Tag: Keynes

100 Years of Mismanagement

Guest Post by

Lost From the Get-Go

There must be some dark corner of Hell warming up for modern, mainstream economists. They helped bring on the worst bubble ever… with their theories of efficient markets and modern portfolio management. They failed to see it for what it was. Then, when trouble came, they made it worse. But instead of atoning in a dank cell, these same economists strut onto the stage to congratulate themselves.

 

KeynesThe scalawag himself. Keynes provided governments with the “scientific” fig leaf fore interventionism that economists had previously denied them. The cost in terms of economic and technological progress is incalculable.

Photo via MIT Press

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Chilling ways the global economy echoes 1930s Great Depression era

Guest Post by John Coumarianos

Protectionism, shaky debt, and weak banking systems have consequences

Getty Images/Keystone/Staff
Huge crowds outside the Sub Treasury Building (now Federal Hall National Memorial) and the statue of George Washington, opposite the New York Stock Exchange at the time of the Wall Street Crash, October 1929. (Photo by Keystone/Getty Images)

One view of what caused the Great Depression in the 1930s is that the Federal Reserve failed to prevent a collapse in the money supply.

This is the famous thesis of Milton Friedman’s and Anna Schwartz’s A Monetary History of the United States, 1867-1960, and it was, more or less, the view of Ben Bernanke when he was chairman of the Federal Reserve.

The global economy today resembles that of the 1930s in several ominous ways.

Financial author Edward Chancellor recently called attention to a paper written by Caludio Borio, head economist at the Bank of International Settlements, that provides a fuller picture of the causes of the Great Depression. The paper also draws parallels between global economic conditions that led to the rise of protectionism in the 1930s and our situation now.

The paper’s thesis is that “financial elasticity” characterizes both the pre-Depression global economy and today’s global economy.  Elasticity refers to the buildup of capital imbalances such as money flows into emerging markets because of low rates in developed markets.

Free flowing capital to emerging markets

As Chancellor tells it, the gold exchange standard established in the 1920s allowed U.S. and U.K. bonds to be used together with gold in exchange transactions among central banks. This arrangement encouraged growth in foreign lending.

Specifically, the U.S. lent money to emerging markets in Latin America and Central Europe. Investors in the U.S. enjoyed higher returns for seemingly little extra risk as defaults were initially low.

However, lending standards began to loosen, and American investors brought their dollars home after the Fed hiked rates in 1928. Money flowed into U.S. stocks, among other things, which, of course were poised for a crash.

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Central Bankers Are Upsetting God’s Applecart

Guest Post by

 

Fools or Knaves?

[ed. note: this article was written shortly before the ECB decision was announced, so the deposit facility rate mentioned in it is still the old one; it has been reduced to – 30 bps in the meantime]

BALTIMORE – Thursday is the big day. Mario “whatever it takes” Draghi is expected to goose up stock markets with more stimulus measures. On the table is more QE… and further cuts to the key lending rate.

 

creationThe good Lord adds jerks to the mix to keep things interesting … we’re happy to report the operation was a success. It may actually have been a tad too successful.

Cartoon by Gary Larson

 

The Chinese feds are also supposed to come forward with another gift to asset holders. According to the Wall Street Journal, the expectation is for something targeting property purchases and another interest rate cut (which would make it cut No. 7 since last November).

 

china-interest-rateChina’s central bank administered one-year benchmark lending rate – click to enlarge.

 

And yesterday, Fed chair Janet Yellen told the Economic Club of Washington:

 

“Were the FOMC [the Fed’s policy setting committee] to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession.”

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The Successor to Keynes

Guest Post by Jeff Thomas from Doug Casey’s International Man

Europe is abuzz with Capital in the Twenty-First Century by French economist Thomas Piketty, released in Europe in March of this year and now a best-seller. It has since crossed the Atlantic and is already the number-one best-seller for booksmith Amazon. It has been called a “blockbuster” of a book, and many reviewers believe that it has the ability to revolutionise the study of economics.

Here are a few quotes from reviews:

In Piketty’s view, the solution is a measure beyond the political reach of any individual nation or international body, as they are now constituted: a global wealth tax. Only such a tax “would contain the unlimited growth of global inequality of wealth, which is currently increasing at a rate that cannot be sustained in the long run.”—Thomas B. Edsall

Many of the book’s 700 pages are spent marshalling the evidence that 21st-century capitalism is on a one-way journey towards inequality – unless we do something. … Piketty’s call for a “confiscatory” global tax on inherited wealth makes other supposedly radical economists look positively house-trained. He calls for an 80% tax on incomes above $500,000 a year in the US, assuring his readers there would be neither a flight of top execs to Canada nor a slowdown in growth, since the outcome would simply be to suppress such incomes. … Piketty’s Capital, unlike Marx’s Capital, contains solutions possible on the terrain of capitalism itself: the 15% tax on capital, the 80% tax on high incomes, enforced transparency for all bank transactions, overt use of inflation to redistribute wealth downwards.—Rosaline Christine McGreevy

His findings will transform debate and set the agenda for the next generation of thought about wealth and inequality. … A work of extraordinary ambition, originality, and rigor, Capital in the Twenty-First Century reorients our understanding of economic history and confronts us with sobering lessons for today.—Amazon

The words, “Brilliant!” Ground-breaking!” and “Visionary!” will no doubt be seen in many reviews of Mr. Piketty’s book. He has written some 700 pages and gone back as far as the eighteenth century in his research, so few would doubt that he has been thorough.

