Archive for the 'Finance' Category

END THE FED

July 6, 2010

END THE FED

(In case you don’t know, The “Fed” is the US Federal Reserve System.)

Why end the Fed? Most Americans have no idea. I think it’s important that every citizen understand this. If enough people did understand this, Ron Paul would now be the U.S. President.

The Fed is the means by which our government can tax us without limit, so the government can finance wars and other programs which taxpayers would refuse to support. The Fed is picking your pocket with the stealth tax.

Without the stealth tax, we probably would have avoided involvement in all of the wars of the past 100 years. There would be no American Empire.

Inflation caused by the Fed is the cause of the boom and bust business cycle, stock market, commodity, and housing bubbles, the great depression, and all the lesser recessions since then, including the present one. The course the Fed is following will assure that this recession will become a long, hard depression, with increasing unemployment and hardship.

The American Banking system is a cartel, and the Fed controls it. A cartel is a group of companies acting together to gain the advantages of monopoly: the profit advantage that comes from the exclusion of competition.

The banking cartel was created by the law which created the Fed. The system protects the banks from competition and from failure. Thus secure, the banks can invest recklessly. That recklessness was what caused the crash of 2008. Sure enough, the banks threatened with bankruptcy in 2009 were rescued with massive bailouts from the government. The excuse was that they were “too big to fail”.

Who’s to blame for this crazy system? I wish I knew. There is a hint, though in the identity of the people who drafted the law which created the Fed. In a secret meeting on Jekyll Island, Georgia in 1910, representatives of the Morgan banks, the Rockefeller banks, and Kuhn, Loeb & Co drafted the bill to create the Fed. The bill was passed into law by Congress in 1913

It would be interesting to trace the relationship of all the financial beneficiaries of the 2009 bailouts to see how they relate to the people who wrote the law, 100 years ago, that created the Fed.

Now I’m going to try to explain just how the Fed can cause all those problems. Bear with me. It isn’t simple. In fact the Fed is designed to create an illusion, to delude us into believing that our government, our banks, and our dollars are real, honest, and trustworthy. All these things rest on our faith. If we lose that faith, they will all collapse. That might return us to the sort of country, and government, that the Constitution originally spelled out.

The Evolution of the dollar

Our dollar started out as the Spanish silver dollar, a strong and trustworthy currency. Later we went onto a gold standard. The dollar was defined as one twentieth of a troy ounce of gold. Ten dollar and twenty dollar US gold coins circulated along with silver dollars. Paper treasury notes circulated in $1, $2, and $5 denominations. These, and silver coins, were all redeemable on demand in gold.

We were on the gold standard. Independent banks printed their own paper notes but they too were redeemable in gold. Banks did print some paper notes in excess of the gold they held, but prudence kept them from getting reckless, lest they get caught out and go bankrupt. This kept them fairly cautious and “reasonably” honest.

Bank customers deposited cash in checking accounts. Banks lent temporary fictitious money called credit to customers by crediting their checking accounts with dollars. Banks developed clearing systems so that checks written on an account in one bank could be deposited to an account in another bank. Any imbalance in the flow of money by checks from one bank to another was balanced by a transfer of gold between the banks.

These transfers of gold kept the banks honest, or at least “prudent”. They had to keep enough gold or silver cash on hand to redeem banknotes and checks. All the banks produced some banknotes and credit in excess of their cash reserves; call it an overhang. If they all had about the same overhang in proportion to their reserves, the interbank gold transfers would balance and they would all keep enough cash to redeem checks. Charging interest on credit outstanding was profitable and the chief source of income for banks.

Businessmen, investors, and speculators use credit to invest and make a profit. They always complain that there isn’t enough “money” in circulation. What they really mean, however is not money but cheap credit. The British had long since perfected a central banking system (The Bank of England) which provided lots of cheap credit. This provided funding for the many colonial ventures which eventually built the British Empire. Many Americans clamored for a duplicate of the Bank of England. They wanted to get rich quick, using cheap credit.

