Free Markets, Free People

Federal Reserve


Podcast for 31 May 09

In this podcast, Bruce, Michael, Billy, and Dale discuss the economy and the Sotomayor nomination.

The direct link to the podcast can be found here.

Observations

The intro and outro music is Vena Cava by 50 Foot Wave, and is available for free download here.

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Juxtaposition

Compare and contrast this rehabilitation effort of Timothy Geitner:

After his hellish opening weeks, Treasury Secretary Timothy Geithner started inviting White House economic officials across the street to his conference room for hours-long working dinners that have helped get — and keep — the whole team on the same page.

[...]

Geithner, a former president of the New York Federal Reserve who once looked like he was floundering in one of the administration’s most scrutinized jobs, is emerging in a new position of strength with the media and the markets, just as he launches President Barack Obama’s high-stakes effort to re-regulate the nation’s financial markets.

[...]

The secretary’s advisers acknowledge that his newfound political standing is tied, in part, to the state of the economy, which is now showing early signs of improvement. But Treasury officials also have updated their playbook after his Feb. 10 speech on financial recovery, which was panned by the press and blamed for a 381-point slide in the stock market.

They decided to “let Tim be Tim” and accepted the fact that his strength wasn’t giving a speech in front of a bunch of flags. Rather, they let reporters see him in off-camera, pen-and-pad settings, where he fielded questions with the confidence that his staff saw behind the scenes. He aced an interview with PBS’s Charlie Rose, thriving in a relaxed setting where he could explain issues at length.

… with this bit of economic reality:

China has warned a top member of the US Federal Reserve that it is increasingly disturbed by the Fed’s direct purchase of US Treasury bonds.

Richard Fisher, president of the Dallas Federal Reserve Bank, said: “Senior officials of the Chinese government grilled me about whether or not we are going to monetise the actions of our legislature.”

“I must have been asked about that a hundred times in China. I was asked at every single meeting about our purchases of Treasuries. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States,” he told the Wall Street Journal.

[...]

The Oxford-educated Mr Fisher, an outspoken free-marketer and believer in the Schumpeterian process of “creative destruction”, has been running a fervent campaign to alert Americans to the “very big hole” in unfunded pension and health-care liabilities built up by a careless political class over the years.

“We at the Dallas Fed believe the total is over $99 trillion,” he said in February.

“This situation is of your own creation. When you berate your representatives or senators or presidents for the mess we are in, you are really berating yourself. You elect them,” he said.

His warning comes amid growing fears that America could lose its AAA sovereign rating.

I guess since the media tried to talk down the economy for the previous eight years, they may as well try and talk it up now that their boy is in the White House. The shame of it is that as the economy worsens, a lot of people are going to be shocked.


“Bernanke Bucks” And The Danger Of Hyper-Inflation

I saw the following two quotes in a Patrick J. Buchanan piece. Now I’m not much of a Buchanan person by any stretch, but the quotes resonated with me and I found myself agreeing with much of what Buchanan said.

“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.” -Ernest Hemingway

Hemingway wasn’t an economist, but there are plenty out there consider John Maynard Keynes a fairly good one, even now. And he said much the same thing about the economic side of the Hemingway quote:

“The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

Right now, in lieu of dollars, our Federal Reserve is in the midst of printing trillions of “Bernanke Bucks”. I hesitate to call them dollars, even though they’re similar in their look and feel. But in essence they are worth little more than the paper they’re printed on. And although you can’t tell them from the dollars circulating out there, their presence makes the those dollars worth less. The more BB’s there are out there, the less the remaining dollars are worth.

It is called “monetizing the debt”.

Or to pick up on Keyne’s point, we’re right in the middle of debauching our currency.

Now, there are several reasons for doing what is being done, and you may or may not agree with them. But it really doesn’t matter. Whether you agree or disagree, printing money for the right reasons or the wrong reasons still has the same effect.

If you think taxation is theft, inflation is no less than that. And in this case it is a calculated theft. Those printing the “Bernanke Bucks” know precisely what the effect on your net worth will be.

Buchanan concludes his piece pointing out what we’ve talked about here for months – this is all about the belief we can avoid the pain:

Yet one senses that we are doing again exactly what we have done before in this generation. Rather than endure the pain and accept the sacrifices to cure us of our addiction, we are going back to the heroin. And this time, with Dr. Bernanke handling the needle, we may just overdose.

The road to hyper-inflation is paved with good, but seriously misguided intentions.

~McQ