News & Analysis
Ben and Barry's Inflation Problem
Inflation caused by Bernanke's "Quantitative Easing" may doom Obama's re-election. Here's a political equation that ought to furrow the brows of everybody working to get a second term for President Obama: QE1+QT1=DEFEAT. For those not cursed to be economists, QE1 stands for Quantitative Easing, while QT1 means "Quantitative Tightening. According to Ralph Benko, writing in Forbes, Federal Reserve Board Chairman Ben Bernanke may be about to doom the Obama re-election effort with that equation. – SF Examiner/Forbes
Dominant Social Theme: The president may be doomed by factors beyond his control. It is a kind of Greek tragedy.
Free-Market Analysis: There seems to be no doubt that Barack Obama is obsessed with gaining a second term as president of the United States. But this article (excerpted above) makes some very good points about how monetary policy plays into presidential politics. We will examine them further, below.
Ben Bernanke's monetary stimulation has been pervasive and ongoing; it has also been historically massive. Never before has a central bank dumped US$20-$50 trillion into the marketplace within a two year time-span as the Fed under Bernanke seems to have done. And Bernanke, it should be noted, is not the only one following these policies. Other central banks have been printing as well to ameliorate the lingering effects of the 2008 economic crisis.
The argument of the above article, which first appeared in Forbes, is that sooner or later the money that has been printed and shoved into bank coffers will start to circulate. This will happen when people wish to spend more, thus gradually increasing the velocity of money and allowing banks to lend if they wish to. As banks begin to respond to consumer demand – having rebuilt their own balance sheets – the dollars that are lingering in bank vaults will be injected into the larger economy causing price inflation.
The thrust of the article – the analysis and ultimate conclusion – is that price inflation should begin to peak as the US presidential campaign begins in earnest. At that point the Fed and Bernanke will be faced with several unpalatable alternatives. Either price inflation expands (risking hyperinflation) or the Fed begins to raise rates in earnest, eventually choking off the "recovery" (which always happens as the business cycle turns) and the economy lapses back into recession.
The article acknowledges all this and has the good sense, as well, to point out that slowing monetary velocity (as we have often mentioned) is not a scientific endeavor. Here's the salient quote: "In the grim reality of the world dollar system, this is virtually impossible. Vivek Ranadivé, the smartest guy in Silicon Valley you've never heard of, astutely wrote in 2007, 'If you applied the Federal Reserve approach to ensuring a suitable temperature in your home, you would turn the heater on and off every three months, overheating or under-heating your house.'"
This is not idle speculation anymore. For months, even years, people have been warning that one cannot dump trillions of dollars into the American economy, and the world's, without creating significant price inflation. At the beginning of March, Bloomberg reported that commodities reached a two-year high; cocoa reached a 32-year high (though there are political reasons why cocoa has soared having to do with the current political turmoil in the Ivory Coast).
Cotton prices have climbed "above the price reached during the cotton embargo of the American civil war in the 1860s," the Financial Times reported. And of course the price of oil continues to rise, and will go even higher because of the Japanese nuclear disaster. Commodity price hikes have an impact on price inflation in the broader economy. One is speaking, the article notes, of months, however, not years. By the end of 2011, or certainly sometime in 2012, price inflation will become a major challenge to the Federal Reserve and, thus, eventually, to the administration itself.
Bernanke has given several extraordinary interviews of late in which he has maintained almost defiantly that he is "100 percent" confident that the Fed can reduce liquidity at the appropriate time and do so with the efficiency. This flies in the face of both history and logic. Historically, central banks do NOT do a good job of controlling price inflation. Afraid of ruining the recovery, they tend to be timid which gives rise to even higher prices. Then, afraid suddenly of hyperinflation, central bankers over-react and tend to push the economy back into recession with a series of pre-emptive rate hikes.
This pattern can be seen most clearly in the US itself in the late 1970s. The Fed initially was not aggressive enough with price inflation, which spiked into the double digits. When Paul Volcker took over as Fed Chairman he wasted no time in raising interest rates aggressively while apparently throttling back on money creation itself. The result was an aggressive diminishment of price inflation, but also a terrible recession that came close to bankrupting a slew of Western money-center commercial banks.
