Now Available from Vending Machines… Gold

In yet another sign of the times, a German company has introduced vending machines in airports and train stations that dispense gold in lieu of the traditional soda and snacks. Even more telling is that the vending machines have received quite a positive response. What do the Germans know that we don’t? Mainly the dangers of inflation and what can happen to a currency run amok.

It seems to be one of those cases where the lack of a history of failure has inured Americans to the dangers of pushing their currency too far. After all, one would think that the logical place to put such a machine would be right here in the good old US of A where the government is running close to a two trillion dollar yearly deficit and the central bank is directly monetizing a portion of this debt. This is the logical place to put a gold vending machine, but there are none to be found in the United States- well, at least, not yet. Chalk it up to cultural differences. The hyperinflation of the Weimar Republic happened in Germany, whereas the dollar has never had any similar episode. The closest we ever came was the inflation of the 1970s, and that seems to be but a distant memory. Continue reading Now Available from Vending Machines… Gold

“The Dollar Sucks!” Says China’s Central Bank

Increasingly various Chinese sources have been going on about their dollar woes. A year ago it was just an academic. Freedom of expression is a limited commodity in totalitarian China, so if you see an academic coming out making statements critical of China’s trading partner you can probably surmise that that message is coming from higher up’s in China’s chain of command. Having a lesser known academic figure make the statement was a way to distance the criticism from the official channels.

But that kind of subtle criticism didn’t seem to have made much of an impact. In fact, we spent the next year attempting to solve every round of bad news by borrowing or printing more money. Last month, the Premier himself said that he was concerned about the value of his country’s investment in the US Dollar. No longer relying in mere academic to hurl criticism, the Chinese wanted us to know on no uncertain terms that they were starting to get a little peeved. We responded to that proclamation by having Helicopter Ben print up $200 Billion or so and start buying US Treasuries- the highest form of inflationary money printing there is.

Now, China’s pissed. “How pissed?” you ask. So pissed that their central bank just came out and called for a new reserve currency. Having the central bank of your major trading partner and holder of close to $2 trillion in your country’s debt come out and call for a new currency to replace yours is not usually considered a good sign. It’s a bit like taking a woman out on a date and having her say that she would very much like to have children someday… with someone who is almost completely unlike you. Rocky times are clearly ahead for this relationship.

But you wouldn’t know that by looking at the US Stock market. Both the Dow and the NASDAQ were up 6.8% today. Continue reading “The Dollar Sucks!” Says China’s Central Bank

Conspiracy Theories That Surround The Federal Reserve: Part II

My last entry explored the popular conspiracy elements contained in G. Edward Griffin’s The Creature from Jekyll Island: A Second Look at the Federal Reserve In part two of this series, I’m going to be looking at the particular conspiracies that I have come to accept as part of the formation of the Federal Reserve.

The period of American history that is crucial to understanding the formation of the Federal Reserve is the last 1800s. Unfortunately, this is a period of American history where most Americans are completely ignorant. US history as it is taught in most schools pays scant attention to this period in history. The US History most of us learn in school spends most of its time discussing Colonial History, the Revolutionary War, the Civil War, and Cold War. No major wars occured during the late 1800s, so its just not considered worth spending much time on. If anything, the only time this period in history gets mentioned is by Democrats trying to remind us how bad this period of time was- back when the goverment’s role was small and bureaucrats and regulators had overrun the nation. This “Gilded Age of the Robber Barons” (as they term it) was surely a vicious time that we can’t afford to go back to.

I derided this attitude in a prior blog, “Who’s Afraid of the Big Bad Robber Barons?” The people who attack this period in history most, tend to be those who understand it the least. The Industrial Revolution was underway during this period and society was in upheaval.The United States was becoming a mammoth industrial power and the real wages of the working man increased dramatically; real wages for labor have only stagnated since, so let’s not be too hasty in our condemnation of this era of the Robber Barons. The foundations of the nation we would become today were all laid during that period. Continue reading Conspiracy Theories That Surround The Federal Reserve: Part II

Conspiracy Theories That Surround The Federal Reserve: Part I

This nation was founded on hard money. It says right in our Article I, Section 10 of the US Constitution that, “No State shall … make any Thing but gold and silver Coin a Tender in Payment of Debt.” We lived as a hard-money nation for well over a century; Americans would only accept gold or silver coin in payment of debt or bank notes that were redeemable in same. That’s not the world we live in today, and on that, most everyone can agree. As for how we got here, there are many different versions of history. This article is the first in a three part series that will examine the history of how this came about, including the various conspiracy theories surrounding it.

