Have nothing to do with the [evil] things that people do, things that belong to the darkness. Instead, bring them out to the light... [For] when all things are brought out into the light, then their true nature is clearly revealed...

-Ephesians 5:11-13

Tag Archives: Fiat Currency

The Bitcoin and Paris Hilton

This article first appeared in The McAlvany Intelligence Advisor on Wednesday, November 27th, 2013: 

 

In a dismissive article in The New York Times on Monday, the author quoted a Bitcoin skeptic who predicted: “In a matter of months you won’t be hearing about it. It will go the same way of Paris Hilton.” He failed to follow the old rule: keep your words sweet and tender because someday

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Proposed Changes to US Currency Symptom of Much Larger Disease

US Currency in UV, visible and IR light

US Currency in UV, visible and IR light (Photo credit: xxv)

Within days of each other, two announcements concerning the future of the US currency appeared in the popular press, and each avoided any mention whatsoever of the primary driver of the changes.

First was the announcement on November 26th from Secretary of the Treasury Timothy Geithner that the U.S. Mint will begin removing pennies and nickels from circulation starting the first of the year, allegedly that they’re too expensive to make. It costs the mint nearly 5 cents to make each penny while it costs more than 16 cents to make a nickel. This is costing the mint a lot of money, an estimated $187 million last year alone.

Two days later CNN reported that the Government Accountability Office (GAO) has called on the Congress to stop printing one-dollar bills and switch instead to one-dollar coins. The GAO claimed that such a move could actually make the government some money:

A $1 coin typically costs about 30 cents for the U.S. Mint to produce, but then the government can sell them to Americans for a dollar each. That financial gain is called seigniorage, and over a period of 30 years, it could [make] the U.S. government about $4.4 billion, the GAO said.

Avoiding the real issue, the GAO said that although the coins cost more to make, they would last longer, thus turning a profit to the government:

We continue to believe that replacing the note with a coin is likely to provide a financial benefit to the government if the note is eliminated and negative public reaction is effectively managed through stakeholder outreach and public education.

Unfortunately there is little likelihood that any of that “outreach” and “education” will include any attempt at explaining why the change is necessary.

The real issue is the declining purchasing power of the currency. And that goes back to the year 1913 when the Federal Reserve System was

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Keynesians are Crazy! Here’s Proof:

English: Japanese Prime Minister Shinzo Abe at...

Japanese Prime Minister Shinzo Abe at the G8 summit in Heiligendamm. (Photo credit: Wikipedia)

For 20 years the Japanese economy has languished. Its stock market, once at 40,000, now is below 10,000. The solution? More of the same medicine that hasn’t worked! It’s insane. At least one intelligent soul has written about it, in The New York Times no less. He calls such policies “unusual”:

For years, proponents of aggressive monetary policy have offered this unusual piece of advice as a way to end Japan’s deflationary slump and invigorate the economy. Print lots of money, they said. Keep interest rates at zero. Convince the market that Japan will allow inflation for a while.

It hasn’t worked. For 20 years it hasn’t worked. So now, Japan’s former prime minister has a great idea:

In a speech in Tokyo on Thursday, Mr. [Shinzo] Abe said he would call for the Bank of Japan to set an inflation target of 2 to 3 percent, far above its current goal of about 1 percent, with an explicit commitment to “unlimited monetary easing” — an open-endedness that has caused jitters among some economists. The bank’s benchmark interest rate should be brought back to zero percent from 0.1 percent, Mr. Abe added.

Abe wants to do even more. He proposes that Japan’s central bank buy construction bonds to

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Hyperinflation in Iran – is US Next?

Iranian rial

Iranian rial (Photo credit: Wikipedia)

Once again I am indebted to Gary North for an article to his members only for an insightful discussion of the hyperinflation going on in Iran. Indirectly, he paints the picture for what will inevitably happen here.

For the record, I pay him $9.95 a month for his daily insights, and I’m glad to do it. I think it’s the bargain of the year. He has thousands of subscribers, so it works well for him too. I recommend that you consider signing up as well. How he writes four insightful articles every day is beyond my comprehension.

