Tuesday, December 23, 2008
Thursday, December 18, 2008
The rationale for the increase would seem to be the faulty logic of increasing bank reserves to increase lending -- such logic made faulty, in this case, because it's not a lack of reserves that's curtailing lending, it's a lack of trust. In the credit world, no one believes anyone anymore. The Fed realizes this, so on October 9, it began paying interest on bank reserves. Consequently, banks have shifted more of their funds into reserves, rather than lending them out. This is called "sterilizing" the reserves. It's also a free lunch for the banks.
Banks make money by charging interest on loans. With lending activity depressed, interest on loans is depressed, and the solvency of the banking system is threatened. This is one reason the Fed began sterilizing reserves: to supplement the banks' loan interest and keep the banks' cash flow intact. It's as if the Fed changed the nature of the member banks' reserves from demand deposits to savings deposits, with the latter paying interest. Since interest is a lender's profit, the Fed is providing the banks profits without risk.
But there's another reason behind its sterilization policy. The Fed is trying to avoid massive inflation, and to do that it has to avoid the money multiplier of commercial bank lending. At the same time it wants to revive lending activity. But how will it accomplish these conflicting goals?
My guess is, by becoming the world's largest commercial bank.
We need to remember the Fed is considered the lender of last resort. It can create money with the stroke of a pen or the press of a key. It doesn't need borrowers, like the commercial banks do, to create money out of thin air. The market of corporate borrowers will therefore trust the Fed because it can always avoid insolvency. So the question arises: Will the Fed begin lending directly to the market while continuing to sterilize reserves to keep banks solvent? And if so, where will it get the funds to lend? From the pool of bank reserves? From credit it creates? Both?
In effect, the commercial banks, the big ones at least, would be swallowed up by the Fed. You would be borrowing from Bank of America in name only. In truth, the loan would be managed by the Fed.
Even in 2008 this possibility seems too ludicrous to consider, but given the premises the Fed has set up, I don't see what other conclusion follows. I can't see the Fed or any central bank building up reserves to promote 100 percent reserve banking, for example, though that would be cause for celebration. Instead, it looks like the Fed is trying to solve the trust problem at the cost of high inflation, though accomplished in an unorthodox manner. The mighty Fed will do the lending, not the shaky commercial banks. Perhaps this is why the Celent report concludes:
. . . one might be excused for thinking that the frequent comparisons with the Great Depression of 1929 are not the most apt. Perhaps the economic crisis in the Weimar Republic some seven years earlier could provide a better comparison.
Wednesday, December 17, 2008
Tuesday, December 16, 2008
As mentioned in this blog on October 31, Frank Shostak said if the Fed cut rates to zero it
would underscore the reality that the Fed is incapable of producing wealth from its printing press. It would show that the Fed is completely powerless, except to produce mis-signals that generate malinvestment. The only thing that might temporarily move is the stock market.The rate cut was not quite to zero. A target rate of zero would be admitting utter futility, so Bernanke and his gang will keep the Fed Funds Rate between 0 - 0.25, which is almost utter futility. That's not zero. Don't anyone say it's zero, because it isn't. Still, Wall Street came through.
Stocks surge after the central bank cuts a key interest rate to the lowest level on record.
Tuesday, December 2, 2008
Thousands of Icelanders marked the 90th anniversary of their nation's sovereignty with angry protest Monday, and several hundred stormed the central bank to demand the ouster of bankers they blame for the country's spectacular economic meltdown.Americans are increasingly aware of the harm fostered by the Fed, but can you see them storming the central bank?
In time, yes. Not the Obama-worshippers. Not the neo-con Republicans. Not the establishment media. Not the tenured academic economists at state universities. But the young libertarians, who are not merely protesting the central bankers, but the institution of central banking itself. The End the Fed movement is growing.
Monday, December 1, 2008
The five myths he explodes are:
- Herbert Hoover, elected president in 1928, was a doctrinaire, laissez-faire, look-the-other way Republican who clung to the idea that markets were basically self-correcting.
- The stock market crash in October 1929 precipitated the Great Depression.
- Where the market had failed, the government stepped in to protect ordinary people.
- Greed caused the stock market to overshoot and then crash.
And the most disastrous myth of all:
- Enlightened government pulled the nation out of the worst downturn in its history and came to the rescue of capitalism through rigorous regulation and government oversight.
