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The Fed's Inflation bomb

John Carney, writing in The Business Insider, questions the Fed's ability to shrink its expanded monetary base to avoid a major inflation. "One of the sources of the growth of the monetary base has been the $1 trillion of purchases of mortgage backed securities by the Fed. . . Much of it is on deposit with the Fed itself, where banks can earn risk-free interest instead of lending it to home buyers at risk of losing their jobs or businesses still suffering from diminished consumer demand."

When bank lending starts to accelerate, the Fed will have to withdraw those funds by finding market buyers for them.
The market’s knowledge that the Fed has become a seller rather than a buyer for mortgage backed securities will likely result in the pricing of these securities falling. In order to bring the yield of these securities up to a level acceptable to the market, they will have to be sold at a discount. This discounting means that the Fed will not be able to withdraw as much liq…

Phantom buyers of Treasury debt

Eric Sprott & David Franklin in their Markets at a Glance calculated that the U.S. government would "need to sell $2.041 trillion in new debt - or almost three times the new debt that was issued in fiscal 2008" to balance its 2009 budget.

But who is in a position to buy so much debt? The writers dug into some government publications and came up with the three biggest buyers:

1. Foreign and International buyers who purchased $697.5 billion.
2. The Federal Reserve who bought $286 billion.
3. The Household Sector who bought $528 billion to Q3 – which puts them on track [to] purchase $704 billion for fiscal 2009.

But wait -- what is "the Household Sector"? For an answer, they turned to the "Federal Reserve Board of Governors Flow of Funds Data which provides a detailed breakdown of the owners of Treasury Securities to Q3 2009." This mysterious group - the Household Sector - bought "35 times more government debt than they did in 2008."
Amazingly, we…

Shostak critiques Bernanke

In a long column addressing a speech Fed chairman Ben Bernanke gave at the Economic Club in Washington, D.C. on December 7, Austrian economist Frank Shostak concludes with these remarks:

Bernanke: "Our regulatory structure requires a better mechanism for monitoring and addressing emerging risks to the financial system as a whole." He goes on to say he favors the creation of a "a systemic oversight council, made up of the principal financial regulators, to identify developments that may pose systemic risks, recommend approaches for dealing with them, and coordinate the responses of its member agencies."

Shostak: "We suggest that the threat of future crises will disappear once the Fed stops tampering with interest rates and the money supply. Furthermore we suggest that the act of money creation out of thin air is going to disappear once the present paper standard is replaced with a gold standard. If we allow a market-chosen money to fulfill the role of the medium…

Characterizing the decade

Time magazine describes the first 10 years of this century as "the decade from hell." Peter Schiff disagrees, saying it had striking parallels to the Roaring Twenties. "[T]he decade now closing gave us the biggest and most irresponsible spending orgy in U.S. history. The past decade was the party; the one ahead will be the hangover."

Schiff goes on to say:
For now, Congress and the President remain as clueless as Time. To show its resolve to "get to the bottom of things," the Obama Administration has impaneled a commission to investigate the causes of the financial crisis. Do not expect the proceedings, which are just getting underway, to come up with anything but the most politically useful explanations.

The Fed's one great success

Jörg Guido Hülsmann is senior fellow of the Mises Institute and author of Mises: The Last Knight of Liberalism and The Ethics of Money Production. (See my review of the latter here.) He teaches in France, at Université d'Angers. In a commentary on the alleged independence of the Fed, he writes:
The Fed has had one great success: it is by far the largest funder of academic research in monetary and macroeconomics, employing hundreds of economists, financing conferences and seminars, providing paid consultancies, and so on. Is it any wonder that the majority of academic monetary and macroeconomists support the status quo?By this he is referring to the 270 economists who have signed an "open letter" supporting the Fed's independence from serious audits. According to this letter, "Economic theory and a massive body of empirical evidence provide strong support for the independence of central banks in their conduct of monetary policy."

How can an institution be &q…

Currency competition

Ron Paul has a sign in his office that reads, "Don't steal - the government hates competition." Government is a monopolist, and one of the ways we've suffered from this monopoly is through its coercive control of money. Government dictates that money will be paper bank notes with no redeeming value and to give us a false assurance turns the production of paper money over to a central bank. The central bank, known as the Fed, falsely claims to be independent of political pressure and to be guided in its "policy" only by what is good for the economy. In return for this grant of privilege, the central bank sees to it that government remains flush with money to cover whatever project D.C. demagogues dream up - foreign war, health care, bailouts for their cronies. It does this by creating money out of nothing, much like a child would do playing make-believe. But when grown-ups do it, it's called counterfeiting. And counterfeiting is a form of theft.