And there can be no doubt that the world is presently facing greater economic turmoil than it ever has in history. One might say that his tome is “right on time.”

So let us examine his principal conclusions and learn why so many people are seeing his vision as the answer to the world’s troubles.

He recommends:

  • Uniform global taxation
  • Confiscatory tax on inherited wealth
  • 15% tax on capital
  • 80% tax on annual incomes over US$500,000
  • Enforced transparency on all bank transactions
  • Overt use of inflation to redistribute wealth downwards

Why didn’t anyone else think of this brilliant plan?

Well actually, they did. In fact, the above is essentially the shopping list of the IMF, the EU, the OECD and, in fact, many of the governments that make up what was formerly described as “the free world.” Piketty’s “vision” so closely follows the visions of these entities that, if he did not exist, they might have had to invent him.

After all, if governments come up with an economic plan that is dramatically socialistic, they might be regarded as being somewhat suspect. However, if an economist, who is of course “independent” in his thinking, offers a grand solution, it becomes easier for the masses to swallow.

Readers of International Man are likely to take a different view. They may argue that the observation that, “satisfactory answers have been hard to find for lack of adequate data and clear guiding theories,” is poppycock. Libertarians and contrarians have been offering very real solutions for decades. Unfortunately, Boobus humanus rarely bothers to pay attention to any view that is not the one currently being promoted by the governments of the day.

As Doug Casey says so accurately:

Even when people recognize and intellectually understand the philosophy of personal freedom and responsibility, most just can’t integrate it into themselves emotionally. And others simply refuse to grasp it intellectually. I’m afraid libertarianism is fated to appeal to only a small minority.

It’s interesting to draw a parallel between Mr. Piketty and John Maynard Keynes. Mister Keynes published his The General Theory of Employment, Interest, and Money in 1936. It was therefore well timed to provide the populace (who were then struggling with the Great Depression) with a brilliant solution from a Cambridge-educated economist.

Mister Keynes’ book was an instant hit with most all governments of the day, as it endorsed more state-controlled, socialistic economic principles. Since 1936, Keynesian economics has been the standard for most all governments and is regularly referred to, to explain why they employ such confiscatory policies.

Now, just in time for the Greater Depression, fate has delivered what we might term Mister Piketty’s “Revised Keynesianism”—an economic standard for the twenty-first century, and one which takes the power of governments up several notches.

Will the governments of the world respond to this new vision and announce that Mister Piketty has “shown the way” out of the current debacle, which has been blamed on capitalism?

Most definitely. Just as Mister Keynes was “just right” for the goals of governments in the twentieth century, Mister Piketty is just right for the goals of governments in the twenty-first century. And, as in the Great Depression, the great majority of people will not only accept the new approach, but applaud.

Of course, those of us with a libertarian bent could simply choose to regard Mister Piketty as a misinformed academic who fails to understand economics, but this would be a mistake.

Yes, there are many people today who are thinking in a more libertarian direction. Indeed, many are seeking to internationalise themselves in order to save their liberty and their wealth. Far more people, however, who also fear the downfall of the present economic system, are sitting tight, in the hope that the light will suddenly go on in the minds of economists and political leaders alike, that what is needed is a more free-market society. This group of people hopes that national leaders will “come to their senses” and reverse the trend toward socialism and fascism.

These latter people might do well to consider that the blueprint for the future has now been published. The blueprint implies that the reason Keynesianism has failed is not that it was socialistic. We are told that it failed because it was not radical enough; not far-reaching enough. A more totalitarian Keynesianism was needed and has now been provided.

If the reader lives in the EU, US, or other country whose economic direction is similar, he is left with the question of whether it is in his interest to remain in a jurisdiction that is likely to become even more totalitarian during and after the Greater Depression.

Editor’s Note: International diversification is the solution and your ultimate insurance policy.

It gives you options and frees you from absolute dependence on any one country.

Achieve that freedom, and it becomes very difficult for any single government to control your destiny.

It’s admittedly late in the game, but not too late to get started, which is why I recommend doing it sooner rather than later. Here is a great place to start.

CULTURE OF IGNORANCE – PART ONE

“Five percent of the people think;
ten percent of the people think they think;
and the other eighty-five percent would rather die than think.”
– Thomas Edison

The kabuki theater that passes for governance in Washington D.C. reveals the profound level of ignorance shrouding this Empire of Debt in its prolonged death throes. Ignorance of facts; ignorance of math; ignorance of history; ignorance of reality; and ignorance of how ignorant we’ve become as a nation, have set us up for an epic fall. It’s almost as if we relish wallowing in our ignorance like a fat lazy sow in a mud hole. The lords of the manor are able to retain their power, control and huge ill-gotten riches because the government educated serfs are too ignorant to recognize the self-evident contradictions in the propaganda they are inundated with by state controlled media on a daily basis.

