Category Archives: Currency and Monetary Policy

Would Joe Biden promote orgies for sexual abstinence?

joebiden

Biden: We need to put more on our national credit card to keep from going bankrupt

CNS News provides the following quote (emphasis added) from Vice President Joe Biden:

“And folks look, AARP knows and the people with me here today know, the president knows, and I know, that the status quo is simply not acceptable,” Biden said at the event on Thursday in Alexandria, Va. “It’s totally unacceptable. And it’s completely unsustainable. Even if we wanted to keep it the way we have it now. It can’t do it financially.”

“We’re going to go bankrupt as a nation,” Biden said.

“Now, people when I say that look at me and say, ‘What are you talking about, Joe? You’re telling me we have to go spend money to keep from going bankrupt?’” Biden said. “The answer is yes, that’s what I’m telling you.”

My response is simple enough even for Twitter:

Earth to Joe Biden: Spending to avoid bankruptcy is like f***ing for virginity.

Considering the way Congress spends our money, perhaps ” orgy for sexual abstinence” may have been a better analogy.

Insert joke about stimulating the economy below.

Government Abandons Lying; Resorts To Pure Naked Threats

I’m at a loss. I don’t know what world can justify this, and can only hope that my readers will be just as appalled as I am, because I have nothing to add.

WASHINGTON (AP) — Former Treasury Secretary Henry Paulson testified on Thursday that he pressured Bank of America Corp. last year to go through with its plans to buy Merrill Lynch but didn’t tell the bank’s chief to hide potential losses from shareholders.

Paulson acknowledged that he warned the bank’s CEO, Kenneth Lewis, that Lewis could lose his job if he dropped the deal. Paulson also said he pledged government aid to the bank but declined to put that promise in writing because the details would have been vague and would have to be disclosed publicly by the Treasury Department.

In testimony to the committee, Paulson said he told Lewis last year that reneging on his promise to purchase Merrill Lynch would show a “colossal lack of judgment.”

Paulson said that “under such circumstances,” the Federal Reserve would be justified in removing management at the bank.

“By referring to the Federal Reserve’s supervisory powers, I intended to deliver a strong message reinforcing the view that had been consistently expressed by the Federal Reserve, as Bank of America’s regulator, and shared by the Treasury, that it would be unthinkable for Bank of America to take this destructive action for which there was no reasonable legal basis and which would show a lack of judgment,” Paulson said.

Paulson said he believed his remarks to Lewis were “appropriate.”

Federal Reserve Chairman Ben Bernanke has denied threatening to oust Lewis and said he never told anyone else to, either. But another Fed official suggested otherwise in an e-mail obtained by House investigators.

Jeffrey Lacker, president of the Richmond Federal Reserve Bank, said in a December 2008 e-mail that Bernanke had planned to make “even more clear” that if Bank of America backed out on the deal, “management is gone.”

Paulson said Bernanke never asked him to relay the message. But, he added, he believed he was expressing the Fed’s opinion that dropping the deal “would raise serious questions about the competence and judgment of Bank of America’s management and board.”

I’ve previously covered this type of activity by Paulson & Bernanke here and here.

Letters To Boxer & Feinstein To Support S.604 On Auditing The Fed

Below is the text of a letter I’ve sent to Senators Barbara Boxer and Dianne Feinstein. H.R. 1207 (introduced by Ron Paul) and S. 604 (introduced by Bernie Sanders) is a bill that requires the Comptroller General to audit the Fed and report back to Congress within the next 18 months. Given that the only oversight they undergo is occasionally having Bernanke lie and befuddle Congress with confusing non-answers, I think it makes sense.

The below letter should be read as a potential template for readers to use when writing to your own Senators and Congressmen. However, there are two caveats to this. First, there are a few points here about California, as we have had some special challenges throughout the tech crunch and the housing collapse. Second, the tone of the letters is geared towards Democrats. If you’re sending this to Republicans, it would make sense to change the language in certain areas.

Either way, I wanted to provide potential talking points for readers who want to contact their Senators and get this ball moving.