Go…

Is gold a hedge against inflation?

Steve Saville, one of my favorite commentators, addressed this question recently:
[U]nder the current system a high rate of monetary inflation is one of the two primary ingredients of a long-term gold bull market. Monetary inflation is not sufficient by itself, but when mixed with the second ingredient the result will be a powerful advance lasting many years.

The second ingredient is: enough economic weakness/problems to bring about a general increase in the desire to save. The economic problems cause both an increase in the desire to save and a reduction in the demand for growth-oriented investments such as equities, while a high rate of monetary inflation prompts people to save in terms of something other than the official currency.

Rather than saying that gold is a hedge against inflation it is therefore more correct to say that gold is a hedge against inflation under certain economic conditions. At other times, investments such as general equities could prove to be far better hedges …

What is Money? by Frederic Bastiat

Note: Frederic Bastiat (1801-1850) was a French economist, statesman, and author.

WHAT IS MONEY?

By Frederic Bastiat

First published in 1849

“Hateful money! Hateful money!” cried F——, the economist, despairingly, as he came from the Committee of Finance, where a project of paper money had just been discussed. “What’s the matter?” I said. “What is the meaning of this sudden dislike to the most extolled of all the divinities of this world?”

F. Hateful money! Hateful money! B. You alarm me. I hear peace, liberty, and life cried down, and Brutus went so far even as to say, “Virtue! Thou art but a name!” But what can have happened?

F. Hateful money! Hateful money!

B. Come, come, exercise a little philosophy. What has happened to you? Has Croesus been affecting you? Has Jones been playing you false? Or has Smith been libeling you in the papers?

F. I have nothing to do with Croesus; my character, by its insignificance, is safe from any slanders of Smith; and as to Jones——

B. Ah! Now I have it. How co…

It shouldn't be this way

The central bank-managed, fiat paper money systems that rule the world's economies should be abolished. The free market can meet our monetary needs just as it does other consumer demands - and it can do so without currency devaluation or the boom-bust cycle. The classical gold standard "failed" because government wanted money it could inflate at will. Bankers wanted a monopoly cartel that would protect them from the fraud of fractional reserve banking. Thus, Americans were handed the Federal Reserve System in 1913. War, inflation, and depressions have been with us ever since.

It shouldn't be this way.

P/E ratio of S&P 500 Missing

Following the P/E ratio of the S&P 500 can help investors determine if stock prices are inflated, depressed, or realistic. If a P/E ratio, also called a multiplier, continues reaching record highs for the S&P 500, it suggests the index for the 500 biggest companies may be too high with respect to reported earnings and earnings growth.

The P/E ratio for the S&P 500 hit 140.76 on September 30, 2009. Here are some recent historical values:
12-31-2007 22.19
12-31-2008 60.70
03-31-2009 116.31In Gary North's Specific Answers of November 17, he notes that Standard & Poor's no longer makes the S&P 500 P/E ratio available to the public. According to an email he received from their webmaster, you must register with their website first, then log in to see it. Why is S&P doing this? Here's North's interpretation:
This is a polite way of saying, "This site is not for the sake of the general public. It is for the sake of the retail brokerage indu…

What is "good" inflation?

Any price inflation that is an outcome of consumer preferences should be construed as good. According to economist Joseph Salerno, there are two kinds of benign inflation:

1. Innovations that permit people to economize on the amount of money they hold in their cash balances brings about a decrease in the demand for money, which in turn tends to raise prices, all other things being equal. Credit cards, for example, enable people to make purchases without drawing down their cash balances. By increasing the demand for goods without a corresponding increase in the money supply, price inflation results.
. . . cash-economizing inflation is benign precisely because it is an outcome of individuals striving to optimize their property holdings through the voluntary exchange process. It is also noteworthy that this kind of inflation involves a one-shot increase in prices: once the new payment method or invention becomes broadly adopted, the decline in the demand for money ceases and prices st…

Gary North, What is Money? Parts 1-17

Gary North concluded his outstanding series of articles today on What is Money? The links to all seventeen essays are posted below as well as on BRC. I encourage you to read them again and again until their messages are firmly understood and remembered.

Part 1: Introduction
“If you don't know what money is, how will you obtain more of it?”

Part 2: Precious Metal Coinage
“Counterfeiting is universally condemned by civil governments . . . because they are all counterfeiters, and they deeply resent an invasion of their turf.”

Part 3: Schizophrenic Economists
Economic textbooks don’t treat central banking as a cartel, yet it unquestionably is.

