Monday, November 22, 2010

Gold v. The Fed

There were no worldwide financial crises of major magnitude during the Bretton Woods era from 1947 to 1971. Lesson: Gold is a more efficient governor of monetary policy that the Federal Reserve.

When it last met, the Federal Open Market Committee (FOMC) signaled its desire to increase the rate of inflation by providing additional monetary stimulus. This policy is based on a false – and dangerous – premise: that manipulating the dollar’s buying power will lead to higher employment and economic growth. But the experience of the past 40 years points to the opposite conclusion: that guaranteeing a stable value for the dollar by restoring dollar-gold convertibility would be the surest way for the Federal Reserve to achieve its dual mandate of maximum employment and price stability...

What’s happened since 1971, when President Nixon formally broke the link between the dollar and gold? Higher average unemployment, slower growth, greater instability and a decline in the economy’s resilience...

Economists and pundits may disagree on why the gold standard delivered such superior results compared to the recurrent crises, instability and overall inferior economic performance delivered by the current system. But the data are clear: A gold-based system delivers higher employment and more price stability. The time has come to begin the serious work of building a 21st-century gold standard for the benefit of American workers, investors and businesses.

read the essay

Saturday, November 20, 2010

Cartoon: Don't Leave Anything Out

Analysis of the Fed

The Fed's predictive history is so horrible at this point, its bankers so manifestly incompetent, its results so dismal, that there are not many ways to defend it at the moment. This is one of the reasons that as an elite promotion it has probably run its course. When modern central banking was "new" – early in the 20th century – there was little anyone could do to combat the "common sense" of building a bank of last resort. But now there is a substantive track record behind this concept, one that allows us to say (regardless of the larger economic illiteracy) that it simply doesn't work...

Central banking doesn't work. No one, not even the smartest person in the world, not even Ben Bernanke, can fix the value and quantity of money for the larger marketplace. Articles like this one in the Washington Post – well written and perceptive as they are – cannot hide this fundamental point. And thanks to the Internet, we have the intellectual resources to formulate for ourselves what is wrong and to try and put it right. We would humbly suggest, as we often do, a free-market money system, hopefully built on free banking, gold and silver, Real Bills and market-competition. Let the best money solutions win. What's so hard about that?

read the essay

What Kind of Freedom?

Obama to award Medal of Freedom to 15, including investor Buffett ... President Obama will award the Medal of Freedom to billionaire investor Warren Buffett, one of 15 recipients who will be given the country's highest civilian honor, the White House said ... Among the other Medal of Freedom recipients will be former president George H.W. Bush; German Chancellor Angela Merkel ... poet Maya Angelou ... and labor chief John Sweeney. – Washington Post

Dominant Social Theme: The US government is at again, honoring the VIPs that mean the most to the American people.

Free-Market Analysis: We are reminded of a certain book when we read who is getting freedom medals from Barack Obama; but more on that at the end of this article. Warren Buffet is a kind of Keynesian socialist in our humble view...

Start with Buffet. Here is a man who constantly campaigns for increased taxes to be placed on US citizens, identifies himself as a Democrat and is worth something like US$50 billion. He poses as an investor, but really he makes "investments" in businesses that have hidden economic advantages, usually via regulatory loopholes. Of course Buffet may seem free-market oriented in the sense that he has made a fabulous fortune in the "investment game" – but when one examines his criteria for picking companies, it becomes obvious that one of them is mercantilism.

This means that Buffet values companies that in some way have developed access to the US government at state or federal levels and can pull levers of power available to no one else. Buffet is thus not investing in companies that necessarily have a better widget. He is putting his money into companies that are interacting most efficiently with government. He is not in his investing making a principled stand for entrepreneurialism or free markets but seeks out firms that have best exploited the current socialist and leveling environment of the US. It is difficult to reconcile this investment philosophy with freedom...