July 9, 2009

Dear Senator XXXXX,

Senate bill S.604, a bill to require the Comptroller General of the US to audit the Federal Reserve, is currently under review with the Senate Committee on Banking, Housing, and Urban Affairs. I am writing to urge your support for this bill.

California has been the epicenter of two asset bubbles over the last two decades: the high tech bubble and the housing bubble. Both brought the illusion of wealth to our state, and both caused much pain to our residents and our state government when they collapsed. There are many causes of asset bubbles, but chief among them are the loose monetary policies of the Federal Reserve. These policies cause malinvestment and excessive speculation, the hallmark of any bubble.

The Federal Reserve policies of Alan Greenspan and continued by Ben Bernanke are placing the financial system of the United States in jeopardy. These policies are largely undertaken without Congressional or Federal oversight, and benefit the interests of our financial sector at the expense of our citizens.

Most recently, the Fed has expanded their balance sheet to $2T buying securities, all the while engaging in a policy of “quantitative easing”, which is the euphemistic term for “printing money”. These policies are unprecedented in American history, and their long-term effects may be far worse than the problems they’re expected to address today.

S. 604’s sister bill in the House (H.R. 1207) has widespread bipartisan support, and over 250 cosponsors – including 25 from California. S. 604 is rapidly gaining sponsorship in the senate, with three additional cosponsors added in the last several days to a (now) total of 7 sponsors.

The Federal Reserve is adopting policies that affect every American at the core of their economic life – the value of our dollars and the value of our homes. They are making these decisions without meaningful Congressional oversight and without allowing anyone to “check the books”.

Congress has a duty to Americans to ensure that the Federal Reserve is acting in our interests, and the first step to doing so is to understand what they’ve already done. An audit is necessary. I hope that I’ve convinced you to support and possibly cosponsor S.604.

Sincerely,
Brad Warbiany

(Followed by contact info)

Give it a shot. I prefer to fax things to elected officials, as I believe there to be a more definitive tactical feel to actual paper. When they see that it’s printed out and faxed, I think it carries a little bit more significance than an email. I also emailed this to both of them, just in case their staffers are more likely to read one than the other.

Pope Benedict XVI Would Make Marx Proud

Pope Benedict XVI has decided to wade into territory which he has no understanding or expertise: the global economy. The New York Times reports that the pope is now calling for a “New World Economic Order”*

VATICAN CITY — Pope Benedict XVI on Tuesday called for a radical rethinking of the global economy, criticizing a growing divide between rich and poor and urging the establishment of a “world political authority” to oversee the economy and work for the “common good.”

He criticized the current economic system, “where the pernicious effects of sin are evident,” and urged financiers in particular to “rediscover the genuinely ethical foundation of their activity.

I have to ask the question to my Catholic friends who believe in Papal infallibility that also happen to believe in free market capitalism: how do you square the two philosophies? (Argument withdrawn; I am by no means infallible and was lacking in my understanding of this concept)

The article continues:

In many ways, the document is a somewhat puzzling cross between an anti-globalization tract and a government white paper, another indication that the Vatican does not comfortably fit into traditional political categories of right and left.

“There are paragraphs that sound like Ayn Rand, next to paragraphs that sound like ‘The Grapes of Wrath.’ That’s quite intentional,” Vincent J. Miller, a theologian at the University of Dayton, a Catholic institution in Ohio, said in a telephone interview.

“He’ll wax poetically about the virtuous capitalist, but then he’ll give you this very clear analysis of the ways in which global capital and the shareholder system cause managers to focus on short term good at the expense of the community, of workers, of the environment.”

Indeed, sometimes Benedict sounds like an old-school European socialist, lamenting the decline of the social welfare state and praising the “importance” of labor unions to protect workers. Without stable work, he notes, people lose hope and tend not to get married and have children.

