Since world leaders and economists continually display a lack of even the most rudimentary of understanding about the unsound nature of our monetary system, I’ve decided to write them a “Monetary Policy for Dummies” to help them understand why the policies and solutions they constantly advocate amount to legalized theft that destroys the wealth of the nations. For example, Dr. Ken Mayland, President of Clearview Economics, LLC, and previously the Chief Economist for First Pennsylvania Bank and KeyCorp, recently advocated a voluntary paycut of 10% for all Americans as his “solution” to the US unemployment problem. Here is his statement below:
"In that vein, let me put forth the ClearView Economics plan to get the nation quickly back to full employment. The current unemployment rate is 9.5%. That amounts to 14.6 million persons who want to work that cannot find jobs. But there is also serious underemployment. I don't accept the U-6 unemployment calculation as being fully representative of all the truly unemployed, but let's allow another 3% to account for all the underemployment. [sarcasm] how mighty noble of you, Dr. Mayland! [/sarcasm] That brings the total unemployed to 19.2 million persons…So here's the plan. EVERYBODY -- from the president down to the chambermaid -- takes a 10% cut in compensation! This freed-up compensation expense is then used to re-employ the 8% (12.3 million) of the unemployed. Net-net, the nation's compensation bill has remained unchanged, and the unemployment rate is now 4.5%! Voila!”
That’s your solution, Dr. Mayland? I mean really? Dr. Mayland’s absurd contentions serve to reinforce my contention that Ivy League educations are nothing more than hype, the greatest intrinsic value of which is presented from networking opportunities versus the actual knowledge, or lack thereof, gained through attendance (Dr. Mayland graduated from MIT and earned his PhD from my alma mater, the University of Pennsylvania). To begin, instead of using an arbitrary 3% to produce a false 12.5% U-6 unemployment rate, why not use a credible source like Shadowstats’s U-6 unemployment rate of nearly 17%? Better yet, why not include the faction of unemployed long-term discouraged workers, since for all intents and purposes, they are unemployed, and use an all inclusive unemployment & underemployment rate of nearly 22%? Maybe if Dr. Mayland started with real unemployment statistics, he could have formulated a viable solution that does not involve the deployment of a financial weapon of mass destruction against a nation’s citizens.
As evidenced by the latest adjusted monetary base chart from the St. Louis Feds above, the Fed’s have created a parabolic spike in monetary base during the last couple of years as part of their “solution” to our current global monetary crisis. Though this explosion in monetary base has not yet translated into an explosion in the monetary supply, eventually, the massive spike in monetary base we see above will yield massive spikes in monetary supply. Why do I believe this? It is only a matter of time before American banks will be forced to seek the multiplier effect of the fractional reserve banking system as their solution to counter the enormous losses that they currently are hiding in their marked-to-fantasy commercial and residential RE portfolio values, courtesy of a paid and bought-off Financial Accounting Standards Board. This is not a matter of if, but when. Lying about asset valuations can delay bankruptcy but it is an impossible solution to insolvency. The big banks WILL have to substantially expand the monetary supply and create a massive supply of new loans using the principles of fractional reserve banking in an attempt to generate revenue that can offset the enormous REAL losses that they are currently concealing in their RE portfolios. View the Max Keiser, Bill Black interview below for a brief synopsis of the real trouble America’s largest banks really face today despite the "all is well" appearance they have manufactured through rigged earnings statements and ongoing multi-million executive bonus payouts.
Today, inflationary and deflationary forces exist in the US economy and have collided in the worst possible mixture for American citizens. Deflationary housing markets have reduced the equity Americans can pull out of our homes in our greatest time of struggle and financial need while inflationary food and energy prices consume greater and greater portions of our monthly income every month. Even though the US Central Bank’s current open market operations and their concurrent stock market ramp up (which has been well documented here on Zero Hedge) will likely cause a short-term US (and European) stock market rally, the eventual result of artificial stock-market ramping that belies free market fundamentals will be a stock market crash. And when the next stock market crashes strike, those invested in stock markets will lose another considerable chunk of their wealth - AGAIN.
It is a myth that inflation cannot exist in a capital sector that is experiencing deflation. Enormously distorted market prices and obscene market inefficiencies occur when Central Banks encourage malinvestment by enforcing abnormally long periods of artificially low interest rate periods. When these distorted market prices return to prices more indicative of a free market, economists state that deflation is occurring. If the US housing market rose 60% above where a free market would have set prices due to Central Bank monetary policies and then plunges 30%, everyone assumes that there are zero inflationary forces at work within the housing markets. This is not necessarily true. Central Banks can still employ inflationary monetary forces and deflation can still come out on top. For example, if the US dollar is inflated by 10% in a year when housing prices plunge 30%, the 30% is the net effect of the 10% inflation in US dollars and the 40% deflation in housing prices. Central Banking monetary policies inflict simultaneous inflation and deflation at times in the economy that work hand in hand with one another to destroy as much wealth of a nation’s citizens as possible. And this is what makes Dr. Mayland’s proposed “solution particularly malicious. The NET effect of inflationary/deflationary forces are inflationary in some sectors while deflationary in others, but wealth-destroying across ALL sectors.
