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The Federal Reserve Is, and Always Has Been, Politicized – Article by Ron Paul

The Federal Reserve Is, and Always Has Been, Politicized – Article by Ron Paul

The New Renaissance HatRon Paul
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Audit the Fed recently took a step closer to becoming law when it was favorably reported by the House Committee on Oversight and Government Reform. This means the House could vote on the bill at any time. The bill passed by voice vote without any objections, although Fed defenders did launch hysterical attacks on the bill during the debate as well as at a hearing on the bill the previous week.

One representative claimed that auditing the Fed would result in rising interest rates, a stock market crash, a decline in the dollar’s value, and a complete loss of confidence in the US economy. Those who understand economics know that all of this is actually what awaits America unless we change our monetary policy. Passing the audit bill is the vital first step in that process, since an audit can provide Congress a road map to changing the fiat currency system.

Another charge leveled by the Fed’s defenders is that subjecting the Fed to an audit would make the Fed subject to political pressure. There are two problems with this argument. First, nothing in the audit bill gives Congress or the president any new authority to interfere in the Federal Reserve’s operations. Second, and most importantly, the Federal Reserve has a long history of giving in to presidential pressure for an “accommodative” monetary policy.

The most notorious example of Fed chairmen tailoring monetary policy to fit the demands of a president is Nixon-era Federal Reserve Chair Arthur Burns. Burns and Nixon may be an extreme example — after all no other president was caught on tape joking with the Fed chair about Fed independence, but every president has tried to influence the Fed with varying degrees of success. For instance, Lyndon Johnson summoned the Fed chair to the White House to berate him for not tailoring monetary policy to support Johnson’s guns-and-butter policies.

Federal Reserve chairmen have also used their power to shape presidential economic policy. According to Maestro, Bob Woodward’s biography of Alan Greenspan, Bill Clinton once told Al Gore that Greenspan was a “man we can deal with,” while Treasury Secretary Lloyd Bentsen claimed the Clinton administration and Greenspan’s Fed had a “gentleman’s agreement” regarding the Fed’s support for the administration’s economic policies.

The Federal Reserve has also worked to influence the legislative branch. In the 1970s, the Fed organized a campaign by major banks and financial institutions to defeat a prior audit bill. The banks and other institutions who worked to keep the Fed’s operations a secret are not only under the Fed’s regulatory jurisdiction, but are some of the major beneficiaries of the current monetary system.

There can be no doubt that, as the audit bill advances through the legislative process, the Fed and its allies will ramp up both public and behind-the-scenes efforts to kill the bill. Can anyone dismiss the possibility that Janet Yellen will attempt to “persuade” Donald Trump to drop his support for Audit the Fed in exchange for an “accommodative” monetary policy that supports the administration’s proposed spending on overseas militarism and domestic infrastructure?

While auditing the Fed is supported by the vast majority of Americans, it is opposed by powerful members of the financial elite and the deep state. Therefore, those of us seeking to change our national monetary policy must redouble our efforts to force Congress to put America on a path to liberty, peace, and prosperity by auditing, then ending, the Fed.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

Arizona Challenges the Fed’s Money Monopoly – Article by Ron Paul

Arizona Challenges the Fed’s Money Monopoly – Article by Ron Paul

The New Renaissance HatRon Paul
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History shows that, if individuals have the freedom to choose what to use as money, they will likely opt for gold or silver.

Of course, modern politicians and their Keynesian enablers despise the gold or silver standard. This is because linking a currency to a precious metal limits the ability of central banks to finance the growth of the welfare-warfare state via the inflation tax. This forces politicians to finance big government much more with direct means of taxation.

Despite the hostility toward gold from modern politicians, gold played a role in US monetary policy for sixty years after the creation of the Federal Reserve. Then, in 1971, as concerns over the US government’s increasing deficits led many foreign governments to convert their holdings of US dollars to gold, President Nixon closed the gold window, creating America’s first purely fiat currency.

America’s 46-year experiment in fiat currency has gone exactly as followers of the Austrian school predicted: a continuing decline in the dollar’s purchasing power accompanied by a decline in the standard of living of middle- and working-class Americans, a series of Federal Reserve-created booms followed by increasingly severe busts, and an explosive growth in federal-government spending. Federal Reserve policies are also behind much of the increase in income inequality.

Since the 2008 Fed-created economic meltdown, more Americans have become aware of the Federal Reserve’s responsibility for America’s economic problems. This growing anti-Fed sentiment is one of the key factors behind the liberty movement’s growth and represents the most serious challenge to the Fed’s legitimacy in its history. This movement has made “Audit the Fed” into a major national issue that is now closer than ever to being signed into law.

