The Counter-Productive Monetary Policy of the Fed

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Sowing Inflation, Reaping Deflation

Courtesy of Antal E Fekete @ New Austrian.org

New Austrian School of Economics

Introduction

Typically, bond speculators carry on interest arbitrage along the entire yield curve. They sell the short maturity and buy the long, hoping to capture the difference between the higher long rate and the lower short rate of interest (borrowing short and lending long). This arbitrage is not risk-free per se as it has the effect of flattening the yield curve. As a result the normal yield curve could get inverted unexpectedly, that is, turned upside down, making the rising curve into a falling one while turning the speculators’ profit into a loss.

However, as a direct result of the policy of open market operations (introduced clandestinely and illegally in 1922 through the conspiracy of the US Treasury and the Fed, long before the practice was legalized ex post facto in 1935) interest arbitrage was made risk-free. Astute bond speculators could thereafter pre-empt Fed action profitably. It never fails. Speculators know that sooner or later the Fed will have go to the bill market to buy in order to boost the money supply. They will buy beforehand. On rare occasions the Fed would be a seller. Then speculators, perhaps acting on inside information, will sell beforehand. This copycat action is an inexhaustible source of risk-free profits. Thanks to the Fed’s open market purchases speculators are assured that they will always be able to dump the bonds at a profit which they have bought pre-emptively. The more aggressively the Fed persists in its effort to increase the monetary base, the greater the bond speculators’ profits will be.

Absolute bad faith Continue reading

ECON 101 – LECTURE 3

GOLD STANDARD UNIVERSITY

Summer Semester, 2002

Monetary Economics 101: The Real Bills Doctrine of Adam Smith

Lecture 3

CREDIT UNIONS

– The Invisible Vacuum Cleaner –
– The Quantity Theory of Money –
– Destruction of the Gold Standard –
– And Discrediting the Real Bills Doctrine –
– Are Two Sides of the Same Coin –
– The Working Man As the Guardian of Sound Money –

Lending versus Clearing

July 15, 2002

I dedicate this lecture to the memory of Ely Moore, the first union official ever to have been elected to the Congress in 1834. He was a solid gold-standard man who believed, with Daniel Webster, that

“Of all the contrivances for cheating the laboring classes of mankind, none has been more effective than that which deludes them with paper money.”

Daniel Webster

In the first two Lectures I dealt with a new blueprint for a gold coin standard for America and the world, designed to avoid two great pitfalls: (1) the pitfall of breakdown of social peace between creditors and debtors, (2) the pitfall of entrusting gold coins that represent the savings of the people to the banks. In this Lecture I shall recommend that the guardianship to preserve the system of sound money should, instead, be entrusted to the laboring classes and their representatives, the Credit Unions, which would be the only financial institutions chartered to carry deposit accounts denominated in Gold Eagle coins, and which would act as clearing houses for the circulation of real bills.

Recall that real bills provide credits to move urgently demanded consumer goods from the producers to the retail outlets. We don’t need banks for that. In any event, short term commercial credits arise not through lending but through clearing. As the supply of consumer goods emerge in production, purchasing media to finance its movement to the consumer emerge simultaneously through the process of clearing. No lending is involved. Coin, credit, circulation, clearing – the four C’s – are central ideas that economics has ignored. We are going to revive them here in preparation to pave the way to a new gold coin standard. Continue reading

Will Our Private Savings Be Sacrificed To Pay Down The Public Debt?

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Courtesy of Adam Taggert @ Peak Prosperity:

Recently, an article by Daniel Amerman caught our attention. Titled Is There A “Back Door” Method For The Government To Pay Down The Federal Debt Using Private Savings?, it details the process known as financial repression, where sovereign debts are slowly paid off by syphoning private savings from an unaware populace.

In this week’s podcast, Chris discusses the mechanics of the process, as well as its probability, with Dan:

To understand financial repression, we have to understand that we’ve been there before. Many nations have gone through periods in the past where they’ve had very high levels of government debt. And there are four traditional ways of dealing with that.

One of them is austerity. Everyone understands that. You raise the tax rates. You lower the government spending. This is a painful choice. It can last for decades. And what do you think the voters think about that?

There is another option and this we can call this the Argentina option. And that’s defaulting on government debts. It’s radical. Everybody understands it. How do the voters feel about it?

