Monday, August 31, 2009

Derailing the bill to audit the Fed

Roughly 75 percent of Americans support an auditing of the federal reserve, but Barney Frank is trying to derail Ron Paul's Audit the Fed bill by rolling it into a "comprehensive regulatory reform package recently proposed by the White House." According to an email from John Tate, president of Campaign for Liberty, the package "grants new, more comprehensive powers to the Fed and strengthens the government's control over our economy."

Gary North writes:
If the bill passes the House and the Senate, Obama will veto it. The FED is not going to be audited by the government. That is not how the world works. The FED is only officially under government authority. Except in wartime, it has never been under government authority. It was set up to provide the illusion of government control. That illusion has worked since 1913.
He may be right about the fate of the bill, but how can the Fed only sometimes (during war) be under government control? What or who directs the Fed to surrender its sovereignty under certain conditions?

Here's where shadow organizations such as the CFR enter the picture. Not that the CFR is calling Frank or Obama and telling them what to do, because Frank and Obama already understand what to do or they wouldn't be where they are. But there are people on stand-by, one would assume, to provide emergency counsel should one of the aforementioned field agents take a wayward stride or make a disturbing comment. The Fed, ultimately, is just a tool of the politically powerful.

Sunday, August 30, 2009

Sheldon Richman on Neglect of Producers

Sheldon Richman, editor of FEE's The Freeman and "In Brief," as well as the author of several books, including Your Money or Your Life: Why We Must Abolish the Income Tax (recommended) explains why politicians are held in such high esteem, while producers and entrepreneurs are virtually ignored:
For most people an understanding of how markets work is not intuitive. It requires the grasp of such elusive ideas as unplanned order, entrepreneurial profit, and prices as capsules of (imperfect) information. These concepts can’t be conveyed in a television sound bite or editorial cartoon. In contrast, government “solutions” are simple. Total health insurance is too expensive? Pass a bill decreeing it to be universal and affordable. Next problem.

A politician who makes a career of proposing such “solutions” is likely to win admiration not only from the public but also from the news media, whose reporters and commentators know as little economics as their readers and viewers. The dynamic leader who gives impassioned speeches and sponsors legislation on behalf of social justice appears heroic in part because few people can find the logical flaws in the program. Observers see only his presumed motives. But motives divorced from understanding are worthless — even dangerous. In a more sensible world, proposing ends while being oblivious to means would be a sign of irresponsibility, the intellectual equivalent of drunk driving. Maturity lies in understanding that, as Steven Horwitz reminds us, ought implies can. That’s where economic logic enters the picture.

During the endless hours of television coverage of Kennedy’s death, someone mentioned that when he was stricken with brain cancer, he received the quality of medical care that “he wanted for everyone.” But such things don’t come from wishing, proposing, or decreeing.
And he concludes:
Nevertheless, for most people government, despite its occasional scandal and atrocity [see Chappaquiddick], is generally trusted (despite what they say), while business, despite its routine creation of benefits, is generally distrusted. (I acknowledge that the unholy alliance of business and state — corporatism — justifies a good deal of mistrust, but it doesn’t account for all of it.)

Let us hope for the day when the passing of a politician gets little more than an inch or two in the obituary section of the newspapers.
The magic provided through a willfully inflatable currency helps cover the "affordable" aspect of government proposals. The welfare state could not exist without legal tender printing press money, the inflation of which is most detrimental to society's poorest.





Wednesday, August 26, 2009

The Virtue of Gold by Stewart Dougherty

Much has been written about the promise of various investments. Stewart Dougherty, a specialist in what he calls inferential analysis, offers these observations:
In the recent crisis, virtually every investment “truism” has been discredited as a myth. Buy and hold; Stocks for the long term; Efficient market theory; Housing prices only go up; Buy land, they’re not making any more of it; Municipal bonds offer safe, tax advantaged returns; Treasurys are guaranteed by the full faith and credit of the United States; the dollar will remain strong because it is the world’s reserve currency; A diversified portfolio offers protection; Demand for serious art works is unquenchable; and on and on. The current markets have laid waste to every one of those theories, and many others.

