The Federal Reserve is adamant about meeting its mandates so much so that it will utilize whatever statistics make it appear their policies are working. Ask anyone who exists in the real world and they will tell you that the ‘official’ inflation rate as reported each month by the Bureau of Labor Statistics (BLS) through the consumer price index (CPI) is out of whack with what they are paying. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
Not to worry. Federal Reserve Chairman Ben Bernanke agrees with you that the core CPI numbers are too unstable and unreliable. Forget the fact that core CPI excludes food and energy prices already, the result was still too high to justify the Fed’s actions. So Bernanke has switched to personal consumption expenditures (PCE) as a baseline for setting monetary policy. PCE is supposed to better reflect changes in people’s buying habits. Historically it runs about 1/3 lower than CPI.
I won’t bore you with all the technicalities involved with the methodology utilized in measuring inflation as you can find it all over the web. Suffice it to say that employing a statistical measure (PCE) that consistently runs 1/3 lower than the previously utilized measure (CPI) which is only a fifth of the real inflation rate as measured by the real feel pain in consumer’s wallets can not lead to anything good. The Fed has a dual mandate of price stability and full employment. Anyone following the unemployment numbers is aware of the fallacy of their measure as well. It only stands to reason that the Fed use artificially low measures of inflation to go along with the massive block of unemployed or underemployed Americans. It’s not at all unrealistic to take the ‘official’ unemployment and inflation numbers and multiply them by a factor of two or three, possibly even more, to get a true picture of our economy.
So why would the Fed engage in such destructive practices? The incessant flooding of the market with liquidity hasn’t seen the corresponding increase in velocity the Fed desires. Simply put, the money isn’t circulating throughout the economy, it’s sitting dormant. The Fed sees this as a problem. They respond to low velocity with further stimuli in a vicious circle of chasing increased economic activity. Economic activity is what fuels the measure of Gross Domestic Product (GDP). Here we go with another misleading measure of the economy. High volumes of economic activity (money changing hands) drives a high GDP number. Along with the artificially manufactured low inflation and unemployment numbers, the Fed wants an artificially high GDP number. This is the broken window fallacy of Keynesians. Economic activity just for the sake of appearing productive doesn’t grow the economy. Only economic activity that increases wealth is productive.
This is why the call to the end the Fed has such legitimacy. On the surface, it appears that they are simply inept utilizing measures that tilt toward what they want to hear and then instituting policy that actually makes the problem worse. Like anything, when you start out with the wrong premise, everything that follows is then wrong. However, only the naive or foolish buy the logic that the Fed has spent nearly 99 years languishing in ineptitude. They know full well what the true measures of the economy are. They can see what effect high food and energy prices are having on consumers and business. In fact, this chart illustrates that food prices today are even worse than 2008.
The market is aware as well. While the derivatives market paid a heavy price for its failure to recognize the inevitability of the collapse of the housing bubble, this time around they are betting on the collapse. Here’s another chart reflective of credit default swap (CDS) activity showing it’s also exceeded 2008 levels.
Here’s the crux of the issue. Do the bankers that control the Fed and have systematically pilfered our wealth over the years exude such confidence that they believe they can time the inevitable collapse of the dollar and divest themselves so as to protect their assets? To answer that, we need to step back and answer some basic questions. For example, what is a successful economy? How have the bankers been stealing our wealth?
What is wealth is a loaded question. It has different meanings for different people. Good health may be enough for some to be considered wealthy. For our purposes, let’s keep it to a measure of economics. The important distinction is when it applies to money for if how many dollars you possess determines your wealth, a millionaire today is worth far less than a millionaire a century ago. This is of course due to the loss of purchasing power of the dollar by our continuous inflationary policies enacted by the Fed. Consider this comparison of two simplified examples of an economy.
Example one is a farmer, a carpenter and a trapper. They barter in order to exchange food, clothing and shelter. Accordingly, each has life’s necessities. They have a functioning economy in that goods and services are exchanged, yet there is no money involved as a medium. Are they wealthy?