Back to Iran: North quotes Steve Hanke at Cato (you can get his article for free!):

Since the U.S. and E.U. first enacted sanctions against Iran, in 2010, the value of the Iranian rial (IRR) has plummeted, imposing untold misery on the Iranian people. When a currency collapses, you can be certain that other economic metrics are moving in a negative direction, too. Indeed, using new data from Iran’s foreign-exchange black market, I estimate that Iran’s monthly inflation rate has reached 69.6%. With a monthly inflation rate this high (over 50%), Iran is undoubtedly experiencing hyperinflation.

The Iranian government is destroying the currency and hence the economy. And from there, the government itself. North thinks if the Israelis wait long enough, they won’t have to

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Constitution Quiz #2: Where Does the Fed Fit In?

John Birch Society – Can You Answer 24 Questions About the Constitution?

Question No. 9: Did the Constitution give the federal government power to create a bank?

Answer: No. It was given power to “coin money,” meaning the power to establish a mint where precious metal could be shaped into coinage of a fixed size, weight and purity.

English: Detail of Preamble to Constitution of...

Detail of Preamble to Constitution of the United States (Photo credit: Wikipedia)

Here are some more questions about the Constitution that initially stumped me:

Question No. 11: Does the Constitution allow a President alone to take the nation to war?

Answer: Absolutely not. The Constitution states very clearly that only Congress has power to take the nation into war.

Question No. 13: Are the Bill of Rights considered part of the original Constitution?

Answer: Many do hold that view because if the promise to add the Bill of Rights had not been made, some of the states would not have ratified the Constitution and it might not have become the “Supreme Law of the Land.”

Question No. 14: According to the Constitution, how can a President and other national officials be removed from office?

Answer: They can be impeached by a majority in the House and tried by the Senate. Impeachment is not removal; it should be considered only as an indictment to be followed by a trial. Two-thirds of the senators “present” must approve removal at a subsequent trial or the person who has been impeached by the House shall not be removed.

Question No. 16: How many amendments to the Constitution are there?

Answer: There are 27. The first ten can be considered part of the original Constitution. And Amendment 18 was repealed by Amendment 21, which means that in 223 years, there have been only 15 amendments. Amending the Constitution is a difficult process, made so by the Founders to keep anything silly or dangerous from being added in the heat of passion.

I’ll look at a few others tomorrow that I couldn’t answer immediately (without looking).

Finish taking the Constitution Quiz here:

Constitution Quiz #1: Where do Executive Orders Fit In?
Constitution Quiz #3: Where Does Democracy Fit In?

Ron Paul, QE3, and Unintended Consequences

Ron Paul

Ron Paul (Photo credit: Gage Skidmore)

On Friday, Congressman Ron Paul, chairman of the House Subcommittee on Domestic Monetary Policy, invited James Grant and Lewis Lehrman to explore the unintended consequences of the Federal Reserve’s latest plan to install Quantitative Easing Number Three (QE3). The Fed’s announcement on September 13 that it would embark on an “open-ended” program to purchase mortgage-backed securities raised concerns about the long-term impact such a program would have on consumers, savers, and investors.

Grant, editor of Grant’s Interest Rate Observer, noted that “prices are the mechanism by which the economy operates” and when the Fed manipulates interest rates, it interferes with prices. In other words, the Fed, by its actions, is engaging in “financial price control” with predictable outcomes, distortions, and consequences:

  1. First, such activity subsidizes speculative activities, as investors seeking higher returns on their capital are forced into making higher risk investments, increasing the chances that they will lose some or all of their capital.
  2. Second, the Fed’s program raises the prices of commodities, as speculators and investors seek a “safe haven” in investments that can’t be inflated or expanded at the wish of a governing board.
  3. Third, this action by the Fed punishes savers and wage earners. Savers receive lower and lower rates of interest on their savings, disrupting plans for home buying and retirement. Wage earners have less incentive to save as the value of their savings becomes more questionable as the dollar loses value.
  4. Fourth, Grant pointed out that the Fed’s plan interferes with international trade, which depends on price predictability over time.

