"Everything you need to know about gold"
The Fed always does its job. So, just what is their job? And, how well do they perform?
For the answer to the first question, one statement will suffice: The Fed’s job is to create money; at all times and in all seasons.
The Federal Reserve Bank creates money for the US government to spend and for banks to loan. It is a partnership that dates back more than one hundred years.
EVERYTHING IS GOING LOWER
Nothing epitomizes cheap money more than the lofty level of bond prices and their corresponding low yields. The old adage of “never chase yield” seems to have been pushed aside in favor of “buy more when the interest rate approaches zero”.
Yield-hungry investors think they are being conservative, though. Some of that reasoning is due to the obvious volatility of the stock market; especially during the first twenty years of this century.
BONDS BIGGER RISK THAN STOCKS
Even before the latest stock market dump, bonds could be considered a bigger risk than stocks. The risk is greater now than it was in 2007-08; and probably more so than at any other time in history.
FED-WATCHING IS OVERHYPED
If you are one of those who is looking for clues from the Federal Reserve as to the direction of the markets, forget it. You are too late.
Too many people think that the latest Fed minutes will give them some indication of what to expect from the markets. Those same people think that the Fed actually has a strategy and that they are “managing the economy” with the intention of pursuing what is best financially and economically for the country.
Wake up! The Federal Reserve does not exist and operate with the intention of acting in our best interests financially, economically, or in any other way.
US GOVERNMENT IS BEHOLDEN TO THE FED
We hear quite a bit today about the issue of Federal Reserve independence. The crux of the argument usually centers on monetary policy executed by the Fed versus opinions of politicians and others who want and expect something different, which they believe will provide more favorable results.
President Trump has been ardently vocal in demanding that the Fed be more aggressive in cutting interest rates. He also wants, and is encouraging, action that would result in a weaker US dollar. He believes that it would be good for American businesses. His reasoning is that a weaker US dollar would make American-made goods more competitive.
Whether or not the President is correct doesn’t matter for purposes of this article. What is important is that there is a wide difference of opinion between the Federal Reserve and its current policies (re: Jerome Powell) as compared to the wishes of the United States government (re: President Trump).
GOLD STANDARD AND THE FEDERAL RESERVE
In a recent opinion by Sebastian Mallaby, published in the Washington Post, the author and columnist says the following:
“Money is an abstraction, a political confection, a set of castles built on air. No wonder it makes people feel queasy. Gold is tangible, immutable, somehow reliable and real; there will always be people who believe in it. But the truth is that modern central banking is one of those elite inventions that generally works. The gold standard has given way to the PhD standard, and we are all the better for it.”
In his article, Mr Mallaby presents his arguments as to the reason and logic that a gold standard will not work and that it is an idea which is out of date and inferior to the current system, i.e., “modern central banking”.
The opinions are a response to statements made by Judy Shelton, currently under consideration for appointment as one of the seven governors on the Federal Reserve Board.
Mr. Mallaby refers to former President Reagan’s “nostalgia” abut the gold standard as being “curious” and says that “survival of this sentiment in 2019 is even more baffling”.
The term “too big to fail” refers to certain businesses whose viability is considered critical to the survival and effective operation of our economic system. These very large businesses are designated as too big to fail because their failure or bankruptcy would have disastrous consequences on the overall economy.
The potential effects are considered to be severe enough, and the costs so unbelievably large, that these businesses are afforded special attention and consideration in the form of bailouts and protection from creditors.
FED INFLATION HAS LESS IMPACT
The chart below shows the ratio of the gold price to the monetary base for the past one hundred years.
The monetary base used in the chart is calculated by the St. Louis Federal Reserve and the following definition is from their website:
“The Adjusted Monetary Base is the sum of currency (including coin) in circulation outside Federal Reserve Banks and the U.S. Treasury, plus deposits held by depository institutions at Federal Reserve Banks. These data are adjusted for the effects of changes in statutory reserve requirements on the quantity of base money held by depositories.” (source)
Does either of the above preclude the other? In other words, if we expect gold to reach $7000.00 per ounce, and we are correct, does that mean that we can’t reasonably expect gold to go as low as $700.00 per ounce? Conversely, if we are predicting or expecting gold to decline from its current level and even breach $1000.00 per ounce on the downside, can $7000.00 per ounce, or anything even remotely close to that number, be a reasonable possibility?
