The Greatest Increase in Wealth Inequality in American History Occurred During the Obama Administration

Source: David Stockman Email

I just received an email from David Stockman's newsletter, and it included the upper graph taken from Edward N. Wolff's "Has Middle Class Wealth Recovered."  There are a number of ways to look at the question of rich versus poor; the above graph uses one, the relative shares of the top one percent and the bottom  ninety percent. (Disclaimer: I'm one of the nine percent in neither category.)  

The gap narrows in the 1970s, but observe  the lower graph, which is of real wage growth.  Real wages stopped growing in 1973.  The reason the wealth inequality declines during the 1970s in the upper graph is that the stock market was falling in the 1970s. Hence, the decline in wealth inequality during the 1970s is a measure of joint pain and only of theoretical importance.  The solution put forward by Richard M. Nixon in 1971 was pumping money into the economy via the Federal Reserve Bank. 

The pure paper money system established in 1971  helped the wealthy but not the majority.  Notice also that the third-most-rapid increase in wealth inequality, according to the upper graph, occurred during the Reagan administration. It began to solidify during the Bush I years, 1988-1992; it remained constant during the Clinton years; then, following the tech bubble bust of 2001 it escalated during the Bush II years, which were the years of the second-greatest gains in wealth inequality.  However, Bush and Reagan were pikers compared to Obama, who oversaw the most massive wealth transfers, which followed the 2008 crisis via the expansion of the Federal Reserve's balance sheet, the creation of massive amounts of reserve IOUs called Federal Reserve bank credit, quantitative easing, and so on. 

The lower graph tells a slightly different story.  Since the early 1970s, when the Fed was given a free hand to redistribute wealth via the creation of paper money, real wages have stagnated.  The GDP has continued to grow, although the meaning of GDP is questionable because it includes government spending and make-work projects that do not create value.  There is little difference between Democrats and Republicans.

Will the Trump Trade War Result in a Spike in Gold?

Gold-stock analyst John Doody holds in a Kitco interview that the Trump tariffs will result in job losses. He says that, in turn, the Fed will cut interest rates. The result of further monetary expansion will be a 2001-2011-like upswing in gold prices. The trouble with his thesis is that interest rates are already so darn low that the Fed doesn't have very far to cut even if it wants to cut. I'm sympathetic to his opinion that a trade war will contribute to a declining economy, resulting in increased Fed intervention. The whole house of cards of the post-Reagan era can fall.

Stock Buybacks and the Wisdom of Presidents

Steven Pearlstein of the Washington Post published an article that draws a parallel between the mortgage bubble of the Bush years and the current corporate stock buyback bubble, which to be fair began under Obama but continues under Trump. Pearlstein omits the biggest bubble of all:  the Obama bailout that sustained years of malinvestment in derivatives and real estate.  Also to be fair, the Obama bailout began under Bush but was ramped up.  At one point economists at the Jerome Levy Center at Bard College identified $29 trillion in subsidies to Wall Street; hence, Obama oversaw the largest subsidization of any industry in the history of the world.

Here is the wisdom of presidents, reflecting the democratic, Progressive genius of the American people:

Bush:  Have the Fed print lots of money and sell houses to people who can't figure out how to find a job. 

Obama: Have the Fed print lots of money and give it to Wall Street investors who can't figure out how to invest. 

Trump: Have the Fed print lots of money and give it to corporate executives who can't figure out how to innovate.

My Letter to the Kingston Freeman Concerning Gary Weiss's Op Ed

The Kingston Freeman published my letter in response to Gary Weiss's Op Ed concerning Ron Paul:

Dear Editor:

Congressman Ron Paul disavows letters which he says he did not write (syndicated columnist Gary Weiss, The Street – Freeman website, Dec. 28, “Ron Paul captures the crackpot vote").

Contrast that Christmas-sized portion of hate doled to Paul to your handling of Barack Obama.

In 2008, there was no criticism of then-Sen. Obama’s associations with anti-Semites and felons, to include Bill Ayers, Jeremiah Wright, and Father Pfleger. In contrast, Weiss convicts Paul without trial.

Paul is the only candidate to question both parties’ refusal to discuss the bipartisan commitment to the Federal Reserve Bank and its creation of income inequality by diverting wealth from the public to Wall Street.

As Nicola Matthews and James Felkerson of the Jerome Levy Institute reveal,  in the past few years the Fed has purchased $29 trillion in assets.  The assets were financed with dollars the Fed printed from thin air.

We have not felt the effects because central banks prop up the dollar.

To the extent that the toxic assets are less than the $29 trillion, there is a loss to the public, likely in the trillions.

The entire American GDP is about $14 trillion.

But that’s the least of it.

 

By tripling the money supply since 2008 (from $800 billion to nearly $3 trillion), the Fed and the two major parties have opened the door to the money center banks increasing the American money supply 30-fold.

