Conspiracy Theory

[Yesterday]

The Confederacy printed it's own money,but it was state by state.It was essentially worthless because it was'nt backed by any appreciable gold reserve.

If you ever get your hands on Confederate bills,check out the prices....Some of them are worth a fortune now!

I know the story sort of, to me it is sad that currency comes at a cost. The money might not have had an asset value beyond need but did it work? Did the system work? As with asset backed dollars he who owns the assets is a lucky person and the rest...to me, an asset backed dollar equals to many opportunities for unfairness which tend to lead to war, look at how we already fight over assets of various kinds. I feel like a bit of an idealist where my views about currency are but if currency is going to be our means of trade, well it's not working in its current form and asset backed really sends a red flag up for me. Didn't fractional banking form in part because there just wasn't enough assets to make enough money? I realize war created a vast need beyond resources but I wonder how long we would of lasted without war till we ended up in the same situation due to commercial expansion.

[Yesterday]

Just so. It is no conspiracy as such; it is the predictable consolidation and retention of Power on an institutional level.

Well said.

[Pliny]

Why do people continually declare the superiority of the gold standard. The gold standard did not prevent the Depression, and to some degree probably made it deeper. It isn't an economic panacea, and it never particularly stopped governments from going into debt.

The gold standard is definitely not superior from the perspective of government and not superior in other respects. It is superior to anything against governments overspending and running up huge deficits. If you want war and welfare you must untie the hands of government monetarily and allow them to spend without restraint - removing the gold standard allows this.

The downfall to a gold standard is that people have to save in order to consume. Banks would have to have deposits in gold in order to make loans. Some argue this would retard technological advances and other industrial advances and even societal humane advances(welfare). I don't believe it would and I further believe that it would be a far more stable society as long as government performed it's mandated duty of justice.

Edited June 19, 2010 by Pliny

[Pliny]

Didn't fractional banking form in part because there just wasn't enough assets to make enough money?

No. It formed because warehousing gold was not profitable enough. Bankers learned they could lend money at interest that was held in their vaults and only about 10% of depositors ever made claims on their deposits at one time. So they could make loans on about ninety percent above their holdings in reserves and be safe. A run would kill them if they followed this line so the risks were calculated and the invention of a central bank could save them from runs. Of course , the idea of central banking was sold to the public as banking stability.

[Pliny]

The Confederacy printed it's own money,but it was state by state.It was essentially worthless because it was'nt backed by any appreciable gold reserve.

If you ever get your hands on Confederate bills,check out the prices....Some of them are worth a fortune now!

Lincoln printed his own money, the Greenback, to pay for the war. He guaranteed the Federal Government would honor the Greenback and it would be redeemable for it's face value in the future. The government didn't redeem them until the 1870's, I believe under Grover Cleveland.

It's an interesting story in that people lost confidence that they would ever be redeemable in gold at their face value. Cleveland (I could be corrected on that) made the decision to finally redeem the Greenbacks. Unfortunately, bankers and other monied interests got wind of the news before it was broad public issue and went around the country buying up the now "worthless" greenbacks for 10% of their face value. When the decree came down big profits were made by those who had bought up all those worthless Greenbacks and could now redeem them at the US treasury.

Edited June 19, 2010 by Pliny

[Yesterday]

No. It formed because warehousing gold was not profitable enough. Bankers learned they could lend money at interest that was held in their vaults and only about 10% of depositors ever made claims on their deposits at one time. So they could make loans on about ninety percent above their holdings in reserves and be safe. A run would kill them if they followed this line so the risks were calculated and the invention of a central bank could save them from runs. Of course , the idea of central banking was sold to the public as banking stability.

Hi, I remember hearing this now that you mention it. Where did the bakner's first get the cash to lend. Were they just wealthy or did they print money?

[Yesterday]

Lincoln printed his own money, the Greenback, to pay for the war. He guaranteed the Federal Government would honor the Greenback and it would be redeemable for it's face value in the future. The government didn't redeem them until the 1870's, I believe under Grover Cleveland.

