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Of (Economic) Myths And (Central Banking) Heretics
Now that a revisionist political backlash against a system that failed its constituency in every possible way is in full force judging by the sea of red almost visible on the metaphoric CNBC heatmap (and literally so, after a casual glance at the turn in the AUDJPY pair derivative known as the futures), it is time for today's little political diversion to end, and for everyone to redirect their attention to where it belongs: namely the Marriner Eccles building located ironically enough on Constitution Avenue in D.C. With just over 12 hours left until what some consider the most important decision in the history of Keynesian economics, and of the fiat monetary regime, we wish to bring to you an extract from William Buckler's recent edition of his most excellent Privateer newsletter. In it he talks about myths and heretics, about dogma and revolution, about ignorance and abuse thereof, but mostly, he talks about the Federal Reserve, and its imminent end. Since pretty much everything else about what may happen tomorrow has been said, here is an essayistic view about what may happen the day after tomorrow.
Of Myths And Heretics
Around 250 BC, the Greek mathematician Eratosthenes proved that the earth was round and calculated its circumference with remarkable accuracy. Almost 1800 years later in 1519, 237 men under Ferdinand Magellan set out in five ships from Seville in Spain. Three years later, 18 men in one ship returned, having completed the first widely known historical circumnavigation of the earth. Even after this proof, many clung to the myth that the earth was flat. Some still do to this day.
In the 15th century, Copernicus displaced the Earth from the centre of the universe, holding that it revolved around the sun - which was the centre of a universe of fixed bodies. In the 16th century, Galileo discovered the moons of Jupiter, proving that not all “heavenly objects” orbit around the earth or the Sun. Giordano Bruno went still further, maintaining that the universe was infinite and therefore had no “centre”. Copernicus got away with it, not having the instruments to prove his contention. Galileo was forced to recant. Bruno refused to recant and was burned at the stake. The reaction to these discoveries by the “powers that be” is typical and reverberates throughout history.
In 1654, Bishop Usher published a work in which he solemnly calculated the age of the earth to be 5659 years. According to the learned gentleman, “Creation” took place at nightfall on the “day” preceding October 23, 4004 BC. Both the Egyptians and the Babylonians had calendar systems which went back further than that. No matter, the “age” of the earth was still hotly contested in the “developed” world in the late 19th century during the debate over Darwin’s theory of evolution.
The Great Modern Myth - Orthodox Economics:
You can unearth long lasting “debates” in every branch of human knowledge. There is a very old and very tenacious tendency to never let the facts intrude on a good theory. In this regard, the study of economics and finance is not immune. The problem is that it is more destructive than any other modern controversy - as the world is just now beginning to discover.
All forward steps in any field of knowledge are made by those who do NOT conform to the orthodox. The problem is that once a particular set of rules and theories does become orthodox, a huge vested interest is quickly built up, all of whom are united in their desire to ridicule, suppress or shun those who do not conform. Religious controversies are the best known example of this, but the practice is rampant in any field of endeavour. It reaches its most virulent level in areas which impinge directly on politics in general and the pursuit of political power in particular. The 20th century had the sad distinction of being the era when government and economics became (seemingly) inextricably intertwined - an even more dangerous development than the previous marriage of church and state.
One of the great achievements of the Founding Fathers in the US was their constitutional separation of church and state. This absolute separation has since been sadly eroded but it still stands as one of the laws which governments must obey and thus as an impediment to the pursuit of power. With economics in general and money in particular, the opposite is the case. Here, there is no constitutional or any other kind of barrier to keep the government out of the lives and the pockets of its citizens. The justification for this has evolved into modern orthodox economics. It is taught by (almost) all institutions of “higher” learning and practised by (almost) all economic decision makers both inside and outside government.
The “Sanctum Sanctorum”:
Translated from the Latin, this means “holy of holies”, the most sacred place within a sacred building. The same is true with a set of ideas which seeks to justify the conduct of human beings. At the base of these ideas, there is a core which cannot be talked about, let alone debated, without incurring the wrath of those who rule. At the heart of government power today lies their complete control over money.
In an article in the UK Telegraph newspaper on October 27, Mr Ambrose Evans-Pritchard talks about “the New Keynesian priesthood that rules our money and our lives”. The metaphor is an apt one. We can only hope that this “priesthood” will fall without the Reformation” that hit the Catholic Church in the 16th and 17th centuries. We can also hope that the “revolt” won’t take as long this time. The “Reformation” lasted over a century and ended - in 1648 - after 30 years of one of the bloodiest wars in Western history. The Fed is, however, nearing its century and there has been no shortage of wars.
Orthodox Fed Policy:
Read any press release put out after any Federal Open Market Committee (FOMC) meeting over the past 20 plus years. You will find two statements (or reasonable facsimiles) contained in it. One is that the policy aims of the Fed are and will remain the maintenance of “sustainable economic growth and price stability”. The other is the perpetual affirmation by the Fed that “longer-term inflation expectations remain contained”. These two pieces of monetary “holy writ” were a constant right through the long “reign” of Alan Greenspan which began way back in August 1987. They remained a constant under Ben Bernanke - who ascended the US monetary throne in February 2006 - until very recently.
In the nearly 70 years since the US Dollar officially became the world’s reserve currency in 1944, the Fed has always held as financial “holy writ” its ability to produce both economic “growth” and price “stability” through its monopoly over the US currency. Even the “inflationary 1970s” and a short period of 20 percent plus US interest rates did not shake that belief. The Fed has never wavered in its belief that no matter how many of them they created out of thin air, the US Dollar would NEVER be rejected.