Wednesday, November 26, 2008
NEW YORK (CNNMoney.com) -- President-elect Barack Obama on Wednesday named former Federal Reserve Chairman Paul Volcker as the head of a special economic advisory board.It's hard to say what the Paul Volcker of 2008 can do in his new role, but Obama's selection of him is a good start. As Fed chairman, Volcker saved the country from becoming another Brazil. Is it too much to hope that Volcker will soon replace Bernanke?
The group, which will include another 8 to 16 members, will provide the new administration with advice on dealing with the nation's financial crisis. It will exist for two years and will meet roughly once a month.
Of course, the only lasting solution is to get rid of the Fed.
Thursday, November 13, 2008
Friday, October 31, 2008
While the Fed is going to do its best to inflate the money, it can happen that money supply won’t increase - depending on the behavior of banks. If banks stop lending, due to tighter credit standards or fewer borrowers, the money supply will not respond. This is what happened in the 1930s.And why doesn't the Fed reduce rates to zero? Shostak:
The worry is that this would produce panic. It would underscore the reality that the Fed is incapable of producing wealth from its printing press. It would show that the Fed is completely powerless, except to produce mis-signals that generate malinvestment. The only thing that might temporarily move is the stock market.Yet some people say the Fed chairman is the most powerful man in the world. Isn't he supposed to have the ability to get the economy growing again? Shostak:
. . . this reminds us that this powerful man only has one tool at his disposal: printing money. And this tool only creates an illusion. One cannot create real wealth by printing money. If printing money could create wealth, there would not be poverty in the world today. Every third world country could print money and become rich. There would never be a recession. We would have perennial wealth creation with no effort.If the Fed is creating more money with its interest rates cuts, why haven't we seen a more dramatic rise in prices? Shostak:
You can pump all the money you want but it does not create anything; it only destroys. It creates a misallocation of resources, consumes capital, and makes everything much worse.
Prices have not responded because businesses do not have pricing power. The reason is that people don’t have as much real income as they used to have. If you don’t have the means to spend, it is hard for business to raise prices.
There would be price inflation if people were spending at the same level as they used to. When production is falling, those who produce have less means of payment. We are looking at a snowball of downward pressure.
Wednesday, October 29, 2008
"To be sure, what comes out of the Fed’s powwows is something that functions like money, and therein lies a big error. For at least the last three centuries economists have had ample evidence that fiat money -- another name for the paper government orders us to use in exchange for real goods and services -- has a short lifespan."
From my article, "Bernanke and the Holy Grail."
The government, led by the Fed and Treasury, is intervening massively to avoid a necessary correction. The implicit premise of its actions is that a correction would ruin us economically. It wouldn't. It would be painful for awhile, but market mechanisms would put the economy on a path to a sound recovery. Interventionism invariably begets more interventionism until the economy becomes a completely state-run bureacracy.
The fundamental issues of the financial crisis are money and banking. And the best primer I know of for understanding these issues is Murray Rothbard's What Has Government Done to Our Money?
In addition, permit me to recommend my own work, The Flight of the Barbarous Relic, which treats the issues in fictional form.
These headlines from CNNMoney struck me as revealing. The standard line is we are a capitalist country. Not true. Under capitalism, there is no central bank, and Wall Street would only be waiting for trading to begin rather than the latest Fed announcement. Under capitalism, there is no such thing as a firm, or three firms, or ten firms, too powerful not to save. The powerful can fall as well as the weak. Not letting the market work hurts our well-being. But letting the market work is capitalism.
We are not a capitalist economy. Corporatism, crony capitalism, state capitalism, neo-mercantilism, interventionism -- one of these terms is more fitting for the kind of economy we have. The state rules, not the market. The state doesn't rule absolutely, not yet, but that's the end-game.
Tuesday, October 28, 2008
"The most serious financial problem for the Nazi State is not the danger of a breakdown of the currency and banking system, but the growing illiquidity of banks, insurance companies, saving institutions, etc. . . . Germany's financial organizations are again in a situation where their assets which should be kept liquid have become 'frozen'. . . . But the totalitarian State can tighten its control over the whole financial system and appropriate for itself all private funds which are essential for the further existence of a private economy. Yet the institutions which still exist as private enterprises are not allowed to go bankrupt. For an artificial belief in credits and financial obligations has to be maintained in open conflict with realities."
From Gunter Reimann, The Vampire Economy: Doing Business Under Fascism (1939), p. 174, about German economic policy under Hitler.We must remember, though, that FDR was a proponent of economic fascism, as are his many admirers in the seats of power today.
