|May 12th, 2012||#21|
Join Date: Jun 2009
budget "cuts" in aztlan
. . .redefined. . .
. . .as a reduction in the increase. . . A group pushes for a real increase of 20%. The legislature says nocando, please settle for a 12% increase. The drop from 20% increase to 12% increase is called a "cut" (!) The XYZ special interest says it is making a sacrifice of 8%!
The Newspapers proclaim-
AUSTERITY FORCES TOILET CLEANER UNION TO ACCEPT BENEFIT CUTS OF 8%
|July 20th, 2012||#22|
David Stockman: Austerity Is Not Discretionary
Interviewed by Alex Daley, Chief Technology Investment Strategist, Casey Research
The next Casey Research Summit, cohosted by Sprott, Inc. and titled Navigating the Politicized Economy, will feature another former White House official who is speaking out against irresponsible government spending: David Walker, the United States Comptroller General from 1998 to 2008. Joining him will be a blue-ribbon panel of other financial experts, including top market strategist Donald Coxe, legendary bond investor Lacy Hunt, and investing legends Doug Casey, Rick Rule, and Eric Sprott... and that's just for openers. Together, they'll help you understand where our politicized economy is today, where it's going, and how to profit from the whole mess.
Learn more and register now to lock in early-bird pricing – you don't want to miss this conference.
Alex Daley: Hello. I'm Alex Daley. Welcome to another edition of Conversations with Casey. Today our guest is former Reagan Budget Director and Congressman David Stockman. Welcome to the show, David.
David Stockman: Glad to be here.
Alex: So we're here in Florida talking at the Recovery Reality Check Casey Summit. What do you think: is the United States economy on the road to recovery?
David: I don't think we are at the beginning of the recovery. I think we are at the end of a disastrous debt supercycle that has gone on for the last thirty or forty years, really. It started when Nixon defaulted on our obligations under Bretton Woods and closed the gold window. Incrementally, year after year since then, we have been going in a direction of extremely unsound money, of massive borrowing in both the private and the public sector. We now have an economy that is saturated with debt: $54 trillion or $53 trillion – 3.5 times the GDP – way off the charts from where it was for a hundred years prior to the beginning of this. The idea that somehow all of that debt is irrelevant, as the Keynesians would tell us, is fundamentally wrong – and the reason why the economy can't get up off the mat.
We're doing all the wrong things. We're adding to the problem, not subtracting. We are not allowing the debt to be worked down and liquidated. We're not asking people to save more and consume less, which is what we really need to do. And so therefore I think policy is just making it worse, and any day now we will have another recurrence of the kind of economic crisis we had a few years ago.
Alex: You paint a very stark picture, but if people just stop spending, start saving, won't companies like Apple see their earnings hurt? Won't the stock market then start to tumble, people's net worth fall? Isn't that a negative cycle that feeds on itself?
David: Sure it does, but you can't live beyond your means because it's pleasant. It's not sustainable. Clearly the level of debt that we have is not sustainable. We have a whole generation – the Baby Boom – that's about ready to retire, and they have no retirement savings. We have a federal government that is bankrupt, literally. Its [debt is] $16 trillion and growing by a trillion a year. Something's going to give. We can't pay for all these entitlements. There won't be the revenue generation in the economy to do it.
So as a result of that, we are deluding ourselves if we think we can just continue to spend. Look at the GDP that came out in the first quarter of this year. It was only 2.2%. Most of it was personal consumption expenditure, and half of that was due to a drawdown of the savings rate, not because the economy was earning more income or generating more real output. It was because of a drawdown of savings. That is exactly the wrong way to go – an indication of how severe the crisis is going to be.
I'm not saying the economy should stop spending entirely. I'm only saying you can't save 3% of GDP and spend 97% if you are going to get out of this fix. As the savings rate goes up both in the public sector (which means reduction of spending and the deficit) and the household sector (to seriously reduce debt burden, which has not really happened) we are going to, on the margin, spend less, save more. It will slow down the economy. It will undermine profits, I agree. But profits today are way overstated. They're based on a debt-bloated economy that isn't sustainable.
Alex: So we can only live beyond our means for so long, as any family knows.
Alex: Now, the government can reduce its expenses at any time by simply reducing spending, and it can reduce debt if it brings in more tax revenue. That's austerity – I think that's how they refer to it. But won't austerity cause massive joblessness? Won't there be millions more people in this country not receiving a paycheck?
David: Yes, but the critique, the clamoring and clattering that you hear from the Keynesians (or even mainstream media, which is pretty clueless economically) that austerity is bad forgets the fact that austerity isn't an elective course. Austerity is something that happens to you when you're broke. And yes, it is painful and spending will go down and unemployment will go up and incomes will be impaired, but that is a consequence of the excess debt creation that we've had for the last thirty years. So austerity is what happens when you break the rules.
And somehow we have this debate going on. They're making a mistake. They chose the wrong strategy. Do you think Greece chose the wrong strategy with austerity? No. No one would lend them money. That's why they ended up in the place they were. Do you think that Spain today is teetering on the brink because they said, "Oh, wouldn't it be a good idea to have austerity?" No, they had a gun to their head. They were forced to do this because the markets would not continue to lend, and even now their interest rate is again rising. The markets are losing confidence, and unless the ECB prints some more money and bails them out some more, they are going to have austerity. So the austerity upon us is the backside of the debt supercycle we had for the past thirty years. It's not discretionary.
Alex: Austerity hasn't been forced upon us yet. The dollar is up, people are continuing to buy Treasuries – both nations and banks are buying Treasuries. To all extents and purposes, people are continuing to show massive confidence in the US government, lend it money at extremely cheap interest rates, and letting it build up its debt.
So you are advocating that, unlike Greece or Spain taking it to the edge and having austerity forced on them, we should volunteer for austerity today? Instead of just kicking the can down the road and living high a little bit longer, until the bill collectors finally come knocking? Why go today, why start austerity now instead of doing what Greece did and going as long as you possibly can?
David: Because Greece is a $300 billion economy. Tiny. A rounding error in the great scheme of things. It's – last time I checked – about eight and a half months' worth of Walmart sales. Okay? That's a little different than when you have the $15 trillion heartland of the world economy, and the $11 trillion Treasury market which is at the center of the whole global financial system buckle and falter. That's the risk you're taking if you say, "Mañana. Kick the can; let's just wait for something good to happen."
This market isn't real. The two percent on the ten-year, the ninety basis points on the five-year, thirty basis points on a one-year – those are medicated, pegged rates created by the Fed and which fast-money traders trade against as long as they are confident the Fed can keep the whole market rigged. Nobody in their right mind wants to own the ten-year bond at a two percent interest rate. But they're doing it because they can borrow overnight money for free, ten basis points, put it on repo, collect 190 basis points a spread, and laugh all the way to the bank. And they will keep laughing all the way to the bank on Wall Street until they lose confidence in the Fed's ability to keep the yield curve pegged where it is today. If the bond ever starts falling in price, they unwind the carry trade. They unwind the repo, because then you can't collect 190 basis points.
Then you get a message, "Do not pass go." Sell your bonds, unwind your overnight debt, your repo positions. And the system then begins to contract – exactly what happened in September and October of 2008. Only, that time it was an unwind to the repo on mortgage-backed securities and CDOs and so forth. That was a minor trial run for the great unwind that is going to happen when the Treasury market is finally shattered with a lack of confidence because, on the margin, no one owns a Treasury bond: they just rent it on borrowed money. If the price starts falling, they'll get out of that trade as fast as they got out of toxic CDOs.
Alex: So when people run away from the US, they will run away all at once.
David: Well, if they run away from the Treasury, it sends compounding forces of contagion through the entire financial system. It hits next the MBS and the mortgage market. The mortgage market then scares the hell out of people about the housing recovery, which hasn't happened anyway. And if there isn't a housing recovery, middle-class Main-Street confidence isn't going to recover, because it is the only asset they have, and for 25 million households it's under water or close to under water.
Alex: We saw something much like that in 2008. All the markets correlated. Stocks went down. Bonds went down. Gold went down with them. It sounds like what you're saying is that the Fed is effectively paying bankers to stay confident in the Fed, and that the moment that stops – either because the Fed stops paying them or something else shakes their confidence – this all goes down in one big house of cards?
David: Yes, I think that's right. The Fed has destroyed the money market. It has destroyed the capital markets. They have something that you can see on the screen called an "interest rate." That isn't a market price of money or a market price of five-year debt capital. That is an administered price that the Fed has set and that every trader watches by the minute to make sure that he's still in a positive spread. And you can't have capitalism if the capital markets are dead, if the capital markets are simply a branch office – branch casino – of the central bank. That's essentially what we have today.
Alex: Last night you told our audience that if you were elected president, the first thing you would do is quit. Or at least demand a recount, I believe were your words, which I thought was telling. Are you saying there are no policy changes we could make today that would get us out of this? Or at least that wouldn't get you assassinated?
David: Yeah, there is a paper blueprint. People who believe in sound money and fiscal responsibility, that you create wealth the old-fashioned way through savings and work and effort and not simply by printing money and trading pieces of paper – there is a plan that they could put together. One would be to put the Fed out of business. You don't have to "end the Fed," although I like Ron Paul's phrase. You have to get them out of discretionary, active, day-to-day meddling in the money markets. Abolish the Open Market Committee.
The Fed has taken its balance sheet to $3 trillion. That's enough for the next 50 years. They don't have to do a damn thing except maybe have a discount window that floats above the market, and if things get tight, let the interest rate go up. People who have been speculating will be carried out on a stretcher. That's how they used to do it. It worked prior to 1914. That's the first step: abolish the Open Market Committee. Abolish discretionary monetary policy.
Let the Fed, if you're going to keep it – I don't even know that you need to do that, but if you are going to keep it – be only a standby source. As Bagehot said (Walter Bagehot, the great 19th-century British financial thinker): provide liquidity at a penalty rate to sound collateral.
Now, that's what J.P. Morgan did in 1907, in the great crisis of 1907, from his library. He didn't have a printing press. He didn't bail out everybody. He didn't do what Bernanke did and say: "Stop the presses, freeze everybody, and prop up Morgan Stanley and Goldman Sachs and all the rest of the speculators." The interest rate, the call-money interest rate, which was the open-market interest rate at the time, some days went to 30, 40, 70% – and they were carrying out the speculators left and right, liquidating margin debt, taking out the real estate speculators. Eight or ten railroads went bankrupt within a couple of months. The copper magnates got carried out on their shields.