Economic Growth And Price Stability?:
Economic growth and price stability are the stated aims of the Fed. In orthodox (read Keynesian) economics, the two are mutually exclusive. You can have one or the other but you can’t have both. To understand this, it is only necessary to realise that Keynesians measure “economic growth” by means of statistics, notably the Gross Domestic Product or GDP. According to the Wikipedia, the orthodox definition of the GDP is: “the market value of all final goods and services made within the borders of a country in a year”. A “market value” is a price. If prices are “stable”, market values cannot increase (or decrease). And if this is the case, then economic growth cannot take place. According to the Wikipedia again: “Economic growth is the increase of per capita gross domestic product (GDP). It is often measured as the rate of change in real GDP”. If there is no change, there can be no growth.
In the real world, prices are exchange ratios between goods and services on one side and money (the medium of exchange) on the other. In that same real world, the only constant is change. That being the case, stable prices are not only undesirable, they are impossible. There is one, and only one, stable item which can be introduced into the process of production and exchange. That one stable item is the physical dimension of what is used as a medium of exchange. We are not talking about the number of units of money, we are talking about the composition of the individual monetary unit. A defined weight and fineness of monetary metal is and has always been the ONLY way to produce this “stability”.
Given the use of such money and a completely unhampered market, prices are free to fluctuate as much or as little as circumstances dictate. In an economy which is truly “growing”, the supply of goods and services available in exchange for money is increasing. New wealth is being produced faster than existing wealth is being consumed. In such an economy, prices are not stable, they are FALLING!
Falling prices are what the Fed and every other central bank fears more than anything else. The reason for this becomes obvious when one considers the nature of the “money” these central banks produce.
“The Difficult We Do Immediately”:
“... The impossible takes a little longer.” This motto has been used by many organisations, the original being the US Army Service Forces in WWII. Actually, it is a perfect motto for Ben Bernanke and will hopefully stand in future as an epitaph of the Fed and every other central bank.
The “difficult” part of what the Fed and every other central bank does is not actually very difficult at all for them, but it most certainly would be for you and me. Today, one of the accepted and primary roles of governments everywhere is to “run” the economy. It is true that they spend all their time passing new rules and regulations into law in order to do the “running”, but their primary means has been and remains their total control over the money in the nation they govern. The institution which justifies and facilitates this is the central bank. It actually produces the money, both physically and as computer entries.
The “impossible” part is the one which Ben Bernanke is just starting to suspect now. For almost forty years, the Fed has maintained the facade that a purely paper fiat money can function in a market economy just as well as an objective REAL money can. Central to this task is their contention that they can control the economy and prices by manipulating the amount of “money” they issue. This is the impossible. It has never been successfully done in the entire history of paper fiat money.
When the Fed talks about “stable prices”, it is not actually serious, it just wants to be taken seriously. The last thing in the world which the Fed or any other central bank wants is stable prices for the paper assets which form the ultimate “collateral” for the paper money they emit in such vast torrents. Any lowering of these prices puts the Fed’s “mandate” of economic growth into danger. From there it is a short step to the collapse of the money itself which has absolutely NOTHING else behind it. To forestall that step being taken, Mr Bernanke is now poised to defy the impossible on a scale never before attempted.
Jettisoning “Stable Prices”:
Ben Bernanke started warning us all about the perils of what he called “deflation” long before he became Fed Chairman in 2006. He gave what is probably still his best known speech way back in November 2001. His title was: “Deflation - Making Sure “It” Doesn’t Happen Here”. He proceeded into the meat of his speech in the following manner: “So, is deflation a threat to the economic health of the United States? Not to leave you in suspense, I believe that the chance of significant deflation in the United States in the foreseeable future is extremely small.”
Almost nine years and some hair raising experiences - most of which had to do with very “significant deflation” in the paper asset markets later - Mr Bernanke has changed his tune. Not only has he decided that “deflation” (falling prices in his jargon) is a significant threat, he has decided that it is an imminent threat. Sadly, the direct means at the disposal of the Fed with which to deal with this threat have already been deployed to their fullest extent. Official US interest rates have been non existent for almost two years. The Fed’s balance sheet - paper “assets” which still retain a “value” only because the Fed owns them - exceeds $US 2 TRILLION. The Fed spent most of 2009 monetising Treasury debt with no benefit to either the real US economy or to the still uncomfortably high official US unemployment rate.
So now, the whole world awaits the Fed’s announcement of a second attempt to pump up the US economy by means of creating US Dollars and using them to buy US government (Treasury) debt. As the “decision date” of November 3 draws closer, the focus of global markets discards almost all other considerations. But what is it, precisely, that the Fed hopes to accomplish?
Encouraging Inflationary Expectations:
When, not if, the Fed and Mr Bernanke do announce their second program of US government debt monetisation, they will have admitted in public that the first (March to October 2009) program has failed them. Further, they will have confirmed for a second time in about a year and a half that the ultimate job of all central banks is to act as a “lender of last resort” to the governments which control them. Third, they will have demonstrated for all that have eyes to see that the “full faith and credit” of government which is the only underpinning for modern fiat money is an illusion. It is no more credible in the light of FACTS than contentions that the earth is flat, that the universe is fixed in place or that “creation” took place well over a million years after the first recognised human beings walked the earth.
Modern governments and their central banks cling to the tenets of orthodoxy in the economic and financial realm with fanatical zeal. They have no choice, their power depends upon them. The situation has now reached a level where the US political and financial establishment have decided that to retain power they have no choice but to risk losing it altogether. The surest evidence of this is Mr Bernanke’s stated intention to encourage “inflationary expectations” amongst the American people.
