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.
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.
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.
(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.
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.
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.
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.
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