federal reserve Archives - Page 2 of 5

Don’t Be Fooled by the Federal Reserve’s Anti-Audit Propaganda

by Ron Paul – Ron Paul Institute for Peace and Prosperity:

In recent weeks, the Federal Reserve and its apologists in Congress and the media have launched numerous attacks on the Audit the Fed legislation. These attacks amount to nothing more than distortions about the effects and intent of the audit bill.

Fed apologists continue to claim that the Audit the Fed bill will somehow limit the Federal Reserve’s independence. Yet neither Federal Reserve Chair Janet Yellen nor any other opponent of the audit bill has ever been able to identify any provision of the bill giving Congress power to dictate monetary policy. The only way this argument makes sense is if the simple act of increasing transparency somehow infringes on the Fed’s independence.

This argument is also flawed since the Federal Reserve has never been independent from political pressure. As economists Daniel Smith and Peter Boettke put it in their paper “An Episodic History of Modern Fed Independence,” the Federal Reserve “regularly accommodates debt, succumbs to political pressures, and follows bureaucratic tendencies, compromising the Fed’s operational independence.”

The most infamous example of a Federal Reserve chair bowing to political pressure is the way Federal Reserve Chairman Arthur Burns tailored monetary policy to accommodate President Richard Nixon’s demands for low interest rates. Nixon and Burns were even recorded mocking the idea of Federal Reserve independence.

Nixon is not the only president to pressure a Federal Reserve chair to tailor monetary policy to the president’s political needs. In the fifties, President Dwight Eisenhower pressured Fed Chairman William Martin to either resign or increase the money supply. Martin eventually gave in to Ike’s wishes for cheap money. During the nineties, Alan Greenspan was accused by many political and financial experts — including then-Federal Reserve Board Member Alan Blinder — of tailoring Federal Reserve policies to help President Bill Clinton.

Some Federal Reserve apologists make the contradictory claim that the audit bill is not only dangerous, but it is also unnecessary since the Fed is already audited. It is true that the Federal Reserve is subject to some limited financial audits, but these audits only reveal the amount of assets on the Fed’s balance sheets. The Audit the Fed bill will reveal what was purchased, when it was acquired, and why it was acquired.

Perhaps the real reason the Federal Reserve fears a full audit can be revealed by examining the one-time audit of the Federal Reserve’s response to the financial crisis authorized by the Dodd-Frank law. This audit found that between 2007 and 2010 the Federal Reserve committed over $16 trillion — more than four times the annual budget of the United States — to foreign central banks and politically influential private companies. Can anyone doubt a full audit would show similar instances of the Fed acting to benefit the political and economic elites?

Some fed apologists are claiming that the audit bill is part of a conspiracy to end the Fed. As the author of a book called End the Fed, I find it laughable to suggest that I, and other audit supporters, are hiding our true agenda. Besides, how could an audit advance efforts to end the Fed unless the audit would prove that the American people would be better off without the Fed? And don’t the people have a right to know if they are being harmed by the current monetary system?

For over a century, the Federal Reserve has operated in secrecy, to the benefit of the elites and the detriment of the people. It is time to finally bring transparency to monetary policy by auditing the Federal Reserve.

Article originally posted at The Ron Paul Institute for Peace and Prosperity.

The Fallacy of Keynesian Stimulus

by Peter St. Onge
Article originally published in the March issue of BankNotes.

One of the great debates today between left and right is whether government stimulus is worth it. The left says “yes, early and often.” And the right says “only in the right circumstances.” Unsurprisingly, both left and right are completely off — stimulus is the quickest way to impoverish an economy.

To see why, we’ll start with America’s most famous burglar, Richard Nixon. Nixon is said to have remarked that “We are all Keynesians.” This is probably true; everybody Richard Nixon listened to was “all Keynesians.” And even today nearly every talking head on TV or in major newspapers is “all Keynesians.” Right-wing, left-wing, it’s just a big pile of Keynesians.

This is important when we see “balanced” debates among prestigious economists — “prestige” in mainstream economics is short-hand for “Keynesian.” Future generations may well find this funny, but today this is where we are.

Why does this matter? Because if the Keynesian orthodoxy is ridiculous, say, then all we get is “balanced” flavors of ridiculous.