Example two is a farmer, a carpenter, a trapper and a banker. They don’t barter as before. The banker prints money and issues it to them in exchange for his food, clothing and shelter. They use the money to buy each others goods or services. If the banker needs more items, he merely prints more money. The farmer, carpenter and trapper must produce more if they wish to obtain more money. The banker appears wealthy as he has lots of money. The farmer, carpenter and trapper appear wealthy if they increase production and have more money. However, every time the banker prints more money to purchase his goods, he diminishes the value of the money already in existence. This leads to requiring more dollars to buy the same thing as the day before. This means the farmer, carpenter and trapper must always produce more just to receive the same amount of dollars from the banker. The economy is very active with all the transactions taking place. However, at some point the producers can no longer keep up increasing production to obtain the same amount of dollars. They spend less money amongst each other. Unable to produce more and running out of money, the economy finally collapses. The banker has lots of money but cannot buy the goods and services he needs any longer since the farmer, carpenter and trapper have gone out of business. Are they wealthy?
A very basic comparison, to be sure, but it illustrates what happens when we have a policy of constantly expanding the money supply. The Fed gets to choose the insertion point for the printed money, which is nothing but a computer entry. They know full well some of it won’t make it into circulation. After all, that’s the whole point, to be able divert it to their constituents. So how do they keep the scheme alive without creating measured inflation and crashing the economy? Notice I said measured. That leads back to the PCE measure rather than the CPI as it’s getting more difficult to mask it. One trick the Fed has been utilizing is to export the inflation. Congress has accelerated our deficit spending so aggressively, we can no longer find enough buyers for the Treasury’s bonds. So the Fed steps in and prints the money to purchase them which effectively devalues all bondholder valuations. China and Japan hold the lion’s share of our foreign debt and they are not happy about seeing their investments losing value due to the actions of the Fed. That’s the benefit, if you will, of having the U.S. dollar serve as the world’s reserve currency.
The Fed knows that as long as that printed money doesn’t get into circulation, they won’t have to face the inflation demons. They can delay by holding their bonds and raising bank reserve requirements, but they still have to walk the line of meeting their mandates. If enough money gets introduced into the supply, price increases will surely follow. The Fed must then implement its tools to check it which will include raising interest rates which have been artificially held down. This means higher debt service costs eating even more of the federal budget. It will also result in higher bond yields and more personal savings. As bank costs rise, this makes borrowing money more expensive. Less lending means less investment by business leading to less expansion and hiring. Thus the economy slows and the Fed then lowers rates and injects more liquidity and we go around and around with the Fed created boom/bust cycles.
What’s different is the deficits and debt. Once the economy rebounds, Congress should be retracting its stimulus spending like good Keynesians. Instead, we have baseline budgeting in which the supposed temporary spending of stimulus becomes the new norm. The deficit becomes entrenched and the debt never decreases. All along, the dollar is devaluing and the debt service costs rise regardless of the interest rate fluctuations. Add in the unfunded entitlement obligations which are always increasing and you have a recipe for disaster. Even if the Fed and their bankster cartel were to stand down and stop skimming profits off the top, the debt and entitlement obligations are at unsustainable levels.
We would need to see the Fed voluntarily stop profiting (NOT!), the economy would have to grow for years at a high level (republican/democrat policies won’t allow it), and we would need complete entitlement reform (the people won’t take one for the team). Do all this and we could grow our way out of debt.
Now, for all you economists who may stumble upon this blog, I’m fully aware there is much left unsaid here about money and the economy. This isn’t intended to be the end all, just a general discussion about the Fed. For those interested in the hypothetical as in what would we do to restore the dollar if the above were to occur, I’ll quote Dr. Edwin Vieira –
Steps to Restoration
Restoration must be done constitutionally. The current system is entirely the product of statutes and regulations, ninety-five per cent of which is unconstitutional. Change will have to be made by the enactment of new and different and constitutional statutes.
I can give you an outline of the steps to bring the US monetary and banking system back into conformance with constitutional law — all of which can be documented historically — based upon early instances of American constitutional and statutory law:
First, recognize that the basic unconstitutional steps that were taken by the government to establish ultimately this fiat currency system must be declared unconstitutional:
- 1. The Federal Reserve Act of 1913
- 2. The seizure of gold coin in 1933
- 3. The outlawing in 1934 of private contracts calling for payment in either gold or silver
Second, disestablish the Federal Reserve system and privatize its few politically legitimate and economically useful functions, such as a national clearing house, etc., to the extent that those functions would be legitimate and useful for private banks if they could be continued, but certainly not under the auspices of anything that looks like the Federal Reserve system.