Conclusion: We started out this article by writing that the distribution of freedom medals to people who, at least in some cases, do not seem interested in the slightest in encouraging freedom reminded us of a certain book. Here is a quote from it. It is very famous and you should be able to figure it out quickly. As follows:

It was as though the world had turned upside-down ... Benjamin felt a nose nuzzling at his shoulder. He looked round. It was Clover. Her old eyes looked dimmer than ever. Without saying anything, she tugged gently at his mane and led him round to the end of the big barn, where the Seven Commandments were written. For a minute or two they stood gazing at the tatted wall with its white lettering.

"My sight is failing," she said finally. "Even when I was young I could not have read what was written there. But it appears to me that that wall looks different. Are the Seven Commandments the same as they used to be, Benjamin?"

For once Benjamin consented to break his rule, and he read out to her what was written on the wall. There was nothing there now except a single Commandment. It ran:


read the essay

Is Capitalism Cruel?

Tibor Machan writes:

Now these issues must always be dealt with comparatively – is capitalism cruel, harsh, heartless compared to what?

Some folks I know have maintained that compared to socialism, capitalism is indeed all these things but I just cannot buy it. Partly it's because I have lived under at least one kind of socialism, the Soviet version, which, as only someone who has been living in a cave for a hundred years would deny, is brutal, never mind cruel, harsh, and heartless...

A fully free market, capitalist system in which everyone must live without resorting to extorting their support from others, without getting bailed out by the government with other people's resources when they have mismanaged their financial affairs – is such a system more cruel than, say, democratic socialism?

Not really, not by a long shot. Any kind of socialism subjects the citizenry to coercive wealth redistribution and makes it impossible to accumulate wealth for oneself, one's family, one's enterprise thus impeding investment, savings and economic development. Instead people in socialist systems have to contend with being slowly bled to economic destitution unless they are savvy enough to circumvent all the damaging socialist practices (think here of George Soros). And, yes, there are quite a few people in socialist societies, even the harshest version of them, who manage to game the system. They may not openly attack their fellow citizens but because they game the system at the expense of these fellow citizens, those others are in fact – although sometimes not visibly – being seriously harmed...

Because so many people have found free market capitalism too harsh, too cruel, or too mean, the system has never been allowed to function as it had been meant to by those who considered it best for a society's economic well being, the likes of Adam Smith, Herbert Spencer, Ludwig von Mises, F. A. Hayek, Milton Friedman and Ayn Rand, among others. (Spencer, especially, got no end of grief because of sentiments like the following: "Sympathy with one in suffering suppresses, for the time being, remembrance of his transgressions. ... Those whose hardships are set forth in pamphlets and proclamations in sermons and speeches which echo throughout society, are assumed to be all worthy souls, grievously wronged; and none of them are thought of as bearing the penalties of their own misdeeds." [Man versus the State, p.22].) Instead they followed the lead of John Maynard Keynes and insisted that people who mismanage their economic affairs are entitled to endless bailouts from the government.

read the entire essay

Jesse Ventura on the TSA

Friday, November 19, 2010

Has the Fed Been a Failure?

A new paper from the Cato Institute

Has the Fed Been a Failure?

“No major institution in the U.S. has so poor a record of performance over so long a period, yet so high a public reputation.” Milton Friedman (1988).

As the one-hundredth anniversary of the 1913 Federal Reserve Act approaches, we assess whether the nation‘s experiment with the Federal Reserve has been a success or a failure. Drawing on a wide range of recent empirical research, we find the following: (1) The Fed‘s full history (1914 to present) has been characterized by more rather than fewer symptoms of monetary and macroeconomic instability than the decades leading to the Fed‘s establishment. (2) While the Fed‘s performance has undoubtedly improved since World War II, even its postwar performance has not clearly surpassed that of its undoubtedly flawed predecessor, the National Banking system, before World War I. (3) Some proposed alternative arrangements might plausibly do better than the Fed as presently constituted. We conclude that the need for a systematic exploration of alternatives to the established monetary system is as pressing today as it was a century ago.


