Glenda R. McGee asked me for a pictorial depiction of how the Federal Reserve Bank and world monetary system work. Fortuitously, Dennis Sevakis sent me this Rube Goldberg music video that captures the essence of current American economic and monetary policy.
Showing posts with label Ben Bernanke. Show all posts
Showing posts with label Ben Bernanke. Show all posts
Saturday, April 23, 2011
Friday, November 5, 2010
Bernanke: Fed Will Not Monetize Debt
QE 2, quantitative easing, is monetization of the federal debt (h/t Glenda McGee). Keynesian economics is founded on lyng. The liars, i.e., the Fed, the economics profession, the federal government and the media, have bamboozled the public for nearly 80 years. Keynesian economics is based on wage reduction and transfer of wealth to asset holders at the expense of wage earners. This is accomplished using welfare as a smoke screen. Transfer the lion's share to asset holders, a small percentage to welfare recipients, then claim that the wealth is being transferred to welfare recipients. This trick was first devised by Augustus Caesar and it has worked beautifully in the United States. Part of the plan is an education system that numbs minds and teaches that the Keynesian plan is all that works. Keynesian economics is based on lying because saying openly that the economics establishment, Wall Street, the federal government and the media plan to make you poorer to subsidize the stock market will not fly in a democracy. You voted the Keynesians in and they have been ruling over you for 80 years. Enjoy the results.
Wednesday, July 21, 2010
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?
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?
Wednesday, May 19, 2010
Ron Holland on the Coming Currency Crisis and Economic Viagra
Ron Holland has an excellent blog on the Lew Rockwell site about the coming currency crisis. Holland makes four excellent points:
1. The Greek crisis may lead to a shrinking of the Euro zone as more socialist nations like Greece pull out in order to have the flexibility to inflate further.
2. Eurocrats would like increasing centralization of Europe, just as Republicrats here in the US favor increases in Washington's power. But, Ron rightly notes, Europe "would be far better off as a confederation of sovereign states that allows competition among individual national currencies." The same is true here in the U.S. The U.S. would be better off if the states were sovereign and were to spin off from Washington, which ought to become a loose coordinative hub like Brussels is today.
3. There will be continuing periods of dollar strength as the mania of "dollar safety" continues to motivate investors. Eventually, though, massive increases in the monetary base and China's and Japan's ending of their subsidization of a devaluing dollar will cause currency depreciation here.
4. Holland concludes: "Eventually the sovereign debt crisis will also come to the U.K. and then to the U.S., with disastrous results. The tragedy in Greece today is just a glimpse of what will happen to the sovereign debt of the United States. It will come to America, and it will come on its own schedule, so be prepared."
That means be ready to purchase gold when the price of gold falls. I have about 5% of my total assets in gold right now and I'm planning to increase it over time, buying in the dips. Other commodities such as agriculture (DBA) and general commodities (DBC) as well as silver (SLV) and other metals should be included in a balanced portfolio. Gold stocks (for instance, Eldorado, EGO or GDF) and leveraged gold ETFs (e.g., DGP) are higher risk/higher return ways of investing in gold. Similar ETFs exist for silver and other commodities.
I am currently 68% in cash and about 10% in commodities, including silver and agriculture as well as gold, and about 6% in two foreign currencies, the Canadian dollar and the Australian dollar. The rest is in a few stocks, including a Singapore ETF (EWS).
My worst positions are the Australian and Canadian currencies which have plummeted, apparently because of the Euro crisis (I don't understand why, but I also don't understand why the dollar is rising). A buying opportunity in the making?
Do not buy and hold. The mammoth increase in monetary reserves two years ago has motivated the past year's run-up in the stock market, and it may be that this injection is running out of steam. It is possible that the massive increase in potential liquidity (tripling of the monetary base) will continue to boost the stock market for some time, but ultimately the viagra will wear off. Then, Bernanke, Obama and their supervisors at 85 Broad Street will need to decide whether to inject nine times the monetary base to try to "get the stock market up" another 50%. If they do, hyper-inflation will be a certainty. If not, then expect some major disappoints in the American stock market.
Bernanke's use of monetary reserves somehow reminds me of viagra. The older the rally gets, the more viagra is needed.
1. The Greek crisis may lead to a shrinking of the Euro zone as more socialist nations like Greece pull out in order to have the flexibility to inflate further.
2. Eurocrats would like increasing centralization of Europe, just as Republicrats here in the US favor increases in Washington's power. But, Ron rightly notes, Europe "would be far better off as a confederation of sovereign states that allows competition among individual national currencies." The same is true here in the U.S. The U.S. would be better off if the states were sovereign and were to spin off from Washington, which ought to become a loose coordinative hub like Brussels is today.
3. There will be continuing periods of dollar strength as the mania of "dollar safety" continues to motivate investors. Eventually, though, massive increases in the monetary base and China's and Japan's ending of their subsidization of a devaluing dollar will cause currency depreciation here.
4. Holland concludes: "Eventually the sovereign debt crisis will also come to the U.K. and then to the U.S., with disastrous results. The tragedy in Greece today is just a glimpse of what will happen to the sovereign debt of the United States. It will come to America, and it will come on its own schedule, so be prepared."
That means be ready to purchase gold when the price of gold falls. I have about 5% of my total assets in gold right now and I'm planning to increase it over time, buying in the dips. Other commodities such as agriculture (DBA) and general commodities (DBC) as well as silver (SLV) and other metals should be included in a balanced portfolio. Gold stocks (for instance, Eldorado, EGO or GDF) and leveraged gold ETFs (e.g., DGP) are higher risk/higher return ways of investing in gold. Similar ETFs exist for silver and other commodities.
