Fed

All Hail The Fed!

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ALL HAIL THE FED!

The United States Federal Reserve Bank has left a century-long trail of damage in its wake. A misguided attempt to manage the stages (growth, prosperity, recession, depression) of the economic cycle has led to nearly complete destruction in the value of our money.

The Federal Reserve caused the Depression of the 1930s and worsened its effects. Their actions also led directly to the catastrophic events we experienced in 2007-08 and have made us more vulnerable than ever before to calamitous events which will set us back decades in our economic and financial progress.

The new Chairman of the Federal Reserve, Jerome Powell, is personable, likable, candid, and direct. But he cannot and will not preside over any changes that will have lasting positive impact.

The Federal Reserve does not act preemptively. They are restricted by necessity to a policy of containment and reaction regarding the negative, implosive effects of their own making.

And their actions, especially including the inflation that they create, are damaging and destructive. Their purpose is not aligned with ours and never will be.

Yet they are not totally independent. In fact, they have a very cozy relationship with the United States Treasury. That relationship is the reason they are allowed to continue to fail in their attempt to manage the economic cycle. You can learn about that relationship in my new book ALL HAIL THE FED!

Whatever your understanding is about the Federal Reserve, it will change after reading this book…

The Federal Reserve – Purpose And Motivation

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With each succeeding day, obsession with the Federal Reserve continues. And the obsession is a good indicator of just how misinformed most of us are.

This is true with respect to various policies, statements, and actions; and includes comments made by board members, either in speeches or interviews. But it is also true regarding purpose and motivation.

To a large extent, it is a matter of perception. Some, maybe most, people see the Fed as the lead driver. There is an assumed aura of authority and control. On all matters economic, we look to them for direction. But where are they taking us? 

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The Fed’s 2% Inflation Target Is Pointless

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FED’S 2% INFLATION TARGET

Within the Federal Reserve sometime in 1996, a discussion took place among FOMC (Federal Open Market Committee) members regarding the subject of inflation targeting. Federal Reserve District Governor (San Francisco) Janet Yellen believed that a little inflation “greases the wheels” of the labor market. Her preferred “target” was 2%. She asked Chairman (at the time) Alan Greenspan his preference.

The Chairman replied.  “I would say the number is zero, if inflation is properly measured.”

On the surface, it might seem that Chairman Greenspan is indicating that no inflation is preferable to “a little” inflation.  But that is contradictory to the actual mechanics of ongoing monetary action by the Fed since its inception in 1913.

The Federal Reserve creates inflation through ongoing expansion of the  supply of money and credit. Our fractional-reserve banking system is intrinsically inflationary – at the very least. And what did he mean by the parenthetical comment, “if inflation is properly measured”.

More likely, he was adopting the role of devil’s advocate and trying to promote further, active discussion among FOMC members. The results seem to indicate this.

In meetings the next day, Greenspan summarized the discussion: “We have now all agreed on 2 percent.” The Federal Reserve now had an internally stated, unofficial inflation target. Their own “guiding light”. But they didn’t want to talk about it publicly.  At least Greenspan didn’t.

He termed their discussion “highly confidential (in) nature” and said: “I will tell you that if the 2 percent inflation figure gets out of this room, its going to create more problems for us than I think any of you might anticipate.”

Ben Bernanke didn’t share Greenspan’s reservations.  He wanted everyone to know that the Fed’s inflation target was 2%.  But why?

One possibility is the need for justification.

Actions by the Federal Reserve are historically unclear as to logic and purpose. That allows for a modicum of privacy and the false descriptive of an independent Fed. It also suggests an aura of ‘special dispensation’ surrounding the Fed.

By late 2010, however, those notions were unravelling quickly as people wallowed in the after effects of the financial crises of 2007-08. Mr. Bernanke and his fellow practitioners of monetary medicine were seen as ineffective, at best, and appeared as if they did not know what they were doing.

Action was, in effect, demanded. And they were not afraid to pull the trigger. But they needed a clear, publicly observable target. How does anyone know you hit the target if they don’t know what you are aiming at?