Why ridiculous? Keynesians’ original sin is that it proposes that spending makes us richer. The other fallacies flow out of that core error. This rich-by-spending doctrine obviously doesn’t work in real life — if you’re poor, the solution is not to borrow money and have a party about it. The solution is to work hard and save up. It’s not rocket science.

Why the appeal? Why are nearly all economists, left and right, Keynesians? The idea that spending makes us richer is a very old one. It’s not original to Keynes, who wasn’t much of an economic or original thinker anyway. Keynes was just regurgitating the age-old fallacy known as “underconsumption.”

“Underconsumption”

Underconsumptionism holds that economies do well when the cash flows. It seems intuitive from the top-down: if people are spending money then times must be good. If they’re not spending money there must be a problem.

Unsurprisingly, this gets it exactly backward. Spending is what happens once you’re rich. It doesn’t actually make you rich. So if an economy is doing well then people do indeed buy more swimming pools. But it’s obviously not the swimming pools
that made them rich.

So what did make them rich? Investment. More specifically, market-led investment. Why the “market-led” part? Because zany bureaucrats define their bridges to nowhere and squirrel-menstruation research as “investment.

Now, it’s not that all government spending is useless — they do build gutters and sewage plants, after all. But we’ve really got no way to know whether some bureaucrat’s “investment” is growing the economy. Hence it’s tempting to say “private investment” is all that matters, but I’ll be open-minded and just
say “market-led.” Meaning that a government that actually did find out market demand (for a bridge from Manhattan to New Jersey, say) would qualify as “market-led” investment and make us wealthier. We can see the role of private investment in the

classic Robinson Crusoe picture. Poor Robinson wakes up hungry, wet, and cold. It rained all night, and he’s picked up a nasty cough. Robinson looks up at the sky, shaking his fist at the Gods of Poverty.

How does Robinson improve his lot? Why, he invests. He builds fishing hooks, fish-nets, berry-shaking sticks. He collects wood, first to build a shelter then to keep a fire going. Investments all.

And over there, in the corner, you can see the Keynesian tsk-tsking, “Why do all that hard work investing when you can just spend more, Robinson?” Remember, these are “prestigious” economists.

So how does this fatal error translate into policy today? The key thing to remember is that when the government increases “spending” it is simply making pieces of paper — known as “dollars.” Not fish hooks. Not firewood. Bidding tickets is what government makes. Why do they do this? Partly to buy votes, of course: if I could print up dollars, I guarantee I’d have a lot of Facebook friends. And partly to “boost” the economy with all that spending.

Fiat Money ≠ Wealth

The problem is, printing tickets isn’t a real resource. You don’t eat paper, as they say. Printing dollars merely bids away resources from other uses.

Let’s say Fed Chair Yellen made an error and printed me up a trillion dollars. Why, I’d use those dollars to buy all — and I do mean all — the beach-front property. I would have the most galactic beach-front party in history. Thing is, Yellen just gave me bidding tickets. She didn’t give me the booze, the DJ’s, the
concrete, or the wood.

So how do I put this party on? Why, I use Yellen’s dollars to bid it all away from you. Yep, you. Building a factory? Too bad: I’ve outbid you for the concrete. Building a back deck? Too bad: it’s my lumber. There’s a party on, didn’t you hear? A Keynesian party.

So is my resource-sucking mega-party making the economy grow? Nope. When it’s all over, when the hangovers along with the ear-ringing subsides are gone, we’ve used real resources. We’ve got no factories. No decks. We’re all poorer. But the politicians did get re-elected, right?

This, in a nutshell, is Keynesian “stimulus.” Whether it comes from government spending (“fiscal stimulus”) or from Federal Reserve money-printing (monetary stimulus). In either case, real resources were bid away from the rest of us and handed out to others.

Stimulus isn’t some magical leprechaun dropping ice cream and puppies from heaven — it’s merely redistribution of resources. Stimulus is taking from those who have and giving to the government’s pals.

So the question “does stimulus work?” is completely missing the point. Putting aside the injustice of redistributive theft, the productivity question is whether the guys who got the bidding tickets did more market-led investment than the guys whose tickets were devalued.

There is no economic reason to think mere redistribution would make us richer. In fact, there are excellent reasons that show redistribution hurts the economy. “Stimulus” itself is nothing more than widespread impoverishment so a clutch of politicians can buy friends.