I am currently 68% in cash and about 10% in commodities, including silver and agriculture as well as gold, and about 6% in two foreign currencies, the Canadian dollar and the Australian dollar. The rest is in a few stocks, including a Singapore ETF (EWS).
My worst positions are the Australian and Canadian currencies which have plummeted, apparently because of the Euro crisis (I don't understand why, but I also don't understand why the dollar is rising). A buying opportunity in the making?
Do not buy and hold. The mammoth increase in monetary reserves two years ago has motivated the past year's run-up in the stock market, and it may be that this injection is running out of steam. It is possible that the massive increase in potential liquidity (tripling of the monetary base) will continue to boost the stock market for some time, but ultimately the viagra will wear off. Then, Bernanke, Obama and their supervisors at 85 Broad Street will need to decide whether to inject nine times the monetary base to try to "get the stock market up" another 50%. If they do, hyper-inflation will be a certainty. If not, then expect some major disappoints in the American stock market.
Bernanke's use of monetary reserves somehow reminds me of viagra. The older the rally gets, the more viagra is needed.
Monday, May 10, 2010
Stock Market Volatility
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."
Tuesday, January 26, 2010
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."
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."
Saturday, January 23, 2010
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.
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.
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.
Tuesday, January 12, 2010
Whither Gold?
Gold went up today just four days after I blogged that I was mostly in cash. I just wrote a column for a popular local newspaper called the Lincoln Eagle that should come out in a few days and I suggested that there are four scenarios that might evolve: (1) bank failures/inflation; (2) deflation/inflation; (3) inflation/stagflation and (4) steady course. Jon Nadler of Kitco had suggested that we were in for a higher interest rate regime like we saw in the late 1970s and early 1980s, but I do not believe that it will be possible for the Fed to successfully execute a deflation or regime of high interest rates followed by a moderate (by 2010 standards, not by 1950 standards) re-inflation as was done under the Carter and Reagan administrations. It is likely that interest rate hikes will lead to stress on banks and additional unemployment. I do not believe that Obama is naive as was Carter to appoint a Fed chairman with the discipline to raise rates. Paul Volcker was exceptional and has not been equaled in the Fed's history. Even there, he reversed his monetarist policy by the early 1980s.
This time around the scenario is much worse. We are at zero (negative real) interest rates and ten percent unemployment. If the Fed raises interest rates then there will be additional unemployment and the Honorable Barney Frank will blow his stack as well as some other things. Moreover, with less reserves the banks will be expected to earn money like everyone else, by working for it, and that will make them unhappy, and the American public cannot allow bankers to be unhappy. It is not part of the American way.
So which way is gold going to go? In situations like this I use the coin flip test. Heads market up short term, tails market down short term. It kept coming up tails, so I'm staying put for now. But not in the long term.
The time for Obama to demand that the Fed clamp down on interest rates was this year. The Fed could have triggered a recession, higher unemployment and higher welfare payments, and the economy would have had two or three years to improve after a year or two of high rates. Instead, Bush handed the banks nearly a trillion dollars, the Fed tripled the monetary base and the money supply is growing like bamboo. Obama added additional handouts, and the likelihood of any sort of fiscal and monetary discipline is now an impossibility for the Messiah of Bloat.
Although I remain in dollars this week, I am watching this closely as my strategy is not wise for the long term.
This time around the scenario is much worse. We are at zero (negative real) interest rates and ten percent unemployment. If the Fed raises interest rates then there will be additional unemployment and the Honorable Barney Frank will blow his stack as well as some other things. Moreover, with less reserves the banks will be expected to earn money like everyone else, by working for it, and that will make them unhappy, and the American public cannot allow bankers to be unhappy. It is not part of the American way.
So which way is gold going to go? In situations like this I use the coin flip test. Heads market up short term, tails market down short term. It kept coming up tails, so I'm staying put for now. But not in the long term.
The time for Obama to demand that the Fed clamp down on interest rates was this year. The Fed could have triggered a recession, higher unemployment and higher welfare payments, and the economy would have had two or three years to improve after a year or two of high rates. Instead, Bush handed the banks nearly a trillion dollars, the Fed tripled the monetary base and the money supply is growing like bamboo. Obama added additional handouts, and the likelihood of any sort of fiscal and monetary discipline is now an impossibility for the Messiah of Bloat.
Although I remain in dollars this week, I am watching this closely as my strategy is not wise for the long term.
Thursday, January 7, 2010
Kitco's Nadler on Markets and the Fed
Jon Nadler had written an article on Kitco a few days ago suggesting that Ben Bernanke's public statement that he would tighten this year ought to give gold bugs pause. Today Nadler writes:
"Bloomberg reports that: “A prospect of higher interest rates in the U.S., the world’s largest economy, probably will strengthen the dollar further and may take 'some of the wind out of the commodity markets’ sails,' said Royal Bank of Scotland Plc’s commodity analysts, led by Nick Moore. The dollar may rally some 15 percent this quarter, they said.”
Nadler recommends a holding of 10 percent of your portfolio in gold. The breakdown in my brokerage account now is as follows:
Cash 45%
Stocks 22%*
High-yield bonds 6%
Gold (GLD) 15%
Agricultural commodities index (DBA) 6%
Silver (SLV) 6%
*Stocks include Kayne Anderson (a gas pipeline investment trust), GE, the health industry index (IYH), a drinking water stock fund (FTSIPCE9R), and several general stock funds.
