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Showing posts from August, 2009

Derailing the bill to audit the Fed

Roughly 75 percent of Americans support an auditing of the federal reserve, but Barney Frank is trying to derail Ron Paul's Audit the Fed bill by rolling it into a "comprehensive regulatory reform package recently proposed by the White House." According to an email from John Tate, president of Campaign for Liberty, the package "grants new, more comprehensive powers to the Fed and strengthens the government's control over our economy."

Gary North writes:
If the bill passes the House and the Senate, Obama will veto it. The FED is not going to be audited by the government. That is not how the world works. The FED is only officially under government authority. Except in wartime, it has never been under government authority. It was set up to provide the illusion of government control. That illusion has worked since 1913.He may be right about the fate of the bill, but how can the Fed only sometimes (during war) be under government control? What or who directs the…

Sheldon Richman on Neglect of Producers

Sheldon Richman, editor of FEE's The Freeman and "In Brief," as well as the author of several books, includingYour Money or Your Life: Why We Must Abolish the Income Tax (recommended) explains why politicians are held in such high esteem, while producers and entrepreneurs are virtually ignored:
For most people an understanding of how markets work is not intuitive. It requires the grasp of such elusive ideas as unplanned order, entrepreneurial profit, and prices as capsules of (imperfect) information. These concepts can’t be conveyed in a television sound bite or editorial cartoon. In contrast, government “solutions” are simple. Total health insurance is too expensive? Pass a bill decreeing it to be universal and affordable. Next problem.

A politician who makes a career of proposing such “solutions” is likely to win admiration not only from the public but also from the news media, whose reporters and commentators know as little economics as their readers and viewers. The d…

The Virtue of Gold by Stewart Dougherty

Much has been written about the promise of various investments. Stewart Dougherty, a specialist in what he calls inferential analysis, offers these observations:
In the recent crisis, virtually every investment “truism” has been discredited as a myth. Buy and hold; Stocks for the long term; Efficient market theory; Housing prices only go up; Buy land, they’re not making any more of it; Municipal bonds offer safe, tax advantaged returns; Treasurys are guaranteed by the full faith and credit of the United States; the dollar will remain strong because it is the world’s reserve currency; A diversified portfolio offers protection; Demand for serious art works is unquenchable; and on and on. The current markets have laid waste to every one of those theories, and many others.

Gold is the antithesis of the investment classes described above. Physical gold represents pure wealth of a very finite quantity with absolutely zero counterparty risk. Because of this distinguishing fact, it is immune t…

Bernanke likely to keep his job

President Obama today announced his reappointment of Ben Bernanke as federal reserve chairman. Reuters:
Obama is counting on Bernanke to nurse the economy back to health at a time when unemployment, home foreclosures and bank failures are still mounting.

The Fed chairman has pushed U.S. interest rates to near zero and flooded financial markets with hundreds of billions of dollars to stem a credit crisis and turn back recession.

Bernanke, appointed by President George W. Bush and widely respected as a top scholar on the Great Depression, now faces the challenge of pulling back the Fed's extraordinary support for the economy without setting back hopes for a recovery.If the economy can recover without mega-piles of excess reserves in the banking system, why did the Fed put the money there in the first place? Is this a kind of Fed hand-holding while the economy begins producing and hiring again?

At any rate, the funds are there, by way of a doubling of the Fed's balance sheet over t…

The Doomed Dollar

Ben Bernanke is optimistic about the recovery, and his comments last Friday sparked a rally on Wall Street. But there are other views. Bill Bonner reports:
[D]espite press reports of a recovery, the key indicators of real economic growth are still falling. Almost one out of ten mortgages are now delinquent. And the rate of foreclosures is increasing faster than any time in the last 30 years. Housing prices, meanwhile, fell 16% in the 2nd quarter, from a year earlier, according to the National Association of Realtors.

Unemployment claims went up last week.Furthermore,
The factories built in China to supply products to America during the bubble years now find they have no market.

Currently, overcapacity and oversupply are causing prices to fall. Falling prices mean rising currency values. Each unit of “money” buys more stuff. But there are many competing currencies, and they don’t all rise and fall together. Even in a world of deflation, some currencies will deflate more than others.

The d…

Death by Free Lunch

This from Richard Daughty, the Mogambo Guru, who defines Death by Free Lunch as
a fatal condition where idiotic governments in the thrall of mindless ‘gimme gimme’ democracy and ‘gimme gimme’ fascism and ‘gimme gimme’ socialism and ‘gimme gimme’ communism obediently borrow and deficit-spend a fiat money, which is created to monstrous excess by their central banks expressly for this very purpose, to benefit their friends and themselves in the short run, but to the horrible detriment of everybody in the longer run as all this new money percolates through the economy to cause horrendous inflation in consumer prices and in the size of government, and people start screaming in outrage and anger and rioting, not because wolves are literally eating them alive, but because inflation in prices and a bankrupt, ruined economy means that they can’t feed their crying children, and all of that incessant wailing is drilling into my head like an ice-pick jammed through my ear and into my freaking brai…

Ron Paul's "End the Fed" is coming next month

And Michael Nystrom at has a pre-publication commentary on it.

