Category Archives: Currency and Monetary Policy

The Inflation Won’t Come From The Fed

Everyone knows the Fed is pushing Quantitative Easing. By that, it means that when America is having trouble selling T-bills at advantageous interest rates, the Fed prints up some money to keep demand. It buys the bonds with newly-printed money. The recent run was $600B or so, and the Fed’s current balance sheet holds about $2.7T in assets (that they can choose to hold as long as they find prudent — since they print the money to keep them and/or roll them over).

But what if I told you that there was another $11T of outstanding US dollars* out there in the world, and that everyone except the US has a say in whether they are circulated. In fact, that those dollars are sitting on foreign soil is a very good thing for the US and has been for decades, but it’s not assured it will last forever. As I said WAAAY back in 2007:

As I’ve pointed out in the past, the dollar’s status as a reserve currency has largely allowed America to inflate with very little visible burden on our own citizens. We create worthless money, use it to buy durable goods from other countries, and watch as they hold that money or reinvest it in the sinkhole that are Treasury bonds. It’s a credit card on the world, and we can print whatever we need to pay it off…

…as long as they don’t wise up. If they do, suddenly that money might come back to us, and we’ll feel the results of the inflation we’ve engaged upon.

Inflation benefits those who see the money first — in this case, Americans who used that money to buy durable goods from overseas. It has the least benefit for those who see the money last. To date, that has been forex reserves, sovereign wealth funds, etc. But should those foreign nations decide they no longer want to hold US dollars, they’ll spend them right back into circulation — and they’ll eventually want us to sell them goods in exchange for those dollars.

If that happens, the inflation comes full circle and we feel it right here at home — without the Fed ever releasing the $2.7T they have on their balance sheet.

We’ve spent the last four decades, ever since Nixon “closed the gold window”, sending dollars abroad to other nations who stick them under their mattresses. This has been the persistent trade deficit we’ve held. Sure, some of those dollars came back to be lent to our own government to finance even MORE spending that didn’t come from the American people, but much of them quite literally got shoved under the mattress.

What happens if they want to spend those dollars? Well, dollar-denominated assets and goods produced in the US will rise in price. Oil, gold, silver, food (produced in the US), etc. Look at gold, for example: In the last year, gold has increased in dollar terms by over 32%, but by less than 8% in Swiss francs. USD vs other currencies show similar (but smaller) gaps. What can explain this? Well, if nothing else, that big buyers like China and India are using their dollar surplus, rather than their reserves in other currencies, to buy gold.

Where’s the endgame if this dollar-spending widens? Well, eventually those dollars are sold to people who don’t want to buy goods from China or US T-Bills: they want to buy US exports or US assets. That sounds good, of course; everyone likes exports! But is it good? Restate it this way: a durable good (i.e. product of American workers’ output) needs to be produced to leave our shores, and it increases the circulating money supply in the USA. The good we produce here is enjoyed elsewhere, while the increased money supply makes our own goods at home more expensive.

We change from trading our paper for other nations’ hard work to trading our hard work for our own paper back.

The endgame is the end of trade deficits, where we work harder as a nation to supply the rest of the world with goods in exchange for a lower standard of living here. That doesn’t sound good to me at all.

America has enjoyed a very privileged position in the world, and that position has only been possible from two things: other nations have trusted us and they’ve had no other options. The first is eroding to the point where they’re looking for the second. If we want to continue enjoying our position in the world, we need to convince the rest of the world that holding the US Dollar as a reserve currency benefits them — and neither trillion Dollar deficits as far as the eye can see or quantitative easing accomplish that.

When the inflation comes, it’s not going to be the Fed printing money — it’s going to be other nations sending us the money printed over four decades and expecting to buy something with it.
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Quote Of The Day

I posted yesterday about Bernard von Nothaus of the Liberty Dollar being convicted. I definitely think the fact support a guilty verdict on the charge of “issuing and passing Liberty Dollar coins intended for use as current money”, but some of the others seem quite a bit ridiculous, such as “conspiracy against the United States”. I think this was more fraudulent than conspiratorial…

…but it appears that the US Attorney doesn’t agree. She seems to think this is a lot more important than the rest of us… And what she says here [on the FBI press release, no less] is chilling:

“Attempts to undermine the legitimate currency of this country are simply a unique form of domestic terrorism,” U.S. Attorney Tompkins said in announcing the verdict. “While these forms of anti-government activities do not involve violence, they are every bit as insidious and represent a clear and present danger to the economic stability of this country,” she added. “We are determined to meet these threats through infiltration, disruption, and dismantling of organizations which seek to challenge the legitimacy of our democratic form of government.”