The potential instability exceeds that of the 1930s.

So far, only Paul has raised these issues.

Maybe I can see Weiss’ point:

Why discuss the Fed when there are plentiful opportunities in the op-ed market to call Paul, R-Texas, and his supporters names, but few to discuss substantive issues? 

MITCHELL LANGBERT

West Shokan

mlangbert@hvc.rr.com

Future of America at the Wall Street Demonstration

H/t Contrairimairi.  I wonder what percentage of the Wall Street demonstrators are as smart as this guy.
.

Obama's Stock Market Weakness

The Dow fell 391 points today while the S&P 500 fell 37 points, 3%, to 1129.  The immediate reason was that yesterday the Fed announced a lukewarm as opposed to a hot easing whereby it is exchanging long term for short term securities.  Take this into account: Federal Reserve Bank Credit has increased over 300% in the past three years. That's the largest money supply increase in American history except when the Continental Congress destroyed the Continental, America's first currency, back in Revolutionary War days.  Given the massive easing, including QE2 earlier this year, one would think that Wall Street would be satisfied. But it isn't.  Dollar inflation isn't enough, and when the Fed announced a lukewarm response to the implosion of European socialism, the American markets crashed.  I've lost a chunk of change because I wasn't expecting QE2 to have had such a weak effect. Plus gold, following a record high within the past few weeks, is in a correction or consolidation mode.  But the strengthening dollar due to the Fed's relative conservatism means that cash has gone up in value, which reduces the losses in riskier assets.

The Obama administration deserves responsibility for recent stock market weakness.  The massive quantitative easing should have had more of an effect on the markets.  It still might. What's holding it back is that the left-wing Obama Democrats have sledge hammered America's economy--the health care bill, environmental regulation, and proposed tax increases frighten investors.  Perhaps Obama and Congressman Maurice Hinchey believe that subsidies to corrupt "green" businesses that quickly fail will somehow stimulate the economy.  Such are Democrats' and America's economics profession's superstitions.  Throwing away money will not stimulate the economy.  We are in for a generation of economic decline because of Obama, Bush and The New York Times.

Unstoppable Force Versus Immovable Object: Road To $6500 Gold Paved with Failing Economic News

Kitco has some excellent commentaries.  Darryl R. Schoon discusses the likelihood of a meltdown in the dollar.  He argues that the 1971 devaluation of the dollar and removal of the international dollar from the gold standard led to a fiat currency.  He claims that traditionally fiat currencies last about 40 years, and we are now 40 years into the paper dollar regime.  The result has been trade imbalances, exodus of manufacturing from the US, and inflation. The paper dollar will become worthless in his view and the reverse will occur for hard assets. The collapsing dollar will lead to volatility and the markets will find a stable replacement for the dollar, likely gold or silver.  He predicts $3,000 to $10,000 gold.  He also argues that gold is no more volatile than tech stocks. Schoon claims that there are five stages of a gold bubble and we are in the fourth stage, where there is increased volatility.

Although I don't put much faith in the Fed or Chairman Bernanke, his message suggests volatility indeed.  Before I summarize his speech as depicted in Bloomberg, notice that silver has lagged gold and that commodities like agriculture and the general commodity index have not increased to the same degree.  One claim may be that current demand for gold is caused by its monetary qualities, that some investors are now viewing gold as money.  However, it is also true that the dollar has gone through a period, in my opinion a temporary period, of strengthening. The dollar has gotten stronger because of risk aversion directed toward the global credit and banking collapse (especially including Greece, Portugal and Spain) and because of the collapse in bubble credit here in the US.

Bernanke's talk today as reported in Bloomberg led to nearly a one percent fall in the Dow and the S&P 500. Bernanke indicates that the Fed is planning to raise interest rates, which will have a depressing effect on the stock market.  Bloomberg quotes Dean Maki, chief US economist at Barclay's Capital:

"'The Fed is not close to implementing additional stimulus.'  Expectations for additional steps were based on 'more hope than fact.'"


There is little doubt that the Fed will keep interest rates close to zero.  But continued weakness in the economy creates a logical problem.  If the Fed stimulates inflation increases.  Stimulus also fuels the short-run gold price.  Bernanke aims to begin reducing the amount of stimulus to avoid these risks.  But he risks further increasing unemployment.  The unstoppable monetary collapse meets the unmovable decline in the US economy.

Mr. Schoon is right that in the long term the current monetary regime will fail.  However, international risk and a weak economy suggest a short term strengthening of the dollar.  This could mean fluctuations of gold of 50% or more.  Ultimately, though, the Fed's "printing press" will cause the dollar to crash.  This will result in increasing commodity prices.