Paul thoroughly condemns the Fed on moral grounds. Nystrom writes:
In its simplest definition, morality is the ability to know the difference between right and wrong. The Fed has a power granted to no one else in society - except counterfeiters. It has the ability to create money from thin air. In fact, the Fed is essentially the largest, most revered, officially sanctioned counterfeiter in the world. It creates money from nothing, which is distributed via Congress to the politically most well-connected individuals and institutions. . .
We should remember that every other counterfeiter is considered a felon and manufactures money without a hint of government reverence. On the other hand, the government grants the power to counterfeit legally to the Fed and only the Fed, by virtue of the Federal Reserve Act of 1913.
As more money is created to fund bailouts, stimulus measures and just about everything else under…

Ludwig von Mises

Mises Institute today published a tribute to Ludwig von Mises that was written on the occasion of his 90th birthday in 1971. Authored by Murray Rothbard, it shows Mises the radical in both approach and practice of economics.
Mises shows that the market economy is a finely constructed, interrelated web; and coercive intervention at various points of the structure will create unforeseen troubles elsewhere. The logic of intervention, then, is cumulative; and so a mixed economy is unstable — always tending either toward full-scale socialism or back to a free-market economy. . .

The instability of the interventionist welfare-state system is now making fully clear the fundamental choice that confronts us between socialism on the one hand and capitalism on the other. Perhaps the most important single contribution of von Mises to the economics of intervention is also the one most grievously neglected in the present day: his analysis of money and business cycles. We are living in an age when ev…

Another hyperinflation prediction

Writes Doug French on today's
But a few savvy folks are taking Bastiat's cue that it's more important to understand what is unseen as a result of economic policies, as opposed to just what is seen. While the fractional-reserve money-manufacturing process is currently broken in the commercial banking sector — because credit-worthy borrowers are hard to source and crumbling real-estate values have bank regulators closing a handful of small banks each Friday evening — the Federal Reserve has expanded its balance sheet to make up the difference and bailed out the large-money-center banks in order that the whole apparatus doesn't collapse.

So instead of allowing the market to provide a healthy cleansing deflation, the Fed, the Treasury, and bank regulators are fighting valiantly to keep the fractional-reserve-bubble machine operating, with the ultimate result likely to be inflation and possibly hyperinflation. "As inflationary pressures mount anew and the fina…

Audit the gold stock

Stewart Dougherty writes at Goldseek (July 27, 2009):
[T]he gold holdings of the U.S. have not been audited in more than 50 years. One reason given for the lack of an audit is that it would be “too expensive” to conduct one.Dougherty continues:
Even the Treasury Department’s clandestine $50 billion Exchange Stabilization Fund (ESF), which is only one-fifth the value of America’s reported gold holdings, undergoes an annual audit. For fiscal year 2008, this audit was conducted by KPMG, a well-known, independent CPA firm. KPMG’s 2008 ESF audit uncovered “significant deficiencies,” “material weaknesses,” a “weak control environment,” and “several control deficiencies.” If a Treasury organization subject to annual audits could fail its recent exam as broadly as that, what are we to assume about the safety and security of the people’s gold supply, which, like the national money geyser, the Federal Reserve Bank, is never audited? And if the ESF is audited each year, what legitimate rationale c…

Will currency destruction save us?

According to a press release of August 12, 2009, the Fed is under the impression that its "policy tools," along with other government interventions, are bringing the recession to an end. To wit,
Although economic activity is likely to remain weak for a time, the [Federal Open Market] Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.The Fed's Beige Book for July 29, 2009, prepared by the Boston Fed, says that
Reports from the 12 Federal Reserve Districts suggest that economic activity continued to be weak going into the summer, but most Districts indicated that the pace of decline has moderated since the last report or that activity has begun to stabilize, albeit at a low level. The one bright spot for those hoping for a real recovery was that most Fed Districts "rep…