Audit the Fed is not the only focus of the growing anti-Fed movement. For example, this Wednesday the Arizona Senate Finance and Rules Committees will consider legislation (HB 2014) officially defining gold, silver, and other precious metals as legal tender. The bill also exempts transactions in precious metals from state capital-gains taxes, thus ensuring that people are not punished by the taxman for rejecting Federal Reserve notes in favor of gold or silver. Since inflation increases the value of precious metals, these taxes give the federal government one more way to profit from the Federal Reserve’s currency debasement.

HB 2014 is a very important and timely piece of legislation. The Federal Reserve’s failure to reignite the economy with record-low interest rates since the last crash is a sign that we may soon see the dollar’s collapse. It is therefore imperative that the law protect people’s right to use alternatives to what may soon be virtually worthless Federal Reserve notes.

Passage of HB 2014 would also send a message to Congress and the Trump administration that the anti-Fed movement is growing in influence. Thus, passage of this bill will not just strengthen movements in other states to pass similar legislation; it will also help build support for the Audit the Fed bill and legislation repealing federal legal tender laws.

This Wednesday I will be in Arizona to help rally support for HB 2014, speaking on behalf of the bill before the Arizona Senate Finance Committee at 9:00 a.m. I will also be speaking at a rally at noon at the Arizona state capitol. I hope every supporter of sound money in the Phoenix area joins me to show their support for ending the Fed’s money monopoly.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

Alan Greenspan Admits Ron Paul Was Right About Gold – Article by Ryan McMaken

Alan Greenspan Admits Ron Paul Was Right About Gold – Article by Ryan McMaken

The New Renaissance Hat
Ryan McMaken
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In the next issue of The Austrian, David Gordon reviews Sebatian Mallaby’s new book, The Man Who Knew, about the career of Alan Greenspan. Mallaby points out that prior to his career at the Fed, Greenspan exhibited a keen understanding of the gold standard and how free markets work. In spite of this contradiction, Mallaby takes a rather benign view toward Greenspan.

However, in his review, Gordon asks the obvious question: If Greenspan knew all this so well, isn’t it all the more worthy of condemnation that Greenspan then abandoned these ideas so readily to advance his career?

Perhaps not surprisingly, now that his career at the Fed has ended, Old Greenspan — the one who defends free markets — has now returned.

This reversion to his former self has been going on for several years, and Greenspan reiterates this fact yet again in a recent interview with Gold Investor magazine. Greenspan is now a fount of sound historical information about the historical gold standard:

I view gold as the primary global currency. It is the only currency, along with silver, that does not require a counterparty signature. Gold, however, has always been far more valuable per ounce than silver. No one refuses gold as payment to discharge an obligation. Credit instruments and fiat currency depend on the credit worthiness of a counterparty. Gold, along with silver, is one of the only currencies that has an intrinsic value. It has always been that way. No one questions its value, and it has always been a valuable commodity, first coined in Asia Minor in 600 BC.

The gold standard was operating at its peak in the late 19th and early 20th centuries, a period of extraordinary global prosperity, characterised by firming productivity growth and very little inflation.

But today, there is a widespread view that the 19th century gold standard didn’t work. I think that’s like wearing the wrong size shoes and saying the shoes are uncomfortable! It wasn’t the gold standard that failed; it was politics. World War I disabled the fixed exchange rate parities and no country wanted to be exposed to the humiliation of having a lesser exchange rate against the US dollar than itenjoyed in 1913.

Britain, for example, chose to return to the gold standard in 1925 at the same exchange rate it had in 1913 relative to the US dollar (US$4.86 per pound sterling). That was a monumental error by Winston Churchill, then Chancellor of the Exchequer. It induced a severe deflation for Britain in the late 1920s, and the Bank of England had to default in 1931. It wasn’t the gold standard that wasn’t functioning; it was these pre-war parities that didn’t work. All wanted to return to pre-war exchange rate parities, which, given the different degree of war and economic destruction from country to country, rendered this desire, in general, wholly unrealistic.

Today, going back on to the gold standard would be perceived as an act of desperation. But if the gold standard were in place today we would not have reached the situation in which we now find ourselves.

Greenspan then says nice things about Paul Volcker’s high-interest-rate policy:

Paul Volcker was brought in as chairman of the Federal Reserve, and he raised the Federal Fund rate to 20% to stem the erosion [of the dollar’s value during the inflationary 1970s]. It was a very destabilising period and by far the most effective monetary policy in the history of the Federal Reserve. I hope that we don’t have to repeat that exercise to stabilise the system. But it remains an open question.

Ultimately, though, Greenspan claims that central-bank policy can be employed to largely imitate a gold standard:

When I was Chair of the Federal Reserve I used to testify before US Congressman Ron Paul, who was a very strong advocate of gold. We had some interesting discussions. I told him that US monetary policy tried to follow signals that a gold standard would have created. That is sound monetary policy even with a fiat currency. In that regard, I told him that even if we had gone back to the gold standard, policy would not have changed all that much.