This is the only way a capital market can work, but it needs an honest interest rate. And we have no interest rate, so therefore we solve nothing and we have the kind of impaired, incapacitated markets that we have today. They're very dangerous, because they're all dependent on twelve people. It is what I call "the monetary Politburo of the Western world," and they are just as dangerous as the Politburo in Beijing or the Politburo of memory in Moscow.
Alex: A twelve-person Open Market Committee determining the future of our economy by manipulating rates. Sounds like central planning to me.
David: It is. They are monetary central planners who are attempting to use the crude instrument of interest-rate pegging and yield-curve manipulation and essentially buying debt that no one else would buy, in order to keep this whole system afloat. It's Ponzi economics. Anybody who had financial training before 1970 would instantly recognize this as Ponzi economics. It is only because of the last twenty years we got so inured to prosperity out of the end of a printing press and massive incremental debt that people lost sight of the fundamental principles of sound money, which, there's nothing arcane about it. It's just common sense. It is not common sense to think that 50, 60, 70% of all the debt that's being created by the federal government can be bought by the Federal Reserve, stuffed in a vault, and everybody can live happily ever after.
Alex: So the government has certainly put us in a precarious position, but I don't think they alone have put America in this position, have they? You mentioned consumer debt becoming a major burden on the economy. How do we shed ourselves of that? I mean, the federal government can repudiate its debts if we walk away from it. We might see a few wars or something from that. It could inflate its way out of it. It can tax its way out of it. But how do households get out from under the debt burden that they have today?
David: Well, it's very tough, and they were lured into it by bad monetary policy when Greenspan panicked in December 2000. The interest rate was 6.5%; we had an economy that was threatened by competitors around the world. We needed high interest rates, not low. He panicked after the dot-com crash, and as you remember in two years they took the interest rate all the way down to 1%, and they catalyzed an explosion of mortgage borrowing, which was crazy.
When they cut the final rate down to 1% in May, June 2003, in that quarter – the second quarter of 2003 – the run rate of mortgage borrowing was $5 trillion at an annual rate. That was nuts! There had never been even a trillion-dollar annual rate of mortgage borrowing previously. In that quarter the run rate was $5 trillion, 40% of GDP. Why? Because the Fed took the rate down to 1%. Floating-rate product got invented everywhere. Anybody that had a pulse was being given mortgage loans by the brokers. The mortgage brokers didn't have any capital or funding. They went to Wall Street. They got warehouse lines, and the whole thing got out of control. Millions of households were lured into taking on debt that was insane, and now we have a generation of debt slaves.
There are 25 million households in America who couldn't move if they wanted to, because their mortgages are under water. They cannot generate a down payment and the 5% or 6% broker fee that you need to move. So we've got 25 million households immobilized, paralyzed, and worried every day about when they are going to lose property, because of what the Fed did. It's a terrible indictment.
Alex: Mobility itself is the American dream, isn't it? It's the ability to pick up and find work and then move and do all that. So now we have people who are slaves to their debt. How do we get ourselves out of this? Is this just a matter of personal financial discipline? Is there a policy move that can happen?
David: It's policy. If we don't do something about the Fed, if we don't drive the Bernankes and the Dudleys and the Yellens and the rest of these lunatic money-printers out of the Federal Reserve and get it under the control of people who have at least a modicum of sanity, we are just going to bury everybody deeper.
It's unfortunate. The American people are as much a victim of the Fed's massive errors as anything else. People were not prudent when they took on debt at 100% of the peak value of their property at some moment in 2004 and 2005. They were lured into it. But now we're stuck with something that didn't need to happen.
Alex: The Federal Reserve was founded in 1914, and it saw America through World War I, World War II. It saw America through Vietnam, saw America through the biggest boom in the economic history of the world. Yet now, today, you are calling for the abolishment of the Fed. Wasn't the Fed here the entire time that America was a prosperous, growing, wealthy, technology-driven nation? What's changed?
David: The greatest period of growth in American history was 1870-1914 – the Fed didn't exist. Right after 1870, when we recovered from the Civil War we went back on the gold standard. It worked pretty well. World War I was a catastrophe for the financial system. The Fed financed it, but I don't give them any credit for that, okay? We shouldn't have been in that war. It was a stupid thing to get involved in. But once we got involved in it, the Fed printed money like crazy, it facilitated borrowing, set the groundwork for the boom of the 1920s and the collapse of the 1930s.
Even then though, we had great minds who coped with reality in a pragmatic way in the Fed. Even Marriner Eccles wasn't all that bad. He stood up to Truman in 1951, when Truman wanted to force the Fed to continue to peg interest rates at 2% or 2.5% when inflation was 5%. Then we had William McChesney Martin: brilliant, pragmatic. He wasn't some kind of gold-standard guy in a pure sense, but a pragmatic guy who understood that prosperity had to come out of private productivity, out of investment, out of risk-taking, and the Fed had to be very careful not to allow speculation to start or inflation to get ignited. In 1958, he invented the phrase, "The job of the Fed is to take the punchbowl away." And we had a small recession. Six months after the recession was over he was actually raising the margin rate on the stock-market loans in order to quell speculation, and raising interest rates so that the economy didn't start to inflate again.
Now that was the regime we had until, unfortunately, Lyndon Johnson came along with his "guns and butter," took William McChesney Martin down to the ranch, and beat the hell out of him and forced him to capitulate. But here's the point I would make: In 1960, at the peak of what I call the golden era – the twilight of fiscal and financial discipline – we had $30 billion on the balance sheet of the Fed. It had taken 45 years to build that up. Then, as they began to rapidly expand the balance sheet of the Fed during the inflation of the '70s and the '80s, even then it took us until September 2008 – the Lehman collapse – to get to $900 billion. Had the balance sheet only grown at 3%, which is what the capacity of the economy to grow, I think, really is, it would have been $300 billion, so they were overshooting.
Alex: We're three times where we should be.
David: Where we should have been by the Lehman crisis event. In the next seven weeks, this crazy lunatic who's running the Fed increased the balance sheet of the Fed by $900 billion, in seven weeks. In other words, they expanded the balance sheet of the Fed as rapidly in seven weeks as it had occurred during the first 93 years of its existence. And that's not all, as they say on late night TV: in the next six weeks they added another $900 billion. So in thirteen weeks they tripled the balance sheet of the Fed.
Alex: Wow, that's an incredible…
David: So no wonder we are in totally uncharted waters, and it's being run by people who are clueless as to how to get out of the corner they've painted this country into. They really ought to be run out of town on a rail.
Alex: I think you'd find that a lot of our viewers would agree with you on that one. You know, the average American is suffering. It looks like the average American is going to have to suffer more to get us out of this, but it seems like the only thing the Fed is interested in these days is propping up the stock market. Why is that? Where does that come from?
David: The Fed has taken itself hostage with this whole misbegotten doctrine of wealth effects, which was created by Greenspan. In other words, if we get the stock market going up and we get the stock averages going up, people feel wealthier, they will spend more. If they spend more, there is more production and income and you get a virtuous circle. Well, that says you can create wealth through speculation. That can't be true, because if it is true, we should have had a totally different kind of system than we've had historically.
So they got into that game, and then the crisis came in September, 2008. They panicked and pulled out the stops everywhere. As I said, tripled the balance sheet in thirteen weeks, [compared to what] they had done in 93 years. They are now at a point where they don't dare begin to reduce the balance sheet, begin to contract, or they'll cause Wall Street to go into a hissy fit. They are afraid to death of Wall Street going into a hissy fit, so essentially, the robots and the boys and girls and the fast-money traders on Wall Street run the Fed indirectly.
Alex: So, in the 1960s, the Fed is taking away the punchbowl. Sounds like in 2010 the Fed is the one adding the alcohol. They are afraid to stop, lest everybody riot.
David: Yes, they got the party going, and they're afraid to stop it. As a result of that you have a doomsday machine.
Alex: At some point we are going to be forced to stop. Market forces will kick in and Europe and China and India will stop lending us money.
David: Yes. As I say, when the crisis comes in the Treasury market, it will be the great margin call in the sky. They'll start unwinding all of the carry trades, all of the repo. Asset prices generally will be affected, because this will ricochet and compound through the system.
Alex: When does this happen?
David: People looked at the housing market and the mortgage market way back in 2003 – there were some smart people looking at this. They looked at the run rate of gross mortgage issuance, the $5 trillion I was talking about, and said: "This is insane, this is off the charts, this is so far beyond anything that has ever happened before, something bad is going to come of this." It's obvious, if you pour debt into markets… I mean a lot of people leveraged 98%, or whatever they were doing at the time with so-called mortgage insurance, and just high loan to value ratios. They were driving up prices, and so there was a housing-price boom going on. It was sucking the whole middle class into speculation. So that's the nature of the system, and now they don't know how to unwind it.
Alex: That's a pretty stark picture. So as an individual investor, what are we to do? How do we protect ourselves in this type of situation? Should I be owning bonds and staying out of stocks? Should I be owning stocks?
David: No, I would stay out of any security markets. These are unsafe markets at any speed. It's all tied together. As I was saying when the great margin call comes and they start selling the Treasury bond, they'll take everything else with it. Real estate is priced off Treasuries. Mortgaged-backed securities are priced off Treasuries. Corporates are priced off Treasuries. Junk bonds are priced off Treasuries. Everything. The stock market will go into a panic. We don't know when the timing will come – we've never been in a world where there is $15 trillion worth of central-bank balance sheets, like we have today. The only thing I think you can conclude is preservation is the only thing you are about as an investor. Forget about yield. Forget about return. Just keep yourself liquid and preserve your capital, because you can't predict the day when, as I say, the great margin call in the sky comes down.
Alex: So if it's not about coming out ahead, it's about coming out not behind everybody else. It's just losing a little less. What's the most effective way to do that? Do you want to hold cash? Alternative options?
David: Yes. I don't even think there's nothing wrong with owning Treasury bills. I mean, if you want to get, for a one-year Treasury, what is the thing now? Twenty basis points or something?
Alex: So when the great Treasury crash comes, I should own Treasury bills?
David: Well, it doesn't mean the price of the Treasury is going to crash, no.
Alex: Okay, so we are just going to see interest rates skyrocket on new issues. The US government is not going to be able to borrow.
David: That's why you're short. If you're in a thirty-day piece of paper, you're not going to lose principal.
Alex: What happens to the dollar in all of this? If I'm holding dollar denominated assets –?
David: Well, the dollar, in theory, people would think is going to crash. I don't think it is because all the rest of the currencies in the world are worse.
Alex: So once again, America is not that bad off.