Gold is the antithesis of the investment classes described above. Physical gold represents pure wealth of a very finite quantity with absolutely zero counterparty risk. Because of this distinguishing fact, it is immune to the costly effects of moral hazard. Gold does not have expensive skyscrapers named to stroke its ego, nor does it have offices or branches dotting the land. Gold has no CEO who demands a multi-million dollar compensation package just for showing up. It has no employees desiring pay raises, health insurance or vacations. Gold does not take three hour lunches, play golf, drink martinis, do drugs, get sick, or demand a lavish expense account. Gold is not dependent upon protection from regulators who discover frauds only after every innocent investor has been wiped out. Gold is not represented by a Congress that spends it into bankruptcy. Gold is unaffected by the Devil’s songs of greed and graft sung by lobbyists and other self-serving parasites. Gold does not charge an endless procession of monthly or annual fees. Gold cannot be manufactured out of thin air by politicians or Central Bank monetary witch doctors.

As money, gold has not one legitimate competitor, though it is surrounded by fiat fakes. In time, those frauds always die of their chronic, congenital disease: immorality. Gold is the free and honest money of the people, not the controlled, monopoly money of bankers intent upon destroying it for private gain by debasement and inflation. Having been born at the beginning of civilization, it possesses the wisdom of time. It is liberty. When border crossings have been closed by soldiers with machine guns and paper money has been a useless persuader, gold has opened the gates for refugees fleeing tyranny and oppression, providing them safe passage. With beauty commensurate to what it represents, gold makes tangible the wondrous, invisible force of freedom. In Latin, the word for gold is aurum, meaning “shining dawn.” Gold is more than honest money; more, even, than liberty. It represents the endlessly renewing fountain of the future, and the shining dawn of life.

As the existing system destroys itself, the question becomes, “how will wealth and financial freedom be defined in the future?” Today, we say that dollar millionaires and billionaires are wealthy. They used to say that about those who possessed millions or billions of Zimbabwean dollars. But that fiat currency is now dead and its possessors are penniless. History is absolutely categorical: fiat currencies are immoral, and because of that, they fail, without exception. Repeat: without exception, as documented throughout all of time. The new wealth will be measured in something different, most likely gold. There are only 5 billion ounces of it on earth, or roughly 0.75 ounces per capita. The supply grows at less than 2% per year, a fraction of world fiat money growth. Much of it is not and will not be for sale; the amount available to the market is less than 0.25 ounces per person. As gold takes its rightful place of honor as the people’s reserve currency, demand for its limited supply will continue to grow. Tomorrow’s billionaires will be those who prepare today for the coming, inevitable monetary paradigm shift. Those who acquire gold now, while it is still available and inexpensive, will create for themselves a future that is secure, free and rich with opportunity.

Tuesday, August 25, 2009

Bernanke likely to keep his job

President Obama today announced his reappointment of Ben Bernanke as federal reserve chairman. Reuters:
Obama is counting on Bernanke to nurse the economy back to health at a time when unemployment, home foreclosures and bank failures are still mounting.

The Fed chairman has pushed U.S. interest rates to near zero and flooded financial markets with hundreds of billions of dollars to stem a credit crisis and turn back recession.

Bernanke, appointed by President George W. Bush and widely respected as a top scholar on the Great Depression, now faces the challenge of pulling back the Fed's extraordinary support for the economy without setting back hopes for a recovery.
If the economy can recover without mega-piles of excess reserves in the banking system, why did the Fed put the money there in the first place? Is this a kind of Fed hand-holding while the economy begins producing and hiring again?

At any rate, the funds are there, by way of a doubling of the Fed's balance sheet over the last year. To keep those funds out of the loan market, the Fed pays the banks interest. A guaranteed interest (currently 0.25%) from the Fed for doing nothing sounds attractive compared to the risks involved in loaning money. But how long can this go on? As Robert Murphy points out, paying interest to the banks increases their reserves, and increases them exponentially.

Bernanke recognizes that at some point banks will want to start lending again, and when this starts to impact the broad measures of money supply, the Fed will swing into battle with its exit strategy. It has various policy tools, all designed to raise interest rates. But if the Fed raises the interest it pays banks on their reserves, thereby setting a floor under the short-term federal funds market, banks will not starve from the decline in lending.

Does that sound reassuring? Will the Fed "tighten monetary policy" just when the (hoped-for) recovery begins to gather strength?