The Eye Of The Tiger:
Like most organisations whose main aim is to accumulate power in the hands of the government, the Fed has always relied on what Elihu Root (see the quote earlier in this section) described as “optimism”. Another word for this is ignorance. Ignorance is not a pejorative term, it simply means a lack of knowledge in a given field of human endeavour. No human being has ever lived who is not totally ignorant about many vitally important areas of knowledge. But no VALID field of human knowledge has ever relied upon ignorance as its prime justification. This is what the Fed now proposes to do.
The fact is that inflation - an increase in the total stock of money - is the modus operandi of every central bank which has ever existed. Central banks still exist only because the vast majority of the people they rule do not equate what they do with inflation. Mr Bernanke now proposes to change that. In doing this, he is placing the biggest bet in history on economic and financial ignorance. All such bets lose.
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This new monetary policy is unreal. I made an animated cartoon for the occasion.
you've been Benroned Bitchez!
http://www.economics.harvard.edu/faculty/farhi/files/collectivemh.pdf
Collective Moral Hazard, Maturity Mismatch, and
Systemic Bailouts
Emmanuel Farhi and Jean Tirole∗
October 7th, 2010
Abstract
Concerned about banks parading around as if they need a bailout? Government has difficulty assessing where banks really are?
Yes, it is all a little strange. An earlier paper I found back in 2008:
http://www.economics.harvard.edu/faculty/farhi/files/global_bpea.pdf
funny vid.
excellent.
Superb. Scary as hell. But superb.
Just how bad is the collapse of the twin religion towers of Keynes and the Federal Reserve going to be?
Answer: Really bad.
References: Mancur Olsun, Tainter.
There will be pain, sure, but we have to make sure it is a good pain, like a near-death experience which results in you no longer taking things for granted (such as fiat currency and the power of the Fed).
We were just discussing this very issue on PsychoNews, about common myths and misconceptions, regarding the Oligarchy and the threat of hyperinflation. You will find A LOT of people just don't want to believe an Oligarchy exists.
The deflation-inflation debate is not a question of which one we get, but WHEN the US loses reserve currency status. Misconceptions: Hyperinflation & The Oligarchy
http://psychonews.site90.net
Yes, superb content, unfortunately with a silly introduction full of confusion. I'm afraid the agressive "darwin fish" intro will drive away much of his supportive readers.
The preceding segment of the quote from The Privateer above:
The Great Financial Myth:
There is no way out of the GFC [Global Financial Crisis]- and no way to prevent it from steadily worsening - until a great myth which has all but totally dominated economic and financial discussions for most of the past century is finally laid to rest. The obstacles confronting those who would challenge this myth are huge because its “truth” has long since been taken for granted. And because it has long since been taken for granted, it has fostered absurdities the like of which can be found in few if any of the other branches of what is taken to be human knowledge. A glance at the recent financial headlines is all it takes to reveal this.
Here is a recent one, from October 26: “Goldman Says Fed Faces $4 Trillion Hole”. The “Goldman” in question is, of course, Goldman Sachs. The individuals contemplating the $US 4 TRILLION sum are economists working for Goldman Sachs. They estimate that this is the amount of paper “assets” which the Fed may have to “buy” to get the US economy “growing” again. The economists hasten to add that the Fed probably won’t go that far, pointing out that a mere $US 2 TRILLION is a more likely total.
Several things are utterly taken for granted in this breathtaking complacency. What will the Fed use to “buy” these “assets”? US Dollars (aka Federal Reserve notes), of course. Where will the Fed get these Dollars? By keying the amount into a computer and from there into the US “money supply”. What will this do to the stock of money in the US? It will increase it by a staggering amount. Here’s where the myth comes in. The myth states that this is NOT “inflation”. It will only become “inflation” if the massive increase in the stock of money is translated into higher prices. But not just any “higher prices”. The prices to rise must be the prices of everyday and vital economic goods and services. Only in this way can “inflationary expectations” be increased. And that, as Mr Bernanke stated in a speech he made almost six weeks ago now, is the express purpose of this particular bout of “quantitative easing”.
There was a time when the Fed only had to print up a single $US Billion or so to get the US economy “growing” again. Then it became a few $US Billion, then tens of $US Billions, then hundreds of $US Billions. Now, a “few” $US TRILLION are said to suffice. Can you see a pattern emerging here? If you can, you are already at least one step ahead of the vast majority of the professional “intelligentsia” in US and global economic and financial circles. For decades, they have stood as a phalanx to assure us all that this upward trajectory of the Fed’s money creation has NOTHING to do with inflation.
The Fed really fucked up. They painted themselves in a corner with this QE bullshit. It is not going to do anything to help the real economy. People are just flat out broke. This cycle of spend spend spend, borrow borrow borrow is done. We have to delever. All this debt overhang has to vanish before we can start a real recovery.
Many things need to change. For one companies raping the general public. We have most companies making record profits, yet the average employee makes nothing when all is said and done(taxes, rent/mortagae, car ins, ect ect.) Yet the CEOS and executives are walking away filthy rich. This is the first thing that needs to be fixed. Even a guy making a decent living earning 70-80k is not left with much.
When will the FED realize that people are done borrowing, baby boomers are not gonna do it, my generation, I am 30, most are broke with school loans. This really is Japan part 2, but IMO it's gonna be worse, at least they had savings and all their debt was internally funded. When is the rest of the world gonna wake up and see what the FED is doing. Why will they continue to fund us.
This is not gonna end well, and all these pumpers on TV and newspapers and blogs should be ashamed of themselves. Or they really are that stupid, i don't know.
You don't need a PhD in economics to see you don't fight a debt crisis with more debt. Just look around and use common sense. Things dont add up.
Whew, read the whole thing.
My pragmatic response is - yeah, so...
Same here. I see a lot of warranted criticism and prognostication but never plans for action. Enlighten me, somebody.