 

“Any formal attack on ignorance is bound to fail because the masses are always ready to defend their most precious possession – their ignorance.” – Hendrik Willem van Loon

The levels of ignorance are multi-dimensional and diverse, crossing all educational, income, and professional ranks. The stench of ignorance has settled like Chinese toxic smog over our country, as various constituents have chosen comforting ignorance over disconcerting knowledge. The highly educated members, who constitute the ruling class in this country, purposefully ignore facts and truth because the retention and enhancement of their wealth and power are dependent upon them not understanding what they clearly have the knowledge to understand. The underclass wallow in their ignorance as their life choices, absence of concern for marriage or parenting, lack of interest in educating themselves, and hiding behind the cross of victimhood and blaming others for their own failings. Everyone is born ignorant and the path to awareness and knowledge is found in reading books. Rich and poor alike are free to read and educate themselves. The government, union teachers, and a village are not necessary to attain knowledge. It requires hard work and clinging to your willful ignorance to remain stupid.

The youth of the country consume themselves in techno-narcissistic triviality, barely looking up from their iGadgets long enough to make eye contact with other human beings. The toxic combination of government delivered public education, dumbed down socially engineered curriculum, taught by uninspired intellectually average union controlled teachers, to distracted, unmotivated, latchkey kids, has produced a generation of young people ignorant about history, basic mathematical concepts, and the ability or interest to read and write. They have been taught to feel rather than think critically. They have been programmed to believe rather than question and explore. Slogans and memes have replaced knowledge and understanding. They have been lured into inescapable student loan debt serfdom by the very same government that is handing them a $200 trillion entitlement bill and an economy built upon low paying service jobs that don’t require a college education, because the most highly educated members of society realized that outsourcing the higher paying production jobs to slave labor factories in Asia was great for the bottom line, their stock options and bonus pools.

Instead of being outraged and lashing out against this injustice, the medicated, daycare reared youth passively lose themselves in the inconsequentiality and shallowness of social media, reality TV, and the internet, while living in their parents’ basement. They have chosen the ignorance inflicted upon their brains by thousands of hours spent twittering, texting, facebooking, seeking out adorable cat videos on the internet, viewing racist rap singer imbeciles rent out sports stadiums to propose to vacuous big breasted sluts on reality cable TV shows, and sitting zombie-like for days with a controller in hand blowing up cities, killing whores, and murdering policemen using their new PS4 on their 65 inch HDTV, rather than gaining a true understanding of the world by reading Steinbeck, Huxley, and Orwell. Technology has reduced our ability to think and increased our ignorance.

“During my eighty-seven years, I have witnessed a whole succession of technological revolutions. But none of them has done away with the need for character in the individual or the ability to think.” – Bernard M. Baruch

The youth have one thing going for them. They are still young and can awaken from their self-imposed stupor of ignorance. There are over 80 million millenials between the ages of 8 and 30 years old who need to start questioning the paradigm they are inheriting and critically examining the mendacious actions of their elders. The future of the country is in their hands, so I hope they put down those iGadgets and open their eyes before it is too late. We need many more patriots like Edward Snowden and far fewer twerking sluts like Miley Cyrus if we are to overcome the smog of apathy and ignorance blanketing our once sentient nation.

The ignorance of youth can be chalked up to inexperience, lack of wisdom, and immaturity. There is no excuse for the epic level of ignorance displayed by older generations over the last thirty years. Boomers and Generation X have charted the course of this ship of state for decades. Ship of fools is a more fitting description, as they have stimulated the entitlement mentality that has overwhelmed the fiscal resources of the country. Our welfare/warfare empire, built upon a Himalayan mountain of debt, enabled by a central bank owned by Wall Street, and perpetuated by swarms of corrupt bought off spineless politicians, is the ultimate testament to the seemingly limitless level of ignorance engulfing our civilization. The entitlement mindset permeates our culture from the richest to the poorest. Mega-corporations use their undue influence (bribes disguised as campaign contributions) to elect pliable candidates to office, hire lobbyists to write the laws and tax regulations governing their industries, and collude with the bankers and other titans of industry to harvest maximum profits from the increasingly barren fields of a formerly thriving land of milk and honey. By unleashing a torrent of unbridled greed, ransacking the countryside, and burning down the villages, the ruling class has planted the seeds of their own destruction.

When the underclass observes Wall Street bankers committing the crime of the century with no consequences for their actions, they learn a lesson. When billionaire banker/politicians like Jon Corzine can steal $1.2 billion directly from the accounts of farmers and ranchers and continue to live a life of luxury in one of his six mansions, they get the message. Wall Street bankers are allowed to commit fraud, reaping profits of $25 billion, and when they are caught red handed pay a $5 billion fine while admitting no guilt. No connected bankers have gone to jail for crashing the worldwide financial system, but teenage marijuana dealers are incarcerated for ten years in our corporate prison system. The message has been received loud and clear by the unwashed masses. Committing fraud and gaming the system is OK. Only suckers play by the rules anymore. A culture of lawlessness, greed, fraud, deceit, swindles and scams was fashioned by those in power. Reckless disregard for honesty, truthfulness, fair dealing, and treating others as you would like to be treated, has permeated the beliefs and behavior of our society.