Having a clearly acknowledged target changes the focus. Judgment is restricted to the new area of focus.  Did you hit the target or didn’t you?

This presumes that the target is justified, of course.  And if an inflation target is justified, why 2%?  Why not a lower number? Or any other number? In truth, it probably doesn’t make any difference.

From the Fed’s perspective, it gives them a license to openly discharge their firearms in the public square. If they miss, they can just reload and fire again.

Should they happen to hit the target, they can either maintain their current posture, or tweak it accordingly so as not to overshoot in the future.

But they will never “hit” their target.  Especially this one.  Why not?

Because it is a moving target, comprised of moving parts. And it is the result of the Fed’s own previous actions.

There is only one cause of inflation: government.  The term government also includes central banks, especially the US Federal Reserve Bank.

What most people refer to as ‘inflation’ or its causes are neither. They are the effects of inflation.   The “increase in the general level of prices for goods and services” is the result of the inflation that was already created.  …Kelsey Williams

Bernanke pushed until he got his way. A formal, precise inflation target rate of 2% was adopted at the FOMC meeting on January 24, 2012.

Five years later…

HEADLINE: The Fed’s Janet Yellen could use some target practice…

Quote: Ever since the Federal Reserve adopted an explicit inflation target of 2% in 2012, the central bank has had limited success in hitting it. Only once, in fact, in the months between April 2012 and today, did the year-over-year increase in the personal consumption expenditures (PCE) price index breach 2%. …MarketWatch/Caroline Baum 12July2017

That shouldn’t be a surprise given that it’s a moving target.  But there is more to it than that.

Right now, the inability to hit the target serves as the Fed’s perfect excuse for not acting more decisively.  This is especially true with respect to raising interest rates. In addition, Ms. Yellen is afraid to do anything. Here’s why.

The bigger risk to the economy and financial stability is another credit collapse.  And they can’t claim ignorance as they did the last time. They know its coming. They just don’t know when.

The levels of debt, the convoluted intricacies of the derivatives market, the interwoven relationships within the shadow banking system are all at hugely more precarious tipping points than ten years ago.

And it is the Fed’s own inability to hit the 2% inflation target that is warning them.

Think of all the hundreds of billions of dollars that went into saving the system from collapse before. And then force feeding the money drug into the patient for another nine years.

The problem is that all of the beneficiaries (i.e patients) of the Fed’s assistance are now hard-core addicts. If the Fed tries to raise rates they could very easily trigger another collapse much worse than before.

The Fed continues to look for the effects of all of those hundreds of billions of dollars to show up in the ‘rate’ of inflation. Supposedly that would be a sign to them of improved economic activity and growth. That isn’t happening.

The reason is because most of the ‘help’ effects showed up in ever higher prices for financial assets (stocks and bonds) and real estate.

And all of those toxic assets (CDOs of every letter and color, and various other esoteric derivatives) have swollen in price to levels far beyond any reasonable value. In addition, far too many of them are resting quietly on the Fed’s balance sheet.

The Fed has actually blown another bubble much bigger than the previous one. Nothing fundamental has changed. The only difference is that the situation is worse than before. Now, out of fear, they are trying to steer a course between action and inaction.

The action, of course, is raising interest rates and offloading their own balance sheet. But their actions could trigger events similar to 2007-08. In which case the Fed’s image would forever be tainted. (I think this is more of a concern for Janet Yellen than her fellow board members.)

The inaction – doing nothing – is pretty much where things are currently. If the Fed maintains ZIRP (zero interest rate policy), the patient could overdose and slip into a coma.

The Fed’s 2% inflation target is an attempt to predict the effects of inflation. That’s impossible. It is also unwise as it reinforces the acceptance of a “little inflation” as normal, necessary. It isn’t.

A “little inflation” is why the U.S. dollar is worth ninety-eight percent less than in 1913 when the Federal Reserve originated.