This is a time to put dogma and politics to one side and concentrate on pragmatic answers. That means more government intervention and co-operation in the short term than taxpayers, politicians or indeed free-market newspapers would normally like.FDR's Brain Trust couldn't have said it better. If you understand Austrian economics, which is virtually ignored in the MSM, you know that "more government intervention" merely augments the policies that brought us to this point. The Federal Reserve boosted Total Fed Credit by another $245.4 billion last week, while increasing the Monetary Base to $984.717 billion, up from $911.454 billion the previous week. The Fed and ECB are expected to cut rates to provide even more liquidity, while Iceland, taking the opposite approach, has pushed interest rates up to 18 pecent.
We continue to be reminded of Captain Bernanke's immortal words, as he guides the U.S. economic ship ever downward: "But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost."
Sunday, October 26, 2008
Sunday, September 28, 2008
would keep credit markets from grinding to a halt under the burden of bad mortgage-backed bonds created by banks at a time when it looked like home prices had nowhere to go but up.Yes, it will look that way as long as the Fed keeps lenders awash in cheap credit.
Mises Institute's Mark Thorton explains what happened to housing in four easy steps.
Friday, September 26, 2008
Tuesday, August 26, 2008
Libertarian novelist - journalist Vin Suprynowicz, basing his calculations on the coin collector's guide the Krause, estimates "the Fed has been creating new 'dollars' at an annualized rate of 15 to 17 percent all year."
We'd have a better idea, of course, if the Fed still published M3, which they discontinued in 2006.
Why does government consistently report inflation low? In other words, why does government lie to us about inflation?
First, they’re locked into all kinds of “Cost of Living Adjustments” for government workers, Social Security recipients, etc. If they admitted inflation was 16 percent, they’d have to give everyone a 16 percent raise this year, another 16 percent next year, a third 16 percent raise in 2010 – which adds up not to 48 percent, but to 56 percent, compounding even more in the fourth and fifth years.
Bankruptcy would suddenly look much closer.
But there’s a far more important reason. If you believe inflation is 5.6 percent, choosing between a “low-risk” bank savings account that promises a 5 or 6 percent return, and a “higher-risk” stock market investment promising an 8 or 9 percent rate of return (remember, “Big Oil” is demonized today for earning “outrageous, windfall” 7 percent profits), seems like a reasonable exercise.
But faced with a 16 percent rate of inflation, such choices are a joke. Either “choice” will net you a hefty annual loss – most of your buying power will be gone in 10 to 15 years. At that point, the only kinds of “investments” that still make sense are those that offer “returns on investment” generally associated with drug dealing and playing the Megabucks.
In such a climate, what sense does it make to invest in any dollar-denominated paper instrument – or even to open a new business? Not much.
Tuesday, August 19, 2008
What are we faced with now? According to a Reuters report,
Wholesale prices shot up in July at the fastest year-on-year rate since 1981, while home builders cut back on construction as they worked through a glut of unsold homes, government data showed on Tuesday.Stefan Molyneux has written:
The reports offered little solace to the U.S. Federal Reserve, which is hoping that a slowing economy will cool inflation so that the central bank can hold off on raising interest rates.
Many times throughout human history, certain societies have come to the valid conclusion that an institution can no longer be reformed, but must instead be abolished. The most notable example is slavery, but we can think of others as well . . .Yes, we can.
Sunday, August 17, 2008
Gold is down nearly 5 per cent so far this year, on track for its first annual decline in seven years. New York Mercantile Exchange gold futures dropped 8.4 per cent for the week, the biggest retreat since 1983.But if intervention is the key to warding off disaster, the economic history of the world would be much different. Interventions take time to play out. They often achieve what appear to be stunning results short-term, such as an investment boom triggered by cheap credit, but we can count on them to fail. And even though the prices of gold, oil, and silver fell sharply last week, they're still high compared to what they were a year ago or earlier this year.
"The debacle was so swift that conventional terms like 'oversold' no longer apply," said precious metals analyst John Nadler at bullion dealer Kitco in Montreal. He said the rout will not likely end until the metal's price drops to "between $680 and $730."
What has happened is that speculative institutional funds that had flooded into gold, and particularly into exchange-traded funds for the metal, have decided to take the money and run, Mr. Nadler said.
That's because developments such as the U.S. credit crunch have failed to do as much damage as expected - thereby keeping gold's price moving up - thanks to intervention by the U.S. Federal Reserve Board and other central banks.