My pension account, which is 60% larger than my brokerage account, is almost entirely in cash and a GIF (interest bearing account) that TIAA-CREF offers. In addition, I hold cash in two banks totaling about 30% of my brokerage account. One of the banks, Everbank, offers international CDs such as Euros and Yen, but I have it all in the dollar now.
Nadler argues that unless you think that hyper-inflation is a possibility that gold is not a good hedge against inflation. He argues that the 1970s's gold boom was an anomaly that occurred because of the absence of investment alternatives such as small business stock funds.
However, you will recall that the inflation of the 1970s took the following path. First, the Vietnam War debt precipitated aggressive Fed policy and Nixon added inflation in the early 1970s. By 1970 the inflation rate was about 4%, only slightly higher than it has generally been during the past 25 years. But at that time people perceived the 4% as high. Today they perceive 3.7% inflation as no inflation.
The taste for gold did not accelerate until later in the decade, the late 1970s, when the Johnson/Nixon money had circulated for five to fifteen years. This occurred because of speculation that was in reaction to visible inflation approaching and exceeding 10%.
At the time that the inflation was reaching its peak, the Carter Fed under Paul Volcker adopted the monetarist policy of raising interest rates to limit monetary growth and inflation. This resulted in high interest rates occurring at the same time that inflation was peaking. High unemployment and high inflation coincided, resulting in "stagflation". Today, the monetary policy of the past two decades which was almost as inflationary as under Johnson and Nixon has been counteracted by international central bank intervention. Thus, national central banks hold US bonds. This creates a market situation that is inherently unstable in the long run. We all have faith in the rationality and dependability of governments to manage the world economy wisely because of the numerous historical precedents such as......? In other words, I am not clear as to what makes central bankers more judicious investors in the dollar than Americans were investors in Nasdaq tech funds.
In any case, the Fed has required Americans to rely on the sensibilities and market judgments of global central bankers. In response to excessive lending and apparently uncontrolled and incompetent use of derivatives in the past two decades, the banking system contracted its loan volume last year. The Fed's response was to triple the monetary base. Since 2006 the money supply has been growing at an 8% clip, more than double the recent inflation rate. Some fear a banking collapse leading to deflation, others fear increasing Fed aggressiveness in expanding the money supply. In any case, the Fed needs to balance three factors: unemployment; the prospect of the collapse of incompetently managed money center banks that rely on fresh Fed money; and inflation. Any tightening will threaten the incompetently run banks and may result in higher unemployment. Thus, the Fed will likely have to choose between short term unemployment and the risk of additional inflation in the already unstable system.
In reaction to global concerns about inflation and, as Nadler points out, tightening in China, there may be some Fed tightening in the near term, which is why I am holding dollars. Over time, however, there are obvious risks as to Bernanke's judgment.
Mr. Nadler has forwarded me some interesting comments. I had written to him this e-mail in response to an article about Ben Bernanke's statement that he is going to tighten:
"I have about 25% of my portfolio in gold and commodities at this point, about 30% in stocks and high-yield bonds and 45% in cash at this point and have been following your column for the past couple of months. The quote from Bernanke sounds compelling but I'm curious if you have (or know of anyone who has) compared Fed chairmen statements with actual policy decisions over the ensuing two years, say tracking back to the 1970s? My guess is that there have been frequent statements about tightening and austerity but much less frequent examples of actually following through. So what is the real content of a Fed chairman's statement that he will tighten? My guess is that the statements frequently do not match reality. Any opinion?
Mr. Nadler wrote the following response Q&A style:
Langbert: So what is the real content of a Fed chairman's statement that he will tighten? My guess is that the statements frequently do not match reality. Any opinion?
Nadler: Not in all cases. The most notorious example was Volcker, in 1982. There is a CPM Group report that illustrates just how much people had geared up for massive inflation but an equally massive interest rate hike sterilized any such nefarious outcomes. Surprise. In any case, I can find that text next week for you if you require.
L: If the Fed tightens and the dollar strengthens, do you think that there would be an effect on the stock market and employment, which in turn would make Obama's political position worse than it has been becoming? In that case, the guy who is investing in stocks will get creamed along with commodities.
N: Investments in anything (other than dollars and debt instruments) would probably take a hit. Commodities more than stock, likely. Foreign currencies and emerging market equities, as well.
L: Recall that in the 1930s Mariner Eckles tightened in 1935 or so and that led to the bottoming in the late 1930s that was below the initial bottom. I suspect Bernanke is aware of that history and doesn't aim to repeat it. Also, if he tightens, it might be a repeat of Carter's administration, with a tightening at the end which sealed Carter's coffin.
A: The political 'palatability' might indeed be low, but someone has to explain that you cannot rebuild and get on with it without some short-term pain. The sooner Obama makes it clear that the problem was hatched and aggravated during the Bush years, the more likely he is to succeed in selling rate hike and tax hike programs. The Fed is independent and will thus act when it sees fit, not when Obama gives the 'all-clear' signal.
Q: tightening two years into the Obama administration will lead to a couple of years of even higher unemployment and a rough ride for the Messiah. Or will the Fed respond to political pressure and tighten a bit, rescinding the tightening at the first sign of stock market declines and higher unemployment? It seems to me that the political pressure to follow the inflationary path at this point is still greater than the threat of inflation. Also, the reserves already created are going to be inflationary if the banking system decides that the risk of the problems from last year have passed. If Bernanke continues to pander to them, they will relax.