It's an interesting story in that people lost confidence that they would ever be redeemable in gold at their face value. Cleveland (I could be corrected on that) made the decision to finally redeem the Greenbacks. Unfortunately, bankers and other monied interests got wind of the news before it was broad public issue and went around the country buying up the now "worthless" greenbacks for 10% of their face value. When the decree came down big profits were made by those who had bought up all those worthless Greenbacks and could now redeem them at the US treasury.

It is sad story at the same time as being interesting. Jeez, it sounds like the market manipulation today. Some things just never change.

[Pliny]

Hi, I remember hearing this now that you mention it. Where did the bakner's first get the cash to lend. Were they just wealthy or did they print money?

They issued notes guaranteeing redemption on a deposit. The notes were used as currency. Not money. Money was called gold and silver which Banks kept "safe" for their customers in their vaults.

[Yesterday]

Basically we have now covered where paper notes came from and what they evolved to be. Our current fractional reserve system with interest coupled with debt being the largest so-called asset. What a mess. Now, I would like to understand what ZIRP is all about and how it plays into our future regarding this mess.

I have read a few differing articles about this. Looking at Japan there are lots of articles depicting the folly and hardships of it, all of which were summed up in one other article that shows how it was the fact that the government didn't reduce spending effectively or stabilize taxes. I can see the trouble in the US with this as well as trouble in Australia. We are doing it here too but it is quiet as usual in the media.

What would be the long term benefits of ZIRP? Would it really remove an entire tier of banking created by interest debt? When I consider figures like 170 million daily interest on government debt and payments made from tax revenues I have to wonder what it would be like without having this hanging over our heads. Could ZIRP give us this?

One major argument I read about is how drastic the government spending cuts have to be initially along with higher if not stable taxes till the deficit is gone, a long hard road. I will pull some links and post them later.

[Pliny]

Basically we have now covered where paper notes came from and what they evolved to be. Our current fractional reserve system with interest coupled with debt being the largest so-called asset. What a mess. Now, I would like to understand what ZIRP is all about and how it plays into our future regarding this mess.

Well, the Bank of Canada just raised it's interest rates so I am not sure we will be following this policy. We may under international pressure.

It hasn't served the Japanese economy well. I don't think.

I haven't looked into it in any depth. On the surface, it makes me nervous. They must have run models on this so they are aware of the remifications. It is only a question of priorities and what they are willing to sacrifice to keep going. It looks like they will tolerate zero economic growth to maintain government levels of spending and taxation.

But I would need to read some articles on it to see if those conclusions are valid.

[Yesterday]

Well, the Bank of Canada just raised it's interest rates so I am not sure we will be following this policy. We may under international pressure.

It hasn't served the Japanese economy well. I don't think.

I haven't looked into it in any depth. On the surface, it makes me nervous. They must have run models on this so they are aware of the remifications. It is only a question of priorities and what they are willing to sacrifice to keep going. It looks like they will tolerate zero economic growth to maintain government levels of spending and taxation.

But I would need to read some articles on it to see if those conclusions are valid.

Hi, from what I gather, it is the stimulus package that drove the interest rate up but Harper fully intends on stopping this on schedule. All the links are on my other computer darn it. I will post them tonight though. Just 3 or 4 but they are very telling in some ways. Harper and Obama are fighting its legitimacy, they are definitely putting on the pressure. The World Bank is fighting back...

http://www.voxeu.org/index.php?q=node/4101

More tonight, I am so glad you are interested in this. The more heads the better to figure things out.

[Yesterday]

Hi, these first 2 links show the commitment from Harper and Obama to reduce/remove deficit quite drastically. I do believe 0 government debt is imperative to ZIRP working. On a side note, I find the interest of these 2 in this could have implications on how the prosperity funds generated through the production tax in the FCCC goal regarding its implementation of pay-out without interest versus with interest.

http://news.sympatico.cbc.ca/home/contentposting/harper_obama_urge_g20_to_boost_economic_recovery/78870f3e

http://www.canadianbusiness.com/markets/headline_news/article.jsp?content=b3692595&utm_source=_BMG9w4B8Lunj4S&utm_content=mwnl41&utm_medium=email

This is just more perspective from a Canadian point of view...