Please see the March issue of BankNotes for the original article and others like it.

Risk Update: Belief in Central Bank Proclamations

by Jeff Clark – Hard Assets Alliance :

Did you know that just two days before the SNB announced they would no longer peg their currency to the euro, SNB VP Jean-Pierre Danthine stated the following to Swiss broadcaster RTS?

“We’re convinced that the cap on the franc must remain the pillar of our monetary policy.”

They changed their mind in 48 hours? Far more likely is that they didn’t want to telegraph the move in advance.

What about the massive QE effort undertaken by the ECB—should we be confident this will solve their problems? No, because according to French bank Société Générale, it isn’t big enough!

The potential amount of QE needed is €2-€3 trillion. Hence, for inflation to reach close to a 2.0% threshold medium term, the potential amount of asset purchases needed is €2-€3 trillion, not a mere €1 trillion.

That is ludicrous and what we should expect from those that view the world through an economic model. The fact that many investors also see this insanity for what it is partially accounts for gold’s positive response…

• “The belief in central banks as the providers of market stability suffered a serious blow last week.” (Chief commodity strategist Ole Hansen at Danish bank Saxo)

• “But to think the ECB has a magic wand and will change all the situation in Europe by its magic wand, in my opinion is not the appropriate reasoning.” (Jean-Claude Trichet, Mario Draghi’s predecessor
at the ECB, who can now speak freely about central bank actions)

What about the US Fed balance sheet?

“The Fed’s balance sheet is a pile of tinder, but it hasn’t been lit… inflation will eventually have to rise.” (Former US Federal Reserve Chairman Alan Greenspan, who can now also speak freely)

By the way, he added this in the same interview:

Question: “Where will the price of gold be in five years?”
Greenspan: “Higher.”
Question: “How much?”
Greenspan: “Measurably.”

What all this means to us is that it’s dangerous to your wealth to believe central banker proclamations (at least while they’re in office). Gold, in spite of its volatility, is more trustworthy—it answers to no one, can’t be created with the click of a button, and has never required the credit guarantee of a third party.

Article originally posted in the February issue of Smart Metals Investor at HardAssetsAlliance.com.

Fed-speak

submitted by jwithrow.

The following is a brief retrospective of the Fed’s promises about how long the fed funds rate would stay near zero, otherwise known as fed-speak.

Starting six years ago, the Fed promised rates would remain “exceptionally low”…

• … first “for some time” (December 2008)
• … then “for an extended period” (March 2009)
• … which morphed into a target date of “at least through mid-2013” (August 2011)
• … stretching to “at least through mid-2015” (September 2012).

Only three months after that last revision, the Fed threw out the chronological playbook and opted for numerical targets…

• … “as long as the unemployment rate remains above 6.5%” (December 2012)
• … “well past the time that the unemployment rate declines below 6.5%” (December 2013).

When Janet Yellen took over from Ben Bernanke, the targets became based on the anticipated wind-down of quantitative easing (QE)…

• … “for a considerable time after the asset purchase program ends” (March 2014)
• … “for a considerable time following the end of its asset purchase program this month” (October 2014).

What’s going on here?

Individual Solutions: Building Financial Resiliency

submitted by jwithrow.

Journal of a Wayward Philosopher
Individual Solutions: Building Financial Resiliency

February 12, 2015
Hot Springs, VA

The S&P opened at $2,071 today. Gold is down to $1,226 per ounce. Oil is floating around $49 per barrel. Bitcoin is hanging around $221 per BTC, and the 10-year Treasury rate opened at 2.03% today.

Ten central banks have cut interest rates so far in 2015. The list includes: Australia, Canada, China, Denmark, India, Egypt, Pakistan, Peru, Russia, and Turkey. Additionally, both the Bank of Japan and the European Central Bank are actively buying sovereign debt… with counterfeited currency created from thin air. The Federal Reserve is taking a break from this exercise after nearly six years of creating currency to shop at the U.S. Treasury and go yard-saling on Wall Street. Of course the $4.5 trillion worth of sovereign debt and mortgage-backed securities still sits on the Fed’s balance sheet in the interim.

All of this economic intervention is a concerted effort to stave off a major credit contraction. The central bankers talk about hitting certain GDP and unemployment rate metrics but that is all part of their dog and pony show. If creating currency out of thin air could actually grow an economy and create jobs then we would already live in a utopian paradise. But that’s just not how the world works.