The pedestrian version of the story is that the American public wanted government oversight over the banking industry, so Congress convened a series of hearings — The Pujo Hearings — as they gathered the necessary information to act. Soon, the Federal Reserve Act was drafted. This provided for a large bureaucracy that included a Federal Reserve Bank in most major cities. Their purpose for having them spread across the nation was two-fold: first, to distribute the power of the Fed far and wide, ensuring each region adequate representation. Secondly, to provide a local Federal Reserve Bank for oversight of the regional banks, making sure they were responsibly conducting their business in a manner not endangering to their depositors. The Federal Reserve Act also empowered the Fed to be the “lender of last resort”; essentially, it was allowed to create money from nothing so that it may purchase US Treasury bonds from troubled banks. The Act was sold as a means of breaking up the power of the banking industry and returning it to those representing the people, to promote responsible banking, and make bank failures a thing of the past.

The first book I ever read on the Fed was G. Edward Griffin’s The Creature from Jekyll Island: A Second Look at the Federal Reserve, which tells a far more gripping tale of the its creation. Continue reading Conspiracy Theories That Surround The Federal Reserve: Part I

Exploring the Myths of the Consumer Driven Culture: Part II

In a previous blog, I defined the basic terms of economic analysis: assets, liabilities, debt, capital, and production. In the second part of this series, it’s time to introduce the complicating factors of the banking section.

As we defined last time, debt is a liability that must be paid from future production. Assets/savings are properly represented either by unconsumed economic goods; the reason we adopt this strict definition is because you can’t store a service and because we need to differentiate between the real savings of a society and money. If money is itself an unconsumed economic good, as it is with all forms of commodity money, then there is no difference. If, however, the money is issued by fiat, then it is functioning merely as a medium of exchange between members of a society who seek to exchange some of theirs production for the benefits of other’s production.

I’m sure astute readers will notice I’ve left services out of the above discussion. That’s not because they are not valuable, but only because they can ultimately only be paid for out of someone’s production. Sure, I may render a service to someone else who herself only derives income by way of providing services, but one can not base a society of services alone: real goods must enter the equation at some point or we’d all starve to death. That’s why I’m saying that ultimately, services must be paid for out of production.

Now enters fiat money into the picture. By law, it must be accepted as money, and it has a certain par value for the trade of goods and services. If the money supply is fixed at a certain level, then good and services should trade in fairly stable range; in fact, because technology lowers production costs, we should see money gain purchasing power of time. If, on the other hand, money is printed by fiat and injected into the system, then you will start to see price distortions. The price distortions will start in roughly the area that the new money entered the system, but over time it will cause an across the board increase in prices. This is because the purchasing power of each unit of the fiat money is being diluted by the introduction of each new unit of fiat money. Continue reading Exploring the Myths of the Consumer Driven Culture: Part II

Exploring the Myths of the Consumer Driven Economy: Part I

Roger recently posted in comments that deflation was bound to continue for “the next 2-3 year period.” His argument referenced a number of different sources and pulls in a lot of complex theories. I feel that it would be best to analyze these points one by one because these are the same points that get tossed around by people on a daily basis. I figure that doing so will take three different posts in a series where I explore economic myths. In so doing I’m going to provide a lot of definitions that are slightly different from the definitions that we here economics spouting. You will find that my explanations provide a great deal of clarity and reduce the situation to mere common sense. 

Let’s start with what wealth is. Wealth is a stock of assets. Assets are, for the most part, unconsumed economic goods. We traditionally think of wealth in terms of money and, back in the days of the gold standard, money was itself an unconsumed economic good. However today our modern money has been technically divorced from economic goods and services. It’s not a complete divorce because we can still use Federal Reserve Notes to pay for things. But the rate of exchange between money and good and services fluctuates from day to day. If we ever found that we could not exchange US Dollars for goods then we would cease to desire them at all and someone who had a lot of them would not be considered rich. This proves my point about wealth. If someone has a mass of things that either are unconsumed/functional economic goods (i.e. real estate, a car, a storehouse of fine wines)  or things that are immediately convertible into such (money) then we would consider him wealthy provided that he did not also have debts that exceeded his assets.