http://worthwhile.typepad.com/worthwhile_canadian_initi/2008/12/international-coordination-with-zirp.html

These articles lay out some major controversies...

http://cij.inspiriting.com/?tag=zirp#

http://cij.inspiriting.com/?tag=zirp#

This last one is just Japanese monetary policy...

http://www.bis.org/publ/bppdf/bispap31k.pdf

[Yesterday]

Prosperity funds link, Obama's commitment to the UNFCCC tax generated fund for wealth redistribution. Not really related to what we are talking about but I mentioned it in my last post and thought I should include a link.

http://us-elections.suite101.com/article.cfm/obama_shared_prosperity_plan

OK maybe more than 3 or 4 links, teehee.

Edited June 22, 2010 by Yesterday

[jbg]

The downfall to a gold standard is that people have to save in order to consume. Banks would have to have deposits in gold in order to make loans. Some argue this would retard technological advances and other industrial advances and even societal humane advances(welfare). I don't believe it would and I further believe that it would be a far more stable society as long as government performed it's mandated duty of justice.

While I generally favor a non-fiat standard I do see some problems. One obvious problem is with gold discoveries. When a "gold rush" occurs, there is an influx of gold and no matching productivity increase. To an extent this fed the bubble that led to the Panic of 1907-8 in this country. Also when war or depression does come governments' hands are tied.

Personally, I favor a basket of commodities' approach; maybe gold, oil, silver and copper.

[Yesterday]

While I generally favor a non-fiat standard I do see some problems. One obvious problem is with gold discoveries. When a "gold rush" occurs, there is an influx of gold and no matching productivity increase. To an extent this fed the bubble that led to the Panic of 1907-8 in this country. Also when war or depression does come governments' hands are tied.

Personally, I favor a basket of commodities' approach; maybe gold, oil, silver and copper.

Gold exchange?

[Yesterday]

The 2009 liquidity trap: a critical analysis of the monetary policy response

Ricardo Cabral1,2

January 9th, 2009

This is the title of a paper that I found and read last night. The most enlightening to date regarding Zirp, its effect on this system, how it should work and what is being done wrong. Going back through the links to link it here they are not working, big surprise. Hopefully with the title if you do look for this, you will find it. There should be a way for me to link pdf files...

Here are a few excerpts from it at any rate just to give you an idea.

He does make some good points.

In this paper, I analyze the unorthodox monetary policy measures that have been undertaken

thus far and argue that monetary policy should be modified so as to create the appropriate

incentives for financial intermediation by the private sector. Specifically, by lowering shortterm

interest rates while long-term interest rates have not fallen as much, monetary authorities

are creating an incentive for banks to switch their lending activity from the private sector

towards the public sector or towards loans guaranteed by governments. Second, by buying or

accepting as collateral private sector assets on a large scale, monetary authorities are

crowding out private sector financial intermediaries. Third, if liquidity trap conditions persist

over years, I argue that central banks would be able to set a negative interest rate target in

4

order to lower nominal interest rates faced by businesses without lowering the incentive for

private sector financial intermediation.

Everyone is ZIRPing...

The recent policies of leading western world central banks and governments should be

understood in the context of the perception of a liquidity trap and lack of trust in the banking

system. Following bank runs in several countries and a marked increased in the demand for

currency by the non-bank public, governments in the Eurozone and in the US have

substantially raised the deposit insurance levels, and in several instances have nationalized

banks or provided capital injections. Central banks have lowered reference short-term riskfree

interest rates, and expanded the monetary base and balance sheets, to enact an easing of

monetary policy.

This I find interesting, it sort of describes the removal of profit making business from the banks. Does this equal the removal of one tier of banking? More or less, I think so. At the very least you could call it an effective leash.

