Nouriel Roubini: U.S. Has Two Economies
By Staff News & Analysis - December 07, 2009

The U.S. has two economies, says Nouriel Roubini, professor of economics at New York University's Stern School of Business and chairman of RGE Monitor. "There is a smaller one that is slowly recovering and a larger one that is still in a deep and persistent downturn," Roubini writes. Roubini notes that while America's official unemployment rate is 10.2 per cent, the figure jumps to a whopping 17.5 per cent when discouraged workers and partially employed workers are included. And, while data from firms suggest that job losses in the past three months were about 600,000, household surveys, which include self-employed workers and small entrepreneurs, suggest a number above two million. "Many of the lost jobs – in construction, finance, and outsourced manufacturing and services – are gone forever, and recent studies suggest that a quarter of U.S. jobs can be fully outsourced over time to other countries," Roubini says. – MoneyNews

Dominant Social Theme: Something must be done.

Free-Market Analysis: The Daily Bell tries to speak to the issue of central banking as much as possible because even after studying the darn strategy individually for two decades or more (and collectively for about a century) we are still regularly shocked at how overwhelmingly powerful (take a deep breath) state-sanctioned, monopoly-fiat-money, fractional-reserve banking really is.

The wonderful (or sad) thing about our current form of central banking is that its largest excrescence first occurred in the early 20th century in a country (America) that was once a bright and shining light of monetary exceptionalism. The free-banking experiment of the 1800s, which included private, fractional-reserve banking must certainly stand as one of the most remarkable free-market monetary experiments of recent times.

Here's a brief history, then, of American money as we understand it. (Given the amount of info on the ‘Net these days, maybe there is information that has escaped our attention and readers are welcome to send in links and info in support of or in contradiction to the following.)

The pre-Fed system certainly had its drawbacks and is derisively known today as Wildcat banking. But in fact, as Murray Rothbard and others have shown us, much of the instability of the system (or at least some of it) had to do with the affirmative obligations of the state-chartered single-branch-only banks to purchase lousy municipal and state bonds as part of their base funding stock. Depositors were always worried about the solvency of these instruments and that is one large reason for the instability of the system.

The central banking setup that came into being in the 20th century is also remarkable. From its very beginning, it seems to us that it was marked by a kind of fraud. Financial historian Ed Griffin (a Bell contributor) and others have written that there was an apparently secret deal between the Bank of England and the American Fed of the time (post World War One). This may have ended up with an agreement that the dollar would be debased so that the pound could return to its pre-war glory as the king of currencies. The American Fed apparently attempted to accomplish this by printing endless amounts of dollars leading to the Roaring Twenties and subsequent Depression.

It is seemingly true that the only way that the Fed was chartered was with a ratio of dollars to gold, but the wise men at the Fed, according to at least some hard-money scholars we speak to, immediately and secretively abrogated the linkage so as to print as many dollars as possible. It was only after the stock market crash that panic set in and Roosevelt, when he came to power, found it incumbent on the presidency to issue "bank holidays." These holidays were not however based on savers trying to remove greenbacks from banks. No, the poor depositors were trying to get their GOLD back. But there was none – or less, anyway, than there should have been!

A case can be made that Roosevelt's gold confiscation scheme ran, partially, along similar lines. Since the wise men at the Fed had apparently illegally abrogated the gold/dollar linkage, the only way for these top men to be truly safe was to wipe out all vestiges of accountability – which they tried to do by confiscating gold.

Why rehearse the previous info (hopefully correct in its general outlines)? Because from our point of view, with all its problems, and there were many, the American money system worked better before the entry of the Fed than afterwards. Sure, there were recessions, depressions, inflations, etc. But when one looks into them, most of them were government created to some degree and in one case, 1907, the suspicion is that debacle was partially engineered by banking interests to develop momentum for what eventually became the Fed.

It is central banking itself that has created not only monetary disasters but SOCIAL disasters. The endless booms and busts of Fed central banking have turned America from an egalitarian miracle into a progressive-socialist mess. First there is a fiat-boom and then a bust that provides the monied interests with the ability to sop up ruined businesses for pennies on the dollar. At the same time as the system puts entrepreneurs out of work, the system is busy dispatching the remaining jobs overseas via the auspices of "international" companies.

The result is an endless bifurcation of society into two increasingly polarized classes. The end result is indeed a South American-style "banana republic" where the monied classes are the bankers, managers, lawyers and accountants that do the bidding of the handful of truly wealthy and everyone else who scrambles on the streets, in the hills, pampas and slums to get by day-to-day. This is indeed where America logically must be headed if the current variant of central banking is not revised, in our humble opinion.

The other pervasive effect that central banking has had on America in particular is that it has turned the country from an agrarian republic into an urban dystopia. Young men and women attracted by the false booms of a Fed-inspired economy are fooled into thinking that the jobs created at the peak of a mania are going to be there forever. Instead they are gone in the next bust. The history of 20th-century republican America (onward), as we wrote once when the Bell was just beginning, is a history of what some Australian's call "dream time" – except it occurs in modernity. Central banking has done more to reshape American society than almost anything we can think of. It has taken a once proud nation and tempted fully a third of it, in our opinion, into jobs that have proved to be mirages. It has made a proud agrarian nation into a serial slum from "sea-to-shining sea."

Central banking is not just responsible for the impoverishment of what was once the American middle class. It is responsible for massive unemployment too as the jobs promised in booms evaporate (often forever) during the busts. Central banking, if left to flourish for a century or so, can virtually turn a society inside out. The third negative consequence of central banking is that it gives the handful of controllers of the money system almost godlike capabilities. As a result, government is funded as never before. The end result is that the worker is squeezed out, the entrepreneur bankrupted while government bureaucrats are endlessly empowered and cultivated. The logical extension of central banking is private sector ruin, public sector advancement, endless authoritarianism (police and military jobs being endlessly attractive), and eventually national collapse.

What is to be done? Get rid of central banking. Don't replace it. Don't modify it. End it. That one thing, that one change, would make a tremendous difference. One can argue (as we have done recently) about fractional reserve private banking and Brownian national banks. But from our perspective the single most effective thing that can be done to America and the West in general to prevent the formation of Caucasian versions of Zimbabwe, is to rid the world of this fiat nightmare of mercantilist central banking that brings misery on the many while enriching (vastly) the (very) few.

Ellen BrownBrownian bonus of the day: Ms. Ellen Brown (pictured left) has herself written to us with an over-arching explanation of certain ambiguities in the text of the modern monetary fable, The Wizard of Oz, as follows: "The explanation given (not by me but by the researchers who first noticed the Populist money reform symbolism in the book) is that the road to Oz, paved with gold, was a false road. The Wizard failed to get Dorothy back home. Gold was the private money of the bankers with their gold-backed banknotes (90% created out of nothing on the fractional reserve system). The secret solution that was on her feet all along, the silver slippers, represented the Populist solution, which was William Jennings Bryan's insistence on a return to government-issued money — in this case silver-backed, silver being plentiful in the U.S. and representing an expansion of the money supply that the depressed economy then desperately needed." Thanks to Ms. Brown for providing this interesting interpretation.

After Thoughts

Get rid of central banks. Let the marketplace in all its glory and guile decide what money is. (Who knows, perhaps the market would decide against fractional reserve banking altogether!) But at least the market would be back in charge of what is naturally and necessarily a private-market function. Regular readers of the Bell know that we believe what would rush in to fill the vacuum would be a private market gold and silver standard, one that has proved both equitable and efficacious throughout history.

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