Try as they may to avoid it, the coming credit contraction is inevitable. You see, the global monetary system has been fraudulent for a little more than four decades now. Gold officially anchored the global monetary system for two centuries prior to 1971. Then, in 1971, President Nixon’s administration acted to break away from two hundred years of tradition and the U.S. ended direct convertibility of the dollar to gold. Of course the “Great Society” welfare programs and the Vietnam War had a lot to do with this decision.

“Your dollar will be worth just as much tomorrow as it is today,” Nixon proclaimed on television with a straight face. “The effect of this action, in other words, will be to stabilize the dollar.”

Of course the exact opposite happened: the U.S. dollar fell off a cliff. Anyone living during the 70’s can attest to this. What was the price of a new home back then? A new car? A hamburger? The difference between what those items cost in 1971 and what they cost today represents how far the U.S. dollar has fallen in purchasing power.

How did this happen?

Well, with all ties to gold removed governments and central banks discovered they could conjure currency into existence to pay for anything they wanted. Tanks, fighter jets, food stamps, Medicare part D, $800 trash cans… no problem! So they embarked upon this historic credit expansion armed with a magical monetary system that provided them with money for nothing.

But governments weren’t the only beneficiaries. The companies making the tanks and the bombs made out like bandits. So did all of the bureaucrats who were hired as government expanded. And the people receiving welfare benefits found the system quite palatable as well. Pretty soon smart people learned that the best business in the world was to sell something to the U.S. government because it had unlimited money to spend. So they descended upon K Street like buzzards on road-kill and pretty soon the suburbs surrounding D.C. claimed home to six of the wealthiest ten counties in the U.S.

The champagne has been flowing up on the Hill and in the lobbyist offices on K Street for four decades now thanks mostly to the fraudulent fiat monetary system in place since 1971. The establishment hails their elastic currency system as a major success but theirs is a self-serving and short term view. Credit has been constantly expanding since 1971 but do we really think this can go on forever? Can we continue to run up debt, print money to pay interest on that debt, and then buy all of the fighter jets, disability checks, politicians, and cheap junk from China without ever having to think twice about it? If not, what happens when the credit contracts and we can no longer afford all of these expenditures?

The Austrian School of Economics tells us what the result of this madness will be: a “crack-up boom” followed by a monstrous bust as all of the bad debt and malinvestments are finally liquidated.

The crack-up boom occurs as the prices of assets and real goods are driven up to the moon by enormous amounts of excess currency conjured into existence in an attempt to perpetuate the credit expansion. After all, that new currency has to go somewhere. This scheme will work to stave off the credit contraction… until it doesn’t. Then cometh the bust.

While Austrian Economics can make the diagnosis, the timing of the bust cannot be predicted. There are too many interconnected factors at play. What’s important is that there is still time to build financial resiliency in advance. The cornerstone of financial resiliency is knowledge and understanding. Understand fiat money is an illusion. Understand the difference between money and wealth. Study Austrian Economics to get a feel for what’s really going on in the economy.

Once you understand how the monetary system actually works you can formulate a customized asset allocation model based upon your personal circumstances.

A resilient asset allocation model will consist of cash (20-30%), precious metals (10-30%), real estate (30-60%), and strategic equities (10-15%).

At minimum you should carry enough cash to cover at least 6-12 months of expenses. Distressed assets will go on sale when then bust hits so any cash in excess of your reserve fund can be used to acquire these distressed assets (real estate, stocks, businesses, etc.) when they are cheap.

Your precious metals allocation should consist of physical gold and silver bullion stored at home or in a legal segregated account overseas. Never store precious metals in a domestic bank vault – Americans learned this the hard way back in the 30’s when the banks closed and FDR raided the vaults to confiscate gold. Remember, precious metals are insurance not speculation. The price of gold (and silver) will skyrocket in terms of fiat currency, but its purchasing power will remain relatively constant just as it has for thousands of years. Those who save in fiat currency will see their wealth evaporate as the credit contraction unfolds while those who hold precious metals will weather the storm. J.P Morgan testified before Congress in 1912: “Gold is money. Everything else is credit.” Don’t be fooled.