That is, if banks do not allocate financial resources entrusted by depositors to private sector

agents, the only two revenue generating alternatives for banks are deposits with the central

bank or government bonds. The rates offered to banks for overnight deposits fell and were, in

March 2009, 0% in the US and 0.5% in the Eurozone. Therefore, the only remaining revenue

generating alternative for banks is to acquire longer-dated sovereign government bonds, hold

them to maturity, and earn a risk-free pure term premium. For example, the nominal rates on

5-year US Treasury and comparable German government bonds were on March 4th, 2009

approximately 2.0% and 2.1%, respectively. If short-term risk free nominal rates remain at

near zero, long term premia are equal to long-term nominal rates, and are an attractive and

riskless investment proposition for banks, so long as short-term interest rates do not rise.

Quantitative versus qualitative....

In summary, to reduce the incentives bank face to switch from private to public sector assets,

quantitative easing should be directed towards longer term government maturities, with the

aim of lowering the risk-free interest rate differential between short- and long-term rates, and

reduce (though not eliminate) the pure term premium.

However, qualitative easing has a detrimental effect on private sector incentives. The liquidity

trap is not solely caused for speculative motives, as in agents believe prices will fall, but also

because of extreme levels of risk aversion. In a liquidity trap, fear trumps greed, or expressed

in another way, the risk premium5 is not large enough to compensate for the heightened levels

of risk aversion. Financial intermediaries demand a high pure risk premium to carry out their

function of allocating savings to investment.

[Yesterday]

Just thinking...every paper or article that I have found to date only looks at ZIRP in a situation where government debts are high. Growing higher as we speak due to the restricted margins of profits for banks (low risk government bond versus high risk public sector loans) who need the governments to spend right now(to produce bonds for sale)in order to keep themselves afloat. In fact some pretty good arguments have been levied, mostly by entities that require interest for profit, about this so called liquidity trap we seem to be in.

So banks right now are happy to buy government bonds and scared to publicly lend. What is this situation going to look like when there is no more government debt per say. If Harper reaches his goals by 2020, would it be safe to say that the g. bonds for sale will lessen? This kind of an impact could force the banks to lend publicly regardless of the lower interest and higher premium as long as current interest restrictions remain on all other methods of profitability for banks. In fact, just the ending of the stimulus spending should have perhaps an impact on public lending. If done properly, without inflation or deflation to any worrying degree according to some experts. Lessons Japan either chose to ignore or failed to get.

There is another side to this that I find very interesting. The fact that US fiat dollars in circulation have been reduced by 9.6% in 2009 regardless of all the stimulus spending. At first, this should be a cause for lament. However, consider that globally there is this quiet push for the removal of fiat based dollars to be replaced with asset backed dollars. One dilemma in this conversion process is the fact that there are just way to many fiat dollars of all types in circulation. Even with the current way over inflated price of gold/minerals there just simply is not enough asset to back every dollar. Is this reduction then a good thing?

I have some links that debate this liquidity trap issue, I'll post them tonight along with some that discuss this dollar conversion around the world. Looking at our current system of debt equaling asset et al I see some major changes coming down the pipe.

Edited June 25, 2010 by Yesterday

[Pliny]

I haven't had much time these days but am reading some of the articles you have posted.

So far ZIRP looks like the end of the road for government monetary and fiscal policy manipulating an economy. They are stuck in the liquidity trap.

Major changes coming? You bet!

Edited June 25, 2010 by Pliny

[Yesterday]

Hi Pliny, I'll be ready when you are. Thanks.

[Yesterday]

http://eng.globalaffairs.ru/numbers/29/1323.html

Here is an article with some meat to it, found it last night looking through my links. This one is about the global financial situation and covers oh so much. Virtually every paragraph deserves a discussion...IMO this was written by someone who does not support an asset backed change but still gives many interesting facts and current directions regarding whatever change we might end up with.

some excerpts...so many points to ponder...

IMF, this is of particular interest to the movement of changing the international reserve currency. Of importance is who will top the IMF list when it gets revised next year. The US will be replaced and sent down the list while Canada should end up in the top 5-8th spot. If Russia and China et al get their way the IMF credit will be the international currency. I find it also interesting that there has been such an attitude change over the last 20 years regarding the IMF. This institution is a very big obstacle standing in the way of an asset backed system(removal of fractional/reserve/credit debt), I can however see this organization working at zero interest. I am not really happy myself with the growing solidity of the IMF in world opinion. We'll just have to see.

