Saturday, September 29, 2007

Thirty-six Years Late and Ten Trillion Dollars Short

Goldbug Howard S. Katz blogs that media coverage of the Fed is rife with fraud. There is no difference, notes Katz, between the Fed's reducing interest rates and increasing the money supply, although the Fed wants to claim otherwise:

"You will usually hear that the Federal Reserve is adjusting the Federal funds (not the T-bill) rate. This is another piece of misinformation designed to keep the public’s eye off the ball. The Federal Reserve does not operate in the Federal funds market...."

Katz notes that in order to purchase T-bills, the Fed must increase the money supply, and it does so through printing more monopoly money, i.e., dollars:

"When the Federal Reserve first received this power, the total money supply of the U.S. was twenty billion dollars. This week it was 1363 billion dollars."

Between 1946 and August 1971 countries operated under the Bretton Woods system under which most countries settled their international balances in U.S. dollars but some redeemed dollars for gold. Because of pre-1971 inflation, balance-of-payments deficits reduced gold reserves. Thus, President Nixon announced that the United States would no longer offer gold. According to the Bureau of Labor Statistics, one dollar in 1971 has the same buying power as $5.13 in 2007. In other words, since the ending of the final link to the gold standard 36 years ago, the dollar has declined to 1/5.13 or 19.49% of its value.

Mainstream economists have developed elaborate rationales for this decline, such as "assuming that all wages are indexed, all savings accounts are indexed, the stock market goes up at a constant rate, and loan payments are indexed, then inflation does not matter". If you believe them you lose money.

After 36 years of post-Bretton Woods inflation, The New York Sun notes that the current real estate bubble has burst. Prices have fallen by the most since 1970 and purchases have fallen by 8.3%, the most in seven years. Construction is in its worst slump since 1991. It is true that there is a bright side to the decline of the dollar, namely, we have become to Europe what Europe was to us in the 1960s: a tourist destination. As the Sun also reports, "New York City's travel, real estate, and manufacturing sectors — which profit from the sale of services to foreigners — will likely benefit." Of course, those who need to purchase real estate in the New York area will pay through the nose, as their monopoly dollars need to be brought in wheel barrows and cannot compete with Euros, Yen or Yuan. But who cares, since those of us who are selling now can retire?

To its credit, the Sun ran another front page article about the dollar's decline , "The Dollar's Fall Starts to Worry". The Sun notes that "foreign investors proclaim that a "for sale" sign has been hung on the city". The Sun quotes Axel Merk:

"No country in the world has ever fought itself to prosperity by weakening its currency"

The Sun also quotes chief of the Fed's counterfeiting operations, Ben Bernanke, as saying that there is a "liquidity crisis". With my TIAA CREF money market fund yielding 3.68%, what kind of liquidity crisis is Bernanke describing? Is he insane? I'm having trouble figuring out whether Ben Bernanke is on hallucinogenic drugs; is a crook; or hopes for a high-paying job from schnorrers* like Jim Cramer.

The Sun also notes that Russia, China and the Middle East countries are starting to exchange dollars for the euro. Given the multi-trillion (not billion) extent of foreign holdings, there is a massive potential for further reductions in the dollar.

Given that the Sun is reporting the dollar decline thirty-six years after the end of the gold standard, and after the Fed has circulated ten trillion dollars in monopoly money around the world, it looks like the Sun's front-page article may be thirty-six years late and ten trillion dollars short. Buy gold and commodities, friends.

*To revise Groucho Marx's song "Hooray for Captain Spaulding"in Animal Crackers (the tune was also the theme to Groucho's 1960s TV Show, You Bet Your Life):

My name is Jimmy Cramer
The Economy's Explorer
Did someone call me a schnorrer?
Hooray, hooray, hooray

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