Money

Does low US price inflation provide room for a more aggressive Fed?

The US Federal Reserve can keep stimulating the US economy because inflation is posing little threat, Federal Reserve Bank of Minneapolis President Kocherlakota said. “I am expecting an inflation rate to run below 2% for the next four years, through 2018”, he said. “That means there is more room for monetary policy to be helpful in terms of … boosting demand without running up against generating too much inflation”.

The yearly rate of growth of the consumer price index (CPI) stood at 1.7% in August against 2% in July and the official target of 2%. According to our estimate the yearly rate of growth of the CPI could close at 1.4% by December. By December next year we forecast the yearly rate of growth of 0.6%.

Shostak CPI

It seems that the Minneapolis Fed President holds that by boosting the demand for goods and services by means of an additional monetary pumping it is possible to strengthen the economic growth. He believes that by means of strengthening the demand for goods and services the production of goods and services will follow suit. But why should it be so?

If by means of monetary pumping one could strengthen the economic growth then it would imply that by means of monetary pumping it is possible to create real wealth and generate an everlasting economic prosperity.

This would also mean that world wide poverty should have been erased a long time ago, after all most countries today have central banks that possess the skills of how to pump money. Yet world poverty remains intact.

Despite the massive monetary pumping since 2008 and the policy interest rate of around zero Fed policy makers seem to be unhappy with the so-called economic recovery. Note that the Fed’s balance sheet, which stood at $0.86 trillion in January 2007 jumped to $4.4 trillion by September this year – a monetary pumping of almost $4 trillion.

Shostak Fed Balance Sheet

We suggest that there is no such thing as an independent category called demand. Before an individual can exercise demand for goods and services he/she must produce some other useful goods and services. Once these goods and services are produced individuals can exercise their demand for the goods they desire. This is achieved by exchanging things that were produced for money, which in turn can be exchanged for goods that are desired. Note that money serves here as the medium of the exchange – it produces absolutely nothing. It permits the exchange of something for something. Any policy that results in monetary pumping leads to an exchange of nothing for something. This amounts to a weakening of the pool of real wealth – and hence to reduced prospects for the expansion of this pool.

What is required to boost the economic growth – the production of real wealth – is to remove all the factors that undermine the wealth generation process. One of the major negative factors that undermine the real wealth generation is loose monetary policy of the central bank, which boosts demand without the prior production of wealth. (Once the loopholes for the money creation out of “thin air” are closed off the diversion of wealth from wealth generators towards non-productive bubble activities is arrested. This leaves more real funding in the hands of wealth generators – permitting them to strengthen the process of wealth generation i.e. permitting them to grow the economy).

Now, the artificial boosting of the demand by means of monetary pumping leads to the depletion of the pool of real wealth. It amounts to adding more individuals that take from the pool of real wealth without adding anything in return –an economic impoverishment.

The longer the reckless loose policy of the Fed stays in force the harder it gets for wealth generators to generate real wealth and prevent the pool of real wealth from shrinking.

Finally, the fact that the yearly rate of growth of the CPI is declining doesn’t mean that the Fed’s monetary pumping is going to be harmless. Regardless of price inflation monetary pumping results in an exchange of nothing for something i.e. an economic impoverishment.

Money

Valuing gold and turkey-farming

Today’s financial markets are built on the sand of unsound currencies. Consequently brokers, banks and investors are wedded to monetary inflation and have lost both the desire and ability to understand gold and properly value it.

Furthermore governments and central banks in welfare-driven states see markets themselves as the biggest threat to their successful management of the economy, a threat that needs to be tamed. This is the backdrop to the outlook for the price of gold today and of the forces an investor in gold is pitted against.

At the heart of market control is the substitution of unsound currency for sound money, which historically has been gold. Increasing the quantity of currency and encouraging banks to increase credit out of thin air is the principal means by which central banks operate. No matter that adulterating the currency impoverishes the majority of the population: central banks are working from the Keynesian and monetarist manual of how to manage markets.

In this environment an investor risks all he possesses if he insists on fighting the system; and nowhere is this truer than with gold. Gold is not about conventional investing in this world of fiat currencies, it is about insurance against the financial system collapsing under the weight of its own delusions. Regarded as an insurance premium against this risk, gold is common sense; and there are times when it is worth increasing your insurance. In taking that decision, an individual must be able to evaluate three things: the relative quantities of currency to gold, the likelihood of a systemic crisis and the true cost of insuring against it. We shall consider each of these in turn.

The relationship of currency to gold

Not only has the quantity of global currency and bank credit expanded dramatically since the Lehman crisis, it is clear that this is a trend that cannot now be reversed without triggering financial chaos. In other words we are already committed to monetary hyperinflation. Just look at the chart of the quantity of US dollar fiat money and note its dramatic growth since the Lehman crisis in 2008.

FMQ 26092014

Meanwhile, the quantity of above-ground stocks of gold is growing at less than 2% annually. Gold is therefore getting cheaper relative to the dollar by the day. [Note: FMQ is the sum of all fiat money created both on the Fed’s balance sheet and in the commercial banks. [See here for a full description]

Increasing likelihood of a systemic crisis

Ask yourself a question: how much would interest rates have to rise before a systemic crisis is triggered? The clue to the answer is illustrated in the chart below which shows how lower interest rate peaks have triggered successive recessions (blue shaded areas are official recessions).

Effective Fed Funds 26092014

The reason is simple: it is the accumulating burden of debt. The sum of US federal and private sector debt stands at about$30 trillion, so a one per cent rise in interest rates and bond yields will simplistically cost $300bn annually. The increase in interest rates during the 2004-07 credit boom added annual interest rate costs of a little over double that, precipitating the Lehman crisis the following year. And while the US this time might possibly weather a two to three per cent rise in improving economic conditions, much less would be required to tip other G8 economies into financial and economic chaos.

The real cost of insurance

By this we mean the real price of gold, adjusted by the rapid expansion of fiat currency. One approach is to adjust the nominal price by the ratio of US dollars in circulation to US gold reserves. This raises two problems: which measure of money supply should be used, and given the Fed has never been audited, are the official gold reserves as reported to be trusted?

The best option is to adjust the gold price by the growth in the quantity of fiat money (FMQ) relative to the growth in above-ground stocks of gold. FMQ is constructed so as to capture the reversal of gold’s demonetisation. This is shown in the chart below of both the adjusted and nominal dollar price of gold.

Gold USD 26092014

Taken from the month before the Lehman collapse, the real price of gold adjusted in this way is $550 today, based on a nominal price of $1220. So in real terms, gold has fallen 40% from its pre-Lehman level of $920, and has roughly halved from its adjusted high in 2011.

So to summarise:

• We already have monetary hyperinflation, defined as an accelerating debasement of the dollar. And so for that matter all other currencies that are referenced to it are on a similar course, a condition which is unlikely to be halted except by a final systemic and currency crisis.
• Attempts to stabilise the purchasing power of currencies by raising interest rates will very quickly develop into financial and economic chaos.
• The insurance cost of owning gold is anomalously low, being considerably less than at the time of the Lehman crisis, which was the first inkling of systemic risk for many people.