Part 4: Bait and Switch
Through fractional reserve banking, “bankers knowingly promise more than they can deliver to every depositor.”

Part 5: Fractional Reserve Banking
“Banks are government-licensed institutions that issue bogus IOUs. Because these IOUs function as money, they are counterfeit money.”

Part 6: What Makes Money Different?
Unlike the supply…

What would happen if China dropped its peg?

Many analysts and politicians see China's peg to the American dollar as a weapon it uses for grabbing market share and stealing jobs from U.S. manufacturers. But the reality is quite different, argues Peter Schiff, who says that "de-pegging would cause the economic equivalent of cardiac arrest." Yet this "tough love" from China and other countries would be much-needed medicine.
Our economy is currently on life support provided by an endless flow of debt financing from China. These purchases are the means by which China maintains the relative value of its currency against the dollar. As the dollar comes under even more downward pressure, China's purchases must increase to keep the renminbi from rising. By maintaining the peg, China enables our politicians and citizens to continue spending more than they have and avoiding the hard choices necessary to restore our long-term economic health.

Contrary to the conventional wisdom, when China drops the peg, the imm…

Bastiat on money

From Frédéric Bastiat's essay, What is Money?:

For riches, don’t you see, are not a little more or a little less money. They are bread for the hungry, clothes for the naked, fuel to warm you, oil to lengthen the day, a career open to your son, a certain portion for your daughter, a day of rest after fatigue, a cordial for the faint, a little assistance slipped into the hand of a poor man, a shelter from the storm, a diversion for a brain worn by thought, the incomparable pleasure of making those happy who are dear to us. . . .

If . . . you look upon an abundance of useful things, fit for satisfying our wants and our tastes, as true riches, you will see that simultaneous prosperity is possible. Money serves only to facilitate the transmission of these useful things from one to another, which may be done equally well with an ounce of rare metal like gold, with a pound of more abundant material as silver, or with a hundredweight of still more abundant metal, as copper. According to tha…

Is the Fed "independent"?

This is a fiction, as Congressman Ron Paul and Senator Jim DeMint explain.

It's always dangerous to fight government problems with government solutions, even when the solution - in this case, Fed transparency - attempts to curb the power of the state. But Paul has made it clear over the decades that his ultimate goal is to abolish the Fed and return monetary sovereignty to the market. His efforts at making the Fed more transparent keeps the Creature in the spotlight where it can more easily be slain.

Gary North on Money, Part 15: Hoarding, Old and New

Someday, perhaps, central banks will stop subsidizing their respective Treasury Departments. On that glorious day, governments will move rapidly toward bankruptcy, interest rates on government debt will rise, the markets will begin to crash, consumer prices will begin to fall, and the mother of all bank runs will begin. Get there early.

Read the full article. Read the full collection of articles on What is Money? by Gary North on BRC.

Zimbabwe gets new life

In Zimbabwe, central banking has burned itself out, and the people are starting to recover.
[Zimbabwe] is now a country without a functioning Central Bank and without a local currency that can be produced at will at the behest of politicians. Since February 2009 there has been no lender of last resort in Zimbabwe, causing banks to be ultra cautious in their lending policies. The US Dollar is the de facto currency in use although the Euro, GB Pound and South African Rand are accepted in local transactions.

Price controls and foreign exchange regulations have been abandoned. Zimbabwe literally joined the real world at the stroke of a pen. Money now flows in and out of the country without restriction. Super market shelves, bare in January, are now bursting with products.

Are you buying gold?

Or are you counting on the government to save the dollar? Doug Casey predicts "a mania in gold."
because the gold and especially silver markets are so tiny, the rush into them will be like trying to push the contents of Hoover Dam through a garden hose. Our positions will go absolutely ballistic.” –Doug Casey, September 2009Casey says the total vale of all the gold ever mined equals $5 trillion in today's prices. Yet U.S. government debt is over twice that amount so far this year. Total global government bailouts are conservatively over four times that amount.

The dollar, like all paper currencies, are exchange instruments managed by governments and big bankers for the benefit of governments and big bankers; in spite of their legal tender status they will eventually become waste material when they're inflated to the point where no one wants them. Then the world will rush into gold, silver and other precious metals. But those are in very limited supply, and their pr…

Inflation is worse than you thought

Do you refer to the government's CPI as an indicator of price inflation? Michael Rozeff doesn't.
I prefer to use the growth rate in the monetary base, also known as M0. By this measure, price inflation is much worse than you thought if you use some version of the CPI.