This is history; but history in monetary terms is driven by logic of currency manipulation and its inherent difficulty. Logically, central bankers do not have the tools necessary to drain liquidity properly; and this is why they are always doing too little or too much. Central bankers claim that they can figure out the tendencies of an economy by watching various, broad money supply gauges. In reality, of course, such indices are both unreliable and backward looking.
This is the ultimate weakness of central banking. There are NO tools that really provide insight into what the economy is doing in real time. Inevitably, the central banker is looking into the proverbial rear view mirror, responding to what the economy has already done rather than what is actually taking place at the actual moment-in-time. This is also in fact, why central banking price fixing of the value and supply of money (for that is what it is) doesn't work. They know this.
Trying to slow down the economy is ultimately just as distortive as printing money. The difference is that while printing money usually causes a boom, draining velocity inevitably causes a bust – a recession or even a depression. This is why central bankers are much better, or certainly more enthusiastic, about adding money than subtracting it. The latter process has a good deal more political and economic risk involved.
Bernanke has maintained that, "the most important lesson of all is that price stability should be a key objective of monetary policy." But these are just words. Bernanke, despite his bravado, has no more tools at his command than any other central banker. He appears more powerful or at least more certain because he has presided over the single biggest injection of monetary material into an economy that has ever taken place. But creating a historical disaster is not necessarily proof of competence. The ability to create a massive monetary injury does not necessarily add to one's competence.
At some point, there will come a rupture between the Obama administration and Ben Bernanke's monetary regime. Perhaps what is to come has not yet occurred to Obama. But he is a thin-skinned and ambitious man. He no doubt sees a second term as vindication for what he has gone through and the extraordinary vilification to which he has been subject. In other words, it is an emotional issue for him. Likely, he will treat his monetary dilemma in the same fashion.
If this is a correct analysis, then Obama will surely pressure Bernanke (privately if not publicly) to restrain himself and the Fed when it comes to slowing the economy. If he is successful, the economy will move from price inflation to something approaching price hyper-inflation given the vast sums of currency that can potentially circulate. And the more successful he is, ironically, the worse the ultimate disaster will surely be.
Sooner or later, the Fed like all central banks in the face of price inflation will have to tighten. But if Obama puts enough pressure on Bernanke and is able to affect Fed policy then the US must probably face a kind of monetary whiplash. First price inflation will become a serious problem; then as panic sets in monetary tightening will be applied harder than it would have been otherwise and the economy will be constricted and severely damaged. This is the sad tale of the 1970s and there is no reason to believe it will not be repeated.
Obama is fond of saying that elections have consequences. Monetary policy, which is not hypothetical but which is acted on, has consequences, too. There seems no doubt that the US and the world are headed toward a bout of sustained price inflation. The only question is how bad it will be, how much chaos it will cause and how out-of-control it will become. The second question then is how fiercely central banks will react, and how deep a slump will be created as a result.
The betting here is that the second decade of the 2000s will be like the 1970s on steroids. The amount of money that it has taken to reliquify the dollar reserve system is truly unfathomable. People simply have no idea of the sheer magnitude of central banking irresponsibility in this regard. To salvage an unsalvageable system, central banks knowingly created the "mother of all price inflations." Now Bernanke et al. will have to deal with it. And in Bernanke's case, he will have to do so within the middle of an election cycle.
Bernanke actually wanted a second term, probably because he was frightened about what would be revealed if he stepped away from the helm. Also, having in large part created the problem, he no doubt believes he is in the best position to fix it, or at least ameliorate the worst of the excesses. It is obviously a delicate balancing act; though one could speculate (and we have) that Bernanke et al. are purposefully trying to destabilize the dollar reserve currency to generate conditions more sympathetic to a (non dollar) global currency, perhaps the IMF's SDRs.
We would venture to say that a tipping point may be closer than mainstream media commentators tend to believe. If the system dissolves before other arrangements can be made, then the money masters will effectively lose control and the global game will collapse. In such a case, it is perfectly possible, as we have argued on many occasions, that the world or at least the West might in some fashion default to a market-based gold and silver standard along with free banking.
Conclusion: What is also clear, however, is that if chaos does overwhelm the current system and people truly lose faith, then Bernanke will likely come to regret that he campaigned so hard for a second term. He will surely become a most vilified individual, along with entire central banking priesthood. Obama will not regret a second term, as he probably will not have one.
