Money Supply

There are those who would blame the people who have chosen to live far beyond their means. They have a point. The financialization of America; where Wall Street con artists,shysters and swindlers rake in billions for shuffling paper and making risky casino bets; mega-corporations ship blue collar middle class jobs to Asia in an all out effort to increase quarterly profits; politicians spend future generations into the poor house in order to get re-elected; and the Federal Reserve purposefully creates monetary inflation to prop up the corrupt system; has systematically destroyed the working middle class and created generations of debt slaves. The American people have been foolish, infantile, and easily duped. But it is clear to me who the real culprits in our long downward spiral have been. Lord Acton stated the obvious, many years ago:

 “The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks.”

? John Emerich Edward Dalberg-Acton

The effects of the massive monetary inflation of recent years are so far mainly reflected in asset prices. Modern art has become a major magnet for investors, whereby one gets the impression that this is truly a gargantuan bubble by now. Works of art are unique, so there is really no yardstick by which one could make sensible comparisons regarding their valuations, except to note that prices today are at multiples of the prices paid in the not-too-distant past. When a Japanese insurance company bought van Gogh's 'Vase with Fifteen Sunflowers' for $39.7 million in 1987, the world was shocked that anyone would shell out so much money for a single painting. It was rightly seen as an outgrowth of Japan's bubble excesses of the 1980s at the time. Today it actually looks like they made a great investment. No-one bats an eyebrow anymore at anything that is not sold for more than $100 million. So if you ever wonder whether there is really an inflationary bubble underway, the answer is clearly, yes, there is.

Today is the big day. Investors are on the edges of their seats, waiting to find out what the Fed will do. Taper? No taper? Or maybe it will taper on the tapering off? Investors don't seem worried... Most of the reports we read tell us the economy is improving. Unemployment is going down. Meanwhile, manufacturing levels are rising. Compared to Europe, the US is a powerhouse of growth and innovation, they say. Compared to emerging markets, it is a paragon of stability and confidence. But wait... What if all these things were delusions... statistical folderol... or outright lies? What if the true measures of the economy were feeble and disappointing? What if the US economy was only barely stumbling and staggering along? As Rick Santelli so uncomfortably asked, "What is Bernanke afraid of?"

Saying we need continuous financial bubbles to keep full employment is such a flawed conception of economics, it belongs on an island of misfit philosophies. Krugman’s incessant promotion of statism is doing more harm to the economy than good. As an opinion-molder, he is perpetuating the economic malaise of the last few years. More bubbles won’t help the recovery, just harm it more. In the middle of a grease fire, Krugman calls for more pig fat. And the rest of us are the ones left burnt.

The Federal Reserve System was created on December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law. Today, the Fed has decided to commemorate the event today with all three living Fed chairman delivering remarks. We are sure it will be very exciting but in the interests of 'balance' we offer a few alternative views of the "success" of the venerable monopoly including its cost: since 1913, the dollar has lost nearly 90% of its purchasing power.

Though still a week shy of its centennial anniversary, the US Federal Reserve will hold a celebration this afternoon in Washington DC. Just imagine the scene - a bunch of current and former central bankers slapping each other on the back, congratulating one another for a job well done over the last 100 years. Of course, this is total nonsense... as is the concept of our modern monetary system in which we award total control of the money supply to a tiny central banking elite. Human beings are fallible. We are not gods. Yet we practically deify central bankers and entrust them with the power to manipulate markets, control prices around the world, and effectively dominate the economy. This system has proven to be foolish and destructive. While the Fed engages in its self-aggrandizement this afternoon, there is another far more important anniversary today - the Boston Tea Party.

China’s economy is straining to keep up a semblance of its former growth rate. The surest sign is the way a shadow market in bank paper has evolved to substitute the commodity that China is increasingly running short of: cash. Bankers are passing around their own ersatz currency, stimulating trade with what, in effect, are off-the-books loans. As in the wildcat currency era of the United States, the antebellum period before America had a national currency, this paper trades at a discount from province to province. It is increasingly used for speculative purposes, is potentially inflationary, and is hard to regulate. The People’s Bank of China (PBOC) has been unable or unwilling to crack down, lest it provoke a serious slowdown. But when the world’s second largest economy must resort to passing around IOUs, the financial community should take note.

