STAFF NEWS & ANALYSIS
Economic Fiat End-Times?
By Staff News & Analysis - February 19, 2010

The Federal Reserve decided Thursday to boost the rate banks pay for emergency loans. The action is part of a broader move to pull back the extraordinary aid it provided to fight the worst financial and economic crisis since the 1930s. The move won't directly affect borrowing costs for millions of Americans. But with the worst of the financial crisis over, it brings the Fed's main crisis lending program closer to normal. The Fed decided to bump up the so-called "discount" lending rate by one-quarter point to 0.75 percent. The increase takes effect Friday. The central bank said the action should not be viewed as a signal that it will soon boost interest rates for consumers and businesses. Record-low borrowing costs near zero are still needed to foster the recovery, it said. The Fed repeated its pledge to keep interest rates at "exceptionally low" levels for an "extended period." – Yahoo/AP

Dominant Social Theme: Don't worry. Everything is under control.

Free-Market Analysis: Recently we have written about how America's – and the world's – fiat financial system could change and even unravel. We have noted that there is generally a fiat-money crisis around the world and that every single global player seems to be struggling with its money and its economy. This is taking place in a fairly easy money environment. But what if money becomes more expensive, as we think it may in the near future? We foresee a very unhappy time indeed. The choices will be difficult. Loosen and allow the possibility of tremendous price inflation – leading to a good deal of social unrest. Or continually tighten and face a good deal of social unrest.

You can see two other articles here:

How Global Fiat Money Dies

Depression 2102 – Western Fiat-Money Finished?

The AP article excerpted above, announcing the first tentative contraction of monetary policy by the Federal Reserve may well be the first shot in the tightening campaign. We do not believe it will be the last. But having written this, we also want to draw your attention, dear reader, to just how sensitive the Fed is about its tiny tightening. Here's some more from the article:

The central bank said the action should not be viewed as a signal that it will soon boost interest rates for consumers and businesses. Record-low borrowing costs near zero are still needed to foster the recovery, it said. The Fed repeated its pledge to keep interest rates at "exceptionally low" levels for an "extended period."

The Fed had signaled for weeks that an increase in the discount rate was coming. It made its announcement Thursday after the financial markets had closed. Investors, however, viewed the bump-up in the emergency lending rate as a step toward broader credit tightening. In after-hours trading, the dollar strengthened, yields on two-year Treasury securities rose and stock futures dipped.

The Fed portrayed its action as moving its emergency program for banks closer to normal. But the markets saw it initially as a prelude to higher borrowing costs across the board.

"I think one man's normalization is another man's tightening," said T.J. Marta, market strategist and founder of Marta on the Markets, a financial research firm, explaining the market's reaction.

Notice the sensitivity? The Fed in no way wants to encourage the perception that money will grow dearer. Why not? The considerations in our opinion may be as much political and social as they are monetary. People the world over, and in America, too, are out of work and out of hope. Were the Fed to signal a strong tightening move, the current grass-roots Tea Party rebellion would likely grow taller than ever, and in a hurry.

The leaders of the Fed are probably also conscious that they are square in the sights of those who are unhappy with the system. There have been hard times before, most notably in the 1970s (in the recent past) but the difference today is that people have a way of informing themselves about what is going on that they didn't have before. Lose your job? Go on line and try to figure out what's going on with the economy. Just lose a lot of your savings? Go on line and try to figure out how that happened. You will find PLENTY of information.

To simply believe, therefore, that the current economic crisis will gradually resolve itself as others have may be somewhat naïve. First of all, this is a very deep crisis, one that has affected every part of the globe and every major Western (and Asian) nation. Second, after 100 years of an increasingly concentrated central banking economy worldwide, people we believe are increasingly tired of the crises and of the constant worry associated with a boom-bust business cycle. Finally, as we have just pointed out, there is the Internet and the ability that people have to use it to find out alternatives to the current system.

These three factors are why we have come to think that substantial economic upheavals (and economic unrest) may be a bit closer than we used to think and more powerful as well. Two years ago, before the crisis, we might have put major upheavals out 10 years or more. Even a year ago, or less, we didn't foresee the dollar being dumped anytime soon, or the US with its phenomenal military power being challenged economically.

But now? The euro-chaos, combined with what we see going on in Japan (and China as well by our estimation) has made us reevaluate our timeline. Fiat currencies are in trouble all over the world, and by extension central banking as a dominant social theme is losing credibility. It is in fact an indefensible financial mechanism. The idea that a group of individuals, no matter how wise or experienced, can set the price of money is ludicrous. Price-fixing simply does not work, so why should it work for money stuff itself?

Price fixing always distorts the economy. Either there is too much of something, which cheapens the product – whatever it is – or too little which causes a queue and additional scarcity and expense. In the case of the current mercantilist central banking regime, the world is first inundated with cheap money and then experiences endless withdrawal and regret (and various forms of ruin). We are in the withdrawal stage now. And regret, this time round, is turning into something more generally worrisome for those who stage-manage the economy worldwide. We believe it is turning into profound anger.

This anger is percolating, but it has not yet begun to boil. It would likely boil over when the cheap money of the past decade turns more expensive. This is surely what the Federal Reserve is worried about it and why it is being careful to explain that its initial tightening is NOT a tightening. The EU, meanwhile, is faced with the specter of tightening the monetary policies of the entire southern half of its enterprise. Japan can stimulate no further and China just dumped hundreds of billions of yuan into its economy and its leaders are probably just as worried about price inflation at this point as they are about future growth.

It is inevitable now that there will be either very expensive money, and then perhaps an explosion of price inflation. Free-market economics tells us that the inflation has already taken place because the money has been printed. But it has not yet transformed into price inflation. History also tells us that central bankers can only tighten for so long before the politicians – or the citizens themselves – get upset and force an easing. And what an easing that would be given the amount of money that central banks have printed in the past year or so!

People are angry in America and increasingly in Europe. Their anger will increase if fiat money becomes dearer. And their anger will increase if fiat money becomes less dear, initiating price inflation. Central bankers actively seek to be known for their intelligent and conservative manipulations of currency. They want credit for their strategic efforts. In the next decade they will not have to try too hard to be noticed. They may find, after all, they do not like the attention.

After Thoughts

Will the system degenerate so far and fast that a precious metals standard of some sort is readopted? Well, macro-predictions are a risky business. We do believe a day of reckoning is closer now than we thought previously for the world's shaky fiat-money system as a whole. The problems are greater and they are globally prevalent. Fiat money is a slender reed in the best of times. And these are not the best of times. If one major currency goes down, so might they all, and surely the dollar would not be immune.

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