Fed Up with Fed's Myths
Tuesday, November 16, 2010 – by Staff Report
Ben Bernanke
The Federal Reserve's announcement on Nov. 3 that it will buy $600 billion worth of Treasury bonds to help boost the struggling U.S. economy reverberated around the world this past week, with condemnation from critics as varied as Sarah Palin and the president-elect of Brazil. Yet much of what the Fed and its chairman, Ben Bernanke (left), have done is shrouded in confusion and misperceptions. – Washington Post
Dominant Social Theme: Let's be reasonable about this. Ben Bernanke is trying very hard and he's getting bad rap.
Free-Market Analysis: Below we analyze an article (see excerpt above) that appeared in the Washington Post recently entitled "Five Myths About the Federal Reserve." Let us mention some good things, first. The article is well written, even elegant, and not overly-complex. It is composed by a smart person and has an air of sincerity that presumably is authentic. On the other hand, the article is just plain wrong in our view, and seems a bit defensive as well. We would argue, in fact, that its appearance itself is a kind of metaphor, an acknowledgement by the elite of just how much trouble the central banking meme is in. That's the significance of the article, in fact. It's a rebuttal of sorts to an assume skepticism about central banking that did not exist until relatively recently.
We would speculate however, that such skepticism will continue to grow, no matter how many pro-central banking articles appear in the mainstream media. Of course, the concept will be defended ferociously, nonetheless. The idea that there is a super smart group of people who can figure out how much money the world needs is surely a fundamental dominant social theme of the Anglo-American power elite. It is the foundation on which so much else rests. Control the ability to print money and one has control, basically, over the whole world.
But in the 21st century, the financial crisis and the truth-telling of the Internet have undermined much of the fear-based promotions that the elite uses to consolidate control over society in order to move it toward one-world governance. The central banking meme is increasingly a casualty as well, hence the need for these sorts of articles. It is written by Greg Ip, who, we learn, is the US economics editor for the Economist magazine.
Fifteen or twenty years ago, such individuals – equipped with a sophisticated frame-of-reference and communication skills – were impossible to contradict. The tools simply were not available. But today the Internet has deepened our knowledge base and given us the ability to suggest alternatives perspectives. Chief among these perspectives is the Misesian concept of "human action." This is the idea that individual humans provide the cultural and economic engine for the world – not elite leaders huddle in a room somewhere.
The idea that that the world needs "leaders" and "governmental organization" is the logical conclusion of the fear-based themes that the elite attempts to circulate using a wide variety of sympathetic instrumentalities such as universities, think tanks, NGOs and the mainstream media which it by and large controls if it does not own it outright. The idea that individuals are powerless, that money is a governmental excretion and that the only way to get things done is to lobby politicians is a core foundational element of power elite propaganda.
We have long maintained that power elite memes would collide with the Internet – a modern Gutenberg press – in the 21st century and that the elite might eventually have to "take a step back" as they did after the press exposed the underlying contradictions of the accepted knowledge of its day. Much of the accepted knowledge of the current age is now under attack as well. Many of the elite's centralizing fear-based promotions seem to be taking a drubbing, from global warming to the war on terror to many of the central (and erroneous) tenets of regulatory democracy itself.
Perhaps the promotion that is in the process of failing the most quickly is central banking, with its economically illiterate underpinnings and quasi-religious overtones. This article does provide a good pro-central banking primer, though in our opinion it leaves out some positive (if false) arguments for central banking – perhaps because it wants to maintain a tone of studious neutrality. In any event, we are happy to offer excerpts from the article along with free-market perspectives to counter what has been presented.
We don't think the central banking paradigm, the world's fundamental organizational mechanism, is anything other than a fraud. But you may come to a different decision, dear reader. Anyway, we now provide excerpts of the main points of the article along with some additional thoughts ...
1. By printing money, the Fed will create runaway inflation ... The Nobel Prize-winning economist Milton Friedman issued a famous dictum nearly 50 years ago: "Inflation is always and everywhere a monetary phenomenon." His belief has become widespread over the years, to the point that even many non-economists assume that when the Fed prints money, higher prices inevitably result. But the link between money and inflation is weaker than people think ... The Fed is trying to stimulate spending, but not by showering people with newly minted dollars. Rather, when the Fed buys bonds, it pushes their prices up and their yields down. Lower long-term interest rates will tempt some people to borrow. They will also make stocks more attractive. Higher stock prices will make consumers feel wealthier and spend more. If that spending outstrips the economy's productive capacity, inflation could result. But that's years away: The economy today is awash in idle factories and unemployed workers.
While we are not Friedmanite monetarists, (we try to be Austrians) it is patently untrue in our view that Fed money printing does not create inflation. Money is just like every other commodity. If there is too much of it eventually the price will drop. In a fiat-money environment, inflation happens as money is printed and loaned into circulation. ... eventually. The velocity of money, much remarked upon, is merely the flip side for DEMAND for goods and services. Thus it is the DEMAND that aids in the circulation of money. The velocity of money is actually representative of the demand for money.