If you are worried about long term monetary instability, commodities other than gold might be better holdings right now.  For example, the DBC, Dunn & Bradstreet Commodity Index and the DBA, Dun & Bradstreet Agricultural Index, have hardly risen since 2008.  Moreover, silver, which can be purchased through SLV, the I-Shares silver trust, can be purchased to take advantage of silver's monetary characteristics.  The claim that gold's price increase is due to its monetary characteristics rather than short term speculation is contradicted by the relative lag in silver's price increase.  If you are hedging for a monetary skid or collapse, SLV might be a better bet than gold for now.

Over time gold will go up.  But if you can buy it at $950 why buy at $1180?

Stock Market Volatility

As of this writing the Dow Jones Industrial Average is up 389 points today, and it was up 450 points an hour ago.  The graph above, from IStockAnalyst.com is of Thursday's Dow.  The 700 point intra-day dip is widely attributed to a trading error.

The trading error scenario spooks me.  If a trader's error can move the Dow 700 points, then that same trader can manipulate the market 700 points.  Saying that a single, unidentifiable trader can manipulate the entire stock market 700 points changes my world view. 

I do not believe in conspiracy or market manipulation theories because economic incentives and the power of imitation are powerful enough to explain virtually all patterns.  Conspiracies exist at times, but they cannot explain most real world phenomena.  Add to that the psychological bias known as fundamental attribution error, the tendency for people to see situations as due to human causes.  For example, for most of human history people believed that Zeus or similar anthropomorphic gods caused thunder and lightening. Conspiracy theories are Zeus-like explanations.

If you had asked me last week whether a single individual could cause a ten percent fall in the Dow by manipulating price, I would have answered absolutely not.  But everyone else, every major financial news source, says I'd have been wrong.  There are enough players who can do this that (1) a simple mistake caused Thursday's 7% intra-day dip and (2) no one can figure out who it was, which means that there are enough such players to make it hard to figure out.  Short term market fluctuations are even less meaningful than I would have thought.


The VIX, a measure of stock market volatility, had mushroomed in recent days (see Yahoo! chart here)  but it fell sharply today, 30% as of 10 AM, following the announcement of a European rescue plan for Greece. Nevertheless, it is still high.  High volatility is associated with stock market bottoms, at least in the intermediate term.

Let's say the sharp dip on Thursday and the sharp increase today are due to the Greek crisis. It seems to me that the Greek cure will work for several years but not forever.  In order to solve their problems, Europeans will need to curtail spending, which would seem to have a detrimental effect on demand, hence profits, hence the markets.  Sounds like the US as well. Without monetary expansion the world economy is burnt toast. The real quality of life has been falling for decades as Federal Reserve Bank monetary expansion has subsidized government, hedge funds and Wall Street at the expense of productive Americans.

One analyst on Kitco  is predicting hyper-inflation as the US and Europe continue to subsidize real estate and stock markets through monetary expansion.  Bloomberg reports today that Ben Bernanke and the Fed have redefined what they mean by "tightening."  Undergrad economics students learn that the Fed tightens by selling treasury bonds to big money-center banks.  The cash received for the bond sales is taken out of circulation, reducing the money supply. In turn, that pushes interest rates up.  But here is what Bloomberg says the Fed now means by "tightening", according to Mitch Stapley of Fifth Third Asset Management:

"Altering a pledge to keep short-term borrowing costs low or articulating plans to begin selling the $1.1 trillion in mortgage-backed securities it now holds will amount to a tightening of monetary policy because the announcements will send bond yields higher, raising borrowing costs, said Mitch Stapley, chief fixed-income officer at Fifth Third Asset Management in Grand Rapids, Michigan."

In other words, the Fed will tighten by saying it will tighten, not by actually tightening.  That sounds a lot like my diet plan, except saying I'm going to diet doesn't have any real long term effect.

The central banks are painted into a corner.  If they raise rates then the world markets will fall.  If they continue to keep them at extraordinarily low levels (money market funds are essentially paying zero now) then there will be escalating inflation.   When inflation starts, there will be few ways to stop it.  One option might be to let the inflation ride. The Kitco analyst is thus predicting a 50,000 Dow, up five-fold from today.

A 50,000 Dow would mean that a dollar today would be worth a small fraction of its current value.  I don't subscribe to that prediction (who knows?) but it does need to be considered.  The other alternative, responsible tightening, would lead to falls in employment and an economic slow down.  Given that unemployment increased recently to 9.9%, according to the Bureau of Labor Statistics, I suspect that Bernanke, et al. aren't in a hurry to raise rates.*

The response to the rising unemployment will likely be additional infusions of money into an already bloated monetary base (recall that Mr. Bernanke and the Fed tripled the monetary base in 2008, and that money is still ready for banks' use).