Really, Anne? Really? You’re going to throw around terms like “domestic terrorism” over this? For as much as I disagree with what von Nothaus was doing — profiting off of those who feel your fiat currency, backed by nothing more than a promise, is on the verge of a potential collapse — he wouldn’t have such a big market to sell to if the Fed wasn’t doing everything in its power to undermine the legitimacy of the US Dollar every day.

Every day the government’s inflationary policies erode the value of the US Dollar, stealing the wealth of people who have worked their butts off to earn those Dollars. While I think what von Nothaus was doing was fraudulent, I think I’m beginning to agree with those who have used the old adage to explain why you chose to go after him: “Don’t steal. The government hates competition.”

Liberty Dollar Founder Reportedly Convicted

Hard to believe it was over three years ago, but may of us in the libertarian movement will remember the seizure of the Liberty Dollar holdings/equipment/etc. For those new to the movement, the Liberty Dollar was a metal-backed currency presented as an alternative to traditional fiat currencies, but unlike Gold/Silver Eagles, or Krugerrands, or gold/silver bullion, was actually intended to be used and spent and traded as money in exchange for goods. It attracted the attention of libertarians and goldbugs, and earned a bit of national visibility when it set to release Ron Paul versions of one of the popular gold coins.

Let me state, first and foremost, that I am not a fan of the Federal Reserve, or of fiat money. I fully support the right of the people of the US to use and circulate alternative currencies. I enjoy the fact that some of those currencies would be backed by precious metals. But I incurred quite a firestorm of comments here after the raid, when I explained that I thought the government was right. While I support alternative currencies, and would love the Liberty Dollar to have been one, I claimed it was NOT an alternative currency:

A competing currency must not be interchangeable with FRN’s, which is the fiction that the Liberty Dollar creators try to uphold. Thus, the ALD becomes a method for them to sell silver at a profit while their associates or merchants work to defraud businesses by offering silver worth less (in FRN terms) for goods that are priced in FRN terms. At each level, it appears to have a cut of profit, as all multi-level marketing schemes do, and at the bottom of the scale, those who receive ALD’s as a “face value” equivalent to FRN’s are being shafted.

The Liberty Dollar does not seem to live up to what is bills itself as. If it were a true competing currency, merchants would price goods in ALD terms higher than in FRN terms, in order to receive identical value for their wares. If it were a true competing currency, the “exchange rate” between ALD’s and FRN’s would float, rather than be defined by the Liberty Dollar creators. I previously have written favorably about the Liberty Dollar, but given new information, I have changed my mind. It does not fit the bill of an alternative currency; it is a scam.

After three years of legal wrangling, it was announced today that the founder of the Liberty Dollar, Bernard von Nothaus, has been convicted on all four counts.

The crux of the government’s case rests pretty much on this, care of Coin World magazine [emphasis added]:

The federal government alleges that Von NotHaus, with three other defendants, worked together to violate the law by making Liberty Dollars the government characterizes as “coins” of silver “intended for use as current money” and “in resemblance of genuine coins of the United States …”

U.S. Assistant Prosecutor Craig Morenao, in opening statements, said the government would set out to prove that von NotHaus deliberately told people to give Liberty Dollars as change for Federal Reserve notes, in direct violation of laws that specifically prohibit the use of passing originally designed coins as current money.

It seems pretty clear that this is not counterfeiting in the *traditional* sense, where you try to copy the direct design. But given that everything I had seen from the website, marketing materials, etc suggested that the ALD should be spent at parity with federal reserve notes, and given to vendors in place of or given to consumers as change in place of federal reserve notes is problematic. Creating a currency to be spent alongside in competition with the US Dollar is one thing — creating a currency to be spent as a US Dollar equivalent is another.

