Gary North on the Fed

Gary North writes:

"If the central institution of an economy is the monetary system, and this institution is controlled by a government-created cartel, and this cartel is independent of the government, then what possible opportunity does the general public have to reclaim freedom for monetary affairs? The answer is obvious: none."

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Fiscally Impossible?

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$222 Trillion Unfunded Liabilities

The expert here is Prof. Lawrence Kotlikoff of Boston University. His most recent report says that total unfunded liabilities went from $211 trillion a year ago to $222 trillion this year.
 
The biggest source of future red ink will be Medicare. In second place is Social Security.

How can the government pay off these obligations? It can't. The possibility does not exist. The government needs a spare $222 trillion to invest in private companies. This investment must make a return of at least 5% to provide the money needed to pay meet the government's obligations. There is no $222 trillion available, and no capital markets large enough to absorb $222 trillion.

Conclusion: the U.S. government will default. 

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Gary North on Voting

North writes:

This world is governed by ethical cause and effect. When people vote for a living, they create an economy that is dependent on more theft. Theft-based economies are Ponzi schemes. It's not just Social Security that is a Ponzi scheme. So is Medicare. So is the FDIC. All governments over-promise. They ask us to become dependent on government promises. The governments issue more promises than taxes and borrowing can fund. Then they inflate.

Government will prove to be the god that fails. That will be a good lesson in theology for hundreds of millions of voters. "Thou shalt not steal, except by majority vote" will prove to have been a destructive principle, although widely believed.

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The Next Crisis or the Continuation of the Current Crisis

Gary North writes:

The mainstream financial media are running stories on the next financial crisis. This is unheard of two years into a so-called economic recovery. So weak is this recovery that the old pre-2008 confidence has not returned...

We are being warned in advance by the financial media: expect another major crisis. The bailouts were not enough. The expansion of the monetary base was not enough. The new Dodd-Frank regulatory structure is not enough...

There is no formula to deal with this. There is no organized government response that is waiting in the wings. There will be another crisis. And when it comes, the response will be the same: to preserve the solvency of the biggest banks, at taxpayer expense and at central bank expense. When it comes to bailouts and central bank inflation, it's all "doable." It will therefore be done.

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The Free Market: A Litmus Test

Gary North writes:

Very few people believe in the free market. This is true of virtually all academic economists. The proof that they do not believe in the free market is that they oppose the creation of a full gold coin standard. They say they believe in the free market in many areas of life, but they do not believe in the free market with respect to the monetary system. Yet, above all other areas of the economy that ought to be governed by the free market, the money system should be. Why is this? Because money is the central institution in a market economy. Control over money is the central form of economic control.

We have seen this with a vengeance with the passing of the banking reform bill of 2010. The great winner in the reform is the Federal Reserve System. It receives the authority over the banking system. It is not limited merely to control over the money supply; it now possesses the authority of direct regulation and intervention.

The central banks of the world have now become allocators of capital. They are making the decisions as to who gets what and on what terms. Central planning over money increasingly has become central planning over the entire economy. This is not a mistake. This is consistent with the original logic of central banking. It means government control over the money supply.

When you hear a self-designated free market economist defend the idea of central banking, meaning a government-licensed monopoly over the monetary base, you can be sure that this person does not believe in the free market. He does not believe in the logic of decentralized private property. He believes in central planning, and he sees the central bank as the agency of such planning.

The few academic economists who are willing to accept even a pseudo-gold standard do not believe the government should be out of the money business. They do not believe in the widespread use of gold coins by the general population. They believe in central banks, and they believe in government control over the banking system.

What I recommend is simple: the removal of all government authority possessed by the Federal Reserve System. There would be no further legal connection between the Federal Reserve System and the United States government.

What would the result be? Within a few years, the Federal Reserve System would go bankrupt. This has been the fate of the two previous central banks of the United States. They could not operate in a competitive environment. They could operate only by means of a grant of monopolistic power by the United States government. So, I am not at all worried about the operation of the Federal Reserve System without government supervision. Besides, there is no government supervision of the Federal Reserve System. There is supervision of the government by the Federal Reserve System. Congress does not control the FED: the FED controls Congress. This has been true since 1914, and it is not likely to change...

If we were to abolish the Federal Reserve System, and if the government would then transfer to American voters all of the gold presently said to be in the vaults of the Federal Reserve Bank of New York and Fort Knox, we would see the restoration of liberty. I can think of no other pair of laws that would transfer more authority to the voters the abolition of the Federal Reserve system and transfer of the gold in the form of tenth-ounce coins back to the voters. This is why this essay is hypothetical.

Who are the opponents of such a procedure? First, the Congress of the United States. Second, all the bureaucrats who work for the Federal government. Third, all of the decision-makers of the Federal Reserve System. Fourth, the vast majority of all commercial bankers. Fifth, the entire academic economics profession. This is why we are unlikely to see this pair of laws passed in our generation.

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Bernanke's Jackon Hole Speech and Gary North's Translation Part I

This list of concerns makes clear that a return to strong and stable economic growth will require appropriate and effective responses from economic policymakers across a wide spectrum, as well as from leaders in the private sector.

Translation: There is going to be central planning like we have not seen since the end of World War II. Corporate leaders are going to fall in line, or else they will face some really daunting problems.
...

Fiscal policy – including stimulus packages, expansions of the social safety net, and the countercyclical spending and tax policies known collectively as automatic stabilizers – also helped to arrest the global decline.

Translation: Also required were budget deficits larger than anything seen since World War II.

...

The prospects for household spending depend to a significant extent on how the jobs situation evolves. But the pace of spending will also depend on the progress that households make in repairing their financial positions.

Translation: We don't know what the pace of spending will be. We don't not know when the job market will recover.

...

full text of Bernanke's speech

Gary North's translation

Double Dip Recession and the Failure of Keynesianism

Gary North writes:

Promoting a revamped Keynesian economic theory – one without any guarantee of job growth – is the equivalent of selling a lifetime subscription to a revamped Playboy: one without any photos. It's a tough sell. Yet this is what Keynesians are facing today. This will be fun to watch.

In the last few days, we have begun to see reports from mainstream Keynesian forecasters and economists who are talking about the possibility of a double-dip recession...

This remains the mainstream consensus: no double-dip recession, but weak economic growth and slow job growth. A few forecasters have said that unemployment will in fact increase. I have, but I am not in the mainstream...

The financial media are beginning to report statements from Establishment forecasters who are saying that a double-dip recession is looking more likely. One of the most prominent of them is Yale economist Robert Shiller. He is the co-creator of the Case-Shiller monthly report on the residential housing prices in 20 American cities. He also coined the phrase "irrational exuberance." He now thinks the odds favoring a double dip are above 50–50. He says that the job market is the problem.

He is a Keynesian. So, he calls on Congress to spend lots more money on another deficit-funded stimulus. He says that the Federal Reserve is "out of bullets." Economists rarely say this about the FED. When they do, it indicates near-panic. He assures us that "If we focus on creating jobs, it's not as expensive as you might think."...

David Stockman, who was briefly Reagan's budget director before he resigned, recently wrote an article on the gargantuan size of the Federal deficit. He made an important but neglected observation. Ever since the third quarter of 2008, the nation's nominal GDP has increased by a tiny $100 billion, but the Federal debt has increased by 25 times the GDP increase.

This means that the hoped-for stimulus has not worked. It has taken $25 of Federal deficits to produce $1 of GDP growth. This marks a major anomaly for Keynesian economic theory. The justification for government deficits in Keynesian theory is that government spending restores economic growth. Money spent by the private sector does not increase economic growth in a recession; government spending does. This has never made any economic sense, but now the non-response of the economy is exposing this original nonsense for what it always was: nonsense. The Federal deficit is skyrocketing, but the economy has barely increased, statistically speaking, and is now slowing...

The optimists are saying that the double-dip recession will not happen, but job growth will be minimal. A jobless recovery is the new normal. This is the abandonment of Keynesianism. This is loss of faith on a paradigm-changing scope. The old Keynesian formula is no longer working. Huge deficits have not led to a V-shaped recovery, or maybe any recovery. The Keynesian multiplier is barely even adding. The Federal Reserve is pushing on a string. But so is Congress. The deficits are not working.

What's a Keynesian to do?

Call for more spending, of course. Call for even larger Federal deficits. Call for bailouts of deficit-plagued state governments, which cannot get loans from Asian central banks...

The Keynesians have only one solution: deficit spending. That is all they have had since 1936. Keynes baptized deficit-spending policies that all governments had begun several years before...

Keynesians assume that money collected by means of badges and guns is far more efficient in producing economic growth than money invested in terms of a hoped-for prospect of a positive rate of return. Keynesianism rests on faith in the following:

1. Badges and guns
2. Government IOUs
3. The wisdom of government

It is based on a lack of faith in the following:

1. Voluntary exchange
2. Private investment
3. The wisdom of entrepreneurship

The government will move to gridlock next year. It will remain there for two years. The deficits will remain high. The economy will stagnate at best, or fall into a decline. There will be no major recovery that persuades voters that they are safe, that the economic future is bright.

We are seeing a loss of faith. It is all-pervasive. The voters see that Congress is impotent. The Keynesians see that the FED is impotent. The economists as a profession have rushed to the Keynesian pump to keep the ship from sinking, but the ship appears to be taking on water despite their best efforts.

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Keynesians and Repeating Mistakes of the Past

It was said of the Bourbons that they forgot nothing and learned nothing. The same could easily be said of some of today’s latter-day Keynesians. They cannot and never will forget the policy errors made in the US in the 1930s. But they appear to have learned nothing from all that has happened in economic theory since the publication of their bible, John Maynard Keynes’s The General Theory of Employment, Interest and Money, in 1936.

Niall Ferguson

The British government, following the advice of Winston Churchill, who was Chancellor of the Exchequer, in 1925 restored the gold standard at the pre-World War I ratio, despite the fact that the wartime monetary inflation had driven up the price of goods. Gold should not have been priced at the pre-War price. But Churchill had decided that national pride was at stake. He pretended that the debasing of the pound sterling had not been government policy.

There was an outflow of gold from the Bank of England. Speculators thought the price of gold in pounds would have to be officially hiked. To keep this outflow from forcing the Bank of England to suspend payment, thereby confirming the forecasts of the speculators, the head of the Bank of England met with the head of the New York Federal Reserve in 1926 and persuaded him to inflate the dollar, so as not to make the dollar too valuable in relation to the pound. This would have caused investors to sell pounds and buy dollars. The U.S. government would then have sent pounds to Britain and asked for payment in gold. The New York FED did what the Bank of England asked. It inflated the dollar. The result was the stock market boom from 1926–1929.

The head of the New York FED died in 1928. His successor recognized that a stock market bubble was in process. The FED ceased inflating. Short-term interest rates rose. This popped the stock market bubble in October of 1929.

The government then intervened. It raised tariffs. It began massive deficit spending. It began to interfere with pricing, so as to keep prices and wages high. In short, it adopted Keynesian policies, which made the economy much worse.

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Gary North on Bernanke and the Fed

The Federal Reserve has lost a lot of its legitimacy. It has also lost a lot of its secrecy. By opposing the audit, Bernanke is positioning himself as an anti-democratic representative of the Wall Street banks. Of course, this is what every FED chairman has been. But this is the first time since 1914 that any FED chairman (or his equivalent) has had to adopt this positioning in full public view.

This is bad news for the Federal Reserve. When the economy gets worse, as it will, the FED will receive its share of the blame, which is considerable. Bernanke is the primary visible agent of the FED. He will no longer get a free ride. The critics are at long last getting a hearing by the informed public – the people with lots of money deposited in large banks. This is why he has been going on television to present his case. No other FED chairman in history has been forced to do this. This is a sign of the degree of panic in the boardrooms.

The more often Bernanke goes on TV, the more people will think: "Methinks he doth protest too much."

This is a very good thing.

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Keynesians Economics Refuted, Again

Keynes' final book was a defense of government spending. This is why the book was hailed as a masterpiece. It backed up what all Western governments were already doing: spending money on welfare projects and running massive deficits.

Keynes believed that there could be permanent depression and price deflation. He said that prices do not always clear markets by balancing supply and demand. The General Theory is a convoluted, deliberately incomprehensible book devoted to disproving the fundamental premise of all economics, namely, that the search for profit motivates buyers and sellers to exchange scarce resources...

Keynes was incoherent. This was deliberate. Why do I say Keynes was deliberately incoherent? Because when he chose to write clearly, he was a master of prose. Read The Economic Consequences of the Peace (1919) or Essays in Biography. When he could not sustain an argument, he adopted the strategy of incoherence. Most of The General Theory is incoherent...

What was Keynes after? A fascist state: the fusion of private ownership and socialism...

Keynesians are deflationists, meaning "the free market will produce permanent depression and deflation apart from government spending and central bank inflation." They believe that, without government spending, huge deficits, and central bank inflation, the economy will go into a deflationary spiral and not recover. They invoke the paradox of thrift and the liquidity trap as reasons. Both rely on the same idea: "money saved in a bank is not simultaneously money lent by the bank to increase production or consumption." It is a fallacious idea. It is "currency under the mattress" economics. It is "break in the flow of funds" economics. It is crackpottery...

Whenever you hear about the need for a government stimulus-spending bill, think "crackpot economics." Whenever you hear that deficits don't matter, think "crackpot economics." Whenever you hear about the need for quantitative easing, think "crackpot economics."

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My thoughts: Gary North explains once again that Keynesian soultions will not lead to economic growth and prosperity.

Thomas Hoenig on the Economy

Federal Reserve Governor Thomas Hoenig discusses the economy in a new paper, An Economy at Risk: The Tough Decisions Ahead.

"In the long run, we are all dead but our children will be left to pick up the tab."

"Capitalism is a process, of success, failure and renewal, and for it to work properly, institutions must be allowed to fail, no matter there size or political influence."

Gary North offers an excellent commentary on the speech here.

The FED is on the back of the tiger. Hoenig sees this. He knows the financial system remains fragile. I presume that he knows that the only way to keep it solvent is for the FED to refuse to sell its assets to the general investment community. Bernanke knows this, too.

No matter how carefully the FED sells off debt, this policy will reverse the recovery. I mean the hoped-for recovery. It is nowhere in sight yet.

Economic Fascism and the Bailout Economy

The whole structure of the national American political system has rested on the solvency of the largest American banks. These banks have all been called into question. They are now gutted. Do I see this as the end of freedom? No, I see it is the end of the fascist state. The monstrosity came close to going belly-up last October. It is on its last, tottering legs. It has lost the respect of the public...

The second event that I regard as almost comparable in importance to the collapse of the Soviet Union was the collapse of the American banking system that took place in September and October of 2008...

Anyone who does not understand the magnitude of what is taking place is an economic ignoramus...

Here is their intellectual problem: they do not believe in the free market. They cannot conceive of a social institution based on voluntarism that can break the backs of government planners and central bankers. They will believe anything but this. They think of themselves as defenders of the free market, but they do not grasp the power of the free market to enforce consumers' decisions...

It has been the Austrian School economists who have warned, decade after decade, that the increase in the federal debt would eventually threaten the solvency of the government and the stability of the dollar. Now that this is visibly coming true, we still do not hear from professional economists cries of warning regarding trillion-dollar annual federal deficits. They say nothing — except when they say it is a good idea, because it is necessary, because we have got to save the banks, because we have got to regulate the economy, and, most of all, because the unhampered free-market system really does not work.

This is what we are getting from people who have generally been known as free-market economists. They are lining up as cheerleaders as the banks go to the federal trough. The federal deficit soars into astronomical regions, and the monetary base soars just as fast, yet the academic economists are silent. This is not the silence of the lambs; this is a silence of unindicted co-conspirators...These people are apologists for the state...

The fascist state has always been an attempt to control private industry by means of inflation, taxation, and regulation. Fascism has always been a system of keeping the big boys alive and happy at the expense of the taxpayers. Of course, the faces change. The system was always one gigantic system of cartels, regulation, and fiat money...

The modern economic system is one gigantic interlocking system of promised bailouts, beginning with Social Security...

Always in the past, there has been a recovery after a recession. Always in the past, the bailouts have worked to cover up the underlying malinvested capital. Always in the past, the Federal Reserve has inflated, and the economy revived.

This economy will revive, but it will revive on a new basis. It is no longer possible for someone who understands Austrian School economics to look at this economy as anything remotely resembling a free-market economy.

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My thoughts: One of North's best essays. Unfortunately it could be a generation or two before we truly recover.