The Federal Reserve System has not lived up to its original promise. Early in its career, it presided over both the most severe inflation and the most severe (demand-induced) deflations in post-Civil War U.S. history. Since then, it has tended to err on the side of inflation, allowing the purchasing power of the U.S. dollar to deteriorate considerably. That deterioration has not been compensated for, to any substantial degree, by enhanced stability of real output. Although some early studies suggested otherwise, recent work suggests that there has been no substantial overall improvement in the volatility of real output since the end of World War II compared to before World War I. A genuine improvement did occur during the sub-period known as the ―Great Moderation.‖ But that improvement, besides having been temporary, appears to have been due mainly to factors other than improved monetary policy. Finally, the Fed cannot be credited with having reduced the frequency of banking panics or with having wielded its last-resort lending powers responsibly.

Its record strongly suggests that the Federal Reserve‘s problems go well beyond those of having lacked good administrators. Although it has manifested itself in different ways during different decades, the Fed‘s failure has been chronic. The problems appear to reside with the institution, and not with particular personalities who have been placed in charge of it. Hence the record would not be likely to improve substantially even with complete turnover in the Board of
Governors. The only real hope for a better monetary system lies in regime change. What sort of change is a question beyond the scope of this paper. The present study has only indicated some possibilities, its main thrust being that the Federal Reserve System, as presently constituted, is no more worthy of being regarded as the last word in monetary management than the National Currency System it replaced almost a century ago.

read the entire paper

Thursday, November 18, 2010

Abolish the Income Tax

Jacob Hornberger writes:

In the midst of the perpetual statist debate over whether President Bush’s tax cuts for the rich should be extended or not, we libertarians should refrain from getting mired in that debate and instead continue raising people’s vision to the libertarian principle, which is: There shouldn’t be an income tax at all and everyone should be free to keep everything he earns and decide for himself what to do with it — spend, save, invest, hoard, donate, or whatever.

For more than a century, Americans lived without income taxation. The reason? Because they knew that income taxation was contradictory to the principles of a free society. When people are free, they are exercising the right to keep the fruits of their earnings. On the other hand, when government has the power to tax incomes, the people are relegated to the condition of serfs...

Let the statists argue over their statist reforms. Let us libertarians continue raising the vision of the American people to a higher level — toward building on the founding principles of liberty enunciated in the Declaration of Independence, including the freedom to keep everything you earn and decide for yourself what to do with it.

read the entire essay

Wednesday, November 10, 2010

How the Fed Keeps Feeding the Financial Crisis

Bill Bonner writes:

Wow! Is this fun, or what? We are so lucky, we can scarcely believe it. We’re getting to live through something most people only read about in the history books…a monetary meltdown.

Last week, our own central bank – the US Federal Reserve – announced that it would print up another $600 billion. This will bring the total to $2.3 trillion added in just a bit over 24 months.

Is this crazy? Is it foolish? Is it stupid? Yes! It is all of those things and more – vain, pigheaded, destructive, reckless…

…supply your own adjective!

Intervention on this scale is risky. So, you might expect that the Fed has some sort of computer program – trusted, reliable, tested and proven – that tells it exactly how much money to put into the system via its QE program…and when.

Well, if you think that, you’re dreaming. The Fed has no such computer program. No formula. Not even a theory that will hold up to inspection.

The whole thing is just a willful, dangerous gamble.

And we’re just happy that it is happening now…when we’re still alive to appreciate it.

It’s not everyone who gets to see a genuine, real-life example of hyperinflation…depression…money panic…and currency suicide. We’re going to see them all. At least, we think so…

But we know the risk of a crash is high. Investors are buying stocks as speculations. The Fed’s hot money is not really going to improve the economy. Everyone but Ben Bernanke knows that. Investors are just speculating that it will push up the stock market. They’re gambling too – just like the Fed.

And maybe it will. But it will be temporary. Because the only thing that can push up the stock market in a reliable way is real growth. And you don’t get real growth by running the printing press. If you did, Zimbabwe would be growing faster than China.

No, dear reader, hot money produces hot action in the market. Speculative fever. Bubbles.

…And crashes, of course.

read the entire essay

Mass Inflation?