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Posted by Dogwood on 03/18/11 10:01 AM
DB – If you have access to a Bloomberg, check out how many stories BBG ran in support of the Ben Bernake yesterday – especially the Ron Paul attack.
Lots of really sophisticated people subscribe to Bloomberg. It was suprising to see them spreading memes that only the naive would believe.
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Posted by Wayne on 03/18/11 06:38 AM
@Ingo
As I read these comments, there is something so obvious here that it is scary.
After every war, we (the US) always seemed to have this need for a Central Bank. Or at least the cry for one to pay off the debts!
Of course, this has not been the case since the Federal Reserve Act of 1913!
Ingo, don't you see the classical pattern here?
Create Wars to force the respective territories to have to borrow, and then force a Central Bank on them!
That is how the Bankers got control of Europe first, and then the US.
This is the oldest game in modern history.
And note that the US has become a military empire since the advent of the FED.
I defy anyone to tell me that this is a coincidence.
In any normal process involving politics, there is an ebb and flow.
But this has been nothing but a constant flow towards one unified financial power. It has never ebbed in history. Even in the US, once we were industrialized (think J.P. Morgan), the money elite have become a independent power that even controls the US Congress and the President!
That is exactly what happened in Europe prior to the fall of the US into their web.
It's no secret that The City of London controls the Monarchy. The Queen can't even enter The City without permission!
And no one has the right to audit the FED.
Do you see the similarity!
And the Queen did knight Greenspan for bailing out the Queen's Bank (Baring Bank) What symbolism right in front of us!
This is too professional to believe that this was not engineered.
It's the classic House of the Red Shield's strategy being worked out.
It's almost like painting by the numbers. Only it's financial domination by the numbers
We have Sun Tzu for War, and the House of the Red Shield for financial domination. And these two may be merging right in front of us at this time. (think China)
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Posted by Ingo Bischoff on 03/18/11 05:42 AM
@ Wayne
"The question I have is what will the good old USA look like when this begins to happen?
If the Argentinians could figure this out, I'm sure the Americans will.
You must admit that this would be a central bankers nightmare. and a tax collector's nightmare, as the black market becomes the only market. just how do you tax that?
And that may well be the only move we have left open to us."
You have valid concerns about hyperinflation in light of what happend in Argentinia and in the Weimar Republic. However, we do not have to end up there.
I suggest to strip the FRN of legal tender protection for payment of private debt right now. The states would charter commercial banks again to create a redeemable currency against Real Bills. The redeemable currency would circulate parallel with the FRN.
After that, all things would just naturally work themselves out to end up with a viable monetary system. People are not stupid. As you say, they catch on quickly. If the Argentinians can figure it out, Americans surely can.
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Posted by Ingo Bischoff on 03/18/11 05:20 AM
@ DB
"The states may have been prevailed upon to accept the central banking conspiracy but that same crowd had tried to implement it before."
This statement makes little sense in light of what I described above.
"And Biddle did the same a hundred years earlier. Again the states had nothing to do with it."
The ink was hardly dry on the signatures placed on the U.S. Constitution and there were bankers trying for a central bank charter. Secretary of the Treasury, Alexander Hamilton urged the Congress to grant such a charter in 1791 to pay for the left over debt from the War of Independence and to establish the credit for the United States abroad. When the twenty year charter expired, the majority of the states, as well as President Jefferson, were against renewal and the charter for First Bank of the United States expired.
When President Madison found himself with considerable debt incurred by the War of 1812, he urged the Congress in 1816 to charter a Second Bank of the United States. When the twenty year charter of that bank came to an end in 1836, the president of the bank, Nicolas Biddle, had cultivated important politicians to vote a renewal of the charter. President Jackson opposed it. The battle over the renewal became bloody, but in the end the Southern States stood square behind Jackson and the renewal failed and Biddle was history. The power of the states over the vote of their U.S. Senators is displayed in the recall of seven Southern Senators merely for voting to censure President Jackson for measures he took to fight the renewal, even so those Senators had voted against the renewal itself.
In light of what I told you about the fight against Biddle and the recall of the Senators, do you still maintain that the States had nothing to do with fighting off central bankers?