Which brings us to the next question, what is a debt? Continue reading Exploring the Myths of the Consumer Driven Economy: Part I

The Dow-Gold Ratio Renders Its Verdict

As those of you who have read my book know, I’m a firm believer in the power of looking at the daily closes of the Dow Jones Industrial Average and comparing it to the price of an ounce of gold. For those of you who don’t know, the Dow Jones started as a simple average of the share price of all of the companies that comprise it; for example, if there were three companies on the comprised the Dow average that had share prices of $5, $10, and $15, then the average would simply be $10.

Over the years, the number of Dow companies that comprise the Dow has risen from the original twelve to now include thirty different industrial companies. Since it’s simply an average of the number of companies, expanding the number didn’t have much impact. it’d be similar to looking at the average test score for classes of different sizes: more or fewer students don’t matter as we’re looking at an average. The reason the Dow Jones Industrial Average (DJIA) is such a large number in comparison to the stocks that comprise it is that those stocks have had numerous splits throughout the years while the Dow has not. Rather the Dow simply corrects for splits so as to maintain a continuous average throughout time. Just as the price of a single share of Microsoft stock would be $8928 at the close of 2007 if it had never split, the DJIA is a average of companies with such share prices. Continue reading The Dow-Gold Ratio Renders Its Verdict

The Nationalization of the Banking Industry

I’ve often said that world governments work in close cooperation with the world’s banking industry. It’s a natural partnership; one creates the money for the other to spend. Of course, our government was founded to be something different. It says right in Article I, Section 8 of the US Constitution that the Congress shall have the power, “To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.”

Despite the fact that Section 8 of the Constitution uses the word “coin” in lieu of print, it is not a blanket prohibition against the issuing of paper money as many of my Libertarian friends believe. The same section of the US Constitution specifies that Congress does have the power “To borrow Money on the credit of the United States”. During the War of 1812, the US Treasury was issuing paper interest bearing notes in order to finance the war and to circulate in lieu of bank notes which were greatly reduced in circulation due to the expiration of the charter of the Bank of the United States in 1811. In a letter by Thomas Jefferson to celebrated French author Say,  dated March 2, 1815 Jefferson wrote:

The government is now issuing treasury notes for circulation, bottomed on solid funds and bearing interest. The banking confederacy (and the merchants bound to them by their debts) will endeavor to crush the credit of these notes; but the country is eager for them a something they can trust to, and so soon as a convenient quantity of them can get into circulation the bank notes die.

So it’s not that the US government was not able to issue notes of paper that would circulate, but that it could not “print” money. That is to say, it could not issue fiat money that was legal tender. The treasury notes that the government issued were a paper money, but the notes were promises to pay gold and silver at a future date. More importantly, no one was under any obligation to take them. Compare that to our present day paper money which must, by law, be accepted for “all debts public and private.” 

The Constitutionality of the government issuing fiat money as legal tender has often been questioned as I discussed in my book. The Supreme Court of the United States declared the United States government had no authority to declare fiat paper money as legal tender in 1871, but President Grant appointed two justices to the Supreme Court who favored fiat money and that decision was soon overturned with Knox v Lee. The problem is that, as Thomas Jefferson himself wrote as Vice President in 1798 that the US Government lacks the Constitutional power “of making paper money or anything else a legal tender,” and yet that is what it has done and continues to do. 

Our modern arrangement does not have the US Government itself issuing the fiat money, but instead it is issued by the Federal Reserve, a private bank. As I mentioned at the state of this post, this arrangement, of the government giving legal tender powers to a private bank that then controls the issuance of money is an old one. It was first tried in England with the Bank of England acting as the monetary extension of the policies that were enacted by Parliament. The reason the government uses its powers to endow a separate body with one of the most fundamental and abusive powers of the state is simple: it garners the support of the monied interests by allowing them the power to control the issuance of the currency. As long as the government is then allowed to monetize its debt by having a central bank uses some of its money creation power to buy government bonds, then both parties are happy; the government has de facto use of a printing press and the private bankers give the legal tender the aura of respectability in return for using the printing press for their own private purposes in the meanwhile. 