The ever increasing number of people in the SNAP program along with abuses committed by retailers and recipients, the skyrocketing number of people faking their way into the SSDI program, billions of taxpayer dollars lost to Medicare fraud, billions more lost paying out earned income tax credit refunds based on non-existent children, public schools falsifying test scores, students cheating on SAT tests, credit card fraud on a grand scale, failure to report income and falsifying tax returns, and a myriad of other dodges and scams are just a reflection of a moral and cultural collapse. The dog eat dog mentality glorified by the media, with such despicable men as Dimon, Greenspan, Corzine, Clinton, Trump, Rubin, Bernanke and Bloomberg honored as pillars of society, has displaced honesty, compassion, humanity, shared sacrifice, and caring about our descendants. Self-interest, self-indulgence, and a narcissistic focus on what is in it for me today has led to an implosion of trust and an attitude of “who cares” about our fellow man, morality, right or wrong, and the fate of future generations. We ignored the warnings of our last President who displayed courageousness and truthfulness when speaking to the American people.

“As we peer into society’s future, we — you and I, and our government — must avoid the impulse to live only for today, plundering for our own ease and convenience the precious resources of tomorrow. We cannot mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage. We want democracy to survive for all generations to come, not to become the insolvent phantom of tomorrow.” – Dwight D. Eisenhower

The Me Generation has devolved into the Me Culture. While the masses have been mesmerized by their iGadgets, zombified by the boob tube, programmed to consume by the Madison Avenue propaganda machines, enslaved in chains of debt by the Wall Street plantation owners, and convinced by their fascist government keepers that phantom terrorists are hiding behind every bush, they surrendered their freedoms, liberties and sense of self-responsibility. There will always be evil men seeking to control and manipulate the ignorant and oblivious. A citizenry armed with knowledge, critical thinking skills, and moral integrity would not passively submit to the will of a corporate fascist oligarchy. Well educated, well informed citizens, capable of critical thinking are dangerous to rich men of evil intent. Obedient, universally ignorant, distracted, fearful, morally depraved slaves are what the owners of this country want. As the light of knowledge flickers and dies, we sink into the darkness of ignorance.

 

“No people will tamely surrender their Liberties, nor can any be easily subdued, when knowledge is diffused and virtue is preserved. On the Contrary, when People are universally ignorant, and debauched in their Manners, they will sink under their own weight without the Aid of foreign Invaders.” – Samuel Adams

Cult of Ignorance

“There is a cult of ignorance in the United States, and there has always been. The strain of anti-intellectualism has been a constant thread winding its way through our political and cultural life, nurtured by the false notion that democracy means that “my ignorance is just as good as your knowledge.” – Isaac Asimov

  

“While every group has certain economic interests identical with those of all groups, every group has also, as we shall see, interests antagonistic to those of all other groups. While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for them plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.

In addition to these endless pleadings of self-interest, there is a second main factor that spawns new economic fallacies every day. This is the persistent tendency of man to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences.” – Henry Hazlitt

America’s cult of ignorance, combined with the selfish interests of various constituencies, the character weakness of the people elected to office, a lack of understanding or interest in basic mathematical concepts, and inability to comprehend the long term and unintended consequences of every piece of legislation, have brought the country to the brink of fiscal disaster. But still, the vast majority of Americans, including the supposed intellectuals and economic “experts”, are basking in their ignorance, as the stock market reaches a new high, the local GM dealer just gave them a 7 year $40,000 auto loan at 0% on that brand new Cadillac Escalade, Bank of America still hasn’t foreclosed on their McMansion two years after making their last mortgage payment, and they just received three pre-approved credit card notices from Capital One, American Express and Citicorp. As long as Bennie has our back printing $1 trillion new greenbacks per year, nothing can possibly go wrong. Our best and brightest economic minds are always right:

“Stocks have reached what looks like a permanently high plateau.” – Irving Fisher, Professor of Economics, Yale University, 1929

“Many of the new financial products that have been created, with financial derivatives being the most notable, contribute economic value by unbundling risks and shifting them in a highly calibrated manner. Although these instruments cannot reduce the risk inherent in real assets, they can redistribute it in a way that induces more investment in real assets and, hence, engenders higher productivity and standards of living.” – Alan Greenspan – March 6, 2000

“We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.” – Ben Bernanke – July 2005

The profound level of ignorance displayed by economists, politicians, business leaders, media personalities, and the average American, regarding the mathematically unsustainable path of our fiscal ship is perplexing to me on so many levels. If the Federal government was a family, the budget ceiling debate would be put into the following terms. Our household earns $28,000 per year, but we spend $38,000 per year and add $10,000 to our credit card balance, which stands at the limit of $170,000. In addition, we owe our neighbors $2 million we don’t have because we promised to pay if they voted for us as Treasurer of our homeowners association. We celebrate our good fortune of getting approved for another credit card with a $30,000 limit by increasing our spending to $39,000 per year. Intellectuals scorn such simplistic analogies by glibly pointing out that the family has a crazy uncle with a printing press in the basement and can pay-off the debt with his freshly printed dollars. And this is where the deliberate and calculated ignorance by the highly educated Ivy Leaguers regarding long term and unintended consequences is revealed. They ignore, manipulate, cover-up and obscure the facts because their wealth, power and influence depend upon them doing so. But ignorance doesn’t change the facts.

“Facts do not cease to exist because they are ignored.” – Aldous Huxley

Nothing exposes the ignorance of various factions within our society better than a debate about budgets, spending, and unfunded liabilities. This is where every party, group, special interest, and voting bloc ignore any and all facts that are contrary to their selfish interest. They only see what they want to see. The fallacies, errors, omissions and mistruths of their positions are inconsequential to people who only care about their short-term self-seeking interests. When I question the out of control spending on entitlements and our impossible to honor level of unfunded liabilities, those of a liberal persuasion lash out with accusations of hating the poor, starving children and throwing granny under the bus. Anyone suggesting we should slow our spending is branded a terrorist by the overwhelmingly liberal legacy media.