I feel moderately bad for those who got sucked in to the Liberty Dollar system. But overall, I feel worse for anyone who would have the goal to create a *true* alternative currency, because the actions of Bernard von Nothaus have given the very concept a bad name, and imbued the idea of alternative currencies with fear of government prosecution. All this for what was just a scam to get rich fleecing people who distrust government fiat money.

Hat Tip: Reason

Open Thread: Successes and Setbacks for Liberty in 2010/Hopes for 2011

Was 2010 a good year or bad year for liberty and why? Like most of you will likely respond, 2010 was very much a mixed bag IMHO.

On the positive side, the mandate section of ObamaCare was found unconstitutional, the military’s “Don’t Ask, Don’t Tell” policy was repealed, Wikileaks exposed the federal government for the corrupt organization it is, the Democrats took a beating on election day, and the Bush era tax cuts were extended (though with the return of the death tax, extension of unemployment benefits, and other compromises in the bill, I’m not yet sure if this was a good or bad thing).

On the other hand, Republicans gained ground on election day (I’m not optimistic that they have changed much since the last time they ran things), the vast majority of incumbents in both parties were easily reelected, government spending is way out of control, the Fed wants to pump some $600 billion into the economy by printing more counterfeit money, unconstitutional invasive searches continue to take place at airports in the name of safety, both Democrat and Republican politicians consider Wikileaks to be a “terrorist” organization, and President Obama believes he can assassinate American citizens where they stand with no due process whatsoever.

On the criminal justice front, The Innocence Network (part of The Innocence Project) exonerated 29 individuals in 2010 for crimes they did not commit. Back in March, Hank Skinner came within an hour of being executed when SCOTUS halted the process. Skinner’s case continues to wind its way through the courts. In other death penalty news of 2010, Kevin Keith’s death sentence was commuted to life by Gov. Strickland, Anthony Graves became the 12th death row inmate to be exonerated in Texas, a key DNA sample was determined to not be a match for another Texas man, Claude Jones who was executed in 2000, and Texas continues to stonewall inquiries into the likely wrongful 2004 execution of Cameron Todd Willingham. As these questionable death penalty cases pile up, hopefully this will be the beginning of the end of the death penalty in Texas and elsewhere.

In a couple of other cases we never quite got around to at The Liberty Papers but deserve to be mentioned: Cory Maye was granted a new trial by the Mississippi Supreme Court because the trial judge failed to give jury instructions to consider a “defense of others” defense and in Arkansas, the Arkansas Supreme Court ordered a new hearing for the so-called “West Memphis 3” to consider newly discovered DNA evidence and juror misconduct from the original trial (if you are not familiar with this case, I urge you to follow this link as a starting point. The more I have looked into this case the more disturbing I find it to be…a perfect example of what is so terribly wrong with the system).

Hopes for 2011
Rather than offering predictions for 2011, here are some of my hopes:

– I hope that the justice will be served in the above cases.

-I hope I am wrong about the Tea Party Republicans and that they will actually be a force of positive change for more liberty and smaller government

-I hope that Ron Paul decides not to run for president for the 2012 campaign but instead puts his support behind former New Mexico Gov. Gary Johnson (I’ll get into my reasoning in a future post).

-I hope by this time next year, I’ll have far more successes than setbacks for liberty to report.

Now it’s your turn. How do you feel about the state of liberty in 2010 and how do you feel about the year ahead?

Yaknow, I was going to write something about this, now I don’t have to

I am a cynically romantic optimistic pessimist. I am neither liberal, nor conservative. I am a (somewhat disgruntled) muscular minarchist… something like a constructive anarchist.

Basically what that means, is that I believe, all things being equal, responsible adults should be able to do whatever the hell they want to do, so long as nobody’s getting hurt, who isn’t paying extra

Quote Of The Day

Those of us who predicted lenders would avoid US Treasuries during the financial meltdown we initially somewhat surprised to see investors flocking to them. It’s the result of a supposed “flight to quality”, and nothing at the time seemed less risky than buying US Treasury bonds, since the Treasury sells its bonds in a currency it can print.