So how is the global economy playing out?

If the economy starts to grow again a small rise in interest rates would collapse bond markets and bankrupt over-indebted businesses and over-geared banks. Alternatively a contracting economy will increase the debt burden in real terms, again threatening its implosion. So the last thing central banks will welcome is change in the global economic outlook.

Falling commodity prices and a flight from other currencies into the dollar appear to be signalling the greater risk is that we are sliding into a global slump. Even though large financial speculators appear to be driving commodity and energy prices lower, the fact remains that the global economy is being undermined by diminishing affordability for goods and services. In other words, the debt burden is already too large for the private sector to bear, despite a prolonged period of zero official interest rates.

A slump was halted when prices collapsed after Lehman went bust; that time it was the creation of unlimited money and credit by the Fed that saved the day. Preventing a slump is the central banker’s raison d’être. It is why Ben Bernanke wrote about distributing money by helicopter as the final solution. It is why we have had zero interest rates for six years.

In 2008 gold and oil prices fell heavily until it became clear that monetary stimulus would prevail. Equities also fell with the S&P 500 Index down 60% from its October 2007 high, but this index was already 24% down by the time Lehman failed.

The precedent for unlimited creation of cash and credit has been set and is undisputed. The markets are buoyed up by a sea of post-Lehman liquidity, are not discounting any trouble, and are ignoring the signals from commodity prices. If the economic downturn shows any further signs of accelerating the adjustment is likely to be brutal, involving a complete and sudden reassessment of financial risk.

This time gold has been in a bear market ahead of the event. This time the consensus is that insurance against financial and systemic risk is wholly unnecessary. This time China, Russia and the rest of Asia are buying out physical bullion liquidated by western investors.

We are being regularly advised by analysts working at investment banks to sell gold. But bear in mind that the investment industry is driven by trend-chasing recommendations, because that is what investors demand. Expecting analysts to value gold properly is as unlikely as farmers telling turkeys the truth about Thanksgiving.

Money

End the Fed’s War on Paychecks

The Democratic Party has made “income inequality” a signature issue for the 2014 (and, presumably, 2016) election cycle.  Democrats, en masse, shout “J’accuse!” at Republicans.  There is a very different story to tell.

“Income inequality” is a crude, and twisted, heuristic for stagnant median family income.   “Income inequality” does not really resonate with voters, asnoted by the Washington Post‘s own Catherine Rampell, with a mountain of evidence showing that Americans don’t begrudge the wealthy their wealth, just are frustrated at the lack of widespread economic opportunity.

So let’s get down to cases.  Stagnant median family income is not the GOP’s fault.  It’s the Fed who done it.

The Atlantic Media Company’s Quartz recently claimed that the Fed has been intentionally keeping a lid on wages.  This has potentially major political implications.  Among other things, this view would allow the Republicans to push the discourse back toward the real problem, wage stagnation.  It can serve to refocus the Congress on the real solution, restoring real, rule-based, integrity to monetary policy as a way to get America moving again.

A culpable Fed gives irony to the fact that it is the Democrats that protect the Fed as if it were the Holy of Holies of the Temple.  What if, as asserted inQuartz, the Fed, by policy, and not the GOP, is the source of wage stagnation?  This opens an opportunity for the GOP to parry the political narrative of “income inequality” and feature the real issue on the mind of the voters and forthrightly to address its core cause, poor monetary policy.

This has been slow to happen because Federal Reserve has exalted prestige. The elite media has a propensity to canonize the Chair of the Fed.   Media adulation has obscured the prime source of the stagnation besetting American wage earners for the past 43 years.

Paul Volcker’s life was exalted (with some real justification), for instance by New York Times prize-winning journalist Joseph B. Treaster as The Making of a Financial Legend.  Downhill from there…

English: Official picture of Janet Yellen from...Official picture of Janet Yellen from FRBSF web site.  (Photo credit: Wikipedia)

Chairman Greenspan was featured on the cover of Time Magazine’s February 15, 1999 issue as the most prominent member of “The Committee To Save The World.”  One of the greatest investigative journalists of our era, Bob Woodward, wrote a deeply in-the-tank hagiography of Alan Greenspan, entitled Maestro. In retrospect, the halo the media bestowed was faux.

The Atlantic Monthly, in its February 12, 2012 issue, featured Fed Chairman Ben Bernanke on its cover as The Hero.  (Hedging its bets, The Atlantic ran a duplicate inside cover referencing him as The Villain.)  Author Roger Lowenstein wrote: “Ben Bernanke saved the economy—and has navigated masterfully through the most trying of times.”  The adulation for Chairman Bernanke, in retrospect, seems overdone.  Even President Obama, at the end of Bernanke’s final term, gave him a not-so-subtle push out the door, as reported by CNN: “He’s already stayed a lot longer than he wanted, or he was supposed to….”

It’s Janet Yellen’s turn for media canonization.  This is premature.

Madame Yellen’s institutional loyalty and obvious decency command this columnist’s respect. Her intentions present as — profoundly — good.  That said, the road to a well-known, notorious, destination is said to be paved with good intentions.  Moreover, canonization demands that a miracle be proven.  None yet is in evidence.

The canonization of Madame Yellen began in earnest with an August 24 article in Politico by Michael Hirsch, The Mystery Woman Who Runs Our Economy. The process was taken up to the next level the very next day in an article by Matt Phillips in QuartzJanet Yellen’s Fed is more revolutionary than Ben Bernanke’s ever was

Hirsch tees it up in Politico nicely:

As has been written, Yellen is clearly passionate about the employment problem. It was no accident that the theme of this year’s Jackson Hole meeting was “labor market dynamics,” and the AFL-CIO’s chief economist, Bill Spriggs, was invited while Wall Street economists were not.

Yellen is also very cagey about whether that’s happening or not: She’s playing her own private game of chicken with inflation, indicating that she wants to see more wage growth for workers (another thing that’s hard to track ahead of time) before she raises rates. Beneath the careful analysis and the caveat-freighted sentences, the bottom line seems to be: “We’re making this up as we go along.”

Phillips, in Quartz, observes that it has been Fed policy to suppress wages for two generations.  Phillips:

From her position as the world’s single most powerful economic voice, the chair of the US Federal Reserve, Janet Yellen, is forcing the financial markets to rethink assumptions that have dominated economic thinking for nearly 40 years. Essentially, Yellen is arguing that fast-rising wages, viewed for decades as an inflationary red flag and a reason to hike rates, should instead be welcomed, at least for now.

It might sound surprising to most people who work for a living, but for decades the most powerful people in economics have seen strong real wage growth—that is, growth above and beyond the rate of inflation—as a big problem.

Phillips then gets to the point, providing what passes for economic wisdom among the enablers of the Fed’s growth-sapping (including wage-enervating) interventions.

Since the end of the Great Inflation, the Fed—and most of the world’s important central banks—have gone out of their way to avoid a replay of the wage-price spiral. They’ve done this by tapping on the economic brakes—raising interest rates to make borrowing more expensive and discourage companies from hiring—as wages started to show strong growth.