But most importantly, according to Grant, the Fed’s willingness to continue to purchase government securities allows Congress to put off the “day of reckoning” — dealing with the inevitable consequences of

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Truth from the Fed? Impossible!

Austin Hill – Even the Fed Doesn’t Believe It’ll Work

Richard Foster, President of the Federal Reserve Bank of Dallas, said:

With each program we undertake to venture further in that direction (in the direction of using monetary policy as stimulus), we are sailing deeper into uncharted waters.

We are blessed at the Fed with sophisticated econometric models and superb analysts. We can easily conjure up plausible theories as to what we will do when it comes to our next tack or eventually reversing course.

The truth, however, is that nobody on the committee, nor on our staffs at the Board of Governors and the 12 Banks, really knows what is holding back the economy.

Chief Actuary Richard Foster

Chief Actuary Richard Foster (Photo credit: Talk Radio News Service)

What an amazing admission! This comes close to admitting that the King is naked after all! The mantle of credibility is slipping badly when one of its own admits that the Fed hasn’t a clue.

Austin Hill then asks another pertinent question:

[Our economy] is already flush with $1.6 trillion in excess private bank reserves owned by the banking sector and held by the 12 Federal Reserve Banks. Trillions more are sitting on the sidelines in corporate coffers. On top of all that, a significant amount of underemployed cash—or fuel for investment—is burning a hole in the pockets of money market funds and other non-depository financial operators.

This begs the question: Why would the Fed provision to shovel billions in additional liquidity into the economy’s boiler when so much is presently lying fallow?

Let me guess: because that’s all they know!

And the impact of continuing, and accelerating, a program that has been proven to be a failure? Here’s a peek at the Federal Reserve’s own chart of the massive “fallow trillions” just waiting…and waiting…to enter the economy and cause the explosion in prices so many are expecting.

When these trillions hit the street, I’m hopeful citizens will remember who’s responsible.

The Fed’s Big Plan: Deceive and Print

Federal Reserve – Press Release, 9/13/2012

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.

The Federal Reserve: The Biggest Scam In History

The Federal Reserve: The Biggest Scam In History (Photo credit: CityGypsy11)

So, another $40 billion of new money pouring into the economy, right? That’s how the Fed operates: it doesn’t borrow the money to buy those mortgage-backed securities that banks are holding (and would love to get rid of and dump onto the Fed). It’s going to “create” that new money and use it to buy them.

That’s the classical definition of inflation. It’s also a classic indicator of panic on the part of the Fed. I mean, what else could they do? The only tools they have are deception and printing.

Here’s the deception part, from the Fed’s official press release (I’ve italicized the relevant parts):

Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent monthsGrowth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed levelInflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.

Let’s look at these highlighted parts of the Fed announcement:

Economic recovery has continued to expand at a moderate pace in recent months.

What recovery? ECRI called for a recession a year ago, iterated its position back in June, and just reiterated it again last week. John Huntsman and Mish Shedlock both concur: we’re already in a recession.

Growth in employment has been slow.

Slow? How about non-existent? It’s growing so slowly that more people are leaving the workforce than are being hired. How about that for “slow?”

The unemployment rate remains elevated.

It’s actually much worse than officially reported (more reliable estimates put the rate at 15 percent, some even higher). The unemployment rate went down because of those people ending their job search efforts!

Growth in business fixed investment appears to have slowed.

Well, what would you expect? Would you invest in this economy now? Why? The Fed is awfully slow in coming to this obvious conclusion.

The housing sector has shown some further signs of improvement, albeit from a depressed level.

Housing starts are running about 750,000 a year, down from 1.2 million in 2007. That’s about 60 percent of normal. Some improvement!

The prices of some key commodities have increased recently.

Oh, really? Have you looked at the price of gold and silver lately? The are setting new highs as I’m writing this!

Deceive and print: how about that as a strategy to get the economy moving again?

