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10 Things That Would Be Different If The Federal Reserve Had Never Been Created

Posted on January 12, 2011 | 3 Comments

From EconomicCollapseBlog.com:

The vast majority of Americans, including many of those who believe that they are “educated” about the Federal Reserve, do not really understand how the Federal Reserve really makes money for the international banking elite.  Many of those opposed to the Federal Reserve will point to the record $80.9 billion in profits that the Federal Reserve made last year as evidence that they are robbing the American people blind.  But then those defending the Federal Reserve will point out that the Fed returned $78.4 billion to the U.S. Treasury.  As a result, the Fed only made a couple billion dollars last year.  Pretty harmless, eh?  Well, actually no.  You see, the money that the Federal Reserve directly makes is not the issue.  Rather, the “magic” of the Federal Reserve system is that it took the power of money creation away from the U.S. government and gave it to the bankers.  Now, the only way that the U.S. government can inject more money into the economy is by going into more debt.  But when new government debt is created, the amount of money to pay the interest on that debt is not also created.  In this way, it was intended by the international bankers that U.S. government debt would expand indefinitely and the U.S. money supply would also expand indefinitely.  In the process, the international bankers would become insanely wealthy by lending money to the U.S. government.

Every single year, hundreds of billions of dollars in profits are made lending money to the U.S. government.

But why in the world should the U.S. government be going into debt to anyone?

Why can’t the U.S. government just print more money whenever it wants?

Well, that is not the way our system works.  The U.S. government has given the power of money creation over to a consortium of international private bankers.

Not only is this unconstitutional, but it is also one of the greatest ripoffs in human history.

In 1922, Henry Ford wrote the following….

“The people must be helped to think naturally about money. They must be told what it is, and what makes it money, and what are the possible tricks of the present system which put nations and peoples under control of the few.”

It is important to try to understand how the international banking elite became so fabulously wealthy.  One of the primary ways that this was accomplished was by gaining control over the issuance of national currencies and by trapping large national governments in colossal debt spirals.

The U.S. national debt problem simply cannot be fixed under the current system.  U.S. government debt has been mathematically designed to expand forever.  It is a trap from which there is no escape.

Many liberals won’t listen because they don’t really care about ever paying off the debt, and most conservatives won’t listen because they are convinced we can solve the national debt problem if we just get a bunch of “good conservatives” into positions of power, but the truth is that we have such a horrific debt problem because it was designed to be this way from the beginning.

So how would America be different if we could go back to 1913 and keep the Federal Reserve Act from ever being passed?  Well, the following are 10 things that would be different if the Federal Reserve had never been created….

#1 If the U.S. government had been issuing debt-free money all this time, the U.S. government could conceivably have a national debt of zero dollars.  Instead, we currently have a national debt that is over 14 trillion dollars.

#2 If the U.S. government had been issuing debt-free money all this time, the U.S. government would likely not be spending one penny on interest payments.  Instead, the U.S. government spent over 413 billion dollars on interest on the national debt during fiscal 2010.  This is money that belonged to U.S. taxpayers that was transferred to the U.S. government which in turn was transferred to wealthy international bankers and other foreign governments.  It is being projected that the U.S. government will be paying 900 billion dollars just in interest on the national debt by the year 2019.

#3 If the U.S. government could issue debt-free money, there would not even have to be a debate about raising “the debt ceiling”, because such a debate would not even be necessary.

#4 If the U.S. government could issue debt-free money, it is conceivable that we would not even need the IRS.  You doubt this?  Well, the truth is that the United States did just fine for well over a hundred years without a national income tax.  But about the same time the Federal Reserve was created a national income tax was instituted as well.  The whole idea was that the wealth of the American people would be transferred to the U.S. government by force and then transferred into the hands of the ultra-wealthy in the form of interest payments.

#5 If the Federal Reserve did not exist, we would not be on the verge of national insolvency.  The Congressional Budget Office is projecting that U.S. government debt held by the public will reach a staggering 716 percent of GDP by the year 2080.  Remember when I used the term “debt spiral” earlier?  Well, this is what a debt spiral looks like….

#6 If the Federal Reserve did not exist, the big Wall Street banks would not have such an overwhelming advantage.  Most Americans simply have no idea that over the last several years the Federal Reserve has been giving gigantic piles of nearly interest-free money to the big Wall Street banks which they turned right around and started lending to the federal government at a much higher rate of return.  I don’t know about you, but if I was allowed to do that I could make a whole bunch of money very quickly.  In fact, it has come out that the Federal Reserve made over $9 trillion in overnight loans to major banks, large financial institutions and other “friends” during the financial crisis of 2008 and 2009.

#7 If the Federal Reserve did not exist, it is theoretically conceivable that we would have an economy with little to no inflation.  Of course that would greatly depend on the discipline of our government officials (which is not very great at this point), but the sad truth is that our current system is always going to produce inflation.  In fact, the Federal Reserve system was originally designed to be inflationary.  Just check out the inflation chart posted below.  The U.S. never had ongoing problems with inflation before the Fed was created, but now it is just wildly out of control….

#8 If the Federal Reserve had never been created, the U.S. dollar would not be a dying currency.  Since the Federal Reserve was created, the U.S. dollar has lost well over 95 percent of its purchasing power.  By constantly inflating the currency, it transfers financial power away from those already holding the wealth (the American people) to those that are able to create more currency and more government debt.  Back in 1913, the total U.S. national debt was just under 3 billion dollars.  Today, the U.S. government is spending approximately 6.85 million dollars per minute, and the U.S. national debt is increasing by over 4 billion dollars per day.