I happen to have "A" credit (I'm insane, I should have bought a McMansion and gotten the Fed to pay off the mortgage) and have started to get those invitations for credit card checks like I used to get a few years ago.  Might inflation be right around the corner?

The one factor that has offset the inflationary bias in the economy is China.  But China is likely to be thinking about expanding its home market rather than continuing to work for ever lower wages selling exports bought in a depreciating US dollar.  If China starts pulling out of the dollar, then stock market increases will be over-matched by commodity increases as the dollar dwindles into the dust heap.



*The BlS writes:

"Nonfarm payroll employment rose by 290,000 in April, 

the unemployment rate  edged up to 9.9 percent, and 

the labor force increased sharply, the U.S. 
Bureau of Labor Statistics reported today. 

Job gains occurred in manufacturing, professional 

and business services, health care, and leisure 

and hospitality. Federal government employment 

also rose, reflecting continued hiring 
of temporary workers for Census 2010."

Do I Have Egg on My Face?

Do I have egg on my face? Sort of. Half an omelet. Chris Johansen forwarded the above video after my diatribes about Beck over the past couple of days. Glenn Beck is a hero for talking about the 2008 expansion of the monetary base. He is one thousand percent ahead of virtually the entire news media, which has tap danced around the financial system's exploitation of the average American.

But Mr. Beck can do more. For example, he attributes the monetary expansion to the government, and that is only partially true. Ultimately, monetary expansion is attributable to the banking system, not to the government. As Beck himself pointed out elsewhere, the Federal Reserve Bank is privately owned. Hence, the value of the dollars in your bank account are determined by private interests, not by the government and not by an objective standard.

As well, Mr. Beck could be exploring how the monetary system has been used to exploit the poor and working class to the benefit of the wealthy, especially the financial system itself which Americans have permitted to control their money. I had referred Beck to several books that examine this, such as Murray Rothbard's Mystery of Banking.

The subject of money is simple. In the 19th century most Americans, including those with first grade educations, were aware of the issue and it was publicly debated. Today, television and newspaper reporters attribute some kind of mystical aura to it.

It's good to talk about the monetary expansion, but omitting the redistributive effects of pumping up the stock market and of causing real wages to stagnate leaves the story incomplete. How the money supply pumps up the stock market is evident. More money means lower interest rates. Lower rates means higher stock market. Higher stock market means more trading. Nothing complicated. More money means more inflation. More inflation means lower inflation adjusted wages. Nothing complicated.

Fancy talk about a new world order is unnecessary to tell this story. The Whigs advocated central banking going back to Hamilton and before. Hamilton based his ideas on the philosopher David Hume, who was incidentally a mercantilist economist who set forth the basic Keynesian concepts that are in use among Progressives today. "Progressives" are "Progressive" because they rely on 18th century ideas.

So, Mr. Beck, you're doing ok, but you could be doing better. B-. But "A" for courage.

More on Reappointment of Bernanke

I received the e-mail below from the Campaign for Liberty. As I previously blogged, although I have been concerned about the Fed for many years (blogging on this issue as long as six years ago) I am not convinced that the Democrats are able to produce a responsible chairman. I may be wrong. It is true that it was Carter (not Reagan, as many people mistakenly think) who appointed Paul Volcker. The shift to conservative monetarist Fed policy was under Carter, not Reagan. I remember very this clearly. I was an MBA student at UCLA then and I had somehow gotten an informal position at the UCLA Business Forecasting Project. I think I was the TA of one of the economics professors. Larry Kimball ran the project and a guy named David Shulman who later became the chief equity strategist at Salomon Brothers from 1992 to 1997 and is now director of the UCLA forecasting project was an advisor. I recall very clearly Shulman's exclaiming that the St. Louis Fed was breaking out champaigne because of the shift in monetary policy in 1979, which was my first semester there.

My point is that the Democrats can potentially come up with a decent Fed chairman but given the current crop of maniacs in the Senate (witness the recent health care bill) I remain dubious. I sent this note to John Tate:

>Dear John--I'm with you in spirit, but I'm not convinced that the Dems will come up with a better chairman. I can imagine Harry Reid's pick for Fed chairman will not be Paul Volcker. Do you have any evidence on this? I'll be glad to blog it.


>January 25, 2010


Dear Mitchell,

After a full year of rope-a-done and refusing to have his Federal Reserve audited, Ben Bernanke is on the ropes and could be knocked out for re-nomination.

Campaign for Liberty activists are in the lead insisting "No Audit, No Bernanke." Please immediately call Senator Kirsten Gillibrand and Senator Chuck Schumer at the numbers below and tell them (again, if you've already called) "No Audit, No Bernanke."

Here's what's going on:

Campaign for Liberty launced a nationwide fight against a bailout for Bernanke last week. Now we are following it up with phones, email and banner ads targeting over a dozen swing-vote senators.