Phillips provides this exaltation of Janet Yellen:

If she’s right, and American paychecks can improve without setting off an inflationary spiral, it could upend the clubby world of monetary policy, reshape financial markets, and have profound implications for everything ….

Higher real wages, without exacerbating inflation, indeed would be something to cheer.  That, demonstrably, is possible.  The devil is in the details.

There’s persuasive, even compelling, evidence that the international monetary system is better governed by, and working people benefit from, a smart rule rather than the discretion of career civil servants, however elite.  An important Bank of England paper in 2011, Financial Stability Paper No. 13, contrasts the poor performance, since 1971, of the freelancing Fed with the precursor Bretton Woods, and with classical gold standard, rules.  This paper materially advances the proposition of exploring “a move towards an explicit rules-based framework.”

A rule-based system would represent a profound transformation of how the Fed currently does its business. House Financial Services Committee Chairman Jeb Hensarling (R-Tx) said, in a recent hearing, that “The overwhelming weight of evidence is that monetary policy is at its best in maintaining stable prices and maximum employment when it follows a clear, predictable monetary policy rule.”

Madame Yellen stated that “It would be a grave mistake for the Fed to commit to conduct monetary policy according to a mathematical rule.”  Contrast Madame Yellen’s protest with a recent speech by Paul Volcker in which he forthrightly stated: “By now I think we can agree that the absence of an official, rules-based cooperatively managed, monetary system has not been a great success.  In fact, international financial crises seem at least as frequent and more destructive in impeding economic stability and growth. … Not a pretty picture.”

Madame Yellen’s ability to achieve her (postulated) goal of rising real wages in a non-inflationary environment likely depends on who is right here, Yellen or Volcker.  It is a key issue of the day.  The threshold issue currently is framed as between “a clear, predictable monetary policy rule” and the discretion of the Federal Open Market Committee.  The available rules are not limited to mathematical ones but, to achieve real wage growth and equitable prosperity, the evidence fully supports the proposition that a rule is imperative.

Returning America to consistently higher real wage growth is a Holy Grail for this columnist.  Equitable prosperity, very much including the end of wage stagnation, is a driving objective for most advocates of a rule-based system, very much including advocates of “the golden rule.”

Getting real wages growing is a laudable, and virtuous, proposition.  Premature canonization, however, is a flattering injustice to Madame Yellen … and to the Fed itself.  The Federal Reserve is lost in a wilderness — “uncharted territory” — partly, perhaps mainly, of its own (well-intended) concoction.

The road to the declaration of sainthood requires, according to this writer’s Catholic friends, documentation of miracles.  If this writer may be permitted to play the role of advocatus diaboli for a moment … no American Economic Miracle — akin to the Ludwig Erhard’s German “Economic Miracle,” the Wirtschaftswunder, driven by currency reform — yet appears in evidence.

Expertise, which Chair Yellen certainly possesses in abundance, can lead to hubris … and hubris in disaster as it did in 2008.  Good technique is necessary but not sufficient.

As this writer elsewhere has noted,

Journalist Edwin Hartrich tells the following story about Erhard …. In July 1948, after Erhard, on his own initiative, abolished rationing of food and ended all price controls, Clay confronted him:

Clay:  “Herr Erhard, my advisers tell me what you have done is a terrible mistake. What do you say to that?”

Erhard: “Herr General, pay no attention to them! My advisers tell me the same thing.”

Erhard, famously, proved right, his experts, wrong.

Madame Yellen by dint of her decency and intellect may yet prove capable of restoring the Great Moderation … and the real wage growth, with low inflation, that went with that.  Yet, at best, Great Moderation 2.0 would be, as was its predecessor, a temporary, rather than sustainable, solution. “Making it up as you go along” is a proposition fraught with peril.

At worst, if Madam Yellen has, as observers such as Forbes.com‘s John Tamny detect, a proclivity for cheapening the dollar as a path to real wage growth she easily could throw working people out of the frying pan and into the fires of inflation.  Moreover, the Fed’s proclivities toward central planning may be one of the most atavistic relics of a bygone era.  Central planning, by its very nature, even if well meant, always suppresses prosperity.   As the sardonic statement from the Soviet Union went, “So long as the bosses continue to pretend to pay us we will pretend to work.”

Some who should know better ignorantly, and passionately, still are stuck in William Jennings Bryan’s rhetorically stirring but intellectually vacuous 1896 declaration, “You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold.”  This is a plank that won Bryan his party’s nomination and cost him the presidency… three times. The electorate knows that cheapening the money is the problem, not the solution.

The Fed, not the gold standard, pressed down the crown of thorns upon labor’s brow. The GOP, rather than playing rope-a-dope on “income inequality,” would do well to dig down to find the monetary rule with which to restore a climate of equitable prosperity and real wage growth.  Results, not intentions, are what counts.

There is abundant evidence that the right rule-based system would not be a “grave mistake” but a smart exit ramp back to growth of real wages.  Anything the Fed does that departs from a dollar price rule is anti-equitable-prosperity.  Anything else hurts all, labor and capital. The Congress, under the leadership of Chairmen Garrett (R-NJ) and Hensarling (R-Tx), whose committee has in front of it the Federal Reserve Accountability and Transparency Act and Joint Economic Committee Chairman Kevin Brady’s (R-Tx) Centennial Monetary Commission, at long last, is bestirring itself. Now is the right time to amp up the crucial debate over monetary policy … by enacting both of these pieces of legislation.

Money

Don’t Believe Government About Price Inflation

[Editor's note, this piece, by Richard Ebeling, is from EpicTimes]
It is an old adage that there are lies, damn lies and then there are statistics. Nowhere is this truer that in the government’s monthly Consumer Price Index (CPI) that tracks the prices for a selected “basket” of goods to determine changes in people’s cost-of-living and, therefore, the degree of price inflation in the American economy.

On August 19th, the Bureau of Labor Statistics (BLS) released its Consumer Price Index report for the month of July 2014. The BLS said that prices in general for all urban consumers only rose one-tenth of one percent for the month. And overall, for the last twelve months the CPI has only gone up by 2 percent.

A basket of goods that had cost, say, $100 to buy in June 2014 only cost you $100.10 in July of this year. And for the last twelve months as a whole, what cost you $100 to buy in August 2013, only increased in expense to $102 in July 2014.

By this measure, price inflation seems rather tame. Janet Yellen and most of the other monetary central planners at the Federal Reserve seem to have concluded, therefore, that they have plenty of breathing space to continue their aggressive monetary expansion when looking at the CPI and related price indices as part of the guide in deciding upon their money and interest rate manipulation policies.

Overall vs. “Core” Price Inflation

The government’s CPI statisticians distinguish between two numbers: the change in the overall CPI, which rose that 2 percent for the last year, and “core” inflation, which is the rate of change in the CPI minus food and energy prices. Leaving these out, “core” price inflation went up even less over the last twelve months, by only 1.9 percent.