Sorry padre, you can’t have it both ways. If you truly believe the Communist/Socialist model is morally superior to Capitalism (an admittedly selfish system by honest supporters such as Ayn Rand) just come out and say so! If one honestly reads the scriptures, one will see that the teachings of Christ are much more in line with Karl Marx than Adam Smith.

But wait, it gets worse…

Benedict also calls for a reform of the United Nations so that there can be a unified “global political body” that allows the less powerful of the earth to have a voice, and calls on rich nations to help less fortunate ones.

In other words, the U.N. should force the citizens of the most efficient and productive nations at gun point to give money to people in nations who are less efficient and less productive in large part because they subscribe to the philosophy of the Pope: “From each according to his ability, to each according to his need.” There’s a word for this; it’s called extortion.

» Read more

The Signs of Inflation

Since Barack Obama has decided to continue down the path George Bush started down,  the path of Robert Mugabe and Friedrich Ebert, the United States economy will soon be facing all the problems associated with inflation.

Unfortunately, the effects of inflation are poorly popularized, meaning that most people have a very limited understanding of inflation.  As a result when confronted with symptoms of inflation people all to often pin the blame on other “causes” such as Jews or greedy white landowners.  These false accusations are heavily promoted by the ruling classes;  after all it’s better that the mob chase some Jews or hedge fund managers with pitch-forks than coming after the rulers who inflated the currency.

What Inflation Isn’t

The primary misconception of inflation is that it merely is the rise in prices.  The news media encourages people to believe this, reporting the inflation rate in the same way it reports on changes in the weather, as if it is some natural phenomenon over which people have no control.

Price increases are a result of inflation, yes.  However, inflation has the same relationship with price increases that war has with the number of burials per month at Arlington Cemetery.

The Mechanics of Inflation

Inflation is the phenomenon where additional money is created.  In the case of the Unites States, the Federal Reserve purchases some asset, such as a United States Treasury Bond, paying by check.  The seller deposits the check in a bank, which then records the additional money as part of its demand deposits.  This is the moment where the inflation occurs.  The bank then loans out 80% of those deposits to borrowers. Those borrowers spend the loaned money. This spent money is deposited back into the banking system. The banks loan out another 80% of this latest round of deposits. This cycle of loaning out money which then spent and then deposited back into the banking systems continues until eventually an equilibrium is established where banks list $4.00 in outstanding loans for every dollar created when the Federal Reserve Bank wrote that first check.

The Math:

A mathematical calculation of the growth of the money supply when central banks create money out of thin air.

A mathematical analysis of the growth of the money supply when central banks create money out of thin air.

The people spending this newly created money bid up prices;  people selling stuff tend to sell stuff to the highest bidder, and the people holding the newly printed money are competing with other buyers to purchase the stuff they want.

The result is that this new money slowly disperses out through the economy, leaving higher prices in its wake.  The people who spend it first get the benefit of being able to buy stuff at pre-inflation prices, the people who spend it last do not.  The people who have access to the newly printed money are left better off, the people who don’t are left poorer.  Inflation invisibly and without much fuss transfers purchasing power from those who are not closely connected economically with the central bank to those who are.

Follow the Money

The price increases generally show themselves in the sectors of the economy where the new money is spent.  For example,  let’s say that President Obama directs the Secretary of the Treasury to sell a bond to generate the money needed to build yet another bridge over some stream in West Virginia named after Robert Byrd. The bond is purchased by the Federal Reserve Bank with newly printed money.  The money is spent by the Federal Government on tools and materials needed to build the bridge.  The price for cranes, hourly employment of road-crews, concrete and steel increases.

The Rise of the Ersatz Product

The other users of these raw materials find themselves struggling to buy the  supplies they need.  For example, a manufacturer of prefabricated steel sheds might find that he has to pay more to get the metal he needs.  He is caught in a squeeze; the price his customers are willing to pay has remained unchanged while his production costs have increased. The manufacturer can’t raise his prices, so naturally he decides to cut costs by attempting to reduce the amount of steel he uses by substitution or adulteration.  The end result, the steel shed might cost the same, but the quality of the steel, the strength of the steel, or its toughness will be inferior, resulting in a shoddier product.  Candy bars are packaged to look like their sizes are constant, while the volume of candy is reduced.  Houses are built less sturdily.  Automobiles are manufactured with lower quality steel, with engines that wear out more rapidly, etc.