There is a third option is rapidly destroying the value of currency. Creating high rates of inflation that very quickly wipe out the true value of a national debt. But that also wipes out the true value of everyone else’s savings and salaries and so forth. It is such an obvious process you can’t really hide it. So how do the voters feel about that?

Those first three – they all work. They’ve all been done before. But they’re all very painful and make the voters very angry.

Now there is a fourth way of doing this. There’s nothing controversial about its existence; it’s not the slightest bit controversial for professional economists or people who have studied economics extensively. It’s financial repression. And it works. It’s what the advanced western nations did after World War II. It was a process that took 25 to 30 years, depending on the country. The West went from an average debt as a percentage of national economy from over 90% to under 30%. So we know it works in practice. Continue reading

The Deflation Nobody Understands

Courtesy of Peter van Coppenolle @ NASOE:

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(But they will experience it first hand)

Professor Fekete has been studying and teaching the gold standard for over 40 years now. Unlike most ‘pundits’ Fekete has held a seat at the Winnipeg Commodities Exchange in order to study the gold market from every angle possible. And studying he has done so relentlessly since immigrating to Canada in 1957. He has used all his powers to educate people about gold. Part of that effort was to groom a ‘hard core’ which now, 2013, constitutes the faculty at the New Austrian School of Economics. Over the years we at the faculty have experienced the rewards that only educators can testify to: the joy when other people finally see some light. And sometimes we encounter detractors too. They are an amusing lot, put there for our entertainment, no doubt.

Professor Fekete, dissatisfied with the body of knowledge on economics, has been a writer and above all a supreme philosopher of economics. Ever since 1957, he has amassed so much old and new knowledge, that we at the faculty of NASoE have quipped that ‘if you want to understand nothing at all about the gold standard, you will have to read B. Goldwater.’ We know that is one offensive statement. But we also stand by our own insights, research and above all methodology, which is a Mengerian disequilibrium approach. Using a good compass does make a difference. The world collectively knows that traditional ‘economics science’ is (expletive) dismal, which is stronger than just ‘dismal’. It has reached the stage were this economic discipline’s own academics are mudslinging each other or hubristically refer to themselves as invincible. (E.g. Krugtron the Invincible, a neoplasm born from a bad ’80 movie.) Or in the Austrian camp, the same old boom and bust line is repeated, yet zero research has taken place, until now, either to correct for some untenable assumptions in the Austrian Business Cycle or to advance knowledge on some other aspect of credit collapse. Nor do they bother to dismiss the Quantity Theory of Money, according to which the more money is brought into circulation, the higher prices will go. “More money chasing fewer goods”, etc..

The question described in the title is the one people least understand. Perhaps I am too harsh. People who never attended or never listened to standard economics, have no problems assimilating my message. It becomes harder to grasp for those afflicted with the idea that inflation and deflation are mutually exclusive. They are not, puzzled looks and hurled insults notwithstanding. The term “hyper-deflation” was never coined nor did such a state ever occur in history and it full scope is unknown as yet. But using Mengerian disequilibrium and Aristotelian logic, I can paint the general idea.

Professor Fekete never subscribed to what he called the Quantity Theory of Money. It suffices to point to the very fact that it is possible to have a shortage of money simultaneously with the overworking of the printing presses. The reason why the QTM fails is that money is not one-dimensional. It is in fact two-dimensional. Quantity is one, and the velocity of circulation is the other dimension. Central banks control the quantity of production and the market firmly controls the circulation speed. Continue reading

BONDS MAY BE DEFYING DIRE FORECASTS

BUT THEY ARE NOT DEFYING LOGIC

(Part One)
Antal E Fekete
New Austrian School of Economics

Courtesy of Professor Fekete.com:

The title of Sy Harding’s article (Gold Eagle, January 31) says it all: “Bonds Defy Dire Forecasts”. But as I have been saying for years, bonds have not been defying logic, Greenspan’s cliché “conundrum” notwithstanding. The behavior of the bond market has been consistent with Keynesianism. By his compassionate phrase “euthanasia of the rentier” Keynes meant the reduction of the rate of interest, to zero if need be, as part of the official monetary policy to deprive the coupon- clipping class of its “unearned” income. Perhaps it is not a waste of time to repeat my argument why, in following Keynes’ recipe, the Fed is acting contrary to purpose. While wanting to induce inflation, it induces deflation.

