Posts Tagged ‘Inflation’

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.

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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.

FRACTIONAL RESERVE BANKING IS BLACK MAGIC

June 18, 2010

FRACTIONAL RESERVE BANKING IS BLACK MAGIC

I’m going to try to explain the hat trick by which money in banks appears out of nowhere.

This may seem crazy to non- economists, but this “pulling money out of thin air” is the cause of the business cycle, the boom and bust and depressions which make the supposedly free market fail and cause periodic misery for millions: companies that fail and the unemployment that scares us. Understanding the hat trick points the way to end that misery. And it’s not enough for the economists to understand it; unless we all understand it, we can’t muster enough political power to stop it.

The hat trick is built into the system all businesses use to keep track of their financial condition. It’s called “double entry bookkeeping”. Each money transaction is recorded in two columns, as either an asset or a liability. The columns are supposed to balance at all times.

When the bank lends me $1000, it opens a checking account in my name. It enters $1000 on the liability side of the ledger. The liability is the new checking account. The bank owes me $1000. I can write checks on my new account and the bank is obliged to redeem them right away.

The entry on the asset side of the ledger is my IOU to the bank. I have promised to pay back the $1000 in 1 year (with interest, but let’s ignore that). So now the balance sheets show additions of $1000 debit and $1000 credit. The book balances, right? Not really. The amounts balance, but the reality doesn’t.

$1000 cash in hand is not at all equal a $1000 IOU to be paid in one year. I can spend the $1000 now. The bank can’t spend my IOU. I assure you that my word is as good as gold, but you can’t know that. So nobody but the bank will accept the IOU as money

The bottom line is that the bank has converted my IOU into temporary cash, $1000 for 1 year. At the end of the year I’ll pay my debt. The $1000 will disappear by way of a pair of entries in the bank’s books, and the interest I pay will be added to the bank’s assets.

Bankers are convinced that this is open, honest, and above board. It’s all down in the book, for anyone to see. It just doesn’t mention that the $1000 asset won’t be a real asset until next year. So for the next year, an extra $1000 will be added to the supply of money in circulation.

Honest or not, it’s a time honored tradition of banking. It’s legal. OK, it’s a gamble. If I spend the borrowed money and then die penniless, it’s a dead loss for the bank. That’s partly what the interest is for, to compensate for such risk. If one out of 20 such loans fails, the bank will still be earning 5% interest on all of the money they pulled out of the hat.

Someone has said that double-entry bookkeeping is one of the greatest inventions. I’ve always found it confusing enough to make me suspect smoke and mirrors- a hat trick.

But– what the banks give, the banks can take away. Aside from the banks making money out of their hat trick, they cause the amount of money in circulation to rise and fall, causing the distorting oscillations of the business cycle.

Why get excited about this hat trick? Practiced by many banks, coordinated by the Federal Reserve, and protected by deposit insurance, the practice of fractional reserve banking gives us a sick dollar, with alternate fever and chills, and most painfully, periodic mass unemployment.

The hat trick causes the humps and hollows in the economy, such as the frenzy of the stock market boom and crash of the 1920s, the depression of the 1930s & 1940s, the stagflation of the 1970s and the Housing bubble and plunge into depression of 2008. And each time, we have spells of unemployment. That’s serious business.

100 years ago, very few people had bank accounts. Workers received their pay in cash or checks. They promptly cashed them at a bank or currency exchange. Banks worked for years to gain our trust, so now nearly everyone has a bank account. We trust the banks and the dollar. It’s only because of that trust that we can be so easily fleeced by the banks and government. The banks need our money in their bank accounts as a base for a pyramid of temporary money called credit. For every dollar that we keep in a bank account, banks can maintain $10 of temporary money (credit), earning interest.

This is all legal. Some judge long ago decided that your deposits in a bank are not deposits for safekeeping, but a loan. If the bank gets in trouble and can’t pay you back, that’s just your tough luck.

The rules of honest banking wouldn’t allow this. Every dollar in a deposit account (Payment on demand) should be backed by a dollar of cash in the vault.

DEFLATION

June 9, 2010

DEFLATION
Keynesian economists speak of deflation as a calamity. They use the word, of course, to mean price deflation and, in fact, they view a drop in price levels itself to be a disaster. Why?

