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: Money Supply

House Bill Offered to Study “Real World” Effects of Fed Policy

In anticipation of the upcoming 100th anniversary of the Federal Reserve on December 23rd, House member Kevin Brady (R-Texas) and Chairman of the House’s Joint Economic Committee, decided back in March to offer a bill to create a commission to

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Summers is out, Yellen is in, the Fed rolls on

Just when it appeared that Larry Summers had the nomination for the next Fed chair all wrapped up, Summers called the White House on Sunday and told his good friend, President Obama, that he was withdrawing his name from consideration. He then sent a formal withdrawal letter to the president:

I have reluctantly concluded that any possible confirmation process for me would be acrimonious and would not serve the interest of the Federal Reserve, the Administration or, ultimately, the interests of the nation’s ongoing economic recovery.

The president dutifully responded with the appropriate accolades:

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CNBC says Larry Summers to replace Ben Bernanke at the Fed

Citing an unnamed source from “Team Obama”, CNBC announced that Larry Summers will be named head of the Federal Reserve by President Obama to replace outgoing chairman Ben Bernanke whose term expires on December 31st.

Despite much media conversation about other potential candidates for the position, chief among them Fed Vice Chairman Janet Yellen, Summers always had the inside track. Summers served as

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Central Banks’ bubble is bursting, sending markets down worldwide

When the Japanese stock market lost more than 6 percent of its value on Wednesday in a massive selloff, pundits jumped on the move to try to explain what happened, and what it all means. Evan Lucas, a market strategist at IG Markets, wrote:

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Slowing Economy Confirmed

The report from Automatic Data Processing (ADP) on Wednesday morning surprised economists once again by coming in substantially below their expectations. The 135,000 new private sector jobs created in May were way below the

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If the Fed has created so much new money, where is the inflation?

Frank Shostak, a scholar at the Mises Institute, asks the same question: where is the price inflation that is supposed to follow the creation of new money? Shostak asks it far more eloquently than I:

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Is the Fed running out of bullets?

MarketWatch is run by competent commentators with a slight conservative cast to their writings. It’s part of the Wall Street Journal’s online offerings. With that in mind, I take an exception to two points of view expressed yesterday in its article about the Fed “running out of bullets.”

First, the article says that the Fed is going to

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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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Austrian School Economics in Estonia

Quarterly Journal of Austrian Economics

Quarterly Journal of Austrian Economics (Photo credit: Wikipedia)

For many, Austrian school economics is theoretical nonsense. It’s nice to read about. It’s nice and logical. It’s common sense economics. But it really can’t apply to the real world. After all, with paper currency backed by nothing and central banks running the show, Austrian thinking is strictly theoretical.

Or maybe not.  Frank Shostak, a scholar at the Mises Institute, has uncovered something quite remarkable in Estonia:

Against the background of a severe economic crisis in the eurozone, one is surprised to find a member of the euro area that is actually showing good economic performance. This member is Estonia. In terms of so-called real gross domestic product (GDP) the average yearly rate of growth in Estonia stood at 8.4 percent in 2011 against overall eurozone performance of 1.5 percent. So far in 2012 the average yearly growth stood at 2.8 percent in Estonia versus -0.2 percent in the eurozone.

How about unemployment there?

Also note that the unemployment rate in Estonia displays a visible decline: it fell to 5.9 percent in August from 7.6 percent in January. In contrast, the unemployment rate in the eurozone climbed to lofty levels in August. After closing at 10.8 percent in January, the eurozone unemployment rate shot up to 11.4 percent in August.

One of the basic premises of Austrian economics is the “cleansing” process that must take place to

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Is QE3 a Myth?

English: President Barack Obama confers with F...

President Barack Obama confers with Federal Reserve Chairman Ben Bernanke following their meeting at the White House. (Photo credit: Wikipedia)

Graham Summers, writing for ZeroHedge, has pointed out that Fed head Ben Bernanke hasn’t done any new buying of securities despite his promise to do so back in September. The Fed publishes its balance sheet. You can see it here, in graphical form. As Summers said, if Bernanke was buying, how come the measure of money – the adjusted monetary base – is declining?

Would Bernanke lie? Oh, no!

The stock market jumped up nicely at the news, but has retraced most of those paper gains. Maybe the market has figured it out: it was

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The Fed is Losing Its Credibility?

Description: Newspaper clipping USA, Woodrow W...

Newspaper clipping USA, Woodrow Wilson signs creation of the Federal Reserve. Source: Date: 24 December 1913 (Photo credit: Wikipedia)

The Federal Reserve’s promise to hold borrowing costs at record lows into 2015 risks a loss of its credibility and a downward spiral in financial markets, according to the Center for Financial Stability.