This is a rather strange claim, however. It is impossible to know what signals a gold standard “would have” created in the absence of the current system of fiat currencies. It is, of course, impossible to recreate the global economy under a gold standard in an economy and guess how the system might be imitated in real life. This final explanation appears to be more the sort of thing that Greenspan tells himself so he can reconcile his behavior at the fed with what he knows about gold and markets.

Nor does this really address Ron Paul’s concerns, expressed for years, toward Greenspan and his successors. Even if monetary policymakers were attempting to somehow replicate a gold-standard environment, Paul’s criticism was always that the outcome of the current monetary regime can be shown to be dangerous for a variety of reasons. Among these problems are enormous debt loads and stagnating real incomes due to inflation. Moreover, thanks to Cantillon effects, monetarily-induced inflation has the worst impact on lower-income households.

Even Greenspan admits this is the case with debt: “We would never have reached this position of extreme indebtedness were we on the gold standard, because the gold standard is a way of ensuring that fiscal policy never gets out of line.”

Certainly, debt loads have taken off since Nixon closed the gold window in 1971, breaking the last link with gold:

Ryan W. McMaken is the editor of Mises Daily and The Free Market. He has degrees in economics and political science from the University of Colorado, and was the economist for the Colorado Division of Housing from 2009 to 2014. He is the author of Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre. 

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

To Really ‘Make America Great Again,’ End the Fed! – Article by Ron Paul

To Really ‘Make America Great Again,’ End the Fed! – Article by Ron Paul

The New Renaissance HatRon Paul
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Former Dallas Federal Reserve Bank President Richard Fisher recently gave a speech identifying the Federal Reserve’s easy-money/low-interest-rate policies as a source of the public anger that propelled Donald Trump into the White House. Mr. Fisher is certainly correct that the Fed’s policies have “skewered” the middle class. However, the problem is not specific Fed policies, but the very system of fiat currency managed by a secretive central bank.

Federal Reserve-generated increases in money supply cause economic inequality. This is because, when the Fed acts to increase the money supply, well-to-do investors and other crony capitalists are the first recipients of the new money. These economic elites enjoy an increase in purchasing power before the Fed’s inflationary policies lead to mass price increases. This gives them a boost in their standard of living.

By the time the increased money supply trickles down to middle- and working-class Americans, the economy is already beset by inflation. So most average Americans see their standard of living decline as a result of Fed-engendered money supply increases.

Some Fed defenders claim that inflation doesn’t negatively affect anyone’s standard of living because price increases are matched by wage increases. This claim ignores the fact that the effects of the Fed’s actions depend on how individuals react to the Fed’s actions.

Historically, an increase in money supply does not just cause a general rise in prices. It also causes money to flow into specific sectors, creating a bubble that provides investors and workers in those areas a (temporary) increase in their incomes. Meanwhile, workers and investors in sectors not affected by the Fed-generated boom will still see a decline in their purchasing power and thus their standard of living.

Adoption of a “rules-based” monetary policy will not eliminate the problem of Fed-created bubbles, booms, and busts, since Congress cannot set a rule dictating how individuals react to Fed policies. The only way to eliminate the boom-and-bust cycle is to remove the Fed’s power to increase the money supply and manipulate interest rates.

Because the Fed’s actions distort the view of economic conditions among investors, businesses, and workers, the booms created by the Fed are unsustainable. Eventually reality sets in, the bubble bursts, and the economy falls into recession.

When the crash occurs the best thing for Congress and the Fed to do is allow the recession to run its course. Recessions are the economy’s way of cleaning out the Fed-created distortions. Of course, Congress and the Fed refuse to do that. Instead, they begin the whole business cycle over again with another round of money creation, increased stimulus spending, and corporate bailouts.

Some progressive economists acknowledge how the Fed causes economic inequality and harms average Americans. These progressives support perpetual low interest rates and money creation. These so-called working class champions ignore how the very act of money creation causes economic inequality. Longer periods of easy money also mean longer, and more painful, recessions.

President-elect Donald Trump has acknowledged that, while his business benefits from lower interest rates, the Fed’s policies hurt most Americans. During the campaign, Mr. Trump also promised to make Audit the Fed part of his first 100 days agenda. Unfortunately, since the election, President-elect Trump has not made any statements regarding monetary policy or the Audit the Fed legislation. Those of us who understand that changing monetary policy is the key to making America great again must redouble our efforts to convince Congress and the new president to audit, then end, the Federal Reserve.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

The Fed Plans for the Next Crisis – Article by Ron Paul

The Fed Plans for the Next Crisis – Article by Ron Paul

The New Renaissance HatRon Paul
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In her recent address at the Jackson Hole monetary policy conference, Federal Reserve Chair Janet Yellen suggested that the Federal Reserve would raise interest rates by the end of the year. Markets reacted favorably to Yellen’s suggested rate increase. This is surprising, as, except for one small increase last year, the Federal Reserve has not followed through on the numerous suggestions of rate increases that Yellen and other Fed officials have made over the past several years.