"You can make these pro-Leviathan statements at will, but there is no historical record to back them up. The Fed's creation was a classic conspiracy of a handful of powerful men."
How you can characterize my statements as "pro-Leviathan" I do not understand. If there is anything I am not in mind, body or soul it is "pro-Leviathan". There is nothing in what I wrote that could remotely be interpreted as pro-FED central banking. The Fed's creation was not at all a classic conspiracy of a handful of powerful men as G. Edward Griffin would like you to believe. There are historical records to that effect all over the internet, in book stores and libraries. However, one has to consult them, instead of taking a popular book as the historical record. I completely reject your claim that there is no historical record which shows that the individual, separate states always were and are still today against central banking.
The original FED was the creator and manager of a national currency. The original Federal Reserve Act of 1913 was supported by the majority of the states. It required the issuance of Federal Reserve Notes only against the value of gold and "Bills of Exchange" held within the system. By these very requirements the 1913 FRA insured a non-inflationary redeemable currency. The FED "Leviathan" we have today was created by violating the 1913 FRA by the NY FED in starting Federal Open Market Operations and monetizing ineligible Treasury debt in the 1920s. The rest of the regional banks in the Fed system failed to object, neither did the Congress. Instead, the Congress in 1934 ex-post-facto legalized the rogue acts of the NY FED and authorized monetization of government debt by the FED system.
The states would never have agreed to this, but the states had ratified the 16th and 17th Amendment in 1913 just before the 1913 FRA became law. The big banks were behind the push by the Progressive Movement whose goal was greater "Democracy" by amending the Constitution for collection of an income tax from the "rich", and by requiring that U.S. Senators be popularly elected. The success of the Progressive Movement supported by the big bankers made possible the demise of the redeemable Federal Reserve Note. By 1934, the bankers had financed the election of a sufficient majority of U.S. Senators and the state governments no longer had a voice in the Senate. The Senators answer to the bankers, not to their state governments. That situation has gone on since 1934. Your assumption that the FED central banking system was created in 1913 is simply false.
I look forward to your comments about my understanding of FED history.
Reply from The Daily Bell
See our above comments. There is no doubt that the states resisted the centralization of the federal Leviathan as you point out. It is perfectly possible that the states and their legislators were stampeded by elite manipulations of the day into believing that a Federal Reserve had some benefit. Certainly the average citizens may have believed so at the time. But to state, as you seem to do, that the states were the DRIVING force behind the Federal Reserve and that this tiny cabal of unholy monetarists was merely an ancillary and innocent business group flies in the face of everything that secret history shows (or indicates) is true. There are undeniable patterns in the shadows. What is stated on papers and documents does not trump these secret historical signatures in our view.
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Posted by Ingo Bischoff on 03/18/11 05:11 AM
@ DB
"Don't know where you get your version of Fed history but there was a secret meeting between JP Morgan, Warburg and the rest that had nothing to do with the states. The states may have been prevailed upon to accept the central banking conspiracy but that same crowd had tried to implement it before. And Biddle did the same a hundred years earlier. Again the states had nothing to do with it. You can make these pro-Leviathan statements at will, but there is no historical record to back them up. The Fed's creation was a classic conspiracy of a handful of powerful men."
I caution against taking the most popular book about the FED, "The Creature from Jekyll Island" by G. Edward Griffin and using it as the lone historical record. BTW, J.P. Morgan was not at the 1910 Jekyll Island meeting.
To answer you, let me take your statement apart piece by piece.
"Don't know where you get your version of Fed history but there was a secret meeting between JP Morgan, Warburg and the rest that had nothing to do with the states."
I read numerous books and historical accounts about the FED as well as congressional records and the Federal Reserve Act itself. My version of FED history is the opinion I formed after reading these books, records and legislation.
The meeting at Jekyll Island was not something out of the ordinary. Members of the Jekyll Island Club met in New York and other places frequently.
The particular meeting to which Griffin refers in his book included the main figures of U.S. Senator Aldrich, Davison for J.P. Morgan, Vanderlip for National City and Warburg for Kuhn, Loeb.
Griffin describes the secrecy that was involved in the travel and visit at the Jekyll Island Club. Because the travel by an important federal politician in the company of big bankers doesn't look good, it doesn't mean that the secrecy involves skullduggery.