But what should happen if the bankers go broke? It might seem a paradoxical question given that they have the power of the printing press, but what would happen if they made so many bad loans that to use the printing press to inflate away the loses would pose too large a threat to the system? I don’t ask this situation lightly, because it’s the situation we’re in today. As the New York Times January 16th story states, the Rescue of U.S. banks hints at nationalization.  With mounting loses, the government has had to step in an absorb bank loses as well as give banks additional funding by way of acquiring equity stakes in these banks. But we are now at the point where the government is basically the largest shareholder of banks such as Citigroup, and, by also being in the position to decide who has to bear what loses and how much of these loses to absorb, the government is now in the position to decide whether a bank shall remain in business and how much profit it will be allowed. This is, of course, in addition to its powers as the single largest shareholder of these banks. 

In essence, the puppet of banking has slipped off the hand of government in this puppet show and any casual observer can tell that its really the entire banking industry has collapsed down to the government’s printing press. Furthermore, the government is now engaging in the seemingly capricious decisions of what gets the benefit of the printing press and who doesn’t. If the banking system, why not the auto industry? If the auto industry, why not, as Hustler Publisher Larry Flynt asks, the porn industry. After all, pornography has fallen on hard times too. 

This situation is dangerous for the government, because it presents the spectacle of modern finance to the public in a way that makes it easy for the common man to understand how the powers of government are being used in a very arbitrary way for the benefit of certain groups. They will also quickly come to under stand that if they are not amongst the groups who are benefitting, then they are amongst the groups that are being made to pay for it. Although, in this case, the payment will be made by way of inflation. The printing press will run and bailout the banking and the auto industry, but the rest of us can do nothing but watch as our money loses value.  This will expose the simple truth of Frederic Bastiat who wrote that “Government is the great fiction by which everyone endeavors to live at the expense of everyone else.”

Staying Motivated in Today’s World

I have a good friend named Baron in Los Angeles. He plays in a rock band, Manic Automatic, and he really deserves credit for getting my interested in looking into the ill effects of the Federal Reserve on American society. He’s going through a rough time in his life right now. Part of it is just those moments we all go through as we age and realize that all the dreams we had growing up have gone unfulfilled, but part of it probably related to his politics. He shares my Libertarian outlook on American politics and that means that, unlike the vast majority of the politically aware American public, he never gets to really celebrate when looking at an election result. Instead he just seems to get increasingly disgusted with a world that seems comprised almost entirely of sheep and the shepherds in the banking industry who are there to sheer them. I understand his frustration because I feel it too.

I was reminded of this recently when I was listening to Andrew Gause being interviewed on Mr. Gause wrote the book, Secret World of Money
as well as Uncle Sam Cooks The Books. At one point during the interview he talked about studying the Federal Reserve for over thirty years and that over that time he had gone from trying to awaken people to action to simple acceptance of what was going on. I don’t have nearly the length of time under my belt that he has, but I have also reached the same sentiment. 

As Morpheous says in the movie The Matrix “You have to understand that most of these people are not ready to be unplugged. And many of them are so inert, so hopelessly dependent on the system that they will fight to protect it.” And so it is with us. Americans can be made to understand that their monetary system is entirely run by a banking cartel that pursues its own interests well ahead of considering theirs, but most of them just don’t care. For those politically minded enough to even be able to follow, the Federal Reserve is part of an indispensable system that they need in order to make the beliefs they are truly passionate about doable. After all, the Republicans want war and the Democrats want the socialized medicine. Neither of those things would really be doable in the absence of a fiat money system. 

And so we go through life; we are surrounded by people who simply don’t realize what’s going on. They are either to apathetic or ignorant to care or they have allowed themselves to be so deluded that they can’t understand the problem outside of the a political framework that makes the problem unsolvable. Few people understand what a gold standard is, what’s our Constitution says about gold and silver being legal tender, or that the world we live in today is not so much better than the old that those ideas have not lost their relevance. Of the few people out there who do care, they are typically so distrustful of the system that they believe so many conspiracies as to simply file “Federal Reserve” as just another conspiracy they believe in such as the JFK assassination or that 9/11 was an inside job. Being a scholar of the Federal Reserve is a lonely life. 