Much more significant than Yellen’s latest suggestion of a rate increase was her call for the Fed to think outside the box in developing responses to the next financial crisis. One of the outside-the-box ideas suggested by Yellen is increasing the Fed’s ability to intervene in markets by purchasing assets of private companies. Yellen also mentioned that the Fed could modify its inflation target.

Increasing the Federal Reserve’s ability to purchase private assets will negatively impact economic growth and consumers’ well-being. This is because the Fed will use this power to keep failing companies alive, thus preventing the companies’ assets from being used to produce a good or service more highly valued by consumers.

Investors may seek out companies whose assets have been purchased by the Federal Reserve, since it is likely that Congress and federal regulators would treat these companies as “too big to fail.” Federal Reserve ownership of private companies could also strengthen the movement to force businesses to base their decisions on political, rather than economic, considerations.

Yellen’s suggestion of modifying the Fed’s inflation target means that the Fed would increase the inflation tax just when Americans are trying to cope with a major recession or even a depression. The inflation tax is the most insidious of all taxes because it is both hidden and regressive.

The failure of the Federal Reserve’s eight-year spree of money creation via quantitative easing and historically low interest rates to reflate the bubble economy suggests that the fiat currency system may soon be coming to an end. Yellen’s outside-the-box proposals will only hasten that collapse.

The collapse of the fiat system will not only cause a major economic crisis, but also the collapse of the welfare-warfare state. Yet, Congress not only refuses to consider meaningful spending cuts, it will not even pass legislation to audit the Fed.

Passing Audit the Fed would allow the American people to know the full truth about the Federal Reserve’s conduct of monetary policy, including the complete details of the Fed’s plans to respond to the next economic crash. An audit will also likely uncover some very interesting details regarding the Federal Reserve’s dealings with foreign central banks.

The large number of Americans embracing authoritarianism — whether of the left or right-wing variety — is a sign of mass discontent with the current system. There is a great danger that, as the economic situation worsens, there will be an increase in violence and growing restrictions on liberty. However, public discontent also presents a great opportunity for those who understand free-market economics to show our fellow citizens that our problems are not caused by immigrants, imports, or the one percent, but by the Federal Reserve.

Politicians will never restore sound money or limited government unless forced to do so by either an economic crisis or a shift in public option. It is up to us who know the truth to make sure the welfare-warfare state and the system of fiat money ends because the people have demanded it, not because a crisis left Congress with no other choice.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

Americans Are Going to be Disappointed in Election Outcome – Article by Ron Paul

Americans Are Going to be Disappointed in Election Outcome – Article by Ron Paul

The New Renaissance HatRon Paul
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It is a sad commentary on the state of political life in the United States that our political conventions have become more like rock music festivals than competitions of ideas. There has been a great deal of bombast, of insults, of name-calling, and of chest-beating at both party conventions, but what is disturbingly absent is any mention of how we got to this crisis and how we can get out. From the current foreign-policy mess to the looming economic collapse, all we hear is both party candidates saying they will fix it, no problem.

In her convention speech Hillary Clinton promised that she would “fight terrorism” and defeat ISIS by doing more of what we have been doing all along: bombing. In fact we have dropped more than 50,000 bombs on ISIS in Iraq and Syria over the past two years and all she can say is that she will drop more. How many more bombs will defeat ISIS? How many more years will she keep us in our longest war, Afghanistan? She doesn’t say.

In fact, the New York Times – certainly not hostile to the Clintons – wrote that it was almost impossible to fact-check Hillary’s speech because, “she delivered a speech that was remarkably without hard facts.”

Clinton’s top foreign policy advisor said just a day after her convention speech that her big plan for Syria was to go back to square one and concentrate on overthrowing its secular president. How many more thousands more will die if she gets her way? And won’t she eventually be forced to launch a massive US ground invasion that will also kill more Americans?

Clinton does not understand that a policy of endless interventionism has brought us to our knees and made us far weaker. Does she really expect us to be the policemen of the world with $20 trillion in debt?

Likewise, Republican candidate Donald Trump misses the point. He promises to bring back jobs to America without any understanding of the policies that led to their departure in the first place. Yes, he is correct that the middle class is in worse shape than when Obama took office, but not once did he mention how it happened: the destructive policies of the Federal Reserve; the financing of our warfare/welfare state through the printing of phony money; distorted interest rates that encourage consumption and discourage saving and investment.