David: Well, we're bad off because when the financial markets reprice drastically, it's going to have a shocking effect on economic activity. It's going to paralyze things. It's going to finally cause consumption to come down. It's going to cause government spending to be retracted.
You know, the Keynesians are right. Borrowing does add to GDP accounts. But it doesn't add to wealth. It doesn't add to real productivity, but it does add to GDP as it's calculated and published – because GDP accounts were designed by Keynesians who don't believe in a balance sheet. So they said, "If the public sector and the household sector are borrowing, let's say, $10 trillion next year, run it though GDP, you'll get a big bump to GDP." But sooner or later your balance sheet will collapse. They forgot about that one. So my point is that we've gone through a thirty-year expansion of the balance sheet, an artificial growth in GDP; now we're going to have to be retracting the collective balance sheets. That means that GDP will not grow. It may even contract, and no one's prepared for that.
Alex: So the economy will collapse. The dollar will be okay, because we still need a medium of exchange and the dollar is the least-bad currency in the world. How does gold fit into the picture? Do you think that gold is a good asset?
David: Yes, I think that gold is a good asset. It's the only currency that anybody is going to believe in after a while.
Alex: Okay, so maybe hold that as an insurance policy. Do you own gold yourself?
David: Yes, as an insurance policy.
Alex: Where else do you invest in today?
David: I'm preserving capital. I'm in cash. I don't think the risk of the system is worth it.
Alex: So you are practicing what you preach, 100%?
Alex: That's great. It's good to hear. This is excellent advice for our subscribers as well, to consider that there's a lot of potential energy built up in the system. You've articulated it well, a lot of painful policy moves ahead of us, and probably something that makes 2008 look like a preview, if you will.
David: It was just a warm-up.
Alex: Just a warm-up. Thank you very much.
David: Thank you.
July 20, 2012
Former Congressman David A. Stockman was Reagan's OMB director, which he wrote about in his best-selling book, The Triumph of Politics. He was an original partner in the Blackstone Group, and reads LRC the first thing every morning.
|August 8th, 2012||#23|
IT’S A MATTER OF TRUST – PART ONE
August 6, 2012 by JimQ
When mainstream economists examine bubbles, manias and crashes they generally concentrate on short-term bubbles that last a few years. But some bubbles go on for decades and some busts have lasted for a century. The largest bubble in world history continues to inflate at a rate of $3.8 billion per day and has now expanded to epic bubble proportions of $15.92 trillion, up from $9.65 trillion in September 2008 when this current Wall Street manufactured crisis struck. A 65% increase in the National Debt in less than four years can certainly be classified as a bubble. We are currently in the mania blow off phase of this bubble, but it began to inflate forty years ago when Nixon closed the gold window. This unleashed the two headed monster of politicians buying votes with promises of unlimited entitlements for the many, tax breaks for the connected few and pork projects funneled to cronies, all funded through the issuance of an unlimited supply of fiat currency by a secretive cabal of central bankers running a private bank for the benefit of other bankers and their politician puppets. Crony capitalism began to hit its stride after 1971.
The apologists for the status quo, which include the corporate mainstream media, intellectually dishonest economist clowns like Krugman, Kudlow, Leisman, and Yun, ideologically dishonest think tanks funded by billionaires, and corrupt politicians of both stripes, peddle the storyline that a national debt of 102% of GDP, up from 57% in 2000, is not a threat to our future prosperity, unborn generations or the very continuance of our economic system. They use the current historically low interest rates as proof this Himalayan Mountain of debt is not a problem. Of course it is a matter of trust and faith in the ability of a few ultra-wealthy, sociopathic, Ivy League educated egomaniacs that their brilliance and deep understanding of economics that will see us through this little rough patch. The wisdom and brilliance of Ben Bernanke is unquestioned. Just because he missed a three standard deviation bubble in housing and didn’t even foresee a recession during 2008, doesn’t mean his zero interest rate/screw grandma policy won’t work this time. It’s done wonders for Wall Street bonus payouts.
The growth of this debt bubble is unsustainable, as it is on track to breach $20 trillion in 2015. The only thing keeping interest rates low is coordinated manipulation by Ben and his fellow sociopathic central bankers, the insolvent too big to fail banks using derivative weapons of mass destruction, and politicians desperately attempting to keep the worldwide debt Ponzi scheme from imploding on their watch. Their “solution” is to kick the can down the road. But there is a slight problem. The road eventually ends.
At some point a grain of sand will descend upon a finger of instability in the sand pile and cause a collapse. No one knows which grain of sand will trigger the crisis of confidence and loss of trust. But with a system run by thieves, miscreants, and scoundrels, one of these villains will do something dastardly and the collapse will ensue. Ponzi schemes can only be sustained as long as there are enough new victims to keep it going. As soon as uncertainty, suspicion, fear and rational thinking enter the equation, the gig is up. Kindleberger lays out the standard scenario, as it has happened numerous times throughout history.
“Causa remota of the crisis is speculation and extended credit; causa proxima is some incident that snaps the confidence of the system, makes people think of the dangers of failure, and leads them to move from commodities, stocks, real estate, bills of exchange, promissory notes, foreign exchange – whatever it may be – back into cash. In itself, causa proxima may be trivial: a bankruptcy, suicide, a flight, a revelation, a refusal of credit to some borrower, some change of view that leads a significant actor to unload. Prices fall. Expectations are reversed. The movement picks up speed. To the extent that speculators are leveraged with borrowed money, the decline in prices leads to further calls on them for margin or cash and to further liquidation. As prices fall further, bank loans turn sour, and one or more mercantile houses, banks, discount houses, or brokerages fail. The credit system itself appears shaky, and the race for liquidity is on.” – Charles P. Kindleberger – Manias, Panics, and Crashes
Despite centuries of proof that human nature will never change, there are always people (usually highly educated) who think they are smart enough to fix the markets when they breakdown and create institutions, regulations and mechanisms that will prevent manias, panics and crashes. These people inevitably end up in government, central banks and regulatory agencies. Their huge egos and desire to be seen as saviors lead to ideas that exacerbate the booms, create the panic and prolong the crashes. They refuse to believe the world is too complex, interconnected and unpredictable for their imagined ideas of controlling the levers of economic markets to have a chance of success. The reality is that an accident may precipitate a crisis, but so may action designed to prevent a crisis or action by these masters of the universe taken in pursuit of other objectives. Examining the historical record of booms and busts yields some basic truths. The boom and bust business cycle is the inevitable consequence of excessive growth in bank credit, exacerbated by inherently damaging and ineffective central bank policies, which cause interest rates to remain too low for too long, resulting in excessive credit creation, speculative economic bubbles and lowered savings.
Low interest rates tend to stimulate borrowing from the banking system. This expansion of credit causes an expansion of the supply of money through the money creation process in our fractional reserve banking system. This leads to an unsustainable credit-sourced boom during which the artificially stimulated borrowing seeks out diminishing investment opportunities. The easy credit issued to non-credit worthy borrowers results in widespread mal-investments and fraud. A credit crunch leading to a bust occurs when exponential credit creation cannot be sustained. Then the money supply suddenly and sharply contracts as fear and loathing of debt replace greed and worship of debt. In theory, markets should clear through liquidation of bad debts, bankruptcy of over-indebted companies and the failure of banks that made bad loans. Sanity is restored to the marketplace through failure, allowing resources to be reallocated back towards more efficient uses. The housing boom and bust from 2000 through today perfectly illustrates this process. Of course, Bernanke declared housing to be on solid footing in 2007.
The housing market has not been allowed to clear, as Bernanke has artificially kept interest rates low, government programs have created false demand, and bankers have shifted their bad loans onto the backs of the American taxpayer while using fraudulent accounting to pretend they are solvent. Our owners are frantically attempting to re-inflate the bubble, just as they did in 2003. Our deepest thinkers, like Greenspan, Krugman, Bush, Dodd, and Frank knew we needed a new bubble after the Internet bubble blew up in their faces and did everything in their considerable power to create the first housing bubble. If at first you don’t succeed, try, try again.
Human nature hasn’t changed in centuries. We have faith that humanity has progressed, but the facts prove otherwise. We are a species susceptible to the passions of power, greed, delusion, and an inflated sense of our own intellectual superiority. And we still like to kill each other in the name of country and honor. There is nothing progressive about crashing the worldwide economic system and invading countries for “our” oil.
History has taught that there will forever be manias, bubbles and the subsequent busts, but how those in power deal with these episodes has been and will be the determining factor in the future of our economic system and country.
Humanity is deeply flawed; the average human life is around 80 years; men of stature, wealth, over-confidence in their superior intellect, and egotistical desire to leave their mark on history, always rise to power in government and the business world; this is why history follows a cyclical path and the myth of human progress is just a fallacy.
“That men do not learn very much from the lessons of history is the most important of all the lessons that History has to teach” – Aldous Huxley
In Part 2 of this three part series I will examine the one hundred year experiment of trusting a small cabal of non-elected bankers to manage and guide our economic system for the benefit of the American people.
|August 9th, 2012||#24|
Join Date: Jun 2009
(Reformatted for readability)
Keynesianism vs. the Gold Coin Standard
by Gary North
Tea Party Economist
Recently by Gary North: The Incomparable Faith of Keynesian Investors
Recently, the leftist London Guardian posted an article against the nineteenth-century gold coin standard. The author, who seems recently to have begun shaving, has provided a highly useful summary of the Keynesian case against the gold coin standard. His article is a fine mixture of familiar old canards and creative new errors. His name is Duncan Weldon.
Mr. Weldon has not written a book, so it is difficult for me to know exactly what his monetary theory is. He was the unknown Keynesian in the 2011 BBC debate between two teams of economists at the London School of Economics: The Keynes vs. Hayek debate. I assume that Robert Skidelsky, his partner, thought he was an up-and-coming economist. Skidelsky is the author of a multi-volume biography of Keynes.
I think it would be a useful exercise to go through Mr. Weldon's case against gold. Clearly, he expects people to take it seriously. While I cannot bring myself to do this, having actually read it, I do think some editor at The Guardian took it seriously, even though he also read it.
GOLD BUGS UNDER EVERY BED
He begins with an historical statement.
Ever since Richard Nixon ended the convertibility of the US dollar into gold in 1971, there have been calls for a return to some form of gold standard. Proponents of this view, often known as "gold bugs", want to see an end to paper money guaranteed by promises and for currencies to once more be backed by precious metal. In the last few years as central banks around the world have engaged in quantitative easing to try and support their economies these voices have become louder.