German High Court Approves Step Toward European Dictatorship

English: European Central Bank ECB Eurotower i...

English: European Central Bank ECB Eurotower in Frankfurt a.M. Germany Deutsch: Europäische Zentralbank EZB Eurotower in Frankfurt a.M. (Photo credit: Wikipedia)

The decision on Wednesday by Germany’s Federal Constitutional Court that clears the way for the European Stability Mechanism (ESM) to extend its power over the national sovereignty of the eurozone’s member states was celebrated as a victory to save the euro.

It was nothing of the sort. It was instead a political victory for dictatorship in the name of the euro.

By putting some temporary limits on just how much the German government can contribute to the ESM, the decision made it appear to be prudent and careful and protective of Germany’s national sovereignty. The court said that Germany’s contribution cannot exceed the currently agreed to amount of $250 billion without approval by the Bundestag, the lower house of the German parliament (roughly equivalent to the House of Representatives in the United States). And the court also required that funds given to the ESM must be

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The Unintended Consequences of Low Interest Rates

Interest rate vs money balance

Interest rate vs money balance (Photo credit: RambergMediaImages)

Complaints from savers about low rates of return on their money have reached the business page of the New York Times. According to the Times, when Bill Taren, a retiree living near Orlando, Florida, learned that his credit union would pay just 0.4 percent interest on his savings, he decided to take the money out of the bank and put it into his mattress because, he said, “at least there we can see the cash.”

It was worse for Julie Moscove of Fort Lauderdale, Florida. Over the last four years, she has watched her interest income drop from $2,000 a month to $400 a month. She said, “It’s ridiculous. I cut coupons now.”

And Dorothy Brooks has been forced to go back to work in order to supplement what’s left of her retirement income, after being retired for the last 10 years:

I got hit a couple of years ago pretty badly in the stock market, so now my savings are weighted mostly toward bonds. Now both investments are terrible. And I can’t put my money in a money-market account because that’s crazy. That just pays nothing.

Keynesian economic policies allegedly designed (and sold to the American people) to stimulate the economy are actually having the perverse effect of

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The Fed’s Credibility Continues to Fade

Reuters – At Jackson Hole, a growing fear for Fed independence

Increasing political encroachment on the Federal Reserve, particularly from the Republican Party, could threaten the central bank’s hard-won independence and undermine confidence in the nearly 100-year old institution.

End The Fed San Francisco

End The Fed San Francisco (Photo credit: aarontait)

Reuters is the British equivalent of The New York Times – thoroughly establishment and its voice in England. When they see that the Fed’s credibility is beginning to suffer, you know that the end is near.

The article said that this was “the pervasive sentiment” at the recent Jackson Hole conference (where, as you remember, Bernanke spoke and said nothing).

Alan Blinder was there. He is the quintessential establishment economist: degrees from Princeton, the London School of Economics, and MIT. Served on Clinton’s Council of Economic Advisors and on the Board of Governors of the Fed. He dreamed up the “cash for clunkers” fiasco that was designed, according to Blinder, to stimulate the economy. We know how well that worked.

Oh yes, he’s also a member of the Council on Foreign Relations – in fact a member of the board of that gaggle of internationalists.

And he didn’t like what he saw:

I do fear for it a bit if the election comes out that way, especially if some of the more radical voices, that happen to be Republican voices nowadays, get reelected. There’s a lot of hostility.

We know who he is referring to: Ron Paul. And what he’s referring to: the bill that recently passed the House to do a full and complete audit of the Fed.

Buried in the article from Reuters was something amazing: that “radical” influence is already beginning to impact the Fed’s behavior! Part of that was reflected in Bernanke’s heavy emphasis on something he couldn’t prove: that the Fed kept things from getting worse. This is not an argument from substance but from conjecture. It was his way of defending the indefensible.

In all, the Jackson Hole conference did accomplish something: an admission by an establishment mouthpiece that the trust and credibility of the Fed continues to decline, and there’s nothing they can do about it.