Monday, August 24, 2009

The Doomed Dollar

Ben Bernanke is optimistic about the recovery, and his comments last Friday sparked a rally on Wall Street. But there are other views. Bill Bonner reports:
[D]espite press reports of a recovery, the key indicators of real economic growth are still falling. Almost one out of ten mortgages are now delinquent. And the rate of foreclosures is increasing faster than any time in the last 30 years. Housing prices, meanwhile, fell 16% in the 2nd quarter, from a year earlier, according to the National Association of Realtors.

Unemployment claims went up last week.
Furthermore,
The factories built in China to supply products to America during the bubble years now find they have no market.

Currently, overcapacity and oversupply are causing prices to fall. Falling prices mean rising currency values. Each unit of “money” buys more stuff. But there are many competing currencies, and they don’t all rise and fall together. Even in a world of deflation, some currencies will deflate more than others.

The dollar is, of course, the world’s main money. In a sense, the whole world economy is under its heel. But it is a heel that has never been dipped in the river Styx. It is now a heel that waits for an arrow.

PIMCO is the biggest manager of bond funds in the world. It says the greenback is going to lose its status and lose its value.

“Investors should consider whether it makes sense to take advantage of any periods of US dollar strength to diversify their currency exposure,” says its Emerging Markets Watch report. “The massive amounts of US dollar liquidity produced in response to the crisis” doom the currency.

Thursday, August 20, 2009

Death by Free Lunch

This from Richard Daughty, the Mogambo Guru, who defines Death by Free Lunch as
a fatal condition where idiotic governments in the thrall of mindless ‘gimme gimme’ democracy and ‘gimme gimme’ fascism and ‘gimme gimme’ socialism and ‘gimme gimme’ communism obediently borrow and deficit-spend a fiat money, which is created to monstrous excess by their central banks expressly for this very purpose, to benefit their friends and themselves in the short run, but to the horrible detriment of everybody in the longer run as all this new money percolates through the economy to cause horrendous inflation in consumer prices and in the size of government, and people start screaming in outrage and anger and rioting, not because wolves are literally eating them alive, but because inflation in prices and a bankrupt, ruined economy means that they can’t feed their crying children, and all of that incessant wailing is drilling into my head like an ice-pick jammed through my ear and into my freaking brain, all because of the loathsome Federal Reserve!


Wednesday, August 19, 2009

Ron Paul's "End the Fed" is coming next month

And Michael Nystrom at goldseek.com has a pre-publication commentary on it.

Paul thoroughly condemns the Fed on moral grounds. Nystrom writes:
In its simplest definition, morality is the ability to know the difference between right and wrong. The Fed has a power granted to no one else in society - except counterfeiters. It has the ability to create money from thin air. In fact, the Fed is essentially the largest, most revered, officially sanctioned counterfeiter in the world. It creates money from nothing, which is distributed via Congress to the politically most well-connected individuals and institutions. . .
We should remember that every other counterfeiter is considered a felon and manufactures money without a hint of government reverence. On the other hand, the government grants the power to counterfeit legally to the Fed and only the Fed, by virtue of the Federal Reserve Act of 1913.
As more money is created to fund bailouts, stimulus measures and just about everything else under the sun, the currency in existence is devalued. Savings are eroded. Wealth is redistributed from the poor to the rich. And all the while, the government and the Fed say the measures taken are necessary, and for the benefit of all. . .
[Earlier in his political career] Dr. Paul had the opportunity to ask a Federal Reserve official about the morality of diluting the money supply and how it differs from a farmer diluting the milk he sells:
"By what moral right do we have to create purchasing power out of thin air? Whether it is done by the creation of credit or Federal Reserve notes or whether it's the creation of SDRs [special drawing rights] and international in scope, by what right do they do this? Is it any more moral to dilute the purchasing power of the money you hold in your wallet than it is for the farmer to dilute the milk supply with water?"
As Nystrom points out, we'd no longer trust the farmer who diluted his milk and would buy our milk from someone else. We have that choice with milk farmers -- but not with the nation's money supplier, the Fed, which holds a government-granted monopoly on the issue of notes.

If Ron Paul's Audit the Fed bill gets passed without dilution, might we expect the government that created this monster to come under closer scrutiny, as well?