The congressional hearings occasioned by the 1907 panic had the "National Monetary Commission" look into all kinds of monetary systems and arrangements that had the members of the commission even traveling to Europe to investigate monetary systems.
The big money center banks had an ally in U.S. Senator Aldrich who pushed a central banking plan as a solution to the fractured monetary system in the U.S. It was this plan the members at the Jekyll Island Club discussed in 1910.
The big money center banks feared that plans for a redeemable national currency, if put into legislation, would bring with it government supervision over their banking practices.
The opposition to the Aldrich central banking plan came from the Western banks and the agricultural banks. U.S. Senators from the West and Midwestern States were instructed by their state governments to vote against any regime that would involve the monetization of government debt.
The Federal Reserve Act which finally passed in December of 1913 specifically declared U.S. Treasury debt ineligible to be monetized. It specifically specified that Federal Reserve Notes could be created only against gold and "Bills of Exchange" within the FED system, and it specified a relatively high level of capital reserves in the form of gold. The states won out over the big money center banks in the passage of the Federal Reserve Act.
I ask you, where was the power and subterfuge exercised by the big bankers in the passage of the 1913 FRA? How was the original FRA a creation of a central bank? You cannot conclude that from the original Federal Reserve Act.
Reply from The Daily Bell
You are ignoring the sweep of history. From the time of Alexander Hamilton onward (and he was probably a European agent) the big New York banks sought to dominate the system. Biddle and Andrew Jackson's confrontation over America's second central bank (or was it the third?) was so fierce that Biddle apparently threatened to cause a US depression via central banking manipulation if Jackson did not back down. Fortunately Jackson didn't.
It is no coincidence that economic centralization proceeded apace after the Civil War, when states rights were essentially negated and the federal government was rampant. Immediately Northern municipalities began exhibiting the psychopathology and corruption of overweening power (see Tammany Hall) and that trend has today culminated in a virtual crescendo of corruption. Serial overseas warfare, an empire with 1,000 international bases, a ruined currency, US$200 trillion in unfunded obligations and a national employment rate of perhaps 70 percent are signifiers of the disaster of "European style" finance.
To claim as you do, that the sociopathic financeers of the early 20th century elite, meeting in disguises at a special Island was nothing more than a fairly normal business meeting is questionable in the extreme.
JP Morgan - his father too - were supposedly agents of the Rothschilds. Morgan supposedly controlled up to 30 or 40 percent of the working capital of the entire US at some point in his Machiavellian career. There is considerable evidence that Morgan created or manipulated the crash of 1907 so as to generate public sentiment for what ultimately became the Federal Reserve Act.
There is more, much more. To maintain that the Act was merely an evolution of state concern is to conflate two separate trends. Yes, the agrarian states were most worried about the New York banks and well they should have been as they had just been crucified on a cross of gold.
Take a look as we have about the way silver was demonitized - not just in the US but around the world, countries falling like dominoes, one after the other. To maintain all this was serendipity seems to miss the point. Post-Civil war, there was nothing but consolidation and centralization. Year by year and decade by decade, Leviathan created itself. The NYSE merged some 20 times; and is still merging today - only on a global scale. The IMF is lobbying to become the world's central bank. SDRs are being consider for a global currency. The EU is trying to grab enormous additional powers from its members states. The UN is more active and aggressive, worldwide, than ever before.
To claim, as you are, apparently, that the predominant strategic thrust behind the Fed was merely one of state "concern" begs the question of the world's larger, endless march toward centralized rule. The pressures are coming from somewhere. There is a trend, historically, andthe creation of the Fed is an obvious part of it. It was not coincidence. It was not anomalous. It is part of a larger pattern. It was deliberate. It was surely an elite manipulation.
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Posted by Wayne on 03/18/11 03:20 AM
@DB
Just watched your interview about Japan. Very strong. stuck to your points, and drove the issue about faulty design that they were all aware of in a clear way. One wonders how much evidence it takes to knock down the government competence totem/meme!
The current nightmare in Japan can only be hidden from consciousness by a combination of both very evil, and very docile people.
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Posted by Wayne on 03/18/11 02:21 AM
@Ingo
"You would be correct with that statement, if we were on a gold standard. However, we are not on a gold standard. Holding your fiat currency from earning whatever interest is dictated to you leaves you worse off. You get nothing and you hold on to a piece of paper that loses value daily.
