Sunday, August 28, 2016

What is The FED Really Up to? Not Running the Economy, that' for Sure!

I'm so tired of the Federal Reserve getting so much credit for "Running the Economy"!  The FED doesn't run the economy, all the people who participate in the economy actually run the economy.  The collective billions of transactions to buy or sell raw materials, capital equipment, IT infrastructure, real estate and consumer goods drives the performance of our economy.  No one person or group of people could possibly coordinate the millions of actors and billions of transactions that take place in the economy that signal participants on what to produce, how much to produce and for what industry segments are the most critical for that production.  It's absurd on the face of it!  I sometimes wonder where this came from and who started this absurd idea and for what purpose?

It is true that The FED manages "open market operations" to sell U.S Bonds of different durations issued by the U.S. Treasury, but this is largely a debt issuance function and is purely financial.  It's the activity in this market created between buyers and sellers which then sets market interest rates that are used all over the World.  The FED does not normally participate in this market, it merely makes the market, so that buyers and sellers can come together and transact.  During Quantitative Easing, however, the FED became a participate in the market and actually PURCHASED these bonds, which ultimately made bond prices go up in value, which caused rates to fall.  This activity is highly unusual in the United States and is usually reserved to markets manipulated by despots and tyrants around the World.  This monetization of the money supply, expands the number of dollars and ultimately steals value from the currency and the holders of the currency.

The unfair and systematic destruction of the money supply through currency creation, whether direct or indirect, is one of the most common arguments for a HARD MONEY system.  The Founders of this country also understood this, which is why they agreed to give Congress this power by writing in Article I, Section 8, Clause 5 of The Constitution, "Congress shall have the power to Coin money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures."  Due to a persistent and unrelenting desire by those in politics and in banking who did not want to be constrained by a system based on coinage, we have moved slowly and deliberately in favor of an unbound system that will ultimately lead to complete destruction.

Some say that this money system is legitimate and sound, and use as evidence the fact that it's worked so well for so long without any major disruptions or inflationary events.  The fact is, history is littered with the corpses of those governments who have gained control over the money with legal tender laws, followed by a systematic theft of the wealth of its citizens through monetary inflation.  It's happening as we speak in Venezuela with an annual inflation rate estimated to be around 700%.  Producers are unable to purchase raw materials in order produce goods for consumers to buy because the money is so manipulated that other countries will not trade with Venezuela.  Those producers are then forced to shutdown limiting goods to the market.  The Venezuelan government responds by rationing goods and the citizens are left with nothing to do but stand in line everyday trying to get food to feed their families.  It is truly criminal and tragic, but even now it continues.

So why hasn't the U.S. collapsed?  It's a good question, and it may have many legitimate answers, but among these are not that the system is sound and fair.  One of the clues to the longevity of the U.S. money system likely dates back to an important global conference that took place in Bretton Woods, CT in July of 1944.  As WWII was nearing its end, government leaders and intellectuals met at this conference to discuss the global financial system in the wake of the great war.  There was much damage to economies all over the world during the war and no advanced country, other than the U.S., was going to be producing any goods for a long time.  Additionally, the U.S. owned or controlled almost the entire world's inventory of gold.  In the face of these overwhelming conditions, the representatives of this conference decided to give the United States and the Dollar the extraordinary privilege of global reserve currency status.  This meant the trade balances between countries would be settled in U.S. Dollars.  This is an extraordinary power, and in hindsight, I'm sure many historians inside and outside the United States see this transfer of sovereignty to the United States as a major global mistake!

Even now, I recognize that the connection that I am trying to make around my case is not entirely obvious.  So, I want to talk about how this privilege has been abused by our government at the expense of Americans and non-Americans.  But to do that, we now need to turn to trade, which is interesting because it is such a hot button during this presidential political season.  Before the World of fiat money in global trade, countries would trade goods with one another and settle global imbalances by transferring gold to make up the difference.  Gold in reserves held by government was owned by all citizens.  If some of that gold had to be shipped to another sovereign country to settle a trade imbalance, then country and its citizens would experience a loss in wealth.  Of course, gold reserves could be replaced by mining more gold and placing those reserves back in the Treasury, but this requires real resources to produce the gold; labor, equipment and time.  What is important to see here is that it's production that produces wealth in global trade, not money.  Increasing money without increasing production, simply increases the price of the goods produced.

Contrast this process with what happens today in a Dollar based reserve currency system back by nothing.  If the U.S. doesn't produce enough goods to trade with other countries in way that the balances are zero, our Federal Reserve just sends a bunch of electronic Dollars to settle the accounts.  Since there are not enough goods sold in the World that one can purchase with Dollars, the excess Dollars come back to the U.S. in the form of demand for U.S. Treasury Bonds.  This is why China owns so much of our National debt and why our interest rates have been so low for so long.  We are expropriating wealth from the rest of the World by sending Dollars to them that required no production to earn and giving them worthless IOUs in trade.  In short, the United States government has been exporting our inflation to sovereign countries around the World.  The net effect is that Americans have been enjoying a standard of living that is not real nor earned, and when this privilege is taken away from the U.S., our standard of living will fall substantially!  This is the nature of a standard of living based on debt built by fiat money!