Saturday, August 2, 2008
From the WSJ:
GM Swings to Loss
Auto Sales Continue to Slide
Jobless Rate Hits Four-Year High
From Kiplinger personal finance:
Growing economy continues to struggle
And at MarketWatch:
U.S. Stocks Look to Fed for Direction
Quoting from the latter:
As the first anniversary of the crisis arrives this coming week, the Dow Jones Industrial Average is down 14%, U.S. economic growth has more than halved, financial institutions have suffered $350 billion in write-downs and fired chief executives and thousands of workers, while house prices have slumped as much as 40% in some areas.And the solutions?
Experts are looking to The Fed, the institution responsible for the crisis.
Or they're giving serious consideration to Obama's planned attack on the oil companies:
Sen. Barack Obama has proposed a revised, speeded-up version of his $50 billion economic stimulus plan, saying a tax on oil companies’ profits should be levied to fund rebates of up to $1,000 for families.Or they're looking at Bush, who's about to sign an emergency relief bill for homeowners:
One of the highlights of the housing bill waiting to be signed by President Bush is a tax credit of up to $7,500 for first-time home buyers. But read a little closer and it doesn’t seem quite as appealing for buyers: that credit has to be paid back.Isn't it amazing how basic economics seems forever beyond the grasp of the world's best-educated people?
Anyone who has ever felt the heft of a gold or silver coin, noticed the variation in size and design among different denominations of precious metal coins, or examined the different types of reeding, incusing, and other edge designs, recognizes that coins are far superior to paper bills in terms of their ability to be distinguishable solely by touch.Furthermore,
If we had a truly free market in currency, private currency producers could produce coins or bills that are tactilely distinguishable, with bills incorporating different sizes, shapes, raised geometric patterns, etc.What prevents us from establishing a distinguishable money? Guess.
Through a multifaceted legal barrier consisting of legal tender laws, anti-counterfeiting statutes worded to prevent the private issue of notes and coins, and punitive taxes on precious metals that would form the backing of a commodity-backed currency, the government has ensured that alternative currencies, such as the Liberty Dollar, have to face an often insurmountable legal hurdle.Governments have always known the difference between sound and unsound money, and how they can benefit from the latter by seizing monopoly control of it.
Wednesday, July 30, 2008
This method of providing, also known as inflation, appeals to statists of all stripes. For generations the left has used it to help fund welfare programs, combining it with their soak-the-rich tax agenda. But the right has caught on, too. Neo-cons find they can rhapsodize about limited government and lower taxes while using inflation to bolster foreign adventures and a domestic police state.
As Ron Paul writes:
The fiat monetary policy we now follow is the most significant factor contributing to our economic peril, and it is central to the neo-con agenda. As we hear new calls to empower the Federal Reserve Board, we should be aware that underlying all neo-conservative policies is the idea of monetary inflation. Inflation is the technique used to pay for the regulatory-state and the costs of policing the world.
Tuesday, July 29, 2008
As Bill Bergman at Morningstar reports:
In the Fed's overall "beige book" review of economic conditions, price pressures were reported as "elevated or increasing" by all 12 of the Federal Reserve's district banks in the latest survey. This may be one of the bleaker inflation assessments in the beige book in recent years.And meanwhile,
The only "official" report directly relating to U.S. labor markets released last week was the weekly unemployment insurance claims report, released Thursday. Initial claims were up significantly, to 400,000. The four-week moving average has climbed steadily higher in the past year, and at an accelerating pace lately.
Saturday, July 26, 2008
"Until the cause of inflation is understood, no effective strategy can be undertaken to combat it," he said.
But is it the case that most policymakers and pundits have flawed ideas about inflation? It doesn't look like it. As Paul admits,
. . . the government does not want inflation to be done away with. Inflation benefits debtors and harms creditors, and the United States government is the biggest debtor of all. The United States government, the banking monopoly under the Federal Reserve System, and politically-connected firms and industries are the first entities to take advantage of new money injected into the system, before prices increase.It's not the government and its pundits that need educating. It's the general public.