When I accuse Wall Street bankers of criminal fraud and ongoing manipulation of the financial markets, the CNBC loving apologists for these felons bellow about the market always being right. When I rail about the military industrial complex and our un-Constitutional invasions of other countries, the neo-cons come out in force blathering about the war on terror and imminent threats. When I point out the horrific results of our government run educational system and how mediocre union teachers are bankrupting our states and municipalities with their gold plated health and pension plans, I’m met with howls of outrage about the poor children. The common thread is that facts are ignored because each of their agendas requires ignorance on the part of their team’s fans.

The following chart of truth portrays an unsustainable path. Ignoring the facts will not change them. This isn’t a Republican problem or a Democrat problem. It’s an American problem.

 

“There are men regarded today as brilliant economists, who deprecate saving and recommend squandering on a national scale as the way of economic salvation; and when anyone points to what the consequences of these policies will be in the long run, they reply flippantly, as might the prodigal son of a warning father: “In the long run we are all dead.” And such shallow wisecracks pass as devastating epigrams and the ripest wisdom.” – Henry Hazlitt

Henry Hazlitt may have written these words six decades ago, but they aptly describe Paul Krugman and the legions of Keynesian apostles whose bastardized interpretation of Keynes’ theory has led us to this fiscal cliff. How anyone can truly believe that borrowing to consume foreign produced goods versus saving and making job creating capital investments is a rational and sustainable economic policy is the height of ignorance. One look at this chart exposes the political party system as a sham. When it comes to the fiscal train wreck, set in motion thirty years ago, the ignorant media pundits peddle a narrative about politicians failing to compromise as the culprit in this derailment. Nothing could be further from the truth. Compromise is what has gotten us to this point. The Republicans compromised and allowed the Democrats to create a welfare state. The Democrats compromised and allowed the Republicans to create a warfare state. The Federal Reserve compromised their mandate of stable prices and preventing financial calamities by inflating away 95% of the dollar’s purchasing power in 100 years, while creating bubbles every five or so years, like clockwork. There are a myriad of facts related to the chart above that cannot be ignored:

  • It took 192 years for the country to accumulate $1 trillion in debt. It has taken us 30 years to accumulate the next $16 trillion of debt. We now add $1 trillion of debt per year.
  • If the Federal government was required to use GAAP accounting, the annual deficit would amount to $6.7 trillion per year.
  • The fiscal gap of unfunded future liabilities for Social Security, Medicare, Medicaid, and government pensions is $200 trillion.
  • Using realistic growth assumptions adds another $6 trillion of state and local government unfunded pension benefits to the equation.
  • The Federal government has increased their annual spending from $1.8 trillion during Bill Clinton’s last year in office to $3.8 trillion today, a 110% increase. The population has increased by 12% over that same time frame, and real GDP has advanced by 25% since 2000.
  • Defense spending has increased from $358 billion in 2000 to $831 billion today, despite the fact that no country on earth can challenge us militarily.
  • The average Baby Boomer will receive $300,000 more than they contributed to Social Security and Medicare over their lifetime. Over 10,000 Boomers per day will turn 65 for the next 17 years.
  • The Social Security lockbox is filled with IOUs. The funds collected from paychecks over the last 80 years were spent by Congress on wars of choice, bridges to nowhere, and thousands of other vote buying ventures.
  • A normalization of interest rates to long-term averages would double or triple the interest on the national debt and increase our annual deficits by at least 30%.
  • Obamacare and the unintended consequences of Obamacare will add tens of trillions to our national debt. The initial budget projections for Medicare and Medicaid showed only a modest financial impact on the financial situation of the country. How did that work out?
  • Entitlement spending in 2003 was $1.3 trillion. Entitlement spending in 2008 was $1.7 trillion. Entitlement spending in 2013 was $2.2 trillion. Entitlement spending in 2018 will be $2.8 trillion, as these programs are on automatic pilot.

When you consider the facts in a rational manner, without vitriolic denials, bitter accusations, acrimonious blame, and rejection of the entire premise, you come to the conclusion that we’ve passed the point of no return. Decades of bad choices, bad leadership, bad men in important positions, bad education, bad governance, and bad citizenship have led to bad times. But very few people, across all socio-economic classes, have any interest in understanding the facts or making the tough choices required to save future generations from a life of squalor. We willfully choose to ignore the facts.

“Most ignorance is vincible ignorance. We don’t know because we don’t want to know.” – Aldous Huxley

Our degraded and ignorant society is incapable of comprehending their dire circumstances or acting for the common good of the country. We are a nation on the take. Greed really is good. Everyone needs to play the game. From the top floor corporate CEO suite to the decaying urban wastelands, we have chosen comforting ignorance to uncomfortable knowledge. Our warped form of democracy enriches the few at the top, while dispensing enough subsistence payments to the lower classes to keep them from revolting, while enslaving the middle class in debt and convincing them it’s really wealth. Mencken understood the pathetic impulses of the American populace decades before we reached our point of no return.