Well, that has changed, as represented by yields:

The bond market is saying that it’s safer to lend to Warren Buffett than Barack Obama.

When it’s “safer” to lend to a corporate businessman who can’t print his own currency or extort his subjects citizens for more tax dollars, you know something serious is going down.

Berkshire Hathaway, P&G, Johnson & Johnson, and Lowe’s are all trading below similar maturity US T-bills, a situation the linked article calls “exceedingly rare”.

But don’t worry, mere citizen. I’m sure Obama’s working on an individual mandate to get you to “do your part” and invest in Treasury bonds.

Hat Tip: QandO

UPDATE: Looks like yields are continuing to rise.

LP’s Wes Benedict on ‘Limited Government’ Conservatives

Those of us who truly believe in limited government* tend to be simultaneously amused and irritated hearing the folks at CPAC speak of limited government as though it’s a principle they truly support. Yesterday, the Libertarian Party’s Executive Director Wes Benedict, monitoring the CPAC festivities from afar, said some of the things that many of us have been thinking:

Unlike libertarians, most conservatives simply don’t want small government. They want their own version of big government. Of course, they have done a pretty good job of fooling American voters for decades by repeating the phrases “limited government” and “small government” like a hypnotic chant.

It’s interesting that conservatives only notice “big government” when it’s something their political enemies want. When conservatives want it, apparently it doesn’t count.

– If a conservative wants a trillion-dollar foreign war, that doesn’t count.

– If a conservative wants a 700-billion-dollar bank bailout, that doesn’t count.

– If a conservative wants to spend billions fighting a needless and destructive War on Drugs, that doesn’t count.

– If a conservative wants to spend billions building border fences, that doesn’t count.

– If a conservative wants to “protect” the huge, unjust, and terribly inefficient Social Security and Medicare programs, that doesn’t count.

– If a conservative wants billions in farm subsidies, that doesn’t count.

It’s truly amazing how many things “don’t count.”

Benedict went on to point out the lack of concern these same people had with the government expansion of President Bush and the health care mandates of another CPAC favorite – Mitt Romney.

While I’m by no means a supporter of the Obama Administration, the idea that many Conservatives seem to have that all the problems we are faced with started on January 20, 2009 is completely ludicrous**.

These are the same people who would gladly support Sarah ‘the Quitter’ Palin, ‘Mandate’ Mitt Romney, or ‘Tax Hike Mike’ Huckabee – none are what I would call ‘limited government’ by any stretch of the imagination.

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Conspiracy Theory Of The Day

Goldbugs have long-believed that central banks try to manipulate the price of gold, i.e. dumping gold onto the market at certain times to keep the price down, then slowly re-acquiring it after the spike passes, etc. But in an era where the goldbugs are predicting $2000/oz and higher (I’ve seen predictions of $5000/oz), I don’t think the central banks have enough gold in their vaults to blunt that rise — and even worse, if they made a concerted effort to dump it, that very signal would push prices through the roof. Even worse, it’s a prisoner’s dilemma. The central banks are helped if they all dump the gold, but if one goes rogue and starts buying it all up, it ruins the plan for all of them.

So no, the central banks can’t just dump their gold onto the market. Yet they have serious fears that the public senses the inflationary forces in the world and are looking for a hedge. And they REALLY don’t want the gold price to spike and fuel those fears.

So what if they created a scare in the gold market about purity? Instead of giving people trust in their own currencies, what if they tried to impugn trust in the ability to buy real gold?

The initial discovery was something like four gold bars, which the Hong Kong bankers drilled invasively to test the contents. Reminds me of drilling the earth and measuring how many grams of gold per tonne. The HK bankers hoped to have 99% gold yield in their drill program for the resident bars. They found something like 1% instead and 99% tungsten. By the way, tungsten sells for less than $70 per ton, which makes its swaps for gold to be 60x more profitable than silver bar swaps. Another handy usage for the Gold/Silver ratio in calculations. The hunt was on. Now not a single assayer on the planet is available, as all are tied up. They have been commissioned to test the gold bars shipped from the United States of Fraudulent Banker America in their own bullion vaults. They use basic methods of four drill holes with direct assay of shavings, but also less invasive methods like electro-magnetic waves to examine the metal lattice structure. When highest level methods are needed, they turn to mass spectrometry. NOW ALMOST NO GOLD BARS WILL LEAVE THE LONDON OR NEW YORK METALS EXCHANGES WITHOUT SOME AUTHENTICATION, AS DISTRUST IS WIDESPREAD.