This is surely comforting to any gold bug who is old enough to remember Nixon's announcement, made when Mr. Weldon's parents were teenagers. At the time, the number of gold bugs was limited to a handful of Austrian School economists and a few elderly souls who could actually remember the pre-1933 American gold coin standard.
Over the next decade, the "hard money" newsletter industry blossomed in the United States, but the number of gold bugs who had access to the mainstream media was still not much larger than a few dozen people. I may be exaggerating these numbers. I cannot think of any gold bug in a professorial position in Great Britain.
THE RHETORIC OF CONTEMPT
Having misled the readers regarding the size and influence of the gold standard's acolytes, he gets rolling.
The specific appeal of gold can be hard to rationalise: it might be aesthetically pleasing, but does that make it a sound basis for a monetary system?
I see. Aesthetically pleasing. It's a matter of taste. Nothing substantive, you understand.
Note: as a debater for over 50 years, I recognize this tactic. When a debater indulges in the rhetoric of contempt in his opening arguments, we can be sure of three things: (1) he thinks he has the judges on his side; (2) he has not got a strong substantive case; (3) he thinks his opponent has only recently fallen off the proverbial turnip truck.
Sometimes I wonder if gold bugs just listened to too much Spandau Ballet in the 1980s.
I cannot say that I am familiar with the Spandau Ballet. Wikipedia informs us that it was a popular rock band in Great Britain. What it has to do with gold eludes me. The phrase "too clever by half" comes to mind.
Robert Skidelsky argued that supporters of the gold standard have an almost atavistic belief in its powers, rooted in the age-old worship of sun gods.
I am quite familiar with Skidelsky's work. He is an economist-turned hagiographer. Of his eleven books listed in his Wikipedia entry, five are on Keynes. None is on any aspect of economic theory, including monetary theory.
So far, in his first two paragraphs, Mr. Weldon has used three examples of rhetorical contempt, but no substance.
This strategy plays well in the debate societies at Oxford and Cambridge, but it does not play well across the English Channel, let alone across the Atlantic. Mr. Weldon is clearly uninterested in any audience beyond Oxbridge and the Labor Party.
THE "DISASTER" OF FALLING PRICES
Here, he identifies the enemy position of all Keynesians.
What they tend to ignore is that the world has tried the gold standard before and it was, in most respects, a disaster.
Here is a statement. It is a conclusion. It is not an argument.
The world tried the international gold standard from 1815 until the outbreak of World War I 1914, which was the greatest period of economic growth in recorded history. The world of 1900 would have been unrecognizable in its wealth for the masses by someone getting out of a time machine activated in 1800.
At present, as the economy grows and produces more goods the central bank can expand the money supply to keep up with output. Under the gold standard, as output increases, the money supply will be fixed and with more goods but the same amount of money, prices will tend to fall.
So, prices tend to fall under the gold standard. The horror! Why, the whole consumer price index would begin to resemble the cost of computing: ever less expensive.
We must understand Mr. Weldon's argument in the light of economic theory and economic history since 1800. Economic theory teaches that economic growth reduces the effects of scarcity. A world without scarcity would be a world where demand and supply balance at zero price. Therefore, when there is economic growth, we should expect to see a world in which consumer prices are falling in the direction of zero prices. The gold standard fostered a world which conforms to the traditional call of economists, who preach the doctrine of salvation by economic growth.
Mr Weldon is appalled by such a conclusion. Why? Because it points to a very great advantage of the traditional gold standard: reduced consumer prices. So, he invokes falling prices as evidence of the gold coin standard's disaster. He therefore implicitly invokes the good old days: greater scarcity, greater poverty, and the all-round economic misery, a la 1800.
I am not using the rhetoric of contempt . . . yet. This really is the logic of his position.
Falling prices might sound like a good thing, and in individual cases they often are, but a falling general price level is usually associated with severe economic strains. Why buy anything today if it will be cheaper next week? The end result tends to be falling output, rising unemployment, falling wages and a large increase in the real burden of debt.
When he says "usually," he means usually since the end of World War I, in which the gold coin standard was abandoned in the West, except in the United States and the United Kingdom, 1925 to 1931, when Winston Churchill unwisely re-established the gold standard at the pre-War price, ignoring a decade of mass inflation. He did this for political reasons. The fake exchange rate maintained the convenient illusion: the fact that the men – he and his colleagues – who had taken the nation into that disastrous war and then had destroyed the pre-War pound sterling as an effect of their financing of the War through currency expansion had not in fact ruined the pound.
Most economists now accept that both the Long Depression of 1873 to 1896 and the Great Depression of the 1930s were aggravated by the gold standard. In the 1930s the sooner countries came off gold, the faster they recovered.
The period of 1873 to 1896 was the single most productive economic period of comparable length in mankind's history. In the section of Friedman and Schwartz's book, A Monetary History of the United States (1963), which the Keynesian economics guild never cites, they proved this with respect to the economic statistics of the United States.
As for economic recovery after 1930, the main nation to recover was Nazi Germany, which used monetary inflation, price and wage controls, rationing, and violence against trade unions as the primary policy tools of economic growth. The Nazi state held down nominal prices by the threat of violence, thereby cutting real wages, so the statistics looked like recovery. The story of this "recovery" is found in Adam Tooze's book, The Wages of Destruction.
TWO KINDS OF DEMOCRACY
Here, he raises the issue of democracy.
A gold standard means that monetary policy and interest rates are set to defend the value of a currency against a metal rather than to reflect economic conditions in the country. As professor Dani Rodrik argued last night, this is fundamentally undemocratic.
Here, we get to the political heart of the debate. The traditional gold coin standard transfers power over monetary policy to the broad mass of citizens, who can start a run on the banks at any time if they suspect that the central bank – highly undemocratic – is turning to inflation as a way to fund the government's debt. It is the democracy of the free market, and the democrats of the ballot box despise this aspect of the free market. They want monetary policy controlled by an alliance of central bankers, commercial bankers, and politicians, who all want to run larger national government deficits without raising interest rates.
The opponents of the gold standard are always defenders of the autonomy of central banks from politics. This argument is correct. These banks are indeed autonomous, or close to it. The central bank is the most undemocratic official government institution in every nation. Calling for the insulation of the central bank from politics is politically comparable to calling for the secret police to be independent from politics, except that the secret police only threaten a few thousand people. The central bank's policies threaten the nation.
Indeed the real reason that the gold standard could not be resurrected in a sustainable manner after its suspension [in] the first world war was the extension of the franchise to incorporate the working class. Once workers had the vote they were unlikely to support politicians who continually put defending the value of money against gold over defending the number of people in work.
The working class, through its ownership of gold coins, and its ability to cause a run on the banks by withdrawing their money in small gold coins, was in fact disenfranchised economically after World War I began. They refused to return to the pre-War gold coin standard in 1918. Politicians and bankers did not want to transfer this power back to the masses. Once the central banks in every nation stole the gold from commercial banks, who had stolen the gold coins of the depositors by breaking the contracts of full gold coin redemption on demand, the political elite never again let the masses have their coins.
THE HIRED HELP
The central bankers have long hired bright young economics graduates of Cambridge and Oxford to persuade the middle classes that fiat money creation by a politically independent central bank was just what the nation needed. The central bankers did the same in every Western nation.
Of course the gold standard had its beneficiaries, most notably in the financial sector. Stable international prices and a very open global capital market in the era of the classical gold standard created a great environment for international bankers.
Here, he reverses historical causation. It was the banking establishment that opposed the re-establishment of a gold coin standard. Why? Because it reduces the ability of the financial community to make massive profits through fractional reserves. Fractional reserves provide the leverage that makes large commercial bankers rich. This is why there is no such thing as a commercial bank that has publicly promoted the gold standard. The last major economist to be employed by a large commercial bank to write in favor of the gold standard was Benjamin Anderson. Chase let him write its newsletter. He left Chase and returned to teaching before the outbreak of World War II.
Economically, the case for the gold standard simply does not stack up and yet it still finds very vocal supporters. Fundamentally the case is political rather than financial. Gold bugs want to see golden handcuffs restraining the ability of central banks to intervene and states to spend, they want to remove any vestige of political control of the monetary system and fix it an arbitrarily chosen shiny metal in order to let free market forces take over. It is therefore no surprise that most gold bugs are to be found on the libertarian right.
Here, he finally gets to the truth. The issue is indeed deeply political. Gold bugs do indeed want to see golden handcuffs that restrain the ability of central banks to inflate. They want to substitute economic control by the masses who own gold coins for political control by an elite. So, gold bugs are usually found on the libertarian Right.
Mr. Weldon is part of a long and distinguished tradition of economists who spend their lives at the feet of central bankers, doing their ideological work for the bankers in exchange for a few scraps that fall from the table.
If you detect the rhetoric of contempt creeping in, you are pretty observant.
These men have baptized the state and the power of monetary debasement as the way of wealth.
Every political class needs its court prophets. Every banking establishment needs politicians who do their bidding. Young men who are not good in physics or chemistry or engineering see their career opportunities at Oxford and Cambridge. They major in economics. The smart ones become bankers. The less smart ones become economists.
The ones who are not smart enough to major in economics major in politics and become politicians.
The bankers hire the economists to tell the politicians what to think.
The economics graduates who are not good enough to get hired by the big banks go into financial journalism.
|August 20th, 2012||#26|
by Michael S. Rozeff
These admirers of inflation hold to the wrong economic model. The FED never should have bought its current portfolio of mortgage securities in the first place. It should sell these securities now. For the FED to start a new round of security purchases is a terrible, terrible idea.