“Democracy is a pathetic belief in the collective wisdom of individual ignorance.” – H.L. Mencken

The only way a democracy can survive is if the population is knowledgeable, vigilant, skeptical, educated, individually responsible, self-reliant, moral, capable of critical thinking and willing to accept the consequences of their actions. A nation of takers, fakers and blamers will not last long. We’ve degenerated into a nation of knowledge hating book burners. Our culture of ignorance will lead to the destruction of our culture and the ignorant masses will wonder what happened.

 

“But you can’t make people listen. They have to come round in their own time, wondering what happened and why the world blew up around them. It can’t last.” – Ray Bradbury – Fahrenheit 451

In Part Two of this examination about our culture of ignorance I’ll explore the roles of technology, family breakdown, government, and propaganda in creating the ignorance that is consuming our system like a mutant parasite. If you are seeking a happy ending, I suggest looking elsewhere.

Money in America, Part Five

 

Previously, we learned that the early 20th Century was a whole new ball game. A new and improved banking reform demanded by the people, with help, led to the Federal Reserve System. The “war to end war” commenced and ended, more or less …

 

Although peace broke out on November 11,1918 an Allied naval blockage hemmed in Germany for eight more months. Some 250,000 civilians, estimated, died in this period of disease and starvation. The necessity of importing food and the refusal of a loan from the United States meant Germany’s gold reserves diminished.

The signing of the Treaty of Versailles on June 28, 1919 ended the blockade. Germany had neither representation nor an invitation to the treaty completion. German reparations were specified at 132 billion marks (US$31.5 billion) and loss of territory, as well as limitations of their military. (The final reparation payment occurred in October, 2010.)

A few movers and shakers sat on the carpet playing their own version of ‘Risk’ and redrawing the world map to their liking. Meanwhile …

The Return of the Gold Standard

Great Britain was one of the victors of World War One – at a cost. They, and others, had monetized the debts for the war effort, double, triple or quadruple their money supply. Germany had extended to eight times pre-war! Only the United States had remained on the classic gold-coin standard, a dollar equal to one-twentieth of an ounce.

By February, 1920, the fiat pound sterling was worth one-third less than the pre-war value. Other countries were worse; the German mark had depreciated by 96 percent.

The British had a plan, floating exchange rates had to go: only a return to the pre-war value of the pound sterling would save the day.

Only one thing was wrong with this idea: an overvalued pound meant their mercantilist export market would suffer. A further complication to the alternate of a realistic value was the trade unionist movement – a deflationary policy was unthinkable. Britain would continue a monetary expansion – inflation – from the new standard and easy credit would solve all problems.

A policy was formulated, provisional on the U.S. maintaining an inflational policy to prevent adverse flow of British gold out of the country.

Britain hedged with the Gold and Silver Embargo Act of 1920, vowing to return to a gold standard by 1925. Both countries had seen an immediate post-war boom – and a ‘correction’ in 1920-21.

 

That Unknown ‘Correction’

Not many people apparently know of the U.S. Recession of 1920-21.

The Federal Reserve had been compliant in easing policy to support World War One. According to New York Federal Reserve Governor Benjamin Strong, the Fed was Treasury’s agent and servant. Independence … Anyway, by 1919, U.S. Inflation had risen over 27%. The Wilson administration slashed federal spending severely and by November, the federal budget was balanced. In concert, the Fed Reserve raised interest rates, sequentially to a final 7%.

This one-two punch to the economy resulted in employment and productivity declining and finally falling remarkably in June, 1920. Farmers, misled by high food prices in wartime had expanded land holdings based on cheap credit. The 7% final Fed’s rate was a killer. Wholesale prices overall declined by half. Bankruptcies on the land and general contagion bottomed the economy. Briefly – the economy immediately bounced upward (not a dead cat bounce) and the short-lived hardship was forgotten in the bling of the Roaring 20s.

Most everyone knew Great Britain intended to restore the gold standard. Speculators took advantage and a return to the prewar value of the pound stering was effectively priced in – objectively, it was overvalued.

Warren G. Harding had assumed the presidency in 1921 and further assisted the recovery by cutting government spending even more.

Incidentally, there was another Harding during this era: William P.G. Harding, second president of the Federal Reserve, 1916-1922. then president of the Federal Reserve Bank of Boston, 1923 to 1930, when he died. Connecting more dots … Carter Glass was Secretary of the Treasury from late 1918 to early 1920.

Great Britain’s post war recovery was not quite reflected in the unemployment rate, which varied between 9 and 15 percent even into 1924. The government countered this with a new unemployment program. Most of the problem involved the export industries. J.M. Keynes offered some opinions and criticism during the period. (By the way, he insisted his name was pronounced “Canes” or “Cains.” Or maybe it was “Cain’s descendant … )

“When stability of the internal price level and stability of the external exchanges are incompatible, the former is generally preferable.

“There is no escape from a ‘managed’ currency, whether we wish it or not. In truth, the gold standard is already a barbaric relic.”

A Tract on Monetary Reform – 1924

Keynes advocated semi-monopolistic structures operating under government approval and with government supervision. He also favored eugenics. And he appeared to believe that individual or private business self-interest should be replaced by the “intelligent judgement” of government. For the common good.