The government statisticians make this distinction because they argue that food and energy prices are more “volatile” than many others. Fluctuating more frequently and to a greater degree than most other commonly purchased goods and services, they can create a distorted view, it is said, about the magnitude of price inflation during any period of time.

The problem is that food and energy costs may seem like irritating extraneous “noise” to the government number crunchers. But to most of the rest of us what we have to pay to heat our homes and put gas in our cars, as well as buying groceries to feed our families, is far from being a bothersome distraction from the statistical problem of calculating price inflation’s impact on our everyday lives.

Constructing the Consumer Price Index

How do the government statisticians construct the CPI? Month-by-month, the BLS tracks the purchases of 6,100 households across the country, which are taken to be “representative” of the approximately 320 million people living in the United States. The statisticians then construct a representative “basket” of goods reflecting the relative amounts of various consumer items these 6,100 households regularly purchase based on a survey of their buying patterns. They record changes in the prices of these goods in 24,000 retail outlets out of the estimated 3.6 million retail establishments across the whole country.

And this is, then, taken to be a fair and reasonable estimate – to the decimal point! – about the cost of living and the rate of price inflation for all the people of the United States.

Due to the costs of doing detailed consumer surveys and the desire to have an unchanging benchmark for comparison, this consumer basket of goods is only significantly revised about every ten years or so.

This means that over the intervening time it is assumed that consumers continue to buy the same goods and in the same relative amounts, even though in the real world new goods come on the market, other older goods are no longer sold, the quality of many goods are improved over the years, and changes in relative prices often result in people modifying their buying patterns.

The CPI vs. the Diversity of Real People’s Choices

The fact is there is no “average” American family. The individuals in each household (moms and dads, sons and daughters, and sometimes grandparents or aunts and uncles) all have their own unique tastes and preferences. This means that your household basket of goods is different in various ways from mine, and our respective baskets are different from everyone else’s.

Some of us are avid book readers, and others just relax in front of the television. There are those who spend money on regularly going to live sports events, others go out every weekend to the movies and dinner, while some save their money for an exotic vacation.

A sizable minority of Americans still smoke, while others are devoted to health foods and herbal remedies. Some of us are lucky to be “fit-as-a-fiddle,” while others unfortunately may have chronic illnesses. There are about 320 million people in the United States, and that’s how diverse are our tastes, circumstances and buying patterns.

Looking Inside the Consumer Price Index

This means that when there is price inflation those rising prices impact on each of us in different ways. Let’s look at a somewhat detailed breakdown of some of the different price categories hidden beneath the CPI aggregate of prices as a whole.

In the twelve-month period ending in July 2014, food prices in general rose 2.5 percent. A seemingly modest amount. However, meat, poultry, fish and egg prices increased, together, by 7.6 percent. But when we break this aggregate down, we find that beef and veal prices increased by 10.4 percent and frankfurters went up 6.9 percent, but lamb rose by only by 1.7 percent. Chicken prices increased more moderately at 2.7 percent, but fresh fish and seafood were 8.8 percent higher than a year earlier.

Milk was up 5.4 percent in price, but ice cream products decreased in price by minus 1.4 percent over the period. Fruits increased by 5.7 percent at the same time that fresh vegetable prices declined by minus 0.5 percent.

Under the general energy commodity heading, prices went up by 1.2 percent, but propane increased by 7.3 percent in price over the twelve-month period, while electricity prices, on the other hand, increased by 4 percent.

So why does the overall average of the Consumer Price Index seem so moderate at a measured 2 percent, given the higher prices of these individual categories of goods? Because furniture and bedding prices decreased by minus 3.1 percent, and major appliances declined in price over the period by minus 6.2. New televisions went down a significant minus15 percent

In addition, men’s apparel went down a minus 0.2 percent over the twelve months, but women’s outerwear rose a dramatic 12.3 percent in the same time frame. And boys and girls footwear went up, on average, by 8.2 percent.

Medical care services, in general, rose by 2.5 percent, but inpatient and outpatient hospital services increased, respectively, by 6.8 percent and 5.6 percent.

Smoke and Mirrors of “Core” Inflation    

These subcategories of individual price changes highlight the smoke and mirrors of the government statisticians’ distinction between overall and “core” inflation. We all occasionally enter the market and purchase a new stove or a new couch or a new bedroom set. And if the prices for these goods happen to be going down we may sense that our dollar is going further than in the past as we make these particular purchases.

But buying goods like these is an infrequent event for virtually all of us. On the other hand, every one of us, each and every day, week or month are in the marketplace buying food for our family, filling our car with gas, and paying the heating and electricity bill. The prices of these goods and other regularly purchased commodities and services, in the types and combinations that we as individuals and separate households choose to buy, are what we personally experience as a change in the cost-of-living and a rate of price inflation (or price deflation).

The Consumer Price Index is an artificial statistical creation from an arithmetic adding, summing and averaging of thousands of individual prices, a statistical composite that only exists in the statistician’s calculations.

Individual Prices Influence Choices, Not the CPI

It is the individual goods in the subcategories of goods that we the buying public actually confront and pay when we shop as individuals in the market place. It is these individual prices for the tens of thousands of actual goods and services we find and decide between when we enter the retail places of business in our daily lives. And these monetary expenses determines for each of us, as individuals and particular households, the discovered change in the cost-of-living and the degree of price inflation we each experience.

The vegetarian male who is single without children, and never buys any types of meat, has a very different type of consumer basket of goods than the married male-female couple who have meat on the table every night and shop regularly for clothes and shoes for themselves and their growing kids.

The individual or couple who have moved into a new home for which they have had to purchase a lot of new furniture and appliances will feel that their income has gone pretty far this past twelve months compared to the person who lives in a furnished apartment and has no need to buy a new chair or a dishwasher but eats beef or veal three times a week.

If the government were to impose a significant increase in the price of gasoline in the name of “saving the planet” from carbon emissions, it will impact people very differently depending up whether an individual is a traveling salesman or a truck driver who has to log hundreds or thousands of miles a year, compared to a New Yorker who takes the subway to work each day, or walks to his place of business.

It is the diversity of our individual consumer preferences, choices and decisions about which goods and services to buy now and over time under constantly changing market conditions that determines how each of us are influenced by changes in prices, and therefore how and by what degree price inflation or price deflation may affect each of us.

Monetary Expansion Distorts Prices in Different Ways

An additional misunderstanding created by the obsessive focus on the Consumer Price Index is the deceptive impression that increases in the money supply due to central bank monetary expansion tend to bring about a uniform and near simultaneous rise in prices throughout the economy, encapsulated in that single monthly CPI number.

In fact, prices do not all tend to rise at the same time and by the same degree during a period of monetary expansion. Governments and their central banks do not randomly drop newly created money from helicopters, more or less proportionally increasing the amount of spending power in every citizen’s pockets at the same time.

Newly created money is “injected” into the economy at some one or few particular points reflecting into whose hands that new money goes first. In the past, governments might simply print up more banknotes to cover their wartime expenditures, and use the money to buy armaments, purchase other military supplies, and pay the salaries of their soldiers.

