Tag Archives: Federal Reserve

In the World’s High Stakes Game of Chicken, Bernanke May Have Just Blinked

In Ben Bernanke’s first ever news conference, he stared down reporters with his boldface rejection of a QE3, but my guess is that in this international game of chicken, Bernanke will soon blink. He disclosed that he will not begin a QE3 after QE2 finishes on June 30, and that the Fed funds target rate may buoy from its near zero rate. His reasons for this decision were that his concerns for inflation have overtaken needs to prime the sluggish economy, and that QE2 has been “effective” and “successful”. With Bernanke’s finger on the button of the world’s economy, has he really forsaken quantitative easing?

Pumping a previously unimaginable $1.5 trillion into the economy certainly had to be “effective” on some level but unfortunately, not on the level that would ease anyone’s mind that America, or the world for that matter, has dodged imminent danger. With all of the stimulus and quantitative easing that encouraged it, the U.S. economy crawled ahead 1.8% in the first quarter of 2011, well below the rate of a normal recovery. Meanwhile, unemployment claims are edging higher as a quarter of the U.S. suffers unemployment or underemployment, and the recent moderate gains in housing prices have peaked and are retreating once again.

The recent rise in commodities signaled the expected results of America’s monetary intervention, inflation. America’s consumer’s goods consumption is import driven and those prices are going up. If Bernanke actually holds true to the promise he gave America prior to testing his monetary theories, and pulls dollars from the economy in response to rising prices, America’s economy will turn down a more diligent path of squeezing out its excesses through a hard double dip recession combined with inflation.

The combination of Japan’s recent tragedy and a continued potential for a downturn in the U.S. may lead to a softening in the growth of worldwide demand, thereby reducing the potential for real demand inflation. However, as the unprecedented flood of dollars multiply in the market, we will see the lagging effect of a continuing drop in dollar purchasing power that will more than offset the soft economy to produce inflation. Commodity prices are the leading indicator of future general inflation as the QEs work their way through the economy.

America will then have stagflation similar to that caused by the currency expansion and oil embargo of the ‘70s. Our import consumer goods prices will accelerate higher, while our domestically captive service prices will drift lower leading to reduced wages and higher unemployment, as commodity inflation saps the energy out of our service driven domestic economy.

Bernanke has the choice of funding a QE3 to pay for rising interest rates that are bound to occur as a result of previous government intervention, or of pulling the plug on this bad monetary experiment and potentially having some frustrated economist coin a phrase with his name in it to mean a “really really bad stagflation”. My guess is that rather than be known for the Bernanke Splits, he will blink and a third, perhaps more moderate, round of QE3 will begin to assist inflation even higher.

That’s my take, what’s yours?

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How Could America Have Squandered the Gold of Ancient Egypt and the Incas?

Gold has been the store of human endeavor since ancient times. While each ounce of gold can hold only a finite amount of labor, perhaps 1,000 hours in non-industrialized nations, some of the gold locked in Fort Knox has touched millions of hours of labor from civilizations untold. For gold’s greatest benefit, as with all money, is not its storage of value but its lasting ability to temporarily hold value in the exchange of non-coincidental barters.

For millenniums, money was the interchange commodity for simple trades as between farmers and herders. The farmer gave the herder a coin in winter for meat, and the herder returned the coin at harvest time for a bushel of vegetables. Farmers and herders relied on the value of gold because precious metals took effort to mine and purify, were tested for weight and purity, and could be stamped, coined and carried. With such a universal appeal, precious metals became synonymous with storage of value and dominated the world’s choice for money.

At one point, America held within its coffers 70% of all the gold that has ever been purified from ancient Egypt and the Incas through modern times. But it was our misjudgment as to the true value of gold that robbed our forts of ingots and brought America to the precipice of ruin. As history’s greatest superpower, why did America not learn from ancient empires that tumbled down the path to insignificance, and why did we allow our government to amass more debt than has ever been owed by every other soul that has ever lived?

1964 marked an accelerating turning point in America’s misfortunes. In 1964, President Johnson was elected to enact Great Society reforms just as America was increasing her involvement in Viet Nam. Baby boomers were entering the work force just as multinational corporations were beginning an upsurge of direct foreign investment and the transfer of jobs to overseas markets. America’s use of oil was peaking just as political undercurrents were coalescing around oil as a geopolitical force.