I use the growth rate of the monetary base for three main reasons. First, it is a very accurate measure of the inflation in bank notes of the Federal Reserve (FED). Second, the FED’s bank note inflation is a major cause of changes in prices in the economy. Third, the CPI has major flaws and difficulties.

The inflation measurement problem is something like measuring the changes in average weight of all the fish in the ocean. The FED’s note inflation is like fish food. As it is dropped by helicopters into the ocean, I assume it produces weight gain that otherwise would not have occurred. Measuring the CPI is like measuring how much weight the fish in the ocean have gained. Measuring the change in the monetary base is…

The Origins of the Federal Reserve

Murray Rothbard's classic has been republished on Mises.org today.
The national-banking system [established during the Civil War] provided only a halfway house between free banking and government central banking, and by the end of the 19th century, the Wall Street banks were becoming increasingly unhappy with the status quo.

How long will banks sit on the bomb?

Analyst Steve Saville points out that the Fed has increased bank reserves 100-fold over the last 14 months - "from around $10B in August of 2008 to around $1000B ($1T) today." These reserves don't constitute an increase in the money supply because they are not available to be spent.

Fortunately, bank lending has declined on a year-over-year basis, so the potential destruction of the fractional reserve system amplifying those reserves 10-fold in the economy has yet to happen.
Even with the decline in bank lending and the general de-leveraging that has occurred within the private sector, the government-Fed tag team has managed to increase the US money supply by around 14% over the past year. If the private banks were to join the inflation party then the risk of hyperinflation would greatly increase, and hyperinflation -- leading to what Mises called a "crack-up boom" -- would be the worst of all possible outcomes.Banks make their money on loans. How long can they…

Does the U.S. "export inflation"?

Yes, but not in the way you might think, says Gary North.

When physical money is sent out of the country, it shrinks the supply of digital money in fractional-reserve American banks, making prices cheaper. Inflation is exported mainly by illegal immigrants.

On the other hand,
Bank-created inflation is not exported. It stays in the trade zone of the nation that creates the money. In today's floating exchange rate system, price inflation in the United States does not affect the price level (a statistical index) in any other country for very long or for very much. Bank-created inflation is not exported. It is merely copied. When foreign prices rise alongside America's rising prices, this is because foreign central banks are matching the monetary policies of the Federal Reserve. Domestic digital inflation is always a domestic bank–inflicted wound. Central banks compete with each other to debauch their domestic currencies. This is not free market competition. It is competitive plunder…

Lies, Damned Lies, and the CPI

While the Federal Reserve is a big supplier of stolen goods to the government, it is by no means the only supplier. As Ron Paul points out, simple adjustments in calculations will accomplish the transfer when the machinery of theft is already in place.

According to the government's current version of the Consumer Price Index, life has gotten cheaper for the first time in decades, which means there's no reason for increasing payouts to Social Security recipients. The CPI is the average price for a "fixed" basket of goods and is supposed to help us gauge how much more (or less) it costs us to live.

But "economist John Williams of Shadow Government Statistics has estimated that if the original methodology of CPI had not changed, Social Security checks would be nearly double what they are today," Paul writes. Substituting hamburger for steak is one way officials arrived at the CPI they needed. Meat is meat according to the government, so the basket of goods re…

Ron Paul's Audit the Fed Bill Gutted

And the agent who did it is Mel Watt, a representative from North Carolina. According to Bloomberg, "Watt’s district includes Charlotte, headquarters of Bank of America Corp., the biggest U.S. lender." By "agent" I refer to Watt's obvious ties to the banking cartel, rather than the people who elected him.
Why does anyone have the unilateral power to change a bill -- any bill -- much less one that has 308 co-sponsors?
Paul says he intends to introduce an amendment when the bill comes to the House floor for a vote, restoring the bill's original language.

Why does the Fed fear deflation?

The U.S. Consumer Price Index fell by 1.5% in August, marking the sixth consecutive monthly decline, writes economist Frank Shostak. Most experts believe that falling prices signals problems for the economy because consumers will postpone buying goods, expecting prices to fall even lower.
Many economists define deflation as a fall in prices, rather than a fall in the money supply. Deflation, therefore, becomes the enemy against which an inflationary monetary policy is directed. With a sufficient increase in the supply of money, prices will rise and people will be more inclined to buy now rather than later when prices will be even higher.
But is this reasoning realistic? Why should falling prices discourage consumption? People must support their lives in the present and so will buy in the present. Even in our inflationary world some prices have fallen deeply while consumers have been buying. As Shostak notes: From December 1997 to August 2009, the prices of personal computers hav…