Real estate presents a unique opportunity currently as we are living during a period of historically low interest rates and lenders are willing to offer long term mortgages at these low rates. This provides a tremendous opportunity to lock in these low rates on real estate for thirty years during which time interest rates will inevitably rise significantly.

We firmly believe stocks should make up the smallest percentage of a resilient portfolio under current economic conditions. Stockholders have been the primary beneficiaries of the massive credit expansion and all of the easy-money chicanery over the past several years. Financial institutions have poured new money into the equities markets and publicly-traded companies have used a ton of excess cash to buy back shares of their own stock. As a result current stock valuations do not reflect the underlying health of the economy. Though stocks will run for a bit longer, we are closer to the end than the beginning of the bull cycle. We think the exception is in the resource and commodity sector, however. The stocks of well-managed companies in this sector could do extremely well over the next few years as the global financial system continues to falter.

Nobody can control macroeconomic conditions but we can each control our individual response to them. Building financial resiliency by constructing a diversified portfolio across several asset classes is an individual solution to a collective problem. Financial resiliency is just half of the picture, however. Tomorrow we will look at what we call home resiliency.

Until the morrow,

Joe Withrow

Wayward Philosopher

For more of Joe’s thoughts on the “Great Reset” and the paradigm shift underway please read “The Individual is Rising” which is available at http://www.theindividualisrising.com/. The book is also available on Amazon in both paperback and Kindle editions.

Fourteen Lessons for the Federal Reserve

submitted by jwithrow.

Excerpt from The Folly of the Fed’s Central Planning:

1. Increasing money and credit by the Fed is not the same as increasing wealth. It in fact does the opposite.

2. More government spending is not equivalent to increasing wealth.

3. Liquidation of debt and correction in wages, salaries, and consumer prices is not the monster that many fear.

4. Corrections, allowed to run their course, are beneficial and should not be prolonged by bailouts with massive monetary inflation.

5. The people spending their own money is far superior to the government spending it for them.

6. Propping up stock and bond prices, the current Fed goal, is not a road to economic recovery.

7. Though bailouts help the insiders and the elite 1%, they hinder the economic recovery.

8. Production and savings should be the source of capital needed for economic growth.

9. Monetary expansion can never substitute for savings but guarantees mal–investment.

10. Market rates of interest are required to provide for the economic calculation necessary for growth and reversing an economic downturn.

11. Wars provide no solution to a recession/depression. Wars only make a country poorer while war profiteers benefit.

12. Bits of paper with ink on them or computer entries are not money – gold is.

13. Higher consumer prices per se have nothing to do with a healthy economy.

14. Lower consumer prices should be expected in a healthy economy as we experienced with computers, TVs, and cell phones.

All this effort by thousands of planners in the Federal Reserve, Congress, and the bureaucracy to achieve a stable financial system and healthy economic growth has failed.

It must be the case that it has all been misdirected. And just maybe a free market and a limited government philosophy are the answers for sorting it all out without the economic planners setting interest and CPI rate increases.

A simpler solution to achieving a healthy economy would be to concentrate on providing a “SOUND DOLLAR” as the Founders of the country suggested. A gold dollar will always outperform a paper dollar in duration and economic performance while holding government growth in check. This is the only monetary system that protects liberty while enhancing the opportunity for peace and prosperity.

Investors Are Coming to Grips with Reality

by Justin Spittler – Hard Assets Alliance:

Today’s financial markets have acquired a knack for ingesting bad news without so much as a hiccup. Lately, that same resiliency—or more appropriately, complacency—has come under pressure.

After lying dormant for months, volatility has come storming back with a vengeance. Investors are finally coming to their senses—much to the delight of the precious metals community.

Patience Wearing Thin

The problems facing the global economy didn’t come out of nowhere. It just took a jolt of volatility to put them in the spotlight—and you can thank the soaring US dollar and the collapse of energy prices for putting investors on high alert.

Of course, there are perks to a strong dollar and cheap energy. A strong dollar makes imported goods more affordable for American consumers, while it’s estimated that weak oil prices will put roughly $500 into the wallet of the average American driver. While neither is positive for precious metals, the euphoria won’t last long.

An appreciating US dollar makes American exports less competitive. Depressed oil prices could cripple the domestic energy revolution, which has been the backbone of the US recovery. The breakout of the dollar also threatens to derail commodity-centric emerging markets, particularly nations that have relied on cheap credit for growth.