Tuesday, August 18, 2009

Ludwig von Mises

Mises Institute today published a tribute to Ludwig von Mises that was written on the occasion of his 90th birthday in 1971. Authored by Murray Rothbard, it shows Mises the radical in both approach and practice of economics.
Mises shows that the market economy is a finely constructed, interrelated web; and coercive intervention at various points of the structure will create unforeseen troubles elsewhere. The logic of intervention, then, is cumulative; and so a mixed economy is unstable — always tending either toward full-scale socialism or back to a free-market economy. . .

The instability of the interventionist welfare-state system is now making fully clear the fundamental choice that confronts us between socialism on the one hand and capitalism on the other. Perhaps the most important single contribution of von Mises to the economics of intervention is also the one most grievously neglected in the present day: his analysis of money and business cycles. We are living in an age when even those economists supposedly most devoted to the free market are willing and eager to see the state monopolize and direct the issuance of money. Yet Mises has shown that

. there is never any social or economic benefit to be conferred by an increase in the supply of money;
. the government's intervention into the monetary system is invariably inflationary;
. therefore, government should be separated from the monetary system, just as the free market requires that government not intervene in any other sphere of the economy.

Monday, August 17, 2009

Another hyperinflation prediction

Writes Doug French on today's Mises.org:
But a few savvy folks are taking Bastiat's cue that it's more important to understand what is unseen as a result of economic policies, as opposed to just what is seen. While the fractional-reserve money-manufacturing process is currently broken in the commercial banking sector — because credit-worthy borrowers are hard to source and crumbling real-estate values have bank regulators closing a handful of small banks each Friday evening — the Federal Reserve has expanded its balance sheet to make up the difference and bailed out the large-money-center banks in order that the whole apparatus doesn't collapse.

So instead of allowing the market to provide a healthy cleansing deflation, the Fed, the Treasury, and bank regulators are fighting valiantly to keep the fractional-reserve-bubble machine operating, with the ultimate result likely to be inflation and possibly hyperinflation. "As inflationary pressures mount anew and the financial markets increasingly shun US Treasuries," wrote John Williams on his Shadow Government Statistics website this past January [available here],

"an inflationary depression can evolve quickly into a hyperinflationary great depression. Although hyperinflation became inevitable in the last decade, the onset of the process just recently was triggered by Fed and the Treasury actions in addressing the systemic solvency crisis."

What Williams describes is phase two of Mises's inflation outline: instead of a rising demand for money moderating price increases, a falling demand for money will instead intensify price inflation. Finally, we come to phase three, where prices go up faster than money supply, the demand for money drops to zero, and government fiat currencies collapse.

Saturday, August 15, 2009

Audit the gold stock

Stewart Dougherty writes at Goldseek (July 27, 2009):
[T]he gold holdings of the U.S. have not been audited in more than 50 years. One reason given for the lack of an audit is that it would be “too expensive” to conduct one.
Dougherty continues:
Even the Treasury Department’s clandestine $50 billion Exchange Stabilization Fund (ESF), which is only one-fifth the value of America’s reported gold holdings, undergoes an annual audit. For fiscal year 2008, this audit was conducted by KPMG, a well-known, independent CPA firm. KPMG’s 2008 ESF audit uncovered “significant deficiencies,” “material weaknesses,” a “weak control environment,” and “several control deficiencies.” If a Treasury organization subject to annual audits could fail its recent exam as broadly as that, what are we to assume about the safety and security of the people’s gold supply, which, like the national money geyser, the Federal Reserve Bank, is never audited? And if the ESF is audited each year, what legitimate rationale can there be for not auditing the nation’s gold supply? Something isn’t adding up.
But only from our perspective, not the government's. Dougherty then makes a disturbing observation:
For the past 28.5 years, from 1980 through June, 2009, the United States government’s gold holdings have been reported as being essentially constant, at around 262 million ounces. Gold hit a nominal price high of $850.00 per ounce in January, 1980, when a severe recession was developing. (Compared to today, 1980 looks like the bubbliest part of the Roaring 1920s.) Inflation-adjusted (using government CPI figures, which are hotly debated), that price would now exceed $2,400 per ounce, whereas the current market price is only $950.00 per ounce. As GATA (www.gata.org) has demonstrated beyond any doubt, U.S. Treasury and Federal Reserve officials actively monitor and seek to suppress the gold price, because a rising price can signal fiscal, economic and/or fiat currency distress, things that are bad for markets and embarrassing for governments. (GATA’s work in this area has been nothing short of heroic, and is well worth examining in detail.) For gold to be selling today at only 40% of its 1980 inflation-adjusted price, in the midst of the worst financial crisis in the nation’s history, is curious.
He then develops three detailed scenarios about the possible status of American's gold stock.