Six simultaneous assaults on the American dollar joined to fuel the American financial malaise; a lack of fiscal adherence to a gold standard, military excursions in support of American interests, funding of the great society, a lack of will to respond to oil cartels, multinational corporate indifference to the plight of the American worker, and a financial industry gone wild.

America did not Steward Its Gold

Even though, for 600 decades of recorded history, gold was the stable base of transactions, the world has temporarily abandoned this gold standard for the last 5 decades. Our abandonment was not because of the world’s enlightenment that gold is an unnecessary physical impediment to the electronic age of finance. It is because, with no viable alternative, the world has clung to the hollowed out American dollar that inflated beyond the discipline of the gold standard.

In the 20th century, industrialized nations twice attempted to redistribute wealth through great wars that left all of Europe bankrupt. Afterward, America held 70 percent of the world’s processed gold, and became through Bretton Woods the gold-backed, paper money guarantor of the free world. During the next 15 years, America squandered her gold to cover currency imbalances, until by 1960 the dollar lost its legitimacy. Interestingly, it took Spain over a hundred years to squander its 20,000 tons of Inca gold.

From 1971 until now, America and the rest of the world have had little choice but to allow our currencies to float, giving up the imperfect discipline imposed by a gold standard. As a result of America’s freewheeling monetary policies, it is now encumbered by a spend drunk Congress and an obliging central bank that have conspired to reduce the value of America’s 1971 fiat dollar to a mere 17 cents today.

Scholars suggest that the reason for the dollar’s fall was the inevitable Triffin dilemma which requires America to carry a current account deficit to provide the world with reserve currency. Yet debt financed trade imbalances are not required to provide reserves. Reserves could just as well have been sold to other countries as given to them through trade shortfalls. No, America’s post war monetary policies quickly gambled away the historical hegemony that was bestowed on us at the end of two world wars.

This five decade hiatus from a gold standard will prove only temporary. Gold’s appeal as the engine of financial growth has not been lost on China. At the end of World War II, U.S. gold reserve was over 18,000 tons but has since reduced to 8,000 tons. China is executing a strategy of purchasing approximately 250 tons per year and, as the world’s largest producer of gold, producing 320 tons per year, and now has surpassed all but the U.S. as the second largest holder of gold with 2,000 tons.

Military Excursions Drained America’s Coffers

Without the ability to borrow vast moneys, earlier civilizations relied on warring, exploration and conquest to quickly expand their stores of gold. This strategy was not without consequences. To fund war, Rome engaged in coin clipping and smelting with lesser metals to reduce size and value of denarius in attempts to pay soldiers with coins of veiled value. After 200 years, the Roman denarius reduced from 100 percent silver to only 5 percent just prior its army leaving Rome unprotected from invasions and fall. Interestingly, it has taken less than 100 years for America’s dollar value to plunge that amount.

As all empires have before, America found that its wars must be financed with inflation. The Fed supported an excessive expansion of the money supply (dollar clipping), creating debt to fund each of America’s wars. The Civil War added 2.8 billion. WWI added another 21 billion. WWII created another $216 billion. The Korean War was financed with taxes. Viet Nam increased the debt $146 billion. Cold war expenditures cost 1.6 trillion. The first Gulf War cost a mere $7 billion. In contrast, Iraq cost $786 billion and Afghanistan cost $397 billion. Not including the 700 foreign soil U.S. military bases that contribute greatly to America’s balance of payments deficit, her major wars added a total of $3.4 trillion dollars of carried debt.

The Great Society Became the Broke Society

President Johnson outlined The Great Society in his State of the Union Speech on January 4, 1965, saying “The great society asks not how much, but how good; not only how to create wealth but how to use it.” Notwithstanding the good that was done by these programs, they drained America’s future potential GDP growth and the money that would fuel her economic engine.

46 years later, Great Society initiatives touched education, health, urban renewal, transportation, arts and culture, Medicare and Medicaid, the Food Stamp program, Project Head Start, The National Endowment for the Arts, The Corporation for Public Broadcasting and federal aid to public education for a total expenditure of $9.5 trillion dollars.

