This Blog Has Moved!

My blog has moved. Check out my new blog at

Your Ad Here

Saturday, November 3, 2007

The Plunge Protection Team - A Good Idea!

There are rumors of a group of people working for the government and Federal Reserve called the "Plunge Protection Team". In the event of a sudden huge drop in the stock market, the Plunge Protection Team is supposed to manipulate the stock market upward. It does this by repurchasing government bonds, which increasing the money supply and cause inflation. In other words, the Federal Reserve is expected to lower interest rates if there's a sudden sharp drop in the money supply.

Due to the Compound Interest Paradox, the money supply is subject to abrupt contractions at any time. As loans are repaid, the money supply decreases. If people start taking out fewer loans, the money supply contracts and there is deflation. With debt-based money, it can become a self-sustaining deflation cycle. Prices go down, so people are reluctant to invest in new businesses, and there is even more deflation.

With debt-based money, there actually are two ways the dollar can collapse. It can collapse in hyperinflation (i.e., the value goes of a dollar goes to zero). The dollar can also collapse in hyperdeflation (i.e., the value becomes infinite). Due to the Compound Interest Paradox and forced taxation, it is possible for the value of a dollar to become infinite. Government force demands that people pay income taxes, and there aren't enough dollars in circulation for everyone to repay their loans and pay taxes. Government force also demands that people come up with dollars to repay their dollar-denominated loans, even though the total amount of outstanding loans is far greater than the total amount of dollars in circulation. Remember, money is destroyed as loans are repaid. With debt-based money, there isn't enough money in circulation to allow all outstanding loans to be simultaneously repaid, and government force demands that loans are repaid with paper dollars. Due to the shortage of dollars for paying loans and taxes, the value of a dollar can become infinite.

However, the government has a credible means for combating deflation. It can print more money! Government debt can be repurchased, i.e. interest rates are lowered. If necessary, the government can have deficit spending.

The stock market is the most reliable measure for the money supply. Most stock market volatility is really money supply volatility.

Given the constraint of working with a defective monetary system, the Plunge Protection Team is actually a good idea. In the event of a severe money supply contraction, this will show up as a severe stock market price drop. When the money supply contracts, the Federal Reserve should expand the money supply to stave off hyperdeflation.

However, there is one problem with increasing the money supply to stave off hyperdeflation. The money created winds up in the hands of bond derivative speculators. Knowing that the Federal Reserve will act to stop hyperdeflation, bond speculation becomes far less risky. Instead of spreading the benefits of inflation everywhere, the new money is concentrated in the financial industry. Of course, much of this newly created money is used to purchase stocks, and so wealth winds up in the hands of the financial industry.

The financial industry wins on both sides of the business cycle. At the bottom of the recession, the banks get to confiscate assets. When the Federal Reserve increases the money supply, the new money is in the hands of banks. When prices are high again, banks can sell off their confiscated assets at a huge profit.

Of course, it would be better to switch to a fair monetary system. However, given the constraint of working under a defective monetary system, the Plunge Protection Team serves a valid purpose.

No comments:

This Blog Has Moved!

My blog has moved. Check out my new blog at