These three men are Keynesians and/or new Keynesians. The difference between an old and a new Keynesian is their models. This is a technical difference, not a matter of substance. The latter use models that explicitly incorporate such features as maximizing behavior, sticky prices, expectations, and new methods of estimation. What’s far more important than these technical bells and whistles is that Keynesians of all stripes share common assumptions and views. All of the following bullet points that they believe in should be rejected:
- Free financial and credit markets are inherently defective and prone to fall apart (called "instability" or "volatility" or some other fancy language like "limits to private market financial intermediation")
- Nevertheless, banks and the financial system are all we have and should be saved by wise regulation, oversight, government guarantees, and central bank bailouts (called "credit easing")
- Economic shocks either emanate from markets or out of the blue but not as a rule from the U.S. government or, perish the thought, the Federal Reserve
- Centralized economic controls (called "policy" as in "fiscal policy" and "monetary policy") can rectify the errors of markets and bring full employment with price stability
- Analysis should be focused on the short term and long term effects ignored
- Always assume that governments and central bankers are uniquely qualified to man the centralized economic controls and right the sinking economic ship
- Never assume that governments and central bankers have done anything to sink the economic ship
- Pay lip service to the inability to measure welfare, but always act as if governments, central bankers and their economists know what’s best for everyone
- Do not question the powers of government and central banks, except to find ways to augment them
- Rely heavily on oversimplified mathematical models of the economy both for understanding an economy and then controlling it
- Act as if economists can find economic constants
- Treat diverse economic activities of diverse and heterogeneous people as if they were governed by a system of equations subject to statistical estimation and control
- Believe that manipulations of estimated parameters in models give results that are what happen in reality, while paying lip service to model limitations
- Pay lip service to "microfoundations", but continue to think in terms of broad aggregates
- As much as possible, ignore land as a factor, ignore heterogeneous capital goods, ignore intermediate business production, and instead emphasize "consumer spending"
- Portray yourselves as modern and cutting edge, throwing off the outmoded theories of the past
- Ignore Austrian economics, classical economics, and land economics, or if they cannot be ignored treat them as the old-fashioned musings of mistaken kooks and gold bugs
- Ignore gold or disparage gold
- Ignore anyone who has qualitative insights about the economy or who doesn’t possess a doctorate or who doesn’t gin up a mathematical model or who has not been anointed as a member of the club
- Ignore history, or else misinterpret it to suit your case
There is no reason even to list these lunatic beliefs and behaviors except that the lunatics are running the asylum. Take the opposite of each bullet point to get nearer to truth. Bear in mind that economics can state truths and some of these can be stated mathematically, but yet economics is not an exact science in the sense of routinely coming up with algebraic constants or numbers that explain the economic activities of many millions of people. People are not like molecules in a gas whose activities can be explained by Boyle’s Law. There are not economic constants like the gravitational constant.or Planck’s constant. Most economists pretend to the exactness of physics by ignoring and oversimplifying reality to the point of misunderstanding economic behavior.
|August 20th, 2012||#27|
Join Date: Jul 2011
There are many good reasons to use silver and gold as a currency. They are nigh unto indestructible, unlike paper that is very easily destroyed and must even be taken out of circulation, destroyed and printed anew. Silver and gold are portable as well as nigh indestructible. Several ounces of silver or gold can be traded for almost anything anywhere in the world. Silver and gold are currencies never turned down and always valued.
Most important of all, the back up a nation's wealth with an iron-clad guarantee of receiving something of industrial use that has been valued as currency for thousands of years. You can't print it physically nor "print it" electronically. You have to find and physically have a valuable item. America used to actually mint true silver coins at .900 purity but they were stopped in their production, bought back, melted down and sold to competitor countries. In the 1960s America stopped redeeming its currency for silver and officially became a fiat currency, worth only whatever stock you put in the honesty and sincerity in the U.S. government to pay back tens of trillions in debt. Talk about a sick joke.
America ended its gold standard in 1933 under FDR and Nixon ended Bretton Woods and finally took America off a silver-redeemable, gold standard altogether.
When a nation isn't bound by the amount of something of true value that it has, like precious metals, it is free to go hog wild printing and devaluing its currency and borrowing money to pay back loans with devalued currency. Since the implementation of this policy with the 1913 Federal Reserve, the 1967 ending of silver redemption and the 1971 actions of Richard Nixon the result is easy to see...
A 13,000 percent increase in the amount of dollars in circulation
More state and federal debt from 1971 to 2012 than the prior almost 200 years of existence of America as a nation.
America is the largest private and national debtor in world history.
The dollar has lost more than 97 percent of its value in the past 100 years.
Ah, the question is, who benefits?
Edit: With the advent of check and debit cards the Fed can increase money supply online. It might surprise most Americans to learn that "money-printing" is nothing of the sort, it is all technological wizardry, all so much binary bullshit of 1s and 0s promised to people somewhere, somehow. There is less than 800 billion dollars "worth" of U.S. currency in global circulation despite the fact that America has a 15 trillion per year economy allegedly and owes 16 trillion dollars worth at a federal level. Essentially America owes the world, just at a nation level, more than 20 times the amount of U.S. currency in circulation. The situation is even worse. The federal government has "intergovernmental debt" of trillions and has promised nothing but impossibility after impossibility with deadbeat so-called welfare programs like Social Security and Medicare. Unfunded liabilities, a fancy way of saying promised money that America simply cannot pay out without having catastrophic, Weimar Republic, Zimbabwe level 100 trillion dollars for a chicken egg hyperinflation stands at 60 to 200 trillion, depending on who you ask! 200 cocksuckin' TRILLION!
You are like the government, too. You "have" lots of money that really is just fairy tales and kike lies. Think of it, your check is "automatically transferred" in a phantom, immaterial way, to kike-owned banks who promise to give it to you if you ask. But it is an absolute impossibility. A bank run would happen if Americans merely asked to take 15 percent of all their money out in 1 day. It just wouldn't be possible to physically honor that. The scariest object in existence in America today is the debit card.
P.S., if you want silver and gold, take possession of silver and gold. Physically place it into your very own vault. Purchasing the promises of kikes to give you money, silver and gold is worthless. Look at how the rubes got burned with MF Global. Motherfucked globally over by kikes. If you can't pick it up, you don't own it. How much money and precious metals do you have and how much do you "have?" Think about it.
|August 21st, 2012||#28|
Film: trailer for The Bubble - which will feature Schiff, Rogers, Faber, Grant
|August 26th, 2012||#29|
Dancing on the Grave of the Keynesian System
by Gary North
The collapse of the Soviet Union in December of 1991 was the best news of my lifetime. The monster died. It was not just that the USSR went down. The entire mythology of revolutionary violence as the method of social regeneration, promoted since the French Revolution, went down with it. As I wrote in my 1968 book, Marxism was a religion of revolution, and Marxism died institutionally in the last month of 1991.
Yet we cannot show conclusively that "the West" defeated the Soviet Union. What defeated the Soviet Union was socialist economic planning. The Soviet Union was based on socialism, and socialist economic calculation is irrational. Ludwig von Mises in 1920 described why in his article, "Economic Calculation in the Socialist Commonwealth." He showed in theory exactly what is wrong with all socialist planning. He made it clear why socialism could never compete with the free market. It has no capital goods markets, and therefore economic planners cannot allocate capital according to capital's most important and most desired needs among by the public.
Mises's argument was not taken seriously by the academic community. Socialism was so popular by 1920 among academics that they did not respond to Mises for over 15 years. When finally one major economist, who really was not a major economist, but was simply a Polish Communist, wrote a response to Mises, it got a great deal of publicity. His name was Oscar Lange. He was a hack. He taught at the University of Chicago. He had no theory of economics. Immediately after World War II, he returned to Poland, renounced his American citizenship, and became a major Polish government bureaucrat. He was Stalin's hand-picked first Polish ambassador to the United States. He was a Marxist. He was a Communist. He was a hack. He spent his career with his finger in the wind, seeing which way it was blowing. As for his critique of Mises, Poland never adopted his so-called practical organizational answer to Mises, and neither did any other Socialist Commonwealth nation.
So, the only major supposed academic refutation of Mises was made by a hack who switched sides to Communism when he got a better offer. Yet he was heralded as a brilliant economist because he had supposedly refuted Mises. The academic world never admitted what Lange was, which was a hack Communist. It never admitted that no socialist nation ever implemented his supposed alternative to the free market system. The academic world simply clung for over 50 years to his completely hypothetical alternative to free market capital allocation. The academic world would not learn the truth.
Finally, when it became clear in the late 1980s that the Soviet economy was bankrupt, a multimillionaire socialist professor named of Robert Heilbroner wrote an article, "After Communism," for The New Yorker (Sept. 10, 1990), which is not an academic journal, in which he admitted that throughout his entire career, he had always believed what he had been taught in graduate school, namely that Lange was right and Mises was wrong. Then, he wrote these words: "Mises was right." Heilbroner wrote the most popular textbook on the history of economic thought that has ever been written, The Worldly Philosophers. He became a multimillionaire off the book royalties. In that book, he did not even mention the existence of Mises. He, too, was a hack – a polished hack (though not Polish), but still a hack. Yet he was widely respected in academia. Academia made him rich.
The academic community is intellectually corrupt. It goes with fads, and it does not react to the truth. It suppresses the truth. I realized this very early in my career, long before I got a Ph.D. The guild in every university department operates as a guild, and it has no commitment to truth in matters controversial until one side or the other loses power. When one side is perceived as possessing power, which the Communists were perceived as possessing, 1917-1991, there is never any direct challenge by the academic community. Academia argued about this or that aspect of the Soviet system which was wrong, which generally related to freedom of speech. But, with respect to the basic operations of the Communist economic planning system, there was never anything like a comprehensive critique of that system, and never did anybody inside the academic community look for the weakness of Communism in Mises' 1920 article.
The Soviet Union was always economically bankrupt. It was poverty-stricken in 1991. It was, in conservative journalist Richard Grenier's magnificent phrase, Bangladesh with missiles. Outside of Moscow, Russians in 1990 lived in poverty comparable to mid-19th century America, but with far less freedom. Yet this was never told to students during the years that I was in school, which was in the 1960s. There were a few economists who did talk about it, but they got little publicity, were not famous, and their books were not assigned in college classrooms. The standard approach of the academic community was to say that the Soviet Union was a functioning economy: a worthy competitor to capitalism.
Paul Samuelson was the most influential academic economist of the second half of the twentieth century. He wrote the introductory textbook that sold more than any other in the history of college economics. In 1989, as the USSR's economy was collapsing, he wrote in his textbook that the Soviet Union central planning system proves that central planning can work. Mark Skousen nailed him on this in his book Economics on Trial in 1990. David Henderson reminded readers in the Wall Street Journal in 2009.
Samuelson had an amazingly tin ear about communism. As early as the 1960s, economist G. Warren Nutter at the University of Virginia had done empirical work showing that the much-vaunted economic growth in the Soviet Union was a myth. Samuelson did not pay attention. In the 1989 edition of his textbook, Samuelson and William Nordhaus wrote, "the Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive."
The creator of the so-called Keynesian synthesis and the first American winner of a Nobel Prize in economics was blind as a bat to the the most important economic failure of the modern world. Two years later, the USSR was literally broken up, as if it had been some bankrupt corporation. Samuelson never saw it coming. People who are conceptually blind never do.
THE KEYNESIAN ERA IS COMING TO A CLOSE
I say this to give you hope. The Keynesians seem to be dominant today. They are dominant because they have been brought into the hierarchy of political power. They serve as court prophets to the equivalent of the Babylonians, just before the Medo-Persians took the nation.