If you had gold savings to invest, you'd be the boss. If on the other hand you want to hold irredeemable currency from investments with the intent of forcing the interest rate up, all you cause the central bankers to do is laugh themselves silly over your crazy idea."
You are creating the Horns of a Dilemma here. That is, Gold or fiat!
I break the horns by moving into investments of my money, and merely use cash as a temporary place till something interesting comes along.
Do you know that during Argentina's hyperinflation, the workers would get their pay,rush out, and buy anything real to get rid of their cash.
Used refrigerators, stoves, cars,etc.
The question I have is what will the good old USA look like when this begins to happen?
If the Argentinians could figure this out, I'm sure the Americans will.
You must admit that this would be a central bankers nightmare. and a tax collector's nightmare, as the black market becomes the only market. just how do you tax that?
And that may well be the only move we have left open to us.
Remember Sanford and Son-the TV series? see link
Click to view link
If the US goes that way, it will be Bernake holding his chest and saying, "Elizabeth I'm coming to join you honey." see link
Click to view link
Ingo, these people are just plain whacked!
They are playing Deities with other people money
Caligula is now on the throne! And we are in trouble! The probable future? see link
Click to view link
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Posted by Ingo Bischoff on 03/18/11 01:42 AM
@ Wayne
"Interest rates are ultimately set by real people who demand a real return on their money. Otherwise, they won't lend it out."
You would be correct with that statement, if we were on a gold standard. However, we are not on a gold standard. Holding your fiat currency from earning whatever interest is dictated to you leaves you worse off. You get nothing and you hold on to a piece of paper that loses value daily.
If you had gold savings to invest, you'd be the boss. If on the other hand you want to hold irredeemable currency from investments with the intent of forcing the interest rate up, all you cause the central bankers to do is laugh themselves silly over your crazy idea.
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Posted by Wayne on 03/18/11 01:40 AM
@DB
"Don't know where you get your version of Fed history but there was a secret meeting between JP Morgan, Warburg and the rest that had nothing to do with the states. The states may have been prevailed upon to accept the central banking conspiracy but that same crowd had tried to implement it before. And Biddle did the same a hundred years earlier. Again the states had nothing to do with it. You can make these pro-Leviathan statements at will, but there is no historical record to back them up. The Fed's creation was a classic conspiracy of a handful of powerful men."
All history proves that the purpose of a Central Bank is to loot and plunder the territory it occupies!
It's power is equal to, if not greater than the territory's Sovereign. given enough time, it will control even that Sovereign.
The proponents of Central Banking prove by their support of Central banking that they are Collectivists.
Central banking defies the very principle of Free Markets, by monopolizing the financial system that supports the Free market.
This is just creating the illusion of a Free market, when you can shut down the Markets ability to function on a whim.
How many people know that when they borrow on most types of loans, that the bank can call that loan back in at any time it deems it prudent to do so!
That's what I call power!
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Posted by Wayne on 03/18/11 01:00 AM
@Ingo
"No. Interest rates will never go to zero. The will half and half and half again and again. The FED rate in the last few years went from 2% to 1% to 1/2% to 1/4% to 1/8% to 1/16%Click to view link will go to 1/32% then to 1/64% and on and on. It will never go to zero."
I doubt that you can apply Zeno's Paradox to interest rates.
Interest rates are ultimately set by real people who demand a real return on their money. Otherwise, they won't lend it out.
This current lunacy that we are buying our own bonds is just monetizing the debt. Yes, it will create the illusion of demand in the short run, but this short run is going to be very short indeed.
Some one, somewhere out there, has a pool of wealth available. The question is, what will that person demand before lending his wealth? We know that we are doomed if that lenders wants Gold and silver for collateral. So it's got to be a high interest rate.
Here we are back at the end. We are freakin Doomed.
We can't afford 50% interest.
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Posted by Wayne on 03/18/11 12:31 AM
No one can take this seriously!
Not that we shouldn't, but what does that have to do with anything? We must look at the US Congress for a clue here.
There are only two possible explanations for this Financial Freak Show.