Think, for a second, what a diabolical scheme this would be, if perpetrated by central banks.

In a move they can blame on simple counterfeiters (trying to pass off the tungsten as if it were gold at a huge profit), they can paralyze the entire gold market in a fear that if you buy gold, it won’t be real. They can try to destroy demand for gold in such a way that — if undiscovered — would never be traced to them. All this while keeping all their gold safely in their vaults and devaluing their fiat currencies.

Now, I’m not going to up and claim that such a scheme is being perpetrated. But would you put it past the central bankers, a group of people desperate to keep faith in their own fiat currencies — since faith is the only thing that backs them?

National Debt Tops $ 12,000,000,000,000

Just 247 days after topping $ 11 trillion and 414 days since passing the $ 10 trillion mark, America’s national debt is now above the eye-popping level of twelve trillion dollars:

It’s another record-high for the U.S. National Debt which today topped the $12-trillion mark. Divided evenly among the U.S. population, it amounts to $38,974.34 for every man, woman and child.

Technically, the debt hit the new high yesterday, but it was posted on the Treasury Department website just after 3:00 p.m. ET today. The exact calculation of the debt is a 16-digit tongue-twister and red-ink tsunami: $12,031,299,186,290.07

This latest milestone in the ever-rising journey of the National Debt comes less than eight months after it hit $11 trillion for the first time. The latest high-point is not unexpected, considering the federal deficit for the just-ended 2009 fiscal year hit an all-time high at $1.42-trillion – more than triple the previous year’s record high.

Much of the increase in the deficit and debt is attributed to government spending outpacing revenue – both exacerbated by the recession and the government response to it – including hundreds of billions in bailouts and stimulus spending and tax cuts along with decreased tax revenues due to rising unemployment.

In recent days, President Obama has spoken of the need to bring the rising deficit and debt under control.

“I intend to take serious steps to reduce America’s long-term deficit – because debt-driven growth cannot fuel America’s long-term prosperity,” he said in remarks prepared for delivery to the leader’s meeting last Sunday at the Asia Pacific Economic Cooperation summit.

The National Debt has increased about $1.6 trillion on Mr. Obama’s watch, though less than $4.9 trillion run up during the presidency of George W. Bush.

Of course, Obama has only been in office ten months, not eight years.

Since Barack Obama took the Oath of Office, the national debt has increased from $ 10,626,877,048,913.08 to $ 12,031,299,186,290.07. That’s an increase of $ 1,404,422,137,376.99 over 302 days, or $ 4,650,404,428.40 per day, $ 193,766,851.18 per hour, $ 3,229,447.52 per minute, and $ 53,824.13 per second.

Anyone want to bet how long it will take to get to $ 13 trillion ?

My guess is August 15, 2010.

Ludwig Von Mises Finally Getting Some Of The Respect He Deserves

von_mises

When Ludwig von Mises first arrived in the United States after escaping from Nazi Europe, and pretty much up until the present day, he was essentially ignored by the mainstream economics community in the United States. It was only through the assistance of American businessmen that he was able to get a job teaching at New York University, and, even then, the work he did had nothing to do with official university activities because he was, effectively, shunned for his uncompromising defense of the free-market.

Earlier this week in The Wall Street Journal, though, Mises is given credit for being one of the few economists in the 1920s to foresee the impending Great Depression:

Mises’s ideas on business cycles were spelled out in his 1912 tome “Theorie des Geldes und der Umlaufsmittel” (“The Theory of Money and Credit”). Not surprisingly few people noticed, as it was published only in German and wasn’t exactly a beach read at that.

Taking his cue from David Hume and David Ricardo, Mises explained how the banking system was endowed with the singular ability to expand credit and with it the money supply, and how this was magnified by government intervention. Left alone, interest rates would adjust such that only the amount of credit would be used as is voluntarily supplied and demanded. But when credit is force-fed beyond that (call it a credit gavage), grotesque things start to happen.