Romney’s Impossible Mission: Create More Jobs

The Real Romney

The Real Romney (Photo credit: elycefeliz)

Republican presidential candidate Mitt Romney promised August 30 to create millions of jobs — 12 million of them, in fact — if he is elected president in November. He said:

What America needs is jobs. Lots of jobs.…

I am running for president to help create a better future … a future where everyone who wants a job can find a job.…

His five-point plan consists of attaining energy independence by the year 2020, strengthening the educational system, forging new trade agreements with foreign countries, cutting the deficit with the ultimate goal of balancing the budget, helping small businesses, and repealing ObamaCare. With the possible exception of “helping small businesses” — whatever that means — nothing in his plan addresses the issue of job creation.

The key issue isn’t job creation but wealth creation. Nothing in his platform talks about making it easier for employers to create more value by making it easier for them to make profits. As Dwight Lee, business school professor at Southern Methodist University,wrote:

The purpose of all economic activity is to produce as much value as possible with the scarce resources (including human effort) available.…

There will always be jobs to do far more than can ever be done. So creating jobs is not the problem. The problem is creating jobs in which people produce the most value.

Lee tells the apocryphal story of an engineer traveling in China who observed a large crew of men building a dam using just picks and shovels. When he asked why they weren’t allowed to use heavy earth-moving equipment which would have completed the project in just a few weeks rather than the months the project was taking, he was told that using that equipment would cost many of the men their jobs. The engineer responded, “Oh! I thought you were interested in building a dam. If it’s more jobs you want, why don’t you have your men use spoons instead of shovels?”

Jobs are merely the end result of an economy becoming more productive and more profitable and are not an end in and of themselves. More jobs will be created only after the economy is allowed to

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Spain is Bleeding to Death

Ambrose Evans-Pritchard: Deposit flight from Spanish banks smashes record in July

Data from the European Central Bank shows that outflows from Spanish commercial banks reached [$92 billion] in July, twice the previous monthly record. This brings the total deposit loss over the past year to 10.9 percent [of deposits]…

Mariano Rajoy en Bilbao. Imagen tomada por Ike...

Mariano Rajoy en Bilbao. Imagen tomada por Iker Parriza (Photo credit: Wikipedia)

In any capitalist economy, bank deposits represent capital in liquid form. Spain is bleeding to death. Evans-Pritchard quotes another expert:

This is highly significant. Deposit outflows are clearly picking up and the balance sheet of the Spanish banking system is contracting.

This is called deflation: a contraction in the supply of money.

I give blood on a regular basis. But I’m only allowed to give one pint at a time, and I can’t go back in less than six weeks to give another pint. Once, when I was into bike racing, I was reminded by Penrose Hospital that it was time to give blood again. I waited until after the race was over. I wanted to be at my best.

The politicians in Spain don’t know about bike racing, and I have serious doubts about their understanding of capital flows. They’re much more interested in continuing to spend other peoples’ money without hindrance.

Says Evans-Pritchard:

The drip-drip of grim figures came amid fears of a constitutional crisis after the Spanish region of Catalonia requested a €5 billion rescue package yesterday from the central government but refused to accept any political conditions.

There it is in a nutshell: loan us more money so we can keep spending, but without conditions on the loan!

Evans-Pritchard reiterated:

Nothing can happen until Spain requests a loan package and signs a “memorandum” giving up fiscal sovereignty. It remains unclear whether Mr. Rajoy [Spain’s prime minister] will agree to this.

It’s the socialist mindset: only banks and governments can revive the sinking economy. Investors with their own funds in the banks see the lie, and are getting their money out while the getting is good.

Spain is bleeding to death.

Another Uninformed Attack on the Gold Standard

Charles Lane: The Failing Case for Gold

As history abundantly demonstrates, the gold standard would not immunize the economy from financial crises. Imposing it would, however, render the central bank powerless to respond to them, as it could not readily expand credit or act as lender of last resort to solvent institutions.

Gold Key, weighing one kilogram is used to acc...