They are in charge of the major academic institutions. They are the main advisors in the federal government. They are the overwhelmingly dominant faction within the Federal Reserve System. Their only major institutional opponents are the monetarists, and the monetarists are as committed to fiat money as the Keynesians are. They hate the idea of a gold coin standard. They hate the idea of market-produced money.
There was no overwhelming outrage among staff economists at the Federal Reserve when Ben Bernanke and the Federal Open Market Committee cranked up the monetary base from $900,000,000,000 to $1.7 trillion in late 2008, and then cranked it up to $2.7 trillion by the middle of 2011. This expansion of the money supply had no foundation whatsoever in anybody's theory of economics. It was totally an ad hoc decision. It was a desperate FOMC trying to keep the system from collapsing, or least they thought it was about to collapse. The evidence for that is questionable. But, in any case, they cranked up the monetary base, and nobody in the academic community except a handful of Austrians complained that this was a complete betrayal of the monetary system and out of alignment with any theory of economics.
The Keynesians are eventually going to face what the Marxists have faced since 1991. Literally within months of the collapse of the Soviet Union, when members of the Communist Party simply folded up shop and stole the money that was inside the Communist Party coffers, any respect for Marxism disappeared within academia. Marxism became a laughingstock. Nobody except English professors, a handful of old tenured political scientists, and a tiny handful of economists in the Union of Radical Political Economists (URPE), were still willing to admit in late 1992 that they were advocates of Marxism, and that they had been in favor of Soviet economic planning. They became pariahs overnight. That was because academia, then as now, is committed to power. If you appear to have power, you will get praised by academia, but when you lose power, you will be tossed into what Trotsky called the ashcan of history.
This is going to happen to the Keynesians as surely as it happened to the Marxists. The Keynesians basically got a free ride, and have for over 60 years. Their system is illogical. It is incoherent. Students taking undergraduate courses in economics never really remember the categories. That is because they are illogical categories. They all rest on the idea that government spending can goose the economy, but they cannot explain how it is that the government gets its hands on the money to do the stimulative spending without at the same time reducing spending in the private sector. The government has to steal money to boost the economy, but this means that the money that is stolen from the private sector is removed as a source of economic growth.
The Keynesian economic system makes no sense. But, decade after decade, the Keynesians get away with utter nonsense. None of their peers will ever call them to account. They go merrily down the mixed economy road, as if that road were not leading to a day of economic destruction. They are just like Marxist economists and academics in 1960, 1970, and 1980. They are oblivious to the fact that they are going over the cliff with the debt-ridden, over-leveraged Western economy, because they are committed in the name of Keynesian theory to the fractional reserve banking system, which cannot be sustained either theoretically or practically.
The problem we are going to face at some point as a nation and in fact as a civilization is this: there is no well-developed economic theory inside the corridors of power that will explain to the administrators of a failed system what they should do after the system collapses. This was true in the Eastern bloc in 1991. There was no plan of action, no program of institutional reform. This is true in banking. This is true in politics. This is true in every aspect of the welfare-warfare state. The people at the top are going to be presiding over a complete disaster, and they will not be able to admit to themselves or anybody else that their system is what produced the disaster. So, they will not make fundamental changes. They will not restructure the system, by decentralizing power, and by drastically reducing government spending. They will be forced to decentralize by the collapsed capital markets.
When the Soviet Union collapsed, academics in the West could not explain why. They could not explain what inherently forced the complete collapse of the Soviet economy, nor could they explain why nobody in their camp had seen it coming. Judy Shelton did, but very late: in 1989. Nobody else had seen it coming, because the non-Austrian academic world rejected Mises's theory of socialist economic calculation. Everything in their system was against acknowledging the truth of Mises's criticisms, because he was equally critical about central banking, Keynesian economics, and the welfare state. They could not accept his criticism of Communism precisely because he used the same arguments against them.
The West could not take advantage of the collapse of the Soviet Union, precisely because it had gone Keynesian rather than Austrian. The West was as compromised with Keynesian mixed economic planning, both in theory and in practice, as the Soviets had been compromised with Marx. So, there was great praise of the West's welfare state and democracy as the victorious system, when there should have been praise of Austrian economics. There was no realization that the West's fiat money economy is heading down the same bumpy road that led to the collapse of the Soviet Union.
It was not a victory for the West, except insofar as Reagan had expanded spending on the military, and the Soviets stupidly attempted to match this expenditure. That finally "broke the bank" in the Soviet Union. The country was so poverty-stricken that it did not have the capital reserves efficient to match the United States. When its surrogate client state, Iraq, was completely defeated in the 1991 Iraq war, the self-confidence inside the Soviet military simply collapsed. This had followed the devastating psychological defeat of the retreat of the Soviet Union out of Afghanistan in 1989. Those two defeats, coupled with the domestic economic bankruptcy of the country, led to the breakup of the Soviet Union.
The present value of the unfunded liabilities of the American welfare state, totaling over $200 trillion today, shows where this nation's Keynesian government is headed: to default. It is also trapped in the quagmire of Afghanistan. The government will pull out at some point in this decade. This will not have the same psychological effect that it did on the Soviet Union, because we are not a total military state. But it will still be a defeat, and the stupidity of the whole operation would be visible to everybody. The only politician who will get any benefit out of this is Ron Paul. He was wise enough to oppose the entire operation in 2001, and he was the only national figure who did. There were others who voted against it, but nobody got the publicity that he did. Nobody else had a system of foreign-policy which justified staying out. His opposition was not a pragmatic issue; it was philosophical.
The welfare-warfare state, Keynesian economics, and the Council on Foreign Relations are going to suffer major defeats when the economic system finally goes down. The system will go down. It is not clear what will pull the trigger, but it is obvious that the banking system is fragile, and the only thing capable of bailing it out is fiat money. The system is sapping the productivity of the nation, because the Federal Reserve's purchases of debt are siphoning productivity and capital out of the private sector and into those sectors subsidized by the federal government.
AFTER THE CRASH
There will be a great scramble ideologically among economists and social theorist as to why the system went down, and what ought to replace it. On campus, there will be no coherent answers whatsoever. The suppression of the truth has gone on so systematically on campus for half a century, as manifested by the universal praise of the Federal Reserve System, that the reputation of campus will not recover. It shouldn't recover. The entire academic community has been in favor of the welfare-warfare state, so it will not survive the collapse of that system. It will become a laughingstock.
It is not clear who is going to come out the victors in all this. That could take a generation to begin to sort out. There will be many claimants, all pitching their solutions, all insisting that they saw the crisis coming. But that will be hard to prove for anybody except the Austrians.
This is why it is important that people understand what is wrong with the prevailing system, and that they say so publicly.
This is why the Christian churches will not have much of a say in any of this, because the churches, and Christianity in general, have had nothing independent to say about the development of the welfare-warfare state.
The analysts with the best arguments are the Austrians. As to whether they are going to be able to multiply fast enough, or recruit students fast enough, or train them fast enough, with some of them going into positions of authority, is problematical. But we do know this: there has been no systematic criticism of Keynesian theory and its policies except by the Austrians over the past 70 years. Only the Marxists gave comparable criticism, and their ship went down in 1991.
Keyynesians talk to each other. They do not seek converts. They do not think they need to. Austrians, being in a small minority, see to persuade non-Austrians. Keynesian economists get tenure for writing gibberish and including meaningless formulas that begin by assuming away reality. Austrians begin with reality: individual human action. Keynesians, when writing for the public, offer conclusions, not explanations. Austrians seek to explain their position, since they know the public is unfamiliar with the fundamentals of Austrian economics.
In a time of breakdown, Austrians will explain why it happened, and pin the blame on Keynesians: "Their system failed. They had control ever since 1940." Keynesians will pin the blame on Keynesians who did not go far enough: "more of the same." We see this already Krugman vs. Bernanke. Which version will the public be ready to believe in a crisis? In the late 1930s, we found it: the Keynesians, who blamed the free market, not the neoclassical economists. "The present system basically OK. We just need more time." Keynesians will say this: "The present system is basically OK. We just need more time."
HOUSEBROKEN AUSTRIAN ECONOMISTS
The battle will be fought and won outside of academia. Here is where Austrians must learn to do battle.
Inside academia, to gain tenure, every assistant professor must go through the motions of genuflecting in front of the Keynesian altar. After they gain tenure, most anti-Keynesians cannot break the habit. They sugar coat their criticisms of Keynesianism. They play the role of loyal opponents. This even include some Austrians -- those who are appalled by the rhetoric of the Mises Institute and Lew Rockwell.com. They are housebroken.
I recall one academic Austrian economist who told me that I am far too dismissive of Keynesianism, and far too contemptuous in my rhetoric. "You just can't say such things!" he told me, not grasping his grammatical error. I responded: "Yes, I can. And I do." That was in 1992. He has not changed. Neither have I.
We have different audiences. He teaches 130 students, three days a week, eight months a year, in a government-funded minor university with no clout within the economics guild. I have 120,000 people on my mailing lists, 70,000 of them five days a week, plus readers on Lew Rockwell.com two days a week, 52 weeks a year. I can play hardball with Keynseain twits. He must guard his words so as to curry favor with those whose opinions count in academia. He has spent his career looking over his shoulder at Keynesians, who exercise power in all of the social science academic guilds, by whose rules he must play as an outsider who is barely tolerated inside the economics guild. I have spent mine telling the crowd that the emperor has no clothes, and that his tailors are mostly Keynesians, with a few montarists pretending to hem the invisible garments. I do not abide by the rhetorical rules -- "gentle, be gentle" -- that Keynesian academics impose on their critics inside academia. "You sit in the corner and wait for your turn. You will get your 15 minutes. Be polite when you get your turn." That is not my style.
I offer this optimistic assessment: the bad guys are going to lose. Their statist policies will bring destruction that they will not be able to explain away. Their plea will be rejected. "Give us more time. We just need a little more time. We can fix this if you let us get deeper into your wallets."
In the very long run, the good guys are going to win, but in the interim, there is going to be a lot of competition to see which group gets to dance on the grave of the Keynesian system.