#9 If the Federal Reserve did not exist, we would not have an unelected, unaccountable “fourth branch of government” running around that has gotten completely and totally out of control.  Even some members of Congress are now openly complaining about how much power the Fed has.  For example, Ron Paul told MSNBC last year that he believes that the Federal Reserve is now more powerful than Congress…..

“The regulations should be on the Federal Reserve. We should have transparency of the Federal Reserve. They can create trillions of dollars to bail out their friends, and we don’t even have any transparency of this. They’re more powerful than the Congress.”

#10 If the Federal Reserve had never been created, the American people would be much more free.  We would not be enslaved to this horrific national debt.  Our politicians would not have to run around the globe begging people to lend us money.  Representatives that we directly elect would be the ones setting national monetary policy.  Our politicians would be much less under the influence of the international banking elite.  We would not be at the mercy of the financial bubbles that the Fed has constantly been creating.

There is a reason why so many of the most prominent politicians from the early years of the United States were so passionately against a central bank.  The following is a February 1834 quote by President Andrew Jackson about the evils of central banking….

I too have been a close observer of the doings of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank. You tell me that if I take the deposits from the Bank and annul its charter I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I have determined to rout you out and, by the Eternal, (bringing his fist down on the table) I will rout you out.

But we didn’t listen to men like Andrew Jackson.

We allowed the Federal Reserve to be created in 1913 and we have allowed it to develop into an absolute monstrosity over the past century.

Now we are drowning in debt and we are on the verge of national bankruptcy.

Will the American people wake up before it is too late?

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Butler Shaffer on the murderous state

Posted on January 11, 2011 | Leave a comment

Butler Shaffer comments on “the pot calling the kettle black”.

Via LewRockwell.com:

When Will They Figure It Out?
by Butler Shaffer

The response of political figures and members of the mainstream media to the killing and wounding of a number of people in Tucson, was not surprising. Had the victims been “ordinary” people alone, the event would have been quickly noted as but another symptom of a conflict-ridden society. There would have been no daily hospital press conferences to update their conditions. But this shooting resulted in the killing of a federal judge, and the grave wounding of a member of congress: now we’re talking “serious” offenses!

Shortly after the shootings occurred, local and national politicians issued press releases that focused on government officials being the targets of such violence. To the politically-minded, the “ordinaries” (or “mundanes”) who were killed or wounded were what they have come to regard as “collateral damage.”

In coming days, the politically-correct chatter will consist of an endless string of non sequiturs: private gun ownership, Tea Party politics, angry rhetoric, the Internet, people who “hate” the government, television violence, et al. Even Sarah Palin has come in for criticism! Like the magician who uses brightly-colored cloths and quick movements in his act, such explanations are designed to distract our attention. As the Wizard of Oz angrily reacted to Toto’s knocking over the screen that revealed his systematic bamboozlement, “pay no attention to that man behind the screen.”

The reality to which increasing numbers of people are becoming aware, is that politics is a violent and corrupt racket that functions on generating fears among those to be ruled. Politicians and other government officials are attracted to political careers not because they want to serve others, but because they have their own visions of what would be “good” for such others, and desire the power to enforce by violence – which is the essence of every government – their expectations. Such people easily find – usually within business organizations and labor unions – people who, unable to prosper in a free market grounded in voluntary transactions, are eager to resort to state violence. “Invisible hands” must be replaced by the “iron fist.”

Every piece of legislation enacted by congress, every order issued by a court, every action undertaken by government officials – whether at a state, local, or national level – has behind it the power to enforce such edicts or acts by the most violent methods to which such officials deem it necessary to resort. From the cop on the corner, to SWAT teams, to men and women who torture others, to assassins, to those who conduct capital punishment, to military personnel armed with the deadliest of weapons, the state – supported by the special interests who have no qualms about employing such methods to further their interests – is nothing if not the institutionalization of violence.

Those who choose to repress an awareness of the vicious, violent, and dehumanized nature of the state will doubtless succumb to the self-serving claims of politicians who fashion themselves noble “public servants” who are victimized by the very violence they have made the central theme for their careers. Political systems – from the local Weed Control Commission to the Pentagon – are defined by their monopoly on the use of violence. Those who use lawful coercion to enforce their wills on others, should be the last heard to lament the “environment of violence” afoot in the land. They have been active participants in the continuing expansion of such life-destroying powers; they insist upon others respecting such authority for their own sense of identity and well-being.

Whenever I hear politicians bemoan such violence, I am reminded of a scene from one of the Godfather films. As Michael Corleone is in church participating in his grandson’s christening, the priest asks him if he rejects violence, to which Corleone answers “yes,” even as his henchmen are going about murdering his adversaries. How politicians can, on any moral or intellectually honest grounds, condemn the violence that they daily legislate and fund, is beyond me. When John McCain angrily weighed in on the Tuscon shootings, I was reminded of his 2008 presidential campaign song-and-dance that went “bomb, bomb, bomb Iran.”

Those who, like this gunman, resort to violence in response to whatever grievances they hold, have reduced themselves to self-destructive acts of utter desperation. I have always rejected the use of violence – whether against the state or other individuals – not so much because of what it would do to them, but what it would do to me. I oppose political systems because I believe that a free, productive, and peaceful society can arise only through the voluntary acts of cooperative individuals; that efforts to impose order by violent means will always work to the destruction of society, as is now occurring. Were I to sanction violence as a solution to the problems our thinking has created, would be to admit that I have been wrong in my assumptions. As I have told a few people who work within political systems, “if I thought that violence could be used to accomplish my ends, I’d join you guys!”