The Senate is boiling over with outrage about the Fed's abuse of the TARP program, bailouts, and money supply, as well as its refusal to submit to a full and complete audit.

Now is the time to deal the knockout blow!

Please call your senators at the numbers below and join in the fight:

Senator Kirsten Gillibrand: 202-224-4451
Senator Chuck Schumer: 202-224-6542

Tell them that Ben Bernanke must not be confirmed without an up or down roll call vote for Audit the Fed on the Senate floor.

This fight is really coming to a head, and the decision could will likely come in the next few days. Please call now.

In liberty,

John Tate

P.S. Thanks to the efforts of patriots like you, Ben Bernanke's days of secrecy at the Federal Reserve may be numbered!

That's because his confirmation is being held up until the Senate votes on Audit the Fed. Please call your senators at the numbers above and tell them plain and simple: "No Audit, No Bernanke."

Fed, Bernanke Cover Up Wall Street Welfare Moms' Receipts

A friend who teaches finance at a college near New York City (he doesn't want me to divulge his name because his college has threatened to fire any professor who reads my blog) has forwarded a telling Bloomberg report in response to my blog supporting the reappointment of Ben Bernanke.

Bloomberg reports that the Federal Reserve Bank required AIG to file a report four times, insisting that AIG delete more than 1,000 pieces of information concerning the bank bailouts. According to Bloomberg:

"AIG was asked to limit what the public knew about the Maiden Lane transactions. The payments have been called a “backdoor bailout” by lawmakers because banks, including Goldman Sachs Group Inc. and Societe Generale SA, were reimbursed at 100 cents on the dollar for mortgage-linked securities that had declined in value."

The Fed, for instance, redacted the information that the price AIG paid for default swaps was nearly 100 percent of market value. The aggregate cost of the transaction, according to the article, was over $15 billion. That's alot of poor people's tax money going down the tube of Wall Street's incompetence.

Moreover, a schedule A that included sensitive information was omitted from AIG's filing with the SEC. The article states:

"the SEC said in a Dec. 30, 2008, letter that AIG was 'required to file the entire agreement, including all exhibits, schedules, appendices.' After consultation with the New York Fed, AIG requested confidential treatment for the Schedule A, and on Jan. 14, 2009, AIG amended a filing saying that the 'confidential portion of this Schedule A has been omitted' and provided to the SEC."

AIG says that they were not the ones who wanted the confidentiality. The schedule would have showed the large subsidies being paid to Wall Street. The Fed, acting on behalf of Wall Street, encouraged the SEC to cover up the identities of the bankers.

It is not news that the Fed acts on behalf of Wall Street and the money center banks. It is been providing these welfare moms on Wall and Broad with welfare slips for more than 75 years.

The question to be asked now is whether an appointee of the Democratic Party-dominated Senate would be an improvement over Chairman Bernanke. It is tempting to say that if Harry Reid and his fellow extremists appointed an even more aggressive Fed chairman, with a policy even more expansive than Bernanke's, all hell might break loose, and this could be the death knell of the Fed. But I cannot hope for ill to come to this nation. As bad as Bernanke is, the Democrats seem likely to appoint someone worse unless the group that opposes Bernanke makes their aim clear.

Bernanke and the Deep Blue Sea

The Hill.com says that a number of senators like Inhofe (R-Okla.), Sessions (R-Ala.), Feingold (D-Wis.), Sanders (I-Vt.), Dorgan (D-N.D.) and Boxer (D-Calif) oppose Ben Bernanke's renomination to head the Fed, while Harry Reid supports his reappointment. Bernanke did what Milton Friedman said the Fed should do in the face of a banking collpase: re-inflate by creating reserves. Right before he died, Friedman wrote an article in the Wall Street Journal applauding the post 2001 re-inflation for eliminating a recession. Seven years later the banking system collapsed because of that re-inflation, and Bernanke followed the same prescription, arguing that the real problem was lack of regulation. There have been banking collapses 50 thousand times and in 50 thousand different circumstances in world history, and to claim that regulating derivatives will in the future eliminate them is a lame joke.

The choice between Bernanke and an appointment by the left-wing extremists in the Senate is a choice between the devil and the deep blue sea. I prefer Bernanke to whatever oceanic corruption the Democrats have on offer. But we need to be thinking of alternatives to the Fed, the source of the current economic problems.

The Federal Reserve Bank was established in 1913 in circumstances that are properly called veiled. Its purpose was expanded in 1932, when the gold standard was abolished, again without public discussion. Since 1913 there has been less innovation, slower growth and, since the ultimate elimination of the gold standard in 1971, a stagnant real hourly wage. The past 42 years of almost no growth in the real hourly wage, the best indicator of the welfare of American workers, contrasts with significant growth between 1800 and 1970. The economy was globalized in the 19th century, labor unions came and went (union density is at the same level now as it was early in the 20th century) but innovation proceeded apace and workers flocked here from all over the world, enjoying generations of upward mobility.