I think the problem here stems from the impossibility of the situation we realize we are in. The world’s banking system is so entrenched that we few who really understand what is happening could never hope to dislodge it. What are we to do then? I say we simply come to terms with this fact; that we put our arms around it and really accept that no matter how much proof we amass as to who is really going on, we will be powerless to change it. Our true power comes in being able to use our knowledge for our own personal gain. 

What? Did you think I was going to say that we use our knowledge for good? What’s good in this world? When the voting population of the United States votes to re-elect George Bush so that he can continue to mortgage our nation’s future fighting a war that was started with a lie, what meaning does this notion of good really have. Sure, we should try to be good to each other and we should engage in a system of ethics such that we improve the sphere of our world that is right around us, but the more money we have, the more good we can do. Instead of blindly investing our money like sheep and allowing ourselves to be sheared, why not use our knowledge to enrich ourselves? 

I’ve been able to soundly beat the stock market year after year and most of that comes from simply trying to figure our what’s really going on in the world and reacting accordingly. When I come to the investing landscape with full knowledge of what’s really going in in the world and everyone else is employing a buy and hope philosophy, I’m at a huge advantage. I have enjoyed using this advantage to enrich myself and I will continue to do so in the future. Why bother trying to save a world that doesn’t want saving when you can gain access to wealth through predicting the Fed’s next move?

I don’t know about you, but those thoughts are what gets me out of bed in the morning. To indulge in the idea that we can somehow defeat the world’s banking system is folly. Sure, we can show how the world is worse off because of it, but no one really cares. We have to accept that most people simply don’t want to be unplugged and instead use the powers that we do have to lead extraordinary lives.

Obama, Keynes, and the Perpetual Motion Machine

Obama is calling for government deficits over the next couple of years to avoid a “deep recession.” I’m not sure if he said it explicitly, but conversations with Democratic friends has shown me that it appears to be a widely held belief that the money can all be made up from tax revenue off of the booming economy that should result after a couple of years or deficit spending. It harks back to what I’ve heard many a Keynesian say; the government needs to run deficits in the down years and surpluses in the up years. “It would only work,” they say, “except that politicians can never bring themselves to reign in their spending.”

Just as markets work towards the betterment of all involved if they perform rationally and with good information, governments would be the perfect guardians of our welfare if only they were somehow free of corruption and not run by power-hungry politicians. Except that we don’t live in an ideal world, so we must make do with the best that we have. However, even if perfection were somehow available, Keynesianism would still be nothing but an intellectual fraud because it’s basically promising the economic equivalent of the perpetual motion machine.

For those of you who don’t know, the perpetual motion machine was a mythical device that, once set in motion, would continue to run forever without requiring any additional energy inputs. There were many attempts in the Middle Ages to create such a device, but they all failed. You can’t get something for nothing, you see. If a machine is to be in motion, then it will require energy. One can not derive more energy from the machine’s motion than it requires to set it in motion and run it. This was not understood at the time, because no one had yet devised the First Law of Thermodynamics which stated that “Energy can neither be created nor destroyed.” 

Similarly, Keynes promises similar benefits to the perpetual motion machine by theorizing that economic downturns are caused by a lack of demand and that the government can step in to become the prime demander, and thereby set in motion a chain of events by which the economy will start booming again. Keynes figured that money put into the system to get the demand humming again could later be taken back out. There’s a reason why Keynes’s system has never worked, and it doesn’t just have to do with greedy politicians. Just as in thermodynamics, you can not prime the pump of commerce and magically create a fountain of wealth from which you can withdraw far more than you put in. As my momma used to tell me growing up, “There ain’t no free lunch.”