The men and women who not only profit from the political racket, but whose identities are so entwined with the state as to be unable to imagine a life without an attachment to coercive power, are unlikely to make any intelligent changes in their lives. A few might begin to figure out that the “public” – for whom they like to pretend they serve – has a growing resentment of them. For the politically minded, the expression of such anger is seen not as a warning that the state has reached too far, but as another “problem” to be dealt with by a further extension of state power. A few members of the class of “ordinaries” may become so frustrated by all of this that they will see violent reaction as their only option. But for the rest of us – weary of the burdens of obedience, the costs of our being looted, and the deadly violence to which our lives are increasingly exposed – peaceful, non-destructive alternatives must be found. We would be better served not by physically attacking the state or its sociopathic operatives, but in walking away from them. Our survival as free men and women requires a secession of our minds from the chains of violence.

January 11, 2011

Butler Shaffer [send him e-mail] teaches at the Southwestern University School of Law. He is the author of the newly-released In Restraint of Trade: The Business Campaign Against Competition, 1918–1938 and of Calculated Chaos: Institutional Threats to Peace and Human Survival. His latest book is Boundaries of Order.

Copyright © 2011 by LewRockwell.com. Permission to reprint in whole or in part is gladly granted, provided full credit is given.

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Hyperinflation will drive gold to unthinkable heights

Posted on December 31, 2010 | Leave a comment

Hyperinflation will drive gold to unthinkable heights

By Egon von Greyerz , December 31, 2010 @ 1:31 pm In Commentary,English

HYPERINFLATION WILL DRIVE GOLD TO UNTHINKABLE HEIGHTS

by Egon von Greyerz

We now live in a world where governments print worthless pieces of paper to buy other worthless pieces of paper that combined with worthless derivatives, finance assets whose values are totally dependent on all these worthless debt instruments.  Thus most of these assets are also worth-less.

So the world financial system is a house of cards where each instrument’s false value is artificially supported by another instrument’s false value. The fuse of the world financial market time bomb has been lit.  There is no longer a question of IF it will happen but only WHEN and HOW.  The world lives in blissful ignorance of this. Stockmarkets remain strong and investors worldwide have piled into government bonds in a perceived flight to safety. Due to a century of money creation (and in particular since the 1970s) by governments and by the fractal banking system, investors believe that stocks, bonds and property can only go up. Understanding risk and sound investment principles has not been necessary in these casino markets with guaranteed payouts for anyone who plays the game. Maximum leverage and derivatives have in the last 10-15 years driven markets to unfathomable risk levels, with massive rewards for the participants.

In the meantime central banks are cranking up the printing presses but as Bernanke recently said quantitative easing is an “inappropriate” description of what should be called “securities purchases”!  Who is he kidding? What the Fed is buying has nothing to do with “securities”. There is no security whatsoever in the rubbish the Fed is purchasing. They are buying worthless pieces of paper with worthless pieces of paper. This is the Ponzi scheme of all Ponzi schemes.

Let us be very clear, this financial Shangri-La is now coming to an end. The financial system is broke, many western sovereign states are bankrupt and governments will continue to apply the only remedy they know which is issuing debt that will never ever be repaid with normal money.

So why does the world still believe that the financial system is sound?

  • Firstly, because this is what totally clueless governments are telling everyone and this is what investors want to hear.
  • Secondly, whether governments apply austerity like in parts of Europe or money printing as in the US, investors want to  believe that any action by government is good, however inept.
  • Thirdly, market participants are in a state of false security due to shortsightedness and limited understanding of history.
  • Fourthly, as long as they can benefit from inflated and false asset values, the market participants will continue to manipulate markets.
  • Fifthly, there has been a very skilful campaign by the US to divert the attention from their bankrupt economy and banks `to small European countries like Greece, Ireland or Portugal. These nations, albeit in real trouble, have problems which are miniscule compared to the combined difficulties of the US Federal Government, states, cities and municipalities.

Euro zone members can’t print money. Many EU countries are downgraded by US rating agencies which don’t dare to touch the US rating. The AAA rating of the US is an absolute sham and totally politically motivated. True to form, rating agencies will only downgrade debt once it has become worthless but never before.

Hyperinflation Watch

The result of massive money printing is a collapsing currency, leading to escalating prices and eventually hyperinflation. This is in simple terms how every hyperinflationary period in history has happened. If in addition, there are world shortages of food, energy and other commodities, this will accelerate the process.

There are currently a number of indicators all pointing to escalating money printing and an imminent start of a hyperinflationary era. Here are some of them:

  1. Fiscal Gap widening at alarming rates in many major economies.
  2. Commodity prices at all-time highs.
  3. Long term interest rates rising.
  4. Most Currencies falling.
  5. Precious Metals at all-time highs against most currencies.

Fiscal Gap

Tax receipts are collapsing and government expenditure soaring in many major economies including virtually all southern European countries as well as in the UK. James Turk has produced on his fgmr.com site two excellent graphs for the USA and the UK showing the extreme severity of these two countries’ deficits.

US & UK ON THEIR WAY TO BANKRUPTCY

The USA and the UK are the favourites to reach hyperinflation first amongst major economies. Both these countries will experience major problems in 2011.  Also many other nations have unsustainable debt levels which will never be repaid with normal money.

GOVERNMENT DEBT WILL NEVER BE REPAID

Commodity Prices
Commodity prices have increased 26% in the last 12 months and 77% in the last 24 months based on the Continuous Commodity Index (CCI). So whilst most economies publish inflation rates of 1-3%, the real cost of food and energy is surging. The US government, which doesn’t eat or use energy, recently published the adjusted 12 months’ Consumer Price Index (ex food and energy) of 0.8% per annum. Whilst most people are struggling with a massive increase in their cost of living, the US government is continuously adjusting and manipulating the published figures.  There are lies damn lies and US government statistics. Who are they fooling!Long Term Interest Rates

In spite of US government debt being totally worthless, investors have bought more than ever, with virtually no return, in a world drowning in sovereign debt paper. We have for some time stated that the US bond market is one of the biggest financial bubbles ever. As we forecast back then, the market turned down (rates up) in January 2009.  A 14 month correction ended in August 2010. Since then both the 10 year and 30 year US Treasury bonds have moved up one full per cent. So investors are finally waking up to the enormous risks in the financial system by selling government debt. We expect both short and long interest to surge in 2011 in many countries and to reach well into double digits in the next few years.