Third, terminate the status of Federal Reserve Notes as obligations of the United States, as legal tender for all debts. There is absolutely no constitutional justification for the American taxpayer to be the ultimate guarantor for the wild investment schemes of banks, savings and loans, and the other members of the the Federal Reserve system.
Fourth, dedicate to the restoration of the constitutional money system the gold that was unconstitutionally seized from the American people in 1933 that is now held by the United States Treasury. Most of the gold is not actually held in Fort Knox — it is held at West Point. It is called “coin melt” gold. It is the ninety per cent pure gold that was melted down into ingots, primarily from coins that were seized during the 1933 seizure because the government did not have that much gold.
Who owns that gold? The people from whom it was stolen own it, because it was illegally taken. The government is engaged in receiving stolen goods. All of that money must be returned to those from whom it was taken — if they can be ascertained — or held in what is called a constructive trust to be used for a purpose related to the restoration of the monetary system, and that would mean coining all of that gold and getting it out into circulation as quickly as possible if we cannot find the actual owners.
Fifth, declare voidable all contracts between member banks and the Federal Reserve system and any other parties where the consideration for contracts on the part of the banks was the unconstitutional monetization of debt. Now what that means is that you collapse the debt pyramid to the detriment of the banks; the banks keep the debts. Thus, it’s not the taxpayers who eat them, the banks eat them. The Rockefellers eat them — the foreign shareholders of those banks eat them. If they don’t like that they can go to jail on RICO charges.
Sixth, revalue in terms of constitutional dollars all outstanding contracts now payable in Federal Reserve Notes. Honest people were forced by circumstances to conduct their financial affairs on the basis of Federal Reserve Notes, and those contracts cannot be voided. The contracts must have some real value attached to them. The real value attached to them would be their value in constitutional dollars.
This problem was solved by the Confederate States after the Civil War. Contracts in the Confederate States that were not declared to be illegal contracts were revalued in then-current constitutional gold and silver coin, and the system worked fine. The Supreme Court figured out how to do that at the end of the Civil War, and it can do the same today.
Immediately begin the free coinage of gold and silver coin; not the limited coinage they do now — the American Eagle coins — but coining as much gold and silver as people want to bring into the mints.
Seventh, adopt all the foreign silver and gold coins as money of the United States — what Congress did in the late seventeen hundreds when there wasn’t even a mint in this country. Where did the original money come from? They just made a list of all the gold and silver coins that were any good and said, “These have so much gold, and these have so much silver,” and they were made the money of the United States. They monetized all the gold and silver of the world instantly. Instantly it could be done.
Those who say there is not enough gold or silver do not know what they are talking about. It is not in circulation because it is not treated as money. Once it is said to be money it will start coming out from the coffers and out from under the beds.
Regulate the value of all those coins and then prohibit the practice of the fraudulent fractional reserve banking schemes and other such typical commercial fraudulent practices.
This is not a visionary program. It is very difficult politically to put it into effect; but it is not, as a matter of economics, visionary.
These steps were taken twice before. At the end of the War of Independence we had the same kind of rotting vegetable currency — the Continental currency — the same Bills of Credit. There were no gold and silver coins in circulation. The economy was absolutely prostrate. All of these steps were taken, and economic recovery followed.
In the South following the Civil War, the Confederate currency was, of course, destroyed. The country was prostrate, and was under military occupation when these same steps were taken. In fact, they were taken in the entire country with the resumption of the Specie Act in 1875 going from the fiat “greenbacks” back to redeemable or fiduciary paper currency.
Such part and parcel reforms have been put into effect in several other countries. It can be done! The only question is whether the American people (a) want it to be done, and (b) have the gumption to make the politicians do it.
I asked earlier if the bankers were smart enough to time the collapse of the dollar and preserve their acquired wealth. Only time will tell. If there were a CDS available for it, I would hedge against them.