The upward mobility ended in 1970, following the final elimination of restrictions on the Fed's power to print money, the Vietnam War and the explosion of regulation in the 1960s and 1970s, LBJ's "great society". Since 1970, Wall Street's activities have considerably expanded, driving almost all other major corporations out of New York City. Hedge funds have flourished. Income inequality has grown. The S&P 500 has grown from 85.02 in 1970 to 1092 today, nearly 13-fold, while consumer prices have grown 5.5 fold. The difference is a wealth transfer from consumers to stock holders that the Fed and the banking system have facilitated. At the same time, the federal and state governments combined have tripled relative to national income. The Fed has facilitated expansion of non-value-producing sectors, banking, Wall Street, real estate speculation and government, at the expense of the value-producing private sector.

The extreme left politicians who would replace Bernanke would accelerate the Fed's destructive subsidies to the wealthy. Bernie Sanders and Barbara Boxer would like to increase the Fed's rate of monetary expansion, subsidizing destructive government programs along with the bankers they claim to detest. The average American would see their pensions, savings and wages decimated while wealthy politicians, real estate investors, corrupt political cronies and "limousine liberals" wallow in the hot loot, the savings of widows and workers' blood.

Recently, former New Mexico Governor Gary Johnson told me that he favors competition between monetary regimes. This would be a major improvement as those who prefer to save and receive pensions in modes other than the dollar could do so. As well, insurance companies could begin to provide the option of retirement annuities in gold if they began to lend at interest with repayment in gold.

AIG Investors Not Allowed To Lose

It's nice to be a bank. You can lend people money you don't have, and make reckless investments at that. Then, when the reckless investments bail, er, I mean fail, economists are eager to justify subsidizing you through public funds in the interest of the "public good". I wonder how hard these guys are laughing when they're on the way to the bank.

According to the Wall Street Journal:

>"Banks in the U.S. and abroad are among the biggest winners in the federal government's revamped $150 billion bailout of American International Group Inc...Banks in the U.S., Europe and Canada bought credit-default swaps on these securities from AIG, which in turn promised to compensate them if the securities defaulted. Defaults haven't been a major problem, but the market values of these CDOs fell sharply over the past year or so...Throughout its AIG rescue efforts during the past two months, the government has had the banks in its sights; it made its initial bailout of AIG in part to avoid potential bank losses that might have threatened the broader financial system...The banks that participate will be compensated for the securities' full, or par, value in exchange for allowing AIG to unwind the credit-default swaps it wrote..."It's like a home run for some of the banks," says Carlos Mendez, a senior managing director at ICP Capital, a fixed-income investment firm in New York. "They bought insurance from a company that ran into trouble and still managed to get all, or most, of their money back."

Petition to Abolish the Federal Reserve Bank

I just received an e-mail from Ron Holland concerning a petition to abolish the Federal Reserve Bank. I have signed it and have forwarded Ron's e-mail to several friends. Ron's e-mail reads:

>"The Federal Reserve Has Created the Risk of a Global Depression!

>"Please sign, publish or forward our Abolish the Federal Reserve Petition at:

http://www.petitiononline.com/fed/petition.html

to all your pro-freedom friends and associates. The collapsing dollar, exploding oil and food prices, falling housing market, the subprime mortgage and growing credit crisis and stock market weakness are all a result of earlier Federal Reserve actions designed to maximize Wall Street and banking profits at the expense of productive, working people around the world."

http://www.petitiononline.com/fed/petition.html

The New York Sun's Home Run

The New York Sun has hit a home run. I had previously blogged about my concern that the Sun's and Fox's coverage of the recent upsurge in prices has omitted the underlying cause: monetary expansion. This is of concern because economists have come up with many nonsensical explanations for inflation such as "cost push" inflation, "demand pull" inflation, unions cause inflation, oil prices cause inflation, consumer expectations cause inflation, speculators cause inflation, ad infinitum and ad nauseum. In the 1970s such spurious explanations reached a crescendo when President Ford wore a button that said "Win" if I recall, and argued that "jaw boning" would stop inflation. Worse, President Nixon had implemented price controls and controls on gasoline prices led to endless lines.

It doesn't take much to expose an unclothed Emperor. The Sun has come out and forthrightly said that the Fed has caused inflation. It will be hard for the mainstream media to spin the kind of fabrications that it spun in the 1970s. The Sun deserves a Pulitzer Prize for this editorial. Perhaps single handedly it will stop the establishment's reluctance to take the necessary steps to end the inflationary cycle and the mainstream media's eagerness to blow smoke in support of inflation.