Conspiracy surrounding the Federal Reserve is a subject of much debate. A controversial topic, yes; one which stirs the imagination of some, fires the suspicion of others, and provokes the declamation of not too few detractors.
From G. Edward Griffin/The Creature From Jekyll Island…
“Back in 1910, Jekyll Island was completely privately owned by a small group of millionaires from New York. We’re talking about people such as J. P. Morgan, William Rockefeller and their associates. This was a social club and it was called “The Jekyll Island Club.”
That was three years before the Federal Reserve Act was finally passed into law. It was November of that year when Senator Nelson Aldrich sent his private railroad car to the railroad station in New Jersey and there it was in readiness for the arrival of himself and six other men who were told to come under conditions of great secrecy.
For quite a few years thereafter these men denied that any such meeting took place. It wasn’t until after the Federal Reserve System was firmly established that they then began to talk openly about their journey and what they accomplished. Several of them wrote books on the topic, one of them wrote a magazine article and they gave interviews to newspaper reporters so now it’s possible to go into the public record and document quite clearly and in detail what happened there.”
The author does a good job of providing details to support the conspiratorial theme. The details include names of prominent historical figures in banking and politics, as well as dates and places. There is also a lengthy section on fundamental monetary and economic theory. The book totals more than 600 pages. It should not be dismissed as a light thing.
In addition to possible conspiracy, another concern in the origin of the Federal Reserve, is whether there is a Constitutional basis for its existence.
Ron Paul, former U.S. Representative…
“First reason is, it’s not authorized in the Constitution, it’s an illegal institution. The second reason, it’s an immoral institution, because we have delivered to a secretive body the privilege of creating money out of thin air; if you or I did it, we’d be called counterfeiters, so why have we legalized counterfeiting? But the economic reasons are overwhelming: the Federal Reserve is the creature that destroys value.” (source)
There are those who see the Fed in a different light; critical of them, but not for the reasons above. Danielle DiMartino Booth, author of the book Fed Up, seems to think the Fed is worth saving, but that a reformation is necessary. She also tends to see the Fed as an institution which is supposed to have the people’s interest in mind – a public institution, if you will.
If the Federal Reserve is a conspiratorial organization, has it done anything to redeem itself? In other words, is its continued existence justified when looking back at its past accomplishments? Or its potential contributions going forward; if it were to be reformed?
Regardless of whether or not the Fed is a conspiratorial enclave, and regardless of whatever ‘need’ for its services might be posited, would a lack of constitutional authorization be sufficient justification for abolishing the Federal Reserve?
For the moment, lets set aside the conspiracy and constitutional arguments. And lets suppose that any reformation needed can be accomplished effectively and efficiently.
What sort of track record does the Federal Reserve have? What have they done to merit our confidence?
One of their self-proclaimed objectives is to manage the economic cycle. What they really meant in proclaiming their ability to do this, is that they could ‘manage’ to avoid recessions and depressions and extend the prosperity phase of the cycle. How well have they done?
The word horrible comes to mind. Abysmal failure is another.
In their initial attempt at managing the economic cycle, the Fed ushered in the most severe depression in our country’s history beginning with the stock market crash in 1929. Even former Fed chairman, Ben S. Bernanke agrees:
“Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”…Remarks by Governor Ben S. Bernanke (At the Conference to Honor Milton Friedman, University of Chicago -Chicago, Illinois November 8, 2002)
But they did do it again.
Six years after his speech, Governor Bernanke presided over another catastrophe in the financial markets. Cheap credit and ‘monopoly’ money had blown bubbles in the debt markets that popped.
Alan Greenspan was Chairman of the Federal Reserve at the time Bernanke made the above statement. When testifying before Congress after the credit implosion of 2007-08 and after he had been replaced by Mr. Bernanke, Greenspan had this to say:
“I discovered a flaw in the model that I perceived is the critical functioning structure that defines how the world works. I had been going for 40 years with considerable evidence that it was working exceptionally well.”