The Rise in Prices

As the money percolates out through the economy, the people coming into possession of it bid up prices.  In fits and starts, at different rates in different sectors of the economy, the price levels go up.  People on a fixed income find themselves becoming poorer and poorer.  The unpredictability of  the price levels causes  accounting to become more uncertain.  Investments and projects that otherwise would be attempted are foregone.  A majority of the population is left poorer as a result of the inflation.

Increased Political Repression

These people naturally lobby for relief.  However the political classes that benefit from the inflation don’t want to stop,  and the people are too ignorant of economics to recognize the fact that it was the printing presses which caused their problems.  Instead the people attack profiteers or greedy manufacturers or the greedy bankers.  They call for price and wage controls, which if instituted, further wreck the economy.

People also try to abandon the unreliable monetary system for alternatives.  They try to do business in foreign currencies or even use commodities such as cigarettes or gold chains as money.  Governments typically react savagely, criminalizing attempts to do business using alternatives to the rapidly devaluing currency.

Stop Me Before I Inflate Again!

Typically, when a government or central bank engages in inflation, they find it hard to stop – the political incentives are too great to resist. They cannot fund their operations if they stop the printing presses. The more the economy falters, the more the tax-base is disrupted, the lower the productivity of the industrial base, the more dependent the elites are on the printing press to fund their lifestyles and the operations of the state.  In private, the central-bankers will admit that the currency debasement is wrecking the economy.  But the central-bankers’ fear of the negative personal consequences if they should stop inflating the currency overrides any impulse to do the right thing.

America’s Peculiar Institution

Some economists argue that since the Federal Reserve is not part of the U.S. government such a doomsday scenario cannot play out here.  They claim that the Federal Reserve, being independent, is immune to political pressure.  Yet throughout its existence it has acted to support the U.S. government; periodically, the Congress threatens to update or revise the Federal Reserve Act to mandate greater congressional oversight of the Fed’s operations and the ‘independent’ organization suddenly becomes quite accommodating.

Historically, the Federal Reserve has purchased only a small fraction of the bonds issued by the U.S. Treasury;  it didn’t have to – there were always sufficient buyers willing to buy Treasury Bonds to keep the U.S. government operating.  That is changing.  The U.S. government will have to borrow more than a trillion dollars a year to fund its operations.  At the same time the U.S. Government is borrowing at such unprecedented levels, the willingness of voluntary investors to purchase the bonds is collapsing.  If the Federal Reserve were passive, within a year or so we would see U.S. Treasury Bonds routinely going unsold at auctions. The Federal Reserve, inevitably, will begin purchasing those bonds to keep the U.S. government solvent.

Protecting Yourself

In an inflationary economic regime, the formal economy is generally a suckers game.  To avoid being taken to the cleaners, consider doing the following:

  • Start or purchase a business making something in relatively widespread demand that is not likely to have price controls slapped on it.
  • Go into a profession where your skills will be in wide demand.
  • Learn how to fix broken things.
  • Cultivate circle of associates with whom you can engage in gray-market or black-market business deals.
  • Befriend a policeman or a judge! They can get you out of hot water should you get tagged for committing an economic ‘crime’.
  • Get to know local gold-dealers, particularly ones who buy and sell gold chains.
  • Learn how to defend yourself; police take time to respond, and are prone to prosecuting economic crimes when confronted by evidence of contraband.
  • Buy an old “Whip Inflation Now” button. It will be about as helpful as it was in the 1970’s

You don’t have to be helpless as the Democratic and Republican Party Apparatchiks loot the economy.  Prudent steps taken now can pay off in the coming dark years.

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.