The media have every reason to fabricate nonsense explanations for inflation. As I have previously blogged, there are special interests that demand inflation: the commercial banks, Wall Street, the real estate business and stock investors. The working man, the conservative saver and the entrepreneur who looks to build a business over the long term are harmed. Thus, in exchange for short term heating of the economy, the public loses entrepreneurial vision, the withdrawal of competent labor (as honest workers are diverted into less productive activities like stock investing), and there are dramatic increases in uncertainty for people on fixed incomes. It is also true that demand for labor is stimulated, but the jobs so created are temporary because the businesses that are created are of insufficient quality to survive the inevitable economic downturn that occurs when the Fed tightens interest rates because it has become politically impossible to continue printing money. By then, fortunes have been extracted from the public by those who had first access to the new money, namely hedge fund managers, and the public pays through higher prices and increased poverty.

Let us applaud the New York Sun and be thankful that at least one firm in lower Manhattan has clear vision and integrity.

Schnorrers' Day on Wall Street

"Hooray for Chair Bernanke
The economic explorer
'Did someone call him 'schnorrer''?

...

This fact I emphasize with stress,
I never print a dollar unless - Somebody's buying.

---Groucho Marx (Ben Bernanke), Animal Crackers

Groucho Marx was, of course singing about himself, Captain Spaulding, in Animal Crackers, but with a small modification or two the lines sing of Ben Bernanke. In case your Yiddish is rusty, "schnorrer" means beggar or sponger, according to Wikipedia. Is it fair that John Q. Public is subsidizing multi-million dollar Wall Street salaries for guys who can't figure out how to run a business?

Please review the entire song:

(All on Wall Street)
At last we are to meet him,
The famous Ben Bernanke.
From climates hot and cranky,
The Chairman has arrived.

Most heartily we'll greet him,
With plain and fancy cheering.
Until he's hard of hearing.
The Chairman has arrived.
At last - The Chairman has arrived.

(Butler)
Mr. Horatio W. Jamison, Field Secretary to Chair Bernanke.

(Jamison/Zeppo)
I represent the Chairman who insists on my informing you of these conditions under which he camps here. In one thing he is very strict, he wants his women young and picked and as for Wall Street bankers, he won't have any tramps here.

(All on Wall Street)
As for bankers he won't have any tramps here,
There must be no tramps.

(Jamison/Zeppo)
The bankers must all be very old,
The women warm, the champagne cold.
It's under these conditions that he camps here.

(Voice off Screen)
I'm announcing Chairman Ben Bernanke

(All on Wall Street)
He's announcing Ben Bernanke

Oh dear, he is coming,
At last he's here.

(Chair Bernanke)
Hello, I must be going,
I cannot stay, I came to say, I must be printing.
I'm glad I came, but just the same I must be going.
La La.

(Mrs. Rittenhouse/Margaret Dumont)
For my sake you must stay.
If you should go away,
You'd spoil this party I am throwing.

(Chair Bernanke)
I'll stay a week or two,
I'll stay the summer through,
But I am telling you,
I must be printing.

(All on Wall Street)
Before you print,
Will you oblige us,
And tell us of your deeds so glowing?

(Bernanke)
I'll print as much as you say,
In fact I'll even stay!
I'll print dollars far and away!

(All on Wall Street)
Good!

(Bernanke)
But I must be going.
I must be printing.

(Jamison/Zeppo)
There's something that I'd like to say,
That he's too modest to relay.
The Chairman is a moral man.
Sometimes he finds it trying
To be printing and printing.

(Bernanke)
This fact I emphasize with stress,
I never print a buck unless - Somebody's buying.
I never print a buck unless - Somebody's paying.

(All on Wall Street)
The Chairman is a very moral man.

(Jamison/Zeppo)
If he hears of a high interest rate, He'll naturally repel it.

(Bernanke)
I hate a high interest rate I do.

(All on Wall Street)
The Chairman is a very moral man.
Hooray for Chair Bernanke, The economic explorer.

(Chair Bernanke)
Did someone call me Shnorrer?

(All on Wall Street)
Hooray, Hooray, Hooray.

(Jamison/Zeppo)
He went onto Wall Street where all the bankers pocket bucks.

(Chair Bernanke)
If I stay here I'll go nuts.

(All on Wall Street)
Hooray, Hooray, Hooray.
He put all his reliance, In courage and defiance,
And risked his life for economic science.

(Chair Bernanke)
Hey, hey.

(Mrs. Rittenhouse/Margaret Dumont)
You are the only Chairman to print money over every acre.

(Chair Bernanke)
I think I'll try and make her.

(All on Wall Street)
Hooray, Hooray, Hooray.
He put all his reliance, In courage and defiance,
And risked his life for economic science.