(Photo credit: Wikipedia)

Here is another perfect example of an uninformed individual given a bully pulpit to promote his ignorance courtesy of the Washington Post.

He refers to a part of the Republican Party’s platform (which means nothing anyway) which calls for a commission to study “possible ways to set a fixed value for the dollar.” This is an allusion to the study done back in 1980 by the Gold Commission which recommended against the concept, but was dissented to by one of its members, Ron Paul, in his “The Case for Gold.”

And this frightens author Lane:

We can only hope that this iteration of Republican pandering to the gold bugs bears no more fruit than the last one. Touted as a cure for the chronic financial instability that central banking purportedly breeds, tying the nation’s money supply to the supply of gold would be worse than the disease.

We know where he stands: “pandering to the gold bugs” is a giveaway to a polemic, not a rational discussion.

A more rational discussion of the gold standard starts with what it would do: rein in the uncontrollable urge by the Fed to bail out the big banks. The Fed, remember, is a cartel whose mission is to protect the big banks from the consequences of their bad behaviors, using taxpayer monies (or digital money created out of nothing which derives its value from depreciating the value of taxpayer monies).

As Steven Horwitz, an Austrian school economist from St. Lawrence University, notes accurately:

If we had a commodity-based free banking system, we would not have had the boom and bust of the 2000s in the first place. The powers that enable the Fed to create liquidity ex nihilo in a crisis are the very same powers that enabled it to drive the real Federal Funds rate below zero for two years and fuel the housing bubble, which gave us the financial crisis and recession.

Just because the Washington Post has a louder voice doesn’t make it any more credible. A wrong-headed opinion about the gold standard is still wrong, no matter who promotes it, don’t you think?

How the Federal Reserve Impacts Morality

Doug French: The Fed Obliterates the Savings Ethic

A central bank’s debauchery of the currency serves to raise people’s time preferences and impair their judgment.

saving and spending

saving and spending (Photo credit: 401(K) 2012)

For years I’ve repeated the dictum that inflation debauches not only the currency but the citizens’ morality: their sense of individualism and personal responsibility. In other words, inflation causes people to act in ways contrary to their own best interests: like saving for a rainy day.

French notes:

My [farmer] grandfather was the diligent sort who would use rainy days to do required maintenance on his implements, noting with derision other farmers who spent rainy days at the bar in town. He believed they would surely end up with broken equipment when the sun would reappear, keeping them from making hay.

So the idea of savings is not necessarily the return one receives on the money that’s socked away, but the peace of mind that, when the weather doesn’t cooperate, the saver has a little stash to tide him over.

Instead, the advice from those who should know better is: go ahead and spend the day in the bar. Your money isn’t worth anything, and it isn’t earning anything. So spend it on something memorable. They can’t take that away from you.

French decried the advice from a so-called financial guru—John Strelecky, who has written four books which have been translated into 20 languages—who said it was OK to spend your tax refund on a memorable experience rather than save it for a rainy day. French remembers the responses from those who agreed with Strelecky. Here’s one:

I think his advice is spot-on, at least given the constraints of the times in which we live. What’s the point in saving if inflation will ravage whatever you manage to accumulate?

You play by the rules of the game. Your savings growth will be puny due to pathetic interest rates, erased by inflation, and confiscated by a rapacious state. So go ahead, enjoy the “money” now, while it still has some value.

Most people don’t really have a better place to put the money than into a pleasurable experience, which is all you will want in the end.

Gotta agree with the comments. Maybe not trips or other “experiences.” But I feel safer with stuff than I do with Federal Reserve notes going forward.

In a microcosm French has illustrated perfectly my point: the Federal Reserve doesn’t just debauch the currency, it debauches morality and good judgment.

The World is Waiting for Jackson Hole

Liar Ben Bernanke

Liar Ben Bernanke (Photo credit: Ondrej Kloucek)

Federal Reserve Chairman Ben Bernanke is expected to give his annual Jackson Hole speech on August 31 while the world waits in anticipation. They are likely to be disappointed.