The Genesis of the Fed

Twice in the 19th century the US government created a central bank and twice the government, under new administrations, closed them down. Finally in 1913, the Fed was created. It has lasted nearly 100 years.

The purpose of a central bank is to form a cartel of the banking system, to coordinate the expansion of lots of credit on top of the gold reserves. By 1971, the number of dollars in circulation was so great And the value of the dollar so reduced, that foreigners were exchanging all their dollars for gold. At that point we simply went off the gold standard. The government confiscated all the gold. We were left with the fiat dollar. The law (fiat) said that the dollar was legal tender, and the legal tender law said that we must accept the dollar “for all debts, public and private”.

The Stealth Tax Alias Government Deficits

Government, more than anybody, likes cheap credit. Obscured by the smoke and mirrors of bookkeeping, (Now you see it, now you don’t!) the Fed “lends” the government whatever amount of money it wants. The loan is never repaid, and the interest the government pays the Fed is returned to the US Treasury. I’d call that loan an outright gift, wouldn’t you?

This is how our government finances its deficit. The Fed creates (counterfeits) new money for the government to spend. Talk about our grandchildren paying the mounting “debt” is a smokescreen. This is why people in government can say, “Deficits don’t matter.” That newly created money is spent as fast as it is created, and becomes a permanent addition to the money in circulation. That’s money inflation.

Something that’s hard to realize is that money, like any commodity, obeys the law of supply and demand. The more dollars available on the market (in circulation), the less each dollar is worth. Not immediately, but in time. The market reacts slowly because the realization spreads slowly that something has changed. Gradually all prices rise. You and I get less real wealth in goods for the money we earn. Uncle Sam has cleverly picked our pockets.

Remember, money is not wealth; it is just a medium of exchange. Putting it in terms of macroeconomics, the market adjusts prices so that the amount of money in circulation matches the amount of goods in production.

It would be tempting to set this down as an equation (It has been tried) but there are two problems with that. First, an equation implies an instantaneous reaction while the response of prices to money supply is a slowly ongoing process which never quite catches up with the latest change in the money supply.

The second problem lies in the definitions of “in circulation” and “in production”. They are both difficult to define and impossible to measure. But that is a fundamental problem with macroeconomics.

The Business Cycle

Perennial government deficits are a one-way street. Government wants money, the Fed supplies it, the government spends it, and goes back for more. The trend is an ever increasing money supply and an ever decreasing value of the dollar.

The business cycle, however, involves a cyclical variation of the money supply which is superimposed on the trend of increasing money supply caused by the government deficits.

The business cycle is caused by the efforts of the Fed to sustain an unsustainable boom. The boom is unsustainable because it is an illusion. The idea that manipulating the supply of money or credit can somehow increase the production of goods is a basic Keynesian fallacy.

The Fed tries to stimulate the economy by reducing interest rates to encourage the expansion of credit. The banks gladly extend credit at low interest, mostly to businesses.

Businessmen invest the new money on capital goods to improve productivity in hopes of profits. Such expansion appears profitable because of the new low interest rates.

The boom that follows does not affect everyone equally. Rather than increase total production, it shifts some productive activity away from production of consumer goods to production of capital goods: the buildings, machinery, and tools needed to improve production. These capital goods will increase productivity, in time. Meanwhile, the supply of consumer goods will be reduced to provide the means (labor and materials) to produce the capital goods.

The Fed operates on the Keynesian fallacy that adding money to the system is all that is needed to expand production and maintain prosperity. However, added production requires added materials and labor. Increasing the production of materials requires even more added labor. Labor is the limiting factor in a boom. More money can’t create more labor. It can only shift workers between jobs and companies and industries.

To persuade workers to move to new jobs requires offers of increased pay. This is the beginning of the price inflation which always follows an increase in the money supply. As workers spend their increased pay, we find an increasing supply of money chasing a reduced supply of consumer goods. Price inflation follows. Wage inflation spreads.