1. Fort Knox scenario - all 261.5 million ounces of gold is really there. "The gold supply is owned free and clear by the United States and its citizens. It is not swapped, hypothecated, pledged, exchanged, leased, sold, claimed, conditionally offered or in any other way compromised with respect to ownership. A full audit of the gold would prove that it exists strictly in bullion form (with no 'paper bullion' or third party warehouse receipts) in the stated depositories. Based on recent fiscal, financial, monetary and economic developments, we view this scenario as possible, but extremely unlikely."

("The United States Bullion Depository, better known as Fort Knox, is said to contain 147.3 million troy ounces of gold, over half the nation’s total reported gold bullion holdings of 261.5 million troy ounces. The remaining 114 million ounces are said to be stored at the Denver and Philadelphia Mints, the West Point Bullion Depository, and the San Francisco Assay Office.")

2. Fort Hocks scenario - an audit would "show that a significant portion of the citizens’ gold has been mobilized by the Treasury and / or the Federal Reserve; in other words, that it has been hocked at the global financial system’s pawn shop. There are many possible means by which this could have happened . . ." He then goes into details about some of these means.

3. Fort Shocks scenario - an audit would "reveal that America’s gold is gone, either in whole, or in part. It might have been sold outright, pledged to counterparties, or otherwise distributed. The belief that there are millions of ounces of gold in Ft. Knox would therefore be a great American delusion. America’s gold could have been sold or exchanged in several ways." He explains how.

Near the end of his must-read article he concludes:
If it becomes known that the United States has surreptitiously hocked or sold its citizens’ gold, the price per ounce would most likely explode. Conceivably, gold would have its first $500 up day as people threw in the towel on other forms of “money” they could no longer understand or trust.
Even if the Fort Knox scenario could be demonstrated as correct, it doesn't mean the other scenarios would never be tried.

Friday, August 14, 2009

Will currency destruction save us?

According to a press release of August 12, 2009, the Fed is under the impression that its "policy tools," along with other government interventions, are bringing the recession to an end. To wit,
Although economic activity is likely to remain weak for a time, the [Federal Open Market] Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.
The Fed's Beige Book for July 29, 2009, prepared by the Boston Fed, says that
Reports from the 12 Federal Reserve Districts suggest that economic activity continued to be weak going into the summer, but most Districts indicated that the pace of decline has moderated since the last report or that activity has begun to stabilize, albeit at a low level.
The one bright spot for those hoping for a real recovery was that most Fed Districts "reported sluggish retail activity" and that "Consumer spending in the early summer remained below previous-year levels in most Districts, as households continued to be price conscious."

Why is this a good sign?

Peter Schiff explains:
To return our economy to health, we must first allow market forces to ring out the excesses of the bubble years. Even government economists acknowledge that this decade’s spending boom resulted from a combination of asset bubbles and the dangerous overextension of consumer credit. Yet the same economists balk at the logical need for spending to drop now that the stimuli are no longer in effect. They argue for the resumption of spending by any means, regardless of its ultimate cost.
To restore economic health, he says, Americans must "stop shopping, live within their means, and replenish their savings."
But rather than accepting the market’s medicine, our government is overriding its own citizens’ responsible behavior. To do so, it has put borrowed money into consumers’ pockets, and then conjured various incentives for them to go out and spend it. This process requires more government bureaucracy, more debt, and more regulation at a time when we can’t afford any of it.
All the government's "incentives" and the Fed's "tools" are only possible because of the fiat paper currency that by law we're forced to accept. If money and banking were subject solely to free market forces, there would be no "dangerous overextension of consumer credit." Banks that tried would go belly-up. But government wants a money it alone can create at will, and the banks want a lender of last resort to bail them out when reckoning day arrives. Sound money and full-reserve banking have no part in this play.