The world began to talk about the necessity to overhaul the global financial architecture long ago: debates have been running for a decade, and hundreds of books have been written, including in Russia. In the late 1990s, the international community intensively discussed the causes of the crisis in developing markets and the role of the International Monetary Fund. The Meltzer Report, drawn by the U.S. Congress, went as far as to offer to reduce the IMF’s role to extending short-term loans to countries with stable finance

Earlier, disputes mostly focused on the role of the IMF and other Bretton Woods institutions in developing markets. At present, analysts, governments and central banks have become aware that these problems are essential, and – most importantly – that they actually involve developed countries and their markets. Whereas previously the analysts considered a safer liberalization outside of the core of the world’s private financial system, today the world economy is facing the challenge of saving the very core from “awkward liberalization.” In the past years, nothing drastic was happening in this sphere, because the status quo suited the G7, by and large. The tremendous financial crisis in the U.S. and the global recession in 2008-2009 broke the impasse for this issue.

The G20’s intention to implement international cooperation remains rather general and vague. For example, no practical accords were reached during the Washington summit (November 2008), which took place at the height of the financial crisis. At the London summit (April 2009), the parties agreed to boost IMF resources, but failed to find accord on principles to modernize the global financial system. The summit in Pittsburgh (September 2009) and the meeting of the finance ministers and governors of central banks in St. Andrews (November 2009) yielded certain tactical accords, such as the commitments to toughen the capital requirements for banks, restrictions on trade of OTC derivatives, etc. But the fundamental issues related to the persistent global imbalances were not fully addressed, and their solution is yet to be found.

Another subject this guy touches on is the global suprapower structure so often referred to as 'One World Government'. New World Order' and so on. According to this compilation of data there is no global cohesion on that front. His facts paint a financial global picture more so than a sovereignty picture but if we all can't get along in finances there is not much hope for the even deeper relations required to drop borders for real.

This is his intro into what he terms are the key problems to the financial system. I believe this could be simply put by referring to it as the mess created by interest debt across the fractional reserve in conjunction with the sale of derivatives. There is so much money owed in the world, how could this debt ever be honored to allow for a switch to asset backed currency?

Even with things like ZIRP which seem to be slowing down the growth of this debt (switching of public long term debt to government long term debt coupled with noticeably less credit available for more public debt)(governments buying massive chunks of public debt owned by banks), even with the reduction of 9.6% of the US fiat currency...the global debt load is the one requires real grit and determination to compromise over before this asset backed change can really take place. I had once thought that perhaps there could be some strength in the movement to reduce the IMF and even to go to the extent of clearing massive amounts of global debt, those days though are long gone. Entrance stage right...Greece who had the US open for them with massive amounts of IMF funding(extension of credits) to get through this mess.

The excessive leverage (ratio of loan capital to funds at one’s disposal – Ed.) of the financial system in general and of developed states in particular shows the basic imbalance between the capital of financial institutions and the size of assets they are managing. In the first place, it concerns the high risk components, such as complex derivative financial instruments. The writing-off of huge volumes of “bad” assets in 2008-2009 was a still larger drain on the financial system.

Edited June 26, 2010 by Yesterday

[Pliny]

Hi, from what I gather, it is the stimulus package that drove the interest rate up but Harper fully intends on stopping this on schedule. All the links are on my other computer darn it. I will post them tonight though. Just 3 or 4 but they are very telling in some ways. Harper and Obama are fighting its legitimacy, they are definitely putting on the pressure. The World Bank is fighting back...

http://www.voxeu.org/index.php?q=node/4101

More tonight, I am so glad you are interested in this. The more heads the better to figure things out.

Harper and Obama are fighting it's legitimacy? By "it", you mean ZIRP, right?

I don't think Obama is fighting it. Harper seems to be continuing traditionally established Keynesian economic central banking policies under a manageable . Obama seems to be listening to Ben Bernanke who is determined to spend his way out of the recession and although Keynsian in it's origin is not the ordinary Keynesian solution.

The Fed announced last week it will not be raising interest rates in the near future. Harper has raised Canada's rate. They are at odds. I think there are different goals.