America’s Addiction to Oil Made Us Slaves to the Oil Cartel

Oil enabled powerful nations to create a world order that flowed money from agrarian nations to those that controlled hydrocarbon powered machines. Oil was the catalyst that propelled the 20th century’s world leaders into fortune and thrust the world into war. Oil is a finite fuel, controlled by a few nations that are barely separated geopolitically and have common ancient civilizations and modern goals.

Already struggling from Viet Nam and Great Society debts, America found herself the object of a politically motivated oil embargo in 1973. Fuel prices soared and supplies tightened to cause the 70’s stagflation in America. From then until now, America has not found the political will through fluctuating fuel prices to organize an intervention away from oil dependence.

Since the embargo, America has consumed 250 billion barrels of oil at a total cost of $11 trillion dollars. This debit line in our national budget has only one trade, oil for dollars. Had America given our energy war a smidgeon of the effort of placing a man on the moon, we could have easily reduced energy consumption by 20 percent for the same productive output, transportation, and environmental comfort, and saved 2.2 trillion dollars. Surely, the costs to achieve such a modest conservation would have to be netted from the gross, but those costs could have been internally generated and added to America’s GDP.

America’s Multinational Corporations (MNC) were Indifferent Citizens

While America fought the war on poverty, her political leaders surrendered to the war on American jobs. Certainly, with the relative world peace supported by America’s military, globalization was bound to occur. With the risk of direct foreign investments reduced, the last five decades have unleashed an acceleration of money flow and intellectual capital from America to other countries.

While over 4 trillion dollars have been invested overseas by American uberwealthy, America has also been a receiver of investment, so that the net outflow has only been 0.7 trillion. However, the loss of America’s wealth and jobs has been much greater, contributing to a stagnant workforce where one in four able Americans has been idled. MNC direct foreign investment has indirectly added $4 trillion dollars to America’s debt.

The Fed Financed MNCs and Saved Banks but Failed to Keep America Employed

During most of the 17th century, Europe embroiled itself in wars that killed 30% of its population. Some of the world’s largest banking houses failed as royal debtors defaulted, including England in1672. Finally, in 1694, the king agreed to give the Bank of England authority to print all of England’s bank notes in exchange for bank loans to support his war with France. The newly created Central bank, having transferred its risk of loss to British subjects, profited simply by printing money for the monarchy. However, this excess printing did not stop the emptying of England’s coffers.

After America revolted to escape the monetary control of the Bank of England, Hamilton, the United States’ Secretary of the treasury, proposed a charter to a create a similar central bank for America. Against Thomas Jefferson’s insistence, the First Bank of the United States became the precursor to America’s Federal Reserve. Some say major banks manufactured a bank run in 1907 to destabilize the Treasury and instigate support for the Federal Reserve Act of 1913 establishing the Fed, a quasi-agency, private enterprise with a quasi-public board.

From the establishment of the Fed until today, many have argued that major Fed decisions have enriched banks at the expense of the American People. An example is the erroneous decision the Fed made to keep interest rates high for an extensive period of time as America and the World clearly were entering the Great Depression. Also of heated debate was the decision to bail out the banking industry at the start of the Great Recession.

Nonetheless, Fed decisions combined with lobbied efforts to reduce financial regulations, allowed Wall Street to orchestrate multiple financial bubbles that consecutively destroyed value in American portfolios. It cost taxpayers $88 billion to bail out the S&L crisis. The boiling and bursting of the dot.com bubble evaporated $5 trillion dollars. Notwithstanding that the credit default bubble lost the world $30 trillion in value, it has thus far cost America $51 billion in bank bailouts, $787 billion in stimulus, $1.5 trillion in quantitative easing, $5 trillion in lost property values, and with over 5 million bankruptcies and 5 million foreclosures, ruined trillions of dollars worth of wealth generating credit.