A paper currency system contains the seeds of its own destruction. The temptation for the monopolist money producer to increase the money supply is almost irresistible. We are now in a situation that looks like a dead end for the paper money system. After the last cycle, governments have bailed out malinvestments in the private sector and boosted their public welfare spending. Deficits and debts skyrocketed. So will money printing be a constant with interest rates close to zero until people lose their confidence in the paper currencies? Can the paper money system be maintained or will we necessarily get a hyperinflation sooner or later? There are at least seven possibilities...

A major issue is the growing disparity between rich and poor, the 1% versus the 99%. While the president’s solutions differ from Republicans, they both ignore a principal source of this growing disparity. The source is not runaway entrepreneurial capitalism, which rewards those who best serve the consumer in product and price. (Would we really want it any other way?) There is another force that has turned a natural divide into a chasm… dun, dun, dun… the Federal Reserve. The relentless expansion of credit by the Fed creates artificial disparities based on political privilege and economic power.

To help readers get a sense of perspective how the US and Japan compare when matched to China, below we present a chart showing the fixed monthly "money" creation by the Fed and the BOJ compared to the most comprehensive money supply aggregate available in China - the Total Social Financing - for the month of November. The chart speaks for itself.

The rate on the 10-year Treasury bond has risen dramatically. Is it priced in to stocks? Does it mean recovery, at last?

The reigning paper money system is at the center of the growing income inequality and expanding poverty rates we find in many countries today. Nevertheless, states continue to grow in power in the name of taming the market system that has supposedly caused the impoverishment actually caused by the state and its allies. If those who claim to speak for social justice do nothing to protest this, their silence can only have two possible reasons. They either don’t understand how our monetary system functions, in which case, they should do their research and learn about it; or they do understand it and are cynically ignoring a major source of poverty because they may in fact be benefiting from the paper money system themselves.

They say those who forget the lessons of history are doomed to repeat them. We’ve seen that maxim made true time and again. The cycle swings fear back to greed. The overcautious become the overzealous. And at the top, the story is always the same: Too much credit, too much speculation, the suspension of disbelief, and the spread of the idea that this time is different. The weaknesses of the human heart and mind means the swings will always exist. Our rudimentary understanding of the forces of economics, which in turn, reflect ultimately reflect the fallacies of people making investing, purchasing, and saving decisions, means policymakers will never defeat the vagaries of the business cycle. So no, this time isn’t different. The specifics may have changed, but the themes remain the same.

End America’s central bank because it caused the crashes of 2008, 1987, and 1929 and will blunder again. That’s what many critics are saying about the Federal Reserve System (the Fed), which turns 100 on December 23. They note that on the Fed’s watch America has endured numerous bubbles, crashes, and inflationary cycles that have greatly devalued the dollar. The Fed, they say, has caused or aggravated several crashes. “If you say the goal of the Fed was to prevent calamities, then you have to say that it has been a failure,” says William A. Fleckenstein. “History and current experience,” Joe Salerno adds, “reveal to us that groups endowed with a legal monopoly over any area of the economy are prone to use it to the hilt to enrich themselves, their friends and allies.”

Bitcoin and other Internet currencies are viewed by some as a Beanie baby fad and, as Citi's Steve Englander notes, by others as revolutionizing the financial system. Market acceptance of alternative currencies now looks to be growing a lot faster than the pace at which the supply of Bitcoin and Bitcoin wannabees is expanding the Internet money supply. The responses fell into five categories which we feel are well worth considering before trading or utilizing the digital currency (including Bitcoin's role in reserves management - Bitcoin with its inelastic supply and deflationary bias would look attractive to reserve managers as a complement to gold, and in contrast to fiat currencies in unlimited supply.). Among skeptics, a minority think that security is a much bigger issue than proponents admit. However correct the longer-term concerns, there is nothing obvious to derail the expansion of Internet currencies in the near-term, as they are meeting both legitimate and illicit economic and social needs.