A: The liquidity will be mopped up with various tools. There is no quid-pro-quo that inflation must result from all of this injecting. What is needed more than anything is more regulation, less lobbying, and far less corporatism. Which, is, what America now has - not capitalism.
You will be all right I trust. Though it will have to be a nimble run...
I am not quite as confident as Mr. Nadler that there will be a nimble Fed and banking response to the massive liquidity that the Fed has handed to the banks or that regulation will help, but hopefully you, dear reader, and I will be nimble in responding to the current monetary risks.
"Bloomberg reports that: “A prospect of higher interest rates in the U.S., the world’s largest economy, probably will strengthen the dollar further and may take 'some of the wind out of the commodity markets’ sails,' said Royal Bank of Scotland Plc’s commodity analysts, led by Nick Moore. The dollar may rally some 15 percent this quarter, they said.”
Nadler recommends a holding of 10 percent of your portfolio in gold. The breakdown in my brokerage account now is as follows:
Cash 45%
Stocks 22%*
High-yield bonds 6%
Gold (GLD) 15%
Agricultural commodities index (DBA) 6%
Silver (SLV) 6%
*Stocks include Kayne Anderson (a gas pipeline investment trust), GE, the health industry index (IYH), a drinking water stock fund (FTSIPCE9R), and several general stock funds.
My pension account, which is 60% larger than my brokerage account, is almost entirely in cash and a GIF (interest bearing account) that TIAA-CREF offers. In addition, I hold cash in two banks totaling about 30% of my brokerage account. One of the banks, Everbank, offers international CDs such as Euros and Yen, but I have it all in the dollar now.
Nadler argues that unless you think that hyper-inflation is a possibility that gold is not a good hedge against inflation. He argues that the 1970s's gold boom was an anomaly that occurred because of the absence of investment alternatives such as small business stock funds.
However, you will recall that the inflation of the 1970s took the following path. First, the Vietnam War debt precipitated aggressive Fed policy and Nixon added inflation in the early 1970s. By 1970 the inflation rate was about 4%, only slightly higher than it has generally been during the past 25 years. But at that time people perceived the 4% as high. Today they perceive 3.7% inflation as no inflation.
The taste for gold did not accelerate until later in the decade, the late 1970s, when the Johnson/Nixon money had circulated for five to fifteen years. This occurred because of speculation that was in reaction to visible inflation approaching and exceeding 10%.
At the time that the inflation was reaching its peak, the Carter Fed under Paul Volcker adopted the monetarist policy of raising interest rates to limit monetary growth and inflation. This resulted in high interest rates occurring at the same time that inflation was peaking. High unemployment and high inflation coincided, resulting in "stagflation". Today, the monetary policy of the past two decades which was almost as inflationary as under Johnson and Nixon has been counteracted by international central bank intervention. Thus, national central banks hold US bonds. This creates a market situation that is inherently unstable in the long run. We all have faith in the rationality and dependability of governments to manage the world economy wisely because of the numerous historical precedents such as......? In other words, I am not clear as to what makes central bankers more judicious investors in the dollar than Americans were investors in Nasdaq tech funds.
In any case, the Fed has required Americans to rely on the sensibilities and market judgments of global central bankers. In response to excessive lending and apparently uncontrolled and incompetent use of derivatives in the past two decades, the banking system contracted its loan volume last year. The Fed's response was to triple the monetary base. Since 2006 the money supply has been growing at an 8% clip, more than double the recent inflation rate. Some fear a banking collapse leading to deflation, others fear increasing Fed aggressiveness in expanding the money supply. In any case, the Fed needs to balance three factors: unemployment; the prospect of the collapse of incompetently managed money center banks that rely on fresh Fed money; and inflation. Any tightening will threaten the incompetently run banks and may result in higher unemployment. Thus, the Fed will likely have to choose between short term unemployment and the risk of additional inflation in the already unstable system.
In reaction to global concerns about inflation and, as Nadler points out, tightening in China, there may be some Fed tightening in the near term, which is why I am holding dollars. Over time, however, there are obvious risks as to Bernanke's judgment.
Mr. Nadler has forwarded me some interesting comments. I had written to him this e-mail in response to an article about Ben Bernanke's statement that he is going to tighten:
"I have about 25% of my portfolio in gold and commodities at this point, about 30% in stocks and high-yield bonds and 45% in cash at this point and have been following your column for the past couple of months. The quote from Bernanke sounds compelling but I'm curious if you have (or know of anyone who has) compared Fed chairmen statements with actual policy decisions over the ensuing two years, say tracking back to the 1970s? My guess is that there have been frequent statements about tightening and austerity but much less frequent examples of actually following through. So what is the real content of a Fed chairman's statement that he will tighten? My guess is that the statements frequently do not match reality. Any opinion?
Mr. Nadler wrote the following response Q&A style:
Langbert: So what is the real content of a Fed chairman's statement that he will tighten? My guess is that the statements frequently do not match reality. Any opinion?
Nadler: Not in all cases. The most notorious example was Volcker, in 1982. There is a CPM Group report that illustrates just how much people had geared up for massive inflation but an equally massive interest rate hike sterilized any such nefarious outcomes. Surprise. In any case, I can find that text next week for you if you require.
L: If the Fed tightens and the dollar strengthens, do you think that there would be an effect on the stock market and employment, which in turn would make Obama's political position worse than it has been becoming? In that case, the guy who is investing in stocks will get creamed along with commodities.