Bill Buckler does not propose solutions. The Privateer is a reporting and analysis paper which comes out fortnightly. With the proper information you will have to create solutions of your own. Does everyone have to be told what to do and what to think? Due diligence -- and then your own course of action. If Buckler were to even suggest a solution he would be too general and there would be even more disagreement in these comments. One size does not fit all.
sell all your precious metals and put your cash on deposit at a not TBTF bank. you can't go wrong!
it was about 2 years ago that the good captain did suggest a few things an individual could do. physical gold and silver was one. making friends with the baker and butcher was another one, (supply chain issues).
having seen massive debasement of currencies before, i agree with him completely.
as the world falls apart for many middle class families today there will be a lot more who will be taken by surprise when their world collapses. there are a lot of delusional people out there, (see election results), and they will be coming after your wealth and well being soon enough.
my advice is to be prepared to not only defend what you have but also to help others.
Oh, hell yeah. I don't even go there. The good Captain always suggests the PMs as a sane alternative to the Ponzi. For me it is so obvious, and a given process, that it does not come to mind. I've been a subscriber to The Privateer for about 10 years and it's genetic to buy gold/silver.
In the Theatre it's called 'papering the house'. Free tickets for everyone! Come enjoy the show.
Just one point on the prefatory material - Aristarchus predated Copernicus and Bruno by some centuries. His heliocentric model was formulated in about the third century BC (Aristarchus died about 20 years after Eratosthenes' globe-earth theory was promulgated).
Somehow, this feels like the tail end of articles telling us the history and the why and how of why we are where are today.
Pretty soon (later this week), it's going to be a running commentary of "Like I said last week/month/year/since 1999)....
Pretty soon after that, we may not have this place to meet and greet any longer....
Ready-ness! Bees Knees Itches!
ORI
http://aadivaahan.wordpres.com
The "People" as in "We the People" must take back control of printing our money from a private for profit bank.
The Treasury is where our currency should come from - interest free!
President John F. Kennedy tried to do it. Remember the silver backed Kennedy dollars? He was succeeding against the banksters - so they had him shot! Take back control of the money from this corrupt, useless, nest of vipers. If not - then it will be the end of freedom. The curtain will come down.
this implication is that there is time left, is there? Or, a better question is, who is going to stop all this. Who? When? How?
We have a whole new crop of politicians all saying they will change DC, get money and debt under control, cut spending, make tons of new jobs, etc. I have heard that before, so have you. They are all awaking this morning, staring at each other with locked eyes, and asking the same question..."now what?". I never heard any plan from anyone on how to change anything.
Jello moved around the plate, nothing more. I will believe something will change when I see meat and potatoes on the plate not colored water. The Fed is not going anywhere, not when it has the power to pump money into the hands of bankers and industry directly or indirectly.
1,000-million dollars was spent (one billion by unknown parties with unknown plans and intentions) to elect all these new folks to save America. That is a lot of debt and obligation to settle even before the newly elected begin to thing about the National Debt or the FED. I wish them all God speed and good luck and hope that our blindfaith has not taken us for a ride around the block once again.
Bob Marley understood a while back in his song "The Real Situation":
"There ain't no use; nobody can stop them now" ? ? ?
Speaking of “myths”…
This statement is completely false. “Separation of church and state” is not in the Constitution. Jefferson's “Wall of Separation” letter, written to the Danbury Baptist Association in 1802, was intended to reassure the Baptists that the First Amendment to the Constitution guaranteed them protection from government oppression and interference.
(Note: Thomas Jefferson did not sign the Constitution, nor was he present at the Constitutional Convention of 1787. Neither was he present when the First Amendment and religious freedom were debated in the first session of Congress in 1789, as he was out of the country in France as a U.S. Minister.)
What is in the Constitution is the “Establishment Clause”. Over time, the meaning of this phrase has been interpreted differently by the Supreme Court, in a way which has (at times) strayed from the original intent. It is now a mess.
http://www.earlyamerica.com/review/fall98/original.html
There is only so much one can do when the purpose of the entire 12 pages of The Privateer is economically focused. (You see about a page and a half above.) If you can't bear some poetic license then the entire message is lost on you. Above we have the quibble about Copernicus, and now this about church and state. What are your thoughts on the economic perspective?
Thanks for the history lesson nonetheless.
What the Constitution "says" about the separation of church and state is what the Supreme Court says it says. That is because the Constitution grants the Supreme Court the sole authority to declare whether Congressional actions are or are not Constitutional So if you support the Constitution (which I assume as an American you do), then you support the Supreme Court's repeated interpretation of that document as requiring that government remain secular.
I really find the idea that 9 people are somehow more Intelligent than 310+Million other people quite disturbing.
They supposedly protect the rights of the minority. Depends upon whether you are in the minority or not as to whether that is a good thing, eh?
My heavens! You must be a learned constitutional scholar on the level of our fearless leader. Did you get that from one of his papers? Oh, that's right, no one has ever seen one. My bad. So tell me good fellow, if the framers wanted us to be ruled by "the committee of 9", why did they bother with the rest of that troublesome document? Comprende' genius? Or why would they provide for the swearing of an oath to uphold it upon pain of death for treason if it simply means whatever the committee of 9 says it means?
Yer a moron. Go back to studying Cliff's notes and leave the discussion to the adults....
Supreme court "constitutional review" has no basis in the constitution. It is a grab for power starting with Marshall. We see the sad consequences of this precedent in hindsight.
Of course, but you'll have less luck convincing these brainwashed dupes than you would giving CPR to a 2 year old corpse. Their minds are closed; Elvis has left the building. The balance of people leaving tyrannical states by fleeing to more free ones is (see the guarantee of travel protected) lost on these children of the devil as well. The framers had more wisdom in the clippings of one fingernail than these empty heads have combined. Shed not a tear for them, for they richly deserve the eternal boot stomping of face that is to be unleashed upon them. They are not worthy of the God given rights their fathers died for, and hence will remain slaves forever. May their chains rest lightly upon them and may posterity forget that they were our countrymen....