Monday, July 21, 2008
Fortunately, a correct theory of depression and of the business cycle does exist, even though it is universally neglected in present-day economics. It, too, has a long tradition in economic thought. This theory began with the eighteenth century Scottish philosopher and economist David Hume, and with the eminent early nineteenth century English classical economist David Ricardo. Essentially, these theorists saw that another crucial institution had developed in the mid-eighteenth century, alongside the industrial system. This was the institution of banking, with its capacity to expand credit and the money supply . . . It was the operations of these commercial banks which, these economists saw, held the key to the mysterious recurrent cycles of expansion and contraction, of boom and bust, that had puzzled observers since the mid-eighteenth century.
And so, President Herbert Hoover, on the eve of the Great Depression, stood ready to meet any storm warnings on the business horizon. Hoover, the "great engineer," stood now armed on many fronts with the mighty weapons and blueprints of a "new economic science." Unfettered by outworn laissez-faire creeds, he would use his "scientific" weapons boldly, if need be, to bring the business cycle under governmental control.
Hoover did not fail to employ promptly and vigorously his "modern" political principles, or the new "tools" provided him by "modern" economists. And, as a direct consequence, America was brought to her knees as never before. Yet, by an ironic twist of fate, the shambles that Hoover abandoned when he left office was attributed, by Democratic critics, to his devotion to the outworn tenets of laissez-faire.
If you want to know how Fannie Mae and Freddie Mac have survived scandal and crisis, consider this: Over the past decade, they have spent nearly $200 million on lobbying and campaign contributions.This is interventionism at work, not capitalism.
But the political tentacles of the mortgage giants extend far beyond their checkbooks.
The two government-chartered companies run a highly sophisticated lobbying operation, with deep-pocketed lobbyists in Washington and scores of local Fannie- and Freddie-sponsored homeowner groups ready to pressure lawmakers back home.
They’ve stacked their payrolls with top Washington power brokers of all political stripes, including Republican John McCain’s presidential campaign manager, Rick Davis; Democrat Barack Obama’s original vice presidential vetter, Jim Johnson; and scores of others now working for the two rivals for the White House.
Thursday, July 10, 2008
Not-So-Safe-Deposit Boxes: States Seize Citizens' Property to Balance Their Budgets
I had misgivings about Harry's published recommendation for two reasons. For one, I recall him saying on his old radio show that he advised burying your gold coins in your backyard, or generally, some location not likely to be discovered by state confiscators. That would rule out anything to do with a bank. Secondly, since Roosevelt's confiscation order of April 5, 1933, no property is safe in any institution. If you want it safeguarded, you'll have to take that responsibility alone.
Saturday, July 5, 2008
In historical perspective inflation is a means to diminish the stress felt by debtors. The policy of the US central bank is construed to create inflation to alleviate that stress. Its monetary policy was, is, and will be "lax" until the economic situation, and the situation of financial firms, will be improved. All in all this will entail an inflationary tendency, even if the latter will entail a bundle of new problems in another three or four more years.Hülsmann:
Poole here confirms the Austrian interpretation of what central banking is all about: special-interest policy in the short run, with harmful aggregate consequences in the medium and long run. Significantly, Poole made this statement only after he had left the Fed (he quit in March).
Monday, June 30, 2008
A bullion coin is a coin struck from precious metal and kept as a store of value or an investment, rather than used in day-to-day commerce. Examples include Krugerrands, British sovereigns, the American Eagle series and the Canadian Maple Leaf series.The American Gold Eagle is a bullion coin first issued in 1986 under the Gold Bullion Coin Act of 1985. Most of the coins are produced from the West Point Mint in West Point, NY, and by law all gold used in the coins must come from "newly mined domestic sources." They carry the mint's mark ("W") beneath the date and are offered in 1/10 oz, 1/4 oz, 1/2 oz, and 1 oz denominations. They are alloyed with silver and copper for better wear-resistance.
As legal tender, these coins have a face value of $5, $10, $25, and $50, respectively. For example, the reverse side of the 1 troy ounce coin is marked with 1 OZ. FINE GOLD - 50 DOLLARS. The other denominations are marked accordingly. The market value of the coins, however, is about equal to the market value of their gold content, not their face value. Today, for instance, the 1 ounce American Gold Eagle would be worth roughly $925.
If you buy bullion coins, Harry recommended taking care of the storage yourself -- don't entrust them to a firm. He does add, though, that a bank safe deposit box is a suitable storage place.
A business owner in Las Vegas, Robert Kahre, paid his workers in gold and silver coins. They had filed income tax returns based on the face value of the coins instead of the much-higher market value. The IRS brought 161 charges against nine people, including Kahre, and failed to get a single conviction.