Even if the government did exactly as Keynes said, it still wouldn’t work, because Keynes was wrong. Pure and simple. Economic downturns are not caused by “insufficient demand.” Indeed, insufficient demand is impossible, as Jean Baptist Say had started over a century earlier (and I’m paraphrasing), “There is not a supply, which is not also a demand.” That is to say that in order to make a product such as as car, I will demand inputs from labor as well as raw materials of all kinds. If the demand where not there for the car, then the demand would also not be there for the labor for the car or the raw materials. Keynes looked at this situation and said that we needed to stimulate demand for the car in order to employ the autoworkers, but what he didn’t seem to understand was that it is impossible, as a whole, for society to have inadequate demand for anything. Keynes attacked Says law as not being able to explain economic downturns, but Say himself actually clearly states that economic downturns are possible but will be hastened towards ending if the government and people are quickly willing to allow the market to find market clearing prices. (For a clearer understanding of Say’s Law, and the failures of Keynesianism, I’d refer readers to Rehabilitation of Say’s Law.

Try to picture it for a minute. How is inadequate demand possible? If people stopped demanding cars, it must be because they were demanding something else other than cars with the money they were spending the buy the cars. Thus demand lost in one arena is picked up in another. “But what if the consumer simply stopped demanding altogether?” you might ask. In that case, they will be looking for an excellent vehicle with which to park their savings gained by not consuming. As savings accumulates across society, interest rates are lowered because of all the money available to lend. Cheap money, as Keynes could tell you, leads to economic boom times as entrepreneurs can now go out and borrow the savings of the others and demand both labor and raw materials for their new venture. 

What, you still don’t believe me? What if no one ever, ever consumed enough to justify investing? Outside of being nonsense, let’s take a look at that scenario for a minute. Let’s simply it down so we can understand it easily, and let’s look at the economy of Robinson Crusoe who, incidentally, has been the target of so many economics texts that I’ve been tempted to pick up the book. One man alone one a desert island demand food and water, and so he must use his labor to create his the objects he demands. To do otherwise, is to starve and die. Now Crusoe demands other things as well as food and water: shelter, clothing, a boat namely. But to acquire those things, he must also build them himself. So in our economy of one, time spent is the only medium of exchange. Crusoe is free to do what he will with the time he has, but he will starve unless he uses at least some of the time to fish and gather water just as he will be without shelter if he does not spend the necessary time to make a house for himself. Even in our economy of one, Crusoe’s demands are far more than his ability to actually consume given the time he has, and so it is with all of humanity. Our wants are limitless. The idea of insufficient demand, is just a Keynesian fairy tale. 

Keynes wanted to explain the business cycle by saying that consumers weren’t demanding enough, but people always have wants for more than their ability to satisfy. As long as people have money, they will want to spend it and it is only interest rates offering us even more goods in the future if we would but forgo present consumption that incentives us to save at all. An across the board reduction in the demand for all goods is only possible when there has been an expansion of the money supply because then people go from having access to lots of credit in order to buy things to suddenly having less access to credit as they have taken on more and more debt. And so it is not the lack of demand that causes economic downturns, but rather the natural after effect of a previous credit expansion. Where the previous credit expansion to never have happened, then there would have been a far more even flow of demand across time instead of people demanding more than they could afford at one time and demand less in the future when the bill came due from past excesses. 

The reason I go into this is so that we could now understand just how ridiculous Keynesianism is. Credit expansions cause a surge in demand that must later be “corrected” when that source of credit is exhausted. Keynes proposed that the government could expand credit to gain great multiples of extra demand and revenue in the future, but that’s clearly impossible. The demand will naturally fall back to its natural level after the credit runs out, and if the government were to ever withdraw some of the credit in the future in order to try to follow Keynes’s advice to run surpluses in boom times, then the system would crash even harder. And so the source of continual budget deficits is not due to the greed or incompetence of politicians, but rather because credit expansions, once started, must continually be supplied with additional credit lest they collapse in on themselves. 

Some economists understood this. In his book, Human Action: A Treatise on Economics Ludwig von Mises wrote that, “The wavelike movement effecting the economic system, the recurrence of periods of boom which are followed by periods of depression is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion.” Yet here we are, decades after Keynesianism failed to bring us out of the Great Depression or Japan out of it’s “lost decade”, still seeing the same ideas spouted by politicians. Neurosis is the tendency to do the same thing over and over again and expect different results. It would seem we are a very neurotic people.