Keynesian economists in the Federal Reserve increase the money supply to achieve what they see as prosperity. (Actually it’s a bubble of malinvestment that eventually must collapse.) The Keynesians see resulting increasing price levels as a healthy symptom of prosperity. So when prices fall, they fear that the bubble may burst.

If the Federal Reserve does nothing at this point, and allows the market to redirect the economy to a more profitable balance, banks will call in loans they now consider risky and increase interest rates. The failing new enterprises of the bubble will quickly shut down, sending redundant workers and materials back into more profitable enterprises. This happened in 1921 and the resulting recession ended quickly in 1922

If the Federal Reserve sees the looming troubles in time and acts as all good Keynesians do, they will force down interest rates to re-inflate the money supply. This may sustain the bubble for a while. When, inevitably, the bubble breaks, the losses will be far greater than they would have been if they had let the banks and entrepreneurs pursue sensible policy, to minimize their losses. When the Federal Reserve reacted with reduced interest rates and increasing money supply in the 1930s, we had the notorious great depression that lasted from 1932 to 1947

Manipulating the money supply always causes transfers of wealth. With inflation, bubbles cause the transfer of materials and labor from ongoing profitable production to capital goods (buildings and tools) for speculative new projects. The last segment of the economy to get adjusted to increased price levels is labor- wages never catch up with increasing prices. Remember, Keynes sold inflation to governments as a stealthy way to reduce real wages.
With deflation, materials and labor will slowly return to more mundane but profitable production. Prices will fall, and workers, at last, will get some benefit, because wages will be the last to fall. Labor will get some temporary benefit from the falling prices until their wages fall, too.

The trouble with the dollar is that it can be manipulated. It is a government creation. Government can create or destroy it at will. Fractional reserve banking makes an ideal tool for the manipulation of the money supply, by creating and destroying credit, which becomes dollars in circulation as soon as the borrower spends it, and disappears when the loan is paid off. This is play money, a fiat currency which the government uses to control the economy and to tax us invisibly.

The advantage of the gold standard is that it defines the dollar in terms of gold. Gold cannot be created or counterfeited.

The disadvantage of the gold standard is that the government defines the standard, and can change the definition at will. In the course of 40 years (1931 to 1971), our government redefined the dollar from 1/20th Troy ounce of gold to 1/35th ounce and then to 1/70th ounce of gold, and finally, to no gold at all. The dollar was legally worthless.

Far superior to the dollar or the gold standard is the use of gold itself as money. That, the government cannot manipulate. Someday, we will take back from our government the freedom to use gold, silver, or anything else we choose, as money.

If we can use gold as money, and establish banking without fractional reserves, we can say goodbye to the business cycle, bubbles, booms, busts, and depressions, inflation, deflation, and the stealth tax. This will never be a free country until we have that freedom.

MALINVESTMENT

June 5, 2010

MALINVESTMENT
The business cycle is the result of distortion of the market caused by the varying supply of money. The distortion during the period of increasing money results in increasing investment in capital equipment. This is the “boom” phase of the cycle.

When the investments, in time, fail, Keynesian economists call such investment “overinvestment”. Actually, the increased money supply was initiated, in accordance with Keynesian theory, to correct a supposed “underinvestment”. Thus the finger of blame can point at the foolish investor who overreacted to the initial stimulus.

The implication of the word “overinvestment” is that in time, the new machine or factory invested in will be put to good use, so the waste of the investment is only temporary. This, however, is not the case, so Austrian economists call it malinvestment. That identifies the investment as a permanent loss. The investment was a big mistake, because the invisible source of the new money hides the inevitable results of its creation, the price inflation which causes the failure of the investment.

The new money (actually increased credit) is created by the banks in response to a signal from the Federal Reserve. The signal is a reduction of the interest rate at which the Fed will lend to the banks. This enables the banks to reduce the interest rate at which the banks will lend to industry.

The entrepreneur is always on a lookout for ways to change, improve, expand, and increase profits. Each possible change involves investment now, which must improve sales enough to pay back the investment later, with interest. If he makes such an investment, he usually does it with borrowed money.

