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Bernanke get hammered, tells truth about US economy

This is absolutely hilarious and sad at the same time.

http://www.zerohedge.com/news/bernanke-gets-hammered-tells-truth-about-us-economy

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Is Free-Market Anarchism Unworkable? Not in America’s Roofing Industry

Is Free-Market Anarchism Unworkable? Not in America’s Roofing Industry

by Mark R. Crovelli

Recently by Mark R. Crovelli: Patriotism Is the Last Refuge of an Idiot

 

   

Maybe it is the fact that most Americans are educated in socialistic quasi-prisons today. Whatever the reason, it seems to be virtually impossible for Americans to conceive of an economy devoid of invasive government regulations and manipulations. The idea of completely freeing the economy of these burdensome government contrivances, which is precisely what free-market anarchism means, is thus completely incomprehensible to them. A totally free market for anything is assumed from the outset to be impossible, unworkable, and dangerous.

And yet, there is at least one sector of the American economy that is already about as anarchistic as could possibly be imagined. I am talking about the thousands of businesses that install roofs and rain gutters in this country. It is an industry that is exciting, dynamic and thrillingly free. The industry offers an important economic lesson for unimaginative Americans who blithely assume that free-market anarchism is impossible, unworkable, and dangerous.

That the roofing industry could be as anarchistic as I claim may seem absurd at first glance, since there are layers upon layers of laws "regulating" it. There are licensing laws in some jurisdictions governing who may or may not install roofs and gutters. There are myriad federal and state laws governing worker safety and workers’ compensation. There are laws governing the minimum wage and restricting the hiring "illegal" immigrants. And finally, there are laws and "codes" governing the installation of the roofing system itself.

How can an industry be considered virtually anarchistic when there exist thousands of federal, state and local laws "regulating" it?

The answer, quite frankly, is that the vast majority of roofing companies don’t give a rat’s ass about the governments’ laws. Most don’t care a whit whether the rich scumbags in congress don’t want them to hire Mexicans. They hire them in droves in order to drive down their prices. Most don’t care one iota whether fat OSHA office workers want them to wear unwieldy and dangerous harnesses. They simply don’t force their workers to wear them, as if the law were voluntary. Most don’t give a damn what the federal minimum wage laws say. They pay their workers as little as the workers will accept in this bad economy and the workers are fantastically happy to have the job. And most don’t give even a moment’s notice to the licensing laws for roofers in certain jurisdictions. They simply have licensed people pull permits for them as quickly as they please. Call me if you need one pulled!

They don’t care at all about these laws because they know the trump card is in their hands: bankruptcy. If the jackasses down at OSHA try to go after one of them for not wearing harnesses, the company will miraculously go under that day only to reemerge two days later with a new name and a new proprietor. If the immigration bureaucrats come after them for hiring so-called "illegals," the remaining "legals" will hang out drinking beer for a few weeks until their other guys are able to get back over the border to get back to work. No big deal. (I once worked with a Mexican in California who was deported early one morning and made it back to work before lunchtime!) What’s the worst the bureaucrats can do to you as a roofing business owner? Take your compressor or stick you with some fines? Ha! See you in two days!

This refreshingly rebellious attitude toward the governments’ asinine laws does not mean that roofers do not care about the quality of their work, however. The key to staying in business and making money in the roofing industry is installing quality roofs and having zero leaks. Either that, or you run from state to state putting up bad roofs for suckers and then get out of town as quickly as possible. (If you ever wondered what kind of person is falling for those ridiculous Nigerian email scams, it’s the same idiot who’s hiring a cheap, out-of-town roofing company. He no doubt wonders how he keeps getting scammed).

Roofers care about putting up good roofs because much of their business comes from word-of-mouth. If you put up a bad roof, you can be sure to have lost that entire neighborhood for once and for all. Also, since any decent roofer has liability insurance against leaks (it is in fact required to do work for insurance companies), he cares passionately about not having to make claims against his insurance. Nothing will put you out of business quicker than making claims against your insurance that will either astronomically elevate your premiums or even cause insurers to refuse you coverage. The free market is thus virtually the only reason why roofers put up good roofs that don’t leak.

Hey, wait a second! What about those building codes and roofing inspections that states and cities have instituted in order to make sure that roofers put up decent roofs? Aren’t these regulations a major reason why roofers do a good job?

I am terribly sorry to have to burst your bubble if these objections are running through your naïve little head, but city roofing inspections and building codes are a complete and utter joke. In the first place, as far as building codes and roofing codes are concerned, cities basically lift the codes from manufacturer instructions or from non-profit organizations, like the ICC. Most commonly the "codes" are simply awkward bureaucratic rehashes of what roofers can read for themselves on the felt rolls or shingle bundles. In other words, the cities basically tell roofers to follow the instructions on the package. If you think that telling roofers to follow instructions is the reason you are getting a good roof, then I have a bridge I’d like to sell to you!

The city roofing inspection racket is no less of a joke. Here’s an example. I was recently doing some carpentry work at a house when the roofing inspector showed up, so I offered to let him use my ladder in order to get up to inspect the roof. He declined, saying "I can tell that it’s ok from here." I have seen that occur more times than I can count. I have also seen roofing inspectors being bribed, as if that should surprise anyone.

More importantly, city roofing inspections are completely unnecessary when the roofer has liability insurance (and anyone stupid enough to hire a roofer, or anyone else for that matter, without liability insurance deserves whatever disaster befalls him). If the roof is installed incorrectly and leaks as a result, the homeowner can make a claim against the roofer’s insurance. The roofing inspector and the city, by contrast, will give the homeowner absolutely nothing if the roof leaks. Of what use, then, is the roofing inspector? This is all the more true since the homeowner’s insurance company will often inspect the roof itself in order to assure that it is installed correctly. Also, some roofing manufacturers, like Genflex for example, will inspect, certify, and guarantee the roof themselves. Given this, why on Earth are these nosy and lazy bureaucrats necessary? The cost of the roof is higher than it otherwise would be without them, and they do nothing that is not already being done better by the insurance companies.

The good news is that it has probably never been easier to get a fantastic and affordable roof in this country. This is due to the rebellious and sunburned anarchists in the roofing industry itself, not to the politicians and bureaucrats who have bankrupted this country.

July 1, 2011

Mark R. Crovelli [send him mail] writes from Denver, Colorado.

Copyright © 2011 by LewRockwell.com. Permission to reprint in whole or in part is gladly granted, provided full credit is given.

Geithner's Victims of Last Resort by Gary North

Geithner's Victims of Last Resort

by Gary North

Recently by Gary North: The #2 Port in the Academic Storm Is About to Close

 

  

You may have heard that the Federal Reserve System is the lender of last resort. This is a misleading concept. The Federal Reserve loans the U.S. government newly created fiat money. The government issues the FED an IOU. It is backed by the full faith and credit of the United States government. But who stands behind the United States government, wallets in hand? You do. And so do I.

We are the victims of last resort.

On May 13, Timothy Geithner wrote a letter to Colorado's Senator Michael Bennet. In his letter, he presented the case against freezing the debt ceiling. The letter is here.

Geithner began with a statement that is muddled almost beyond belief. "As you know, the debt limit does not authorize new spending commitments." Quite true. The debt limit does not authorize anything. It prohibits the authorization of any further borrowing. Officially speaking, prohibiting borrowing is the idea behind the debt ceiling. That is why Congress keeps raising it. Congress does not want to cut spending. It also does not want to raise taxes in order to pay for the spending.

The sentence says the opposite of Geithner's point. We know this because of what came next. "It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past."

He therefore did not really mean that "the debt limit does not authorize new spending commitments." He meant to write this: "An increase in the debt limit does not authorize new spending commitments." Therefore, he reminded Bennet, to raise the debt limit does not authorize any new spending commitments. Geithner, in his befuddled way, was trying to offer Congress a fig leaf to cover its nakedness. By raising the debt ceiling, Congress will be perceived by the voters as spending recklessly, which is an accurate perception. Geithner was trying to say this: by raising the debt ceiling, Congress does not automatically pass new spending laws.

Millions of voters understand this shell game. If the ceiling gets raised, Congress can then vote for new spending bills. If it doesn't get raised, Congress cannot pass new spending bills without cutting existing spending. The debt ceiling inhibits Congress.

Geithner's sales pitch is simple: Congress must raise the debt ceiling in order to meet its existing commitments. He is giving Congress a way to justify this ceiling hike to constituents. "We're not wild spenders. We're merely making it possible to fulfill previous Congressional commitments made to the public. You don't want us to break our promises, do you?"

He then wrote: "Failure to raise the debt limit would force the United States to default on these obligations, such as payments to our servicemembers, citizens, investors, and businesses." This is correct. This is the famous bottom line.

Do you see what this implies? A rising debt ceiling is built into American politics. Using Geithner's logic, there is no escape from an ever-larger national debt. Every year, the ceiling will have to be raised. Medicare is in the red. Social Security is in the red. Combined, they are about $100 trillion in the hole, according to some estimates.

Who is going to buy this Treasury debt as it rolls over every 50 months (today's average maturity)? For how much longer? This money will have to come from somewhere. It will come from money that might otherwise be invested in the private sector.

Ever since November 2010, the money has come mainly from the Federal Reserve System: $600 billion in newly created money. This will stop after this week. Then what?

The constant absorption of capital by the U.S. government cannot go on forever. It will undermine the growth of the economy by transferring investment capital to the Treasury. When the economy stops growing, the deficit will get worse. At some point, investors will stop lending to the Treasury at anything except very high rates. This will turn a recession into a depression. The government will raise the debt ceiling, but it will not get the funds required to keep spending. This process of ever-rising debt will not go on. As economist Herb Stein observed decades ago, when something cannot go on, it has a tendency to stop.

This means that when the Federal Reserve finally stops buying U.S. debt, there will be a great default. I mean finally. I do not mean temporarily. I do not mean this year. The fear of another recession may keep the safe-haven money flowing into the Treasury this year. But, at some point, investors will demand higher interest rates. Geithner's letter raises this specter of higher interest rates if the debt ceiling is not raised. But this threat will also exist if the debt ceiling is raised and raised again, as it will be.

The Federal Reserve at some point will start buying Treasury debt again to keep rising rates from crippling the economy. This means price inflation will return, as it did in the late 1970s. Then it will move above that era's rate of rising prices. This is why the FED will eventually have to face the music: either hyperinflation or the Great Default. I believe that it will choose the Great Default. If it refuses, then the dollar will collapse.

In either case, the division of labor will contract. In either case, there will be bankruptcies. There will be massive unemployment of people and resources.

We are nowhere near this moment of truth. I know there are lots of people out there who say that hyperinflation is imminent. They are wrong.

DEFAULT NOW

Geithner is facing a default if the debt ceiling is not raised. He said that a default would call into question for the first time the full faith and credit of the United States government. He is correct. I can think of no more liberating event. The monster would go bust.

Investors around the world would lose money, he says. I surely hope so. That might keep them from financing the monster again. Anyway, for a couple of years.

He thinks there will still be buyers, but at higher rates. That would restrict the government's spending, since the government would have to pay investors rather than subsidize new boondoggles.

Default would increase borrowing costs for everyone, he wrote. He did not say why this would be the case. If the government defaults, people will invest elsewhere. It seems to me that this would be good for the private sector. Geithner needs to prove his case.

"Treasury securities are the benchmark interest rate," he wrote. They are? Why should a FED-subsidized interest rate be the benchmark? Why should an out-of-control international debtor set the standard?

THE MOB

"A default would also lead to a steep decline in household wealth, further harming economic growth." Think about this. A thief sticks a gun in your belly. He says, "hand over your money . . . forever." He then shares this money – after handling fees – with his fellow mobsters.