1. They are too stupid to understand the consequences of this, or
2. They know the real numbers and we finished no matter what anyone does, so why not just keep doubling down at the Big Casino?
Unfortunately, both come to the same end.
To quote the infamous Mogambo Guru, "We are freaking Doomed" Rational Economic Calculation has taken an indeterminate sabbatical.I suggest we join it, before we all get as crazy as the Policy makers.
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Posted by Vauung on 03/17/11 11:51 PM
@ Ingo Bischoff
I missed your final flurry of very interesting remarks about supply and demand vs price discovery during the world oil market discussion. My understanding has been that the opportunity for arbitrage is set by supply/demand disequilibrium (shortages and gluts) at existing price levels, and that price discovery resulted from the entrepreneurial process by which such disequilibria were exploited and thus erased. The Austrian approach, from Menger, thus replaces the mechanical assumption of supply-demand equilibrium under idealistic conditions of frictionless perfect competition, with a realistic mechanism by which actual markets, driven by patchworks of entrepreneurial activity, trend locally and imperfectly towards equilibrium (elmination of arbitrage opportunity). Your brief remarks seem to suggest that this understanding of price is still over-dependent upon a classical framework. I wonder whether there is anything succinct you could add in the way of a corrective?
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Posted by Ingo Bischoff on 03/17/11 11:19 PM
@ Vauung
"Expect the next president to be the patsy who was too blind or incompetent to lose the thing."
George W. Bush was picked to take the fall for the collapse of central banking and 9/11 saved him. George W. was no dummy, and he figured out that the best thing to do to survive was to make Hank Paulson his Treasury Secretary. Paulson was a Democrat, but George W. held him as a hostage, and sure enough those big banks and bond houses wanted to hang the collapse of the system around W's neck by maneuvering Lehman into bankruptcy at the end of 2008. However, W was too smart for them. He signed the TARP legislation and headed out of town.
Now, Obama has the ball, but the game is over. He just doesn't know it yet.
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Posted by Ingo Bischoff on 03/17/11 11:07 PM
@ Dottie
"When you say front run the Fed, do you mean in the current environment? Aren't interest rates as low as they can go?"
No. Interest rates will never go to zero. The will half and half and half again and again. The FED rate in the last few years went from 2% to 1% to 1/2% to 1/4% to 1/8% to 1/16%Click to view link will go to 1/32% then to 1/64% and on and on. It will never go to zero.
What you need to understand is that each such interest drop is a 50% drop from the previous level of interest. What is an asset on the books of the banks is a liability on the books of the borrower. A 50% drop of the FED interest rate increases the value of the assets on the books of the bank by 50%. Coversely, it increases the liquidation value of the businesses which borrowed the money from the banks.
As long as the businesses don't need or want to payoff the loans ahead of schedule, there is no harm that occurs. However, many businesses sell out, merge or restructure, and the liquidation value of the business becomes an issue. Many businesses find themselves out of cash and in insolvency.
That is why low but steady interest rates are good for businesses, and plunging interest rates are a disaster.
By front running the FED, I mean to purchase Treasury paper, then wait until the FED lowers the interest rate again. You must look at the percentage reduction from the last level, not at the nominal rate of interest. With a reduction in the interest rate, the Treasury paper you bought will have increased in value, and then you just sell it back to the FED.
You enter no risk by doing this, because the FED must lower the interest rate to save the banks. The big banks are the FED.
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Posted by Vauung on 03/17/11 11:02 PM
It's easy to imagine both major parties racing to lose the 2012 election, given the financial and geopolitical apocalypse the winner is going to inherit. Presidential ego is probably far from the most important factor in such matters, but at that personal level it's quite clear that only a patriotic saint or a megalomaniac sociopath would be interest in riding US hyperpower over the cliff (and patriotic saints are the political equivalent of unicorns). Expect the next president to be the patsy who was too blind or incompetent to lose the thing.
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Posted by Ingo Bischoff on 03/17/11 09:59 PM
@ Dottie
"Also, I have read that Friedman, in his later years, recanted his support of Keynesian principles. Can anyone dispute that?"
His recantation came much too late. Milton Friedman was a Keynesian until he came to the University of Chicago. Then he disagreed with Keynes, but only in the details. Milton Friedman in supporting Austrian "free markets" thinking sooner or later had to come to the conclusion that the monetary policy he espoused wasn't consistent with "free market" thinking. The problem was that "Austrian" economics isn't clear on a workable monetary system either. He may have recanted his Keynesian bent as regards the monetary system, but he had no answer for a workable system.