(Chair Bernanke)
Hey, hey.

(All on Wall Street)
Hooray for Chair Bernanke, The economic explorer.
He brought his name undying fame
And that is why we say, Hooray, Hooray, Hooray.

(Chair Bernanke attempts to speak)
My friends, I am highly gratified at this magnificent display of effusion and I want
you to know.........

(All on Wall Street)
Hooray for Bernanke, The economic explorer.
He brought his name undying fame
And that is why we say, Hooray, Hooray, Hooray.

(Chair Bernanke)
My friends, I am highly gratified at this magnificent display of effusion and I want
you to know.........

Hooray for Ben Bernanke, Wall Street's hero.....
Well, somebody's got to do it!

Hooray, hooray, hooray.

Howard Katz's Poem

At the beginning of each issue of Howard S. Katz's financial newsletter, the One-Handed Economist, he offers a poem. Here is the poem from the January 11 issue, which is on his website:

In gold your wealth you now should park.
It hit 900 dollar mark.
Upon Filet mignon we sup
Cause price of gold is going up.

Oh, Ben Bernanake gets no thanks
He only wants to help the banks
He takes advantage of the rubes
And US dollar-down the tubes.

Yes, US dollar sinking fast
The other nations are aghast
The more they print, now don't you know,
The lower does its value go.

And as the dollar hits new lows,
Now into gold the money flows.
Yes, gold stocks, gold stocks, buy, buy, buy.
Gold stocks are going to the sky.

Model portfolio, good news
About our profits we enthuse.
And on this subject I can say,
This week we hit $200 K.

Oh Ben Bernanke he is bad.
He steals our wealth and makes us mad.
So people you must all be bold.
And buy those mining stocks of gold.

Gold and Commodity Exposure in Your Portfolio

John Maynard Keynes quoted Lenin as saying that best way to destroy the capitalist system is to debauch the currency. There is debate whether Lenin said it or not. In any case much harm can be done from inflation. Since 1979, the compound inflation rate in the United States has been 3.7%. This has accompanied a lengthy stock market increase and a much larger production of dollars by the Federal Reserve Bank. The US money supply has increased several times, but there is a much larger amount of dollars in circulation around the globe, perhaps as much as 8 or 9 times the number of dollars in circulation in the US. The result of this is that the dollar is at all-time lows against a range of currencies, and has the prospect of depreciating further. The reduction in the buying power of the dollar is beneficial for exporters and may attract some factories back to the US. But it will harm those who hold dollars. In particular, those who hold savings accounts and long term bonds will be harmed as prices increase. Similarly, those on pensions and annuities will be harmed. The days when inflation was merely a domestic affair are over. The depreciating dollar means that many prices are increasing now. If Ben Bernanke continues to inflate the number of dollars (reduce the Fed Funds rate) then there could be a sell-off by foreign governments, who are holding trillions of dollars that are depreciating in value. In turn, this would cause inflation here.

This kind of instability poses as serious a risk to your portfolio as the risk of a stock market decline. A stock market decline is a possibility if the Fed reacts to the sharp dollar declines appropriately, that is, by raising interest rates. If the Fed continues to cater to Wall Street and America's wealthy on food stamps (those who benefit from the stock market increases that unrealistically low interest rates have caused) then the stock market might continue to go up until the inflation gets so bad that nominal interest rates are forced up by inflation. Jim Cramer will literally be forcing senior citizens to eat dog food just so he can see his portfolio increase.

It is conceivable that given the irresponsibility that the Bernanke Fed has demonstrated so far there will be a major inflation. This will exacerbate the income inequality that liberal economists harp on but erroneously attribute to fiscal policy.

Gold stocks have been performing very well this year and I have been quite happy as a result. As well, the metal itself as well as other commodities such as oil and grain have been going up very nicely. If there is a massive dollar depreciation, which is not an unrealistic risk, having a good share of your money in commodities will protect you.

One way to invest in commodity stocks is through the Ivy Natural Resources Fund . The trailing 5 year returns are 34.05% versus 21% for the S&P 500. As well, the Powershares index fund family has a number of commodity and dollar bearish indexes. These include gold, silver, oil, energy, agricultural, commodity index, dollar bearish and a number of others.

The frightening thing about massive inflation is that the investment that you naturally think of as most safe, cash, gets trashed. A dollar held since 1979 is worth about 34 cents today. In a massive inflation, the depreciation would go much further much more quickly.

Friends, I urge you to cover yourselves. The "economic miracle" of the past 25 years has been a three-card-Monty game. The 25-year old bliss in the stock market results from currency depreciation that is inherently unethical (because it is based on stealing from the poor to give to the rich). It will have serious consequences for conservative investors, and possibly end with a major stock market decline. It could be much worse than what I am describing if there is a major sell off of the dollar.