The Mogambo Guru writes:

The thing that has sent me into Mogambo Panic Mode (MPM) over the terrifying inflationary implications is the latest outrage from the Federal Reserve, reported at as, “The Federal Reserve will buy an additional $600 billion of Treasuries through June, expanding record stimulus and risking its credibility in a bid to reduce unemployment and avert deflation.”

It turns out that the announced $600 billion, in six measly months, as perfectly horrific as it is, is not the whole story, as we later find out when Bloomberg later in the article reports, “Including Treasury purchases from reinvesting proceeds of mortgage payments, the Fed will buy a total of $850 billion to $900 billion of securities through June, or about $110 billion per month, the New York Fed said in accompanying statement.”

$110 billion per month! Per month! Per freaking month! Gaaahhhh!...

In case you were wondering, the purpose of the QE program is to create the money that the government needs to borrow this year. Otherwise, the Treasury has to try and sell $2 trillion in bonds to the few people who have saved some cash money, but it is ludicrous to think that these few people could possibly come up with $2 trillion! Hahaha!

And then more next year, and the year after, and the year after! Hahaha! Insane!

And if you think that this will not end Very, Very Badly (VVB), then I am pretty sure that I am on safe ground to say that you don’t know squat about economics. I say this without fear of contradiction for two important reasons...

And I also say this without fear of contradiction because there is not one example in the last 4,500 years – 4,500 years! – where any of the thousands and thousands of corrupt, dirtbag governments that borrowed themselves into such overwhelming bankruptcy and/or created so much new fiat money to spend that had ever, ever, ever, either magically or miraculously, succeeded in preventing total disaster by (unbelievably) creating, borrowing and spending more money!...

To even suggest otherwise is Sheer Freaking Lunacy (SFL), and if you do, then you will be shunned by decent people and end up in the gutter, career-wise, writing about economics for The New York Times or be a laughable egghead university professor at Princeton (“Them that can, do, and those that can’t, teach, or end up as chairmen of the Federal Reserve where they can prove that they can’t, but they thought they could because they were willingly gullible halfwits who could not see the utter stupidity of their preposterously simplistic neo-Keynesian econometric crapola of equations and computer models, which is such an absurd idea that it makes me guffaw in a Loud Mogambo Laugh Of Scorn (LMLOS) for Ben Bernanke, Paul Krugman and all the lowlifes who agree with either of them about anything.)”

read the entire essay

Bill Bonner: Creating Bubbles to Maintain Stability

Bill Bonner writes:

“Global Backlash Grows,” says The Wall Street Journal.

This is the backlash against Ben Bernanke’s crackpot money-printing scheme.

The foreigners don’t like it. Because the US is flooding the world with “hot money.” This fast cash chases oil, commodities, collectibles, farmland – just about everything.

It creates bubbles. It distorts markets. And it will certainly lead to busts and bankruptcies…and maybe to hyperinflation, too.

So, sit back and enjoy the show, dear reader. It’s the greatest show on earth. Yes, it will most likely lead to embarrassment and poverty in the US. Yes, the US dollar will cease being the world’s reserve currency. And yes, America’s leading economists – many of whom have won Nobel prizes – will be shown to be hapless goofballs.

But this is all good news to us. Under the leadership of modern US economists, Americans have been getting poorer for the last 10 years...

How came it to be that the taxpayers are on the hook for $600 billion more in financial responsibilities with no vote of their elected representatives? No point in even asking the question….

This is, after all, late, degenerate state-guided capitalism. If Congress can make citizens buy something they don’t want – such as health insurance – surely the Fed, which is a privately-owned bank, can write checks from the taxpayers’ checkbooks. Heck, nothing is too absurd.

So, the Fed goes boldly where no sensible person would want to go. It is trying – trying! – to create bubbles…asset bubbles, to make people feel like they have more money. If people feel richer, the feds reason, they’ll spend more money. Presto, we’ll be richer.

read the entire essay

A Return to the Gold Standard

Richard Ebeling writes:

Over the weekend of November 6-7, 2010, World Bank president, Robert Zoellick , proposed in a column written for the Financial Times that the global economy once more be linked to gold as an anchor to help maintain currency stability and reduce inflationary expectations in international markets...