In Conclusion

Adding up the numbers versus our $15 trillion dollar debt, it is amazing that the resiliency of the American economy is thus far holding ground:

10,000 tons of gold: $0.5 trillion
Wars: $3.4 trillion
Great Society: $9.5 trillion
Lack of Energy Policy $2.2 trillion
MNC DFI: $4.0 trillion
Banking Debacles: $12.4 trillion +
Total $32.0 trillion

The idea of currencies unsupported by gold reserves is not in itself troublesome. Whether Crowley shells, tally sticks, or paper money, if the market has trust in its role as a place holder for non-incidental barter, any money will do. However without the external discipline imposed by a gold standard, America must instead substitute gold’s imposition for a President strong enough to stand for American sovereignty, a Fed subjugated to defend a stable currency, a Congress selfless enough to impose its own financial discipline, and a willingness of American businesses to defend American jobs. Otherwise, America’s five decade reign over this short lived worldwide fiat money dollar system will come to an end.

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Filed under American Governance, China, Federal Reservre, Foreign Policy, Free Trade, Full Employment, Multinational Corporations, U.S. Monetary Policy, U.S. Tax Policy, War, World Sustainability

Will Someone Tell America’s Emperors of Finance They Have No Clothes?

There are those that tout Keynesian and Chicago theories as our protection in this dire economic situation America finds herself. They claim these theories were successfully tested in the Depression, but we know that many experts equally believe that stimulus and money printing was not successful then nor will it be now. Friedman himself said that excessive money printing, like drug addiction, has to keep accelerating until ultimately failing in hyperinflation to sustain short term positive effects. No, evidence strongly leans toward the theory that what drew us out of the double dip depression of the thirties was that bombs destroyed worldwide industrial output creating demand for U.S. manufacturing, not the eerie monetary and fiscal voodoo policies we are chanting around the fire today. Prominent economists now say we are headed imminently toward our second dip.

I am warning my friends of dire inflation, but predicting inflation, after global merchants like the CEO of Wal-Mart disclose they cannot hold inflation back any longer isn’t fear mongering. I am simply a master of the obvious taking no credit for my discernment. However, to claim that all is well as the Emperor rides naked through the streets is simply blind loyalty to failed policies. I like the little boy who pointed out the Emperor flaunting of body parts that should never be displayed in a processional, am simply calling the tailor a fraud.

I hope that my fears are allayed but it seems there will more than likely be no return from the abyss. No government in history has been able to turn back once this extreme an acceleration of money supply has occurred. This drug crazed college experiment must unfortunately continue on for our economy will implode otherwise. We have no choice but to continue printing. However, let’s not rewrite history. If the real purpose of Henry Paulson’s “shock and awe” monetary policy was not to protect the wealth of his cohorts but to save the world’s financial system and to avoid the catastrophe of burning down of America’s house, then adding an unprecedented amount of dollar flow to an already bloated supply to eradicate the residue of his quick fix was the equivalent of burning down the entire city of Rome to drown out the awful fiddling of Nero.

Certainly, this disastrous repair of our economy would not have even occurred if it were not for repeated administrations allowing the deregulation and consolidation of the financial industry. I could never defend their malfeasance. Each time, the financial industry coalesced and bubbled into an interweaving quagmire of evasive tactical and strategic conglomeration, I scratched my head at the seemingly complicit nature of our regulators. Gone was the protection envisioned at the height of dismantling that occurred with the Depression. The multinational gold rush fueled the revolving doors between Wall Street and Capitol Street, creating a frenzy of Ponzi fever gambling America’s future for a few gold nuggets.

And if I will not defend almost criminal policies of creating businesses too big to fail, I certainly would not defend spending billions if not trillions to keep them in place. The banks that created the morass should have been allowed to fail along with the humanoids that crept within their demonic walls. Those bankers and banks that had enough souls to live through the implosion could have been propped up to continue on, sorely but not worse for the wear than today.

Ask the 8 million 99ers, that forgotten group that has a higher suicide rate than any other, if these policies were the right ones. Or perhaps we could get a positive response from the millions who have lost or will lose their homes through foreclosures even as scores of millions lose their life’s savings holding onto the obsolete dwelling boxes we used to proudly call our prime investments. Perhaps the elderly gents who used to own their own businesses who will now be bagging groceries for a living until they can no longer lift the cans of food, inflated by our QE2, off the checkout line into upper class grocery bags will proudly support our future path. Like Japan, we will drift into our forgotten decades and wonder if there was a better way out of the collapse of 2008.

