
As the nation’s senior legalized counterfeiting agency, the Federal Reserve System bailed out two government-owned agencies that the free market had come close to forcing into bankruptcy because of their inefficiency when they were privately owned. With this newly created counterfeit money, we backed up the decision of the former CEO of Goldman Sachs to burden American taxpayers with an extra $5 trillion of debt liabilities.

Bernanke went on to describe another supposed success of the bailout.
We are seeing progress in the money market mutual funds, and in the business lending area.

I remain curious about business lending. In December 2007, just as the recession began (according to the National Bureau of Economic Research, a private think tank), commercial bank lending peaked. It has gone down ever since without an uptick. According to the most recent chart issued by the Federal Reserve Bank of St. Louis, commercial bank lending to commercial firms and manufacturers is the same as it was a year ago, i.e., there has been zero growth. It had been declining for over a year when Bernanke gave his interview.

Yet Bernanke assured Mr. Pelley, “we’ve seen some improvement in the banks.” There was no doubt improvement in the balance sheets of the largest banks. And why not? The Federal Reserve System had swapped at face value several hundred billion dollars in marketable Treasury debt for depreciated toxic loans on the banks’ books — loans that had no known market price. The government’s accountants then counted these borrowed assets as belonging to the banks, thereby allowing them not to write down to face value the supremely bad loans that the banks had unloaded onto the Federal Reserve.

To see this and other interventions by the FED, take a look at this chart, published by Cumberland Associates. Pay close attention to what happened to the FED’s monetary base after September 24, 2008.

Bernanke on April 3 summarized what the Federal Reserve System did in order to produce green shoots.
As of April 1, 2009, we had roughly $525 billion of discount window credit outstanding, of which about $470 billion had been distributed through auctions and the remainder through conventional discount window loans.

But wait! There’s more! That was just the money that had gone to the big banks. The loans made to all financial institutions totaled $860 billion.


We are assured by our parents from an early age that money doesn’t grow on trees. We are told this when we ask for a few extra dollars. But money does grow on trees, if, on the side of the trees, there are these words: “FDIC-Insured.”

Money also grows on the biggest tree of all: the Federal Reserve’s tree. That tree creates the counterfeit digital money that it then uses to lend to the biggest banks, so that the FDIC does not have to intervene next Friday to bail them out. This conserves the rapidly declining reserves of about $13 billion in T-bills that are held by the FDIC. A year ago, the FDIC had $50 billion in reserves. Bailing out over 40 local banks has depleted the FDIC’s piggy bank. Yet the FDIC still has about 300 unnamed banks on its troubled banks list.

Instead of saying “money doesn’t grow on trees,” parents should say this: “Who do you think I am, the Federal Reserve?”

What would happen if money did grow on trees? There would be high demand initially for money trees. But then, as the green shoots of greenbacks flowered on these trees, the value of money would fall. Put differently, prices would rise.

Those people who bought their trees first and got them into production will have made a killing. The wise ones will have bought everything at the top of their wish lists. They will now be buying items further down on these lists.

Those people who got to the local nurseries later in the season would begin to worry. They paid top dollar for their money trees. Now the value of the trees’ output — the fruits of production — is falling.

Some of them will sell their flowering money trees to those who have not yet noticed that prices are rising. They will tell buyers, “you won’t have to wait for your money. Get your hands on it today.”

Others, who are more sophisticated, will borrow money, using the future output of their trees as collateral for the loans. They will then use this borrowed money to buy things that appreciate under price inflation.

Highly sophisticated investors will buy up whole orchards. They will rate them in terms of output, costs of production, and location. These will be divided into investment classes, called tranches. They will then sell these packaged ownership claims to future output. These will be purchased by insurance companies, retirement funds, and hedge funds. This is called “securitizing.”

The hedge funds will borrow money at 30 to 1 to buy these securitized packages of promises to pay. This is called “leverage.”

Large banks will lend money to multiple hedge funds. This is called “portfolio diversification.”

Those with less sophistication will go out and buy more trees, in order to increase the output of dollars. They hope to overcome the money’s fall in value by increasing production.

If this process continues, the money eventually falls to zero value. This is called hyperinflation.

If this process is called to a halt by the Federal Reserve System, those who got into the money tree loan market late in the process will find that almost nobody can pay off the loans they accepted when money was growing on trees. Borrowers default on their legal obligations. They declare bankruptcy. This is called Great Depression 2.