Geithner is saying that if the victims ever decide not to let the thief steal any more of their money, this will reduce household wealth. It will indeed – the household wealth of the thieves. It will increase the household wealth of the victims.

"Higher mortgage rates would depress an already fragile housing market, causing home values to fall." Fact: home values have fallen even as the U.S. Government's debt ceiling has soared. There is a reason for this. As the government has borrowed more money, thereby reducing the money available to the private sector, housing prices have fallen. He did not explain this economic fact. He did not mention it. I can understand why not.

"This significant reduction in household wealth would threaten the economic security of all Americans and, together with increased interest rates, would contribute to a contraction in household spending and investment." He meant the households of politicians, bureaucrats, and everyone who is on the take from the U.S. government.

But what about the victims? What about the taxpayers whose net worth is being used as collateral for Treasury debt? Why would a ceiling on the government's pledge of their future wealth produce a "significant reduction" in their future household wealth? He needed to explain this.

Keynesian economists need to explain this.

Keynesian financial columnists need to explain this.

They never do.

AMERICAN TAXPAYERS: VICTIMS OF LAST RESORT

"Default would also have the perverse effect of increasing our government's debt burden, worsening the fiscal challenges that we must address and damaging our capacity for future growth." So, if Congress votes to cap the government's debt, this will produce even greater debt. We must therefore seek national solvency through additional debt. Solvency through debt! I am reminded of another group of slogans: war is peace, freedom is slavery, and ignorance is strength.

What else would a default do? "It would increase rates on Treasury securities, which would significantly increase the cost of paying interest on the national debt." Yes, it would. But the question arises: If the government defaults on its debt, why would it bother to pay any interest at all? The whole idea of default is to stop paying.

It's just like people who owe more on their homes than the homes are worth. They stop paying. If they are evicted – most are not for months or years – they will rent. They will pay less in rent than they pay on their mortgages. In the meantime, they pay nothing except property taxes. (Governments will foreclose when lenders won't.)

The idea of the debt ceiling is to keep the government from running up its tab, based on the future net worth of taxpayers. The idea behind opposing any increase of government debt is this: "Let's stop any new spending projects." Higher interest rates, if they come as Geithner said they will come, will reduce the ability of the government to start new wealth-distribution boondoggles. The money that would have funded the new projects will have to go to creditors in the form of interest payments.

Why is this bad?

It is bad if you are a member of a group that gets payoffs from the Federal Godfather. It is not bad if you are not.

He said that a default will lead to weaker growth. It will lead to more unemployment. A sagging economy will lead to lower tax revenues and "increased demand on our safety net programs." Whose safety net programs? "Ours."

Why will unemployment rise if the government cannot spend borrowed money? Why won't taxpayers save more money, leading to greater economic output and therefore reduced unemployment? Why is it bad for the economy to allow taxpayers to spend more of their own money the way they want to? These questions apparently did not occur to Geithner, or if they did, he chose not to consider them.

A default will lead, he said, to a reduction in "productive investments in education, innovation, infrastructure, and other areas. . . ." He said "investments." That is a political code word for "government subsidies." A default would mean that the government will have to spend less in those areas of the economy in which (1) politicians buy votes, (2) salaried, Civil Service-protected bureaucrats spend money to innovate, and (3) the teacher unions prosper.

He warned that "Treasury securities are a key holding on the balance sheets of every insurance company, bank, money market fund, and pension fund in the world." This is true. This means that taxpayers' future wealth has been mortgaged to provide securities for these outfits. So, if we take this argument seriously, how will the government ever stop increasing the debt ceiling? It won't. The Federal debt system has addicted the world's financial institutions to the promise that American taxpayers are the victims of last resort.

The U.S. government borrows by promising that American taxpayers will fork over the money. The mob has bought itself fiscal credibility. It has guns and badges, and it can finance itself by assuring investors that these guns and badges will be used.

How can this ever be stopped? Geithner or his successors will be able to use this argument forever.

There are two ways that it can be stopped: (1) hyperinflation by the Federal Reserve, which will buy the Treasury's IOUs when other investors cease; (2) default whenever the Federal Reserve stops buying new Treasury debt. One or the other must happen, because (1) the Congress keeps running $1.5 trillion annual deficits, and (2) the Social Security and Medicare liabilities are unfunded.

In the meantime, Geithner implores Congress to kick the can one more time. He will be back for another increase in a year. He is a cheerleader. "Kick it again! Kick it again! Harder! Harder!"

GEITHNER'S PAULSON IMITATION

He said that a default would raise questions about the solvency of the institutions that hold Treasury debt. This could cause a run on money-market funds. It could be "similar to what occurred in the wake of the collapse of Lehman Brothers." He said that this could "spark a panic that threatens the health of the our entire global economy and the jobs of millions of Americans."

This sounds terrifying, but is it true? We have heard all this before: in September and October of 2008. Geithner's predecessor, Hank Paulson, and Ben Bernanke warned high-level Congressmen that this was about to happen. That was how they got Congress to fund TARP. But they never proved that a collapse was imminent. In a persuasive presentation, former budget director David Stockman has shown that no such collapse was imminent.

"Even a short-term default could cause irrevocable damage to the American economy." Irrevocable! Really? Is the American economy so dependent on Treasury interest payments that everything that Americans do or own is at risk? Why? Because "Treasury securities enjoy their unique role in the global financial system precisely because they are viewed as a risk-free asset." I see. Risk-free assets. But risk is inescapable in life. Geithner said that this does not apply to buyers of IOUs from the U. S. Treasury. Not yet, anyway.

When an IOU issued by an agency that is running a $1.6 trillion annual on-budget deficit is regarded as risk-free by investment fund managers, then my strong suggestion is that you not allow those fund managers to handle your retirement portfolio.

"Investors have absolute confidence that the United States will meet its debt obligations on time, every time, and in full." They do? Really? Then they are incapable of reading a balance sheet.

"That confidence increases demand for Treasury securities, lowering borrowing costs for the Federal government, consumers, and businesses." It does? Really? Let me understand this. The demand for Treasury securities increases, because investors with "absolute confidence" in the Treasury's IOUs hand over their money to the Treasury. Yet this transfer of funds somehow lowers borrowing costs for consumers and businesses. I am a bit confused. If the Treasury gets the capital, how can consumers and businesses also pay less for capital? If money goes to the Treasury, how is it simultaneously made available to consumers and businessmen?

You see my problem. I am not a Keynesian. I have this theory that money transferred to X cannot be simultaneously transferred to Y. If money is spent by X on what he wants to buy, it cannot be spent by Y on what he wants to buy. But this is not the case in the world of Keynes.

"A default would call into question the status of Treasury securities as a cornerstone of the financial system, potentially squandering this unique role and the economic benefits that come with it." I ask: Whose economic benefits? The fellow holding the badge and the gun or the fellow with the wallet?

"If the United States were forced to stop, limit, or delay payment on obligations to which the Nation has already committed," he said, "there would be a massive and abrupt reduction in federal outlays and aggregate demand." Again, I have this problem. I am not a Keynesian. I understand cause and effect as follows. If spending by Y (the government) decreases, this leaves more money in X's (the taxpayer's) wallet. When X spends his money without the middleman of the guy with the badge and the gun, aggregate demand does not change. I realize that this is not true in Geithner's parallel universe, but that's how aggregate demand works in my world.

I guess I need a formula. Without a formula, economists cannot perceive cause and effect. So, here goes: $X + $Y = $X + $Y.

To understand this, we need story problems. We all hate story problems, but they help us understand.

(1) "If X spends $1.6 trillion dollars, and Y spends no dollars, how much is aggregate demand?"

(2) "If Y sticks a gun in X's belly and says 'hand it over,' and then spends $1.6 trillion, how much is aggregate demand?"

(3) "If Y comes to X and says, 'hand it over, but this is a loan,' and X forks it over, when Y spends $1.6 trillion, how much is aggregate demand?"

Geithner does not operate in terms of this formula. So, he said that when the government (Y) stops spending, there will be a decrease in aggregate demand. Somehow, the excess money that is now in X's wallet will disappear. "This abrupt contraction would likely push us into a double dip recession." He did not define "us." He wanted Senator Bennet to believe that if Y spends less money, X will suffer a double dip recession. We're all in the same boat, he implied. Why? Because . . . a drum roll, please . . . we owe it to ourselves!

This is Keynesianism's parallel universe. It is a world of endless increases in the U.S. government's debt ceiling. It is a world of endless increases in the Federal Reserve System's monetary base, filled with IOUs from the U.S. government. It is a world in which guns and badges turn stones into bread.

CONCLUSIONS

Here is Geithner's conclusion: "It is critically important that Congress act as soon as possible to raise the debt limit so that the full faith and credit of the United States is not called into question." He went on to say: "I fully expect that Congress will once again take responsible action. . . ."

He and I define "responsible action" differently. He defines it as "authorize people with badges and guns to borrow more money in terms of their ability to get their hands on enough taypayer money to keep paying interest." It is a system in which the taxpayer is the victim of last resort.

I have a different conclusion. I think that Congress will authorize another increase in the debt ceiling. It will do this multiple times. As this limit is increased, there will be a reduction in the number of investors who have absolute confidence in the full faith and credit of the United States government.

Congress is not going to balance the budget, because there seem to be no negative consequences for not balancing the budget, either political or economic. So, the debt will get larger.

At some point, interest rates will rise. Then we will see the negative consequences that Geithner described in his letter.

Geithner is arguing for a delay. That is what most politicians argue for. Today, most politicians have adopted the faith of Dickens' Mr. Micawber: "Something will turn up." They are right: the debt ceiling, then interest rates, then the monetary base, then M1, then the money multiplier, then prices. So will unemployment. Up, up. up.

The key is the money multiplier. When it finally moves up, price inflation will move up with it. Until then, the Federal Reserve can join with Congress in the game of kick the can. The debt ceiling will rise.

Inside the can are lots of IOUs. They are IOU's signed by Congress on our behalf. We are the targeted victims of last resort.

We won't be. At any rate, future voters won't be. The creditors will be.

There will be a Great Default when voters finally say, "We're not going to pay." On that day, your net worth had better not rest on a pile of IOUs issued by the U.S. government. Otherwise, you will be like Thomas Mitchell, in "Gone With the Wind," sitting at his desk in 1865, mad as a hatter, insisting that he was rich. Why? He had lots of government bonds issued by the Confederacy.

So, the victims of last resort will not be the taxpayers after all. They will be the trusting people who retain absolute confidence in the full faith and credit of the United States government right to the bitter end. Either hyperinflation will ruin them or default will, or maybe both: as the Confederacy experienced.

June 29, 2011

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North

The Next Financial Crisis.

The Next Financial Crisis

by Gary North

Recently by Gary North: The Safe Banking Fantasy

 
  

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

The first sign that "this time, it's different," was Treasury Secretary Geithner's statement, which received widespread coverage, that there will be another crisis.

On May 18, The Daily Beast ran a story on Geithner's unexpected appearance at the initial screening of an HBO movie, Too Big to Fail, which dramatizes the crisis of late 2008, during which time Geithner was president of the Federal Reserve Bank of New York. In an interview, Geithner said this. "It will come again. There will be another storm. But it's not going to come for a while."

That was surely forthright for a sitting Treasury Secretary. He was not specific, but to say that another crisis will come was unique. He added this: "It's not going to be possible for people to capture risk with perfect foresight and knowledge."

That was amazingly forthright. It points to the reality of the naive faith of regulators that they can devise formulas that will keep the system from being hit by some unexpected mini-crisis that will trigger a wider systemic breakdown. He acknowledged that risk analysis, based on statistics, cannot deal with uncertainty: events outside the law of large numbers that serves as the basis of statistics. Ludwig von Mises discussed this in 1949, and Frank H. Knight wrote a book on this in 1921: Risk, Uncertainty, and Profit. Nassim Taleb has called this a black swan event. Whatever we call it, such an event torpedoes the best-laid plans of government regulators as well as statisticians advising leveraged banks.

