It’s easy to be negative about the U.S. economy these days. Find a glint of silver, and folks come running to point out all of the dark clouds looming about. This, of course, is what we got last week when the monthly jobs report was released from the U.S. Department of Labor (DOL). Folks pooh-poohed the number of jobs and whining that they’re not enough or that it’s less than a bunch of economists thought that it might be. But you know what? Stuff ’em.
Given how poorly states like California and Illinois have funded the pension funds for their own employees, one would think that this would stop dead in its tracks any plan to have the government assist in managing private sector funds too. The spate of recent activity, however, suggests otherwise.
The financial world is plodding along like a drunken sailor avoiding debt collectors by keeping no cash in his wallet. It’s not the kind of calm that’s going to last or end well. But the storm will have to wait until after the Olympics.What a game! We’ve never watched ice hockey closely before. But watching […]
“When they come for my gun, they will have to pry it out of my cold, dead hands,” is a common refrain I often hear from the Neo-Cons when there is a threat, credible or otherwise, that the U.S. government is going to take their firearms.And, when I hear this crazy talk, I agree with […]
Last year was quite the year for Bitcoin. We’ve seen exponential growth in Bitcoin’s exchange rate and extensive coverage in the media. Another phenomenon we have witnessed is the proliferation of alternative cryptocurrencies, five of which we’ve provided below.What all of these cryptocurrencies have in common is that they rely on a decentralized network to […]
The nonpartisan Congressional Budget Office is acting in a bipartisan way to cover up the biggest single threat to the bipartisan political alliance that is stripping America of its wealth: the United States Congress.There is no question that the following policy is bipartisan. Democrats and Republicans in Congress are completely agreed that the following information […]
Amidst all the revelations about how the American people, many of whom are absolutely convinced they live in a free society, have their telephone calls, emails, website visits, and who knows what else under surveillance by their own government, let’s not forget the massive infringements on financial privacy that have gone on for decades.Consider, for […]
Image: ShutterstockBitInstant CEO Charlie Shrem, along with alleged co-conspirator Robert Faiella, was arrested by federal authorities last week for allegedly laundering more than $1 million worth of Bitcoins. This is a tiny amount compared to the largest drug-and-terrorism money laundering case ever. Yet when British bank HSBC was found guilty in 2012 of laundering billions, […]
The exercise had an awesome name, inspired by the movies: “Quantum Dawn 2.”On July 18, scads of U.S. banks, stock exchanges and government agencies took part in a digital fire drill — a practice run in the event all of Wall Street came under massive cyberattack.This isn’t the first time banks have come under an […]
The faces of the Detroit bankruptcy are the thousands of pensioners whose promised benefits are suddenly part of the restructure negotiation. When Motown filed for Chapter 9 last July, the city had $11.5 billion in unsecured liabilities. The vast majority of this was pension and health care benefits owed to retired city employees.The images of […]
So you’ve maneuvered the Obamacare website, plugged in your top-secret information and found out how much you are forced to pay to avoid a fine.And for some of you, it turns out you qualify for a government subsidy — making the premium sound like a bargain. But signing on that line to accept the government’s […]
The Largest Company in History:“The United States Corporation of Government (USCOG)”I follow global social and commercial networks, looking for entrepreneurial opportunities.Innovation surges when industry and government models change. Buggy whips. Landline phones. Railroads. The Soviet Union. Apartheid South Africa. All marked social and commercial innovation, both bad and good.We are witnessing a new form of […]
We’d like to give the banks in Australia some credit. They’ve finally gone and done it. They have caught up with 1960s technology. They’ve figured out how to use PIN numbers.How to only use PIN numbers, that is. They’re considering scrapping signatures on credit cards to cut down on fraud. Apparently, having to verify your […]
We put in a good-citizen call to the SEC the other day.“There’s a massive scheme to manipulate stock prices,” we told the friendly agent.“I have to tell you that your call is being monitored so that we can better serve the public,” he replied.“Oh, don’t worry about that. The NSA is tapping our call anyway.”“Are […]
Bitcoins are largely considered digital currency (or “crypto currency”) so you’d expect it to be treated like currency on a retail web site. But the Internal Revenue Service might not think so.