But in spite of Wolf's concerns, it can be argued the costs of a gold standard are far less that the costs that have been imposed on society from a century of gross mismanagement of the monetary system by governments around the world. Since 1914, when the Federal Reserve System came into operation as America's central bank, and the beginning of the First World War that same year, the world has experienced severe inflations, including a number of hyperinflations, and the rollercoaster of several booms and recessions, including the Great Depression of the 1930s and the current global economic downturn.

Placing the fate of the world's monetary system in the hands of monetary central planners, who have had all the discretion imaginable through their control of paper money instead of gold, has not secured an inflation- or recession-free economic environment...

Finally, Wolf's concern that a real gold standard would tie the hands of governments and central banks from having the discretionary authority to manipulate the monetary system should be considered a "plus," not a minus. Only the most doctrinaire Keynesian can deny or fail to see that past recessions and the current economic downturn were all preceded by unsustainable booms resulting from monetary expansions and interest rate manipulations that threw savings and investment out of balance, artificially stimulated misplaced construction projects, and misdirected labor into employments that became unprofitable to maintain once the inevitable financial and investment bubbles burst...

Monetary central planning has worked no better than any other form of central planning over the last one hundred years. The world's central bankers – just like the central planners in the old Soviet Union – just do not have the knowledge, wisdom and ability to successful manage the monetary system of a market economy...

The return to a market-based money such as gold, therefore, is both possible and desirable. And it would be most effective in acting as a barrier against any further government abuses of the monetary system, if such a return to gold was introduced through the freeing of banking and financial markets from the heavy-hand of government, as well.

The next phase of our post-communist world may very well require the end to monetary socialism, which is what central banking really represents.

read the entire essay

Economic Collapse?

The world seems on course for another crisis in 2012. The same people who caused the last crisis are still in charge. They'll get us into another.

Andy Xie

Federal Reserve Chairman Ben Bernanke with ex-chair Alan Greenspan. Greenspan presided over one of the largest periods of growth in US history. But it proved unsustainable. Now, he is warning that America must pay down its substantial debt. On average, the US national debt has been growing by $3.2 billion per day since 2006.

What is now even more disturbing about our future is that it is quickly becoming conventional wisdom that, not only do we need another inflated asset class to generate American-style prosperity, but that it’s the central bank’s job to make that happen.


Debunking Pro-Tax Increase Propaganda

National Commission on Fiscal Responsibility and Reform

President Obama created the bipartisan National Commission on Fiscal Responsibility and Reform to address our nation's fiscal challenges. The Commission is charged with identifying policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run. Specifically, the Commission shall propose recommendations designed to balance the budget, excluding interest payments on the debt, by 2015. In addition, the Commission shall propose recommendations that meaningfully improve the long-run fiscal outlook, including changes to address the growth of entitlement spending and the gap between the projected revenues and expenditures of the Federal Government.

The Commission will meet as a whole once a month while Congress is in session. The Commission will vote on a final report containing a set of recommendations to achieve its mission no later than December 1, 2010. The final report will require the approval of at least 14 of the Commission's 18 members.

Working Groups

Discretionary Working Group

The Discretionary Working Group will research and discuss issues related to discretionary spending.

Discussion leaders:
Rep. Spratt and Sen. Coburn
Sen. Coburn
Dave Cote
Sen. Durbin
Ann Fudge
Rep. Hensarling
Alice Rivlin
Rep. Ryan
Rep. Schakowsky
Rep. Spratt

Mandatory Working Group

The Mandatory Working Group will research and discuss issues related to mandatory spending.

Discussion leaders:
Alice Rivlin and Sen. Gregg (on Social Security) or Rep. Ryan (on other mandatory issues)
Sen. Baucus
Rep. Becerra
Rep. Camp
Sen. Coburn
Sen. Conrad
Sen. Crapo
Sen. Gregg
Rep. Hensarling
Alice Rivlin
Rep. Ryan
Rep. Schakowsky
Rep. Spratt
Andy Stern

Tax Reform Working Group

The Tax Reform Working Group will research and discuss issues related to tax reform.