"Things were falling apart," Geithner said. "We had no playbook and no tools. . . . Life's about choices. We had no good choices. . . . We allowed this huge financial system to emerge without any meaningful constraints. . . . The size of the shock was larger than what precipitated the Great Depression."

That is the official government line, which Treasury Secretary Hank Paulson used to persuade Congress to fork over $700 billion in TARP loans. It justified the Federal Reserve's swaps at face value of liquid Treasury debt in its portfolio for unmarketable toxic assets held by large banks. It justified the 2009 stimulus package of another $830 billion.

The author of the article correctly noted: "In the end, the taxpayers saved the Wall Street investment banks, with Geithner & Co. injecting enough capital to cushion them from bad bets." That is exactly what happened.

GEITHNER RETREATS

On June 6, Geithner spoke at a meeting of the American Bankers Association in Atlanta. Here, his analysis was completely different from what he had revealed in his appearance at the HBO screening. It turns out that the system was saved by investors, not by the government and the Federal Reserve.

Of the 15 largest financial institutions in the United States before the crisis, only nine remain as independent entities.

Those that survived did so because they were able to raise capital from private investors, significantly diluting existing shareholders. We used stress tests to give the private market the ability – through unprecedented disclosure requirements and clear targets for how much capital these institutions needed – to distinguish between those institutions that needed to strengthen their capital base and those that did not.

He did not mention that the reason why investors came to the rescue was that the winners had been bailed out by the taxpayers and the Federal Reserve.

Regulation has saved us, he insisted, and it will continue to save us.

We now have the authority to subject all major financial institutions operating in the United States to comprehensive, consolidated limitations on risk taking. That represents a dramatic change from before the crisis, when more than half of the financial activity in the nation that was involved in "banking" from the investment banks to large finance companies, AIG, and Fannie Mae and Freddie Mac, operated outside those limits.

And the markets where firms came together – like the over-the-counter derivatives markets – will now be subject to oversight, once regulators finalize and implement new rules authorized by Dodd-Frank. We now have much stronger tools to limit the risk that one firm's failure could cascade through markets to weaken the rest of the system.

Overall, and this is the most important test of crisis response, the U.S. financial system is now in a position to finance a growing economy and is no longer a source of risk to the recovery.

He ended with this inspiring promise. "So we will do what we need to do to make the United States financial system stronger. We will do so carefully. And as we do it, we will bring the world with us."

This was cheerleading for government regulation. This is what we have come to expect. The problem is this: it is a full-scale retreat from his admission at the HBO screening.

GEITHNER'S GOOFS

Simon Johnson took him to task in the New York Times on June 9, in an article titled, "The Banking Emperor Has No Clothes." Johnson was the chief economist of the International Monetary Fund, and is a member F.D.I.C.'s newly established Systemic Resolution Advisory Committee. He said that Geithner is naive about the supposedly high degree of safety for the banking system. He complains that Geithner is way too optimistic.

First, he reminds us that the government bailed out the banks. He reminds us of Geithner's admission of this in his HBO interview. Second, he reminds us that the international banking system is interconnected.

But big banks in almost all other major countries have run into serious trouble, including those in Britain and Switzerland – where policy makers are now open about the potential scope of further disasters. French and German banks made large amounts of reckless loans to peripheral Europe and have strongly resisted higher capital requirements, helping to create the current potential for contagion throughout the euro zone (and explaining why the Europeans are so keen to keep control of the International Monetary Fund).

Geithner claimed in Atlanta that U.S. banks are less concentrated than other nation's' banks. But how will that save our banks from a crisis that is triggered outside the U.S.? "Mr. Geithner's most serious mistake is to believe that we can handle the failure of a global megabank within the Dodd-Frank framework."

Mr. Geithner's thinking on bank size is completely flawed. The lesson should be: big banks have gotten themselves into trouble almost everywhere; banks in the United States are very big and have an incentive to become even bigger; one or more of these banks will reach the brink of failure soon.

Johnson then gets to the famous bottom line. The bottom line is this:

There is no cross-border resolution mechanism or other framework that will handle the failure of a bank like Citigroup, JPMorgan Chase or Goldman Sachs in an orderly manner. The only techniques available are those used by Mr. Geithner and his colleagues in September 2008 – a mad scramble to find buyers for assets, backed by Federal Reserve and other government guarantees for creditors.

That this should appear in the New York Times is indicative of the extent to which the old confidence in the banking system is fading.

FELDSTEIN WEIGHS IN

On June 8, the Wall Street Journal ran a column by Martin Feldstein, who served as Reagan's chairman of the Council of Economic Advisers. He is a Harvard faculty member.

Feldstein is a Keynesian. He has a reputation as a conservative. He is on the board of contributors to theJournal. He is regarded as a conservative because he favors tax cuts. But he also favors Federal spending in times of crisis. Somehow, he also comes out for a lower deficit.

He said that Obama's $830 billion stimulus package did not go far enough. "As for the 'stimulus' package, both its size and structure were inadequate to offset the enormous decline in aggregate demand." The money should have gone to the Defense Department.

Experience shows that the most cost-effective form of temporary fiscal stimulus is direct government spending. The most obvious way to achieve that in 2009 was to repair and replace the military equipment used in Iraq and Afghanistan that would otherwise have to be done in the future. But the Obama stimulus had nothing for the Defense Department. Instead, President Obama allowed the Democratic leadership in Congress to design a hodgepodge package of transfers to state and local governments, increased transfers to individuals, temporary tax cuts for lower-income taxpayers, etc. So we got a bigger deficit without economic growth.

This is pure Keynesianism. It is a call for massive spending in a recession. So, should there be another fiscal crisis, Feldstein's recommendation is a bigger stimulus. The problem for his is this: with the economy slowing, it will be even more vulnerable to an unexpected black swan event.

Second, we are getting an economic slowdown, he says, because Obama will not make the Bush tax cuts permanent. This creates uncertainty in the minds of investors. So, he sounds like a supply-side economist. But he isn't. He is a traditional Keynesian.

Third, there is the deficit.

A third problem stems from the administration's lack of an explicit plan to deal with future budget deficits and with the exploding national debt. This creates uncertainty about future tax increases and interest rates that impedes spending by households and investment by businesses.

Fourth, there is the official strong dollar policy that has led to the decline of the dollar. But he never mentions Federal Reserve policy: QE2.

What are our prospects? He is not optimistic.

The economy will continue to suffer until there is a coherent and favorable economic policy. That means bringing long-term deficits under control without raising marginal tax rates – by cutting government outlays and by limiting the tax expenditures that substitute for direct government spending. It means lower tax rates on businesses and individuals to spur entrepreneurship and investment. And it means reforming Social Security and Medicare to protect the living standards of future retirees while limiting the cost to future taxpayers.

All of these things are doable. But the Obama administration has not done them and shows no inclination to do them in the future.

So, here is a Harvard economist saying that we needed a larger stimulus in 2009, but we need reduced spending now. We also need to reform Social Security and Medicare, while protecting the future retirees and limiting costs. All this is doable.

All this is utter nonsense. The politics of Medicare and Social Security have not changed in 40 years because there is no politically acceptable way to limit their costs. Voters will vote against anyone who suggests such a reform. The voters were promised the Keynesian moon, and they will not tolerate the popping of that pipe dream. In short, none of what Feldstein suggests is doable, short of a monumental crisis that enables Congress to start goring specific electoral oxen. And when that crisis comes, Feldstein will no doubt recommend a large deficit, with the money going to the Defense Department.

This is Establishment Wall Street opinion.

WIGGIN TELLS IT STRAIGHT

Then there was an article in Forbes, a conventional outlet, written by Agora's Addison Wiggin. He begins with this.

There is definitely going to be another financial crisis around the corner," says hedge fund legend Mark Mobius, "because we haven't solved any of the things that caused the previous crisis."

Mobius is a legendary hedge fund manager. If he thinks there is going to be another crisis, we would be wise to listen.

Wiggin thinks the Greek debt crisis is a good candidate for a trigger event.

The Greek crisis is first and foremost about the German and French banks that were foolish enough to lend money to Greece in the first place. What sort of derivative contracts tied to Greek debt are they sitting on? What worldwide mayhem would ensue if Greece didn't pay back 100 centimes on the euro?

That's a rhetorical question, since the balance sheets of European banks are even more opaque than American ones. Whatever the actual answer, it's scary enough that the European Central Bank has refused to entertain any talk about the holders of Greek sovereign debt taking a haircut, even in the form of Greece stretching out its payments.

The ECB is determined to protect the Too Big to Fail banks. It always says that it will not lend more money to the Greek government, but it always does. It calls for more bailouts by the German and French governments. The game must go on!

It will accomplish nothing. Going deeper into hock is never a good way to get out of debt. And at some point, this exercise in kicking the can has to stop. When it does, you get your next financial crisis.

CONCLUSION

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

The international banking system is an interdependent, interconnected system. The system is not transparent. Even if it were, the level of debt – unsecured IOUs – is enormous. Wiggin comments.

Estimates on the amount of derivatives out there worldwide vary. An oft-heard estimate is $600 trillion. That squares with Mobius' guess of 10 times the world's annual GDP. "Are the derivatives regulated?" asks Mobius. "No. Are you still getting growth in derivatives? Yes."

In other words, something along the lines of securitized mortgages is lurking out there, ready to trigger another crisis as in 2007-08.

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

June 11, 2011

Gary North [send him mail] is the author of Mises on Money. Visithttp://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North

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Link to the original article: http://lewrockwell.com/north/north990.html

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Human Freedom Rests on Gold Redeemable Money by Warren Buffett's Father

Human Freedom Rests on Gold Redeemable Money

by Hon. Howard Buffett
U.S. Congressman from Nebraska
The Commercial and Financial Chronicle 5/6/48

 

   

Is there a connection between Human Freedom and A Gold Redeemable Money? At first glance it would seem that money belongs to the world of economics and human freedom to the political sphere.

But when you recall that one of the first moves by Lenin, Mussolini and Hitler was to outlaw individual ownership of gold, you begin to sense that there may be some connection between money, redeemable in gold, and the rare prize known as human liberty.

Also, when you find that Lenin declared and demonstrated that a sure way to overturn the existing social order and bring about communism was by printing press paper money, then again you are impressed with the possibility of a relationship between a gold-backed money and human freedom.

In that case then certainly you and I as Americans should know the connection. We must find it even if money is a difficult and tricky subject. I suppose that if most people were asked for their views on money the almost universal answer would be that they didn't have enough of it.

In a free country the monetary unit rests upon a fixed foundation of gold or gold and silver independent of the ruling politicians. Our dollar was that kind of money before 1933. Under that system paper currency is redeemable for a certain weight of gold, at the free option and choice of the holder of paper money.

Redemption Right Insures Stability

That redemption right gives money a large degree of stability. The owner of such gold redeemable currency has economic independence. He can move around either within or without his country because his money holdings have accepted value anywhere.

For example, I hold here what is called a $20 gold piece. Before 1933, if you possessed paper money you could exchange it at your option for gold coin. This gold coin had a recognizable and definite value all over the world. It does so today. In most countries of the world this gold piece, if you have enough of them, will give you much independence. But today the ownership of such gold pieces as money in this country, Russia, and all divers other places is outlawed.

The subject of a Hitler or a Stalin is a serf by the mere fact that his money can be called in and depreciated at the whim of his rulers. That actually happened in Russia a few months ago, when the Russian people, holding cash, had to turn it in – 10 old rubles and receive back one new ruble.