Keynes surely appreciated the U.S. Federal Reserve System. Before 1914, government issued gold certificates were 100% redeemable. FRNs afterward were only 40% backed by gold. Aha, thus the money supply increased during the war years a great deal.

Benjamin Strong had gone to England in 1916 to set up monetary coordination between the two countries. He met Montague Norman, then deputy governor of the Bank of England and a personal and professional friendship began that ended only in 1928 when Strong died.

A dozen years working together can accomplish a lot. The goal was to return to a gold standard with the pound sterling at $4.86, its pre-war value. To accomplish this, the U.S. would maintain inflationary policy to keep gold from leaving England. Strong and his New York Fed purchased U.S. government securities from November 1921 to June 1922 and the money supply grew. To enhance this policy, Norman also advocated lowering Fed interest rates.

Strong was ill through much of 1923 and the Federal Reserve Board sold off much of the government securities. On his return, Strong intervened again and again the money supply increased.

Secretary of the Treasury Andrew Mellon received the rationale that keeping American prices higher than British would establish the pound around par and facilitate the return to the gold standard. By early 1925, a line of credit to Britain of $200 million in gold was necessary to keep the scheme alive. The House of Morgan assisted with a $100 million line of credit. No one in authority disagreed with these maneuvers, neither Mellon nor the Federal Reserve Board. Higher prices in America supported the pound sterling.

Even so, Norman came to America for a serious talk with Strong and “Jack” Morgan, seeking reassurance about returning to gold.

Harding had died in office in August, 1923 and Vice President “Silent Cal” Coolidge had become the new president. Business as usual. Except …

… there was this: Weimar Germany and war reparations. The German war machine was powered by the printing press – the national debt went from 5 billion marks to 156 billion. Their wartime government had imposed price controls but the flood of money printing overwhelmed such efforts.

The first reparations payment, at 2 billions of gold marks at the 1913 value came due in June, 1921. A combination of gold, currency, coal, iron and wood sufficed to keep the wolves from the door.

But prices had caught up well and truly with the supply of money and in 1922, it appeared a default on the next installment was inevitable.

“Jack” Morgan organized an international reparations conference; to no one’s surprise, no easy answer was available. The German cost of living index that June was 41 but had risen to 685 by December.

France had its fifty-year grudge for the defeat of 1871 and with Belgium, invaded the productive Ruhr industrial area in January, 1923.. The Weimar government ordered a general strike. To pay the idled workers and support families who’d lost their homes during the 18-month occupation, there was only one quick answer: print more money!

Imagine at a given moment that a person orders one cup of coffee at a cost of 5,000 marks – and minutes later, a second cup had risen to 9,000.

Overall the mark had gone from 4.20 to the U.S. Dollar in 1914 and by November, 1923, one dollar fetched 4.2 trillion with a T marks.

Klaus Mann, a writer of the day: “What breathtaking fun it is to watch the world coming off the rails … the complete depreciation of the only truly credible value in this godforsaken era: that of money.”

His brother, Golo Mann, a historian: “What was there to trust, who could you rely on if such were even possible?”

A critic of the government at the time was interviewed and asserted that the high cost of living was the biggest problem Germany faced. “We intend to make life cheaper,” he declared. His name was Adolf Hitler.

The Gold-Exchange Standard!

At last! Years in the making, the British Cabinet announced the return to gold on March 25, 1925, with conditions: a $300 million credit line from the U.S., no Bank of England change of the bank rate, and the new pretend standard would be based on gold bullion and not gold coin redemption. Also, the Chancellor of the Exchequer would discourage the domestic use of gold coin. If this didn’t work, there was always the legislative hammer.

By comparison, the classical gold standard empowering redemption in gold coin restrained issue of the currency and government excess. The bullion standard thus disempowered ordinary people but kept exchange for international trade.

The Gold Standard Act of 1925 specified a minimum bullion bar of 400 gold troy ounces. Montague Norman explained it this way:

“ … confidence in the value of money does not depend upon the existence of gold coin … in times of abundance hoarding [of gold coin] is bad because it weakens the command of the Central Bank over the monetary circulation and hence over the purchasing power of the monetary unit … the use of monetary gold can be limited, in case of need, to the settlement of international balances.”

In point of fact, however, Britain would be on gold and European countries effective went on a pound sterling basis. Effectively, European countries would redeem their masses of international trade currency for pounds as reserves.

The beauty of this was that Britain could issue more pounds for settlement which was a stealth opportunity for European economies to inflate their own money supply due to greater pound reserves. Such a deal!

America was the exception in this scheme but the Strong-Norman connection ensured U.S. Dollar inflation and no gold would flee jolly old England.

Some European countries fared better than others, initially. France, for example, had experienced significant inflation to the rate of 240 francs to the pound. Under the British plan, France returned to gold at 124 francs/pound. Germany, Austria, and other countries that experienced hyperinflation returned to the pretend gold standard at a more pragmatic rate.

Immediate post-war prices were high due to the armies of fiat dollars sloshing around the world. Those early masters of the universe feared ‘deflation’ so much that the falling prices of 1920-21 convinced them without much effort that an inflationary policy was the best response.

Some 39 countries were embroiled in the gold-exchange standard by 1926, and 43 by 1928.