From the Las Vegas Review-Journal:
. . . the trial lasted four months. It relied heavily on evidence gathered in a controversial armed raid in May 2003 on several of Kahre's local business places. The raid entailed keeping more than 20 workers handcuffed, at gunpoint, in 106-degree heat without shade or water while agents collected records and equipment.Kahre is pursuing civil actions against several parties, including the head prosecutor J. Gregory Damm and the IRS "agents."
In Making Economic Sense, Rothbard made this observation [p. 267]:
. . . there is what can only be considered a grisly joke perpetrated on us by the U.S. Treasury. The one-ounce gold coin is designated, like the pre-1933 coins, as “legal tender,” but only at $50. In other words, if you owe someone $500, you can legally pay your creditor in ten one- ounce coins. But of course you would only do so if you were an idiot, since on the market gold is now worth approximately $420 an ounce. At the designated rate, who would choose to pay their creditors in $4,200 of gold to discharge a $500 debt?
The phony, artificially low gold price, is of course designed by the U.S. Treasury so as to make sure that no one would use these golds coins as money, that is, to make payments and discharge debt. Suppose, for example, that the government designated the one-ounce coin at a bit higher than the market price, say at $500. Then, everyone would rush to exchange their dollars for gold coins, and gold would swiftly replace dollars in circulation.
All this is a pleasant fantasy, of course, but even this superior system would not solve the major problem: what to do about the Federal Reserve and the banking system.
Friday, June 27, 2008
The false prosperity induced by the speeding up of the printing presses over at the Federal Reserve led to what Alan Greenspan once called "irrational exuberance," a delusion created by the very easy money policies he carried out as head of the Fed. No sooner had certain Beltway sages declared that the age of permanent abundance was upon us – and that this rendered the struggle against the Welfare-Warfare State irrelevant – than their economic cornucopia of limitless wealth went empty. As banks are bailed out while ordinary Americans are turned out into the streets, the manic hubris of Fukuyama's historical "endism" and prophecies of universal prosperity via "globalization" stand revealed in all their silliness.This is one of his best articles.
Wednesday, June 25, 2008
The U.S. economy has been hit by a credit crisis which began in the sub-prime mortgage market, prompting a series of interest rate cuts to help boost the economy. But price pressures are growing, making more rate cuts unlikely.Isn't this a forbidden scenario, according to the More-Money-Will-Always-Save-Us outlook?
Greenspan said he did not believe arguments that the housing problems in the U.S. were due to interest rates being too low during his tenure. "As far as I'm concerned, the data do not support it (that argument). The housing bubble is clearly an international phenomenon."Let's see, Greenspan inflated here, other central banks inflated there. A bousing bubble developed here, housing bubbles developed there. But according to Greenspan's logic, the Fed is not at fault because we had housing bubbles here and there, making it an "international phenomenon."
The author of Gold and Economic Freedom continues his intellectual free-fall. A few years ago he told Ron Paul he had re-read the article recently and still stood by it. Let's see him stand up for it now. Let's hear him repudiate the Fed and fiat money and call for an honest gold standard.
Saturday, June 21, 2008
"Stocks will limp into the next week at levels not seen since the Bear Stearns debacle, with no hope of a boost from the Federal Reserve."So reads the opening paragraph of a column by Nat Worden.
Don't count on the Fed. No boost from Bernanke.
And the Bear Stearns debacle? Was that in any way related to past Fed "boosts"?
Friday, June 20, 2008
Sunday, June 15, 2008
Nowhere in their little click-and-see article do they mention where all these higher prices come from. Nowhere do they suggest putting a dagger in the Fed and its "monetary policy" of "accommodation."
Saturday, June 14, 2008
What is the right response to a recession? The first rule must be to do no harm. When it comes to government, that is asking a lot and enough. Beyond that, in an ideal world, we would shut down the Fed, reduce the cost of employment, reduce taxes, zap environmental controls on exploring for and refining oil – this would be a good beginning. We could expect the recession to last less than a year under these policies. As it is, we could be in for a very long and deep recession.
Thursday, June 12, 2008
So why does the article not condemn the idea of centrally-planned monetary policy? Why isn't it calling for the abolition of the Fed and the establishment of sound money? All it does is throw some figures at us -- if inflation continues at the present 4% rate a private pension or annuity payment of
When there are too many dollars chasing too few goods and services, you get inflation. And it's the Federal Reserve's job to get that balance right. When the Fed lowers rates, it pumps more cash into the economy; when it raises rates, it pulls the money back in.