Excellent piece, and very accurate in its description of the purpose of central banks (yes, bankers LOVE inflation :-) ).
As to the following quote:
"Central banks still exist only because the vast majority of the people they rule do not equate what they do with inflation. Mr Bernanke now proposes to change that. In doing this, he is placing the biggest bet in history on economic and financial ignorance."
The author may be missing the fact that the housing bubble is a reflection of the undeniable fact that over _decades_, an ever growing number of people have been equating the Fed with inflation. The credit bubble burst was the point at which too many people knew about this and blew up the country (credit/leverage = the only lossless inflation protection available).
I believe the deed is already done. And the rubicon was terminally crossed with the first round of QE by both the Fed, BOE and ECB. There will be more rounds but the first one was sacrilegious and will slowly but surely reach the level of general consciousness over time.
...the shame and the sham of what it is to be an american...token leaders that lie, steal, borrow, and beg...heroes paid to pretend to be real and hide the truth until truth devours their very character of being...corporations given rights and abuse them to their own death. ..a country where honor and dignity is ridiculed, oppressed, denied, and or resented by those that can no longer feel compassion, only contempt for their neighbor, their brother...where the news tells of tragedy, promotes fear, and disguises humanity. we have reached a moment in time where ignorance rules and freedom is sacrificed so that a few can continue to waltz in time to a tune now faded...as i try, i fail to put into words a description for our moment in time that will provide a clear portrait of what it is to be soveriegn...i fail to be an active participant in the corruption of law...i fail to see as the majority or the minority...i fail my fellow countrymen on this day for it is a day where i am sacrificed for the common greed and no one is there to defend nor praise the fact that i exist. my heritage is of no value...only paper is cherished...only silicon chips are worshipped...only a grave marker awaits me...and my generation of lost souls shall raise their flag of victory...pretending to believe that they are more worthy than any life ever will be...what number will save a nation burning.
This is beautifully written, the lower case I (i) is a genius touch, please write again, thank you
Meh. It is extremely unlikely that the Fed will actually quantify QE2 in the upcoming statement. It is likely that they will issue some language asserting it is an available option if warranted by economic and financial conditions.
That is to say - expect to be disappointed when the statement does not read "eleventeen quadrillion dollars, bitches! make it rain!" but rather something to the effect of "the Fed, in upholding it's mandate of maintaining stable prices and full employment, is prepared to recommence large scale asset purchases if warranted by economic conditions."
That sounds about right.
Gotta agree with you there.
Have you been reading their script?
Elections as planned - check. Markets higher - check.
Tomorrow, QE2 as planned - markets higher as planned.
We close the year at highs. I believe someone at ZH will be making a donation in the name of CD.
While I agree with many that tomorrows statement is more important then today's elections I strongly doubt Zimbabwe Ben will be clear. It will be some nebulous wording about continued support and low inflation expectations, measured and cautious policy to expand growth and other nonsense. I expect a low-ball number for QE2 but he will leave the door open to expand the operation. And quite frankly he does not even need to do that. As he is not bound to disclose anything to the world as seen by the bailouts and swap lines. He could very well say no QE and then buy like crazy, it's not like we could get an audit any time soon.
This is not the end of the orthodoxy, we are not even in the inquisition and counter reformation yet.
Bernucklehead is a pussy. Why don't you just do it already Benny????? Let the chips fall where they may! The jig is up! Let us get back to reality!
"In doing this, he is placing the biggest bet in history on economic and financial ignorance."
True, but so far it's worked. The balance sheet of the Fed (& probably all central banks) is not even worth rolling up & smoking, yet their liabilities remain 'money good'.
Since the quantity theory of money is bunk (inflation - an increase in the total stock of money) & so far quality hasn't made a big impact (ok, gold is rising), I think Ben's bet may yet work, at least as well as the last time anyhow.
I agree - certainly seems like his plan is working. Look at all the strong manufacturing numbers her and globally. Next tick up is employment and we're on a much more stable path of recovery. Never thought it could happen but it is. Gotta give the guy credit.
Except I would argue that stability has nothing to do with it.
The last 'boom' was hardly stable. It might seem like a recovery to some (or most) but really it's just 'inflation'.
We needed controlled inflation to get this thing back on track and that's exactly what's happening. I'm shocked. I thought he had about a 1 percent chance of it working and it did. There's definitely a recover - nice, slow and steady.
"Appearances are deceiving." Math always wins. That much debt can not be repaid and will eventually default. Then the avalanche.
There's nothing nice about this pathetic "recovery". But you are correct that it is slow. And you are wrong about it being steady. What you are right about is what all ZH'ers know: ZIRP gooses financial assets. Till it doesn't.
Also, there is no such thing as controlled inflation.
It ain't over till it's over. And when it happens don't mistake the crack up boom for a recovery. I expect many outlets to make that mistake, but it could be a costly one.
You mean like the strong personal income number and the robust GDP figure?
Yes, and all that other good news. WTF?
Have to agree, the real 'danger' is not a falling stockmarket in $ terms, it's a endlessly rising one, which can only mean the government bond market is failing in gold terms.
Yeah. Credit is all your gonna get. And that is just debt.
Central bankers' kept the world revolving around the one-dimensional surface of a Mobius' strip, until their worlds collided.
Here are my definitions. Remember that all goods and services of monetary value available for exchange within an economy are dependent upon surplus energy available for goods/services manufacture and all transportation aspects. All goods services of monetary value have embodied energy value. All money itself being a physical representation of a claim on energy. Energy man cannot quantify with his sense's without a unit of account to represent it. A monetary units energy value (purchasing power) is a share in the value of the sum energy consumed within an economy at any time (energy embodied into the production/transportation/consumption lifescycle of all goods/services of monetary value).