Politicians — elected officials — are street smart rather than book smart.If you care about influencing government policy it helps to know how they think.Forbes contributor Nathan Lewis argues that:“Too much is done today on the oral tradition. That is, literally, what it is. In this post-Gutenberg age, we have some better alternatives.“Thus, we need […]
Bitcoin has been making headlines for months now. Extreme price fluctuations have sparked a vigorous debate: Is it a currency or a scam? Is Bitcoin viable in the long-term, or are we witnessing a bubble waiting to burst?The answers to these questions are simple: Yes, Bitcoin is a currency, but we cannot know if it […]
The Silk Road was an undercover website where you could buy or sell illegal goods — drugs mainly. I believe passports were changing hands for about $6,000, and I understand weapons were also sold, but that was ceased in response to the spate of shootings in the U.S. over the summer. The essence of the […]
The market has selected different things as money throughout history. Some of these items have served as money in isolated places for specific periods of time — for instance, cigarettes in prisoner-of-war camps. Cigarettes continue to be a currency in prisons if allowed, but if not, according to Wikipedia, “postage stamps have become a more […]
[Ed. Note: This article originally published on Jan. 24, 2013]Stocks up. Gold down. Bitcoin… waaay up.The S&P 500 busted through the 1,500 mark this morning. Stocks haven’t been this expensive since 2007… right before they got a whole lot cheaper… for a whole lot longer. Gold, meanwhile, dipped a tad. This, despite central bankers of […]
Now, this is sheer entertainment. The Chicago branch of the Federal Reserve has addressed the great monetary question of our day. A researcher has taken a detailed look at the prospects for market-based crypto-currency, with a special focus on Bitcoin. It concludes that Bitcoin is not a viable replacement for the dollar. The report includes […]
The standard version of how money came to be goes like this: First, there was barter. (A handful of nails for a pint of ale!) Then, along came various forms of money. An evolutionary derby eventually crowned gold and silver as the supreme money. And finally, credit (or debt) was born. This is the apex […]
2013 represents another turning point in the demise of the American Empire. If you view it in economic (rather than ethical or moral) terms, the high water mark of Empire was probably in the late 1990s.But the Internet bubble and bust marked an important turning point. It coincided with the birth of the euro, a […]
It was a wild ride last week in the world of the Deep Web, that section of the Internet that requires special tools to access. The feds took down the site called Silk Road and claim to have arrested its founder and administrator. The news streams were filled with lurid tales of derring-do in this […]
My community in the Deep South prides itself on friendship, community feeling, and an overall happy spirit. So it was a bit strange for all of this to be utterly smashed and obliterated in the course of a few calamitous weeks in which friend turned against friend, colleagues became antagonists and enemies, and families were […]
A new assessment of state pension obligations suggests the problem is even worse than it already appears.How much worse?EMPTY COOKIE JAR: Pension liabilities are worse than many states’ official figures indicate.Using a more conservative method of accounting for financial gains in the marketplace, there is a $4.1 trillion gap between assets and liabilities — known […]
I dreamed I saw Bernard von NotHaus, alive as you or me.Said I, “But Bernard, you’ve been jailed two years.”“I never was,” said he.Bernard has been the called the Rosa Parks of the alternative money movement. More than 10 years ago, he had this idea that he would make his own money — not the […]
We’ve been telling anyone who will listen that the Fed has gone where the central bank has never gone before. Pre-crisis, the Fed’s available resource looked like it always had in the postwar period. Nearly overnight, thanks to its magical money creating powers of buying debt with funds it created, the Fed’s balance sheet shot up — like straight up. In fact, it tripled — from $900 million to more than $3 trillion. It’s not stopping either: the Fed will soon have $4 trillion in its coffers.
Why does Bernanke say he did this? To give the economy a jolt and thereby fix unemployment. It’s true that headline unemployment could sink below 6.5 percent. If that were to happen, Bernanke and his posse might douse their QE campfire and head home.
Trouble is that this isn’t likely to happen anytime soon. The latest unemployment number is 7.9 percent. And in the last quarter, productivity as measured by the GDP fell. Fell!
Think of it: the Fed will have quadrupled its balance sheet in five or six years time. The results: stagnation and persistent unemployment.
What’s missing from this catalog of bad effects of loose money? You and I might have expected prices to soar. Back in 2008, if you had known that by the end of 2013 the central bank would triple its balance sheet, and that a year or two later it further expanded its footings to four times, you might have thought we’d been making history Zimbabwe-style by now.
Why haven’t we seen historic levels of hyper-inflation? The necessary triggers are not there. The demand for holding money (instead of spending it) is higher than normal. The banks are licking their crash inflicted wounds, parking reserves at the Fed insteading of lending. You have to have lending in order to have money creation and hyperinflation. That isn’t happening.
How unusual is this conundrum? It’s happened before. In fact, the Fed’s balance sheet has ballooned even more just after the Fed was created in 1913. The sorry tale is chronicled in Economics and the Public Welfare by Benjamin Anderson.
After the Fed was created, It didn’t take long for the Fed’s Board of Director’s first chairman, Charles Sumner Hamlin, to figure out how to grow his business. He wasn’t even a banker. He was a lawyer, academic, and unsuccessful gubernatorial candidate.