The new money would pass into the hands of those selling those armaments or military supplies or offering their services as warriors. These people would spend the new money on the particular goods and services they found desirable or profitable to buy, raising the demands and prices for a second group of prices in the economy. The money would now pass to another group of hands, people who in turn would now spend it on the market goods they wanted to demand.

Step-by-step, first some demands and some prices, and then other demands and prices, and then still other demands and prices would be pushed up in a particular time-sequence reflecting who got the money next and spent in on specific goods, until finally more or less all prices of goods in the economy would be impacted and increased, but in a very uneven way over time.

But all of these real and influencing changes on the patterns of market demands and relative prices during the inflationary process are hidden from clear and obvious view when the government focuses the attention of the citizenry and its own policy-makers on the superficial and simplistic Consumer Price Index.

Money Creation and the Boom-Bust Cycle

Today, of course, virtually all governments and central banks inject new money into the economy through the banking system, making more loanable funds available to financial institutions to increase their lending ability to interested borrowers.

The new money first passes into the economy in the form of investment and other loans, with the affect of distorting the demands and prices for resources and labor used in capital projects that might not have been undertaken if not for the false investment signals the monetary expansion generates in the banking and financial sectors of the economy. This process sets in motion the process that eventually leads to the bust that follows the inflationary bubbles.

Thus, the real distortions and imbalances that are the truly destabilizing effects from central banking inflationary monetary policies are hidden from the public’s view and understanding by heralding every month the conceptually shallow and mostly superficial Consumer Price Index.

Money

Currency turbulence

You’d think that the US dollar has suddenly become strong, and the chart below of the other three major currencies confirms it.

USDvsGBPEURJPY_12092014

The US dollar is the risk-free currency for international accounting, because it is the currency on which all the others are based. And it is clear that three months ago dollar exchange rates against the three currencies shown began to strengthen notably.

However, each of the currencies in the chart has its own specific problems driving it weaker. The yen is the embodiment of financial kamikaze, with the Abe government destroying it through debasement as a cover-up for a budget deficit that is beyond its control. The pound is being poleaxed by a campaign to keep Scotland in the union which has backfired, plus a deferral of interest rate expectations. And the euro sports negative deposit rates in the belief they will cure the Eurozone’s gathering slump, which if it develops unchecked will threaten the stability of Europe’s banks.

So far this has been mainly a race to the bottom, with the dollar on the side-lines. The US economy, which is officially due to recover (as it has been expected to every year from 2008) looks like it’s still going nowhere. Indeed, if you apply a more realistic deflator than the one that is officially calculated, there is a strong argument that the US has never recovered since the Lehman crisis.

This is the context in which we must judge what currencies are doing. And there is an interpretation which is very worrying: we may be seeing the beginnings of a major flight out of other currencies into the dollar. This is a risk because the global currency complex is based on a floating dollar standard and has been since President Nixon ended the Bretton Woods agreement in 1971. It has led to a growing accumulation of currency and credit everywhere that ultimately could become unstable. The relationship between the dollar and other currencies is captured vividly in the illustration below.

The gearing of total world money and credit on today’s monetary base is forty times, but this is after a rapid expansion of the Fed’s balance sheet in recent years. Compared with the Fed’s monetary base before the Lehman crisis, world money is now nearly 180 times geared, which leaves very little room for continuing stability.

It may be too early to say this inverse pyramid is toppling over, because it is not yet fully confirmed by money flows between bond markets. However in the last few days Eurozone government bond yields have started rising. So far it can be argued that they have been over-valued and a correction is overdue. But if this new trend is fuelled by international banks liquidating non-US bond positions we will certainly have a problem.

We can be sure that central bankers are following the situation closely. Nearly all economic and monetary theorists since the 1930s have been preoccupied with preventing self-feeding monetary contractions, which in current times will be signalled by a flight into the dollar. The cure when this happens is obvious to them: just issue more dollars. This can be easily done by extending currency swaps between central banks and by coordinating currency intervention, rather than new rounds of plain old QE.

So far market traders appear to have been assuming the dollar is strong for less defined reasons, marking down key commodities and gold as a result. However, the relationship between the dollar, currencies and bond yields needs watching as they may be beginning to signal something more serious is afoot.

Economics

Rethinking Japan’s “Lost Decades”

[This article, by Peter St. Onge, first appeared at mises.org]

 

One of the great economic myths of our time is Japan’s “lost decades.” As Japan doubles-down on inflationary stimulus, it’s worth reviewing the facts.

The truth is that the Japanese and US economies have performed in lock-step since 2000, and their performances have matched each other going as far back as 1980.

Either Japan’s not in crisis, or the US has been in crisis for a good thirty-five years. You can’t have it both ways.

Here’s a chart of per capita real GDP for both Japan and the US from 2000 to 2011. Per capita real GDP is the GDP measure that best answers the question: “is the typical person getting richer?”

The two curves look like they came from the same country:

 

japan1

Next, we can go back to 1980, to see where the myth came from. Japan was just entering its “bubble” decade:
japan2

We can see what happened here: Japan had a boom in the 1980s, then Japan busted while the Americans had their turn at a boom. By 2000 the US caught up, and Japan and the US synched up and shadowed each other, reflecting boom followed by the inevitable bust.

The only way you can get to the “lost decades” story is if you start your chart exactly when Japan was busting and America booming. Unsurprisingly, this is standard practice of the “lost decades” storytellers.

Of course, this would be like timing two runners, and starting the clock when one of them is on break. It’s absurd, but it gives the answer they want.

Things get worse when you include the artificial effects of inflation and population. Higher inflation and population growth both make the economy appear bigger without making people richer. If America annexed Mexico tomorrow, the US economy would grow by 30 percent. But that’s not going to make the average American 30 percent richer.

Adjusting for inflation and population is Macro 101. It’s so basic, in fact, that we might wonder if the “lost decades” macroeconomists are being intentionally forgetful. Why on earth would they do that?

Who Benefits from the “Lost Decades” Myth?

Who promotes the “lost decades” myth? Are the storytellers trying to make Japan look bad, or the US look good?

I suspect it’s a little of both: politicians in Japan need the sense of crisis to push their vote-buying schemes. It’s a lot easier to sell harmful policies if you can just convince the voters that everything’s already fallen apart. They’ve got nothing to lose at that point. In a crisis we are all socialists.

This cynical PR campaign is bearing fruit already, as Japanese voters accept inflationary policies from their new prime minister. In the name of reviving an economy that’s supposedly on its death-bed. Hard-working Japanese are losing their savings through low rates and inflation, but honor demands sacrifice so long as the future of the children supposedly hangs in the balance.

In reality, the re-telling of Japan’s myth reminds one of a doctor who lies to a patient so he can sell a cure that harms the patient.

On the American side, the myth of Japan’s “lost decades” is similarly useful: it makes our economic overlords seem like they actually know what they’re doing. And it serves to warn the naysayers: the “lost decades” myth is a bogeyman waiting to pounce if we ever falter from our bail-outs and vote-buying stimulus.

The truth, hidden in plain view, is that Japan’s not bad enough to be a battering ram for Japan’s Keynesian vote-buyers, and the US economy isn’t good enough for our home-grown vote-buyers to keep their jobs.