In past years the invitation-only event hosted by the Kansas City Fed in Jackson Hole, Wyoming, has been an opportunity for Bernanke to suggest future Fed policy actions. In 2010 he said that a second round of stimulus—called QE2 for Quantitative Easing Round Two—was likely, and in November of that year the Fed began its purchase of another $600 billion of long-term debt securities.

Since then little has changed: Unemployment remains significantly above eight percent, the housing market remains largely moribund, gross domestic product remains barely positive, and consumer confidence is waning.

Some investors are expecting nothing but a repeat of Bernanke’s talk in Jackson Hole last August when he said: “The Federal Reserve will certainly do all that it can to help restore high rates of growth and employment” but “most of the economic policies that support economic growth in the long run are outside the province of the central bank.”

Which was a banker’s way of saying, “We’re

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Financial Stability Oversight Council Runs Amok

Library of Law and Liberty: The Revenge of Richard Nixon: The Consumer Financial Protection Bureau Spreads Its Tentacles

The institutional structure of the CFPB is novel in American history—not merely an independent agency, it is an independent agency tucked inside another independent agency (the Federal Reserve). Its decision-making is not only independent of any review by the President or Congress, but also from the Federal Reserve itself. Its budget is independent from the congressional appropriations process and is instead drawn directly from the operating revenues of the Federal Reserve, a sum that will rise to 12% of the Federal Reserve’s operating expenses by 2013 (an estimated budget of $448 million). The only check on CFPB’s power is the power of the Financial Stability Oversight Council (FSOC) to veto actions by the CFPB but even then the veto can be exercised only by a 2/3 vote of the Council and only if the proposed action would seriously threaten the safety and soundness of the American financial services system.

Constitution

Constitution (Photo credit: The COM Library)

This so-called agency is the latest example of government run amok: totally unaccountable, run by an unvetted bureaucrat appointed illegally by a socialist president. How about that for comfort in the Constitutional process?

Here’s more from Zywicki:

An agency headed by one person, completely insulated from democratic control and budgetary oversight, guarantees an agency that is vulnerable to all of the excesses that strangled the American economy in the 1970s—regulation that chokes innovation and cripples economic growth. And, indeed, even in its short time in existence the CFPB is already manifesting the problems of cost externalization, undue risk aversion, and other regulatory costs.

In its one-year existence, the agency has not failed to disappoint: one rule that it has issued (illegally, as the agency is not authorized by the Constitution) will impose—ready?—7,684,000 man hours to comply with it! Another one—designed to simplify mortgage disclosures—is 1,099 pages long!

As Zywicki laments:

Regrettably this sort of decision-making was entirely predictable for this agency with inadequate checks and balances.

Inadequate? How about non-existent?

Where’s the Hyperinflation?

Jerry Bowyer: Where’s The Hyperinflation?

the Fed has created an enormous pool of “money” since the credit crisis. In fact, they have more than tripled their monetary reserves. Doesn’t that mean that we should have a more than tripling of prices?

International Money Pile in Cash and Coins

International Money Pile in Cash and Coins (Photo credit: epSos.de)

Good question, and one that I’ve asked myself for a long time. Where is the price inflation that inevitably (we are told) follows monetary inflation? There is a little, of course, and some is buried inside the economy: price decreases that we would otherwise enjoy due to more efficient production and creative new technologies aren’t being felt.

But Bowyer makes a number of good points here:

Even allowing for the time delays and the slower circulation of money in a more slowly moving economy, it seems as though monetary shenanigans which started in 2007 should have been felt by the summer of 2012.

And so, why not? He does some good clarifying of what some, including myself, consider difficult mechanics involved in creating money:

Let’s start with the Fed and money. There is a kind of short-hand in which we say the Fed prints money. But that’s not exactly true. Money creation is a joint exercise between the central bank and the banking system. What the fed creates are entries in an accounting system which gives the banks permission to act as if there is extra money on their balance sheets.