Monetary inflation... Is the decrease in energy value (purchasing power) of the total money supply (including credit). This occurs when the ratio of monetary units available for value exchange (velocity) increases within an economy relative to the energy units consumed (energy embodied in production/transportation of goods/services) within the economy at any given time.
Monetary deflation... Opposite, no need to explain. Often a result of unservicable debt and thus credit unit destruction.
Cost push inflation... Occurs when the price of a paricular product/service to an economy increases without an increase in the sum monetary supply or the velocity of monetary units seeking value exchange for the particular good service. This occurs when the supply of a particular good/service available to an economy falls relative to historical demand/price equilibrium, thus raising price. Or investor speculation raises exchange value above consumer market supply/demand equilibrium eventually resulting in demand destruction (bubble).
Energy (real) inflation... Occurs when the supply of available energy that can be utilized to perform work decreases within an economy thus increasing real value of all goods/services that embody a share of this scarcer energy in production/transportation/consumption lifecycle. As both real and nominal value for goods/services is increasing, this is easily and often mistaken for monetary inflation. But as energy itself determines objective value, the net result is decreased economic activity through demand destruction and thus slowed/negative growth (deflation).
Energy (real) deflation... Occurs when the production of goods/services for exchange within an economy falls (name your cause). As less energy is being consumed in goods/service manufacture, the supply of monetary units available for energy value exchange within the economy increases relative to energy consumed, thus decreasing each monetary units represented energy value. Energy deflation occures relative to base money supply available for value exchange once credit units have been purged from the goods/service economy. Energy deflation is a possible hyperinflation (loss of value exchange trust) mechanism.
Your definitions are complicated. I prefer to think of money as what extinguishes debt. Inflation is a loss of value of debt masquerading as money, which is also deflation, which means they are the same thing. No wonder the endless debate over 'inflation' or 'deflation', you can't separate the two.
I guess you could say that money and energy are linked, perhaps you could say money is 'energy good', since matter is energy.
Complicated? Maybe, at first thought, but ultimately correct.
You said it. Inflation and deflation ARE THE SAME THING. Embodied energy value and money as a representation of this value explains this thoroughly.
Both inflation and deflation are a decrease in the energy claim value (purchasing power) of a monetary unit.
It is the fantasy claim on real energy we call credit that serves to complicate the definitions. As credit is destroyed, it tranfers its energy claim to the base money supply. An increase in purchasing power by default.
However, If there were no such thing as credit and energy consumption within an economy (embodied in the production of goods/services of monetary value) decreased, so does the energy share of each monetary unit. In a world without credit (and speculative markets), real prices would always reflect producer/consumer, supply/demand (energy) equilibrium.
Today, cost push inflation is driving real goods/service values higher. In effect, real income is falling, deflation. Although nominal prices for everything will eventually fall back to below (initially) pre credit prices, real values for essential goods and services will increase due to monetary unit scarcity. $10 oil is not cheap when the quantity of monetary units available to the real worker/consumer (value creating) economy is almost non-existent.
All practiced economic theory today is absolute bullshit. Our surviving ancestors will look upon us with a sickly bewilderment.
Austrian economics may have the best grasp on todays bullshit but as it is still a profit system of energy exchange, and thus requires infinite growth (thus energy consumption), it also belongs to the pages of history.
Our near term future inability to substitute increasing consumption of finite energy resources over increased energy efficiency (per unit consumed) to attain economic growth will wipe the slate clean.
Monetary economics is an abstract, analogue version of energy economics (physics/thermodynamics). It may not be able to explain why someone would pay $500k for a V12 Ferrari or $1k for a Gucci handbag (subjective valuation). But it can easily explain why a good used $2k 2001 Honda civic and a hessian "eco" bag is better value (objective value, energy embodied/work efficiency). Or why producing 200 brands/designs of flatscreen televisions that all essentially do the same thing instead of one universal, upgradable, repairable, and recyclable TV design is far greater economic value.
"$10 oil is not cheap when the quantity of monetary units available to the real worker/consumer (value creating) economy is almost non-existent."
You seem to be arguing the quantity theory of money, which is bunk. The value of money depends on its quality, for credit masquerading as money (the dollar) it would be the quality of the debt held as collateral by the credit issuer i.e. will the debt be extinguished?
And a world without credit is implausible, you would denying hundreds or even thousands of years of human history.
As money is the trusted medium of exchange and its scarcity should always reflect the scarcity of energy utilized within an economy, yes. Its quantity relative to the goods and services available for exchange most certainly matters. Sure, we could represent all value with one note if we wanted to, but that would make value exchange quite difficult don't you agree?
I'm not attempting to be argumentative but as credit is purely the construct of mans mind, and does not exist in objective reality, I cannot debate it as representing existing value because it does not. I strongly disagree that a world without credit is implausible. Credit itself is implausable, it really does not exist outside of mans mind and without mans "laws" to enforce its false claim on real matter. If you believe that credit does exist in nature and the thus, the physical universal constants that govern it, please, let me know ;-)
Think of it this way. Credit is a claim on future energy surplus. What happens if that surplus does not come to fruition? You cannot claim what you do not own. Thats one thing the Austrians know well, real money must be a claim on real value that exists at the time of value exchange. Credit is a promise to repay in real value that may or may not exist tomorrow. Its a fiction, a lie, an enigma. But don't mistake credit debt as real debt. If I loan you base money that represents actual real time value, and that was created out of past surplus value, thats a different story. The interest however, is credit, and may or may not ever exist. Thus the wise push by many Austrians to destroy fractional reserve banking.