[Yesterday]

Harper and Obama are fighting it's legitimacy? By "it", you mean ZIRP, right?

I don't think Obama is fighting it. Harper seems to be continuing traditionally established Keynesian economic central banking policies under a manageable . Obama seems to be listening to Ben Bernanke who is determined to spend his way out of the recession and although Keynsian in it's origin is not the ordinary Keynesian solution.

The Fed announced last week it will not be raising interest rates in the near future. Harper has raised Canada's rate. They are at odds. I think there are different goals.

Hi, yes Harper did raise the rate a bit but I'm waiting to how it falls when the stimulus is finished, if it does fall. I found an article that discusses the different approaches between Harper and Obama. The US situation is much more indepth and debt ridden than ours and he is a fool to not perhaps raise the rates temporarily till the stimulus stops. Japan took too long to raise theirs enough to deal with inflation/deflation. Now they sit at .25% roughly and the economy is starting to move again without too much struggle. Perhaps Harper is just skipping the lost years learning from Japan's mistake. Time will tell eh?

I can understand the fear you mentioned earlier about ZIRP, it has much potential for either good or bad. I'm curious to see what they do with it in the end.

[Yesterday]

Harper and Obama are fighting it's legitimacy? By "it", you mean ZIRP, right?

Yup, I mean ZIRP.

Quantitative versus qualitative....

Looking at these 2 paragraphs, especially the first one...

Why would it be important to reduce the incentives to switch from private to public?

In summary, to reduce the incentives bank face to switch from private to public sector assets,

quantitative easing should be directed towards longer term government maturities, with the

aim of lowering the risk-free interest rate differential between short- and long-term rates, and

reduce (though not eliminate) the pure term premium.

However, qualitative easing has a detrimental effect on private sector incentives. The liquidity

trap is not solely caused for speculative motives, as in agents believe prices will fall, but also

because of extreme levels of risk aversion. In a liquidity trap, fear trumps greed, or expressed

in another way, the risk premium5 is not large enough to compensate for the heightened levels

of risk aversion. Financial intermediaries demand a high pure risk premium to carry out their

function of allocating savings to investment.

So, according to this little blurb on inflation/deflation our only concern is inflation. Comparing Harper and Obama based on this alone I would have to wonder about Harper if his concept on when to stop QE next March is 'in time' for our situation and will it actually require the sale of federal assets. Is Obama going to be able to stop QE in time given the severity of their situation? Especially given the fact no-one wants to buy Fed assets.

Martin Wolf on deflation

In his FT column, Martin Wolf says deflation is not going to happen. There is more of a danger of inflation, if central banks do not reverse their policy of quantitative easing in time, and start to sell the assets they are current buying, and if governments are not drastically reducing their deficits. This is particularly the case for countries with no credible currency regimes (did he mean the UK?). He said fightling deflation is easy. The hard part is achieving stability afterwards.

http://www.eurointelligence.com/index.php?id=581&tx_ttnews[pointer]=40&tx_ttnews[tt_news]=2297&tx_ttnews[backPid]=743&cHash=df97f5561d

PS Given the fact that I do not personally have a background in finance and an innate need to question anything I don't understand...I couldn't tell you if Martin Wolf's idea on inflation is accurate but perhaps some of you would know...

Edited June 27, 2010 by Yesterday

[Yesterday]

http://worthwhile.typepad.com/worthwhile_canadian_initi/2008/12/deficits-cause-crowding-in-by-reducing-deflation.html

If deficit spending increases aggregate demand, it will reduce deflation, reduce expected deflation, reduce real interest rates, and so increase investment. In a ZIRP, deficits crowd in investment.

Did Harper's 108 billion (roughly) increase our aggregate demand? Russia and China think so, so does the EU and Germany and likely others, at this stage in ZIRP though the Canadian people don't think so. I think we need to see what will happen when the stimulus stops. No sense really at this stage even considering the US on these terms. Nothing will increase demand for their bonds/assets any time to soon.

[Pliny]

Yup, I mean ZIRP.

Quantitative versus qualitative....

Looking at these 2 paragraphs, especially the first one...