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Ron Paul is America’s Winston Churchill

It has been said of Winston Churchill that while he did not win the war, World War II most certainly would have been lost without him. During the war, President Roosevelt called him the most important man on earth. And yet, for a decade prior to the war, Churchill was sent out into the political wilderness by his party and country. His staunch, bull dogged, steadfast ideas were not yet right for his time.

During the thirties, as Germany’s war machine increasingly telegraphed its war intentions to the world, Churchill continued to speak out against the Nazis only to be labeled a warmonger by the appeasing British leadership. When war finally fell upon Europe, Churchill was once again called back into service and led the world through one of its greatest crises in history.

The United States is now facing a greater threat than at any time since that war. We are in great need of our Churchill who will unite both political parties to defeat the enemy of our time. The world must only turn a few degrees more on its political axis for America to finally align with the steadfast political views of Congressman Ron Paul. Like Churchill, Ron’s message has been steadfast and is the remedy for America’s return from the abyss.

His views are the prescription for America, albeit complex and interconnected. They are not a simple pill that will quickly bring us back to health and they must be adhered to holistically. His policies cannot be deduced to sound bites. Each component is critically interrelated and requires a disciplined analysis. As Churchill’s expensive conservative hawkish rearming prescriptions were understandably sidelined by the British people during the midst of the Great Depression, it is also understandable that Ron Paul’s holistic cost cutting prescriptions would be sidelined by the press, the opposition, and even his own party during America’s seemingly prosperous previous bubble decades.

As our baby boomer and borrowing fueled bubble economy seemed to prosper during the previous three decades, Ron’s stern warnings for America seemed ill placed, especially when our leadership pointed toward the shining city on the hill and dismissed his message as irrational. Amongst the noise of complex issues we faced, it was no wonder that the American People placed him to the side of national politics. Yet during this time of faux prosperity, Ron prophesied about rising debts, rising trade agreement imbalances, rising trade deficits, rising job losses, rising inflation, rising unfunded Federal budgets, rising Medicare and Social Security differentials, rising Fed abuses, rising military costs, rising federal work forces, rising anti-sentiment for dollar reserve currency, and rising gold prices.

As Great Britain hoped in the 1930’s that appeasement of Germany would allow England to escape the cost and aggressive stance of military preparedness, America hoped that our political leadership would steer us clear of the coming financial crisis that increasingly telegraphed its inevitable certainty. Churchill’s best prescription was plucked from political obscurity to lead Great Britain miraculously out of certain defeat. It is now Ron Paul’s destiny to implement the holistic prescription that he has contemplated for decades. It is time for America to finally fully contemplate Congressman Ron Paul’s hopeful solution.

What is the complex crisis in which America finds itself and what is Congressman Paul’s equally complex but holistic prescription?

Years of excessive government budgets have slowed our GDP growth below its ability to support our growing work force.

For three decades, multinational corporations have escalated direct foreign investment, transferred jobs overseas, and returned low price foreign goods, causing escalating trade deficits, government and private debt, and unemployment compensation.

Our government gave multinational corporations free trade agreements, tax incentives and R&D subsidies that created and transferred innovations overseas, further eliminating jobs in America.

Our Congress continues to spend 80 percent more than it taxes the American public. Our election process and Fed allows Congress to spend without managing our exploding debt.

A private consortium of banks runs the Federal Reserve and supports Congress’s irresponsible spending by printing money. It creates inflation, a silent tax that hurts our seniors and poor the most.

Our Social Security and Medicare entitlements that had 40 workers per retiree when enacted, now has only 3. In their current form, they are unsustainable.

America spends more than the entire rest of the world on defense. Yet given realities of modern warfare, we do not need 700 foreign bases.

Without intervention, America’s housing crisis will drag the country through stagflation for another decade.