However the problem runs much deeper and I will not elaborate to much further haha. But when anything is sold for a profit, profit being an an claim on real energy value in excess of the energy embodied into the "widget", we create credit. Everyone of us who earn an income do it everyday. That is why the profit system itself has no future. It requires infinite growth, credit/debt only allowed us to reach our net energy limits sooner ;-)...
The logic of profit (credit) is simple, but I'll make it complicated haha. Lets assume that the US is a closed economic system. Now I'm sure you will agree that the sum value of all the economys monetary units must reflect the the market value of all the nations assets of monetary value in existence at any time right, thats the point is it not? But given that the US is a profit exchange system, more monetary value must actually exist than asset value or else a functioning market exchange economy would not exist. This is because when we produce new products, we exchange them above actual cost of production and keep the difference. So if more monetary value claims actually exists than sum asset values, the economy must then produce new assets of monetary value in order to fill the monetary value void and maintain asset/monetary value equilibrium. But in producing and exchanging these new assets, not only has the sum total value of the economy grown, but now we have created an even larger monetary value claim void and so, the cycle must repeat infinitely? Profit itself is a ponzi that requires ever greater consumption of energy, embodied into the production of goods and services of exchange value that we trade for the profits we all need to survive.
Also, if we did not increase the quantity of monetary units, their individual value would rise and thus, a nation of savers. Monetary velocity would fall, capital markets would become unprofitable and asset price deflation (and thus monetary value) would fall. Deflation. Gold standards are deflationary by nature. Base monetary units must always increase in quantity relative to a nations asset values in order to maintain equilibrium.
"With economics in general and money in particular, the opposite is the case. Here, there is no constitutional or any other kind of barrier to keep the government out of the lives and the pockets of its citizens."
How about money shall only be silver and gold?
Buckler addresses that very question elsewhere. ZH can't post the entire 12 pages since some will complain about the length, post a comment after reading 2 paragraphs, etc. You can rest assured that the position of The Privateer is that real money is best.
Learned historical discussion. I could sum it up a little more quickly, though. The Fed is full of crap and they use whatever theory they can dredge up to justify what they do, which is print money and give it to their owners, the bankers.
There are some really good ideas here about the destructiveness of orthodoxy, but that probably relates to the fact that economics is not really a science whereas your other examples are actually scientific ones.
More importantly there is a pretty large logical error(s) in this essay. You state:
A “market value” is a price. If prices are “stable”, market values cannot increase (or decrease). And if this is the case, then economic growth cannot take place.
In the context in which you are using this, a market value is really a price times a quantity. And since quantities can change it follows that economic growth can take place even if prices are stable. The essay seems to acknowledge as much when it states a bit further on:
In an economy which is truly “growing”, the supply of goods and services available in exchange for money is increasing.
But then follows a very strange statement:
New wealth is being produced faster than existing wealth is being consumed. In such an economy, prices are not stable, they are FALLING!
I am not sure exactly what this means but wealth really isnt consumed, stuff is. Stuff is created as an offshoot or consequence of wealth creation, normally as a result of profiting from the investment of wealth. As a rough definitional matter, I will posit that wealth is created when new capital arises that did not exist before as a result of some kind of economic undertaking or even just through "finding" something like gold or silver even. Of course this begs for a definition of capital which I am too tired to provide. In any event, while there are some good thoughts in this essay, there seems to be more explication and teasing apart of the threads of the concepts needed, which I am also too tired to provide right now. Cheers anyway and keep the good ideas coming.
It sounds like you may be confusing 'wealth' with 'money'. Stuff is indeed wealth. The creation or refinement of stuff is the creation of wealth. You don't even really need money for this to happen, although it really helps the process a lot.
But in a system where the money supply is relatively fixed, when wealth is created, the money gets more valuable.
Yep, and taken to its ultimate origins. Wealth is the availablity of a net energy surplus able to be utilized to perform work. The massive energy surplus available to modern man is embodied into the goods and services we produce to satisfy need and want. Money is a physical representation of this invisible energy value.
Our distant ancestors may have considered wealth as a life of energy equilibrium. Expending less energy to attain a food energy resource than what was contained within allowed a sufficient net energy gain to expend energy seeking tomorrows energy fix. Net energy equilibrium, survival. We have become so disconnected from nature that we have forgotten what wealth really means.
Is it merely a coincidence that the energy surplus attained through agriculture coincided with the birth of money as we know it? That agricultures food energy surplus freed more labor from working the fields, allowing increased production of other goods/services of value, and thus, the requirement for a medium of exchange between food energy (our only energy source) and goods/services producers. I think not.
Money represents an energy claim on a share of the energy embodied into all goods/services produced. Always has, always will. Without increasing rates of net energy surplus, the economic profit system grinds to a violent halt. This forces some tough but long overdue questions to be asked about our collective economic future in a world of declining net energy surplus. I hope we make the wise decision ;-)...
Another great idea overlooked by most.
Interesting. I don't usually like your single minded comments but this one made me think.
But don't forget innovation. Innovation is what allows a unit of energy to be stretched and allowed to create more wealth than before. It is also what is stolen by the bankers and discouraged by inflation. Innovators should receive the benefit of their innovation but through inflation "sleight-of-hand" provided care of the Fed, the bankers spend it first.
Perhaps. But well said. The second sentence is it in a nutshell and is really the point of the article I think. The rest is just flourish.
Not overly bright Bernanke reminds me of the group of young guys out hunting 'coons one night with dogs. When the dogs treed a raccoon one brave (not overly bright) young soul volunteered to climb the tree & extricate the 'coon. Before too long the guy up in the tree with the 'coon was heard to holler down to the group below, "somebody please just shoot up here amongst us - some of us needs some relief"
I'll work on my spelling later.