Why would it be important to reduce the incentives to switch from private to public?

So, according to this little blurb on inflation/deflation our only concern is inflation. Comparing Harper and Obama based on this alone I would have to wonder about Harper if his concept on when to stop QE next March is 'in time' for our situation and will it actually require the sale of federal assets. Is Obama going to be able to stop QE in time given the severity of their situation? Especially given the fact no-one wants to buy Fed assets.

PS Given the fact that I do not personally have a background in finance and an innate need to question anything I don't understand...I couldn't tell you if Martin Wolf's idea on inflation is accurate but perhaps some of you would know...

OK.

Well, I think your understanding of finance is different and perhaps more advanced than mine. So I expect to do some learning.

Here is the Wikipedia illustration of "quantatitive easing".Quantatitive easing

In practical terms, the central bank purchases financial assets (mostly short-term), including government paper and corporate bonds, from financial institutions (such as banks) using money it has created ex nihilo (out of nothing).[1]

Normally, a central bank increases the money in the economy indirectly by lowering the discount rate or reserve requirements, but when it cannot lower them any further it can attempt to seed the financial system with new money through quantitative easing.

Under "ZIRP", which I believe is a policy forced by circumstance rather than the choice of governments, normal means to increase the money supply have to be abandoned. In other words it has reached the bottom of the discount rate and commercial banks have high reserves so it cannot lower reserve requirements or interests rates any further. Those tools are gone. So the central bank resorts to buying government bonds from commercial banks to inject capital and stimulate economic activity. I don't say economic "growth" because stimulating economic activity is closer to the truth. Economic growth from stimulus money is perhaps a band-aid to growth but that growth is suspect to a continuation of malinvestment and bad business practices that killed the economy in the first place.

The big concern regarding the "ZIRP" approach is inflation. Governments do not want their precious fiat currencies to be worth just the paper they are printed on. However, they are more willing to risk that than the much more feared, especially by government, condition of "deflation". Deflation to the average person means prices are going to go down but money will be hard to come by because of lower economic growth. Inflation to the average person means prices are going to go up but at least there is the economic activity to money around to provide goods to buy. In both instances the consumer, the average person, feels there is a shortage of money. Under inflation prices are too high and under deflation there is not enough money around. Under inflation it is not easy to save and under deflation saving is preferred to spending.

Under normal conditions Government uses it's economic tools to just slightly keep the economy inflating. Circumstances amy arise where it has to depart from it's policies such as wars, external threats, or when it's social policies create bubbles that clash with their fiscal policies. Ignoring economic concerns for humanitarian concerns. The housing bubble in the States was precisely that. The government encouraged and pursued a policy of home ownership to grant opportunity to unqualified buyers for humanitarian reasons.

Why do governments fear deflation so much and are seemingly willing to risk anything to avoid it? Deflation means less economic activity. It means less money is around. It is actually a decrease in the money supply. This subsequently means less revenues for government and government is not as elastic as the private sector. The private sector has to bend to economic circumstance but the government will not and will try and maintain it's size, it's budget and it's revenues which the private sector will be squeezed to provide thus further clamping economic activity.

If governments did nothing deflation would set in and government would find itself hard pressed to fund it's liabilities.

So herein lies the reason that the market cannot weed out or correct malinvestments and weak business practices.

Wall street and corporations like GM have been providing government it's revenues so they will continue to be propped up.

ZIRP, in my opinion, is the government's policy to not face economic reality.

The Keynesian theory is flawed in my opinion because it attempts to control wage and price levels and also production by controlling the money supply, whereas production is the real measure of economic growth and the money supply is simply an accounting of economic growth and has to constantly adjust value based upon government monetary policy plus economic growth.

Government policy, in other words, is an added, and in my view unnecessary, variable. But they like to be in control and avoid someone else getting a monopoly on all the money. They constantly warn society that this is a grave concern. The response of the public to this concern is to demand the rich be taxed..

Well, the economic summit is generating some friction within the G20 not to mention at it's gates. But it is an exercise to ensure that economies remain to serve government and that national governments must remember this and work within the designed structure. A loss of political strength and/or economic control is the consequence.