 

Economics

As Germany loses battle for ECB, QE goes global

What is Super Mario up to?

First, he gave an unexpectedly dovish speech at the Jackson Hole conference, rather ungallantly upstaging the host, Ms Yellen, who was widely anticipated to be the most noteworthy speaker at the gathering (talking about the labor market, her favorite subject). Having thus single-handedly and without apparent provocation raised expectations for more “stimulus” at last week’s ECB meeting, he then even exceeded those expectations with another round of rate-cuts and confirmation of QE in form of central bank purchases of asset-backed securities.

These events are significant not because they are going to finally kick-start the Eurozone economy (they won’t) but because 1) they look rushed, and panicky, and 2) they must clearly alienate the Germans. The ideological rift that runs through the European Union is wide and deep, and increasingly rips the central bank apart. And the Germans are losing that battle.

As to 1), it was just three months ago that the ECB cut rates and made headlines by being the first major central bank to take a policy rate below zero. Whatever your view is on the unfolding new Eurozone recession and the apparent need for more action (more about this in a minute), the additional 0.1 percent rate reduction will hardly make a massive difference. Yet, implementing such minor rate cuts in fairly short succession looks nervous and anxious, or even headless. This hardly instils confidence.

And regarding the “unconventional” measures so vehemently requested by the economic commentariat, well, the “targeted liquidity injections” that are supposed to direct freshly printed ECB-money to cash-starved corporations, and that were announced in June as well, have not even been implemented yet. Apparently, and not entirely unreasonably, the ECB wanted to wait for the outcome of their “bank asset quality review”. So now, before these measures are even started, let alone their impact could even be assessed, additional measures are being announced. The asset purchases do not come as a complete surprise either. It was known that asset management giant BlackRock had already been hired to help the ECB prepare such a program. Maybe the process has now been accelerated.

This is Eurozone QE

This is, of course, quantitative easing (QE). Many commentators stated that the ECB shied away from full-fledged QE. This view implies that only buying sovereign debt can properly be called QE. This does not make sense. The Fed, as part of its first round of QE in 2008, also bought mortgage-backed securities only. There were no sovereign bonds in its first QE program, and everybody still called it QE. Mortgage-backed securities are, of course, a form of asset-backed security, and the ECB announced purchases of asset-backed securities at the meeting. This is QE, period. The simple fact is that the ECB expands its balance sheet by purchasing selected assets and creating additional bank reserves (for which banks will now pay the ECB a 0.2 percent p.a. “fee”).

As to 2), not only will the ECB decisions have upset the Germans (the Bundesbank’s Mr. Weidmann duly objected but was outvoted) but so will have Mr. Draghi’s new rhetoric. In Jackson Hole he used the F-word, as in “flexibility”, meaning fiscal flexibility, or more fiscal leeway for the big deficit countries. By doing so he adopted the language of the Italian and French governments, whenever they demand to be given more time for structural reform and fiscal consolidation. The German government does not like to hear this (apparently, Merkel and Schäuble both phoned Draghi after Jackson Hole and complained.)

The German strategy has been to keep the pressure on reform-resistant deficit-countries, and on France and Italy in particular, and to not allow them to shift the burden of adjustment to the ECB. Draghi has now undermined the German strategy.

The Germans fear, not quite unjustifiably, that some countries always want more time and will never implement reform. In contrast to those countries that had their backs to the wall in the crisis and had little choice but to change course in some respect, such as Greece, Ireland, and Spain, France and Italy have so far done zilch on the structural reform front. France’s competitiveness has declined ever since it adopted the 35-hour workweek in 2000 but the policy remains pretty much untouchable. In Italy, Renzi wants to loosen the country’s notoriously strict labour regulations but faces stiff opposition from the trade unions and the Left, not least in his own party. He now wants to give his government three years to implement reform, as he announced last week.

Draghi turns away from the Germans

German influence on the ECB is waning. It was this influence that kept alive the prospect of a somewhat different approach to economic challenges than the one adopted in the US, the UK and, interestingly, Japan. Of course, the differences should not be overstated. In the Eurozone, like elsewhere, we observed interest rate suppression, asset price manipulations, and massive liquidity-injections, and worse, even capital controls and arbitrary bans on short-selling. But we also saw a greater willingness to rely on restructuring, belt-tightening, liquidation, and, yes, even default, to rid the system of the deformations and imbalances that are the ultimate root causes of recessions and the impediments to healthy, sustainable growth. In the Eurozone it was not all about “stimulus” and “boosting aggregate demand”. But increasingly, the ECB looks like any other major central bank with a mandate to keep asset prices up, government borrowing costs down, and a generous stream of liquidity flowing to cover the cracks in the system, to sustain a mirage of solvency and sustainability, and to generate some artificial and short-lived headline growth. QE will not only come to the Eurozone, it will become a conventional tool, just like elsewhere.

I believe it is these two points, Draghi’s sudden hyperactivity (1) and his clear rift with the Germans and his departure from the German strategy (2) that may explain why the euro is finally weakening, and why the minor announcements of last Thursday had a more meaningful impact on markets than the similarly minor announcements in June. With German influence on the ECB waning, trashing your currency becomes official strategy more easily, and this is already official policy in Japan and in the US.

Is Draghi scared by the weak growth numbers and the prospect of deflation?

Maybe, but things should be put in perspective.

Europe has a structural growth problem as mentioned above. If the structural impediments to growth are not removed, Europe won’t grow, and no amount of central bank pump priming can fix it.

Nobody should be surprised if parts of Europe fall into technical recessions every now and then. If “no growth” is your default mode then experiencing “negative growth” occasionally, or even regularly, should not surprise anyone. Excited talk about Italy’s shocking “triple-dip” recession is hyperbole. It is simply what one should expect. Having said this, I do suspect that we are already in another broader cyclical downturn, not only in Europe but also in Asia (China, Japan) and the UK.

The deflation debate in the newspapers is bordering on the ridiculous. Here, the impression is conveyed that a drop in official inflation readings from 0.5 to 0.3 has substantial information content, and that if we drop below zero we would suddenly be caught in some dreadful deflation-death-trap, from which we may not escape for many years. This is complete hogwash. There is nothing in economic theory or in economic history that would support this. And, no, this is not what happened in Japan.

The margin of error around these numbers is substantial. For all we know, we may already have a -1 percent inflation rate in the Eurozone. Or still plus 1 percent. Either way, for any real-life economy this is broadly price-stability. To assume that modest reductions in any given price average suddenly mean economic disaster is simply a fairy tale. Many economies have experienced extended periods of deflation (moderately rising purchasing power of money on trend) in excess of what Japan has experienced over the past 20 years and have grown nicely, thank you very much.

As former Bank of Japan governor Masaaki Shirakawa has explained recently, Japan’s deflation has been “very mild” indeed, and may have had many positive effects as well. In a rapidly aging society with many savers and with slow headline growth it helped maintain consumer purchasing power and thus living standards. Japan has an official unemployment rate of below 4 percent. Japan has many problems but deflation may not be one of them.