Without "money" printing there can be no price inflation, nor any inflation to begin with. Every dollar that Bernanke prints evidently and obviously (eventually) adds to inflation and will, sooner or later, in our view, manifest in price inflation. Bernanke's quantitative easing is a down payment for something that may approach hyperinflation. The article does no one any services by not disinguishing between the quantity of circulating money (inflation) and a subsequent rise in prices (price inflation).
2. The Fed is endangering the global recovery by trying to drive down the dollar ... Since Chairman Ben Bernanke hinted in late August that the Fed might resume quantitative easing, the value of the dollar has fallen steadily, dropping 7 percent against the euro, 3 percent against the yen and 7 percent against the Korean won. Many foreign officials and analysts have accused the Fed of deliberately driving down the dollar to give U.S. exporters a competitive advantage abroad. The truth is more complicated. If the Fed had an explicit policy of devaluing the dollar, it would sell dollars on the open market, buying foreign currencies in return. However, the Fed does this only with the Treasury's consent. The Fed hasn't sold dollars since 2000 ... This is a zero-sum game. As a falling dollar boosts American exports, it hurts the exports of our trading partners. But that's as it should be. After years of living beyond its means, the United States must now save more and consume less.
This point (above) intends to establish the continuing mythology that the Federal Reserve is 1. not a conspiracy and, 2. not intentionally diminishing the value of the dollar. Since the dollar has diminished by between 95 percent and 99 percent over the past 100 years in terms of the goods and services it can buy, it is a safe best that the Fed is not in the least concerned about the buying power of the dollar. In fact, the Western power elite – if one probes their statements and strategies – is very interested in reducing the competitive advantages of the West via the rest of the world in order to more easily introduce world government (in our opinion, anyway). To maintain that what is going on is merely the result of innocent policy movements over the past century is almost purposefully misleading.
3. The Fed is trying to finance the government's profligacy ... By buying Treasury debt, the Fed is in effect financing the federal deficit. This raises alarms: Hyperinflation in countries such as Zimbabwe or Weimar Germany occurred when private investors wouldn't lend to the government, so the government printed money to finance its spending. But that's not what's happening here. Even with our budget deficit as a share of GDP near a post-World War II record, there's no shortage of private and foreign investors to buy Treasury bonds.
Everyone wants dollars? We don't think so. The US is bankrupt. Its obligations amount to some US$200 trillion. Nobody in his or her right mind should be buying dollars (or any fiat currency for that matter). The reason that the rest of the world wants American dollars likely has to do with the dollar as a reserve currency. We have dealt with this in the past. People and countries need dollars in order to buy oil. This policy was put into effect in the 1940s, basically at the barrel of a gun. America, and presumably Britain, insisted that the rest of the world purchase oil with dollars, and those funny, little countries in the Middle East went along with it (not suprisingly). This established the dollar as the world's dominant currency in one swoop.
Everyone needs oil. The cycle feeds on itself and the perception of the dollar as a valuable commodity is inevitably fueled by the necessary nature of holding such dollars. This is also why the US probably maintains so many military bases around the world. The US prints to dollars to support its military and then uses its military to intimidate the rest of the world into continuing to use dollars to purchase oil.
The larger issue, of course, is that this strategy is now beginning to fail. The rest of the world is less intimidated by the US and the US itself is having increasing problems with its own solvency. But to maintain that the institutional interest in the dollar is somehow simply because the US is seen as "a good bet" by professional money managers is to provide an observation that leaves out the underlying force (and military linkages) driving the world's dollar-economy.
4. The Fed is immune to politics ... If only it were so. The Fed is technically independent from the rest of the government, but presidents and Congress have ample ways to pressure it. They can privately and publicly browbeat the chairman, withhold his reappointment, appoint compliant governors or amend the Federal Reserve Act ... Obama reappointed Bernanke last year and has been solidly behind the Fed. But for how long? The time will come when Bernanke must tighten monetary policy. Chances are, it will be sooner than Obama wants. Will his support be as unwavering then?
"If only it were so!" If only the Fed were immune from "political influence." But the Fed is not some sort of sterile entity; its bankers are not test-tube creations and central banking policies tend to support the deliberate charade of Western regulatory democracies. The operative term is "mercantilism" – a program in which the wealthiest individuals and industries determinedly seek access to the levers of government in order to manipulate them for private gain.
Central bankers meet in a expensive chambers all over the world to "fix" the price of money; when difficulties arise, central banks "stabilize" the system by giving away huge amounts of currency to their cronies under the pretext that a failure of the paper money will be inordinately destabilizing. The idea is that this entire exercise is somehow for the benefit of society at large. But in the case of the Fed, for instance, the dollar has been debased by nearly 100 percent in the past century.