Trump tweeted this week that home ownership is at its lowest rate in 51 years. He promised that if elected he will bring back “the American dream.” He seems to have no idea that home ownership is so low because the Fed-created housing bubble exploded in 2007-2008, forcing millions of Americans who did not have the means to actually purchase a home to lose their homes. Not a word about the Fed from Trump.

How are these candidates going to fix the problems we face in America if they have absolutely no idea what caused the problems? No matter who is elected, Americans are going to be very disappointed in the outcome. The warfare/welfare state is going to proceed until we are bankrupt. There is hope, however. It is up to us to focus on the issues, to focus on educating ourselves and others, and to demand that politicians listen.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

We’re Going Deeper into Debt as Real Incomes Fall – Article by Victor Xing

We’re Going Deeper into Debt as Real Incomes Fall – Article by Victor Xing

The New Renaissance HatVictor Xing

New York Fed President Dudley recently commented that “real consumer spending growth appears to have moderated somewhat from the relatively robust pace of the second half of 2015.” While this may suggest headwinds from cyclical economic conditions, there are emerging signs that ultra-accommodative policy also acts as a constraint on consumer spending via income effects. Instead of inducing savers to spend and borrow, rapid asset price appreciation as a result of monetary easing has outpaced wage growth, and pass-through services inflation subsequently reduced discretionary income and forced already-levered consumers to save instead of spend. This unintended consequence worked against accommodative policy’s desired substitution effects and suggests further easing would likely yield diminishing results if asset price appreciation continues to outpace real income growth.

Asset Price and Services Inflation Outpaced Real Wage Growth
Post-2008 policy accommodation broadly lowered funding costs for consumers and businesses to supported asset price appreciation. However, rising prices have also made assets less affordable, and home buyers “priced out” of their respective housing markets subsequently became involuntary renters. Not only do they not benefit from rising home values, higher education, and medical care inflation also outpaced aggregate real wage growth (Chart 1) to weigh on renters’ discretionary spending.

xing1In response with rising commercial real estate prices (Chart 2), businesses also pass on higher operating costs in the form of services inflation. Year-over-year personal consumption expenditure — services (chain-type price index) has been well-anchored in the 2% range (2.13% in Feb 2016) since 4Q 2011.

xing2Another factor constraining consumer spending is the well-publicized effect of student debt burden. This supports a view that household spending may be at a lower potential than during prior cycles, thus magnifying the costs of higher services inflation as a result of asset price appreciation.

Consumers Redlining their Engines: Inability To Pay $400 Emergency Expense
Accommodative monetary policy encourages consumers to spend and borrow rather than hoarding cash. However, cash-strapped consumers already facing the pressure of debt burden would likely do neither.

Federal Reserve’s recent Report on the Economic Well-Being of U.S. Households highlighted signs that some consumers are already stretching their spending power to meet existing obligations. 47% of respondents reported that a $400 emergency expense would be “more challenging to handle” (unable to use cash or a credit card that they pay off at the end of the mouth). Results from middle-income household with $40,000 to $100,000 annual income were similarly downbeat, where 44% of respondents indicated difficulties (Chart 3).

Chart 3: Percent of respondents who would completely pay an emergency expense that costs $400 using cash or a credit card that they pay off at the end of the month (by race/ethnicity and household income)

xing3Source: Federal Reserve Board of Governors

Chart 4: During the past 12 months, was there a time when you needed any of the following, but didn’t get it because you couldn’t afford it?

xing4Source: Federal Reserve Board of Governors

A survey on health-care expenses was also discouraging. 31% of respondents reported going without some type of medical care in the preceding 12 months due to inability to afford the cost. 45% of those surveyed under a household income of $40,000 reported similar decisions to defer treatment.

In the section “spending relative to income,” Fed researchers reported that one-in-five respondents with spending exceeded their income (leveraged spending). These are signs that consumers were taking advantage of lower rates, but the spending does not appear to be sustainable without corresponding rise in real wage growth.

Rising Renter Cost Burden
Another factor constraining discretionary spending is rising renter cost burden. The Harvard Joint Center for Housing Studies projected a “fairly bleak picture of severe renter burden across the U.S. for the coming decade.” The report acknowledged falling incomes among renters and the persisting gap between renter income and renter housing costs (Chart 6), as well as severely burdened renter households (housing costs of more than 50% of household income) reaching 11.8 million in 2015 (Chart 7), or about one in four renters.

Assuming the correlation between rental price inflation and asset price inflation holds, further declines in housing affordability as a result of policy easing would exacerbate renter burden — one likely needs rising real wages to offset.