I hold here a small packet of this second kind of money – printing press paper money – technically known as fiat money because its value is arbitrarily fixed by rulers or statute. The amount of this money in numerals is very large. This little packet amounts to CNC $680,000. It cost me $5 at regular exchange rates. I understand I got clipped on the deal. I could have gotten $2½ million if I had purchased in the black market. But you can readily see that this Chinese money, which is a fine grade of paper money, gives the individual who owns it no independence, because it has no redemptive value.

Under such conditions the individual citizen is deprived of freedom of movement. He is prevented from laying away purchasing power for the future. He becomes dependent upon the goodwill of the politicians for his daily bread. Unless he lives on land that will sustain him, freedom for him does not exist.

You have heard a lot of oratory on inflation from politicians in both parties. Actually that oratory and the inflation maneuvering around here are mostly sly efforts designed to lay the blame on the other party's doorstep. All our politicians regularly announce their intention to stop inflation. I believe I can show that until they move to restore your right to own gold that talk is hogwash.

Paper Systems End in Collapse

But first let me clear away a bit of underbrush. I will not take time to review the history of paper money experiments. So far as I can discover, paper money systems have always wound up with collapse and economic chaos.

Here somebody might like to interrupt and ask if we are not now on the gold standard. That is true, internationally, but not domestically. Even though there is a lot of gold buried down at Fort Knox, that gold is not subject to demand by American citizens. It could all be shipped out of this country without the people having any chance to prevent it. That is not probable in the near future, for a small trickle of gold is still coming in. But it can happen in the future. This gold is temporarily and theoretically partial security for our paper currency. But in reality it is not.

Also, currently, we are enjoying a large surplus in tax revenues, but this happy condition is only a phenomenon of postwar inflation and our global WPA. It cannot be relied upon as an accurate gauge of our financial condition. So we should disregard the current flush treasury in considering this problem.

From 1930-1946 your government went into the red every year and the debt steadily mounted. Various plans have been proposed to reverse this spiral of debt. One is that a fixed amount of tax revenue each year would go for debt reduction. Another is that Congress be prohibited by statute from appropriating more than anticipated revenues in peacetime. Still another is that 10% of the taxes be set aside each year for debt reduction.

All of these proposals look good. But they are unrealistic under our paper money system. They will not stand against postwar spending pressures. The accuracy of this conclusion has already been demonstrated.

The Budget and Paper Money

Under the streamlining Act passed by Congress in 1946, the Senate and the House were required to fix a maximum budget each year. In 1947 the Senate and the House could not reach an agreement on this maximum budget so that the law was ignored.

On March 4 this year the House and Senate agreed on a budget of $37½ billion. Appropriations already passed or on the docket will most certainly take expenditures past the $40 billion mark. The statute providing for a maximum budget has fallen by the wayside even in the first two years it has been operating and in a period of prosperity.

There is only one way that these spending pressures can be halted, and that is to restore the final decision on public spending to the producers of the nation. The producers of wealth – taxpayers – must regain their right to obtain gold in exchange for the fruits of their labor. This restoration would give the people the final say-so on governmental spending, and would enable wealth producers to control the issuance of paper money and bonds.

I do not ask you to accept this contention outright. But if you look at the political facts of life, I think you will agree that this action is the only genuine cure.

There is a parallel between business and politics which quickly illustrates the weakness in political control of money.

Each of you is in business to make profits. If your firm does not make profits, it goes out of business. If I were to bring a product to you and say, this item is splendid for your customers, but you would have to sell it without profit, or even at a loss that would put you out of business. – well, I would get thrown out of your office, perhaps politely, but certainly quickly. Your business must have profits.

In politics votes have a similar vital importance to an elected official. That situation is not ideal, but it exists, probably because generally no one gives up power willingly.

Perhaps you are right now saying to yourself: "That's just What I have always thought. The politicians are thinking of votes when they ought to think about the future of the country. What we need is a Congress with some 'guts.' If we elected a Congress with intestinal fortitude, it would stop the spending all right!"

I went to Washington with exactly that hope and belief. But I have had to discard it as unrealistic. Why?

Because an economy Congressman under our printingpress money system is in the position of a fireman running into a burning building with a hose that is not connected with the water plug. His courage may be commendable, but he is not hooked up right at the other end of the line. So it is now with a Congressman working for economy. There is no sustained hookup with the taxpayers to give him strength.

When the people's right to restrain public spending by demanding gold coin was taken from them, the automatic flow of strength from the grass-roots to enforce economy in Washington was disconnected. I'll come back to this later.

In January you heard the President's message to Congress. or at least you heard about it. It made Harry Hopkins, in memory, look like Old Scrooge himself. Truman's State of the Union message was "pie-in-thesky" for everybody except business. These promises were to be expected under our paper currency system. Why? Because his continuance in office depends upon pleasing a majority of the pressure groups.

Before you judge him too harshly for that performance, let us speculate on his thinking. Certainly he can persuade himself that the Republicans would do the same thing if they were In power. Already he has characterized our talk of economy as "just conversation." To date we have been proving him right. Neither the President nor the Republican Congress is under real compulsion to cut Federal spending. And so neither one does so, and the people are largely helpless.

But it was not always this way.

Before 1933 the people themselves had an effective way to demand economy. Before 1933, whenever the people became disturbed over Federal spending, they could go to the banks, redeem their paper currency in gold, and wait for common sense to return to Washington.

Raids on Treasury

That happened on various occasions and conditions sometimes became strained, but nothing occurred like the ultimate consequences of paper money inflation. Today Congress is constantly besieged by minority groups seeking benefits from the public treasury. Often these groups. control enough votes in many Congressional districts to change the outcome of elections. And so Congressmen find it difficult to persuade themselves not to give in to pressure groups. With no bad immediate consequence it becomes expedient to accede to a spending demand. The Treasury is seemingly inexhaustible. Besides the unorganized taxpayers back home may not notice this particular expenditure – and so it goes.

Let's take a quick look at just the payroll pressure elements. On June 30, 1932, there were 2,196,151 people receiving regular monthly checks from the Federal Treasury. On June 30, 1947, this number had risen to the fantastic total of 14,416,393 persons. This 14½ million figure does not include about 2 million receiving either unemployment benefits of soil conservation checks. However, It includes about 2 million GI's getting schooling or on-the-job-training. Excluding them, the total is about l2½ million or 500% more than in 1932. If each beneficiary accounted for four votes (and only half exhibited this payroll allegiance response) this group would account for 25 million votes, almost by itself enough votes to win any national election.

Besides these direct payroll voters, there are a large number of State, county and local employees whose compensation in part comes from Federal subsidies and grants-in-aid.

Then there are many other kinds of pressure groups. There are businesses that are being enriched by national defense spending and foreign handouts. These firms, because of the money they can spend on propaganda, may be the most dangerous of all.

If the Marshall Plan meant $100 million worth of profitable business for your firm, wouldn't you Invest a few thousands or so to successfully propagandize for the Marshall Plan? And if you were a foreign government, getting billions, perhaps you could persuade your prospective suppliers here to lend a hand in putting that deal through Congress.

Taxpayer the Forgotten Man

Far away from Congress is the real forgotten man, the taxpayer who foots the bill. He is in a different spot from the tax-eater or the business that makes millions from spending schemes. He cannot afford to spend his time trying to oppose Federal expenditures. He has to earn his own living and carry the burden of taxes as well.

But for most beneficiaries a Federal paycheck soon becomes vital in his life. He usually will spend his full energies if necessary to hang onto this income. The taxpayer is completely outmatched in such an unequal contest. Always heretofore he possessed an equalizer. If government finances weren't run according to his idea of soundness he had an individual right to protect himself by obtaining gold.

With a restoration of the gold standard, Congress would have to again resist handouts. That would work this way. If Congress seemed receptive to reckless spending schemes, depositors' demands over the country for gold would soon become serious. That alarm in turn would quickly be reflected in the halls of Congress. The legislators would learn from the banks back home and from the Treasury officials that confidence in the Treasury was endangered.

Congress would be forced to confront spending demands with firmness. The gold standard acted as a silent watchdog to prevent unlimited public spending. I have only briefly outlined the inability of Congress to resist spending pressures during periods of prosperity. What Congress would do when a depression comes is a question I leave to your imagination.

I have not time to portray the end of the road of all paper money experiments.

It is worse than just the high prices that you have heard about. Monetary chaos was followed in Germany by a Hitler; in Russia by all-out Bolshevism; and in other nations by more or less tyranny. It can take a nation to communism without external influences. Suppose the frugal savings of the humble people of America continue to deteriorate in the next 10 years as they have in the past 10 years? Some day the people will almost certainly flock to "a man on horseback" who says he will stop inflation by price-fixing, wage-fixing, and rationing. When currency loses its exchange value the processes of production and distribution are demoralized.

For example, we still have rent-fixing and rental housing remains a desperate situation.

For a long time shrewd people have been quietly hoarding tangibles in one way or another. Eventually, this individual movement into tangibles will become a general stampede unless corrective action comes soon.

Is Time Propitious

Most opponents of free coinage of gold admit that that restoration is essential, but claim the time is not propitious. Some argue that there would be a scramble for gold and our enormous gold reserves would soon be exhausted.

Actually this argument simply points up the case. If there is so little confidence in our currency that restoration of gold coin would cause our gold stocks to disappear, then we must act promptly.

The danger was recently highlighted by Mr. Allan Sproul, President of the Federal Reserve Bank of New York, who said:

"Without our support (the Federal Reserve System), under present conditions, almost any sale of government bonds, undertaken for whatever purpose, laudable or otherwise, would be likely to find an almost bottomless market on the first day support was withdrawn."

Our finances will never be brought into order until Congress is compelled to do so. Making our money redeemable in gold will create this compulsion. The paper money disease has been a pleasant habit thus far and will not he dropped voluntarily any more than a dope user will without a struggle give up narcotics. But in each case the end of the road is not a desirable prospect.

I can find no evidence to support a hope that our fiat paper money venture will fare better ultimately than such experiments in other lands. Because of our economic strength the paper money disease here may take many years to run its course.

But we can be approaching the critical stage. When that day arrives, our political rulers will probably find that foreign war and ruthless regimentation is the cunning alternative to domestic strife. That was the way out for the paper-money economy of Hitler and others. In these remarks I have only touched the high points of this problem. I hope that I have given you enough information to challenge you to make a serious study of it.

I warn you that politicians of both parties will oppose the restoration of gold, although they may outwardly seemingly favor it. Als o those elements here and abroad who are getting rich from the continued American inflation will oppose a return to sound money. You must be prepared to meet their opposition intelligently and vigorously. They have had 15 years of unbroken victory.

But, unless you are willing to surrender your children and your country to galloping inflation, war and slavery, then this cause demands your support. For if human liberty is to survive in America, we must win the battle to restore honest money.

There is no more important challenge facing us than this issue – the restoration of your freedom to secure gold in exchange for the fruits of your labors.

Thanks to David Stockman for pointing this out to me. Ed.

May 14, 2011

Howard Buffett was an Old Right libertarian congressman and businessman from Omaha, Nebraska. One of his aides was Murray Rothbard. His son is the oligarch Warren.

Copyright © 1948 The Commercial and Financial Chronicle

 
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Nixonomics at the New York Times

The sinking New York Times is running cover for the Federal Reserve.  Read this article to see him strip away the emperor's clothes.  I especially like the sections on Nixonomics.
 
The article appeared on LewRockwell.com: http://www.lewrockwell.com/north/north979.html
 

Nixonomics at the New York Times

by Gary North

Recently by Gary North: The Foundational Economic Myth of Our Era: 'Government Cured the Great Depression'

 

   

On August 15, 1971, a Sunday, President Nixon unilaterally suspended the last traces of the gold standard. He "closed the gold window" on his own authority. From that time on, no government or central bank has been able to exchange dollars for Treasury gold at a fixed price. Nixon broke the Bretton Woods agreement of 1944. He broke the nation's word. He cheated. That was his way. Ever since that day, American monetary policy has been Nixonomics.