(Read more about the Federal Reserve here

 

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

The Fed’s Dilemma – Doing The Right Thing Won’t Help Janet Yellen Or Us

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THE FED’S DILEMMA

The Federal Reserve doesn’t know what to do.  That’s too bad.  For all of us.

The bigger problem is that it probably doesn’t make much difference what they do – or don’t do. 

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The Fed And Drug Addiction – A Prediction

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THE FED AND DRUG ADDICTION

The Federal Reserve Bank was established in 1913. Its stated purpose was to control the economic cycles; more specifically to avoid panics and crashes by smoothing out the variances in the stages (prosperity, inflation, recession, depression) of the economic cycle.

The plan centered around control (expansion and contraction) of the money supply and exertion of any influence it could muster regarding direction (up, down, or stable) of interest rates.

Before going further, lets talk for just a bit about drug addiction. Without being overly technical, lets briefly and generally look at the course of addiction; other than for purely experimental reasons, or peer pressure, or social association. Most addictive habits are the result of attempts to escape, or hide, or avoid problems and concerns.

What is most important, however, is the process itself and the effects of usage; both concurrent and cumulative.

An initial ‘fix’ will likely provide temporary relief and/or even induce a state of calm or euphoria. All good so far.

After a reasonably short period of time, the effects (for the most part) seem to dissipate and the individual returns to previous reality.  And, of course, after a brief interlude, is just as aware of the issues that were of concern previously.

Soon thereafter, the next attempt at escape is pursued.  But something is different.  This time the effects experienced are not as ‘positive’ as before and don’t last quite as long.  In addition, the aftereffects resulting from the ‘come down’ are more pronounced.

The seemingly logical next step for most users is to up the dosage; which is done. And the effects are more positive and might even last as long as the first time. But the aftereffects are worse.

The Federal Reserve has proclaimed their intention to manage the economic cycles. And, yes, they do believe they can. At least they say they can. And they have said that for decades. But, unfortunately, for them and  for us, they have not been able to do so and cannot do so. Not that they will admit that.

The Fed’s efforts at controlling the money supply are attempted in expectation of minimizing the effects of recession, maintaining financial and economic stability, promoting prosperity, and avoiding calamities like the Depression of the thirties.  Certainly those are commendable objectives. But are they even possible?

Likely not. And their track record thus far indicates more harm than good has come from their efforts.

The Fed has the tools to expand and contract the money supply. But on a continuous basis, and ongoing for over one hundred years, the focus is on expansion. And the net result of their cumulative expansionary efforts is a ninety-eight percent decline in the value of the U.S. dollar.

That is the price we have paid for hoping and believing that a small group of individuals can “manage the economic cycles” and avoid temporary and  short-term pain associated with the changes in the cycle.

As addiction to drugs becomes more intense, and the dosage and frequency increase, so do the cumulative negative effects. An individual who is habitually addicted starts to notice a breakdown in organs and systems within the body. And each succeeding fix or dosage supplies less and less of the intended effects; and doesn’t last as long.

As the reality of the addiction sets in, and all along the way, half-hearted attempts are made at kicking the habit. Get off the drugs and get better.  But in most cases, the shorter, temporary illusion of something better or something not as bad prevails. And so the destructive behavior continues.  But the withdrawal symptoms are worsening. Hence, any abstention is brief.

By now, death may very well be apparent. Continued usage will kill the patient. But the effects of withdrawal, by necessity, might pose just as great a risk. In other words, it just might be too late to do anything of lasting, positive, consequence. Damned if you do, and damned if you don’t.

What we refer to as ‘inflation’ are really the effects of inflation that has already been created by the Fed.  The continued, ever-increasing expansion of money and credit destroys the value of existing money. Over time, as the existing money loses its value/purchasing power, the effects show up generally in the form of rising prices.

This is why it costs more today to buy life’s necessities (and luxuries) than it did ten years ago; or twenty years ago, etc. On a year-to-year basis it is usually not too noticeable. But sometimes the symptoms are exacerbated such as in the seventies.

The long-term results of reliance on the Fed’s infusions of money and credit have brought us to a similar juncture as that mentioned above in the drug addiction scenario.