Monetary Tools Becoming Dull

The precarious state of the global economy doesn’t just have investors on edge. Policymakers in countries across the globe face a dilemma: risk an economic crash by stepping away from their maligned economies, or provide their debt-addicted with another dose of stimulus. It’s a lose-lose situation.

Yet it’s a no-brainer for central bankers, whose greatest fear is deflation.

The situation is no different in the United States even though the Federal Reserve ended its quantitative easing program in October. Remember, the Fed has said it will be “patient” in raising rates; and you can bet Yellen will fire up the printing press the second that the US economy shows symptoms of flatlining.

Unfortunately, the next round of stimulus won’t be as effective as previous installments, and investors seem to be waking up to that harsh reality.

Perceptions Change; the Case for Gold Stays the Same

As an analyst, I spend most of my days sifting through data, crunching numbers, and gathering different perspectives in an attempt to gain clues about the future. And yet, I’ll be the first to admit that economic forecasting is a silly process. Nonetheless, my feeling is that gold has hit a bottom.

That’s probably something you’re sick of hearing. Some in the precious metals community have been calling an end to the gold market rut for months… others for much longer.

Why do I think that this time is different? It has little to do with fundamentals. The case for owning gold has changed little recently, although we’re receiving more and more reminders. What’s changing is the perception of Western investors.

After witnessing unconventional monetary policies push financial markets to new heights, investors seem to be losing faith in this grand experiment. This uneasy feeling is starting to bring them back to gold—the most crisis-proof asset of all.

Luckily, there’s still an opportunity for investors to pick up gold while incurring little downside risk. There are few sellers at today’s prices, and those holding gold are what I like to call “strong hands.”

Even if gold hits a few speed bumps throughout the year, investors will sleep easier knowing that some of their wealth is held in the most time-tested of all assets.

Article originally posted in the January issue of Smart Metals Investor at HardAssetsAlliance.com.

The Folly of the Fed’s Central Planning

by Ron Paul – Ron Paul Institute for Peace and Prosperity:

Over the last 100 years the Fed has had many mandates and policy changes in its pursuit of becoming the chief central economic planner for the United States. Not only has it pursued this utopian dream of planning the US economy and financing every boondoggle conceivable in the welfare/warfare state, it has become the manipulator of the premier world reserve currency.

As Fed Chairman Ben Bernanke explained to me, the once profoundly successful world currency – gold – was no longer money. This meant that he believed, and the world has accepted, the fiat dollar as the most important currency of the world, and the US has the privilege and responsibility for managing it. He might even believe, along with his Fed colleagues, both past and present, that the fiat dollar will replace gold for millennia to come. I remain unconvinced.

At its inception the Fed got its marching orders: to become the ultimate lender of last resort to banks and business interests. And to do that it needed an “elastic” currency. The supporters of the new central bank in 1913 were well aware that commodity money did not “stretch” enough to satisfy the politician’s appetite for welfare and war spending. A printing press and computer, along with the removal of the gold standard, would eventually provide the tools for a worldwide fiat currency. We’ve been there since 1971 and the results are not good.

Many modifications of policy mandates occurred between 1913 and 1971, and the Fed continues today in a desperate effort to prevent the total unwinding and collapse of a monetary system built on sand. A storm is brewing and when it hits, it will reveal the fragility of the entire world financial system.

The Fed and its friends in the financial industry are frantically hoping their next mandate or strategy for managing the system will continue to bail them out of each new crisis.

The seeds were sown with the passage of the Federal Reserve Act in December 1913. The lender of last resort would target special beneficiaries with its ability to create unlimited credit. It was granted power to channel credit in a special way. Average citizens, struggling with a mortgage or a small business about to go under, were not the Fed’s concern. Commercial, agricultural, and industrial paper was to be bought when the Fed’s friends were in trouble and the economy needed to be propped up. At its inception the Fed was given no permission to buy speculative financial debt or U.S. Treasury debt.

It didn’t take long for Congress to amend the Federal Reserve Act to allow the purchase of US debt to finance World War I and subsequently all the many wars to follow. These changes eventually led to trillions of dollars being used in the current crisis to bail out banks and mortgage companies in over their heads with derivative speculations and worthless mortgage-backed securities.