So the interest rate he pays for the borrowed money can make or break the profitability of the investment. The new, lower, interest rate will persuade many people to borrow and invest in something that, until that point, showed no hope of profit.

The entrepreneur’s calculations are based on other things beside the interest rate. He includes known costs of materials and labor and overhead. Unfortunately, he assumes that these will remain stable for long enough to make the investment profitable. That assumption is his downfall.

The reason for this is that the source of the loan was newly created credit: that is, counterfeit money. This constitutes a theft of value from all the dollars in existence and an invisible subsidy for the borrower.

The dollar has been debased. As the entrepreneur spends that loan to start his new project, the market begins to reflect the increased flow of dollars and the reduced value of the dollar. Prices begin to rise, not only on the things he invests in, but eventually throughout the economy. When the project goes into production, the costs of materials and labor begin to rise. In time the project proves unprofitable. The project is shut down, people are laid off, and we have a recession. The new factory and equipment, purpose-built for the project, is of little use for any other purpose. It is sold at a loss or left to disintegrate.

Of course it is not just the effect of a loan to one company that causes the price inflation. Thousands of companies investing millions of counterfeit dollars are all adding to the debasement of the dollar and the price inflation.

The Fed has triggered a boom. The trick is to maintain the boom by constantly adjusting the interest rate. It can’t be done, because you can’t reduce the interest rate any more, once it reaches zero. That is our position today.

The malinvested money has gone into projects which are inherently unprofitable. They appeared profitable only because they were subsidized by the theft of wealth which is counterfeiting, and the unsustainable low interest rate. When the projects prove unsustainable, they are abandoned. The materials and labor that went into them are a permanent loss, except for what parts of them can be sold off for other, more profitable ventures. The crash has arrived and we’re into the depression.

INFLATION: THE RACE TO THE BOTTOM

May 26, 2010

INFLATION: THE RACE TO THE BOTTOM
How do you measure the value of a dollar? I’ve already written about the cost of living index. That’s mostly a work of creative bookkeeping, a work of fiction to convince us that we only have a little bit of inflation. Could we measure the dollar in terms of British Pounds or Euros or Japanese yen? That wouldn’t tell us whether the dollar was inflating or deflating, or whether these currencies are inflating or inflating. The truth is that all of these currencies are being inflated, but at different rates.
What’s going on here? Why are all currencies being debased in value? The answer lies in Keynesian economics. This is bad economics, riddled with fallacies, but the economics of John Maynard Keynes is the answer to a politician’s prayer.
Keynes was an elitist who felt that the common man existed to support the elite. His economics was fundamentally immoral, for it was designed to deceive the ordinary working class, so they would willingly support the elites (of which he was, of course, the most elite). And, of course, the common people were too stupid to make wise choices; they needed wise men like himself to guide them and their governments.
Keynes explained his economic theory to President Franklin Roosevelt, who was struggling to get us out of the great depression. Workers would accept reduced real wages as long as they were getting increased dollar wages. Inflation, the stealth tax, would support government and provide money to subsidize industry and make-work projects to get the economy back on track. Roosevelt became a convert.
In time, Keynesian economics became the religion of all governments. Their wants had outgrown what their people would willingly pay in taxes. They had to get a bigger share of the wealth by stealth.
Actually, the economics of Keynes was a throwback to mercantilism, an often refuted economic philosophy that keeps coming back. It comes from the false notion that money is wealth, and goods are simply a means to obtain wealth. The idea is to make your country rich by exporting more goods than you import, and piling up the excess money in the government’s vaults.
So if you inflate the currency, you reduce the labor cost of production. You can then sell more goods abroad. Having reduced the value of your money, imports become more expensive so you import less. You pile up reserves of foreign currencies. So? What’s the use of foreign reserves. We have enriched other countries with cheap goods. We have impoverished our newly cheap labor to do it. The money we collect isn’t wealth. It’s useless unless we spend it.
The problem is that each government is playing the same inflation game in a race to inflate your own currency faster than other countries inflate theirs. We are in a race to the bottom, where money has no value at all.
Actually, all governments are in a race with technology. Advancing technology, at an ever increasing rate, creates and produces newer, better, products at decreasing cost. This masks the effect of inflation, so that in the long run, our standard of living improves despite the ever increasing slice that government takes from the annual pie. Although our lives are improving in material wealth, however, growing government means ever growing depletion of our freedom.