Chart 5: In the past 12 months, would you say that your household’s total spending was more, less, or the same as your income? (by household income)

xing5Source: Federal Reserve Board of Governors

xing6xing7

Impacts of “Long and Variable Lags” Between Asset Price Inflation and Real Wage Growth
Financial market participants play an essential role in the transmission of Federal Reserve’s monetary policy by affecting financial conditions — the following components are part of the GS Financial Conditions Index:

  • Short-term bond yield
  • Long-term corporate credit spread
  • Stock market variable
  • Exchange rate

The Federal Reserve only has effective control of the very front-end of the Treasury curve via conventional monetary policy. Nevertheless, unconventional policies such as QE, as well as forward guidance on SOMA principal reinvestments also allow the central bank to affect longer-term funding costs via the expectations and “recruitment channel.” Under this mechanism, asset prices take little time to react to changing policy stances, while impacts on income growth and economic conditions would often take longer to manifest.

Such lag between asset price appreciation and changing economic conditions carries a hidden cost — if asset price inflation becomes well entrenched ahead of broad-based economic growth, those without assets would be penalized just to maintain their life-style, and the reduction in their discretionary spending would serve as a disinflationary drag to Federal Reserve’s effort to reflate the economy.

Conclusion
Inefficiencies within the monetary policy transmission mechanism have resulted in income effects becoming greater than the substitution effects. Under this scenario, ultra-accommodative policy may induce further saving by asset-less consumers to further weigh on aggregate demand. Additionally, policymakers should exercise caution if increasingly aggressive and unconventional reflationary policies do not yield intended results.

Victor Xing is founder and investment analyst at Kekselias, Inc. He is formerly a fixed-income trading analyst for the Capital Group Companies with 5 years of experience on its interest rates trading desk.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Chasing 2 Percent Inflation: A Really Bad Idea – Article by John Chapman

Chasing 2 Percent Inflation: A Really Bad Idea – Article by John Chapman

The New Renaissance HatJohn Chapman

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In just two years, inflation targeting (namely, the quest for 2 percent inflation) has gone from the lunatic fringe of economics to mainstream dogma. Much of the allure springs from notions that a little inflation motivates people to speed up spending, thereby greatly increasing the efficacy of central bank stimulus. It is touted as a cure for sagging demand and a defense against the (overly) dreaded deflation.

Other benefits include melting away some of the massive government and private debts and improving people’s perception of progress as they see their nominal wages rise. Employers can lower real wages without unpopular dollar pay cuts. The Fed can allow price increases to signal the need for production responses, allow for minor supply shocks and for monopolistic industries to increase prices all without a monetary response that would hurt other elements of the economy.

For the politicians it provides a tax windfall in the form of capital gains taxes on inflated assets and income taxes on interest that simply reflects inflation. It also necessitates printing more money thereby earning seigniorage (profits from printing money) for the government. In addition, it provides cover for competitive currency devaluation and is a great excuse to kick the can down the road: “Let’s not tighten before we reach our highly desired inflation target.”

What’s Magical about 2 Percent Inflation?
Then there is the question of why 2 percent? Perhaps that was seen as a still comfortable rate during some past periods of strong growth. Conditions today are very different, which perhaps suggests they are trying to imitate past growth by copying symptoms instead of substance. Of course for politicians, permission to print money is a godsend, and with inflation all around the developed world below 2 percent, it was “all aboard!”

Clearly not all of the features above are desirable, but even some of the touted ones are underwhelming. While increased inflation expectations will speed up spending, it is far from being the reservoir of perpetual demand that some seem to believe. Essentially, a onetime increase in expectations of a new steady rate of inflation would speed up purchases for the period ahead, but with negligible net effects in subsequent periods — a onetime phase shift in demand.

The Danger of Raising Interest Rates
After almost eight years of stimulus, the Fed has taken its first timid steps toward normalizing monetary policy. That means we will soon have to contend with something entirely absent during the years of easy money — a bill for all of the goodies passed out and the distortions created. And what a bill! A 3 percent rise in average interest rates on just our present government debt over the next few years would ultimately amount to over $500 billion a year in additional interest expense, equal to roughly 1/7 of current Federal tax receipts. Those bills start arriving with a vengeance when rates go back up, and for the first time in years the market will see concrete evidence of whether the US and other governments are willing to pay the price of continuing to have viable currencies.

Prior to the appearance of inflation targeting, I was already dreading the impact of political interference with efforts to return to normal. But targeting makes every politician an economist, able to make simplistic, grandstanding statements with the authority of the Fed’s own model. This makes the problem far worse.