As we become more dependent on the inflation to keep things going, the effects of each successive expansionary effort have less impact. And we become more vulnerable in two ways.

The first is an overdose. Too much money, too quickly, leads to complete destruction and repudiation – death – of the currency. The runaway or hyper-inflation in Germany in the 1920s is a defining example.

The second is a credit collapse. Not enough money at the right time and the patient slips into withdrawal. And the effects of withdrawal – monetarily speaking – could be so bad as to usher in true deflation and a full-scale depression.

Just as a drug addict must endure pain and discomfort in order to cleanse himself, so must it be with our monetary system. It is not the individual, per se, or the system that are at fault. The dilemma results from the  cumulative effects of repeated bad choices over long periods of time.

In 2008-09 our economy bordered on the verge of collapse. Think of the drug addict who has slipped into withdrawal and the accompanying symptoms have become almost unbearable.

Doing the right thing would have required enduring the pain while setting things straight. In order to effectively cure the patient, this means implementing sound monetary policy; admitting the failure of policies and actions that had been pursued for the past century; and resisting the temptation to avoid the necessary pain by relapsing into previous bad habits.

Unfortunately, the Federal Reserve chose to ramp up the dosage and increase the frequency.

The patient (U.S. dollar) has stabilized and is currently in recovery – temporarily. But full recovery is only possible if a purging and cleansing occurs. That won’t happen voluntarily; by the Fed, the U.S. Government, or by U.S. citizens.

The path chosen is one of managing the illness. The addict who wishes to avoid withdrawal and its often excruciating symptoms does something similar. Temporary comfort and illusion provided by regular doses of the drug – in this case, money – masks the pain and avoids the reality of the existing condition. And it leads eventually to death and destruction.

You cannot get better by killing yourself slowly, a little bit at a time.

What’s worse, however, is the increased likelihood that the entire system will collapse under its own weight, no matter how hard someone tries to avoid the inevitable consequences.

That is where the Federal Reserve (and U.S. Government) are today. It is exactly as we said earlier in referring to the addict who has passed the point of behavior modification and common sense having the desired effect.  Too much damage has been done. Damned if you do, damned if you don’t.

Something similar to 2008-09 is going to occur again. Only it will be much worse. And regardless of the traditional, reactionary talk and efforts to save us, the system will likely not withstand the “symptoms of withdrawal”.

Learn to enjoy things now; as they are currently. It probably won’t get much better than this.

(more about The Federal Reserve: A Game Of Chess And The Source Of The Federal Reserve’s Power)

 

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

Source Of The Fed’s Power

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SOURCE OF THE FED’S POWER

We have become pawns in the game of Chess being played by the Federal Reserve Bank.  Who is their opponent?  Anybody else who makes a move.

We have become pawns in the game of Chess being played by the Federal Reserve Bank.  Who is their opponent?  Anybody else who makes a move.

Week in, week out, everyone’s eyes and ears seem fixed on what the Federal Reserve Board will say or do.  Mostly, it is about what they say. That’s because they can’t really do much of anything.

Except inflate the supply of money and credit.  Which they have been doing for over one hundred years.  And they are good at it, too.  The historic erosion in value of the US dollar should merit more acclaim – or outrage.  Unfortunately, the Fed is good at shifting the focus of concern to their opponent(s).

In their various statements, members of the Federal Reserve Bank often refer to their policies, decisions, and efforts in ways that make them sound sincere about their attempt to “manage the economy”.  And, admittedly, they are sincere in that attempt.  The trouble is, it is an impossible task.

The US Federal Reserve has led us down a primrose path by virtue of their self-proclaimed intention to manage and modify the stages of the economic cycle (prosperity, inflation, recession, depression).

Federal Reserve Bank policies are a repudiation of fundamental economic principles. The consequences of those policies and actions are evident in the historical results and the final resolution will be ugly.

On the face of it, that should be enough to discourage anyone from taking upon themselves such a hopeless task.  But the problem is much worse than that. The inflation created by the Federal Reserve is intentional. And their efforts have brought about a ninety-eight percent decline in the value of our money.