Stabilizing the current system obviously does not benefit the public at large as they system is not being run for its behalf in the first place. Central banks are operated not for your benefit, dear reader, but for that of the elites that installed them. The ability to print money-from-nothing is an impossible and ultimately dysfunctional privilege. The control of such funding gives individuals the ability to impose their will on the larger society from the shadows where they operate. Tidal waves of money wash over society and recreate it with greater and greater authoritarian constructs. Over generations, strategies are refined and plans are put in place. Central banking and its money power are the fulcrum of regulatory democracy, which is growing more intolerable every year.
"If only it were so!" In fact, we wish the Fed, in particular, were not merely LESS immune to politics (and more responsive to Congress), but that Congress would simply do away with it. There is no philosophical, moral or economic justification for central banking. It is a brutal price fixing operation that artificially mandates the value and quantity of money. There is no way that any group of human beings can EVER know how much money the economy needs, and yet every day around the world the banking industry pretends it is so.
Only the marketplace itself can provide information on the amount of money necessary to its proper function. It does this via mechanism of supply and demand. Too much money in circulation and the price of gold and silver begin to drop – prompting hoarding and mining shut downs. The price gradually rises and mines open up again and people dishoard gold and silver. This is the only way that money ought to circulate, as a product human action, a million or a billion individual decisions about the price of money and the volume of its circulation.
5. Bernanke knows what he's doing ... Bernanke came to his job with an impressive resume, including years of studying the Great Depression. To that he can now add the irreplaceable experience of running the central bank through one of its most harrowing periods. If anyone should know what he's doing, it's him ... It would be nice if we could isolate these errors to ensure that they never happen again. But the global economy is complicated and always changing, and the Fed can never be certain of the consequences of its actions. Has it now gone too far, fueling reckless speculation, inflation and global trade tensions? Or has it not gone far enough, inviting stagnation and deflation? No one knows for sure – Bernanke included.
This last argument is of the "limited hangout" variety. It is an increasingly popular one, we think, as it must be. The Fed's predictive history is so horrible at this point, its bankers so manifestly incompetent, its results so dismal, that there are not many ways to defend it at the moment. This is one of the reasons that as an elite promotion it has probably run its course. When modern central banking was "new" – early in the 20th century – there was little anyone could do to combat the "common sense" of building a bank of last resort. But now there is a substantive track record behind this concept, one that allows us to say (regardless of the larger economic illiteracy) that it simply doesn't work.
In a sense, the entire paper money system around the world has virtually fallen apart. Even now, Western banks are like the walking dead. Central banks are throwing money at their zombie-like commercial bank distribution centers but evidently and obviously it is not working. The system is so distorted that no one wants to borrow and no one wants to lend. The only way to salvage something is to unwind the system gradually – hence the predictions that current ruinous status quo will continue on for at least another decade.
What is not said of course (nor written) is that people will not tolerate another decade of what is going on today. In fact, the is the elite's greatest fear in our view – that it will run out of time. It is one thing to inflict chaos on the world in order to offer the salvation of greater centralization (as the Western elites are wont to do) but it is another thing to destabilize society so badly that people end up in some sort of open revolt. That's not in the playbook! The misery was to be pervasive – but not so deep that people conclude that some sort of civil or even violent rebellion is more attractive than their current environment.
Yet what did the elite expect? Central banking is a ruinous game. Along with the graduated income tax, it is like a ravening two-headed beast that rips away at the fabric of civil society until there is almost nothing left. Every recession puts more people out of work and further centralizes industry and hollows it out. Every boom sucks people out of productive jobs and into the Dreamtime of fiat-money wealth that is as evanescent as the jobs themselves. The end result, 50 or 100 years later is a shattered society with 30 percent unemployment and the few people who do have jobs working two and three of them to support themselves and their families.
Of course that's in the private sector. If you are lucky enough to have a government job, you are probably doing fairly well. Unlike the private sector, government flourishes in a central banking economy. Every downturn is supposedly to be cured by new laws and new regulations. There is always a solution just beyond the horizon that will magically fix the system. If there is any one blessing to come out the current mess, is that is people are gradually losing faith in government itself and its magic regulatory elixir.
Conclusion: Central banking doesn't work. No one, not even the smartest person in the world, not even Ben Bernanke, can fix the value and quantity of money for the larger marketplace. Articles like this one in the Washington Post – well written and perceptive as they are – cannot hide this fundamental point. And thanks to the Internet, we have the intellectual resources to formulate for ourselves what is wrong and to try and put it right. We would humbly suggest, as we often do, a free-market money system, hopefully built on free banking, gold and silver, Real Bills and market-competition. Let the best money solutions win. What's so hard about that?
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