The Center for Financial Stability (CFS) is a relative newcomer to the field of financial analysis, a think tank dedicated to providing the public with the straight scoop – the skinny – about financial markets. I wish them luck. If this quote  from their latest article is any indication, they’re headed in the right direction.

I don’t know yet if they hold the Fed in the same low esteem that I do, but they do recognize that it only has two tools in its toolkit: words and printing:

The Fed is essentially making a bet that its promise will in fact keep long-term rates low for that period as well,” said Lawrence Goodman, president of the CFS in New York, a research group focused on global finance and markets, in an interview.

“If rates edge higher due to factors such as inflation or credit issues, then the Fed will suffer a loss of its reputational state and that could have complications all across the yield curve. That can happen quickly and can unleash a forceful slide in the market and could thrust the economy back into recession.”

Well, Goodman got that part right. They’re “making a bet” which may not pan out. Inflation is one reason. The monetary inflation has already taken place, and the Fed is continuing to inflate the money supply as I write. I liken it to a dam with flood waters building behind it. The dam is peoples’ expectation that their money will retain its value and that a good thing to do with it, in a recession, is to keep it nice and safe somewhere, using it to pay off debts and building savings accounts and “rainy day” funds.

But that dam could break at any moment. I wish the historical literature were clearer on when it has broken in the past. Some call it a “trigger point.” But it is a BFO moment – a blinding flash of the obvious – that the money isn’t safe, its purchasing power is diminishing, and – comes the moment: “Gosh, I better spend it now before it loses any more value!” – the game is over. The dam has burst, the flood of money already created pours into the marketplace, driving up the prices of everything – everything!

The other concern the CFS has is “credit issues.” This is important. At some point – again indeterminate, unfortunately – when bond holders determine that they are taking excessive risks by holding US treasury securities, and start demanding higher interest rates to offset that increased risk. Again: game over. The government’s costs of borrowing will increase, increasing the risk of default. It’s called a vicious circle: the increase in costs increases the chances of default, so even higher interest rates are demanded…

The CFS’s solution? Stop buying those government securities! But that would merely hasten the day of rising interest rates, wouldn’t it? The Fed is the buyer of last resort. If they stop buying, who else would? It’s a fatal game.

The CFS throws up its hands:

“The monetary transmission mechanism is seriously flawed. So the Fed needs to find alternatives to printing money.”

The only problem is that there are none. There are only two tools in the Fed’s toolbox.

The Fed is Playing With Fire

Ben Bernanke

Ben Bernanke (Photo credit: Paul RA)

Federal Reserve Chairman Ben Bernanke’s promise not only to expand the money supply by buying more mortgage-backed securities but to continue doing so until he sees “ongoing sustained improvement in the labor market” has sparked numerous warnings of unintended consequences as a result. The Federal Open Market Committee said on September 13:

If the outlook for the labor market does not improve substantially, the committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.

One of the people who is most nervous about the Fed’s plan to continue to print until the recovery begins in earnest is Martin Feldstein, former chairman of President Ronald Reagan’s Council of Economic Advisors. Writing in The Financial Times newspaper, Feldstein called Bernanke’s idea a “dangerous” strategy which could lead to

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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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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?

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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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.

Ron Paul Has the Final Say

WASHINGTON, DC - FEBRUARY 29:  Republican pres...

In his last public opportunity to quiz Federal Reserve Chairman Ben Bernanke, who appeared before the House Financial Services Committee on July 18, Texas Congressman and Republican presidential candidate Ron Paul took the time to put things into perspective:

For the past few years the Federal Reserve System has received criticism from all sides of the political spectrum, and rightly so, for its unprecedented intervention into the economy and its bailouts of large Wall Street banks and foreign central banks.

This has been Paul’s theme ever since he entered Congress following a special election in April 1976. In a position paper that his staff prepared in June of 1976, Paul attacked a pending bill in Congress to fund the International Monetary Fund following the breakdown of the Bretton Woods agreement when President Nixon took the dollar off the gold standard in 1971.

The staffer primarily responsible for that paper, Gary North, remembers starting work on Friday, June 11, 1976, and being given the task of preparing the paper in time for the Monday deadline. He worked all weekend on it, and when it was published, it made such an impression on Senator William Proxmire, then chairman of the Senate Banking Committee, that he invited Paul to testify before his committee. Says North: “At the time, I had never heard of a House member testifying to a Senate Committee. I have never heard of it since.”

But that testimony launched a three-decades-long campaign by that lone congressman to question the existing monetary system, especially the centerpiece of that system, the Federal Reserve.

In his July 18 testimony, Paul recalled his primary problem with the IMF—the same problem he has with the Fed—is that it is a central bank that was deliberately designed to

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Sorry, Rising Corn Prices Not Due to Inflation

Jeff Carter: Grain Prices Could Be The Nail in the Economic Coffin

So far, the Federal Reserve has been extremely lucky. They have held interest rates at 0%. They have monkeyed with the market mechanism of the economy via quantitative ease, and Operation Twist. It recently has come out that regulators knew about the LIBOR deception back in 2008. But they can’t control the price of food.