"When inflation first shows up, people are always wanting to blame other things than Federal Reserve policy," says Brian Wesbury, chief economist at First Trust Advisors. "In the 1970s it was OPEC, today it's China. But in reality, our inflation is coming from easy money."
$5,000 a month will buy only $2,300 worth of goods and services in 20 years' time. If inflation jumps to 6%, the purchasing power of that retirement income will fall to $1,600 over that same period.And if it gets far worse than either of these, then what? Will the U.S. president personally run the printing presses in a gesture of "concern"?
Why are so many people willing to let the Fed ruin us?
Monday, June 9, 2008
Saturday, June 7, 2008
Government is economically wiser since the mid-70s, he claims. Given that government has created a debacle similar to the one in the 70s, what does that say about its ability to learn from its "mistakes"?
He brought up the subject of lessons central bankers have allegedly learned since the high inflation days of the mid-70s, the most crucial of which are (1) "high inflation can seriously destabilize the economy," and (2) "the central bank must take responsibility for achieving price stability over the medium term."
And audience members complained that Bernanke wasn't entertaining?
Let's see, government contributions to our economic well-being in recent years . . . such as the shot in arm SOX (the Sarbanes-Oxley Act) gives to outsourcing?
Or the potential of SOX to "turn into a litigation time bomb"?
Or government's robust penchant for war and the horrendous costs it entails?
Yes, we don't have price ceilings on gasoline today, as he points out, but is that because of government's greater economic wisdom or political expediency? Could it be that Republicans don't relish the prospect of conducting an election with people lining up on odd or even days, as they did in the mid-70s, hoping to find gas in the pumps for the state-mandated price?
Bernanke apparently wants the world to believe that central bankers in the 1970s were unaware that high inflation is bad medicine for an economy, as if banking authorities knew nothing about post-war hyperinflations or about the persistent inflation we get when governments abandon hard money and force fiat standards and banking cartels on their economies.
Counterfeiting is one of mankind's oldest cons. Are we to believe that it took 60 years for U.S. central bankers to realize they were the government's official counterfeiters?
He also seems to believe that without a sufficently high inflation we pay a price "in terms of lost output and employment" -- which he sees as the downside of Paul Volcker's anti-inflationary policies that began in 1979. As for achieving medium-term price stability, does that means the Fed runs the presses but not too fast?
Two points to consider: Why do we need price stability over any term? The free market tends to push prices down. Why is that a bad thing?
Second, who on earth believes central bankers have behaved with restraint since the 10 percent inflation days of the mid-70s? Greenspan ran the printing presses around the clock. At the time everyone was cheering, especially Wall Street.
According to the BLS inflation calculator, which is programmed by the government, it would take $4.00 today to buy the same thing $1.00 did in 1975. Using the CPI calculator at ShadowStats.com, which uses the government's pre-Clinton method of computing the CPI, price inflation is more than double what the BLS claims. Is this what he means by maintaining stable prices over the medium term?
Is that the best performance we can expect from our money?
According to measuringworth.com, from 1875 - 1908, a period in which the Fed was noticeably absent but gold wasn't, the annualized inflation rate was negative. In 1908, it took $.84 to buy what $1.00 would in 1875. Prices dropped during a period of explosive economic growth. Investments were funded mostly by real savings instead of Monopoly money. It was a time when people could save for their old age. They didn't have to roll the dice in a Fed-inflated stock market or depend on the government's fraudulent Social Security program. The dollar was actually a store of value.
Many students were reportedly bored with Bernanke's remarks. From the Fed's perspective, that's good. Had he sung a different song, such as the one about the Fed's deliberate dollar destruction, more people would have been awake at the end.
The only surprise is how cheap the meal ticket is, given what the Fed can do for the big players.
Kissing The Ring?