Ron’s steadfast, decades-long prescription includes:
• Reducing the size of government now
• Amend the constitution to require a balanced budget.
• Protect our position as the world’s reserve currency by balancing the budget
• Live within our means and begin to reduce the debt
• Reduce and reform taxes to support domestic business investment and job growth, and that provides enough
capital for future GDP growth
• Reduce our military budget to protect America from Invasion and provide for technology improvements ahead of
our enemies.
• Eliminate the majority of our foreign military bases
• Use extreme vigilance to ensure our military is not used for non-national security purposes.
• Reorganize or eliminate the Fed so that printing of money will not be an option to cover taxing short falls and
that artificial inflation will be eliminated
• Create more efficient and cost effective solutions for employment than massive government stimulations that
exacerbate our Federal debt.
• Correct the home mortgage crisis by reforming bankruptcy laws to allow home mortgages to be reduced to the
market value of the home so that the housing market can once again operate efficiently.
• Eliminate incentives to obfuscate the American public by making all government actions transparent, like
ensuring that all Federal spending is on budget, and that the Fed transparently reports the M3 money supply.
• Eliminate or minimize Government manipulations of markets that create inefficiencies and loss of jobs. Unions
should not be restricted from organizing but should not get special treatment. Subsidies should be eliminated if
possible. Minimum wage should be eliminated and social protections should be covered in other ways.
• Eliminate multinational corporation low cost loans.
• Redirect R&D funding on small businesses that create more jobs for America.
• Significantly reduce our overseas budget of over a trillion dollars while our economy is in crisis. Foreign aid
should be reduced or eliminated. The Koreas that were forced apart by Russia and the U.S. should be
allowed to reunite. Nation building should cease.
• Eliminate government intervention of the medical industry that hinders competition.
• Eliminate departments like the Department of Education that should be managed by the States.

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Is the Federal Reserve Harming Job Growth?

The Fed originated from a private agreement of the world’s richest bankers in 1910. Reacting to clamors to regulate the “money trust”, leaders of the world’s banking systems came together to create the plan for the Fed, that Congress enacted in 1913.

The plan did not completely turn over the power of the world’s banking system to Congress. It instead created a “partnership” intended to retain power while sharing oversight with Congress. The President recommends and Congress confirms 7 board members to the Fed from banks, and the banks appoint 5 other members from regional Fed banks that are in turn owned by private banks to the FOMC that makes Fed actionable decisions.

The Fed is subject to oversight by Congress. Yet oversight means that the Fed reports a summary of its actions after the fact. Congress cannot dictate to the Fed, and can only change its charter by statute, which has been politically unachievable, even though a bill to end the Fed has 55 congressional signatures. Members of congress cannot attend Fed meetings and cannot audit the Fed. Thus, the Fed has authorization by our government to manage the banking system free from political controls.

Even so, congress has little incentive to place restrictions on the Fed. For every dollar that Congress spends, Congress borrows 40 cents from the Fed, who essentially just has it printed. And Congress needs the banks to get re-elected. 94% of congress persons with the most election funds win their elections. 90% of election funds are given by wealthy individuals, large corporations and the banks.

It is claimed by some “conspiratorialists” that through complex stock ownership in five U.S. banks, the original stockholders of the Fed still maintain control of Fed actions. Whether or not this is true, the actions of the Fed have resulted in great wealth transfer to bank shareholders through Fed actions including engineering inflation. In the 300 years before the Fed, inflation was minimal except for the absorption of wars. In the 97 years since the Fed, inflation has increased 1,900 percent.

When banking investments soured in 2008, many claimed that the Fed acted in the best interests of its shareholder banks over those of the United States. With the great recession, the Fed entered into unprecedented activities. In March 2008, the New York Fed advanced funds for JPMorgan Chase Bank to buy investment bank Bear Stearns. Also, in September of 2008, the Fed gave an $85 billion loan to AIG for a nearly 80% stake in the mega-insurer. In October, 2008, the Fed acquired the ability to pay interest to its member banks on the reserves the banks maintain at the Fed. And quantitative easing has the potential to inflate the U.S. out of losing housing portfolios.

In essence The Fed’s actions have protected the wealth of international investors at the expense of small investors that are nearing retirement with life savings in fixed incomes.  By preserving this wealth, the Fed is also enabling the funding of third world multinational corporation direct foreign investment without consequence.

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