Wednesday, August 12, 2009

The reason for using a commodity money

In 1923 Ludwig von Mises published an essay, "Stabilization of the Monetary Unit -- from the Viewpoint of Theory." He was addressing the monetary crisis governments created when they abandoned the gold standard in 1914 and went to war. His recommendation, cited below, was ignored in favor of a fiat paper standard governments or their central banks could manipulate at will. Without sound money, economic crises are unavoidable.
The reason for using commodity money is precisely to prevent political influence from affecting the value of the monetary unit. Gold is not the standard money [merely] on account of its brilliance or other physical and chemical characteristics, but because the increase or decrease of its quantity is independent of any orders issued by political powers. The crucial function of the gold standard is that it makes changes in the quantity of money subject to the laws determining the profitability of gold production. (as translated by Jorg Guido Hulsmann in his paper, "Mises on Monetary Reform: the Private Alternative," November 13, 2008)

Monday, August 10, 2009

Greenspan's mea culpa

Bill Bonner, co-author of Financial Reckoning Day and other books on finance, has deservedly harsh words for economists generally and Alan Greenspan in particular:
At least something good has come out of the economic crisis; it blew off the purple robes that clothed economists and exposed their naked flanks. Still, they don’t deserve the beating they’re getting in the press – with snide remarks and sarcastic comments; they deserve better. A beating with sticks!

Even Alan Greenspan admitted he had “found a flaw” in his own thinking. We will have to imagine the giggles from the back of the room – if anyone had been awake. It was as if Stalin had confessed to being rude to his mother or Bernie Madoff copped a plea for shoplifting. The mea was fine, but the culpa didn’t seem to measure up to the facts. He, more than any living human being, was responsible for the biggest financial debacle in history; you’d hope he’d be a gentleman about it and hang himself.

Meanwhile, the queen of England visited the London School of Economics and had a question: why weren’t economists on top of this thing?

They replied to this question last month. In a three-page letter, they avoided the simple truth – that their trade was no more reliable than fortune telling and marriage counseling. The letter claimed that a “psychology of denial” prevented government and financial eyes from seeing the catastrophe in front of them. It was “a failure of the collective imagination of many bright people,” they said.

In fact, it was the exact opposite – imagination run wild. Economists imagined a world without yesterday or tomorrow…a world in which you could run up debts forever and never have to pay them back.
Have they at least learned from their mistakes? Not a bit. They love Keynes more than ever.
From one scam to another…from bailing out Wall Street to bailing out the entire world economy, the more stimulus programs fail to bring a recovery, the more economists call for more stimulus.

Economics in three words

Do not steal.

Sunday, August 9, 2009

The BIS is sweating the recovery

The Bank for International Settlements (BIS) was founded in 1930 as a means of facilitating reparations payments from Germany to the Allied powers. According to Wikipedia,
The original board of directors of the BIS included two appointees of Hitler, Walter Funk a prominent Nazi official, and SS officer Oswald Pohl, both convicted at the Nuremberg trials after World War II, as well as Herman Schmitz the director of IG Farben and Baron von Schroeder, the owner of the J.H.Stein Bank, the bank that held the deposits of the Gestapo.
The BIS was alleged to have helped Germans loot assets from occupied countries during WW II, and accordingly a UN monetary committee recommended its liquidation at the "earliest possible moment." Economist J. M. Keynes and other British, along with President Harry Truman, prevented the dissolution in 1945. Today, the BIS serves as a bank for central banks, with 55 member banks worldwide. Fed chairman Ben Bernanke is currently on the BIS board.

According to the late professor Carroll Quigley of Georgetown University in his book, Tragedy and Hope: A History of The World in Our Time, the BIS was to serve as the apex of a system of world financial control run by privately-owned central banks. "It was set up to be the world cartel of every-growing national financial powers by assembling the nominal heads of these national financial centers." Each central bank would seek to dominate
its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world.
With this background, we might expect the BIS to endorse the massive stimulus programs that governments and their central banks are pushing on their economies, and in principle they do. But the BIS is worried. According to a report in The Australian on June 30, 2009, the BIS said
there would not be a sustainable recovery until major problems in both the financial system and in the real economy were tackled, and it warned that governments were a long way from dealing adequately with either.
Furthermore,
. . . fiscal expansion tends towards permanency and a rise in long-term deficits.
Although the deficits could be manageable if recovery came quickly, the BIS believes the task of removing the distortions that caused the crisis in the first place has barely begun.