Dottie...
"The two paragraphs above, I don't understand. What I do understand is that retired people who had planned to live within their means with a reasonable interest income of 3-5% or so are being robbed. Commentators say"seemingly without thinking it's a bad thing"that Bernanke has forced the "risk trade". He has forced people who had planned to live on interest to get into equities. I think that is awful."
It might be helpful to you to understand the FED and why you cannot save USD/FRNs, if you read my interview with Anthony Wile on The Daily Bell dated 3/6/2011. You can find it under the listing of
"Exclusive Interviews" on The Daily Bell site.
To reply to your comment about people planning to save, you must understand when FDR confiscated the savings of the American people in 1933 and prohibited them from holding gold in the future, he not only took their savings, he also prevented them from saving. You cannot save USD/FRNs which are created by monetizing government debt. The reason why the Congress had to create the Social Security Act in 1935 lay in this very fact. The SSA is a payoff to the American people for confiscating their savings and for prohibiting them from saving for their old age. Politicians want to paint the SSA as an entitlement now in order to further manipulate the American people. It is outrageous.
As to the Federal Reserve Act, Griffith has it wrong. The Federal Reserve Act was an attempt by the separate states to save the "commercial banking system" and reign in the big money center banks. The NY FED violated the FRA in the 1920s by monetizing ineligible "Anticipation Bills" (U.S. Treasury debt). It caused the 1929 stock market crash. FDR helped out the banks by declaring a bank holiday and declaring the USD/FRN an irredeemable currency. All this could never have happened had the states not ratified the 16th and 17th Amendment. The Congress in 1934 ex-post-facto legalized the rogue acts by the FED in the 1920s and authorized the FED to monetize government debt. From 1934 on, anything Griffith remarks about FED action is absolutely correct.
The final coup de grace to the USD/FRN came with Nixon's action, on the strong recommendation by Milton Friedman, to suspend redemption of the USD/FRN for foreign central banks.
...and here we are....stewing in the mess central banking creates.
Reply from The Daily Bell
Don't know where you get your version of Fed history but there was a secret meeting between JP Morgan, Warburg and the rest that had nothing to do with the states. The states may have been prevailed upon to accept the central banking conspiracy but that same crowd had tried to implement it before. And Biddle did the same a hundred years earlier. Again the states had nothing to do with it. You can make these pro-Leviathan statements at will, but there is no historical record to back them up. The Fed's creation was a classic conspiracy of a handful of powerful men.
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Posted by Ol' Grey Ghost on 03/17/11 09:42 PM
@ Dotti
"I don't know how many people will have things to barter in the off season. Will we still have city water?"
There will always be things and services to barter year round. You just have to be creative. Anything run by government is questionable after a major crash so city water is something you should prepare to do without. It always best to have a redundant system for every 21st century convenience we depend on that works off of 19th century technology such as a well and hand-operated pump.
There are those amongst us here who are optimistic that something can be done to right the ship-of-state in the U.S. but I belong to the doom and gloom crowd that believes it will eventually all be for naught. Somewhere between the two poles of opinion you might find something useful for yourself and your family.
"However, I'm not sure how to return to this forum. It will probably be Monday night or Tuesday before I can return--I will be traveling. I have always gotten to the forum by reading DB articles and going to the bottom."
As a subject grows cold, everyone usually moves on to the next article that the multiple-personalities of the Swiss gnomes and bipolar elves publish here at the Daily Bell. Just keep reading as you have been in the past and you'll find us...
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Posted by Bill on 03/17/11 08:25 PM
This happened to Jimmy Carter-forces at that time also delayed the release of the Iran hostages. As militant as Jimmy was, he was not militant or as pro-elitist as his successor.
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Posted by Dotti on 03/17/11 08:15 PM
Thanks to all who answered my questions--especially Ingo for your patient explanations.
I look forward to many interesting communications.
However, I'm not sure how to return to this forum. It will probably be Monday night or Tuesday before I can return--I will be traveling. I have always gotten to the forum by reading DB articles and going to the bottom.
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