The reason for using a commodity money

In 1923 Ludwig von Mises published an essay, "Stabilization of the Monetary Unit -- from the Viewpoint of Theory." He was addressing the monetary crisis governments created when they abandoned the gold standard in 1914 and went to war. His recommendation, cited below, was ignored in favor of a fiat paper standard governments or their central banks could manipulate at will. Without sound money, economic crises are unavoidable.
The reason for using commodity money is precisely to prevent political influence from affecting the value of the monetary unit. Gold is not the standard money [merely] on account of its brilliance or other physical and chemical characteristics, but because the increase or decrease of its quantity is independent of any orders issued by political powers. The crucial function of the gold standard is that it makes changes in the quantity of money subject to the laws determining the profitability of gold production. (as translated by Jorg Guido Hulsmann in…

Greenspan's mea culpa

Bill Bonner, co-author of Financial Reckoning Day and other books on finance, has deservedly harsh words for economists generally and Alan Greenspan in particular:
At least something good has come out of the economic crisis; it blew off the purple robes that clothed economists and exposed their naked flanks. Still, they don’t deserve the beating they’re getting in the press – with snide remarks and sarcastic comments; they deserve better. A beating with sticks!

Even Alan Greenspan admitted he had “found a flaw” in his own thinking. We will have to imagine the giggles from the back of the room – if anyone had been awake. It was as if Stalin had confessed to being rude to his mother or Bernie Madoff copped a plea for shoplifting. The mea was fine, but the culpa didn’t seem to measure up to the facts. He, more than any living human being, was responsible for the biggest financial debacle in history; you’d hope he’d be a gentleman about it and hang himself.

Meanwhile, the queen of England vi…

The BIS is sweating the recovery

The Bank for International Settlements (BIS) was founded in 1930 as a means of facilitating reparations payments from Germany to the Allied powers. According to Wikipedia,
The original board of directors of the BIS included two appointees of Hitler, Walter Funk a prominent Nazi official, and SS officer Oswald Pohl, both convicted at the Nuremberg trials after World War II, as well as Herman Schmitz the director of IG Farben and Baron von Schroeder, the owner of the J.H.Stein Bank, the bank that held the deposits of the Gestapo.The BIS was alleged to have helped Germans loot assets from occupied countries during WW II, and accordingly a UN monetary committee recommended its liquidation at the "earliest possible moment." Economist J. M. Keynes and other British, along with President Harry Truman, prevented the dissolution in 1945. Today, the BIS serves as a bank for central banks, with 55 member banks worldwide. Fed chairman Ben Bernanke is currently on the BIS board.


Commodity prices and government

Investment guru Jim Rogers said recently:
I'd rather own commodities than just about anything I can think of in a period when the whole world is debasing paper money. . . If I'm right, the [commodity] bull market still has a long way to go; the fundamentals have only gotten better in the last year. The best place to have your money is in commodities.What has been the pattern of commodities historically? When the world used a commodity money -- gold or silver or both -- price indices show a decline in commodity prices. Hans-Hermann Hoppe, in Democracy: The God That Failed, notes that
Before World War I, the U.S. index of wholesale commodity prices had fallen from 125 shortly after the end of the War between the States, in 1868, to below 80 in 1914. It was then lower than it had been in 1800 [which was 102.2]. In contrast, shortly after World War I, in 1921, the U.S. wholesale commodity price index stood at 113. After World War II, in 1948, it had risen to 185. In 1971, it w…

The Case Against the Fed

Mises Institute has republished David Gordon's excellent review of Murray Rothbard's The Case Against the Fed -- a must-read for anyone wishing to understand the Federal Reserve System.
But is not this practice [of fractional-reserve banking] a blatant instance of fraud? So it would appear, and so Rothbard firmly avers that it is. Unfortunately, several nineteenth century British legal decisions held otherwise, and these verdicts were adopted by the American courts as well. How serious were these decisions? In Rothbard's view they have been primarily responsible for "the disastrous inflations of the past two centuries." [Mystery of Banking, p. 93]

A system of free banking would serve to counter the tendency of banks to inflate through fractional reserve banking. "Free banking," Rothbard concludes, "far from leading to inflationary chaos, will insure almost as hard and noninflationary a money as 100 percent reserve banking itself." [ibid., p. …

Cash for Clunkers

The Associated Press reports that
The government's popular "cash for clunkers" program may be running out of money after only a matter of days as car shoppers flock to dealerships to take advantage of the rebates.Known as the Car Allowance Rebate System, or CARS, it was originally funded at $1 billion and scheduled to run until November 1, or until the money ran out. The money ran out in days, as CARS has subsidized the purchase of 22,782 vehicles, with another 25,000 deals in the pipeline waiting government approval. Dealers are worried the government won't come through with the money.
Lawmakers said they would try to find additional funding for the program, which under the legislation could grow to $4 billion for the funding of up to 1 million new car sales.Wouldn't it be wonderful to help consumers take up to "1 million gas guzzlers off the road," as the CARS bill's author, Rep. Edward Markey, D-Mass., said recently?

The answer is no -- not if yo…