Eight months earlier, he had announced his conversion to Keynesianism. This passage is from the amazingly good documentary on PBS, "Commanding Heights."

For one thing, whatever the effects of the Vietnam War on the national consensus in the 1960s, confidence had risen in the ability of government to manage the economy and to reach out to solve big social problems through such programs as the War on Poverty. Nixon shared in these beliefs, at least in part. "Now I am a Keynesian," he declared in January 1971 – leaving his aides to draft replies to the angry letters that flowed into the White House from conservative supporters. He introduced a Keynesian "full employment" budget, which provided for deficit spending to reduce unemployment.

If you think I am trying to tar and feather critics of the gold standard and defenders of Keynesian economics by connecting their ideas to a pragmatic, lying politician, then you're brighter than your brother-in-law thinks.

THE NEW YORK TIMES

It should come as no surprise that the premier mouthpiece of American Establishment official opinion, The New York Times, is hostile to the traditional gold coin standard or any state-guaranteed version of the gold standard.

The New York Times used to be called "the gold standard of journalism." But it was always a fiat standard. And like the fiat United States dollar, its value keeps sinking.

The gold coin standard places limits on a central bank's ability to create money out of nothing, meaning counterfeiting. This is why its critics hate it.

At the center of almost every national economy today is a central bank that has been granted the government-sanctioned authority to intervene in the financial sector on behalf of large multinational banks. In the city of over-leveraged multinational banks, the New York Times wants no limits placed on the ability of the Federal Reserve System to bail out over-leveraged multinational banks.

The Times is well aware of the fact that Ron Paul is most famous for his position, which is also his book's title, to end the FED. This position was considered crackpot, even within conservative political circles, prior to Paul's run for the Republican Party's nomination for President in late 2007. His was a well-timed candidacy. The economy went into a recession in December of 2007.

His stand against the FED spread rapidly in late 2008, after the FED and the U.S. government bailed out the biggest banks. The anti-FED genie is out of the bottle. Never before in America's post-1913 history has there been this much public opposition to the FED.

The Times can do nothing about this, other than to publish an occasional obligatory article that announces: "You know where we stand." Of course we know. We also know that the fiscally besieged Times is going bankrupt.

We know that its influence is fading, along with all print media. We know that there will not be enough paying online subscribers to offset the declining revenues from advertising, which the Times cannot command these days in the face of its declining readership.

So, for old Times sake, I offer my critique of its recent piece, "Be Careful Wishing for the Fed's End." That warning makes about as much sense to me as this one: "Be Careful Wishing for the Times' End." The author is the company's in-house financial columnist, Roger Lowenstein.

A CRISIS OF CONFIDENCE IN THE FED

Lowenstein leads off with one of the most heart-warming paragraphs of my intellectual life.

Ben S. Bernanke, the Federal Reserve chairman, faces a crisis of confidence. He is excoriated on the right for debasing the currency, and blasted on the left for failing to stimulate more than he has. It has gotten so bad that last week Mr. Bernanke, who prefers to discuss monetary policy with erudite professors like himself, submitted to the indignity of a news conference. Among the uninvited was Representative Ron Paul, who is flirting with a presidential run, and who, if he took office in 2013, would like nothing more than to celebrate the Fed's centennial by ... abolishing it.

Think about this paragraph. Never before in the FED's history has any chairman faced this kind of opposition.

And that got me to thinking: What if there were no Fed? Don't laugh; it has happened before. The United States had a primitive central bank, conceived by Alexander Hamilton, but President James Madison let its charter lapse in 1811.

Madison did nothing of the kind. By the terms of its incorporation, it automatically lapsed, and no President had any authority to keep it from lapsing.

Lowenstein does not mention that, during the long fight over the re-chartering of the Bank, Albert Gallatin, the Secretary of the Treasury, had favored the Bank's re-chartering from 1809 to 1811. At no time did Madison fire him or suggest that he did not speak for Madison on this issue. Madison had two years to do so; Gallatin repeatedly lobbied Congress for the renewed charter. In 1811, the vote to re-charter failed by one vote in the House. In the Senate, the vote was tied; Vice President Clinton voted against it. Therefore, Madison did not let the First Bank's charter lapse. Congress did, just barely. If Madison had publicly opposed the re-chartering, the votes would not have been close. But he kept silent. He let Gallatin speak for him. In 1816, Madison favored the creation of the Second Bank of the U.S. He signed it into law.

Having misled his readers regarding the First Bank of the United States, Lowenstein goes on to mislead them about the second Bank, i.e., Madison's Bank.

A second such bank became the target of President Andrew Jackson, who viewed it as a "hydra" and a "curse" upon the nation. Jackson sought to decertify the bank and, in 1836, succeeded. Never mind that the following year, the United States was plunged into a serious financial panic. The curse had been lifted, not to reappear for nearly a century.

Never mind? Here is what he wants his readers not to mind. The president of the Bank, Nicholas Biddle, filed for re-chartering in 1831, five years early. The election of 1832 was fought mainly over the re-chartering of the Bank. Jackson vetoed the bill to re-charter. Congress failed to override the veto. Jackson's Party had a smashing victory in November. The government ceased depositing funds in the Second Bank. Biddle's bank began calling in loans, to pressure Jackson to comply. This action failed. The panic of 1837 was the result of an expansion of fractional reserve banking at the state level, 1833-36, over which the U.S. government had no constitutional control.

If the U.S. government had simply refused to deposit tax receipts in the banks, calling in specie and holding it as "excess reserves," to use the nomenclature of today's Federal Reserve System, there would have been no boom or bust, 1833-37. This idea was well known. It was called the independent Treasury system.

There was an inflow of silver, 1833-37, because of the inflationary policies of Santa Anna's government. It was the result of Gresham's law: a fixed exchange rate on silver. This inflow had nothing to do with Jackson or the Second Bank. The monetary base grew. Reserve requirements were not raised by state banks, including the Bank of the United States, still run by Biddle. The problem was fractional reserve commercial banking, as always: the state-granted license to counterfeit money.

IF THERE WERE NO FEDERAL RESERVE

The Establishment can no more conceive of money without a central bank than it could conceive of television programming standards without the Federal Communications Commission in 1970 or airline ticket pricing without the Civil Aeronautics Board in 1977.

Established in 1913, the Fed was to be a banker to the nation's banks, controlling the money supply and, thus, the value of the currency. Without a Fed, someone else would have to handle these (and other) tasks of central banking.

Under the FED, there was monetary inflation in the World War I era, then the recession of 1920-21, and then the monetary inflation and bust of 1926-30, followed by the Great Depression. Stability? There was none.

"Money," observes the Fed historian Allan H. Meltzer, "does not take care of itself." But who else could regulate the value of money? And regulate its value in relation to what?

Why doesn't money "take care of itself"? Because governments want to control it. Contract law serves the other markets. Why not money? Why should money be under the control of a system of 12 privately owned banks that are under a government board?

In its founding days, the United States defined the dollar by an explicit weight of gold or silver.

No, it didn't. The dollar was always a silver standard. Then a price control with gold was set by the government, which led to Gresham's law. Sometimes gold would be in short supply, sometimes silver. That is what price controls produce: gluts and shortages.

During the first half of the 19th century, state-chartered banks issued notes, preferably backed by metal, that circulated much as dollar bills do today. But since these banks were private, and differed widely in their standards, their notes were accorded different values. In effect, the country had lots of "monies."

Exchange rates set the value of these notes, just as the free market does in the currency markets today. With computerization in our day, this is no problem. The government can set what currency it requires for tax payments. Gold would be a good choice. The government does not need to set currency ratios. It does not need to monopolize money. But politicians want to.

The United States moved to normalize the situation during the Civil War. It restricted the issuance of notes to more uniform, federally chartered banks, which were required to hold Treasury bonds (as well as gold) in reserve.

The government did this to gain more control over the money supply. It had suspended payment in gold in late 1861 – a violation of contract. Then it created "greenbacks" – unbacked paper money – in a wave of price inflation. The South did the same, only much worse. It was theft: first the suspension of specie payments, then from the people through inflation.

Should the Fed be interred, this abbreviated history provides some clues about alternatives. One solution would be for private banks to issue money – perhaps bearing the likeness of Jamie Dimon and the seal of his bank, JPMorgan Chase. Alternatively, the Treasury could do it.

Private agencies of all kinds could issue money. The market would decide which to use. Money tied to gold or silver would enjoy a great advantage. Banks do this now, but without being tied to gold. Their digits are money.

If the government ever does this, then hyperinflation is a sure thing. This would be greenback economics, which is always political and inflationary in modern times. On greenback economics, click here.

A GOLD STANDARD

As long as contracts are not violated, private money would work far better than the Federal Reserve's legalized counterfeiting does. Any firm could issue an IOU for gold or silver or platinum coins of a specific weight and fineness. Just be sure it has the metals in reserve.

But what will the money represent? Gold is the first obvious answer. James Grant, the newsletter writer, author and gold bug par excellence, asserts that gold money is superior to the "fiat" money of the Fed. By fiat, he means that it has value only because the Fed says it does. (Representative Paul, less diplomatically, refers to Federal Reserve notes as "counterfeits" and to the Fed as a price fixer.)

Grant is correct. Paul is correct. Fiat money is counterfeit money. Let the banks issue warehouse receipts 100% backed by gold. Contract law will take over. There will be a market for gold coins.

Let us interject that in any monetary system, some authority must fix either the price of money or the supply. McDonald's can either set the price of a hamburger and let the market consume the quantity it will – or, it can insist on selling a specified quantity, in which case consumer demand will determine the price.

I will not let "us" interject anything of the kind. There is no logic to it. Gold, silver, and platinum are limited by mining costs, but there is no fixed money supply. There never has been in man's history. The statement is conceptually ludicrous and historically ludicrous. No authority need fix either the supply or the price of anything.

The Fed has a similar choice with money. The Bernanke Fed, which is trying to stimulate the economy, regulates the price of money – the interest rate – presently 0.0 percent. Paul Volcker, who assumed command of the Fed in 1979, when inflation was rampant, chose the opposite tactic. Mr. Volcker provided a specific (and, dare I say, miserly) quantity of liquidity, letting interest rates go where the market directed – ultimately 20 percent. There is an element of arbitrary choice either way.

The element of arbitrary choice is the heart of the problem: it will eventually be misused. Central banking's cheerleaders want us to believe that wise, salaried bureaucrats should control the monetary base. There is a problem here: these bureaucrats then must let commercial bankers, speculators, and governments decide what the money is worth. They cannot determine this on their own authority.

The gold standard, in effect, replaces the Fed chief with the collective wisdom (or luck) of the mining industry. Rather than entrust the money supply to a guru or a professor, money is limited by the quantity of bullion.

He's got it! The private property rights system restricts the money supply, so that neither politicians nor central bank committees are in charge of our money. We can trust mining costs with greater confidence than politicians with badges and guns and a printing press.

The law in the early 20th century stipulated that dollars be backed 40 percent in gold. This fixed the dollar in relation to metal but not in relation to things, like shoes or yarn, that dollars could buy. This was because the quantity of bullion that banks had in reserve, relative to the size of the economy, fluctuated. As a historian noted, it was as if "the yardstick of value was 36 inches long in 1879 ... 46 inches in 1896, 13 and a half inches in 1920."

Whoever that unnamed historian was, he was an economic ignoramus. Money is not a measure. It is a social institution based on contract. The government wants to get control over it, so that it can create fiat money and thereby impose an inflation tax rather than tax voters directly.

The gold standard – which John Maynard Keynes termed a "barbarous relic" – led to ruinous deflations.