The Counterfeiter

April 7, 2010

The Counterfeiter

If technology is your thing, you like a challenge, and you enjoy taking chances, you might find counterfeiting a good way to earn a living. The technological challenge is fast moving; as fast as the Treasury Dept finds new ways to detect counterfeit money, you must find new ways to foil their detection. The risk, of course, is of getting caught and landing in prison.

Our government, which supposedly believes in the free market and competition, does not tolerate any competition with it’s monopoly on counterfeiting.

THE EFFECTS OF COUNTERFEITING

Printing $20 bills doesn’t quite give you something for nothing. You need to print a lot of twenties to get back what you invest in equipment and time and skill. But let’s suppose you print enough to recover your investment and a lot more. What are the consequences?

You can buy all sorts of goodies and live like the rich. The people you spend your money with will appreciate the new business you give them, because they’ll get a bit of extra income. They, too, will spend a bit more and live a bit better. The extra money ripples outward in ever-widening circles, so maybe everybody benefits from your counterfeiting, right?

Wrong. This would be something for nothing. The real world of production and consumption hasn’t changed; it hasn’t increased production. All you have done is shift the consumption of some of the goods to yourself and a few early receivers of your counterfeit money. Other people will have to do without the goods you bought.

There will now be a bit more (counterfeit) money circulating and chasing the remaining goods. The result is that prices will increase so that the later receivers of the counterfeit money will pay more money to buy fewer goods. These are the people you have robbed to provide your new affluence.

Of course, you are just a small time counterfeiter, so your new wealth has only cost a few pennies from each to the millions of people you have robbed. They won’t even notice!

It’s a different story with the real big-time counterfeiters, the banks and the government. This is legalized counterfeiting, on a grand scale and unending. Or have you noticed how prices have gone up in the last hundred years? It’s called price inflation.

Rising price level is really an abnormal situation in a healthy economy. With producers competing for our money, they forever innovate, finding newer and more efficient ways to produce better and cheaper goods.

The government can, of course, print any number of dollars at any time. It’s legal theft. Or the Federal Reserve can achieve the same result in a more roundabout and less obvious way. By such means, the government can finance a war, or a moon landing, or anything else that taxpayers would not willingly pay for.

Much of the counterfeiting by the banks consists of “credit”, loaned out to industry to finance expansion and new enterprise. This is the root cause of the business cycle, the never ending succession of boom, bust, and depression.

The Cost of Living Index

April 5, 2010

THE COST OF LIVING INDEX
The concept of the value of a dollar is difficult to grasp because we habitually measure the value of all other things in terms of dollars. We use the dollar as a unit of measure, like the inch or the ounce. Initially the U.S. dollar was a fairly useful unit of measure, when it was defined as a twentieth of an ounce of gold. Gold has been valued rather consistently for thousands of years. With the abandonment of gold, the dollar is now a rubber yardstick which keeps shrinking without end.

There is, however, no good way to measure the value of gold or of the dollar. At any moment in time, the market determines the terms of exchange of any money for any other goods, with all of the exchange rates (prices) for other goods varying constantly and independently of each other.

Each exchange rate depends on the supply and demand for each of the goods being traded, including the money good. A change in the supply of money affects the rate of exchange just as a change in the supply of the other good affects the rate of exchange. Economists understood this long ago but bankers didn’t want to hear about it.

Governments, too, don’t want to hear about it. Governments want cheap credit (Loans at low interest rates) to fund their pet projects (wars, pyramids, moon landings), which the taxpayers will not willingly finance. A reckless banker is the Government’s best friend.

A cost of living index is supposed to indicate the value of a dollar (and thus the rate of price inflation) by taking the total cost of a “basket” of goods. The result, however, depends on the choice of goods in the basket, and the “weighting” given to each good.