Beginning in September 2008, the Federal Reserve System intervened. It did so in order to forestall Great Depression 2. This has created Great Depression 1.4.


If I melt a gold medallion and a copper medallion and mix the ingredients, this is legal. The metal cools into a hard blob.

If I melt a trademarked gold medallion and a copper coin and mix the ingredients, and then pour the mixture into a mold that looks just like the trademarked medallion’s mold, this is legal.

If I try to sell the resulting medallion as if it were a trademarked medallion, this is a trademark infringement. This is not legal.

Why not? Because the transaction is fraudulent. The debased medallion is not easily recognized as a fake by the buyer. He pays full price for a less valuable medallion. He trusts the medallion’s appearance. This cheats him, and it cheats the producer of the trademarked medallion, whose product line now faces resistance from buyers, due to the increased number of fakes in circulation.

But what if I produced a medallion with slightly more gold in it than the trademarked versions? No one is harmed. The buyer gets a little extra gold. The reputation of the original medallions rises. It is unlikely that any jury would convict me. If the medallion company took me to court, its lawyers would have a hard case. “Ladies and gentlemen of the jury, this man is undercutting our firm by offering a technically superior product while imitating our trademark. He is taking business away from us by his unscrupulous practice of offering people a better deal for their money.” My guess: a hung jury.

But why would I produce such a medallion? To gain faster acceptance by the public. The trademarked medallions have a ready audience. The company that produces them is counting on this when it offers a medallion with lower gold content than a competitor is willing to offer.

The lawyer makes his case. “Ladies and gentlemen of the jury, this man is defrauding my client of his profit margin, a margin based on extensive ignorance of buyers regarding my client’s profit margins. My client insists that he has a legal right to continue to exploit this consumer ignorance.” My guess: a hung jury.

What lawyer would argue that in front of an audience? How soon would that line of reasoning be on the Internet?

Better to let sleeping medallions lie.

With this as background, consider a coin. Coins are issued only by governments. This is because all governments prohibit any other producer from producing the coins.

There is a profit margin. It’s called seigniorage. Governments have used this as a source of revenue from the beginning of money. Private producers would cut into this profit margin. The state makes this illegal. It invokes something called “state sovereignty.” This is properly defined as “our God-given right to stick a gun in your belly and tell you to stop, or else.”

Then there is debasement. The state gets people to accept its coins, on the assumption of a fixed quantity and fineness of gold, silver, or mixture. Then it adds more base metal than precious metal. It has more coins to spend on whatever it buys.

People catch on. Sellers start asking higher prices. Or they may play the same debasement game. The prophet Isaiah warned the residents of Judah: “Thy silver is become dross, thy wine mixed with water” (Isaiah 1:22).

The classic statement of this strategy was in the Soviet Union. Workers said of state-run industries: “They pretend to pay us, and we pretend to work.”

The result is universal debasement. This includes moral debasement and judicial debasement. Quoting Isaiah:
Thy princes are rebellious, and companions of thieves: every one loveth gifts, and followeth after rewards: they judge not the fatherless, neither doth the cause of the widow come unto them (Isaiah 1:23).

National rulers do not like to hear such warnings. They believe that the debasement game can go on.

Commercial bankers in a fractional reserve system also do not like to hear this. The process of monetary debasement is the basis of modern exchange. What nut-case dares to challenge this?

Central bankers don’t like to hear this, because it challenges their competence to manage the debasement process in a scientifically precise way. It implies that there will come a day of reckoning.
Therefore saith the Lord, the LORD of hosts, the mighty One of Israel, Ah, I will ease me of mine adversaries, and avenge me of mine enemies: And I will turn my hand upon thee, and purely purge away thy dross, and take away all thy tin: And I will restore thy judges as at the first, and thy counsellors as at the beginning: afterward thou shalt be called, The city of righteousness, the faithful city (Isaiah 1:24—26).


Rulers think they can escape the day of reckoning. So do central bankers. They are wrong. They can only defer it.

Bernanke’s green shoots are fertilized by digital greenbacks. To get more green shoots, he will have to add more fertilizer. I have no doubt that he will.

Gary North [send him mail] is the author of Mises on Money. Visit He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

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