The main tenet of Keynesianism is that the government has the power to manipulate interest rates as it pleases, in order to keep unemployment in check. Keynes argued that the free market economy was unstable as it was open to the swings of irrational investor optimism or pessimism that would result in unpredictable and wild fluctuation of output, employment and prices. Wise politicians guided by brilliant economists − such as, first and foremost, himself − had to have the power “to prime the pump” (read: to pump up the money supply) as well as the power to “fine-tune” (read: to suppress) the rate of interest. They had to have these powers to induce the right amount of spending needed to put people to work, to entice entrepreneurs with ‘teaser interest rates’ to go ahead with projects they would otherwise hesitate to undertake. Above all, politicians had to have the power to unbalance the budget in order to be able to help themselves to unlimited funds to spend on public works, in case private enterprise still failed to come through with the money.

However, Keynes completely ignored the constraints of finance, including the elementary fact that ex nihilo nihil fit (nothing comes from nothing). In particular, he ignored the fact that there is obstruction to suppressing the rate of interest (namely, the rising of the bond price beyond all bounds) and, likewise, there is obstruction to suppressing the bond price (namely, the rising of the rate of interest beyond all bounds). Thus, then, while Keynes was hell-bent on impounding the “unearned” interest income of the “parasitic” rentiers with his left hand, he would inadvertently grant unprecedented capital gains to them in the form of exorbitant bond price with his right. Continue reading

The Real Inflation Fear – US Food Prices Are Up 19% In 2014

Courtesy of Zerohedge:

We are sure the weather is to blame but what happens when pent-up demand (from a frosty east coast emerging from its hibernation) bumps up against a drought-stricken west coast unable to plant to meet that demand? The spot price (not futures speculation-driven) of US Foodstuffs is the best performing asset in 2014 – up a staggering 19%…

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h/t Bloomberg’s Chase van der Rhoer

Causes And Consequences Of Kondratiev’s Long-Wave Cycle

Courtesy of Prof. Antal E Fekete @ 24hgold.com:

Summary for the busy executive

Here we offer a new theory explaining the causes of Kondratiev’s long-wave economic cycle in terms of gold and the hoarding of commodities. Our description of the cycle itself is also novel and very different from the conventional. We shall be talking about a huge oscillating money-flow to-and-fro between the bond market and the commodity market. When the money-tide begins to flow at the commodity market and ebb at the bond market, we have the inflationary phase of rising prices and interest rates. When the tide is reversed and it begins to flow at the bond and ebb at the commodity market, we have the deflationary phase of falling prices and interest rates. In one word, Kondratiev’s long-wave cycle is the manifestation of the fluctuation in the propensity to hoard. The key question is this: what causes this fluctuation? Is it a natural phenomenon outside of man’s control or, perhaps, it is induced by wrong-headed government policy?

Economic cycles

Economists recognize four major cycles, or regular fluctuations, in the economy as follows:

(1) Kitchin’s short-wave cycle of average duration 3-5 years, discovered in
1930;

(2) Juglar’s cycle of average duration 7-11 years, discovered in 1862;

(3) Kuznets’ medium-wave cycle of average duration 15-25 years,
discovered in 1923;

(4) Kondratiev’s long-wave cycle of average duration 45-60 years,
discovered in 1922.

J. Schumpeter, who was born in Austria and came to the United States where he also served as President of the American Economic Society in the 1950’s, was an outstanding student of economic cycles. He believed that the various cycles are inter-dependent, in contrast with the view of others such as Forrester, who believed that the cycles act independently of one another. Schumpeter baptized three of the four cycles by naming them after their discoverers. The exception was Kuznets’ cycle which he did not recognize.

At any rate, Kuznets got a “consolation prize” for being passed over by Schumpeter, namely the Nobel Prize for economics. Moreover, he is the only Nobel-laureate among the four name-giving economists. Kuznets noticed that residential and industrial buildings have an average useful life of 21-23 years. His medium-wave cycle is about fluctuations caused by the amortization-cycle and the problem of replacing ageing buildings. It is interesting to note that all the students of cycles among the four whose name begins with a K were Russian. Continue reading