Government-imposed expansion of bank credit distorts our “time preferences,” or our desire for saving versus consumption. Government-imposed interest rates artificially below rates demanded by savers leads to increased borrowing and capital investment beyond what savers will provide. This causes temporarily higher employment, wages and consumption.

Ordinarily, any random spikes in credit would be quickly absorbed by the system—the pricing errors corrected, the half-baked investments liquidated, like a supple tree yielding to the wind and then returning. But when the government holds rates artificially low in order to feed ever higher capital investment in otherwise unsound, unsustainable businesses, it creates the conditions for a crash. Everyone looks smart for a while, but eventually the whole monstrosity collapses under its own weight through a credit contraction or, worse, a banking collapse.

The system is dramatically susceptible to errors, both on the policy side and on the entrepreneurial side. Government expansion of credit takes a system otherwise capable of adjustment and resilience and transforms it into one with tremendous cyclical volatility.

(…)

We all know what happened next. Pretty much right out of Mises’s script, overleveraged banks (including Kreditanstalt) collapsed, businesses collapsed, employment collapsed. The brittle tree snapped. Following Mises’s logic, was this a failure of capitalism, or a failure of hubris?

Mises’s solution follows logically from his warnings. You can’t fix what’s broken by breaking it yet again. Stop the credit gavage. Stop inflating. Don’t encourage consumption, but rather encourage saving and the repayment of debt. Let all the lame businesses fail—no bailouts. (You see where I’m going with this.) The distortions must be removed or else the precipice from which the system will inevitably fall will simply grow higher and higher.

That was Mises’ argument in The Theory Of Money And Credit, but he did so much more than that. In Socialism, first published in 1921, Mises laid out in detail the reasons why the centrally planned economy of nations like the USSR could never produce a rational economy and were doomed to failure. He was, of course, proven right in that regard as we learned only twenty years ago. Mises’ magnum opus is Human Action: A Treatise on Economics and while it’s not easy reading it is well worth consuming for even the amateur student of economics.

Here’s hoping people will start taking Mises’ lessons to heart before we make the same mistakes all over again.

Babs Boxer Will Do Anything For Re-Election: Even Cosponsor S.604!

Back in July, I sent letters to Barbara Boxer and Dianne Feinstein urging them to support or even cosponsor S.604, the Audit-The-Fed bill. I received the typical mealy-mouthed responses (posted below after the fold), and like a bad blogger I never actually mentioned the responses here. How mealy-mouthed was Boxer’s response? Well, THIS was the most substantive thing she said:

I believe that all citizens should become involved in the legislative process by letting their voices be heard, and I appreciate the time and effort that you took to share your thoughts with me. One of the most important aspects of my job is keeping informed about the views of my constituents, and I welcome your comments so that I may continue to represent California to the best of my ability. Should I have the opportunity to consider legislation on this or similar issues, I will keep your views in mind.

Great… You thank me for sharing my thoughts. I feel empowered!

What you don’t say is anything whatsoever regarding your opinion on the legislation (at least Feinstein gave me *something*). So how do I interpret your letter?

‘I’m gonna put my finger up in the air and see which way the wind blows, because I have a vulnerable seat in 2010 and I don’t want to piss anyone off. If I see any benefit to myself, I might at some point take a position on this legislation.’

So, today, when I was reading United Liberty, I was reminded of S.604, and decided to check to see if there were any surprises. And to my astonishment, there was! Barbara Boxer actually co-sponsored S.604!!

Do I think she’s really all that interested in an audit of the Federal Reserve? Not from the email response I received. But hey, she knows a populist wave when she sees one, and she’s gonna ride this one to Nov 2010.