Two percent, which has (foolishly) been defined as desirable, will quickly be interpreted as an average. “So what’s the big deal,” critics will say, “about a pop to 3 percent or more, after all it has spent years ‘below target’, and if you excluded a handful of ‘temporary exceptions’, it would still be only 2 percent …?” Imagine the political storm if the Fed decided to quickly raise rates a couple of full percentage points in response to a surge in inflation to 3 percent.

There are a lot of people (especially politicians) whose short-term interests would be harmed by a sharp rise in interest rates. Lulled by today’s relative calm, many fail to appreciate how explosive the situation becomes when we transition from the concerned waiting of the long easy money period to the concrete tests of our credibility during renormalization. If we had to temporarily sacrifice half a percent from our already tepid growth rate to preserve the credibility of the dollar, that would pale next to the cost of worldwide panic and collapse. Unfortunately the sacrifice part is up front.

Americans think of inflation as a purely monetary phenomenon, which the mighty and independent Fed has handled in the past and will again if necessary. Actually once the inflation genie starts to escape from the bottle it becomes purely a political problem. Even the most determined central banker is helpless if the people refuse to accept the paper money, the politicians balk and take away the bank’s independence, or there is an opposition political party promising a credible-sounding and painless alternative plan. It comes down to what the market sees as the political will and ability to pay the short-term cost of reining in the inflation.

The Political Advantages of the 2 Percent Target
Political resistance to the cost of moving back to normal plus our willingness to decisively confront signs of panic will be watched carefully by owners of dollars and dollar instruments. This is a huge liquid pool which could stampede en masse into wealth storage and productive assets. Such a run would quickly become unstoppable and would mean a collapse of the world economy. Inflation targeting greatly facilitates the political opposition to decisive Fed action right at the first critical test points where there might still be hope of heading off an uncontrollable panic.

Deliberately seeking higher inflation amounts to intentionally damaging people’s faith in a fiat currency, one already in danger from massive debt, disquiet over novel monetary policy, and noises from Congress about reducing Fed independence. Targeting also provides a handy excuse to delay returning to normal, thereby worsening the mounting distortions. Finally, it invites wholesale political interference with the Fed’s efforts to manage an orderly return to normal financial conditions.

John Chapman is a retired commodity trader, having headed his own small trading firm for over thirty years. Prior to that he worked in the international division of a large New York bank, managed foreign exchange hedging for a major NY commodity firm, and worked as a silver trader.

Economics, especially money and banking, has been a passion of his since college. In 1990 he took a trip to South America for the express purpose of studying inflation “at its source.” His formal economics credentials consist of half a dozen courses, five of which were as an undergraduate at MIT (where he majored in aeronautical engineering.) He also received an MBA from the University of Arizona.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

What Did Fed Chairman Yellen Tell Obama? – Article by Ron Paul

What Did Fed Chairman Yellen Tell Obama? – Article by Ron Paul

The New Renaissance HatRon Paul
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This week, President Obama and Vice President Biden held a hastily arranged secret meeting with Federal Reserve Chairman Janet Yellen. According to the one paragraph statement released by the White House following the meeting, Yellen, Obama, and Biden simply “exchanged notes” about the economy and the progress of financial reform. Because the meeting was held behind closed doors, the American people have no way of knowing what else the three might have discussed.

Yellen’s secret meeting at the White House followed an emergency secret Federal Reserve Board meeting. The Fed then held another secret meeting to discuss bank reform. These secret meetings come on the heels of the Federal Reserve Bank of Atlanta’s estimate that first quarter GDP growth was .01 percent, dangerously close to the official definition of recession.

Thus the real reason for all these secret meetings could be a panic that the Fed’s eight-year explosion of money creation has not just failed to revive the economy, but is about to cause another major market meltdown.

Establishment politicians and economists find the Fed’s failures puzzling. According to the Keynesian paradigm that still dominates the thinking of most policymakers, the Fed’s money creation should have produced such robust growth that today the Fed would be raising interest rates to prevent the economy from “overheating.”

The Fed’s response to its failures is to find new ways to pump money into the economy. Hence the Fed is actually considering implementing “negative interest rates.” Negative interest rates are a hidden tax on savings. Negative interest rates may create the short-term illusion of growth, but, by discouraging savings, they will cause tremendous long-term economic damage.

Even as Yellen admits that the Fed “has not taken negative interest rates off the table,” she and other Fed officials are still promising to raise rates this year. The Federal Reserve needs to promise future rate increases in order to stop nervous investors from fleeing US markets and challenging the dollar’s reserve currency status.

The Fed can only keep the wolves at bay with promises of future rate increases for so long before its polices cause a major dollar crisis. However, raising rates could also cause major economic problems. Higher interest rates will hurt the millions of Americans struggling with student loan, credit card, and other forms of debt. Already over 40 percent of Americans who owe student loan debt are defaulting on their payments. If Federal Reserve policies increase the burden of student loan debt, the number of defaults will dramatically increase leading to a bursting of the student loan bubble.