Furthermore, the absence of inflation in the Eurozone is no surprise either. There has been no money and credit growth in aggregate in recent years as banks are still repairing their balance sheets, as the “asset quality review” is pending, and as other regulations kick in. Banks are reluctant to lend, and the private sector is careful to borrow, and neither are acting unreasonably.

Expecting Eurozone inflation to clock in at the arbitrarily chosen 2 percent is simply unrealistic.

Conclusions

Draghi’s new activism moves the ECB more in the direction of the US Fed and the Bank of Japan. This alienates the Germans and marginally strengthens the position of the Eurozone’s Southern periphery. This monetary policy will not reinvigorate European growth. Only proper structural reform can do this but much of Europe appears unable to reform, at least without another major crisis. Fiscal deficits will grow.

Monetary policy is not about “stimulus” but about maintaining the status quo. Super-low interest rates are meant to sustain structures that would otherwise be revealed to be obsolete, and that would, in a proper free market, be replaced. The European establishment is interested in maintaining the status quo at all cost, and ultra-easy monetary policy and QE are essentially doing just that.

Under the new scheme of buying asset-backed securities, the ECB’s balance sheet will become a dumping ground for unwanted bank assets (the Eurozone’s new “bad” bank). Like almost everything about the Euro-project, this is about shifting responsibility, obscuring accountability, and socializing the costs of bad decisions. Monetary socialism is coming. The market gets corrupted further.

Economics

Our obsession with monetary stimulus will end in disaster

The following is a commentary I wrote for The Forum section of London business-paper City A.M. The link is here.

It is now six years since the collapse of Lehman Brothers, and considering that the US economy has officially been in recovery for the past five years, that equity indexes have put in new all-time highs, and that credit markets are once again ebullient to the point of carelessness, it is worth contemplating that monetary policy remains stuck in pedal-to-the-floor stimulus mode. Granted, quantitative easing is (once again) scheduled to end, and the first rates hikes are now expected for next year, but the present policy stance certainly remains highly accommodative. A full ‘exit’ by the Fed is still merely a prospect.

Expectations appear to be for the US economy to finally emerge from its long stay in monetary intensive care healthier and fit for self-sustained, if modest, growth. I think this is unlikely. The lengthy period of monetary stimulus will have saddled the economy with new dislocations. And if central bank intervention did indeed manage to arrest the forces of liquidation that the crisis had unleashed, then some old imbalances will also still hang around.

“Easy money” is – contrary to how it is frequently portrayed – not some tonic that simply lifts the general mood and boosts all economic activity proportionally. Monetary stimulus is always a form of market intervention. It changes relative prices (as distinguished from the ‘price level’ that most economists obsess about); it alters the allocation of scarce resources and the direction of economic activity. Monetary policy always affects the structure of the economy – otherwise no impact on real activity could be generated. It is a drug with considerable side effects.

The latest crisis should provide a warning. As David Stockman pointed out, it did not arrive on a meteor from space, but had its origin in distortions in the housing market in the US – and the UK, Spain and Ireland – and in related credit markets, and therefore ultimately in the “easy money” policies of the early 2000s. Administratively suppressing short rates down to 1 percent for a prolonged period was then the “unconventional” policy du jour, and it was a success of sorts. A credit crunch and deleveraging were indeed avoided, which were then feared as a consequence of WorldCom and Enron defaulting and the dot.com-bubble bursting, but only at the price of blowing an even bigger bubble elsewhere.

This is the problem with our modern fiat money system. With the supply of money no longer constrained by a nature-given, scarce commodity (gold or silver), but now fully elastic, essentially unlimited, and under the control of a lender of last resort central bank, the parameters of risk-taking are forever altered.

Allegedly, we can now stop bank-runs and ignite short-term growth spurts, or keep the overall “price level” advancing on some arbitrarily chosen path of 2 percent. But we can achieve all of this only through monetary manipulations that must create imbalances in the economy. And as the overwhelming temptation is now to use “easy money” to avoid or shorten any period of liquidation, to go for all growth and no correction, distortions will accumulate over time.

As we move from cycle to cycle, the imbalances get bigger, asset valuations become more stretched, the debt load rises, and central banks take policy to new extremes to arrest the market’s growing desire for a much needed cleansing. That policy rates around the world have converged on zero is not a cyclical but a structural phenomenon.

Central bank stimulus is not leading to virtuous circles but to vicious ones. How can we get out? – Only by changing our attitudes to monetary interventions fundamentally. Only if we accept that interest rates are market prices, not policy levers. Only if we accept that the growth we generate through cheap credit and interest-rate suppression is always fleeting, and always comes at the price of new capital misallocations.

The prospect for such a change looks dim at present. Last year’s feverish excitement about Abenomics and this year’s urgent demands for Eurozone QE show that the belief in central bank activism is unbroken, and I remain sceptical as to whether the Fed and the Bank of England can achieve a proper and lasting “exit” from ultra-loose policy in this environment. The near-term outlook is for more heavy-handed interventions everywhere, and the endgame is probably inflation. This will end badly.

Economics

The wages-fuel-demand fallacy

In recent months talking heads, disappointed with the lack of economic recovery, have turned their attention to wages. If only wages could grow, they say, there would be more demand for goods and services: without wage growth, economies will continue to stagnate. It amounts to a non-specific call to stimulate aggregate demand by continuing with or even accelerating the expansion of money supply. The thinking is the same as that behind Bernanke’s monetary distribution by helicopter. Unfortunately for these wishful-thinkers the disciplines of the markets cannot be bypassed. If you give everyone more money without a balancing increase in the supply of goods, there is no surer way of stimulating price inflation, collapsing a currency’s purchasing power and losing all control of interest rates.

The underlying error is to fail to understand that economising individuals make things in order to be able to buy things. That is the order of events, earn it first and spend it second. No amount of monetary shenanigans can change this basic fact. Instead, expanding the quantity of money will always end up devaluing the wealth and earning-power of ordinary people, the same people that are being encouraged to spend, and destroying genuine economic activity in the process.

This is the reason monetary stimulation never works, except for a short period if and when the public are fooled by the process. Businesses – owned and managed by ordinary people – are not fooled by it any more: they are buying in their equity instead of investing in new production because they know that investing in production doesn’t earn a return. This is the logical response by businesses to the destruction of their customers’ wealth through currency debasement.

Let me sum up currency debasement with an aphorism:

“You print some money to rob the wealth of ordinary people to give to the banks to lend to business to make their products for customers to buy with money devalued by printing.”

It is as ridiculous a circular proposition as perpetual motion, yet central banks never seem to question it. Monetary stimulus fails with every credit cycle when the destruction of wealth is exposed by rising prices. But in this credit cycle the deception was so obvious to the general public that it failed from the outset.

The last five years have seen all beliefs in the manageability of aggregate demand comprehensively demolished by experience. The unfortunate result of this failure is that central bankers now see no alternative to maintaining things as they are, because the financial system has become horribly over-geared and probably wouldn’t survive the rise in interest rates a genuine economic recovery entails anyway. Price inflation would almost certainly rise well above the 2% target forcing central banks to raise interest rates, throwing bonds and stocks into a severe bear market, and imperilling government finances. The financial system is simply too highly geared to survive a credit-driven recovery.