The cumulative effects of their ‘success’ have made their job even more difficult.  Now their efforts are almost solely focused on containing the effects of their own inflation.  The stages of the economic cycle mentioned above are skewed in ways which alter their duration and hugely increase their volatility.

So why does the Fed do the things they do?  For that matter, why does the Federal Reserve Bank even exist?

From my article, The Federal Reserve And Interest Rates – Definitely Not What You Think:

In addition, the Federal Reserve Bank is also charged with ensuring the financial operation of the US Government. Or, in other words, maintaining their (the US Government’s) ability to borrow money by issuing more and more debt in the form of Treasury securities. In my opinion, this is the sole and overriding purpose behind the existence of the Federal Reserve. And it drives every decision they make. It is not about the economic effects of their policies on US citizens (individually or collectively). It is ALL ABOUT KEEPING THE US GOVERNMENT SOLVENT. The US Government is not solvent, of course, but maintaining and reinforcing the confidence in their financial viability is absolutely essential. And nothing else takes precedence.

Alan Greenspan was noted for his verbiage.  Other Federal Reserve Board chairs and members make frequent comments about various things related to the economy and financial matters.  And the official reports and statements given for public consumption are usually crammed with facts and figures deemed to be part of a credible basis for the decisions and actions taken.

But, whereas there is a great deal of information related, you won’t hear anything referring to the above reason for the existence of the US Federal Reserve Bank.

The responsibility of “keeping the US Government solvent” may sound ‘laudable’ to some. I certainly would prefer that the US Government be able to return to solvency and maintain it. But something seems amiss.

It isn’t so much about keeping the government solvent as it is facilitating the government’s ability to borrow more and more money.  This is done  by issuing more and more Treasury bills, notes, and bonds.  When the US Government needs money, the Federal Reserve creates deposits of Treasury securities in the accounts of certain ‘primary’ banks/dealers. Those institutions are then responsible for placing the securities with numerous other dealers and so on, down the line.

The largest amounts are sold to foreign governments and (very) large investors.  Some are held by dealers as part of their investment inventory and some by banks who hold them as part of their reserves.  The proceeds of those placements, of course, flow back to the US Treasury.

Acting for and in behalf of the US Government in the placement of US Treasury securities is the primary role of the Federal Reserve Bank.  And it is the source of their power.

Buying from and selling to certain primary dealers in Treasury securities is an ongoing function of the Fed.  It is done for the purpose of expanding and contracting the supply of money and credit already in the system.  Which is an active way for the Fed to execute their mandate to “manage the economic cycles”  and ‘hopefully’ ensure that economic conditions and operation of the financial system allow for continued issuance of more and more debt by the US Government (i.e., more U.S. Treasury Bonds).

This has supposedly worked reasonably well for several decades. But since the supply of money and credit is always expanding, the value (purchasing power) of the US dollar continues to suffer. Which is precisely why “a dollar today doesn’t buy what it used to” or “doesn’t go as far”.

And therein lies the rub.  Confidence in the dollar is critical to the US Government.  If that confidence is not sustained, then all bets are off.

The US Government must be able to sell enough Treasury securities. Otherwise, they will not have enough money to operate.  If they don’t have the money to operate, they lose control – and power.  And they will do whatever they can to avoid that outcome.

Any policy or ‘action’ by the Fed is always taken with this objective in mind:  Maintain the viability of the market for US Treasury Securities.  This enables the ongoing operation and function of the US Government.

As long as people continue to “look to the Fed” for direction, then they are demonstrating a degree of confidence that keeps things from unraveling.  And it helps the Fed maintain a semblance of status quo.  Which in turn benefits the US Government.

The Fed’s power lies in their manipulation and ongoing expansion of the supply of money and credit.

Unfortunately, expecting, wishing, and hoping that an isolated few individuals can control, avert, or stop the economic consequences that have been brought to bear on their own citizens and the rest of the world is a pipe dream.

Sooner or later, the dam will burst.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!