And lets not forget the Fed induced bubble surrounding stocks in the late nineties which was pricked in early 2000. Greenspan was at the helm then, too.
But is this really any wonder? What can you expect after reading what Danielle DiMartino Booth says…
“The economists were satisfied parsing backward-looking data to predict future events using their mathematical models. Financial data in real time were useless to them until it had been “seasonally adjusted,” codified, and extruded into charts. Fed employees had no interest in financial news.”
In addition to not-so-stellar management of the stages of the economic cycle, the Fed has managed to destroy the value of the U.S. dollar, too.
Since 1913, purchasing power of the U.S. dollar has declined by more than 98 percent. Another way of saying this is that $50,000. 00 today is the equivalent of $1000.00 one hundred years ago.
The U.S. dollar’s loss of purchasing power is the result of inflation created by the Fed. The Fed creates inflation by expanding the supply of money and credit.
The expansion of the supply of money and credit cheapens the value of all money in circulation. The inflation is intentional. And since the inflation is ongoing and cumulative, its effects are unpredictable and volatile.
Both the Fed and the U.S. Government act complicitly in the creation of money…
“The U.S. Treasury, in conjunction with the Federal Reserve, continually expands the supply of money and credit by issuing Treasury Bonds, Notes, and Bills. The Federal Reserve receives the newly certified Treasury securities and then issues a credit to the U.S. Treasury reflecting the corresponding dollar amount. But where does the Federal Reserve get the money that it gives to the U.S. government? It is created out of nothing.”
Does any of this support the view of the Federal Reserve as an institution that is capable of providing value added services? Do you think they care what the media thinks? Or the President?
After a century of irresponsibility and complete abdication of fundamental economics, we have probably passed the point of no return. Current weakness and volatility in the financial markets are telling us that.
The US dollar is in a state of perpetual decline (by intention) which will ultimately end in complete repudiation. Whether or not the Federal Reserve continues to raise interest rates is not the real issue. They will do – or not do – whatever they think will keep the charade going for a while longer.
Which is exactly what they did ten years ago. And they succeeded temporarily… But we don’t really know how much systemic damage was done (i.e. exactly how much money and credit were created, how big is the Fed’s balance sheet and how badly inflated are the numbers, how under-capitalized are the banks). I assure you, it is much worse than anything we have been told.
Similar events today would bring about a price collapse in all markets as well as usher in deflation and a full-scale depression. All of this would be resisted on every front by government and the Federal Reserve. They would literally launch an all-out financial war (and maybe another real war, too) by opening the money and credit spigots full force in a futile attempt to reverse the credit implosion and negative price action of critical assets.
In effect, their efforts and intentions would be similar to those observed during the Great Depression of the thirties. The results would be similar – not productive and inefficient. The depression would also last much longer than needed. And the price declines which are necessary to correct the excesses of the past and cleanse the system would be countered every step of the way by regulations and programs of dubious value. The efforts of government would actually worsen things and prolong the suffering.
It is more likely, though, that the results would be much worse than anything we could imagine. Even a relatively strong U.S. dollar would be unable to survive the onslaught. In their efforts to stave off the natural effects of their own harmful ways, the government would ‘kill’ the dollar. We would likely find ourselves awash in money and credit created without regard to potential damage. All in order to stave off the inevitable results while ignoring their cleansing effects on a very ill economy.
Federal Reserve conspiracy or not, we are in for quite a ride.
(also see The Federal Reserve And Long Term Debt – Warning!)
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
When government (or a President) claims that Federal Reserve policy is hurting the economy, they are either grandstanding, or are ignorant about the function and purpose of the Federal Reserve.
No one wants to see the economy suffer, anymore than they want to see a plague, or infectious disease, affect millions of people. And no President wants to be in office to preside over a recession or depression. But neither can they exercise any power or influence regarding the implementation of Fed policy; particularly when it comes to interest rates.