Goods change. Apples are pretty much the same product they were 100 years ago, but today’s cars are totally different than the cars of 100 years ago, and buggy whips, in common use 100 years ago, are now antiques. Things like computers change so rapidly that there’s no comparison between the current products and those of 10 years ago, much less 100 years ago.

All goods are not given equal importance in the cost of living. If you average the prices of 1 house, 1 car, one hamburger, 1 aspirin, and so on, the cost of living index will depend almost entirely on the cost of the house. So the statisticians apply weighting to each good according to the percentage of income that the “average” family spends on each such item per year.

Obviously, this requires lots of questions for the statisticians to answer: How big a house, in what location? What make and model of car? Which size hamburger? With cheese? This also gives the statisticians plenty of leeway to please the politicians by picking and weighting the goods in the basket to make the resulting inflation look low.

Thus, for many years while the price of housing was going up like a skyrocket, housing prices were omitted altogether from the basket. This gave the impression that the government was nicely in control of inflation.

Nevertheless, our government employs statisticians to give us a cost of living index. They use this index to adjust Social Security Pensions. Employers use the index to adjust pay scales. The government has every incentive to keep the index low to keep down Pension increases. The statisticians oblige by choosing the goods and the weighting in the basket.

We can sense that the value of the dollar is falling, as prices, in general, rise, but we can’t put a meaningful number on it. The cost of living index is, instead of an educated guess, a creative work of fiction to suit political purposes.

The Boom and Bust Business Cycle

April 5, 2010

The Boom-Bust Business Cycle
The economy consists of producers creating goods (including services) and the exchange of those goods for other goods created by other producers, and the ultimate consumption of goods. In parallel with this flow of goods from producers to consumers is a parallel flow of money in the opposite direction, from consumers to producers. Competition of buyers, and competition of sellers, constantly causes the adjustment of prices with the result that the flow of money is matched to the flow of goods.
All producers are also consumers so the flow of money is unending. The same money keeps circulating throughout the economy, facilitating the exchange of goods, so the money is not consumed as the goods are. There is no need to add new money to the economy. There is, in fact, a good reason not to. Adding new money results in the increase in prices which we call inflation. More importantly, it transfers wealth from everyone who possesses money to the bank that creates the new money.
The bank lends the new money to, say, a manufacturer. The manufacturer believes that, because of the low interest rate, he can profitably invest in capital goods: newer, better production tools to increase production and reduce his operating cost. This will hopefully enable him to pay off his debt with interest to the banker, and still make a profit for himself.
However, many manufacturers, borrowing newly created money from banks to expand their business, or start new businesses, will distort the economy. Makers of the capital goods they buy will hire more workers. To get workers to move to new jobs, the makers of capital equipment will have to offer higher wages, buy more materials, and perhaps invest in new tools themselves, all with newly created money to meet the increased demand for their products. There is a boom in the sector of the economy which makes capital equipment.
The creation of new money has brought apparent prosperity, at least in the tool-making sector. Who pays for this prosperity? Who loses in the boom?
The boom has been created with stolen wealth, by reducing the value of all money. The theft is the stolen value of your wages and my pension, and of our investment in life insurance policies and bonds and such. Except for the winners in the capital goods industries, everyone loses.
The transfer of materials and labor to the capital goods industry has reduced the supply of consumer goods, and thus reduced the standard of living for most of us.
This might bring some benefit to us in time, providing us with newer, better, cheaper products from the expanding producers. However, this is not our free choice. We have, by stealth, been forced to subsidize the expansion of some producers by meanwhile reducing the production, and our consumption, of goods from other producers.
Moreover, at some point banks will refuse to extend continuing credit, or increase the interest rate on the credit. This will happen when the Fed decides the economy is “overheating” and forces the banks to reduce their outstanding loans. Without the subsidy of the low interest loan, the business expansion will collapse, and people will lose their jobs. This completes the classic sequence of boom, bust, and depression.
This is in contrast to what would happen in a free market. Banks would not be permitted to create new (counterfeit) money. Enterprising producers would have to borrow real money from our savings, paying the free market interest rate. The interest rate would have to be enough to impel us to reduce our current consumption to save the money to lend.
In time we would be repaid with real money plus interest. In a free market, banks would simply act as middleman between savers and borrowers.