N: Investments in anything (other than dollars and debt instruments) would probably take a hit. Commodities more than stock, likely. Foreign currencies and emerging market equities, as well.
L: Recall that in the 1930s Mariner Eckles tightened in 1935 or so and that led to the bottoming in the late 1930s that was below the initial bottom. I suspect Bernanke is aware of that history and doesn't aim to repeat it. Also, if he tightens, it might be a repeat of Carter's administration, with a tightening at the end which sealed Carter's coffin.
A: The political 'palatability' might indeed be low, but someone has to explain that you cannot rebuild and get on with it without some short-term pain. The sooner Obama makes it clear that the problem was hatched and aggravated during the Bush years, the more likely he is to succeed in selling rate hike and tax hike programs. The Fed is independent and will thus act when it sees fit, not when Obama gives the 'all-clear' signal.
Q: tightening two years into the Obama administration will lead to a couple of years of even higher unemployment and a rough ride for the Messiah. Or will the Fed respond to political pressure and tighten a bit, rescinding the tightening at the first sign of stock market declines and higher unemployment? It seems to me that the political pressure to follow the inflationary path at this point is still greater than the threat of inflation. Also, the reserves already created are going to be inflationary if the banking system decides that the risk of the problems from last year have passed. If Bernanke continues to pander to them, they will relax.
A: The liquidity will be mopped up with various tools. There is no quid-pro-quo that inflation must result from all of this injecting. What is needed more than anything is more regulation, less lobbying, and far less corporatism. Which, is, what America now has - not capitalism.
You will be all right I trust. Though it will have to be a nimble run...
I am not quite as confident as Mr. Nadler that there will be a nimble Fed and banking response to the massive liquidity that the Fed has handed to the banks or that regulation will help, but hopefully you, dear reader, and I will be nimble in responding to the current monetary risks.
Monday, March 16, 2009
Howard S. Katz's Poem for March 8
Howard S. Katz has preceded his current newsletter with this poem:
A sadder man you’ll never see
Than Don Quixote Bernanke.
The only thing that he does know
Is how to print a lot of dough.
He’s striding all about the town
Not knowing whether up is down.
He fights “Depression” it is said.
“Depression” is all in his head.
Dear Bernanke, may I be bold?
Suggest you view the price of gold.
The thing to know, before you sup,
The price of gold is going up.
And that’s a signal, if you’re wise,
That all the prices – gonna rise.
And then the country will be poor,
No goods to buy at local store.
You’re bailing out the ultra-rich
And leaving country in the ditch.
I’ve said to you, you are a cad.
Cause printing money’s very bad.
No, this is point you do not know.
One can’t get rich by printing dough.
So turn your policy around
And give us money that is sound.
A sadder man you’ll never see
Than Don Quixote Bernanke.
The only thing that he does know
Is how to print a lot of dough.
He’s striding all about the town
Not knowing whether up is down.
He fights “Depression” it is said.
“Depression” is all in his head.
Dear Bernanke, may I be bold?
Suggest you view the price of gold.
The thing to know, before you sup,
The price of gold is going up.
And that’s a signal, if you’re wise,
That all the prices – gonna rise.
And then the country will be poor,
No goods to buy at local store.
You’re bailing out the ultra-rich
And leaving country in the ditch.
I’ve said to you, you are a cad.
Cause printing money’s very bad.
No, this is point you do not know.
One can’t get rich by printing dough.
So turn your policy around
And give us money that is sound.
Tuesday, February 3, 2009
President Andrew Jackson's Message to the Federal Reserve Bank, Today's Congress and President Obama
"It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes. Distinctions in society will always exist under every just government. Equality of talents, of education, or of wealth can not be produced by human institutions. In the full enjoyment of the gifts of Heaven and the fruits of superior industry, economy and virtue, every man is equally entitled to protection by law; but when the laws undertake to add to these natural and just advantages artificial distinctions, to grant titles, gratuities, and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society--the farmers, mechanics, and laborers--who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their Government. There are no necessary evils in government. Its evils exist only in its abuses. If it would confine itself to equal protection, and as Heaven does its rains, shower its favors alike on the high and the low, the rich and the poor, it would be an unqualified blessing. In the act before me there seems to be a wide and unnecessary departure from these just principles.
"Nor is our Government to be maintained or our Union preserved by invasions of rights and powers of the several States. In thus attempting to make our General Government strong we make it weak. Its true strength consists in leaving individuals and States as much as possible to themselves--in making itself felt, not in its power, but in its beneficence; not in its control, but in its protection; not in binding the States more closely to the center, but leaving each to move unobstructed in its proper orbit.
"Experience should teach us wisdom Most of the difficulties our Government now encounters and most of the dangers which impend over our Union have sprung from an abandonment of the legitimate objects of government by our national legislation, and the adoption of such principles as are embodied in this act. Many of our rich men have not been content with equal protection and equal benefits, but have brought us to make them richer by act of Congress. By attempting to gratify their desires, we have in the results of our legislation arrayed section against section, interest against interest, and man against man, in a fearful commotion which threatens to shake the foundations of our Union. It is time to pause in our career to review our principles, and if possible revive that devoted patriotism and spirit of compromise which distinguished the sages of Revolution and the fathers of our Union. If we can not do at once, in justice to interests vested under improvident legislation, make our Government what it ought to be, we can at least take a stand against all new grants of monopolies and exclusive privileges, against any prostitution of our Government to the advancement of the few at the expense of the many, and in favor of compromise and gradual reform in our code of laws and system of political economy."