When inflationary forces spread to more and more sectors of consumption, as it eventually will when bankers’ self-preservation instincts trigger lending in earnest, the standard of living for every American will be cut even more as a devaluing dollar will decrease its purchasing power. So Dr. Mayland’s solution to cut everyone’s salaries by10% will lead to a much higher cut in REAL purchasing power and cause every American to struggle at a greater rate just to survive. I wonder if Spanish citizens will latch on to Dr. Mayland’s solution to their massive unemployment problem and take a voluntary, self-inflicted 15% paycut? The only result Dr. Mayland may foster with his unemployment “solution” is the start of the next revolution.
But such citizen threatening moves aren’t relegated to American bankers. In Japan, Prime Minister Naota Kan stated that he is meeting with the Bank of Japan this week to consider a greater expansion of the Yen monetary supply because a strong yen and poor stock market performance has threatened to “derail the economic turnaround.” Is it not just a tad counterintuitive that a strong currency would be “bad” for the economy? It’s counterintuitive because it is not true. Mr. Kan, like Dr. Mayland, seems to be unable to recognize that a weak, devaluing yen is terrible for all Japanese citizens. Any short-term benefits of an economic stimulus created merely by shoving trillions of a currency down the economy’s throat are more than negated by the concurrent destruction of a nation’s wealth that results from such an approach. Sure, Japanese exporters that do not understand monetary valuations may believe that devaluing the Yen by 5% is of benefit to them because, perhaps at current levels, their exports may drop by 4%. And the Japanese government will eventually have to consider the conundrum of having their imports slapped with restrictive tariffs by foreign governments that desire to protect their domestic industries from being overrun by a flood of cheap Japanese imports. But this is exactly what stupid monetary policies that uphold the use of unsound, “fake” money achieves – a game of financial Russian roulette among sovereign nations in which every nation is afraid of pulling the trigger that may yield the bullet that will kill their economy. And that bullet, quite ironically, is a stronger currency (relative to the weaker currencies of other large economies).
However, the silver bullet that can kill the entire game of financial Russian roulette is the implementation of sound money that is sound because it is backed not by the empty worthless promises of bankers and governments, but by precious metals with real intrinsic value. Given that Japanese PM Yukio Hatoyama resigned little more than two months ago, and his replacement, Naota Kan immediately issues a statement about the necessity of maintaining a weak Yen, one thing in the financial landscape remains crystal clear. Though the faces of political leadership may change in Japan, Australia, the United States and the UK, their masters and loyalties remain to the bankers and not the people. Any American that still continues to believe that Obama has served his or her fiscal interests to a higher degree than his predecessors George W. Bush, William Jefferson Clinton or George Bush Sr. should seek immediately be remanded to a class in Austrian economics not only for his or her immediate enlightenment but as an antidote to the path of financial suicide to which he or she remains committed.
In closing, it is clear that despite the lack of understanding of our global monetary system by our leaders, Central Bankers remain crystal clear about the end game of their quantitative easing programs. Just 24 hours after a Malaysian state announced that they would accept Islamic gold dinars and silver dirhams as an alternate currency for business transactions and the initial sale of USD $630,000 of these coins on August 12, 2010, the Malaysian Central Bank declared the use of these very gold and silver coins as illegal. Turns out that even Malaysian Central Bankers are students of Alan Greenspan’s writings and realized the validity in his following statement: “In the absence of a gold standard, there is no way [for the public] to protect [its] savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal.” Local Malaysian governments figured out a way to enable the public to protect its savings through the issuance of gold and silver coins. Enter the Malaysian Central Bank and its declaration that gold and silver coins are illegal forms of currency in order to protect its, and not the people's, interests. Wash, rinse, repeat. Watch the world’s wealth sink into oblivion, leaving wealth-destroying monetary policies unopposed for decades into the future thanks to the miseducation of Dr. Mayland and men of his ilk.
About the author: JS Kim is the Chief Investment Strategist and Managing Director for SmartKnowledgeU, a fiercely independent investment research & wealth consulting firm that seeks to help citizens build wealth by helping them understand, and therefore protect themselves against, the destructive monetary policies of bankers and governments.