The banks, therefore, have permission to lend more. The reserves they lend end up in someone else’s account in a bank, and that bank then has permission to lend more, and on and on the system goes. It’s called ‘fractional reserve banking’…

And then he simplifies the process even further by using an everyday example: syrup:

I like to think of monetary base as money syrup, like the syrup that’s used to make soda. You add the carbonated water to the syrup and you get soda (or pop, or soda pop, depending on where you live.) The ratio of syrup to soda is the soda multiplier. How fast we buy and drink the soda is the velocity.

This makes sense to me. He also explains that many dollars are overseas, waiting to be spent sometime in the future. So the price inflation down at the store is there waiting to happen. Just not yet.

Boston Fed President Calls for More “Stimulus”

printing money

printing money (Photo credit: Paul Nicholson)

After reviewing the weak jobs report from the Bureau of Labor Statistics (BLS) that was released last Friday, the president of the Federal Reserve Bank of Boston, Eric Rosengren, decided it was time to call for more money to be added to the economy. The jobs report showed a gain that slightly exceeded economists’ consensus, but because of people quitting the work force because they couldn’t find jobs, the unemployment rate went up. And a separate report, not heralded by the media, showed households reported losing more than the BLS’s gains.

What to do? Add more money to the economy. And keep on adding more money until the moribund economy finally awakens. Here’s Rosengren’s prescription:

You [add money] until it’s clear that you’re no longer treading water. You continue to do it until you have documented evidence that you’re getting growth in income and the unemployment rate consistent with your economic goals.

The Fed has already added an astounding $2.3 trillion of new—freshly created out of nothing—money since the start of the Great Recession in 2007, with little to show for it. And so “doctor” Rosengren is calling for more of what made the patient sick in the first place:

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Growth in Money Supply: Mainlining Heroin

Ambrose Evans-Pritchard: Global slump risk falls as world money rebounds

The first green shoots have begun to emerge in money supply data from across the world, raising hopes of a tentative global recovery by later this year.

I don’t know why more economists (I am not one, just a wanna-be) don’t use an analogy that I find useful: money created out of nothing and injected into the banking system by buying government bonds is like mainlining heroin.

I have no experience with such activity, but the analogy is useful nevertheless. The addict (and we are addicted to easy money, aren’t we?) is seeking another “high” and shoots himself with heroin. Over time, however, it takes more and more heroin to achieve the same high.

Eventually, of course, the addict either dies from an overdose, or goes through rehab and suffers the painful inevitable withdrawal. The longer the addict puts off the day of withdrawal, the worse it will be.

And so we come to the whole point of Ambrose Evans-Pritchard’s article from the British liberal paper Telegraph: money supply is (and has been since the middle of June) increasing greatly. He provides a useful graph of world money supply and if you look carefully, you’ll see a sharp upturn in that supply taking place starting in June.

I went to the Federal Reserve charts available here and found the same thing: the Adjusted Monetary Base, which had declined sharply since the middle of February, has enjoyed a significant “bounce” upward, again starting at about the middle of June.

And the effects of that additional injection of money and credit is having its expected (temporary) effect. Evans-Pritchard quotes Mr. Simon Ward at Henderson Global Investors who tracks these sorts of things:

Mr. Ward said global industrial output should start to “bottom out” by October. The rebound is a huge relief to monetarists following the sudden collapse of M1 growth from a peak of 5.1pc last November, a rare pace of decline with echoes of early 2008…

Any world recovery is likely to be very fragile as the US and Europe battle the headwinds of debt deleveraging, and China struggles to manage the fall-out from its last credit blitz. There is no margin for policy error anywhere. Yet the bulls have a nice puff of wind in their sails for now. Enjoy it.

At least he’s honest about one thing: the high will be temporary; our stock market just went over 13,000 on the Dow for the first time since April, after hitting a bottom of just over 12,000 in late May/early June. That coincides nicely, doesn’t it, with the increase in the supply of money beginning in early June?

But the heroin addict will enjoy another high, putting off the inevitable crash for another little while.

Many of the articles on Light from the Right first appeared on either The New American or the McAlvany Intelligence Advisor.