There are a lot of forces assembling behind the Audit the Fed movement. Those forces are having traction. Enough traction, in fact, to get a California Democratic Senator to fall into line. It may be a political calculation, but if someone like Boxer has to make that calculation, it proves that there’s actually some real mojo here. Congratulations are due to Ron Paul, because without his tireless work in the House, we wouldn’t be this close to a serious review of what goes on at the Fed.
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End The Fed, Save America

It seems improbable that monetary policy could become a “sexy” political topic, but Ron Paul has done it. It started during his 2008 Presidential campaign when he continually talked about the Federal Reserve when asked about the economy, continued through his oft-entertaining interrogations of Fed Chairman Ben Bernanke, and most recently has culminated his sponsorship of H.R. 1207, a bill to conduct a General Accounting Office audit of the entire Federal Reserve System. It’s all pretty amazing actually; who would have ever thought that people would be getting excited over the Federal Reserve Board ?

In his new book End the Fed, though, Paul provides a clear, concise explanation for why we all need to be worried about the fiat paper money system that we’ve lived under for decades. As Paul says, the system itself is unsustainable over the long term, and Federal Reserve itself has contributed to economic instability in the 96 years since it’s founding.

This isn’t a detailed economic treatise, it’s a call to political action, and Paul does an excellent job of making his case for the argument that we need to bring an end to the monetary system that is, slowly but surely and inevitably, destroying us and destroying freedom. Instead, he argues that we need to return to the days of the Gold Standard, which doesn’t even need a central bank to function properly. You may disagree with the end scenario that Paul proposes, but it’s hard to disagree with his assertion that liberty in money is as necessary for a free society as liberty in thought or property.

Paul’s most important insight in this book, though, comes in his concise demonstration of how the “magical printing press” monetary system that we have today makes possible the leviathan state that is threatening to bankrupt us. Without a central bank with the ability to create money at will and in secret, it’s highly unlikely that the welfare-warfare state would be able to exist. Without free money, the state would be forced to either raise taxes or borrow money to finance it’s ventures and adventures and it’s unlikely that either taxpayers or bondholders the kind of unlimited spending that fiat money makes possible.

What this means is this — you’ll never have a truly limited government as long as you have a central bank with the power to create “money” at will.

That’s why it’s important to End the Fed, and that’s why this book is one that everyone should read.

Why You Should Support Auditing The Fed

The Fed is tasked with the dual goals of price stability and restraining inflation. Folks like myself would suggest it hasn’t done a very good job of either, but that’s not crucial to the question of whether we should be able to determine how they’re attempting to fulfill their mission.

Particularly irksome when we’re talking about an audit is the fact that they’ve just admitted to engaging in gold swaps, influencing the gold price, in opposition to past denials and with the assertion that they should be able to continue hiding the specifics:

The Federal Reserve System has disclosed to the Gold Anti-Trust Action Committee Inc. that it has gold swap arrangements with foreign banks that it does not want the public to know about.

The disclosure, GATA says, contradicts denials provided by the Fed to GATA in 2001 and suggests that the Fed is indeed very much involved in the surreptitious international central bank manipulation of the gold price particularly and the currency markets generally.

The Fed’s disclosure came this week in a letter to GATA’s Washington-area lawyer, William J. Olson of Vienna, Virginia (http://www.lawandfreedom.com/), denying GATA’s administrative appeal of a freedom-of-information request to the Fed for information about gold swaps, transactions in which monetary gold is temporarily exchanged between central banks or between central banks and bullion banks. (See the International Monetary Fund’s treatise on gold swaps here: http://www.imf.org/external/bopage/pdf/99-10.pdf.)

Gold has been flirting with the $1000/oz level for several weeks (topping it a few times). Those in the gold market have long believed that central banks are suppressing the price to keep fears of inflation from hitting the roof.

How much longer do we have to allow the fed to lie to us, and then when we catch them red-handed, assert that they know well enough that we have to let them hide details on top of their lies?

I say we audit the fed. Then End The Fed.

Chinese Worried Obamacare Is Too Expensive For Them To Pay For

Obama says that he won’t sign a healthcare bill that adds one dime to the deficit. I hope he’s right about that, because the people who are financing that deficit are a tad bit worried about the prospect:

And yet, there was budget director Peter Orszag rushing to a lunch with Chinese bureaucrats on a Monday in late July. To his surprise, when Orszag arrived at the site of the annual U.S.-China Strategic and Economic Dialogue (S&ED), the Chinese didn’t dwell on the Wall Street meltdown or the global recession. The bureaucrats at his table mostly wanted to know about health care reform, which Orszag has helped shepherd. “They were intrigued by the most recent legislative developments,” Orszag says. “It was like, ‘You’re fresh from the field, what can you tell us?’?”