I wish you'd pick some other prey.
5000 years from now archeologists will dig up the Federal Reserve Building, and correctly deduce that it was once indeed an important bank.
They'll dig around in vain for signs of any gold and silver, and they will correctly conclude that it was also looted by thieves centuries earlier.
.
OH YEAH? NOW ANSWER THIS QUESTION FOR ME BRAINIACS:
IF THE EARTH IS ROUND => WHY DOESN'T MY COFFEE CUP FALLS OVER WHEN I PUT IT ON THE GROUND?!!
round... jokers....
I am now a fan of the Fed, but it is easy to take cheap shots at them because they are unelected.
They are merely responding to the most ridiculous, corporate-centric policy ever followed, globalisation!"
Whilst the US continues to promote closing down factories at home and exporting the labour to China, why are you suprised about 10% unemployment and falling government receipts?
Maybe we should re-allign our portfolios to support American workers?
ahem.
"Now" should read "not."
As you all embark on a search for the truth, the right philosophy - may I remind you that we are just a tribe of monkeys in a forest - all your philosophies will mean diddly if some competing tribe decides to take your territory and yer wemen (sic).
Never forget we are in a strategic game ( not a game of chance) - may the player with the superior strategy win - and may the whining of the losers be of limited duration and amplitude.
Therefore - the measure of goodness of the Federal Reserve must revolve around whether they enhance or detract from our strategic position on the world stage - ie. prevent the barbarians from killin yer wemen and rapin yer cattle.
the ultimate job of all central banks is to act as a “lender of last resort” to the shadow governments which control them.
There! Fixed that for ya'.
At this moment in history we do have a competing tribe in faraway lands that has been employing its slaves( trained by us) to package various bits and bobs of technology that we send them in plasic packages ( that we send them) and thereby accumulating a huge cumulative "trade surplus". Now then, the question arises whether that particular tribe should run the world at our expense - merely because they had more willing slaves at a lower level of human development - to enslave - to enclose the aforementioned bits of technology into plastic enclosures. Wot say yooos guys?
As far as the current essay under discussion - I think altogether too much credibility is being given to Mr bernanke's intelligence. hey - llook - he's just a regular guy - who ahd some math smarts and made into th eIvy leagues and then basically put one foot in front of the next to get where he is. To expect him to be a revolutionary, question the underpinnings of the monetary religion etc - well you are asking too much - give the guy a break. That way lies insanity for a guy like that with limited intellectual amplitude - he just wants to be a good little boy and do a good job. he is highly unlikely to question his masters. He's a tool.
naw - to get a strategic edge in the jungle guys like bennie are just useful idiots , they dont have the badwidth or the testosterone or the intestinal fortitude. They dont give you a phd at princeton if you have any of those.
No suh - we need guys like hamerin hank ( rules are for losers) tpes - college wreslers - power player types. Dey got dat testosterone and not much else - but youse guys will have a great time - just dont rub him the wrong way - or tell him he's got to obey dem laws and such - dat's sure to make hoim maaaad - ya'll dont want dat fer sure.
Bernie may be on the right track. Force interest rates below zero so banksters with have to pay homeowners to hold their mortgages. Voila, housing bubble, and happy days are here again.
Da thing about modern money - as Bennie once said " can create an unlimited amount at no cost" - yes and all - But - But - The darn thing must be scarce for the bulk of the population - or else it loses any magic it had. So Bennie does not want to "create money at no cost"and hand it to deserving childrens charities and such - no - no way. Those types MUST rspect money, always be short of money, be under the tax gun to produce money , spend their waking hours dreaming about money - THATS what gives money any meaning - otherwise its just some bearded guy typing zeroes into a laptop - where's the fun in that?
Axioms Of Fiat Money:
1. Must be scarce for the bulk of the population.
2. Taxes have to be denominated in this type of money - and extreme violence used against any peasants who are unable to pay their taxes in the denomination specified..
All else is secondary, corollaries if you wish. I just felt the need to point out the axioms because I have found folks wondering .. if bennie can " create dollars at no cost" - why then do they suffer all day long to pay taxes, to pay interest on their serf debts - cant bennie just create enough dollars ( " at no cost") to take care of the govt budget - why do they ned to milk the poor peasant?? Well - read da axioms.
So - I really must go - but wanted to say - all this is not about a search of the TRUTH, or a search for the RIGHT WAY.
It has to do with Power and how a small group of primaes can get a much larger group of primates to service their ..umm.. "needs"..
The Central Problem of Cental Bankers:
- To remain Relevant.
Yep thats it - not "to be right", not " to maintain low unemployment and high growth with low inflation" ( hahahahah). No sir. Dey just want attention. Because they are just a bunch of schmucks typing zeroes into laptops - with some cockamamey theories of the world ( fact free theories I might add).
No - they just want CNBC to be uttering their names all day long.
Most excellent. I would like to see the Fed audited first, before their demise. Also how much GOLD is really in Ft Knox?
But if you had access to a Fed audit and knew how much gold was in Ft Knox some of the mystery of the Fed would disappear.
For the Fed, like magicians, mystery is their stock in trade.
Do you remember the rambeling, incoherent double-speak of Greenspan when he was running the Fed? Compare his talks of then and now. Now he speaks about as clearly as any other Fed centric economist working for a private enterprise.
The Fed currently holds the most powerful lever in the world; the magic lever that makes the money machine produce dollars. As long as the mystery of when, how, and why they move the money lever remains veiled in secrecy then the Fed retains power.
"The process by which banks create money is so simple that the mind is repelled."
John Kenneth Galbraith
If only there were an honest and just way of distributing the newly-created fiat...
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