There have never been any ruinous deflations based on a contracting supply of gold. Gold's supply constantly increases, though slowly. There were many deflations based on fractional reserve banking – fiat money allowed to commercial bankers by the state – when the over-leveraged (over-counterfeited) banks got hit by bank runs.

When gold reserves contracted, so did the money supply. David Moss, a Harvard Business School professor, asserts that the United States experienced more banking panics in the years without a central bank than any other industrial nation, often when people feared for the quality of paper; specifically, it experienced them in 1837, 1839, 1857, 1873 and 1907.

States authorize commercial bank counterfeiting. The Constitution does not authorize the U.S. government to intervene to stop this practice. That is what federalism is all about. That is what the Tenth Amendment used to be about, before it was gutted by the Supreme Court.

THE CREATURE FROM JEKYLL ISLAND

The Establishment occasionally admits that the November 1910 meeting on Jekyll Island was a quiet gathering. But it was not a conspiracy. Not at all. The difference is this. . . There must be a difference. . . Anyway, it was all for the public's good.

The Fed was conceived to alleviate such crises; that is, to be "the lender of last resort." This function was fulfilled, ad hoc, by the financier J. P. Morgan in the panic of 1907. But Morgan was old, destined to die the year the Fed was created; some institution was needed. Hostility toward central banks, an American tradition, was such that in 1910, lawmakers and bankers convened at Jekyll Island, Ga. – under the ruse of going duck hunting – to sketch a blueprint.

The FED was conceived to bail out the big New York banks. It was justified as a tool to alleviate crises. And, yes, it was a conspiracy consummated on Jekyll Island by a group of bankers and Senator Nelson Aldrich, John D. Rockefeller, Jr.'s father-in-law.

Part of the aim of the new central bank was a more flexible money supply – for instance, to lend to farmers in the winter. Another was to lend into the teeth of a panic – though only to solvent institutions and on sound collateral. The insurance giant American International Group – a controversial bailout recipient in 2008 – would not have qualified.

AIG surely qualified in 2008. That is what "flexibility" is for: to bail out insiders.

Farmers in the winter. Right! As if the FED cared a whit about farmers, back then or now. Did the FED save farms in the 1920s? No. Did it save farm area banks, 1930-33? No. In any case, prices for grain adjust in winter. That is what pricing is for. That is also why interest rates change. Conditions change. You don't need counterfeiting to smooth out supply and demand based on seasons.

In its early days, the Fed maintained the gold standard – forcing it to maintain tight money even in 1931, in the midst of the Great Depression. Economists today regard this as a mistake.

This is Milton Friedman's misleading intellectual legacy. The FED did not tighten money, 1930-31. See the chart provided by a vice president of the St. Louis Federal Reserve Bank. The monetary base was flat.

Money shrank because 9,000 banks went under. That ceased in 1934, when the FDIC was set up. The FED had no authority or ability to save 9,000 banks.

The circumstances are relevant to those who envision a Fed-less future. England had departed from the gold standard; worried that the United States would follow suit, people demanded to trade dollars for gold. Professor Meltzer deduces that the gold standard doesn't work for one country alone; the bad paper money corrupts the good.

This is the ill-informed person's view of Gresham's law: that the free market rewards bad money. It doesn't. When there are government-imposed fixed exchange rates – price controls on money – the artificially overvalued money drives out the artificially undervalued money. In other words, price controls create gluts and shortages. Every economist knows this. Any economist who promotes Gresham's law without explaining this price control factor is trying to put the shuck on the rubes. Lowenstein is one of the rubes who got shucked.

AN ALTERNATIVE TO GOLD

Here is where Lowenstein lets his imagination soar.

An alternative to gold, and to the Fed, was suggested by Mr. Bernanke's hero, Milton Friedman: let a computer govern the money supply. John Taylor, a former Treasury official, has derived a formula, the Taylor Rule, which Fed policy often agrees with. Adopting the formula in a mechanical way would trim the deficit a bit, since the Fed could dismiss every one of its 200 economists. The problem with a formula (also its virtue) is its lack of flexibility. Alan S. Blinder, a former Fed vice chairman, notes that strict adherence to the Taylor Rule during the recent crisis would have mandated an interest rate of negative 5 percent. (That is, the economy was so weak, and people so unwilling to borrow money, the computer would have paid people 5 percent a year to accept it.) This being impractical, Mr. Bernanke was moved to improvise a remedy other than negative rates.

This is academic self-puffery. There is no Taylor rule at the FED. That is my point and Ron Paul's point. There are no rules. You know: "flexibility," as Lowenstein calls it. There is only ad-hockery, such as: (1) double the monetary base, (2) swap T-bills at face value for toxic assets held by large New York banks, and (3) lend billions to large foreign banks.

If the computer is out and the Fed shuttered, Professor Meltzer suggests that the dollar be backed by euros, pounds and yen (and, eventually, the renminbi). This new money would require that each of the financial powers commits to a targeted rate of inflation – say, 2 percent a year. People who didn't trust the dollar to maintain its value could trade them for euros. Now there's an idea that would delight the Tea Party – American money backed by France.

Professor Meltzer can say anything he wants. Nobody has to believe him. I surely don't.

The dollar is not backed by anything, and has not been ever since August 15, 1971, when Nixon without authorization suspended payments in gold to foreign central banks. Nixon was a petty tyrant, but here the Congress and business cheered. He imposed price and wage controls. More cheering. Ben Bernanke presides over Nixonomics, as have all subsequent chairmen of the Board of Governors of the FED. But no one in the Establishment wants to call the system what it really is: Nixonomics.

Actually, this system is not terribly different from today's. We have, indeed, fiat money, convertible into foreign exchange and regulated, not always successfully, with the intent of maintaining (or not too quickly depreciating) the dollar's purchasing power. And if money is a unit of value, it is hard to conceive of a yardstick better than purchasing power.

I see. A yardstick. This "yardstick" has shrunk by over 95% since 1914, the year the FED opened for business. You can check this with the inflation calculator of the Bureau of Labor Statistics.

But the Fed, thanks to an act of Congress in 1978, and perhaps to America's suspicious anti-central banking culture, has a dual mission – protecting the value of the dollar and promoting long-term growth and employment. In this, it differs (at least in degree) from Europe's and other central banks. In many ways, this mission creep – the Fed's expanded power and role in the economy – lies at the root of the animus that Americans feel for it.

This is not a dual mission. It is a dual public relations statement. Congress did not specify any numbers. The FED gets to make them up as it goes along . . . and does.

Banking purists would like, if not to abolish the institution, to return it to the job envisaged on Jekyll Island. They are, in a sense, the financial equivalent to strict constitutionalists. Nostalgia has its place, but so does pragmatism. Mr. Bernanke and his colleagues may be flawed, but democracy trusts in the power to elect, appoint and, if need be, remove. It is fine to lament their alleged excesses – for instance, the Fed's swollen balance sheet in the name of stimulation, or "quantitative easing." It is another to imagine that regulating the money could be as simple as it was in 1913, or that a formula, or a barbarous relic, could do the job.

CONCLUSION

In his view, defenders of the gold coin standard are quaint relics of the past, just as gold is. He writes: "They are, in a sense, the financial equivalent to strict constitutionalists. Nostalgia has its place, but so does pragmatism." So, adhering to the Constitution is nostalgia. So is the idea of a world without the creature from Jekyll Island.

What Lowenstein wants is pragmatism. You know: flexibility.

This is what every central banker always wants. Also, every dictator.

Richard Nixon surely wanted it.

It is what Ron Paul does not want. Neither do I.

End the FED.

May 7, 2011

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North

 
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Beware the Demon of Inflation.

The Mogambo Guru brings you some horrifying facts concerning price increases reported by several groups that tend to under-report such things.  You need solid high dividend stocks in your stock portfolio because the increase in consumer goods prices are higher than reported.  To get a better understanding of why read this article: http://bit.ly/CPILies
 
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Apr 1, 2011
Beware the Demon of Inflation
from The Daily Reckoning by The Mogambo Guru
The 5-Minute Forecast came to me in an email with the subject line reading “5-Minute Forecast – Everybody Panic.”

Naturally, as a guy who is always on the verge of panic because of the fact that all the monstrously excessive amounts of money that the Federal Reserve is creating will cause inflation in prices, this affected me greatly.

I assume this recommendation to panic is because the monetary base shot up by a whopping $90 billion last week as the Federal Reserve continues its insane over-creation of money so that it can monetize, through the year, a couple of trillion dollars or so in government deficit-spending over the next year, so as to try, try, try to spend our way out of bankrupting debt by creating more debt, to create more money for the government to borrow and spend, all of which will cause prices to rise, rise, rise, which I interpret to mean, “We’re Freaking Doomed (WFD)!”

Well, I was half right in my original conclusions, in that they noted that “Easy money is already having its affect in the US Wholesale prices, which trotted upward in December and January, reached a full gallop in February,” which is when “The producer price index (PPI) rose 1.6%.”

Gulp! This is the rise in prices in one month! And annualized, The 5 calculates it to be 19.2% inflation in prices!

And the bad news is that a 19.2% annual inflation is “for finished goods. If you move further back in the production chain, prices for crude goods rose 3.4% last month.”

My heart was racing at such horrific inflation news, and forcing myself not to start screaming, I instead concentrate on the positives involved here: they did not annualize a compounding 3.4% inflation, and gold and silver will be guaranteed to rise along with the general, roaring inflation, and they will rise even more with a Big Fat Kicker (BFK) from the general sense of panic in the economic/financial world when all those fiat-money chumps will be flooding, in a panic, into the relatively tiny gold and silver markets, bidding the prices of gold and silver to insane levels.

With a subsiding fear, I calmed down enough to read that they went on “And February was no fluke. PPI for crude goods has risen 20.7% over the last six months since February’s gain,” which is so easy to simplistically annualize by merely multiplying 20.7% inflation times 2 to get an annual inflation rate of 41.4% that I am, despite my best efforts, again in a full-fledged Mogambo State Of Panic (MSOP), feeling those familiar crushing pains in my chest and a racing, pounding heartbeat.

Like the kind of stabbing pains and numbness in my left arm I got when the Bureau of Labor Statistics (BLS) announced that the US consumer price index (CPI) rose 0.5% last month – which works out to inflation running at a fast 6% annual clip, and rising.

The Wall Street Journal reported it as, “Energy prices surged 3.4% during the month, while food prices jumped 0.6%.”

Without a soundtrack of kettledrums pounding “boom boom boom” and the sound of ravenous wolves howling close by to tip you off about the sense of terror here, you can still hardly repress a shudder when The Journal goes on, “Even though markets have cooled recently, the rise in commodity prices from recent months is expected to continue making its ways from producers to consumers.”

I love the next part, as it trots out some guy named Alan Levenson of T. Rowe Price saying, “If that holds, by summer this impulse toward higher monthly food-price gains should diminish somewhat,” which appears to mean that prices will keep rising, but not quite as fast for some reason that I cannot imagine, and this makes it OK.

And even with the prices of housing falling, the cost of home ownership (“measured as the cost of renting the home you own”) increased 0.6% y/o/y, which I assume means that although the value of houses is going down, water heaters still need replacing, the television needs updating and there is a leak in the roof over the kid’s head that she is whining about because the stain on the ceiling looks like a werewolf looking at her.

I reassuringly told her that it kind of looks like a werewolf, alright, but it’s better than resembling the horrible demon of inflation getting ready to eat us alive, gobbling the guts out of me, her, and everybody she loves, when prices rise so high because the evil Federal Reserve keeps creating more and more money to buy up government bonds so that the government can try to spend its way out of bankruptcy by going farther into bankruptcy.

“And besides,” I said, “Werewolves are mythical creatures, and don’t really exist, while the devouring demon of inflation is very, very real.”

So she said, “So it is better that it resembles a werewolf?”