---President Andrew Jackson
Bank Veto, July 10, 1832
Upon President Andrew Jackson's veto of the Charter of the Second Bank of the United States, the predecessor of the Federal Reserve Bank.
"Nor is our Government to be maintained or our Union preserved by invasions of rights and powers of the several States. In thus attempting to make our General Government strong we make it weak. Its true strength consists in leaving individuals and States as much as possible to themselves--in making itself felt, not in its power, but in its beneficence; not in its control, but in its protection; not in binding the States more closely to the center, but leaving each to move unobstructed in its proper orbit.
"Experience should teach us wisdom Most of the difficulties our Government now encounters and most of the dangers which impend over our Union have sprung from an abandonment of the legitimate objects of government by our national legislation, and the adoption of such principles as are embodied in this act. Many of our rich men have not been content with equal protection and equal benefits, but have brought us to make them richer by act of Congress. By attempting to gratify their desires, we have in the results of our legislation arrayed section against section, interest against interest, and man against man, in a fearful commotion which threatens to shake the foundations of our Union. It is time to pause in our career to review our principles, and if possible revive that devoted patriotism and spirit of compromise which distinguished the sages of Revolution and the fathers of our Union. If we can not do at once, in justice to interests vested under improvident legislation, make our Government what it ought to be, we can at least take a stand against all new grants of monopolies and exclusive privileges, against any prostitution of our Government to the advancement of the few at the expense of the many, and in favor of compromise and gradual reform in our code of laws and system of political economy."
---President Andrew Jackson
Bank Veto, July 10, 1832
Upon President Andrew Jackson's veto of the Charter of the Second Bank of the United States, the predecessor of the Federal Reserve Bank.
Friday, October 17, 2008
Fed Increases Monetary Base by 16% in One Week
Howard S. Katz recently put this week's increase in the monetary base on his blog. The increase of over 16% in one week is historical. The United States increasingly looks like the Weimar Republic. Just one month ago I had a conversation with an economist who previously worked for the Fed. She insisted, correctly, that the money supply had not increased in several years (because foreign governments were monetizing our debt for us, creating an unstable monetary "game"). In just five weeks Ben Bernanke has proven her utterly wrong. The monetary base has gone from $888 billion on 9/11/08 to $1.74 trillion on October 16. In other words, Reserve Bank Credits increased better than 16% this week. This should double the money supply in the coming two years. This will cause inflation and a bull market in stocks, at least temporarily. However, there also may be dollar sales as foreign holders panic at this historic devaluation. A rocky road ahead. The chart and numbers follow.
Wednesday, October 8, 2008
Evolution of a Bail-Out Opponent: Correspondence with Jim Crum
Prior to 1980 I became interested in the problem of economic decline, especially in New York City, and inflation. I met Howard S. Katz, who interested me in the gold standard around 1979. I lost interest in inflation issues after Reagan's election in 1980. I didn't pay attention because I assumed that the Fed had changed to a monetarist position and so was controlling inflation. Then I learned that "supply side" economics was really just Keynesian economics coupled with tax cutting and the pretense of free market rhetoric (while expanding government you tell everyone you're for small government and it's inevitable and that you can't stop government's growth because of the Democrats, even when the Democrats are a minority). Then I learned that Greenspan was increasing the money supply at better than 8 percent a year over many years. Then I learned that foreigners were monetizing US debt for us, facilitating an extra six or seven years of monetary expansion from 2001-8 but creating the risk of hyper-inflation if the foreigners panic. Then I learned that George W. Bush believes in government. Then I learned that President Bush appointed a Fed chairman who believed that dollars should be spread from a helicopter. Then I learned about the bail out. Then I learned that the Fed increased the money supply by 35% in August and September. I don't have to head for the hills. I already live in the hills, and I have re-habbed my house in the hills!
Jim Crum writes:
This is going to get interesting- fast.
I know our business is feeling it. I have many friends in the trades and that work is coming to a grinding halt in many areas. I am not a fearful man. Yet the signs are very ominous, and it might be too late to bring things under control. To that end, I am of the opinion that things may really deteriorate quickly. Such a surge in cash and a slowing in economic output could lead to really aggressive inflation while wages drop- 1970’s stagflation all over again.
I cannot say, using polite language, how upsetting this is. The rank in competency of those in charge (Congress & Fed) is just short of criminal. With nothing to hold them in check, the last thirty years have been setting us up for a tremendous fall.
Jim Crum writes:
This is going to get interesting- fast.
I know our business is feeling it. I have many friends in the trades and that work is coming to a grinding halt in many areas. I am not a fearful man. Yet the signs are very ominous, and it might be too late to bring things under control. To that end, I am of the opinion that things may really deteriorate quickly. Such a surge in cash and a slowing in economic output could lead to really aggressive inflation while wages drop- 1970’s stagflation all over again.
I cannot say, using polite language, how upsetting this is. The rank in competency of those in charge (Congress & Fed) is just short of criminal. With nothing to hold them in check, the last thirty years have been setting us up for a tremendous fall.
Tuesday, June 10, 2008
Bernanke Discovers the Dollar
The valiant New York Sun has printed my letter in its June 10th edition and online here:
'Bernanke Discovers the Dollar'
Thank you for your editorial about the Fed's role in creating inflation ["Bernanke Discovers the Dollar," June 5, 2008].
In the late 19th century the Mugwumps, the educated New Yorkers and Bostonians who opposed the spoils system and big government, were concerned about currency depreciation and inflation that Civil War greenbacks had caused.