As with the stealth tax, the means to invest in capital goods is taken by stealth from the value of every dollar in circulation. It also reduces the value of my insurance policy and your pension fund.

The action of the Fed has defeated our efforts to provide for the future. The Fed has taken away our free choice as to how much to spend now and how much to provide for the future. We have been forced to do without some consumption goods now, to subsidize industry in the hope of better or cheaper goods in the future.

Businesses calculate the investment in new capital goods to be profitable on the basis of current prices of materials and labor. Increasing prices of materials and labor may be enough to turn the profit to loss. Some of those projects will fail. When this happens, new buildings and machinery will be wasted, abandoned or sold off at a loss.

When the banks feel that the credit they have expanded has become excessive in proportion to their reserves, they will halt the expansion or even reverse it. To do this, they will raise interest rates on their outstanding credit. This will cause more businesses to fail.

When, finally, some businesses default on their interest payments, bankers will panic and call in loans to retreat to a safer reserve ratio. This is the crash phase of the business cycle. Businesses retrench, downsize, and lay off workers.

The money supply has suddenly shrunk and prices and wages have dropped. Unemployment soars. Recession has arrived. The boom was started by creating money out of nothing. Now the money has returned to the nothingness from which it came. The Fed has orchestrated the cycle, guided by the fallacies of John Maynard Keynes.

FREE MARKET PENSIONS

July 1, 2010

FREE MARKET PENSIONS

The welfare state is under threat by demographics. Many people are now living for many years beyond retirement age. The US social security pension system is an ever growing government obligation. Financially, it is a pyramid scheme which is doomed to collapse. We badly need something better. The free market can always provide the best answer. The Social security system is a major and growing government intervention into the economy of each household. It’s time to retire the government pension scheme.

Following current US trends, we have people spending fewer years in productive work, more years preparing for work, and living more years after retirement. The number of people living past 100 is growing rapidly. I retired in 1991. Since then, my children’s generation has supported me. Now my grandchildren’s generation is also supporting me. If I live to 100, my great-grandchildren’s generation will be supporting me and also supporting my children. Perhaps I should do them all a favor and die now.

But what happened to all the money I paid into the social security fund? Wasn’t it invested so that the proceeds of the fund would support me now? No, it was “loaned” to the US government. But the US government doesn’t pay its debts. It spent the money and just kept on “borrowing” from the social security fund. The “fund” is a fiction. My pension is paid out of the social security contributions of the present working generations.

The free market alternative is obvious. Instead of investing in the fictitious government fund, you could invest it in some free market institution, which will be legally obliged to deal honestly with you.

If you pay into an annuity during your working years, you will have a pension for as long as you live.

A mutual fund of stocks and bonds can provide your pension in your old age. If you spend only the dividends in your retirement, you can leave the fund to your children to build up their pensions.

In each case your savings are invested in something productive which will earn dividends and interest for you by producing goods for consumption.

Paying into the social security retirement was easy when I started work back in the 1940s. As I remember it, my deduction was 3%, including the matching payment from my employer. Now, the total would be 33% if I were still working.

Phasing in a free market system, while still paying enough to cover the entitlements already committed to, will mean even greater taxation for the next working generation. The politicians haven’t yet found the political courage to start the transition. Will they ever? They may just paper it over with inflation, the stealth tax.

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100% UNEMPLOYMENT

June 30, 2010

100% UNEMPLOYMENT

A few hundred years ago, workers rebelled against the competition of machinery. They feared loss of their jobs, and starvation.

Fast forward to 2010. The Japanese, fascinated with robots, are creating multipurpose robots in human form. They have highly automated warehouses where the only humans in sight are bemused spectators. The obvious trend is to fewer human workers and more machines/robots/computers.

Fast forward to 2410. Automated machines/robots/computers do all the work, unguided by human hand, with only a few people to tell them what to do, to make, to design, or to solve. What will people do with their time? More important; how will people earn a living?