English: Corn

Corn (Photo credit: Wikipedia)

I don’t know Jeff Carter. But he has put his finger on something that I think needs more air time: despite the Fed’s huge expansion of the money supply and the forcing down of short term interest rates, the economy is still in the doldrums. In fact I wrote recently in The New American that we’re already in recession despite all those efforts.

But some people see the price of grains—wheat and corn prices specifically—heading much higher and think: “it must be the Fed.” They expand the money supply, making each piece of money worth less, and that shows up by requiring more pieces to buy corn and wheat. In a general sense that is true. But not here, and not now.

First of all, in order for increases in the supply of money to show up in the market place and grocery stores, people have to spend it. And there’s a measure of that “propensity to spend”—it’s called the velocity of money. It’s how quickly money is exchanged in the economy. There’s even a chart that shows the velocity of money which you can access at GaryNorth.com. It’s part of free information on his site: just look on the left for “Federal Reserve graphs” and you’ll find it.

The velocity of money has dropped to near record lows. So there’s plenty of money, but people are hoarding it, or paying off debts. So there’s no price inflation. At least not yet.

What then is happening to the price of wheat and corn? It is responding to market forces! There’s a drought. It’s causing much lower production of grains. Lower supply, same demand, voila! Prices go up.

And they will come back down. Maybe not in the next week. But in the free market, things happen to make prices go back down. Farmers (around the world) will see high prices and offer their products here for sale. Farmers will expand their fields and commit more of them to growing grains. Voila! Increased supply, same demand, lower prices!

It’s a wonder to behold. Just don’t blame it on the Fed.

Myths About the Marshall Plan

Logo used on aid delivered to European countri...

When establishment historians consider the Marshall Plan, its intents and purposes and alleged successes, they typically make at least two errors–one in logic and the other in history. First, they assume that since Europe began to revive at about the time the Marshall Plan was implemented then that revival must have been because of the plan, not in spite of it.

Second, they fail to make any mention of the forces in the background that had a much different purpose in mind: specifically, how to use the Marshall Plan to further their internationalist agenda.

One example of a “court historian” providing his readers with the accepted view of the Marshall Plan is Robert V. Remini, professor emeritus at the University of Chicago, and author of numerous books on the American republic’s early figures, such as Andrew Jackson, Henry Clay, John Quincy Adams and Daniel Webster. In 2005 Remini was appointed the Historian of the U.S. House of Representatives. Remini thus serves as the perfect example of someone who knows his history but fails to tell all he knows, especially when it comes to the Marshall Plan.

In his “A Short History of the United States” Remini had this to say about the Marshall Plan:

Secretary of State, George C. Marshall, then devised a plan, which he outlined in a speech at Harvard University on June 5, 1947, by which the United States would assist European nations to rebuild their shattered economies…

Between April 1948 and December 1951, the United States contributed a little over $12 billion to Europe…

By 1951 Europe had not only achieved its prewar level of production but its level of industrial production rose to virtually guarantee prosperity for the future…

There it is: the United States, out of the goodness of its heart, gave five percent of its gross national product with no strings attached to European nations to help them get back on their feet. And it worked!  Look! By 1951 Europe had fully recovered!

It is tempting to ascribe malevolent intentions to Remini. But that does not preclude asking some questions and pointing out some errors of commission and omission in his establishment view. For instance, who

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Latest ADP Jobs Report Confirms Slowing Economy

Christine Lagarde

On Thursday, accounting firm ADP issued its National Employment Report noting that jobs in the non-farm private business sector increased by 176,000 in June. ADP’s CEO, Carlos Rodriguez, said, “It is encouraging to see companies creating jobs, particularly in the goods-producing sector where we see positive growth following two months of job loss.” Reuters jumped on the alleged positive news, calling it a “hopeful sign.”

Unfortunately, one month does not make a trend. When June’s numbers are compared to January’s, ADP’s total nonfarm private jobs growth has increased from 110 million to 110.9 million, a gain of 77-100ths of one percent, or about 142,000 new jobs each month. A closer look reveals that most of those jobs were in the highly volatile service sector, in small businesses, usually fast-food or similar businesses, known for their high turnover. In fact, the goods-producing sector gained just one half of one percent employment since January, translating into less than 16,000 job gains each month. These numbers are hardly a “hopeful sign,” but more reflective of an economy that has flat-lined.

Another report from the Department of Labor showed that new claims for unemployment insurance dropped by 14,000 last week to 374,000, the lowest level in six weeks. But that was offset by an upward revision from

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