In particular, the Mugwumps were concerned that inflation led to the re-distribution of wealth from wage earners and those on fixed incomes to financial speculators like Jay Gould.
Ever since President Nixon jettisoned the international gold standard in 1971, Americans' average real hourly wage has declined. There has been no previous 38-year decline in the real hourly wage.
Modern economists, lacking the Mugwumps' courage, have averted their gaze from link between income inequality and monetary expansion.
But the link is obvious, and it is becoming more severe. In 1884 the Mugwumps bolted the Republican Party to vote for a Democrat, Grover Cleveland, a gold standard proponent.
Let us hope that John McCain offers greater integrity than did Cleveland's 1884 opponent, James Blaine.
MITCHELL LANGBERT
Associate Professor of Business and Economics
Brooklyn College
Brooklyn, N.Y.
'Bernanke Discovers the Dollar'
Thank you for your editorial about the Fed's role in creating inflation ["Bernanke Discovers the Dollar," June 5, 2008].
In the late 19th century the Mugwumps, the educated New Yorkers and Bostonians who opposed the spoils system and big government, were concerned about currency depreciation and inflation that Civil War greenbacks had caused.
In particular, the Mugwumps were concerned that inflation led to the re-distribution of wealth from wage earners and those on fixed incomes to financial speculators like Jay Gould.
Ever since President Nixon jettisoned the international gold standard in 1971, Americans' average real hourly wage has declined. There has been no previous 38-year decline in the real hourly wage.
Modern economists, lacking the Mugwumps' courage, have averted their gaze from link between income inequality and monetary expansion.
But the link is obvious, and it is becoming more severe. In 1884 the Mugwumps bolted the Republican Party to vote for a Democrat, Grover Cleveland, a gold standard proponent.
Let us hope that John McCain offers greater integrity than did Cleveland's 1884 opponent, James Blaine.
MITCHELL LANGBERT
Associate Professor of Business and Economics
Brooklyn College
Brooklyn, N.Y.
Monday, June 9, 2008
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 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.
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.
Friday, May 9, 2008
Spreading Shortages Due to Greenspan-Bernanke Federal Reserve Policy--Woodrow Wilson Turns in His Grave
My wife just returned from a Food Emporium supermarket on the upper west side of Manhattan. She tried to buy light bulbs but all the light bulbs had been sold except for two packs in which one light bulb was broken each. Likewise, her best friend just returned from her house in Hawaii and said that there is rice rationing there. As well, my wife has repeatedly been unable to purchase spa and beauty products at our health club in Ulster County, New York and has been told by the sales people that there are backlogs on orders across the board. Suppliers have not been shipping. This is the first time that we have seen a shortage of light bulbs in the supermarket.
These shortages are directly attributable to Fed policy, specifically of the Greenspan-Bernanke Fed. Across the board shortages and price inflation result from malinvestment attributable to excessively low interest rates that fund Wall Street and the commercial banking industry. Thus, the public has subsidized Wall Street to build houses that no one can pay for. The inflationary consequences of the Greenspan-Bernanke policy over the next 30 years will cause many headaches. Although a shortage of spa products or light bulbs are inconvenient, and I can hedge by buying commodities indexes and the like, the Greenspan-Bernanke Fed's three decade-long Christmas for Wall Street, hedge funds and real estate developers has resulted in the death of children in the third world and significantly lower incomes for the average American worker.
It distresses me that double talk--e.g., blaming the results of the Fed's decades-long inflationary stance on third world trade--that characterized discussions about the inflationary recession of the 1970s is again appearing, this time among "conservatives". Social-democratic conservatives seem eager to claim that the interventionist Fed policies of the last three Republican and Clinton administrations have not caused across-the-board inflation in commodity prices, flat wages of workers, wealth transfers to speculators, and child starvation in the third world. They are the friends of big government.
The only solution to flat earnings, reduced wages, inflation and shortages is to get government out of our money supply. That means establishing the kind of gold standard in which Woodrow Wilson believed when he established the Federal Reserve in the first place in 1913. Wilson had voted as a "Gold Democrat" for the New Democratic (Gold) Party in 1896. He did not anticipate that the New Deal coupled with the social democratic (Roosevelt-Rockefeller-Nixon-Bush) wing of the Republican Party would declare against the gold standard. And who would have thought that following Richard ("We are all Keynesians now") Nixon, so-called conservatives have become bigger apologists for government control, regulation and debasement of our money supply than their left-wing social democratic colleagues.
These shortages are directly attributable to Fed policy, specifically of the Greenspan-Bernanke Fed. Across the board shortages and price inflation result from malinvestment attributable to excessively low interest rates that fund Wall Street and the commercial banking industry. Thus, the public has subsidized Wall Street to build houses that no one can pay for. The inflationary consequences of the Greenspan-Bernanke policy over the next 30 years will cause many headaches. Although a shortage of spa products or light bulbs are inconvenient, and I can hedge by buying commodities indexes and the like, the Greenspan-Bernanke Fed's three decade-long Christmas for Wall Street, hedge funds and real estate developers has resulted in the death of children in the third world and significantly lower incomes for the average American worker.
It distresses me that double talk--e.g., blaming the results of the Fed's decades-long inflationary stance on third world trade--that characterized discussions about the inflationary recession of the 1970s is again appearing, this time among "conservatives". Social-democratic conservatives seem eager to claim that the interventionist Fed policies of the last three Republican and Clinton administrations have not caused across-the-board inflation in commodity prices, flat wages of workers, wealth transfers to speculators, and child starvation in the third world. They are the friends of big government.
