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Showing posts from December, 2009

The Fed's Inflation bomb

John Carney, writing in The Business Insider, questions the Fed's ability to shrink its expanded monetary base to avoid a major inflation. "One of the sources of the growth of the monetary base has been the $1 trillion of purchases of mortgage backed securities by the Fed. . . Much of it is on deposit with the Fed itself, where banks can earn risk-free interest instead of lending it to home buyers at risk of losing their jobs or businesses still suffering from diminished consumer demand."

When bank lending starts to accelerate, the Fed will have to withdraw those funds by finding market buyers for them.
The market’s knowledge that the Fed has become a seller rather than a buyer for mortgage backed securities will likely result in the pricing of these securities falling. In order to bring the yield of these securities up to a level acceptable to the market, they will have to be sold at a discount. This discounting means that the Fed will not be able to withdraw as much liq…

Phantom buyers of Treasury debt

Eric Sprott & David Franklin in their Markets at a Glance calculated that the U.S. government would "need to sell $2.041 trillion in new debt - or almost three times the new debt that was issued in fiscal 2008" to balance its 2009 budget.

But who is in a position to buy so much debt? The writers dug into some government publications and came up with the three biggest buyers:

1. Foreign and International buyers who purchased $697.5 billion.
2. The Federal Reserve who bought $286 billion.
3. The Household Sector who bought $528 billion to Q3 – which puts them on track [to] purchase $704 billion for fiscal 2009.

But wait -- what is "the Household Sector"? For an answer, they turned to the "Federal Reserve Board of Governors Flow of Funds Data which provides a detailed breakdown of the owners of Treasury Securities to Q3 2009." This mysterious group - the Household Sector - bought "35 times more government debt than they did in 2008."
Amazingly, we…

Shostak critiques Bernanke

In a long column addressing a speech Fed chairman Ben Bernanke gave at the Economic Club in Washington, D.C. on December 7, Austrian economist Frank Shostak concludes with these remarks:

Bernanke: "Our regulatory structure requires a better mechanism for monitoring and addressing emerging risks to the financial system as a whole." He goes on to say he favors the creation of a "a systemic oversight council, made up of the principal financial regulators, to identify developments that may pose systemic risks, recommend approaches for dealing with them, and coordinate the responses of its member agencies."

Shostak: "We suggest that the threat of future crises will disappear once the Fed stops tampering with interest rates and the money supply. Furthermore we suggest that the act of money creation out of thin air is going to disappear once the present paper standard is replaced with a gold standard. If we allow a market-chosen money to fulfill the role of the medium…

Characterizing the decade

Time magazine describes the first 10 years of this century as "the decade from hell." Peter Schiff disagrees, saying it had striking parallels to the Roaring Twenties. "[T]he decade now closing gave us the biggest and most irresponsible spending orgy in U.S. history. The past decade was the party; the one ahead will be the hangover."

Schiff goes on to say:
For now, Congress and the President remain as clueless as Time. To show its resolve to "get to the bottom of things," the Obama Administration has impaneled a commission to investigate the causes of the financial crisis. Do not expect the proceedings, which are just getting underway, to come up with anything but the most politically useful explanations.

The Fed's one great success

Jörg Guido Hülsmann is senior fellow of the Mises Institute and author of Mises: The Last Knight of Liberalism and The Ethics of Money Production. (See my review of the latter here.) He teaches in France, at Université d'Angers. In a commentary on the alleged independence of the Fed, he writes:
The Fed has had one great success: it is by far the largest funder of academic research in monetary and macroeconomics, employing hundreds of economists, financing conferences and seminars, providing paid consultancies, and so on. Is it any wonder that the majority of academic monetary and macroeconomists support the status quo?By this he is referring to the 270 economists who have signed an "open letter" supporting the Fed's independence from serious audits. According to this letter, "Economic theory and a massive body of empirical evidence provide strong support for the independence of central banks in their conduct of monetary policy."

How can an institution be &q…

Currency competition

Ron Paul has a sign in his office that reads, "Don't steal - the government hates competition." Government is a monopolist, and one of the ways we've suffered from this monopoly is through its coercive control of money. Government dictates that money will be paper bank notes with no redeeming value and to give us a false assurance turns the production of paper money over to a central bank. The central bank, known as the Fed, falsely claims to be independent of political pressure and to be guided in its "policy" only by what is good for the economy. In return for this grant of privilege, the central bank sees to it that government remains flush with money to cover whatever project D.C. demagogues dream up - foreign war, health care, bailouts for their cronies. It does this by creating money out of nothing, much like a child would do playing make-believe. But when grown-ups do it, it's called counterfeiting. And counterfeiting is a form of theft.

Go…

Is gold a hedge against inflation?

Steve Saville, one of my favorite commentators, addressed this question recently:
[U]nder the current system a high rate of monetary inflation is one of the two primary ingredients of a long-term gold bull market. Monetary inflation is not sufficient by itself, but when mixed with the second ingredient the result will be a powerful advance lasting many years.

The second ingredient is: enough economic weakness/problems to bring about a general increase in the desire to save. The economic problems cause both an increase in the desire to save and a reduction in the demand for growth-oriented investments such as equities, while a high rate of monetary inflation prompts people to save in terms of something other than the official currency.

Rather than saying that gold is a hedge against inflation it is therefore more correct to say that gold is a hedge against inflation under certain economic conditions. At other times, investments such as general equities could prove to be far better hedges …

What is Money? by Frederic Bastiat

Note: Frederic Bastiat (1801-1850) was a French economist, statesman, and author.

WHAT IS MONEY?

By Frederic Bastiat

First published in 1849

“Hateful money! Hateful money!” cried F——, the economist, despairingly, as he came from the Committee of Finance, where a project of paper money had just been discussed. “What’s the matter?” I said. “What is the meaning of this sudden dislike to the most extolled of all the divinities of this world?”

F. Hateful money! Hateful money! B. You alarm me. I hear peace, liberty, and life cried down, and Brutus went so far even as to say, “Virtue! Thou art but a name!” But what can have happened?

F. Hateful money! Hateful money!

B. Come, come, exercise a little philosophy. What has happened to you? Has Croesus been affecting you? Has Jones been playing you false? Or has Smith been libeling you in the papers?

F. I have nothing to do with Croesus; my character, by its insignificance, is safe from any slanders of Smith; and as to Jones——

B. Ah! Now I have it. How co…