Japan, which has accelerated monetary debasement of the yen at an unprecedented rate, finds itself in this trap. If anything, the pace of its economic deterioration is increasing. The explanation is simple and confirms the obvious: monetary debasement impoverishes ordinary people. Far from boosting the economy it is rapidly driving us into a global slump.

The solution is not higher wages.

Economics

Did “The Nixon Shock” Lead to Nixon’s Resignation?

This month we observe the 40th anniversary of the resignation, under threat of imminent impeachment, of President Richard M. Nixon. Nixon aide and loyalist Pat Buchanan sums up, in a column in USA Today Liberal Elites Toppled Nixon his view:

“Richard Nixon was not brought down by any popular uprising. The breaking of his presidency was a product of the malice and collusion of liberal elites who had been repudiated in Nixon’s 49-state landslide in 1972.”

Nixon, as it happens, was not 1974’s only casualty. As William Safire recalls, Nixon’s secretary of the treasury, John Connally, “was indicted for taking graft on the same day the President was charged by the House Judiciary Committee for abuse of power.”

Both men were instrumental in the repudiation of the Bretton Woods gold-dollar monetary system that had undergirded post-war American (and world prosperity). Bretton Woods, indeed, was coming apart (as a gold+paper pastiche standard inevitably is prone to do). A gold-based international monetary order called out, however, to be mended not ended. Nixon ended it.

The House Judiciary Committee’s charges and the Connally indictment uncannily fulfill a prophecy by Tom Paine. Paine’s Common Sense triggered the American Revolution. Paine later wrote a tract, Dissertations On Government; The Affairs of the Bank; and Paper Money in 1786. It was issued the year before the Constitutional Convention that would send the confederated former colonies into the epic called the United States of America. It was, in part, a perfect diatribe against paper-based (rather than gold or silver defined) money.

Paine observed:

But the evils of paper money have no end. Its uncertain and fluctuating value is continually awakening or creating new schemes of deceit. Every principle of justice is put to the rack, and the bond of society dissolved: the suppression, therefore; of paper money might very properly have been put into the act for preventing vice and immorality.

As to the assumed authority of any assembly in making paper money, or paper of any kind, a legal tender, or in other language, a compulsive payment, it is a most presumptuous attempt at arbitrary power. There can be no such power in a republican government: the people have no freedom, and property no security where this practice can be acted: and the committee who shall bring in a report for this purpose, or the member who moves for it, and he who seconds it merits impeachment, and sooner or later may expect it.

Of all the various sorts of base coin, paper money is the basest. It has the least intrinsic value of anything that can be put in the place of gold and silver. A hobnail or a piece of wampum far exceeds it. And there would be more propriety in making those articles a legal tender than to make paper so.

The laws of a country ought to be the standard of equity, and calculated to impress on the minds of the people the moral as well as the legal obligations of reciprocal justice. But tender laws, of any kind, operate to destroy morality, and to dissolve, by the pretense of law, what ought to be the principle of law to support, reciprocal justice between man and man: and the punishment of a member who should move for such a law ought to be death.

The death penalty for proposing paper money? Paine called for the criminal indictment as a capital crime, and for impeachment, of any who even would call for tender laws.

Connally was acquitted on the charges of graft and perjury. Later he underwent bankruptcy before dying in semi-disgrace. Nixon resigned rather than undergoing impeachment, also living out his life in disgraced political exile. The spirit of Paine’s declaration was fulfilled in both cases. Connally and Nixon engineered this violation, abandoning the good, precious-metal, money contemplated by the Constitution. Nemesis followed hubris.

The closing of the “gold window” was based, by Connolly, on deeply wrong premises. It was sold to the public, by Nixon, on deeply false promises.

On August 15, 1971 President Nixon came before the American people to announce:

We must protect the position of the American dollar as a pillar of monetary stability around the world.

In the past 7 years, there has been an average of one international monetary crisis every year. Now who gains from these crises? Not the workingman; not the investor; not the real producers of wealth. The gainers are the international money speculators. Because they thrive on crises, they help to create them.

In recent weeks, the speculators have been waging an all-out war on the American dollar. The strength of a nation’s currency is based on the strength of that nation’s economy–and the American economy is by far the strongest in the world. Accordingly, I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators.

I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.

Now, what is this action–which is very technical–what does it mean for you?

Let me lay to rest the bugaboo of what is called devaluation.

If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today.

The effect of this action, in other words, will be to stabilize the dollar.

Now, this action will not win us any friends among the international money traders. But our primary concern is with the American workers, and with fair competition around the world.

To our friends abroad, including the many responsible members of the international banking community who are dedicated to stability and the flow of trade, I give this assurance: The United States has always been, and will continue to be, a forward-looking and trustworthy trading partner. In full cooperation with the International Monetary Fund and those who trade with us, we will press for the necessary reforms to set up an urgently needed new international monetary system. Stability and equal treatment is in everybody’s best interest. I am determined that the American dollar must never again be a hostage in the hands of international speculators.

Nixon’s promise that “your dollar will be worth just as much tomorrow as it is today” has, of course, completely falsified. The 2014 dollar is worth only 15 cents in 1971 terms, buying 85% less than it did in 1971. Some bugaboo. All of Nixon’s other rationalizations for going off gold also have been falsified.

The closing of the gold window turned out to be the slamming of the golden door to social mobility and equitable prosperity. In the wake of the closing of the gold window median family income stagnated, never again experiencing secular recovery. Meanwhile the income of the wealthy has continued apace. This has produced the very income inequality so loudly denounced by progressives who, ironically, are the last defenders of the very policy which is the probable cause of our inequitable prosperity.

Brother Pat Buchanan states that Nixon

…ended the Vietnam War with honor, brought all our troops and POWs home, opened up China, negotiated historic arms agreements with Moscow, ended the draft, desegregated southern schools, enacted the 18-year-old vote, created the EPA, OSHA and National Cancer Institute, and was rewarded by a grateful nation with a 61% landslide.

Even as Watergate broke, he ordered the airlift that saved Israel in the Yom Kippur War, for which Golda Meir called him the best friend Israel ever had.

His enemies were beside themselves with rage and resentment.

Buchanan, while admirably loyal, ignores the correlation between Nixon’s embrace of paper money and Paine’s prophetic call for impeachment for that high crime. Let us now, in this month of the 40th anniversary of Nixon’s resignation and the 43rd of his abandonment of the gold standard, pause to wonder. It is bewildering circumstance that the very liberal elites Buchanan indicts as malicious in their treatment of Nixon today represent the most reactionary of defenders of the most pernicious, and only enduring, residue of the Nixon Shock: paper money, “a most presumptuous attempt at arbitrary power.”

Originating at http://www.forbes.com/sites/ralphbenko/2014/08/18/pat-buchanan-ignores-the-underlying-reason-richard-nixon-was-forced-to-resign/