Discussion Leaders:
Rep. Camp and Sen. Conrad
Sen. Baucus
Rep. Becerra
Rep. Camp
Sen. Conrad
Dave Cote
Sen. Crapo
Sen. Durbin
Ann Fudge
Sen. Gregg
Andy Stern

Co-Chairs' Proposal 11/10/2010

Weekly Claims November 11

This graph shows the 4-week moving average of weekly claims since January 2000.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased this week by 10,000 to 446,500.

This is the lowest level for the 4-week moving average since January of this year September 2008 - an improvement over recent months, but still elevated - and still a sign of weakness in the job market.


Trade Deficit September 2010

[T]otal September exports of $154.1 billion and imports of $198.1 billion resulted in a goods and services deficit of $44.0 billion, down from $46.5 billion in August, revised.


Sarah Palin on the Fed

“We shouldn’t be playing around with inflation. It’s not for nothing Reagan called it “as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man.” The Fed’s pump priming addiction has got our small businesses running scared, and our allies worried. The German finance minister called the Fed’s proposals “clueless.” When Germany, a country that knows a thing or two about the dangers of inflation, warns us to think again, maybe it’s time for Chairman Bernanke to cease and desist. We don’t want temporary, artificial economic growth bought at the expense of permanently higher inflation which will erode the value of our incomes and our savings. We want a stable dollar combined with real economic reform. It’s the only way we can get our economy back on the right track.”

-Sarah Palin

Sarah Palin critiqued:

“First off, Reagan’s quote, delivered to a Republican fund raising event in October 1978 — according to the Columbia Book of Quotations — came as inflation was hovering around double-digits.We’ve got a very different situation now, the consumer price index for all items minus food and energy rose 0.8% over the year to September, the lowest 12-month increase since March 1961, the Bureau of Labor Statistics said.

Second, Germany did indeed have a nasty battle with hyper inflation about 90 years ago in the Weimar Republic. But what’s worrying Germany right now is not that their good friends in the U.S.A. will soon be selling bundles of greenbacks by weight, rather it’s that a cheaper dollar is a threat to their own all-important export sector. That’s a legitimate concern for them. But do you really take advice on business strategy from your competitor?

Third, permanently high inflation could indeed erode the value of savings and incomes. But deflation — which is the bigger worry and the reason why the Fed recently announced it is warming up the electronic printing presses — has costs too. It means debts get tougher and tougher to pay off. Last, keep in mind that inflation-scare mongerers have been wrong throughout the entire financial crisis."

Matt Phillips

The Business Cycle


Tuesday, November 9, 2010

No Right to Health Care, Education, or a Job

Jacob Hornberger writes:

Statists love to say that people have a right to such things as health care, education, or a job. That’s just plain statist nonsense. People do not have a right to health care, education, or a job.

People have a right to seek health care, education, or a job but they don’t have a right to them...

In other words, you have the right to pursue happiness but you have no right to force others to provide you with health care, education, or a job. Genuine liberty entails the right to live your live any way you wish, so long as you leave everyone else free to do the same thing.

read the entire essay

Monday, November 8, 2010

Smith v. Marx

QE2 and Inflation

Stefan Karlsson writes:

It is generally assumed, and rightly so, that the new round of "quantitative easing" will generate higher inflation in the United States. But it is rarely explained just why it will do so. After all, QE2 will not be conducted by dropping dollar bills from helicopters.

Well, there are essentially three mechanisms by which it happens: higher money supply, lower money demand and lower supply of goods and services.

1) Regarding money supply, it should be noted that by lowering interest rates, QE2 will boost demand for loans. Higher demand for loans will in a fractional reserve banking system generate a higher money supply. Given a certain level of money demand and supply of goods and services, a higher money supply will result in higher price inflation.

2) Regarding money demand, higher inflationary expectations will cause people to be less willing to hold money (as its real value is expected to drop), thus reducing money demand. And lower money demand has a very similar effect on prices as a higher money supply.

It should be noted though in this context that to the extent that QE2 lowers nominal interest rates, this will increase money demand as the opportunity cost of holding money drops.

So the net effect of Fed bond purchases on money demand depends on to what extent it raised inflationary expectations more than it lowers nominal interest rates.

And it seems that the increase in inflationary expectations is this time somewhat bigger than the drop in nominal yields.

As of this writing, the nominal 5-year yield has dropped 21 basis points since August 31 (from 1.33% to 1.12%) while the inflation indexed 5-year yield has dropped 72 basis (from 0.14% to -0.58%) points since August 31, implying that inflationary expectations has increased 51 basis points (from 1.19% to 1.70%) during that period.

Thus, QE2 has likely reduced money demand somewhat.

3) Regarding the issue of reduced supply of goods and services, it should be noted that to the extent that QE2 reduces the value of the dollar and to the extent that companies adjust prices, it will raise import and export prices, causing a reduction in the inflow of foreign goods and services and increase in the outflow, reducing the supply of goods and services available to Americans.

A lower supply of goods and services will given certain levels of money supply and demand increase the dollar price of goods and services.

In conclusion we can clearly see that by a combination of a higher money supply, a reduction in money demand and a reduced domestic supply of goods and services, QE2 will clearly increase price inflation. The only uncertainty is just how big this effect will be.


The Fed's Interventions

Thursday, November 4, 2010

Quantative Easin'

Paul: “Government Can Not Create Prosperity”

QE2: $600 Billion

The Federal Reserve cannot solve all the economy’s problems on its own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators and the private sector.

-Ben S. Bernanke, chairman of the Federal Reserve Board of Governors

This is what life after “QE2” looks like:
  • Record gold prices
  • Stocks back at pre-Lehman levels
  • And a dollar cruising toward its 2008 lows.

Everything is rallying…in terms of depreciating dollars. Mission accomplished. Ben Bernanke needs George W. Bush’s ol’ “shock and awe” flak jacket.

In case mainstream media coverage made you glaze over, here’s the quick and dirty of the Federal Reserve’s fateful decision…

  • The Fed will buy $600 billion in Treasuries over the next 8 months
  • The mortgage securities the Fed bought during QE1 now reaching maturity will continue to be rolled over into Treasuries, as they have been since August. That’s another $275 billion, give or take
  • There was also the caveat that more of this could be in the works if unemployment stays high and inflation (as defined by core CPI) stays low.

Hmmn… If the federal budget deficit is supposed to run $1.2 trillion during fiscal 2011 (that’s the consensus guess)…and the Fed will purchase $875 billion in Treasuries over the next eight months (that’s two-thirds of a year)…

This is yet another reason we don’t expect the House Republicans to convert to the gospel of fiscal responsibility any more than they did last time they were in the majority: They can indulge in demon spending unto oblivion…and the Fed will have their back...


Bill Bonner writes:

The Fed announced a $600 billion purchase program, from here until June. Even in dollars, that’s a lot of money to throw into a market. The stated purpose is to lower interest rates even further…trying to coax business into hiring and consumers into spending.

Will it work? Will it create real prosperity…growth…and wealth? Ha. Ha. Nope. No chance.

How can we be so sure? Well, theory and practice. In theory, it makes no sense. Real jobs require real investment by real investors, entrepreneurs and businesspeople. It takes time. Skill. Luck. Giving the banks more money (which is what happens with QE) merely destabilizes serious producers. They don’t know what to expect. Cheap money forever? Will inflation increase? What should interest rates be? They don’t know. So, they wait…and watch…and the slump gets worse. Besides, the economy is correcting for a reason. Any interference is bound to be a mistake.

The lessons from experience are even more damning. There is no instance in all of history when printing press money actually turned around a correction. And if you really could make people better off by printing money, Zimbabweans would be the world’s richest and most prosperous citizens. Followed by the Argentines; they’ve got 25% inflation right now.

Nope; it isn’t going to work. And even if it seems to be working…it will actually be making people worse off.


Bill Gross writes:

The dollar is in danger of losing 20% of its value over the next few years if the Federal Reserve continues unconventional monetary easing, Bill Gross, the manager of the world's largest mutual fund, said on Monday.


Exports to China


Social Security: Reality

Jacob Hornberger writes:

All too many Americans simply do not wish to see the reality of Social Security. They’ve lived all their lives under myths, illusions, and delusions, mostly self-imposed. And many of them get furious when you confront them with reality. It’s easier to continue living under the myths, illusions, and delusions.

Reality: There is no Social Security fund. There never has been a fund. There never will be a fund. From the very beginning, Social Security has been just another socialistic welfare program, no different from food stamps or agricultural subsidies.

Reality: The government is not like a private business. It does not create wealth. It is also not a fountain of wealth. It does not have its own money. The only way it gets its money is by taking it away from people in the private sector.

Reality: Social Security is a straight, out-and-out, socialistic program. It’s not a coincidence that the Social Security administration has a bust of Otto von Bismarck on its website. He was known as the Iron Chancellor of Germany. He got the idea of Social Security from German socialists and then introduced it into Germany’s paternalistic, welfare-state way of life.

Reality: Social Security program is one of major factors that are heading America toward bankruptcy.

Reality: Young people are already having a terribly difficult time starting out in life, including buying a home and raising a family. Why in the world would any senior citizen desire to make life more difficult for young people, including their children and grandchildren and their friends by continuing to impose an enormous Social Security tax burden on them?

Seniors have the opportunity to do the right thing before they pass from this life. They have the opportunity to call for the repeal, not the saving, of Social Security. Many seniors don’t need the money anyway. Some will have to continue working, which isn’t necessarily a bad thing. In fact, imagine the economic prosperity and job creation that would result from ending the enormous Social Security tax burden. Others will have to depend on their children or others for help.

What’s wrong with all that? Have Americans lost all their faith in the workings of a free society?

America’s experiment with socialism (as well as its experiment with military empire) has failed. America’s senior citizens should do the right thing and demand the repeal, not the reform, of Social Security. Repealing Social Security, the crown jewel of America’s welfare state, would help lead America out of its statist morass and put our nation back on the road of economic liberty, free markets, prosperity, sound money, voluntary charity, and a constitutionally limited-government republic.

Thomas Sowell on The Great Depression and Economic Recovery

Sowell writes:

Guess who said the following: "We have tried spending money. We are spending more than we have ever spent before and it does not work." ...

It was Henry Morgenthau, Secretary of the Treasury under President Franklin D. Roosevelt and one of FDR's closest advisers.

He added, "after eight years of this Administration we have just as much unemployment as when we started. . . And an enormous debt to boot!"...

Far from pulling the country out of the Great Depression by following Keynesian policies, FDR created policies that prolonged the depression until it was more than twice as long as any other depression in American history. Moreover, Roosevelt's ad hoc improvisations followed nothing as coherent as Keynesian economics...

It is not a pretty story. But we need to understand it if we want to avoid the ugly consequences of very similar policies today.


Cartoon: Business is Thriving

Wednesday, November 3, 2010

Part I: Keynesianism It’s All About Spending

It’s All About Spending

Is our prosperity derived from a continual circular flow of spending? Is it impossible for a society to increase it’s total savings? Can deficit spending by a government step in to replace private activity in order to maintain full employment and restore lasting economic growth? What is a liquidity trap and what does it mean for the economy? What did Keynes really mean by “in the long run, we’re all dead”?


Monday, November 1, 2010

Personal Savings Rate September 2010

Personal saving as a percentage of disposable personal income was 5.3 percent in September, compared with 5.6 percent in August.

Real Personal Income

Personal income decreased $16.8 billion, or 0.1 percent, and disposable personal income (DPI) decreased $20.3 billion, or 0.2 percent, in September ... Personal consumption expenditures (PCE) increased $17.3 billion, or 0.2 percent.