Let Us Fail

California’s in a world of hurt, exacerbated by the fact that we didn’t offer to give the state a whole bunch more money during our ballot propositions yesterday. There are a lot of reasons for our pain, but it really comes down to a state that never quite understood TANSTAAFL. They’ve been sold the lie that government can do everything they desire, and all of it “with NO MONEY DOWN!!!” Now the bill is due, and there’s going to be some trouble.

But the question is where we go from here. And I can tell you that there is going to be a cry to go to Washington DC, because the government of California is “too big to fail”. I’m not going to be one of the voices calling for this, but as Megan McArdle points out, there are quite a few who will:

There is a surprisingly sizeable blogger contingent arguing that we have to bail them out because however regrettable the events that lead here, we now have no choice. But actually, we do have a choice: we could let them go bankrupt. And we probably should.

If Uncle Sugar bails out California, California will not fix its problems. Perhaps you want Obama to make it fix the problems, using the same competence, power, and can-do spirit with which he has repaired all the holes in the banking and auto manufacturing sectors. But Obama is not in a good position to do this. California Democrats are a huge part of his governing coalition. All Obama can do is shovel money into the bottomless pit of California’s political system.

If California is bailed out by Washington, it will simply be another way to prop up a system that is fundamentally broken. California has spent decades building up the unsustainable and crushing tax & spending burden we now have. Income taxes are high (9.55% for most people above $40K), sales taxes are high, fees and regulations are high. About the only thing we have that isn’t high is property tax, and Sacramento keeps trying to change that.

Fundamentally, we need to be taught a lesson. We need to finally understand that you simply cannot live in perpetual deficit. Arnold Schwarzeneggar recently explained why:

“This is the harsh reality of the crisis we face. Sacramento is not Washington [DC]… We cannot print money.”

Maybe, just maybe, if we fail it will teach us a lesson. It will teach us that money doesn’t grow on trees, and that there is an economic limit to your ability to act in constant deficit. It will teach us that the abnormal — not the normal — scenario is one of constantly printing your way out of problems. Maybe, just maybe, it will restore some semblance of welcome economic sanity to California.

But I doubt it. Obama will find a way to paper over the problems, we’ll play kick the can because Sacramento is “too big to fail”, and wait until this becomes a problem so large that only a national collapse of our entire monetary system will teach us a lesson.

I need to start taking my piles of spare change to CoinStar — paper money will heat my house a lot better than coinage.

Truth Hurts… Ignorance Hurts Worse

I disagree with Schiff on hyperinflation; but we’re DEFINITELY going to be seeing significant inflation. I’m thinking 1979 levels or so.

Note: Schiff is also a firm believer in the inherent value fallacy; which is just that, a fallacy. There is no such thing as a stable currency, because nothing has inherent value. All value is circumstantial.

Fiat currency is a horrible thing, but the solution is NOT specie currency, which has its own issues (which can be just as bad as those of fiat currency). The solution is a global free currency market, without government value setting by fiat, OR by an arbitrary commodity standard… or any other arbitrary standard for that matter.

Let the market decide what the currency of a nation is worth, and it will seek its natural level AT ANY GIVEN MOMENT. Let the markets set their own confidence level, based on whatever a currency represents, is backed by, what its purchasing power is… whatever the market values.

We are approaching the technology basis that will allow this, though we aren’t there yet. Universal realtime international communications are a pre-requisite for an efficient currency market. Currently, currency markets present significant arbitrage opportunities based on asymmetric information, communications lag, and government distortion.

Unfortunately, now that governments have the power of fiat currency, they will absolutely refuse to give it up.

We’ve got maybe a 24 month window of slight recovery and plateauing of prices; then we doublehump this, with real economic contraction spurred on by the devaluing dollar, rapid inflation; and concomitant high interest rates, and tighter credit (you think credit is tight now? Not even close).

If you want to buy a house, do it 18-24 months from now on a fixed rate mortgage; and plan on living there the rest of your life. Inflation is going to wipe out a significant amount of your debt anyway.

… Presuming the Chinese don’t bail out on us entirely, and kick this off SIX months from now, instead of 24 months from now.

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

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