Governor of the Bank of France, Emile Moreau had this to say at the time:

“England … putting Europe under a veritable financial domination … remedies prescribed always involve the installation in the central bank of a foreign supervisor who is British or designated by the Bank of England … guarantee against possible failure they are careful to secure the cooperation of the Federal Reserve Bank of New York. Moreover, they pass on to America the task of making some of the foreign loans if they seem too heavy, always retaining the political advantages of these operations.”

In the U.S., the money supply from 1921 to 1929 increased 61 percent. This certainly helped Great Britain but not enough. The self-serving policy of a strong pound sterling in reality shot themselves in the foot and fettered their export market. Also, militant trade unions maintaining a high wage rate also exacerbated high unemployment. During the whole of the Roaring Twenties, Britain’s unemployment rate remained around recession grade and was eleven percent by 1929.

Meanwhile, American prices had started to decline in the middle of the decade, and this threatened the balance again Britain. Not to be undone, the dynamic duo, Strong and Norman called a secret conference in 1927. Britain had already suggested to France that perhaps the pound sterling might have to be devalued. The duo met with counterparts from the French and German central banks. Even the Federal Reserve Board in Washington know nothing of this.

Strong promised more inflation, a boost to the stock market, and a further purchase of $60 million sterling to backstop that British pound. He also made significant purchases of U.S. Securities.

An article in The Banker, a London journal, praised Strong as “a friend of England in her greatest need.

Strong died in October, 1928, from a lengthy illness, and never saw the fruits of his labors.

The stock market certainly benefitted by Strong’s attentions, doubling in 1929. Before President Coolidge vacated the White House in March, 1929 he praised the American economy as “absolutely sound” and said stocks were cheap.

Black Thursday and Beyond

Belatedly, the Federal Reserve tried weakly to stuff the easy money genie back in the bottle. But the trends were already in place – July, 1927 unemployment, 3.3% and Dow Jones Industrial Average, 168. Early October, 1929, unemployment around 5%, DJIA, 343.

Coolidge had said back in 1927, “I do not choose to run for president in 1928.” He already had five years in and believed that too often, the man became the office. Harding, before him, had offered Herbert Hoover a cabinet post. Hoover chose Commerce, which was a minor position – and he aimed to change that. Harding died in office and VP Coolidge rose to the White House and though he kept Hoover in place, he privately referred to him as ‘Wonder Boy’.

The 1928 three-way early race for Republican nominee led to Hoover being nominated on the first ballot. The election went resoundingly to him with Democrat Al Smith winning but six states.

Hoover courted the press in his first seven months but after Black Thursday, his availability was diminished. Having already made a name for himself as a reformer and regulator of early radio, he made more plans for reform. He disliked laissez faire ideas and advocated public-private cooperation, expanded the civil service and unleashed the Justice Department and Internal Revenue Service on tax evaders like Al Capone.

Far from the “do-nothing presidency” faux reputation believed by some, he was a very busy administrator with hands in every pot, domestic and foreign.

Meanwhile in the last week of October, the Federal Reserve was still assisting Montague Norman; doubling the hoard of government securities and adding $300 million bank reserves increased liquidity, fuel to the fire on Wall St. Speculators on margin included more people than you can imagine: elevator operators, shoe shine boys, housewives, farmers, college students; it seemed every American was acting on the latest hot stock tip.

Volatility had increased with large swings both ways. DJIA peaked at 381.17 on September 3, the culmination of a six-year run.

On Thursday, October 24, the market fell by 11% after the opening bell.

Panic! The House of Morgan, Chase Bank, and the National Bank of New York met to agree on emergency funding. Richard Whitney, vice president of the New York Stock Exchange was chosen as their facilitator. He placed massive orders for blue chip stocks, U.S.Steel and others. By the day’s close, the DJIA was only down 6.38 and everyone breathed a sigh of relief until …

“Black Monday”, October 28, the market opened to massive selling and lost 13%. “Black Tuesday” followed with another drop of 12%. Sixteen million shares were traded that day, setting a record that lasted nearly 40 years.

One of the triggers for the instability was the anticipation, or dread, of the passage of Hoover’s Smoot-Hawley tariff.

Despite more interventions, the market continued to slide until November 13, 1929, with the Dow closing at 198.60. Then a bear market rally (dead cat bounce) took the peak to 294.07 on April 17, 1930. From there, the market declined to July 1932 when the Dow closed at 41.22. Only in November, 1954 did the Dow see a figure reminiscent of the 1929 peak.

The so-called ‘do nothing’ president got his tariff, part of an overall plan of price and wage manipulation, the Glass-Steagall Act, the National Credit Corporation, forced migration of Mexicans back to Mexico, the largest peacetime tax increase in history, the Federal Home Loan Bank Act, the Emergency Relief and Construction Act, the Reconstruction Finance Corporation – and more. Truly, these were the seeds of the New Deal.

Hoover’s policies claimed he did too little, too late, nothing worked – and then there was the debacle of the Bonus Army.

He accepted a nomination for re-election in 1932, likely because no other of the party wanted the job. Franklin Delano Roosevelt called Hoover “jelly” and people not only threw rotten eggs and fruit at his appearance but several assassination attempts were thwarted. By the election, Hoover won only as many states as Al Smith had in the previous election. Roosevelt captured the presidency, the house and the senate, and increased Democratic representation in many states as well.

 

Our next episode will begin with the real default of 1933, more interventions, the recession within the Depression, and the real end of the Great Depression.