The Fed wasn’t even in operation when the Austrian crown prince was assassinated in Sarajevo on June 28, 1914. Investors in Berlin and Paris pushed the panic button in late July. The Vienna exchange closed on July 27 and Austria declared war on Serbia.
In the next few days, stock markets around the world closed. On July 31, 1914, the London market closed. Five hours later, just before it was to open for trading, the authorities of the New York Stock Exchange told brokers they would not ring the bell.
The next day, Germany declared war on Russia and on August 4th, England declared war on Germany.
Talk about markets tightening up! Of course in those days the world was on a gold standard. Benjamin Anderson writes: “when grave uncertainties arise, and, above all, when unexpected war comes, men prefer gold to real estate…With the apprehension of war, however, the effort is made to convert illiquid wealth into liquid form as rapidly as possible, even though heavy sacrifices are involved.”
But New York’s loss of gold abruptly turned and gold began flooding in “a rate never dreamed of before,” writes Anderson. Over a billion dollars of gold flowed in from December 1914 to May 1917. The dollar strengthened, the pound and other currencies dropped. Goods were flying out of America, but only gold was coming back.
After the U.S. entered the war in 1917, the Federal Reserve Act was quickly amended to allow the issuing of federal reserve notes against both gold and commercial paper. Member bank reserve requirements for demand deposits were reduced to 13 percent in central reserve cities, 10 percent in reserve cities, and 7 percent in country banks. The percentage had been 25 percent not long before that.
“Bank credit was easy,” writes Anderson. “It was easy to float new securities.”
The wartime boom was on. And the Fed’s balance sheet exploded in size. The Fed’s total resources on November 26, 1915 were $637 million. The vast majority of that was cash and gold. Member bank reserves made up most of the liabilities..
By late October 1918, just prior to the Armistice, cash and gold at the Fed quadrupled. It’s reserves stood at $2.1 billion. Once you add in war bonds, discounted obligations, and bills bought in the open market, you get a grand total of $5.3 billion — all in three short years.
Meanwhile, member banks added to their reserves. Bank deposits also jumped up from $17.4 billion in June 1914 to $28 billion in June 1918.
Sounds like a prescription for hyperinflation, does it not? But this didn’t happen.
Anderson explains why: the markets were broken.
This is a remarkable exhibition of restraint in the employment of bank credit in a great war. We had to finance the government with its four great liberty loans and its short-term borrowing as well. We had to transform our industries from a peace basis to a war basis. We had to raise an army of four million men and send half of them to France. We had to help finance our Allies in war, and, above all, to finance shipment of goods to them from the United States and from a good many neutral countries.
Anderson explains that credit rationing served to hold down bank credit expansion. Nonessential industries needing funding were turned down. Then as now, banks know where their bread is buttered. Besides, loaning to the government is safer than lending to the widget maker down the street, especially in a time of war.
Construction and other ordinary activities were crowded out as bank credit was steered to wartime needs. After the war, restraint ended, and the boom expanded. Yet, Anderson writes that “money and bank credit was not the dominating factor in the postwar boom…”
However, the growth in bank deposits and the size of the Fed during the war years is undeniable. Plus, bank loans and investments grew another 25 percent from the spring of 1919 to April 1920. Federal debt had exploded because of wartime expenditures.
By war’s end annual consumer price inflation rates had jumped well over 20 percent. In response, the New York Fed ratcheted up its rate (and the other Fed banks followed). Rates moved from 4.75 percent in November 1919, to 6 percent in January 1920, and to 7 percent in June of that year.
Following the war, the government slashed spending from $18.5 billion to $6.4 billion–a 65 percent reduction. The result was a crash in wholesale and retail prices and a moderate decline in wages. Unemployment soared.
You’ve likely never heard of America’s 1920-21 depression because it came and went so quickly. Anderson explains, “we took our losses, we readjusted our financial structure, we endured our depression, and in August 1921 we started up again.”
The current Federal Reserve is emulating its wartime expansion of 1915 to 1918. The federal government is copying FDR’s New Deal of the 1930′s. It is showing the same results: a broken banking system, a stagnant economy, high unemployment, but also price restraint.
We’re five years and counting of Ben Bernanke’s fight to the death with deflation. There’s nothing new or path breaking about it. Experience tells us this modern version of a stupid policy will create many more years of stagnation.
When will the inflation arrive? Maybe later, but maybe never. The point of the monetary policy was to keep overextended banks from going bust. But that comes with other results that are different from what many people might have expected. We’ll pay the price but not in the same way as Zimbabwe and Weimar Germany. Our coming chaos will likely take a different form.