The only solution to flat earnings, reduced wages, inflation and shortages is to get government out of our money supply. That means establishing the kind of gold standard in which Woodrow Wilson believed when he established the Federal Reserve in the first place in 1913. Wilson had voted as a "Gold Democrat" for the New Democratic (Gold) Party in 1896. He did not anticipate that the New Deal coupled with the social democratic (Roosevelt-Rockefeller-Nixon-Bush) wing of the Republican Party would declare against the gold standard. And who would have thought that following Richard ("We are all Keynesians now") Nixon, so-called conservatives have become bigger apologists for government control, regulation and debasement of our money supply than their left-wing social democratic colleagues.
Wednesday, April 30, 2008
Progressive-Liberal Economists Murder Children
Economist Ben Bernanke
Weep and pray for children in nations with food shortages, who have been starved by the progressive-liberal Fed policies of the Greenspan and Bernanke Fed. For the past three decades progressive-liberal economists have advocated creation of money, that is, liquidity or credit, to stimulate real estate investment. This misallocation of resouces inhibited food production by transferring resources away from commodities production to construction.
Keynesian progressive-liberal economists have caused a global food shortage. Too little food being produced and the transfer of land to developers mean that agriculture cannot adjust to increasing demand. The Fed's actions, in response to the claims of Keynesian economists, are starving children. The economists are murderers because they have induced the world's banking community to engage in policies that have starved children. Now, their chief concern is that the starvation not impede Wall Street's profit picture.
Recently economist James Galbraith responded to my blog about his television appearance, claiming that higher interest rates would be a catastrophe. But the policies that the Fed has adopted, i.e., creation of money by lending it to hedge fund managers and commercial banks at public expense, has resulted in starvation around the world. Keynesians don't view the starvation that their policies have caused to be a catastrophe. Only a decline in Wall Street's profit picture is a catastrophe to them. Starving children is a detail of no economic consequence to their models.
Weep and pray for children in nations with food shortages, who have been starved by the progressive-liberal Fed policies of the Greenspan and Bernanke Fed. For the past three decades progressive-liberal economists have advocated creation of money, that is, liquidity or credit, to stimulate real estate investment. This misallocation of resouces inhibited food production by transferring resources away from commodities production to construction.
Keynesian progressive-liberal economists have caused a global food shortage. Too little food being produced and the transfer of land to developers mean that agriculture cannot adjust to increasing demand. The Fed's actions, in response to the claims of Keynesian economists, are starving children. The economists are murderers because they have induced the world's banking community to engage in policies that have starved children. Now, their chief concern is that the starvation not impede Wall Street's profit picture.
Recently economist James Galbraith responded to my blog about his television appearance, claiming that higher interest rates would be a catastrophe. But the policies that the Fed has adopted, i.e., creation of money by lending it to hedge fund managers and commercial banks at public expense, has resulted in starvation around the world. Keynesians don't view the starvation that their policies have caused to be a catastrophe. Only a decline in Wall Street's profit picture is a catastrophe to them. Starving children is a detail of no economic consequence to their models.
Monday, April 28, 2008
The New York Times on Ben Bernanke, June 20, 1913
The New York Times wrote an article on the McAdoo-Owen-Glass Banking bill, which became the Federal Reserve Act, on June 20, 1913. The Federal Reserve Act was passed in December of that year. The Times wrote:
"Banking and politics would be one. All experience forbids us to assume with any degree of confidence that appointments made by the President and confirmed by the Senate would be made with that careful attention to the need of securing fit and experienced men which the great importance of the banking business and its delicate and easily disturbed relation to the industries of the country so urgently require. We know that our Government is one of the least efficient, most wasteful and loosely conducted of the great business institutions of the country. And into such incompetent hands it is proposed to intrust the control of banking upon which all other business is so intimately dependent. Loans upon the security of farming lands are provided for. Does anybody suppose that the policy of the Federal Reserve Banks or of the Federal Reserve Board would in this particular be determined with entire indifference to the farmer vote? Or that in Congressional or Presidential campaign years the regulation of the discount rate or the determination of banking policy in general would be decided on by minds taking no thought of political ends to be gained? The germinal principle of the bill appears to be distrust of banks and bankers. We may assume that not only financiers and bankers, but business men generally will take sober thought concerning the centralizing features of the bill and the spirit and the policy which have inspired it."
"Banking and politics would be one. All experience forbids us to assume with any degree of confidence that appointments made by the President and confirmed by the Senate would be made with that careful attention to the need of securing fit and experienced men which the great importance of the banking business and its delicate and easily disturbed relation to the industries of the country so urgently require. We know that our Government is one of the least efficient, most wasteful and loosely conducted of the great business institutions of the country. And into such incompetent hands it is proposed to intrust the control of banking upon which all other business is so intimately dependent. Loans upon the security of farming lands are provided for. Does anybody suppose that the policy of the Federal Reserve Banks or of the Federal Reserve Board would in this particular be determined with entire indifference to the farmer vote? Or that in Congressional or Presidential campaign years the regulation of the discount rate or the determination of banking policy in general would be decided on by minds taking no thought of political ends to be gained? The germinal principle of the bill appears to be distrust of banks and bankers. We may assume that not only financiers and bankers, but business men generally will take sober thought concerning the centralizing features of the bill and the spirit and the policy which have inspired it."
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