"The financial sector has to shrink, as it has grown too large and accumulated assets of dubious quality," it said. "Debt and leverage in both the financial and the non-financial sectors have to decline further, and household saving rates need to rise to more reasonable levels."
Of course, the BIS will not admit that the source of the distortions came from the central banks' cheap money policies. The staggering level of bailouts, both past and yet to come, will continue to aggravate those distortions and produce new ones. With many economists predicting high inflation or even hyperinflation in the near future, we could be witnessing the last days of central banking.

Friday, August 7, 2009

Commodity prices and government

Investment guru Jim Rogers said recently:
I'd rather own commodities than just about anything I can think of in a period when the whole world is debasing paper money. . . If I'm right, the [commodity] bull market still has a long way to go; the fundamentals have only gotten better in the last year. The best place to have your money is in commodities.
What has been the pattern of commodities historically? When the world used a commodity money -- gold or silver or both -- price indices show a decline in commodity prices. Hans-Hermann Hoppe, in Democracy: The God That Failed, notes that
Before World War I, the U.S. index of wholesale commodity prices had fallen from 125 shortly after the end of the War between the States, in 1868, to below 80 in 1914. It was then lower than it had been in 1800 [which was 102.2]. In contrast, shortly after World War I, in 1921, the U.S. wholesale commodity price index stood at 113. After World War II, in 1948, it had risen to 185. In 1971, it was 255, by 1981 it had reached 658, and in 1991 in was near 1,000. . . [D]uring the seventy-three years from 1918 until 1991, the U.S. money supply increased more than sixty-four-fold.
The Fed began operations in 1914. Government abandoned gold in 1933 domestically and in 1971 internationally to remove an important barrier to inflation. Rogers is betting governments will continue destroying their currency. I see no reason to expect them to act differently.

Monday, August 3, 2009

The Case Against the Fed

Mises Institute has republished David Gordon's excellent review of Murray Rothbard's The Case Against the Fed -- a must-read for anyone wishing to understand the Federal Reserve System.
But is not this practice [of fractional-reserve banking] a blatant instance of fraud? So it would appear, and so Rothbard firmly avers that it is. Unfortunately, several nineteenth century British legal decisions held otherwise, and these verdicts were adopted by the American courts as well.
How serious were these decisions? In Rothbard's view they have been primarily responsible for "the disastrous inflations of the past two centuries." [Mystery of Banking, p. 93]

A system of free banking would serve to counter the tendency of banks to inflate through fractional reserve banking. "Free banking," Rothbard concludes, "far from leading to inflationary chaos, will insure almost as hard and noninflationary a money as 100 percent reserve banking itself." [ibid., p. 117]

Saturday, August 1, 2009

Cash for Clunkers

The Associated Press reports that
The government's popular "cash for clunkers" program may be running out of money after only a matter of days as car shoppers flock to dealerships to take advantage of the rebates.
Known as the Car Allowance Rebate System, or CARS, it was originally funded at $1 billion and scheduled to run until November 1, or until the money ran out. The money ran out in days, as CARS has subsidized the purchase of 22,782 vehicles, with another 25,000 deals in the pipeline waiting government approval. Dealers are worried the government won't come through with the money.
Lawmakers said they would try to find additional funding for the program, which under the legislation could grow to $4 billion for the funding of up to 1 million new car sales.
Wouldn't it be wonderful to help consumers take up to "1 million gas guzzlers off the road," as the CARS bill's author, Rep. Edward Markey, D-Mass., said recently?

The answer is no -- not if your goal is to correct the mistakes that brought on the recession. As Peter Schiff observes:
By incentivizing Americans to destroy fully paid-for cars so they can go deeper into debt buying brand new ones, the government weakens an already crippled economy. The last thing we want to do is subsidize Americans to go deeper into debt by buying more stuff. Don’t they realize that is precisely the behavior that got us into this mess?
The additional debt will help short-term GDP numbers, but at the price of long-term misery. The rampant stimulus policy of the Obama/Bernanke administration "will prove lethal to any recovery," Schiff concludes. "The recession is over; long live the depression!"