As it happens, health care is much on the minds of the Chinese these days. Over the last few years, as China has become the world’s largest purchaser of Treasury bonds, the government has grown increasingly sophisticated in its understanding of U.S. budget deficits. The issue has become all the more pressing in recent months, as the financial crisis and recession pushed the deficit to record levels. With nearly half of their $2 trillion in foreign currency reserves invested in U.S. bonds alone, the Chinese are understandably concerned about our creditworthiness. And this concern has brought them ineluctably to the issue of health care. “At some point, if you refuse to contain health care costs, you’ll go bankrupt,” says Andy Xie, a prominent Shanghai-based economist, formerly of Morgan Stanley. “It’s widely known among [Chinese] policymakers.” Xie himself wrote a much-read piece on the subject in 2007 for Caijing magazine–kind of the Chinese version of Fortune.

The Chinese, unfortunately for them, have worked their way into a suicide pact with America. They are simply too heavily invested here to see any serious problems with our economy, government, or monetary base. Had they not spent the last decade buying up enormous Treasury holdings, they could let us implode our economy and “fix” our debt/spending issues through debasing our currency, and then swoop in to buy assets on the cheap once we hit bottom. But that’s not on the agenda. If we take the low road, we’re towing them along for the ride.

Obama says he won’t accept a bill that adds to the deficit. I don’t believe him, since I’ve already seen him fail to live up to his promises on taxes and legislative transparency. Even worse, though, he’s got the folks who plan to finance that deficit worried. And the last group you want to scare are the ones you’re trying to get to lend you money.

Hat Tip: Ezra Klein

Inflation Causes Misallocation of Production

The spike in car buying has caused automakers to ramp up production (via John Stossel):

Many auto industry analysts and dealers expect sales volumes to fall now that the program is over. They worry that many people who took advantage of the program were merely accelerating purchases they would have made later in the year.

If that’s true, the premature sales could hurt automakers, which increased production in the third quarter to replenish clunker-depleted inventories that had already grown low because of factory shutdowns over the summer.

Cash for Clunkers is essentially an inflationary policy. This is a policy well described by Adam Smith Milton Friedman, with the exact same consequence:

In a dynamic world demands are always shifting, some prices going up, some going down. The general signal of increasing demand will be confused with the specific signals reflecting changes in relative demands. That is why the initial side of faster monetary growth is an appearance of prosperity and greater employment. But sooner or later the signal will get through.

As it does, workers, manufacturers, retailers will discover that they have been fooled. They reacted to higher demand for the small number of things they sell in the mistaken belief that the higher demand was special to them and hence would not much affect the prices of the many things they buy.

The government has arbitrarily and falsely increased demand for a specific good (new cars). They’ve done so by throwing money at it (a locally inflationary policy) and the automakers are ramping up production in response to what they THINK is a more stable recovery. But they may soon find, as Adam Smith Friedman predicted, that they have been fooled.

Obama: You’re doing a heck’uva job, Bernie

Continuing his George Costanzaesque presidency, Obama has decided to reappoint Ben “Helicopter” Bernanke to another term on the Fed.

Here’s what Obama had to say:

Ben approached a financial system on the verge of collapse with calm and wisdom; with bold action and outside-the-box thinking that has helped put the brakes on our economic freefall

I thought it might be useful to take a look at some highlights of this Solon, this central – planner whom George Bush put in charge of the money supply:

Of course, as usual, Obama is dead wrong: the Federal Reserve’s actions have actually prolonged the downturn, made it worse, and have laid the foundations for an even bigger crash down the road.

Monetary Base of U.S. Dollar

In the days before the election, I told many of my fellow Massachusetts residents that Obama was not so much a break from George Bush as a continuation of his worst policies. I am sorry to say that he has been proving me right since. And this is yet another nail in the coffin of an administration that is showing itself to be even more incompetent than the Bush presidency.

I am an anarcho-capitalist living just west of Boston Massachussetts. I am married, have two children, and am trying to start my own computer consulting company.
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