Get out your dancing shoes. Keep them polished. Our day is coming.
|December 7th, 2012||#30|
Started reading Keynes Hayek: The Clash That Defined Modern Economics, by Nicholas Wapshott (2011). Here's an interesting bit:
In The Economic Consequences of the Peace, Keynes had raised the perils of inflation running out of control in language that would be hurled back at him by Hayek and his "sound money" followers. Keynes was aware that the fixed relationship between currencies before World War I, pegged to the price of gold, had been overtaken by events, because governments had printed money to pay for the war. Keynes reminded readers that the undermining of currencies was an invitation to revolution. "Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency," wrote Keynes. "By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens." Keynes gave credit to the Bolshevik leader for his perspicacity. "Lenin was certainly right," he wrote. "There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency." In November 1918, by Keynes's reckoning, "in Russia and Austro-Hungary this process [of printing money] has reached a point where for the purposes of foreign trade the currency is practically useless." But Keynes cautioned that "the preservation of a spurious value for the currency, by the force of law expressed in the regulation of prices, contains in itself, however, the seeds of final economic decay." For those like Hayek, huddled in winter coats in their apartments because they could not afford fuel, Keynes's warning rang true. (pp. 22-23)
Last edited by Alex Linder; December 7th, 2012 at 11:21 PM.
|December 7th, 2012||#31|
Join Date: Jun 2009
entire quote from Keynes
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose.
Last edited by Rick Ronsavelle; December 8th, 2012 at 12:41 PM.
|February 20th, 2013||#33|
Join Date: Jul 2005
slobomotion 12 minutes ago
Hi, how are ya? Since '10 no bank here in France would give me a USD acct, and I found USD not accepted in Turkey -- this was new. (Euros and lire, fine -- huh? USD were always accepted there, I'd heard!) A French bank I have for fun just announced, no more accts opened for "U.S. persons." Interesting, huh?
· in reply to savgal1211 (Show the comment)
Posted today at utube
Isn't it strange that we talk least about the things we think about most?
We cannot allow the natural passions and prejudices of other peoples
to lead our country to destruction.
-Charles A. Lindbergh
Last edited by America First; February 20th, 2013 at 05:00 PM.
|February 21st, 2013||#34|
The Pound Gets Pounded
by Peter Schiff
As the global currency war intensifies, the majority of attention has been paid to the 17% fall of the Japanese yen against the U.S. dollar over the past few months. The implosion has given cover to the sad performance of another once mighty currency: the British pound sterling. But in many ways the travails of the pound is far more instructive to those pondering the fate of the U.S. currency.
Japan has a unique economic and demographic profile which makes it a poor stalking horse. Newly elected Prime Minister Shinzo Abe and the Bank of Japan have clearly and forcefully committed Japan to a policy of inflation at any cost. Even in a world of serial money printers their plans stand out as exceptional. Britain, on the other hand, is charting a more conventional course to the same destination.
The UK government, under conservative Prime Minister David Cameron and Chancellor of the Exchequer George Osborne, has succeeded in bringing marginal discipline to their budgetary imbalances. From 2009 to 2012, British government expenditures rose a total of just 1.6%, which was far below the official pace of inflation. (In contrast, U.S. federal spending grew by 7.9% over that time period). Since 2009 the British have kept their debt-to-GDP ratio lower than America's and have cut into that metric at a faster rate. But while the British are conservative when compared to their American cousins, they are hardly austere when compared to Germany (which continues to have a nearly balanced budget and extremely low debt to GDP). Paul Krugman blames Britain's lackluster economic performance on their misguided experiment with austerity.
The monetary side of the equation also puts the UK within the spectrum of its peers. Ever since the Great Recession began in 2008 the Bank of England, led by outgoing Governor Mervyn King, has been far more stimulative than the European Central Bankers in Frankfort (but not quite as much as the Federal Reserve or the Bank of Japan). In contrast to the permanent and ongoing bond-buying quantitative easing programs underway in the U.S. and Japan, the Bank of England has engaged in such measures only selectively.
Given the relatively moderate approach pursued by the British, the poor performance of their currency may be hard to fathom. The deciding factor may be that the Pound Sterling is not nearly as vital to investors, or as integrated into the global economy, as the U.S. dollar or the euro. The greenback, being the world's reserve currency, has always benefited from demand that is independent of its economic fundamentals. The euro benefits from the size of the euro zone and the legacy of German banking discipline. The pound enjoys no such privileges and as a result foreign central banks do not feel as pressured to prop it up. As a result, over the past few years the pound has been... pounded. Since July 2008, the currency is down 26.7% against the U.S. dollar, and in recent months it has started falling faster than all other developed currencies except for the Abe-pummeled yen. Since October 1, 2012 the pound has fallen by 4% against the dollar and 8% against the euro.
The pound's health is made more suspect by the extreme challenges faced by the Bank of England as it tries to stimulate the most admittedly inflation prone economy among the major Western nations. Unlike the Federal Reserve, which is tasked by statute to combat both inflation and unemployment, the BofE has only a single mandate: to keep inflation contained. On that score it has been failing habitually. Inflation in the UK has been north of its 2% target for the past five years (the current official rate is 2.7%). In its most recent inflation projections, Mr. King admitted that it will stay that way for years to come, and that it may exceed 3% this year and next. With its currency weakening and inflation accelerating, the mandate of the BofE would clearly indicate that the time has come for monetary tightening.
However, like all central bankers, Mr. King, and his successor, the Canadian Mark Carney, will not be bound by such triflings as statutory mandates and past promises. In his press conference last week, Mr. King spoke of "looking past" current inflation figures to a time when he expects inflation will moderate. When the choice is between inflation and the political pain of economic contraction, bankers (at least those who don't speak German) will choose inflation every time.
While the American media has poked fun at the Bank of England's backtracking, they somehow do not understand that the Federal Reserve would be doing the same if not for the advantages given to us by the dollar's reserve status. Our ability to monetize the vast majority of the annual government deficit while exporting our inflation through half trillion dollar trade deficits and the overseas sale of hundreds of billions of Treasury bonds annually means that we do not yet face the pressures bearing down on the Bank of England.
For now at least Cameron is sticking to his guns and making the politically difficult case to voters that today's hard choices will yield benefits down the road. This puts all the pressure on the Bank of England to satisfy the calls for stimulus. The Federal Reserve is fortunate in that the Obama Administration shares none of Cameron's fiscal determination.
But already the Fed has done plenty of backing off from its prior promises. Just a few months ago Ben Bernanke announced specific inflation and unemployment triggers that would apparently put monetary policy on automatic pilot. But just last week, Fed Vice Chairman Janet Yellen announced that those goalposts (6.5% unemployment and 2.5% inflation) should not be considered "triggers" but as thresholds past which the Fed "may consider" tightening. When U.S. prices start to rise in earnest, look for the denials and rationalizations to come in torrents. The Fed will never acknowledge high inflation no matter what the data, nor will it ever take any steps to combat it. The simple reason is that it will be unable to do so without bringing on the economic contraction that is so terrifying to the British.
However, as British inflation accelerates, the pressure on the Bank of England to change course will intensify. As monetary stimulus continues to take its toll on the pound, price pressures will mount, even as the economy continues to stagnate. In other words, it is charting a course to stagflation. Perversely, this will put even more pressure on the BofE to ease. However, more cheap money will not stimulate the economy but merely cripple it further by fueling the inflationary fire.
At some point the British will have to admit that stimulus doesn't work. To break the inflationary spiral and rescue the ailing pound, the BofE will be forced to aggressively raise rates, at which point the British government will have no choice but to slash spending more deeply than would have been the case had they taken their medicine sooner. However, if the BofE refuses to tighten even in the face of much higher official inflation, the pound may deteriorate further and the UK might be left with the embarrassing choice of adopting the euro.
As far as the United States is concerned, the U.K. is the canary in the coal mine. What they are going through now, and what they may be about to go through, we will surely experience in the years ahead. The only difference is that the leeway afforded to us by our special status simply gives us more rope to hang ourselves. When the noose finally tightens, the fall will be that much more painful.
February 20, 2013
Peter Schiff is president of Euro Pacific Capital and author of The Little Book of Bull Moves in Bear Markets and Crash Proof: How to Profit from the Coming Economic Collapse. His latest book is The Real Crash: America's Coming Bankruptcy, How to Save Yourself and Your Country.
|February 21st, 2013||#35|
Join Date: Feb 2013
There's nothing in gold, that makes money any better when tied to it, its just commodity fetishism.
|February 21st, 2013||#36|
Join Date: Jun 2009
that's the cover story
". . .the BofE has only a single mandate: to keep inflation contained. . ."
the BofE has only a single mandate: inflate. . .
|August 3rd, 2013||#37|
Ruinous Inflation Proposals
By Michael S. Rozeff
August 3, 2013
In this day and age, one should never assume that “educated” persons, especially those who have “earned” advanced degrees in economics, know the least bit of economics or possess the least bit of sense that might steer them away from the refuse that passes for economic thought. This is especially true in the case of those who propose ruinous money policies, thereby joining the ranks of monetary cranks and demonstrating to one and all an economics IQ south of 25.
I speak specifically of Biagio Bossone and Richard Wood. They have penned an article that more than amply wins them the prize of monetary crank of the year. Unlike lay populist-inflationists who are commoners lacking in economics education, these two gentlemen have no such excuse. Both are professional economists who have been and still are very deeply involved with governments and government institutions.
Bossone and Wood are very dangerous men. Their ruinously inflationary ideas, if adopted, will destroy the economies that they think will be saved. The lofty positions they have held in such institutions as the World Bank, the IMF, the OECD, the Paris Club, and the Australian Treasury make them all the more dangerous. But what makes them most dangerous is their ability to make their proposals sound logical, necessary and effective. They are persuasive to the kinds of officials and politicians who respect statist credentials and who are looking for a magical solution to what they view as “problems”. We are living in such a topsy-turvy world of ignorance married to power that the most incredibly stupid policies can be recommended and adopted. Shallow, impatient and ignorant politicians possessed of an agenda and biases listen to a brain trust, as in the classic case of Franklin Delano Roosevelt. They then proceed to inflict terrible policies upon a nation.
Bossone and Wood have a ready recipe for ruining the market economy of any country. The name of it is – MONETARY INFLATION. But they do not call it by that name. We already have one new name for inflation of the monetary base, and that is QE (quantitative easing), and now we have another, thanks to them. It’s OMF or overt money financing. There is an important institutional difference in QE and OMF, the result of which is that the price inflation under OMF is worse than under QE.
The word inflation appears once in the cited article, and it is to assure readers that the QE policies so far have not triggered something called “demand-pull inflation”. Forget the adjective demand-pull. They are wrong about inflation, in the monetary aggregates (like the monetary base and money supply), in asset prices, in commodity prices and in retail goods and services.