By increasing the federal government’s cost of borrowing, an interest rate increase will also make it harder for the federal government to manage its debt. Increased costs of debt financing will place increased burden on the American people and could be the last straw that finally pushes the federal government into a Greek-style financial crisis.

The no-win situation the Fed finds itself in is a sign that we are reaching the inevitable collapse of the fiat currency system. Unless immediate steps are taken to manage the transition, this collapse could usher in an economic catastrophe dwarfing the Great Depression. Therefore, those of us who know the truth must redouble our efforts to spread the ideas of liberty.

If we are successful, we may be able to force Congress to properly manage the transition by cutting spending in all areas and auditing, then ending, the Federal Reserve. We may also be able to ensure the current crisis ends not just the Fed but the entire welfare-warfare state.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

Dumb and Dumber – From Negative Interest Rates to Helicopter Money – Article by Paul-Martin Foss

Dumb and Dumber – From Negative Interest Rates to Helicopter Money – Article by Paul-Martin Foss

The New Renaissance Hat
Paul-Martin Foss
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We’ve all run into someone who thinks that all it take to bring about prosperity is to give everyone a million dollars. If everyone is a millionaire, we’ll all be rich and be able to afford anything we want, or so the thinking goes. Any sound economist knows that wouldn’t be the case, however. If everyone were given a million dollars the increased amount of money chasing the existing stock of goods would merely result in a massive rise in prices. No one would be better off, at least not once prices were once again equilibrated. The concept of giving everyone a million dollars is so absurd that no one takes it seriously. That is, they don’t take it seriously when a million dollars is the proposed amount. When the amount is smaller, all of a sudden it becomes a viable and increasingly-discussed policy proposal: helicopter money.

Ben Bernanke was derided for bringing up the possibility of helicopter money in 2002, although the idea dates back to Milton Friedman. What Bernanke did say was:

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

In fact, if you read that speech you will see Bernanke touting the effectiveness of policies which the Fed has since tried and failed at, as well some policies which the Fed has not yet tried and which we hope it never will.

As a decade of stimulus, quantitative easing, and zero or below-zero interest rates has now proven to be an absolute failure, helicopter money is once again being discussed as a potential central bank action, by central bankers who have no idea what to do and who are grasping at straws. The chief fixed income analyst at Nordea bank has publicly speculated that the European Central Bank (ECB) might be able to distribute 1,300 euros to each European citizen in a bid to boost inflation.

This bid to boost inflation makes the age-old error of confusing more money and higher prices with greater wealth. We know from our million-dollar example that that isn’t the case. So why try on a small scale what fails at the large scale? It is like the minimum wage debate, in which those who favor boosting minimum wages argue that it will result in workers being better-paid and more well-off. Yet we know that raising the minimum wage will result in some workers losing their jobs, as businesses cannot absorb all the increased costs and must dismiss their least-productive workers. The challenge to the proponents of minimum wages always is, if $15 an hour is so good, why not $15,000 an hour? Well, that’s because such a large increase would make abundantly clear what the minimum wage proponents are trying to hide. Minimum wages make some workers better off, but they do so by forcing other workers out of work, thus their wage falls to $0. In the same way, if the ECB could give 1,300 euros to each person, why not 1,300,000 euros? Because prices would rise in result and quickly negate any short-term benefit gained by the monetary increase. That type of hypothetical question exposes the farce of such handouts.

If helicopter money is implemented, those who first gain the use of the new money may benefit by increasing consumption before prices rise, while others will see prices rise before they are able or willing to use the money. But the end result will be higher prices but no overall increase in welfare. The economy will not see any sort of burst in productivity from a one-shot injection. So what will be proposed next? How about multiple injections of helicopter money over extended periods of time? That would seem to follow.

But again, anticipation and expectation of future injections would not lead to economic growth. It would only serve to further raise prices as new money enters the economy and transfers wealth to those who first use the new money from those who don’t. Economic growth comes not from more money or higher prices, but from savings and investment. No matter where in the economy central bank monetary injections enter, they cannot and will not result in real economic growth.

Zero interest rates didn’t do what central banks thought they would do, so they moved to quantitative easing. QE didn’t do what central banks thought it would do, so they moved or are moving to negative interest rates. Negative interest rates won’t work either so, assuming they don’t completely destroy the banking system beforehand, central banks may very well resort to helicopter money. Guess what, that won’t work either. How much more suffering will central banks have to impose on their countries before people realize that they are monetarily, morally, and intellectually bankrupt?

Paul-Martin Foss is the founder, President, and Executive Director of the Carl Menger Center for the Study of Money and Banking, a think tank dedicated to educating the American people on the importance of sound money and sound banking.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.