I said, “Yes, it is! And even the horrible monster of inflation is easily defeated by merely buying gold and silver. So we are covered both ways, my little darling, so that neither werewolves nor the horrible Federal Reserve can harm us!”

That’s when I asked her, “Can you say ‘Whee! This investing stuff is easy!’”?

Reassured, she closed her eyes, her face radiant with a cute little smile as she said, in a voice almost a whisper, “Whee!” before she fell fast asleep.

The Mogambo Guru
for The Daily Reckoning
 
Link to original article: http://bit.ly/fl8CHD

Marc Faber says gold headed higher long term.

Swiss hedge fund manager, Marc Faber, says gold is going much high in the long run.  Central bankers around the world continue to print massive quantities of money.  All that money will be converted into the M1 measure of the money supply through the fractional reserve banking process.  I agree with him.  Therefore, you should have 20-30% of you net worth in precious metals.

I recommend that gold coins should make up 80% of your PMs and silver coins should make up the remaining 20%.

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INTERNATIONAL. Marc Faber the Swiss fund manager and Gloom Boom & Doom editor says it is a big error to print money because it rarely flows into the assets central banks aim to boost. He says more people have already sold their gold than have increased their positions and he doesn’t think gold is in a bubble.

Speaking from Mexico City to Matt Miller and Carol Massar on Bloomberg Television's "Street Smart" on Wednesday ahead of a speech titled "When everything else fails, policy makers can always be sure of immortality by making spectacular errors" Faber said: "A big error is to print money. I think it doesn't help in the long run. It can give a temporary boost to economic activity but it doesn't lead to sustained economic growth."

"In fact it creates a mispricing of assets and goods & services and has negative implications on the pricing mechanism," he added

Printing money is the easy part of it, knowing where it will flow to is trickier he noted, adding that money printing in the US hasn't flown into the assets the Federal Reserve wants to boost, namely housing. Instead it created other bubbles overseas and in commodities.

Does he expect further easing?

"For sure there will be QE3, but not right away", Faber said, suggesting the Fed would like to see a correction of up to 20% in equities and then" to have an excuse for QE3".

"My view is there will be QE3, QE4, QE5, QE6......until QE26, until the whole system breaks down," he said

Faber, who turned bearish shortly before the 2007-2009 bear market, says QE2 is fully discounted in the markets. He expects some seasonal strength in April, perhaps a new high, but then we will have a more "significant setback in May, June".

What would be the impact of the Fed stopping QE2 today on the market?

The market will go down,  however "the market is designed to go up and down. That is the purpose of having a market economy," he said.

He went on noting that the marginal impact of printing money diminishes, "so every times you need to print more money to push the markets higher".

Faber said the US economy is already out of control and he sees a need for every interest group in the US to make sacrifices.

In the latest edition of the Gloom Boom & Doom report he writes: A level-headed, knowledgeable, and intelligent American friend of mine (she has been buying gold for years) recently observed that, “Only when the American people insist that sound business practices and moral standards be brought back will we be able to give the people of this country a future.” Unfortunately, I believe that the ongoing moral decay among US politicians and the business elite, the irresponsible fiscal and monetary policies, the decline in educational standards and infrastructure, the trade and current account deficit, the weak US dollar, and the heavy- handed and ambiguous meddling in foreign affairs by US officials, are all pieces in a puzzle, which when assembled reads: Failed State.

Where would he suggest investors put their money at this point?

In general terms, Faber recommends real estate, equities, commodities and precious metals.

"An investor should have at least 25%-30% in precious metals," he suggested as he doesn't think the Fed will increase rates to a positive real rate.

Faber also warned precious metals could correct but remain poised to go much higher in the long run and suggested buying the dips.

"I think they [Precious Metals] could also correct," because the breakout in gold above the November-January high is not convincing, "but in the long run with Bernanke at the Fed and Mr. Obama maybe another six years at the White House, gold will go substantially higher," he said.

The price of spot gold for immediate delivery ended March at a new monthly-close record of US$1,439 per ounce at the London Fix.

Thursday saw the Spot Gold Price in Dollars complete its 9th quarterly gain in succession – the longest run since 1979 according to Bloomberg data.

Faber said the number of people owning gold is much lower than many believe.

"Calm down about everybody being long precious metals" he told the Bloomberg anchors. More people have already sold their gold than have increased their position.

"I don't think gold is in a bubble," he stressed.

In fact, "gold is very cheap in comparison to the money and the credit that has been created and in comparison to the size of financial assets in the world," Faber added.

The price of gold slumped 1.4% lunchtime Friday in London, falling back from its highest-ever monthly close as the Dollar jumped on news of stronger-than-expected US jobs hiring in March.

"What we have to see now is how gold fares in an environment of rising interest rates, where holding a non-yielding asset goes against you," reckons RBS commodity strategist Nick Moore, speaking to Reuters.

Note:  Dr Marc Faber was born in Zurich, Switzerland. He went to school in Geneva and Zurich and finished high school with the Matura. He studied Economics at the University of Zurich and, at the age of 24, obtained a PhD in Economics. Between 1970 and 1978, Dr Faber worked for White Weld & Co in New York, Zurich and Hong Kong.

Since 1973, he has lived in Asia. From 1978 to February 1990, he was the Managing Director of Drexel Burnham Lambert (HK). In June 1990, he set up his own business which acts as an investment advisor and fund manager.

In 2000 Faber decided to spend more time writing his newsletters as well as growing his advisory business. He moved back to his home in Chiang Mai, Thailand, maintaining only a small administrative office in Hong Kong.

Dr Faber publishes a widely read monthly investment newsletter 'The Gloom Boom & Doom Report'  which highlights unusual investment opportunities, and is the author of several books.

Link to original article: http://www.bi-me.com/main.php?id=51976&t=1&cg=4 

Why Interest Rates Will Rise. Why AGNC Will Lose.

Conditions are optimal for American Capital Agency Corp. (AGNC) to produce profits; however, those conditions are temporary.  The people who operate AGNC  are Keynesians.  Some of the senior officers used to work for Fannie Mae and/or Freddie Mac.  You must believe in the Keynesian mantra to work at those two government-sponsored enterprises.  Interest rates will rise and destroy AGNC's profitability.  Read the article from Gary North for a detailed explanation of why interest rates will rise.  This is the Austrian economics perspective.  Ignore it at your own peril if you own AGNC or any other mortgage REIT.

Why Interest Rates Will Rise.

by Gary North

Recently by Gary North: Milton Friedman's Contraption

 

  

The world is on a Keynesian spending spree. Western central banks are inflating as never before in peacetime. Western governments are running massive budget deficits.

The European Union in 1997 established a Stability and Growth Pact, which set guidelines for fiscal policy: an annual deficit of no more than 3% of GDP and a total government-debt-to-GDP ratio of no more than 60%.

The West is far beyond both limits. In a March 20 speech by a senior IMF official, we read the following.

In advanced economies, reducing unemployment is a priority. At the same time, however, public debt is piling up to unprecedented heights, creating worries in many advanced countries about fiscal sustainability. In fact, IMF analysis indicates that advanced economy fiscal deficits will average about 7 percent of GDP in 2011, and the average public debt ratio will exceed 100 percent of GDP for the first time since the end of World War II.

As is increasingly obvious, such a fiscal trend simply is not sustainable. While expansionary fiscal policy actions helped to save the global economy from a far deeper downturn, the fiscal fallout of the crisis must be addressed before it begins to impede the recovery, and to create new risks. The central challenge is to avert a potential future fiscal crisis, while at the same time create jobs and support social cohesion.

He is a standard Keynesian economist. He stated without qualification that "expansionary fiscal policy actions helped to save the global economy from a far deeper downturn." He assumed that his listeners would agree with him. This has been the Keynesian party line ever since 1936. It is not questioned. But now the acceptance of the Keynesian party line has removed all resistance to fiscal deficits on an unprecedented peacetime level.

"The central challenge is to avert a potential future fiscal crisis, while at the same time create jobs and support social cohesion." This is like saying, "Governments need to pursue policies of black and white – no gray." According to Keynesians, the fiscal crisis can be overcome by economic growth. But governments still pursue massive deficits, and central banks inflate. No Keynesian is willing to say, "Enough is enough. The economy is now on a path to self-sustained recovery. It is time to implement an exit strategy for both the deficits and monetary expansion." On the contrary, they call for extending the deficits. They praise the central banks' willingness to buy the IOUs of national governments.

The speaker was straightforward in his assessment of what must be done. The problem is, there is no major political party that will do this.

The immediate fiscal task among the advanced countries is to credibly reduce deficits and debts to sustainable levels, while remaining consistent with achieving the economy's long-term growth potential and reducing unemployment. Achieving the fiscal adjustment alone is no small task: The reduction in advanced economies' cyclically adjusted primary budget balance that will be needed to bring debt ratios back to their pre-crisis levels within the next two decades is very large – averaging around 8 percent of GDP – although there is considerable variation across countries. Large gross financing requirements – averaging over 25 percent of GDP both this year and next – only add to the urgency of creating credible medium-term fiscal adjustment plans.

Urgency? What urgency? There is no sense of urgency. The deficits climb, the debt-to-GDP ratios climb, and politicians show no sign of being willing to reverse this.

Low interest rates have saved Western economies from suffering serious restraints on fiscal policy. This will not last much longer, he thinks.

This combination of rising debt but stable debt service payments is not likely to continue for long, however. Higher deficits and debts – together with normalizing economic growth – sooner or later will lead to higher interest rates. Evidence suggests that an increase in the debt-to-GDP ratio of 10 percentage points is associated with a rise in long-term interest rates of 30 to 50 basis points.

He identified the #1 problem: spiraling costs for government-funded medicine. The problem is, this is politically untouchable. He knows this. He failed to mention it. Instead, he merely described it.

To be credible, any advanced economy fiscal consolidation strategy must deal with the cost of entitlements that are a if not the key driver of long-term spending pressures. Of course, health care-related spending reforms will have to form a central part of any budget strategy. New projections by IMF staff show that for advanced economies, public spending on health care alone is expected to rise on average by 3 percent of GDP over the next two decades. Thus, for any budget consolidation plan to be credible, it must deal with the reality of rising health care costs. Inevitably, successful reforms in this area will include effective spending controls, but also bottom-up reforms that will improve the efficiency of health care provision.

Credibility is as credibility does. Western governments are doing nothing to bring these deficits under control. By this standard, the promises and assurances of politicians in the West are incredible.

This is the elephant in the living room. An IMF official at least mentioned its presence. He of course offered no suggestions as to how the elephant should be removed, or who will attempt to remove it. That is for politicians to decide.

Politicians have decided to let the elephant occupy the living room indefinitely.

Voters are unaware of the problem. They think that this elephant can be dealt with. But elephants must be fed, and their waste must be removed. By whom?

MEDICARE

Medicare for years has been running a deficit. This deficit has been funded by the general fund. The trustees expect this to continue. But they offer hope. The system will not be busted until 2029. By "solvent," they mean that the Trustees will not run out of nonmarketable IOUs to sell back each year from the Treasury, which has to come up with the money to buy these IOUs, year by year.

The trustees also make a major assumption. The legislation of 2010 will reduce Medicare costs, as promised. This was the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 2010 (the "Affordable Care Act" or ACA).

Much of the projected improvement in Medicare finances is due to a provision of the ACA that reduces payment updates for most Medicare goods and services other than physicians services and drugs by measured total economy multifactor productivity growth, which is projected to increase at a 1.1 percent annual rate on average. This provision is premised on the assumption that productivity growth in the health care sector can match that in the economy overall, rather than lag behind as has been the case in the past. This report notes that achieving this objective for long periods of time may prove difficult, and will probably require that payment and health care delivery systems be made more efficient than they are currently.

Anyone who believes that passing that law is going to reduce Medicare costs probably also believes that the elephant in the living room will soon go away of his own accord. The trustees know better, so they covered their backsides: "This report notes that achieving this objective for long periods of time may prove difficult." May prove difficult! Indeed!

The handwriting is now on the wall, written in red ink. No one seems to notice. The king does not call for a modern-day Daniel to translate. The message is in a foreign tongue: digits. The king does not call in the accountants to translate, because he knows what they will say. The message is much the same as it was in Daniel's day: MENE, MENE, TEKEL UPHARSIN. TEKEL means the same: "You have been weighed in the balance and found wanting."

Any politician who openly says, "It's time to cut back on Medicare," will find himself out of a job after the next election. The insurance companies welcomed Medicare as a way to get high-risk oldsters off their rolls. They kick you off when you turn 65. They will not pay for anything that Medicare would pay for. You can stay on the rolls by paying high premiums, but you will not be paid.

There is no way to go back. The elephant will remain in the living room. He will grow. He will consume more. The pile of dropping will increase.

Everyone in high places knows how this will end: in default. No one is willing to say the form that the default will take.

Some think it will end in hyperinflation. But that does not end the program. It will still be there on the far side of T-bill repudiation.

Some think it will be the unwillingness of central banks to buy government debt. They will cease inflating That will cause Great Depression 2.

Some think the oldsters will finally be cut off and returned to their children for medical care. At today's Medicare costs, that will be $11,000 per year of added insurance fees, which private companies will refuse to insure for people with existing conditions.

Someone will pay to get the elephant out of the living room. The taxpayers will not bear the costs of Medicare indefinitely.

RE-THINKING KEYNES

John Maynard Keynes wrote in the depths of the worldwide depression. His most famous book was published in 1936: The General Theory of Employment, Interest and Money, soon captured the minds of younger economists. A decade later, Keynes died. At the time of his death, it was clear that his explanation of the Great Depression would become dominant.

In 1948, the first edition Paul Samuelson's Economics textbook appeared. It became the dominant textbook in the West. It was called neo-Keynesian. That is, it was only partially incoherent, unlike Keynes' General Theory, which is totally incoherent. (Skeptics who think I am exaggerating have either never read The General Theory or have spent years reading textbooks to prepare them to believe they understand The General Theory when they read it after they have received their Ph.Ds in economics.)

Keynes' publisher, Macmillan, had published Lionel Robbins' excellent book, The Great Depression, in 1934. It was short, readable, and theoretically accurate. It is online for free here.

In 1937, Macmillan published another book on the causes of the depression, Banking and the Business Cycle, by three economists. It is online for free here.

If these two books had carried the day in the economics profession, the West would be far richer today, if we assume that decisions made by private property owners are more efficient than decisions made by politicians and central bankers, none of whom can be held personally economically accountable for the outcome of their decisions. These two books were coherent, accurate, and committed to the free market. They are forgotten today. Were it not for the Mises Institute's program of online posting and physical reprinting of out-of-print books on free market, they would probably not be available.

The world's economists are allied to the politicians. They defend massive government deficits as necessary to avoid recessions and unemployment. But unemployment is higher than anything since the Great Depression. The policies have clearly failed. Nevertheless, apologists use the familiar argument from counter-factual history: the rate of unemployment would be much higher today if it had not been for the deficits and central bank inflation. This needs to be proven. They do not attempt to prove it.

The Keynesians have been given a free ride by non-Austrian School economists. While economists gripe about this or that minor technical detail about the deficits and the central bank inflation, there is no full-scale critique of these policies by mainstream economists. They have bet the farm on the positive outcome of the policies.

The rise of commodity prices testifies to a growing problem. Price inflation apart from energy and food has remained low. Energy and food prices are dismissed as irrelevant in the medium-term, because they are volatile. They go down, too. But when price categories do not go down, as these two have not ever since late 2008, the statisticians are supposed to incorporate them into their statistical model. Government statisticians are resisting this.

As the rise in prices forces a rise in interest rates, debt will become a major drain in consumer spending. Consumers respond to rising monthly expenditures by cutting back on borrowing. Governments do not. They call on the central bank to intervene and buy bonds with newly created money. This cannot go on much longer. The inflation premium in the bond market will increase.

Government is absorbing the savings of Americans. The sink holes that constitute the Federal government's constituencies will absorb the money that would otherwise have gone to finance businesses. Economic growth will slow. Then it will become contraction.

CONCLUSION

The IMF bureaucrat ended his speech with this.

In sum, there is no doubt that given the evolution of the recovery, countries are grappling with increasingly-complex and increasingly-diverse challenges. This is certainly true of fiscal policy. But to move toward a future of strong, sustainable, and balanced growth, these fiscal challenges need to be addressed urgently. The time for action is now.

Thank you for your attention.

The problem: no one in power is paying attention. The time for action is now, he said. Salaried economists have been saying this for years. But no one takes any action.

Government debts will increase until rates go up. Then lenders will still lend. Private capital will suffer. It will be crowded out at the governments' low rates.

The Federal Reserve System is buying most new Treasury debt today. The monetary base is rising. Monetary inflation is increasing. Price inflation is increasing. This is why interest rates will be going up.

If you are in debt for anything on a floating-rate basis, you are in trouble.

March 24, 2011

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North

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You Call It Inflation, I Call It Theft.

 This is an excellent article from Forbes by Bill Flax.  Tell your children the truth about inflation when they are ready to hear it.  Encourage them to save.  Saving is capital formation.  Teach them to be entreprenuers that serve customer's market needs and they will set for life.
 
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You Call It Inflation, I Call It Theft

Mar. 3 2011 - 5:05 pm | 5,977 views | 0 recommendations | 5 comments
IRS building on Constitution Avenue in Washing...

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On my daughter’s birthday, she received a crisp new $5 bill, which she promptly deposited in her piggy-bank. Never foregoing an opportunity to expound on free market principles, I warned about her susceptibility to a subtle means of theft even more devious than a burglar breaking in at night against whom you might get a clear shot.

Usually, when she asks why it’s, “Because I told you so!” But for inflation, because Washington wills it, that explanation hardly suffices. And as often as economic prognosticators prescribe currency debasement as some miraculous panacea, her question is a good one. Why do we suffer inflation?

I searched online for “benefits of inflation.”

Inflation Spurs Growth – The theory goes something like this: Since savers realize the value of their money will erode, they spend more quickly thus stimulating the economy. If we believe tomorrow brings higher prices, we buy today. Basically, we spend before the monetary authorities steal our money’s value. Hmm.

The proponents of consumption-based stimuli overlook the essentiality of saving. While burying your money in the ground wastes its talents, most save via bank accounts or through the purchase of capital assets. Thus saving makes investment capital available for new businesses hiring new workers and creating new products that sustain and beautify life. The accumulation of capital drives growth.

Inflation discourages saving. Inflation buries capital into the ground as people flee toward real estate as a protective hedge. Inflation stymies growth.

Inflation Decreases Debt Burdens – If we borrow say, $14 trillion and then cheapen our debt through dollar devaluation, the repaid lenders can’t buy as much thanks to diluted dollars being returned to them.  Inflation essentially harms savers for the benefit of borrowers. Every dollar borrowed requires a dollar saved. The economy gains nothing by such mischief.

Generally, borrowers aren’t responsible for this debauchery so it’s not fair to label it theft. In government’s case, dilapidated debts at least rise to the level of fraud. Why does Washington willfully reward the profligate by cheating the prudent? Ah yes, because they exude profligacy.

Inflation Increases Asset Values – As the dollar falls, the price of our assets raises commensurately. Stocks, real estate, etc. surge. That sounds wonderful, but their value increases against what? Since the prices for everything else rise too all we’ve secured is a nominal gain for tax collectors to confiscate. We derive no real benefit.

A stock that cost $20 thirty years ago would need to fetch over $50 today just to match the CPI, understated as it remains.  If it now costs $40, you pay the IRS on the $20 nominal gain even as your stock actually lost value.  Washington thus rewards itself for its own reckless monetary policy. The more they inflate, the more they take.

A similar phenomenon nails your wages. As your salary increases, you pay more taxes even as you can afford less. A two percent raise increases your tax bill two percent, but if prices also rise only the IRS derives any benefit.

Inflation Offsets Unemployment – The Philips Curve, the illusion that increasing inflation decreases unemployment, remains a staple of macroeconomics even as few still publicly acknowledge its role. Bernanke, Geithner et al remain smitten by the Philips Curve.

To succeed, this essentially entails deceiving workers. Since the price of labor, your wage, is less elastic than many other costs, businesses can raise prices quicker than can employees increase their salary demands. As businesses raise prices to cope with inflation, the cost of labor proportionally lowers. Thus, in Keynesian theory, more workers can be hired as inflation dilutes your pay.

Remember this when you hear some self-proclaimed friend of the working man imploring that we accept inflation as a means to expand employment. They peddle pay cuts for workers in real terms versus free marketers who promote wealth generating growth. Growth affords higher living standards for all. Inflation silently erodes living standards.

Inflation Promotes Exports – While few non-economists still accept the Philips Curve, the crowd espousing inflation as a facilitator of exports proves more enduring. Exporters love dollar debasement.

In theory, if the dollar falls then anything priced in dollars becomes cheaper for someone holding say, euros. But the dollar and the euro are merely measuring sticks. The underlying transaction involves trading our goods. Currency is a tool; a ticket of exchange. Currency simplifies trading relative to bartering. You may not want my output, but you definitely want my dollar so that you can acquire what you do want.

For illustrative purposes only, ignoring taxes, regulatory burdens, and transportation costs or differing local tastes, if the dollar equals the euro and it takes a dollar to buy a dozen eggs then it too will take a euro to buy those eggs.  Purchasing price parity.

But as the dollar plummets, a euro is now worth more. Thus it takes more dollars to buy eggs, but it still takes but one euro. Domestic eggs didn’t become cheaper in euros. This isn’t some mysterious or complicated economic theory or even subject to debate. It’s elementary school mathematics: the transitive property. If A equals B and B equals C then A too must equal C. Making A not equal B doesn’t change the value of C.

Markets are not perfect and as well as the arbitragers perform, timing differences remain. Gutting the dollar never makes eggs cheaper in euros other than timing discrepancies, which can make or break producers. Firms whose inputs are denominated in one currency and their outputs in another frequently get jilted.

As the dust settles, things must balance, but if you bought a dozen eggs yesterday in dollars to sell them tomorrow in Euros, the dollar’s lack of certainty promotes intrigue. Inflation wobbles the scale hindering international commerce.

When parties trade of their own volition, by mutual consent and to mutual advantage, both expect to gain and both should, assuming an honest scale. When Washington deliberately engineers a false balance, the likelihood that someone gets harmed rises dramatically. Cheating your trading partners can win the day, but isn’t a successful long term strategy.

Like the Philips Curve, promoting exports by debasing the currency effectively pokes the pendulum. The inflation driven exhilaration proves fleeting as the pendulum swings back like a wrecking ball. Some latch onto the pendulum as it soars higher, but others get whacked as it returns.

Inflation is deceitful and ineffective. It swindles savers, fleeces lenders, pumps taxes higher and triggers malinvestment. It doesn’t reduce unemployment; it whittles away your wage. Nor does inflation promote exports, but it does make international trade more frightening.

If inflation succeeded, it would be merely dishonest. But as history proves, it never works. Neither Bush, nor Obama’s weak dollar policies did anything to alleviate the overblown “trade deficit” and much to undermine growth. There is no evidence that inflation fosters exports or employment.

As Washington plunders the value of our property and expropriates the product of our labor, inflation reduces us to servitude. Debasement is a despicable ploy the government uses to rob you blind. Period.

So what do I tell my children?

Link to original article: http://blogs.forbes.com/billflax/2011/03/03/you-call-it-inflation-i-call-it-theft/