In the U.S., for example, food prices are rising at over a 4 percent rate. Salmon prices are up 40 percent. Many prescription drug prices are rising 7-10 percent. U.S. home prices are up over 12 percent this year. In 2007, gasoline made a record high of $3.18. Crude oil was $65 a barrel. In 2008, gas fell to $2 and crude to the $40 area where it remained in 2009 until the FED launched its inflation known as QE. Gasoline in 2013 averages $3.55, above its previous record while crude oil is now about $105 a barrel. Bar soap, tuna fish, sardines and potato chips have all been downsized. Palm oil, a major component in commercial soaps, was $382.83 a metric ton in July of 2003. It has doubled to $763.04 as of June, 2013. That’s 7 percent a year, on average.
The government constantly adjusts consumer price indexes downwards, under the presumption that when prices rise, people substitute away from their preferred goods to cheaper goods. Yes, one can now read on forums that people decide to make their own soap and do their own auto repairs. This doesn’t negate the fact that prices have risen! It only means that the price index doesn’t measure the fact that prices have risen. The government can get away with murder in more ways than one.
It is misleading and outright wrong for Bossone and Wood to use technical jargon like “demand-pull” in describing inflation. A continuing rise in prices over many years, which is how inflation manifests itself, has its origin in one cause only and that is excessive money-printing. It is absolutely no accident that Americans are experiencing inflation right now at a high rate, once we observe that the FED’s policy has doubled a money supply measure like M1 in just 4 years. That’s a rate of 18 percent a year. Bossone and Wood want even more money growth than this. They think the central bank has been too stingy.
Bossone and Wood begin their effort in persuasion by observing “that current monetary and fiscal policies are misplaced and are largely impotent” at stimulating economic growth. I would say they are totally impotent. I would say that they are not only totally impotent, they cause the opposite to happen. They degrade economic growth. There are good reasons for this impotence, which is why their recommendation to change QE to OMF will fail and produce a result opposed to their hopes.
Bossone and Wood think that monetary and fiscal actions by the central bank and government can stimulate economic growth. They are wrong. There is no way in the world that monetary policy can stimulate growth because such growth comes not from “money”. There is more than an ample supply of money to conduct economic exchanges. As long as there are market prices, any supply will suffice; and certainly decades of rising prices attest to the fact that money growth has more than sufficed for the purpose of market transactions.
Growth comes from businesses that invest in profitable projects financed by real savings. It comes from capital accumulation, and that requires saving in an expectation of earning a return. To the extent that central bank and government policies are manipulating interest rates and influencing asset prices, they are discouraging saving and increasing the uncertainty of future returns. There is certainly no way that government can stimulate economic growth if, as it is doing, it borrows from banks, the central bank and the public, thereby either inflating the money supply or diverting savings from business enterprises, and then plows the money into non-productive projects like foreign wars and pseudo-education. Calling these “investments” doesn’t make them investments.
The delusion that central banks and governments can stimulate economic growth is at the heart of the Bossone and Wood argument. They think an economy is like a patient with a heart attack who requires stimulation or heart massage. In fact, an economy is more like a basically healthy person who has been battered and shackled by police.
Bossone and Wood drag in the canard of government austerity. To them there is government “austerity”. In April of this year, federal government expenditures are running at an annual rate of $3.82 trillion, just below a record $3.84 trillion one year earlier. Six years earlier, the rate was $2.92 trillion. An increase of 31 percent in 6 years or just over 5 percent a year can hardly be termed austerity.
Bossone and Wood think of the economy in misleading metaphorical terms that make the economy sound like a person who is a sick patient subject to inexorable diseases that require the interventions of physicians. They say that “recovery is failing to take hold” in the same way that a patient fails to recover after being given doses of medicine. Here the medicine is monetary and fiscal medicine or government doctoring. Some countries are “sliding deeper into depression.” This is like a patient sliding into a coma. What’s the disease? They say it’s “deflationary tendencies”. How wrong can these doctors of economics be when their thermometers cannot even measure prices? How wrong can they be when they assume that the patient’s temperature is the cause of the purported disease? How wrong can they be to think that a falling price level, if ever we were to observe such a phenomenon which we are not now observing and haven’t observed for decades, is a bad thing? Have consumers not benefitted tremendously from lower prices for information storage and manipulation?
Bossone and Wood are clueless men who nevertheless possess the power of intellectualizing their false ideas. This would not be a bad thing in a stateless world. In this world where governments have powers to enact their destructive policies, we get invasions of Iraq and invasions of market economies.
At least, the two do not hide what they want. They endorse an article by two other inflationists with the title “Helicopter money: or how I stopped worrying and love fiscal-monetary cooperation”. What Bossone and Wood advocate and dub OMF is the age-old fiat money inflation in which the government directly prints and distributes money. The central bank is bypassed. This is the same idea proposed by lawyer Ellen Hodgson Brown. What Bossone and Wood want is “for governments to legislate to enable the Ministry of Finance (not the independent central bank) to create new local legal tender currency to be used to finance budget deficits.” In the U.S., the Ministry of Finance is the Treasury Department.
At present, the central bank has a degree of separation from Congress in the control over the monetary base. This prevents Congress from issue after issue after issue of fiat money. Instead Congress has to borrow money, and borrowing entails subsequent taxation. This stems the money creation. Bossone and Wood propose to remove this institutional barrier. QE policies have already crossed this barrier to a large extent, but Congress built a new one by allowing the central bank to pay interest on bank reserves so as to prevent the conversion of the monetary base into money via bank loans to the public. OMF enables direct fiat money inflation.
Direct control over money has been tried before in this country, in fact, direct government issuance was tried many times by colonial governments. The money issues were called “bills of credit”. Unless the system had built in constraints, not usually the case, the issues far outran the capacities of the governments to collect taxes and to redeem the issues in gold coin, if they so promised. The result was ruinous inflation.
The U.S. Constitution closed the door on bills of credit and mandated silver and gold to be used by the governments, state and federal, as money. This mandate was breached during the Civil War but later repaired. However, the mandate for metallic money was fully erased in stages in the twentieth century, replacing metallic money with central bank money. Now Bossone and Wood are recommending another major step backwards, which is that the central bank money be replaced by government fiat money. It would be obtained by issuing non-marketable bonds to the central bank, which becomes a passive and empty player that ships the dollars or euros to the Treasury.
Bossone and Wood are politically naive. They mention constraints on fiat money issue. Using Italy as an example, they say that the fiat currency would be issued “to directly finance a budget deficit of predetermined magnitude.” The constraint is supposed to be that the budget deficit is “predetermined”. But how? What legislature operating in a democratic political system will not enlarge the budget indefinitely? How could such a predetermination ever occur except by constitutional amendment? How likely is that? What guarantee is there that such an amendment, even if adopted, would not later be altered or ignored?
Bossone and Wood also naively write of the government returning dollars or euros to the central bank to redeem these bonds: “At a later date, if and when appropriate, and after economic growth has provided a revenue dividend, these bonds could be redeemed.” How likely is that to happen? Even now, five years since the panic of 2008, the FED continues to buy $85 billion of mortgage and government bonds a month and constantly devises new excuses for doing so. What government would not have even more excuses not to redeem its modern bills of credit being dubbed OMF?
Bossone and Wood act as if markets do not exist. They act as if the government controls the economic decisions of billions of people, when the reality is that people have substantial power to make their own decisions. Faced with the proposed monetary system, their incentive is to insure themselves against the expected greater depreciation in the currency, which will be caused by even greater fiat money issues than is now the case. They will bid up prices as they attempt to rid themselves of the new money issues circulating in the economy. Price inflation will worsen. Asset price bubbles will occur. Uncertainty over monetary calculation will rise steeply, inhibiting economic growth. It is absolutely astonishing that Bossone and Woods never once mention these consequences of their recommendations even though they have been the ruinous results of such policies many times in the past and even in the recent past.
Every country should only be Zimbabwe, according to Bossone and Wood. Good luck with that.
|August 3rd, 2013||#38|
Join Date: Jun 2009
Dennis Kucinich has already introduced legislation for print and spend. [HR2990]
Why would PTB [jews] allow the Fed to evaporate?
WARNING: Many WN favor this type of monetary system. It is far-left and many rightists have been seduced. [Also used in NS Germany. Why not, socialism is socialism]
|July 3rd, 2015||#39|
Join Date: Jun 2015
Sorry for coming so late to the party, just found this website a few weeks ago.
I've debated liberals a few times on the intellectual bankruptcy of Keynes and wish I'd read this thread first. Not that I would have convinced them but perhaps some of the bystanders would have been more likely to think twice.
A few disagreements/ requests for clarity:
The only alternative the majority will go for is something else that is simplistic and promises something for nothing.
See below for response to "good guys will win."
Unfortunately, I cannot think of any time in history when chaos and collapse was followed up by an increase in freedom. Historically, jews have intentionally collapsed nations in order to make out like bandits at the fire sale afterwards. Some would argue that Hitler's ascendance was an increase in liberty, even though it went from a republic to a dictatorship. Arguing against this would end up being like arguing against keynes with liberals, so I'll just say that the big problem with dictatorships isn't during the initial reign (Hitler, Augustus, etc.), but during the succession crises between each dictator. The following dictators often have to make deals with minorities (Praetorian guards, the super rich to pay the Praetorians, etc.) in order to stay in charge and that necessitates screwing over the powerless majority.
One thing I noticed was that Keynes himself didn't seem to advocate constant deficit spending and a constantly growing debt. From my simplistic understanding of what he said, his theory isn't really a theory but rather a suggested policy of counter-cyclical spending. When the economy is bad a nation should decrease taxes, borrow money, and increase spending. When the economy is good a nation should increase taxes, decrease spending, and pay down debt. Unfortunately politicians seem to have forgotten about the part they don't want to remember.
Last edited by Zorost; July 3rd, 2015 at 02:29 AM.
|July 3rd, 2015||#40|
Join Date: Aug 2012
Arguing against the "Keynesianism" of the US government is a terrible approach. It would be like judging a home's security system when it is disarmed by a criminal already inside the house. The real culprit behind deficit spending is the usury/high interest loan finance system, a purely capitalist innovation.
The Germans borrowed some concepts from Keynes in their economic miracle. They were able to recreate this economic miracle in Austria-which was a very capitalist society and one of the last nations with a gold standard despite being poor as shit-shortly after the Anschluss.
Gold standard is a failure. As are all a priori , completely baseless assertions made by the Jew theorists supporting the pseudo-science of the "market".
"The favorite slogan of the reds is: 'No Pasarán!: Yes we have passed! And we tell them...and we tell them, we will pass again!'"
― Benito Mussolini after the Communist capitulation in Barcelona