It took a while to go from a gold standard in 1913 to the unbelievable paper bailouts that occurred during the crash of 2008 and 2009.

In 1979 the dual mandate was proposed by Congress to solve the problem of high inflation and high unemployment, which defied the conventional wisdom of the Phillips curve that supported the idea that inflation could be a trade-off for decreasing unemployment. The stagflation of the 1970s was an eye-opener for all the establishment and government economists. None of them had anticipated the serious financial and banking problems in the 1970s that concluded with very high interest rates.

That’s when the Congress instructed the Fed to follow a “dual mandate” to achieve, through monetary manipulation, a policy of “stable prices” and “maximum employment.” The goal was to have Congress wave a wand and presto the problem would be solved, without the Fed giving up power to create money out of thin air that allows it to guarantee a bailout for its Wall Street friends and the financial markets when needed.

The dual mandate was really a triple mandate. The Fed was also instructed to maintain “moderate long-term interest rates.” “Moderate” was not defined. I now have personally witnessed nominal interest rates as high as 21% and rates below 1%. Real interest rates today are actually below zero.

The dual, or the triple mandate, has only compounded the problems we face today. Temporary relief was achieved in the 1980s and confidence in the dollar was restored after Volcker raised interest rates up to 21%, but structural problems remained.

Nevertheless, the stock market crashed in 1987 and the Fed needed more help. President Reagan’s Executive Order 12631 created the President’s Working Group on Financial Markets, also known as the Plunge Protection Team. This Executive Order gave more power to the Federal Reserve, Treasury, Commodity Futures Trading Commission, and the Securities and Exchange Commission to come to the rescue of Wall Street if market declines got out of hand. Though their friends on Wall Street were bailed out in the 2000 and 2008 panics, this new power obviously did not create a sound economy. Secrecy was of the utmost importance to prevent the public from seeing just how this “mandate” operated and exactly who was benefiting.

Since 2008 real economic growth has not returned. From the viewpoint of the central economic planners, wages aren’t going up fast enough, which is like saying the currency is not being debased rapidly enough. That’s the same explanation they give for prices not rising fast enough as measured by the government-rigged Consumer Price Index. In essence it seems like they believe that making the cost of living go up for average people is a solution to the economic crisis. Rather bizarre!

The obsession now is to get price inflation up to at least a 2% level per year. The assumption is that if the Fed can get prices to rise, the economy will rebound. This too is monetary policy nonsense.

If the result of a congressional mandate placed on the Fed for moderate and stable interest rates results in interest rates ranging from 0% to 21%, then believing the Fed can achieve a healthy economy by getting consumer prices to increase by 2% per year is a pie-in-the-sky dream. Money managers CAN’T do it and if they could it would achieve nothing except compounding the errors that have been driving monetary policy for a hundred years.

A mandate for 2% price inflation is not only a goal for the central planners in the United States but for most central bankers worldwide.

It’s interesting to note that the idea of a 2% inflation rate was conceived 25 years ago in New Zealand to curtail double-digit price inflation. The claim was made that since conditions improved in New Zealand after they lowered their inflation rate to 2% that there was something magical about it. And from this they assumed that anything lower than 2% must be a detriment and the inflation rate must be raised. Of course, the only tool central bankers have to achieve this rate is to print money and hope it flows in the direction of raising the particular prices that the Fed wants to raise.

One problem is that although newly created money by central banks does inflate prices, the central planners can’t control which prices will increase or when it will happen. Instead of consumer prices rising, the price inflation may go into other areas, as determined by millions of individuals making their own choices. Today we can find very high prices for stocks, bonds, educational costs, medical care and food, yet the CPI stays under 2%.

The CPI, though the Fed currently wants it to be even higher, is misreported on the low side. The Fed’s real goal is to make sure there is no opposition to the money printing press they need to run at full speed to keep the financial markets afloat. This is for the purpose of propping up in particular stock prices, debt derivatives, and bonds in order to take care of their friends on Wall Street.