INTEREST RATES WILL RISE STRONGLY

In spite of interest rates at minimal levels, both sovereign states and individuals have major problems servicing current debt. With interest rates likely to rise to at least 12-15% and probably higher, no one will be able to service debt with “normal money”. Add to that the fact that government debt will surge in most countries. The US debt is currently $ 14 trillion. It is likely to rise to at least $20 trillion in the next few years and probably a lot higher. The interest cost for the US government at that stage is likely to be at least double the tax revenue. One would assume that the US government is well aware of what their ruinous actions are leading to. But in spite of this, they continue to increase the deficit by reducing fiscal revenues and increasing spending. What planet are they living on!  What is absolutely self-evident is that they will not clear up their own mess, as the present government will be a one term wonder!

Currencies Declining

Since 1971, the value of the US dollar (paper money) has gone down 97.5% against real money (gold). Since Nixon abolished gold backing of the US dollar in 1971, both the dollar and most other currencies have been totally destroyed by reckless government. Nixon should not have been impeached for Watergate. Instead he should have been prosecuted and jailed for destroying the world’s currency system. Concurrently, banking developed into a fractal system whereby banks could lend massive multiples of their deposits and capital. All of this has served to drive up asset prices to totally unsustainable levels.

All currencies are declining against gold but some faster than others. The US dollar for example is down 78% against the Swiss Francs since 1972. During the same period the pound has declined a massive 85% against the Swiss Franc. Both the dollar and the pound are now at all-time lows against the Swiss currency. But the Swissy is only strong relative to weak paper currencies because against real money/gold the Swiss Franc has declined 87% since 1972.

DOLLAR DECLINE WILL ACCELERATE IN 2011

As a consequence of accelerated money printing, all paper currencies will fall precipitously against gold in the next few years. Therefore all paper money should be avoided and especially the Dollar, the Pound and the Euro.

Precious Metals to reach unthinkable heights

Gold has gone up 40 times against the Dollar in the last 40 years and almost 6 times in the last 11 years. Very few investors have participated in this rise since the 1999 low at $ 250. Less than 1% of world financial assets are invested in gold and gold stocks. Between 1920 and 1980 circa 25% of financial assets were invested in gold and gold stocks.

THERE WILL NOT BE ENOUGH GOLD

The major rise in gold in the last 11 years has been a stealth move with very few investors participating. The dilemma is that there is not enough gold to satisfy the coming increase in demand. We have in previous articles forecasted the gold price to reach anywhere between $ 6,000 and $ 10,000 in the next few years – see “Gold entering a virtuous circle”. As we explained at the time, these are totally realistic targets without the effect of hyperinflation.

GOLD WILL SURGE IN 2011

Bearing in mind that we are likely to see hyperinflation in the US, the UK and many European countries, the $6-10,000 target for gold is much too low. The dilemma is that it is absolutely impossible to predict how much money will be printed by governments. In the Weimar republic gold reached DM 100 trillion. But it is really irrelevant what level gold and other precious metals will reach in hyperinflationary money.
What is much more important to understand is that physical gold (and silver) will protect investors against losing virtually 100% of the purchasing power of their money. Whatever real capital appreciation gold will have in the next few years is of less importance. But what is vital, is that physical gold (stored outside the banking system) is the ultimate form of wealth protection both against a deflationary collapse and a hyperinflationary destruction of paper money.

Throughout history gold has protected investors against various calamities but this time, holding physical gold will be absolutely critical to financial survival.

Matterhorn Asset Management AG
Bahnhofstrasse 28a
CH 8001 ZURICH
Switzerland
+41 44 213 62 45 – Tel
+41 43 456 97 11 – Fax
matterhornassetmanagement.com

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The Purchasing Power of the Dollar Since 1914

Posted on December 19, 2010 | 3 Comments

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First National Bank of Me

Posted on December 15, 2010 | Leave a comment

Safe sales soar as worried bank customers keep money at home
By Michael Brennan Deputy Political Editor
Tuesday December 14 2010

SAFE sales are soaring as more and more worried bank customers stash their cash at home.

AIB said last month that the amount of money on deposit at the bank has fallen by €13bn since the start of the year — although it blamed most of the reduction on withdrawals by companies and financial institutions.

Another reason for the increased use of home security safes is a growing fear of burglaries because of the recession.

The AllSafes.ie company, one of the largest suppliers in the country, said its sales of home safes had increased by 80pc over the past three months compared with the same period last year.

Its founder, Neil Donnelly, said that most customers did not reveal their purpose for buying one –except to say they wanted it to store cash or jewellery. But some of them had specifically cited their fears about the banks while buying a home safe.

More…

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Austrian Economics in Fortune Magazine

Posted on December 14, 2010 | 1 Comment

From Fortune Magazine:

Will the Fed be able to survive Ron Paul?

December 14, 2010 11:48 am

The erstwhile presidential candidate and soon to be head of Congressional oversight of the Federal Reserve talks gold, jobs and the presidency with Fortune.

If there’s anything to be said about U.S. Congressman Ron Paul, he sure is persistent. And lately, that inner flame that’s helped him gain the reputation for sometimes being the “G.O.P. loner” appears to be paying off.

The soft-spoken obstetrician has represented the 14th District of Texas on and off since 1977, spending much of his political career arguing that the Federal Reserve is evil for America and far too secretive. He doesn’t see why there’s so much faith in paper money, including the U.S. dollar. If Paul had it his way, there’d be a return to the gold standard. He even laid out his case in his book, End the Fed.

What’s more, Paul is a big believer in Austrian economic thought – the idea that government has no role in regulating the economy. And for years, he’s supported keeping Congress from any action not explicitly authorized in the Constitution, or that he sees as wasteful spending, including – as a recent New York Times article highlighted – on issues as ceremonial as honoring Mother Teresa with the Congressional Gold Medal.

No doubt Paul’s views fall outside the mainstream. At times, his thoughts are arguably off-putting and easy to brush off as extremist political rhetoric. Even Libertarians don’t always see eye-to-eye with the Texas politico.

Lately though Paul’s views are garnering the attention that he and supporters have long been waiting for. Earlier this month, Paul was picked to head the House subcommittee on domestic monetary policy. That means he will help oversee the body he’s opposed to — the Federal Reserve — as well as currency and the dollar’s value.

If anything, it appears the timing somehow worked out for beliefs that Paul has held for decades. The congressman’s backing has grown considerably with the rise of the Tea Party, whose frustrations with government bailouts of big banks and corporations following the financial crisis seem to fall in line with Paul’s views.

I caught up with Paul this week to talk about his new role, the Fed, how the world could possibly return to the gold standard and the 2012 presidential election. The following is a lightly edited transcript of our talk.

What are the Federal Reserve’s shortcomings?

They’re doing a job that’s impossible to do. So it’s not a single person’s fault. It’s not just former Chairman Alan Greenspan or just current Chairman Ben Bernanke. It’s the assumption that anybody knows what interest rates should be, or the assumption that they know what money supply should be, or the assumption that they can have stable prices or the assumption that they could deal with unemployment.

Do you think we’re better off without a Central Bank?

Sure, it’s better off that we don’t have depressions and inflations and financial chaos and the problems that we face. We of course wouldn’t have this backdoor financing of big government fighting wars overseas and getting people to depend on the welfare state. None of that can happen without a Federal Reserve.

What do you think of the Fed’s latest move to start pumping $600 billion into the economy in hopes to boost the recovery through huge purchases of long-term bonds?

I think it’s terrible. They got us into trouble because there was too much quantitative easing. I mean it was a continuous inflation and artificially low interest rates that Bernanke gave us – he gave us all the bubbles so you can’t solve all the problems of quantitative easing with more of it. So we had one, we’re on number two. But actually we had it under Bernanke. They didn’t call it that but it was essentially the same thing – massive monetary inflation with interest rates way lower than the market.

So what do you think the economy would look like without the Fed?

We’d probably have a much healthier economy – it wouldn’t be so fragile. Nobody would be worrying about currency exchange rates and people wouldn’t be in and out of currencies and spending all their energy doing what they’re doing. Also, we wouldn’t have a situation where the Fed creates money and hands it out for free and let’s the banks make billions of dollars. And the poor people who are retired and have CDs get nothing and because of the downturn in the cycle, which the Fed creates, people lose their jobs and lose their houses. You wouldn’t have any of that.

This was all very clearly predicted by Austrian economic theory and it’s come about and it’s very disturbing to the Fed because they’re going to have to recognize that their theories are completely wrong and they’re not about to do that gracefully.

As chairman of the House subcommittee on domestic monetary policy, which among other things oversees the Federal Reserve, you’ve mentioned you will renew your push for a full audit of the Fed. What do you hope this will do?

It would tell us who the beneficiaries are.  They’ve released recently some information but they really didn’t tell us exactly about everything and where the money has gone and what kind of collateral they have. The people in this country deserve to know who are the beneficiaries and their budget and what they hand out is bigger than the Congress, which is pretty amazing. They’re off budget. They’re not responsible to anybody.

Who do you think the beneficiaries are?

We don’t know exactly but obviously banks and big corporations and foreign central banks and foreign governments.

How do you think these corporations have benefited from the Fed?

They receive free money. I mean they tide them over. The free market would have allowed General Motors (GM) to go bankrupt and the various companies that got the benefits. The banks would have had to reassess and the bad debt would have been liquidated rather than have all the derivatives and the illiquid assets being dumped on the taxpayer, which is what the Fed holds. Instead of the people who made all the money in the boom times suffering they got bailed out and the people who got stuck with it will be the American taxpayer.

You’ve long advocated returning the world to the gold standard. Where do you see the US dollar going?

The world will eventually give up on the dollar. That’s why the markets are so shaky – they don’t know what to do. Gold prices are up and commodity prices are starting up. And most people realize that the world will not be suckers forever and just take our dollars at will. I mean if we can create trillions of dollars and expect to buy goods and services someday they’re going to put their foot down and I think we’re just starting to see the signs of that happening.

The euro conveys no more confidence than the dollar. All the currencies are paper money. So the only way you can measure the value of the currency is by something that has been used for 6,000 years and that is in its relationship to gold. And that of course shows that all the currencies are weakening, which means in time all the crisis will go up. So the measurement has to be on what the money purchases.

I think what’s going to happen is what’s happened in the last 10 years. People will start using gold as money, shift some of their paper assets into gold. Purchasing power of gold goes up and it will go up in all currencies, even though there may be minor fluctuations where the yen may do better than the euro – that sort of thing.

Do you really think America could adopt the gold standard? How can this practically happen?

Not only the faith in the gold standard, it’s the lack in confidence in paper and insanity of creating money out of thin air. Throughout history, we’ve seen that money ought to be a real asset whether it’s silver or whether it’s gold depending on the situation. People always want something of real value.

Look at how many people have money in exchange-traded funds for gold. Billions and billions of dollars. I’ve always considered myself being on the gold standard. I studied this in the 1960s and the predictions made that Bretton Woods couldn’t work. When it failed in 1971 it really caught my attention. Back then you can buy gold at $35 an ounce. I put my reserves in gold and it hasn’t hurt at all. People who would have had at the same time parked a bunch of paper dollars back then they would have lost about 80% of their purchasing power where the purchasing power of gold has skyrocketed.

But then some would argue that investment in gold is also a bubble. What would you say about that?

They can believe it, but I think it’s the bonds that are at a bubble and the dollar is at a bubble. But no, I don’t consider that a bubble at all. There will be corrections – you can have gold go down $200 or $300 and it wouldn’t prove a thing.

Although I wrote the book End the Fed, I don’t say that you should end the Fed in one day. All I say is allow the constitution to be used – you can use gold and silver as legal tender, that’s what the law still says. We have multiple currencies being used around the world all the time. There’s no reason why we can’t have a couple of currencies circulating here in this country. So we should be allowed to have gold and silver as legal tender to pay our debt.

How do you think the economy would improve if the gold standard were adopted?

The transition is one thing, but if you were on a gold standard the economy would be many, many fold stronger and you wouldn’t have the business cycle. You wouldn’t have to go through booms and busts. Prices would be relatively stable, the purchasing power of your money would be stable, balance of payments would be adjusted automatically.

But gold over the century has increased in supply by 2% to 3%. If more people are demanding gold and there doesn’t seem to be enough physical gold, it pushes the purchasing power of gold up. Then the incentive grows for the people to mine gold. So it has worked many many times over hundreds if not thousands of years of history.

Do you want to end the Fed?

Well, I don’t expect to. The Fed’s going to end itself when they destroy the system. So yes I would end the Fed but I would do it gradually and have a transition. I would let people voluntarily opt out and not be forced to use depreciating money. Just think about how terrible it is that people make 1% or less on a certificate of deposit and banks get money for free and then they buy Treasury bills for 3% or 4% making billions of dollars. It’s just not fair and people are waking up to this.

You’re a big believer in Austrian economics, which holds that government does not have a role in regulating the economy. Some people would argue it was the lack of government regulations that contributed to the financial crisis. What would you say to something like that?

I think it was too much regulation. What they did was create the imbalance by keeping artificially low interest rates, which causes excessive debt and mal investments. For instance, interest rates were low, builders built too many houses, prices of houses seemed to go up, seemed like it would last forever, congress comes in and they pass a law, affirmative action that you must give loans to everybody even people who don’t qualify.

Will you run for president in 2012?

Sure, there’s always a chance. Probably depends on my mood come next January or February. I have not made up my mind. I have a lot of people supporters who are very anxious for me to do it. Right now I’m totally undecided.

It seems a lot of presidential candidates will neutralize their positions on certain touchy topics.Would you ever characterize yourself as extreme?

No, I think what we have is extreme. It’s out of wack. I mean I want to balance the budget – I don’t know why that would be extreme. I want limited government, I wanted personal liberty, I want to bring our troops home.

But some would consider ending the Fed is a bit extreme, don’t you think?

No, I think printing money is extreme and crazy. I think the obscenity is allowing the Federal Reserve to print $3.3 trillion and we don’t even know where it went. That to me is what’s so extreme. And that’s what the American people are waking up to. Government is extremely out of control. That is what I think everybody agrees on in the Tea Party movement.

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John Williams: Hyperinflations will start in the next couple of months

Posted on December 13, 2010 | 1 Comment

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A Return to the Gold Standard? by Richard M. Ebeling

Posted on November 9, 2010 | 1 Comment

From Richard Ebeling:

A Return to the Gold Standard? by Richard M. Ebeling

Over the weekend of November 6-7, 2010, World Bank president, Robert Zoellick , proposed in a column written for the Financial Times that the global economy once more be linked to gold as an anchor to help maintain currency stability and reduce inflationary expectations in international markets.

A few days earlier, on November 1, Financial Times columnist, Martin Wolf, had written a piece precisely asking, “Could the World Go Back to a the Gold Standard?” Wolf pointed out, “It is not hard to understand the attractions of a gold standard. Money is a social convention. The advantage of a link to gold (or some other commodity) is that the value of money would apparently be free from manipulation by the government. The aim, then, would be to ‘de-politicize’ money.”

But Wolf raised a number of objections to reestablishing a gold standard, including, (a) the fact that it would require a significant revision upwards in the official price of gold in terms of dollars, which seemed unfair to him since it would give an unearned windfall to current holders of gold; (b) it would impose additional transactions costs in international dealings since some trade imbalances would have to be settled through transfers of gold; and (c) it might inhibit necessary flexibility in the banking and financial system for the monetary authority to counteract recessionary forces that may lead to falling production and rising unemployment.

As Martin Wolf correctly observed, historically a primary advantage of a gold standard was that it removed the hand of the government from the handle of the monetary printing press. Over and over again, governments have used their power or influence over the monetary system to either debase coins or print up paper money to cover its expenditures in excess of the taxes collected from the citizenry.

But in spite of Wolf’s concerns, it can be argued the costs of a gold standard are far less that the costs that have been imposed on society from a century of gross mismanagement of the monetary system by governments around the world. Since 1914, when the Federal Reserve System came into operation as America’s central bank, and the beginning of the First World War that same year, the world has experienced severe inflations, including a number of hyperinflations, and the rollercoaster of several booms and recessions, including the Great Depression of the 1930s and the current global economic downturn.

Placing the fate of the world’s monetary system in the hands of monetary central planners, who have had all the discretion imaginable through their control of paper money instead of gold, has not secured an inflation- or recession-free economic environment.

In the mid-1980s, leading free market economist, Milton Friedman, who for decades had advocated a paper money monetary system restricted to increasing the money supply within a narrow “rule” of three percent a year, admitted that he had been all wrong in believing that such a system could ever work. He said that he, now, realized that it would never be in the interest of governments or their central banks to resist the temptation of printing money to cover government spending, serve special interest groups, and advance other short-run political purposes. He concluded that, in retrospect, the costs on society since 1914 from inflations and the boom and bust cycle caused by central bank mismanagement were far greater than the costs that would have been associated with a real, politically-free gold standard from mining, minting and storing gold, and facilitating transactions through use of the yellow metal during the 20th century.[i]

The fact is, government-caused inflations, and fears of inflation, have already delivered a windfall gain to all those astute and entrepreneurial enough to investment in gold or gold-mining companies over the years. They have protected their wealth and assets from dollar depreciation and sometimes earned handsome returns from their holding of gold. But it was government monetary mismanagement that created this “opportunity.”

If the Federal Reserve were to stop increasing the money supply, and if a new legal redemption rate between gold and dollars were to be established on the basis of the estimated total number of dollars in circulation in the world divided by the amount of gold held by the U.S. government, any financial “gains” made by the holders of gold would be all due to the avalanche of dollars that have been printed up by the Federal Reserve over the decades. Gold’s dollar appreciate in value has been due to the dollar’s depreciation caused by unlimited monetary expansion.

Finally, Wolf’s concern that a real gold standard would tie the hands of governments and central banks from having the discretionary authority to manipulate the monetary system should be considered a “plus,” not a minus. Only the most doctrinaire Keynesian can deny or fail to see that past recessions and the current economic downturn were all preceded by unsustainable booms resulting from monetary expansions and interest rate manipulations that threw savings and investment out of balance, artificially stimulated misplaced construction projects, and misdirected labor into employments that became unprofitable to maintain once the inevitable financial and investment bubbles burst.[ii]

Monetary-induced booms are the “cause” that precedes the inescapable bust that follows. Eliminate or radically reduce the possibility for central banks and governments from artificially creating such booms, and the likelihood of having to go through economy-wide downturns will have been dramatically reduced or done away with.

At one point in his article, Martin Wolf mentions that some have called for an even more radical monetary reform than even a government-managed new gold standard: the abolition of central banking and a full separation of money from the state, through a monetary system based on competitive, private free banking.

Wolf sets that alternative aside as well, thinking that the world is certainly not ready for such a change, even if it was workable. But, in fact, this is the ultimate and most reasonable of all the alternatives to the existing system of monetary central planning through the government institution of central banks.

Monetary central planning has worked no better than any other form of central planning over the last one hundred years. The world’s central bankers – just like the central planners in the old Soviet Union – just do not have the knowledge, wisdom and ability to successful manage the monetary system of a market economy.

How can central bankers know what market rates of interest should be, better than the competitive interaction of borrowers and lenders for the use of scarce savings for various investment purposes? How can central bankers know what the quantity and types of money and credit should be in the market, better than those who wish to use various commodities for money purposes, and interact for various forms of lending and borrowing?

Money emerged out of market interactions, through people’s search for ways to better facilitate their transactions. Governments did not create money; but governments have been highly creative in devising ways to monopolize its control over money, and manipulate its quantity and value for political purposes.

Banking and other forms of financial intermediation do not require government creation or oversight to function effectively to bring lenders and borrowers together for mutual advantageous exchanges. But government regulations and controls imposed on financial markets can generate anti-competitive practices; can result in distorted and misdirected uses of savings and capital; and can enable the wasteful siphoning off of a part of society’s scarce resources to fund the insatiable appetite of government for spending other people’s money.

Luckily, over the last twenty years, a number of free market economists have successfully demonstrated how a private, competitive free banking system can operate, and perform far better a variety of tasks and activities for which it has been presumed a central bank was needed.[iii]

The time has come to rethink the basic premises of the existing monetary order. And this needs to begin with thinking “outside the box” of the predominant macroeconomic policy framework.

The wisdom and insights of the classical economists must be given a new hearing, in terms of their argument in support of a market-based commodity monetary system, such as a gold standard.

Even more radically, we need to rethink the rationale for central banking all together. We need, in the phrase of Austrian economist, F. A. Hayek, to consider the “denationalization of money,” and a monetary order based on private, competitive free banking.

The return to a market-based money such as gold, therefore, is both possible and desirable. And it would be most effective in acting as a barrier against any further government abuses of the monetary system, if such a return to gold was introduced through the freeing of banking and financial markets from the heavy-hand of government, as well.

The next phase of our post-communist world may very well require the end to monetary socialism, which is what central banking really represents.

[i] Milton Friedman, “Economists and Economic Policy,” Economic Inquiry (Jan. 1986), pp. 1-10; “The Resource Cost of Irredeemable Paper Money,” Journal of Political Economy (June 1986), pp. 642-64-7; and, “Has Government Any Role in Money?” Journal of Monetary Economics, Vol. 17 (1986) pp. 37-62.

[ii] See, Richard M. Ebeling, “Market Interest Rates Need to Tell the Truth, or Why Federal Reserve Policy Tells Lies,” in Richard M. Ebeling, Timothy Nash, and Keith A. Pretty, eds., In Defense of Capitalism (Midland, MI: Northwood University Press, 2010) pp. 57-60; and Richard M. Ebeling, Political Economy, Public Policy, and Monetary Economics: Ludwig von Mises and the Austrian Tradition (London/New York: Routledge, 2010), Ch. 7: “The Austrian Economists and the Keynesian Revolution: The Great Depression and the Economics of the Short-Run,” pp. 203-272.

[iii] Kevin Dowd, Private Money: The Path to Monetary Stability (London: Institute of Economic Affairs, 1988); and, The State and the Monetary System (New York: St. Martin’s Press, 1989); George Selgin, Theory of Free Banking: Money Supply Under Competitive Note Issue (Totowa, NJ: Rowman & Littlefield, 1988); and, Banking Deregulation and Monetary Order (New York: Routledge, 1993); Lawrence H. White, Free Banking in Great Britain: Theory, Experience, and Debate, 1800-1845 (Cambridge: Cambridge University Press, 1984); Competition and Currency: Essays on Free Banking and Money (New York: New York University Press, 1989); and, Theory of Monetary Institutions (New York: Wiley-Blackwell, 1999).

Posted by Northwood University at 3:53 PM

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Gold Will Outlive Dollar Once Slaughter Comes: John Hathaway

Posted on October 30, 2010 | 1 Comment

From Bloomberg:

Gold Will Outlive Dollar Once Slaughter Comes

By John Hathaway – Oct 28, 2010
Bloomberg Opinion

The world’s monetary system is in the process of melting down. We have entered the endgame for the dollar as the dominant reserve currency, but most investors and policy makers are unaware of the implications.

The only questions are how long the denouement of the dollar reserve system will last, and how much more damage will be inflicted by new rounds of quantitative easing or more radical monetary measures to prop up the system.

Whether prolonged or sudden, the transition to a stable monetary system will become possible only when the shortcomings of the status quo become unbearable. Such a transition is, by definition, nonlinear. So central-bank soothsaying based on the extrapolation of historical data and the repetition of conventional wisdom offers no guidance on what lies ahead.

It’s amazing that there is no intelligent discourse among policy leaders on the subject of monetary rot and its implications for the future economic and political landscape. Until there is fundamental monetary reform on an international scale, most economic forecasts aren’t worth the paper on which they are written.

Telltale signs of future trouble aren’t hard to spot. Only a few months ago, Federal Reserve Chairman Ben Bernanke and a chorus of other high-ranking Fed officials were talking about exit strategies from the U.S. central bank’s bloated balance sheet and the financial system’s unprecedented excess liquidity. Now, those same officials are talking about pumping more money into the system to stimulate growth.

Risky Targets

And they’re not alone: Six months ago, the chief economist of the International Monetary Fund, Olivier Blanchard, suggested that raising inflation targets to 4 percent from 2 percent wouldn’t be too risky.

This sort of talk must grate on the nerves of our trading partners, China, India, Russia and others, who have accumulated pyramids of non-yielding Treasury debt. No haven there. Return- free risk may be a better way to put it. And bickering among central bankers over currency manipulation and rising trade tensions doesn’t exactly reinforce one’s confidence in a scenario of sustained economic growth and a return to prosperity.

The prospects for an orderly unwinding of the extreme posture of global monetary policy are zero. Bernanke, Jean- Claude Trichet and Mervyn King, his counterparts in Europe and the U.K. respectively, are huddling en masse upon the most precarious perch in the history of monetary affairs. These alleged guardians of monetary stability, in their attempts to shore up the system, have simply created the incinerator for paper money. We are past the point of no return. Quantitative easing may well become a way of life.

No Freak Occurrence

The consensus investment view seems to be that the credit crisis of 2008 was a freak occurrence, unlikely to repeat. That is wishful thinking. Monetary policy has painted itself into a corner. Based on our present course, there will be more bubbles and more meltdowns.

Financial markets and institutions sense trouble, as reflected in the flight to supposedly safe assets such as Treasuries and corporate-debt instruments with paltry yields, as well as the reluctance to lend by commercial banks. We are stuck in an epic liquidity trap. The irony is, if global central banks succeed in creating inflation, the value of these safe assets will be destroyed. It is a slaughter waiting to happen.

In the pedantic mentality of central bankers, their playbook creates just the right amount of inflation. As inflation accelerates, consumers will spend to get rid of their dollars of diminishing value and spur the economy. Once consumers start spending, it will be time to raise interest rates because a solid foundation for prosperity will have been established, they say.

Slender Thread

But whatever the playbook promises, the capacity of financial markets to overshoot can’t be overestimated. The belief among policy makers and financial markets in the possibility of this sort of fine-tuning is preposterous, but it is the slender thread on which remaining investment and business confidence rests.

The breakdown of the monetary system will be chaotic. When inflation commences, it will be highly disruptive. The damage to fixed-income assets will seem instantaneous. Foreign-exchange markets will become dysfunctional. The economy will become even more fragile and unpredictable.

Gold is an imperfect, but comparatively reliable, market gauge for the extent of current and future monetary destruction. The recent acceleration in the dollar price of the metal to $1,381, a record high in nominal terms, coincided with talk of a new round of quantitative easing and highly visible discord among major nations on trade and currency-valuation issues.

Naysayers’ Bubble

Naysayers point to gold’s price and see a bubble, without understanding that the only acceleration that is taking place is in the rate of decline of paper currency. The Fed is organizing an attack on the dollar’s value, believing that this is the most expedient way to defuse deflationary market forces. The man in the street is unaware, a perfect setup. Inflation can only be successful when the public doesn’t see it coming.

The sudden torrent of commentary on gold isn’t the sign of a bubble. Anti-gold pundits provide a great service to those who grasp this historical moment: They facilitate the advantageous positioning of the one asset most likely to be left standing when the dust settles.

(John Hathaway is a managing director of Tocqueville Asset Management LP in New York. The opinions expressed are his own.)

To contact the writer of this column: John Hathaway at JHathaway@Tocqueville.com

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net

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Mr. T and Gold

Posted on October 13, 2010 | Leave a comment

http://www.youtube.com/v/pWAu7FmKbYc?version=3

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