Think the Federal Reserve could be doing a better job? Don’t tell that to Columbia Business School. The prestigious Ivy League graduate unit just named the 32nd recipient of its annual Distinguished Leadership in Government Award: Fed Chairman Ben S. Bernanke. He was set to get the honor this month as a big draw at a school fundraising dinner at the Waldorf-Astoria in New York. Previous recipients include Bernanke’s four immediate predecessors back to 1970, including the now controversial Alan Greenspan. Columbia declined to answer our written query asking how “distinguished leadership” differed from “mere leadership.” Noteworthy since the Fed’s recent bailout of Bear Stearns: Many of the $1,500 meal tickets have been bought by large banks and other financial entities that are subject to Bernanke’s policies. —William P. Barrett
Wednesday, June 4, 2008
Promote a central bank as the solution to fractional reserve banking's periodic economic crises, though without blaming or even mentioning the fractional reserve nature of banking. Instead, blame the crises on a lack of an "inelastic" currency, i.e., one that can be created by a central authority at the touch of a finger on the government's printing press. Get the country's leaders to talk up a central bank, then when most of the country isn't watching, say, around Christmas, ram the bill creating the central bank through the national legislature. After the bill is signed into law, have your pundits continue to reassure the public their financial worries are over.
Later, when the public starts to grumble that their currency doesn't buy as much as it used to, tell them speculators are ripping them off. Pass laws regulating speculators and give it headline prominence. When the next financial crisis arrives, blame it on the market again. Attack speculators for evading the laws you passed. Blame people for hoarding their gold. As punishment, take the gold out of their hands, threatening them with prison and a heavy fine if they refuse to give it up. Hoard it in government fortresses instead.
This would normally be called plunder. A few hidebound economists will in fact call it that. Dismiss them as hopelessly orthodox or as enemies of the people. Reassure the public that the better economists have thoroughly refuted the orthodox superstitions supporting a gold standard. Confiscating the people's gold, therefore, is not an act of theft. It is enlightened monetary policy. From now on money is whatever government says it is. From this point forward government will see to it that money isn't scarce.
And from this point forward the financial life of the middle class is ruled by counterfeiters who have the prestige of being called the country's bankers.
Tuesday, June 3, 2008
People suspect that the gold standard would disempower the nation-state as we know it, including its ability to wage endless wars. To me, this is the strongest case for reform. If we want freedom and peace, the gold standard is the topic that cannot and will not die.
Sunday, June 1, 2008
What is so serious about this development?
On the welcome page of this blog there’s a quote from Ludwig von Mises’ Economic Freedom and Interventionism, 1951:
“What makes it possible for a government to increase its funds by inflation is the ignorance of the public.”
What relevance does this have to the Fed’s “challenge”? Here’s Mises’ statement in context:
“What makes it possible for a government to increase its funds by inflation is the ignorance of the public. The people must ignore the fact that the government has chosen inflation as a fiscal system and plans to go on with inflation endlessly. It must ascribe the general rise in prices to other causes than to the policy of the government and must assume that prices will drop again in a not-too-distant future. If this opinion fades away, inflation comes to a catastrophic breakdown.
“The Housewife's Behavior
“If the housewife who needs a new frying pan reasons: ‘Now prices are too high; I will postpone the purchase until they drop again,’ inflation can still fulfill its fiscal purpose. As long as people share this view, they increase their cash holdings and bank balances, and a part of the newly created money is absorbed by these additional cash holdings and bank balances; prices on the market do not rise in proportion to the inflation.
“But then -- sooner or later -- comes a turning point. The housewife discovers that the government expects to go on inflating and that consequently prices will continue to rise more and more. Then she reasons: ‘I do not need a new frying pan today; I shall only need one next year. But I had better buy it now because next year the price will be much higher.’ If this insight spreads, inflation is done for. Then all people rush to buy. Everybody is anxious to reduce his holding of cash because he does not want to be hurt by the drop in the monetary unit's purchasing power. The phenomenon then appears which, in Europe was called the ‘flight into real values.’ People rush to exchange their depreciating paper money for something tangible, something real. The knell sounds of the currency system involved.
“In this country we have not yet reached this second and final stage of every protracted inflation. But if the authorities do not very soon abandon any further attempt to increase the amount of money in circulation and to expand credit, we shall one day come to the same unpleasant result. It is not a matter of choosing between financing the increased government expenditure by collecting taxes and borrowing from the public on the one hand and financing it by inflation on the other hand. Inflation can never be an instrument of fiscal policy over a long period of time. Continued inflation inevitably leads to catastrophe.” [All emphasis mine]
With Bernanke publicly committed to inflation as the great cure for market meltdowns, he could find himself facing a bull with two deadly horns: on the one, hyperinflation, if he runs the presses in earnest and the ignorant public gets wise to his policies, or on the other, the risk of turning the recession into a depression if he slows the presses for a protracted period. Of course, Bernanke doesn't want a financial calamity and will continue with Fed CPR to try to get the economy out of the recession without bringing on massive inflation.
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