Personally, I like to work, to solve problems, to meet challenges or even just work up a sweat. I get great satisfaction from the final success of my labors, mental or physical. So how do I get such satisfaction, now that I’m retired and don’t need to work for a living? Believe me, it’s easy. I’m as busy as ever, doing things I choose to do, setting my own goals. Until my mind crumbles, I won’t be bored.

So this might give us a clue as to how those people in the 25th century will earn a living. Somebody will have to invest in all that machinery. Only capitalists will have incomes. So they will all have to become capitalists. They will live on the returns from their investments. They will have plenty of free time to pursue their own interests. A technical type like me might devote his time to scientific research, to learn what makes the atoms and the universe tick.

HEDGING AGAINST INFLATION

June 29, 2010

HEDGING AGAINST INFLATION

Behind each currency stands a central bank. Each central bank, guided by Keynesian economic theory, is inflating the currency. Money supplies in all countries are always increasing. As a result, prices increase as money loses value. That’s inflation. If you have any savings, the value of your savings is decreasing. What to do? How can you protect your savings from the erosion of inflation?

One answer is, don’t have savings. Go into debt. Spend as fast as you can to acquire real goods instead of bad money. Real goods will keep their real value. This is what our governments, also guided by Keynesian economic theory, encourage us to do. Keynes said that this is the road to prosperity.

Since the 1930s, in the USA, this has been good advice, if you’re borrowing to buy a home. The US government set out in the 1930s to make home-buying irresistible with subsidies, loan guarantees, and tax breaks. In the long run, for most people, a mortgage to buy a home has proven to be a good investment. Many of those who lost out in the recent housing bubble were those who bought a house they really couldn’t afford.

This happened because the government pressured the banks to lower their standards for credit worthiness. Others were caught out because of the euphoria of a boom. The oft-repeated statement “you can’t lose” was the consensus until the bubble broke. Home prices were much higher than the cost of building them. People paid such prices because they “knew they couldn’t lose”.

Of course the incentives to buy a home heaped on by the government pressured many to tie themselves down geographically. It limited their options to find new jobs in a recession, when it was harder to sell your home to move to a new job. Otherwise, the risk was small and the long-term gains were great because the government was subsidizing your purchase with loan guarantees, low interest rates, and tax breaks.

Supposedly, the zero risk option to escape the erosion of your savings by inflation was to buy US government bonds. You can believe that if you trust your government. But if the government decides to default on its debts, who can prevent it? And government has the option of repaying you with cheap money by inflating the currency.

In fact that is already happening. The debasement of the dollar by inflation is more than enough to wipe out the value of the interest that the bonds supposedly pay for the loan. You’ll lose a bit less than you might lose if you keep your money under your mattress. After all, this is the same government that stole all the gold that backed the dollar when we were on the gold standard back in 1930.

So what other options are there to escape the theft by inflation? Many investments can pay much higher interest than government bonds. The more interest an investment pays, the more risk of loss goes with it. Perhaps corporate bonds are the safest. The stock market can pay much more, but it takes expertise to know which stocks or bonds to buy.

I have twice invested small sums in mutual stock funds with fair success. For a modest fee (less than 2% per year) a specialist manages the fund for some goal: maximum earnings, maximum growth, minimum risk, etc. This is fairly safe in the long run (several years) and can pay with growth in excess of inflation. In the short term, the value of your fund will bounce around a bit. Just sit tight, ignore the daily static, and leave your fund to grow until you need the cash. Find a fund with a record of growth over many years, including bubbles and recessions.

Another safe long-term investment is in gold. This will show even more short-term static than stocks, but gold has inherent value and in the long run is a very good hedge against inflation. However, you earn no interest on gold, you may have to pay storage fees, and transaction fees when you buy and sell. And there’s always the chance that the government may confiscate it. They have done it before.

Let’s face it. We are powerless against the total power of government. We are their only means of support, and they will take it from us , somehow.