This “mandate” that the Fed follows, unlike others, is of their own creation. No questions are asked by the legislators, who are always in need of monetary inflation to paper over the debt run up by welfare/warfare spending. There will be a day when the obsession with the goal of zero interest rates and 2% price inflation will be laughed at by future economic historians. It will be seen as just as silly as John Law’s inflationary scheme in the 18th century for perpetual wealth for France by creating the Mississippi bubble – which ended in disaster. After a mere two years, 1719 to 1720, of runaway inflation Law was forced to leave France in disgrace. The current scenario will not be precisely the same as with this giant bubble but the consequences will very likely be much greater than that which occurred with the bursting of the Mississippi bubble.

The fiat dollar standard is worldwide and nothing similar to this has ever existed before. The Fed and all the world central banks now endorse the monetary principles that motivated John Law in his goal of a new paradigm for French prosperity. His thesis was simple: first increase paper notes in order to increase the money supply in circulation. This he claimed would revitalize the finances of the French government and the French economy. His theory was no more complicated than that.

This is exactly what the Federal Reserve has been attempting to do for the past six years. It has created $4 trillion of new money, and used it to buy government Treasury bills and $1.7 trillion of worthless home mortgages. Real growth and a high standard of living for a large majority of Americans have not occurred, whereas the Wall Street elite have done quite well. This has resulted in aggravating the persistent class warfare that has been going on for quite some time.

The Fed has failed at following its many mandates, whether legislatively directed or spontaneously decided upon by the Fed itself – like the 2% price inflation rate. But in addition, to compound the mischief caused by distorting the much-needed market rate of interest, the Fed is much more involved than just running the printing presses. It regulates and manages the inflation tax. The Fed was the chief architect of the bailouts in 2008. It facilitates the accumulation of government debt, whether it’s to finance wars or the welfare transfer programs directed at both rich and poor. The Fed provides a backstop for the speculative derivatives dealings of the banks considered too big to fail. Together with the FDIC’s insurance for bank accounts, these programs generate a huge moral hazard while the Fed obfuscates monetary and economic reality.

The Federal Reserve reports that it has over 300 PhD’s on its payroll. There are hundreds more in the Federal Reserve’s District Banks and many more associated scholars under contract at many universities. The exact cost to get all this wonderful advice is unknown. The Federal Reserve on its website assures the American public that these economists “represent an exceptional diverse range of interest in specific area of expertise.” Of course this is with the exception that gold is of no interest to them in their hundreds and thousands of papers written for the Fed.

This academic effort by subsidized learned professors ensures that our college graduates are well-indoctrinated in the ways of inflation and economic planning. As a consequence too, essentially all members of Congress have learned these same lessons.

Fed policy is a hodgepodge of monetary mismanagement and economic interference in the marketplace. Sadly, little effort is being made to seriously consider real monetary reform, which is what we need. That will only come after a major currency crisis.

I have quite frequently made the point about the error of central banks assuming that they know exactly what interest rates best serve the economy and at what rate price inflation should be. Currently the obsession with a 2% increase in the CPI per year and a zero rate of interest is rather silly.

In spite of all the mandates, flip-flopping on policy, and irrational regulatory exuberance, there’s an overwhelming fear that is shared by all central bankers, on which they dwell day and night. That is the dreaded possibility of DEFLATION.

A major problem is that of defining the terms commonly used. It’s hard to explain a policy dealing with deflation when Keynesians claim a falling average price level – something hard to measure – is deflation, when the Austrian free-market school describes deflation as a decrease in the money supply.

The hysterical fear of deflation is because deflation is equated with the 1930s Great Depression and all central banks now are doing everything conceivable to prevent that from happening again through massive monetary inflation. Though the money supply is rapidly rising and some prices like oil are falling, we are NOT experiencing deflation.

Under today’s conditions, fighting the deflation phantom only prevents the needed correction and liquidation from decades of an inflationary/mal-investment bubble economy.

It is true that even though there is lots of monetary inflation being generated, much of it is not going where the planners would like it to go. Economic growth is stagnant and lots of bubbles are being formed, like in stocks, student debt, oil drilling, and others. Our economic planners don’t realize it but they are having trouble with centrally controlling individual “human action.”

Real economic growth is being hindered by a rational and justified loss of confidence in planning business expansions. This is a consequence of the chaos caused by the Fed’s encouragement of over-taxation, excessive regulations, and diverting wealth away from domestic investments and instead using it in wealth-consuming and dangerous unnecessary wars overseas. Without the Fed monetizing debt, these excesses would not occur.

Lessons yet to be learned: