federal reserve

The Federal Reserve And Long-Term Debt – Warning!

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FEDERAL RESERVE AND LONG-TERM DEBT

Won’t somebody please say something different about the Federal Reserve? Or nothing at all?

It seems amazing to me that we are so studiously focused on comments, statements, or actions emanating from the Fed. It is as if we expect to find a morsel of truth that will give us special insight or a clue as to their next move.

I suppose that is reasonable to a certain extent – especially today. We are social-app (il)literate and very impatient. Seems to be a sort of day-trader mentality.  Problem is that every morning we see the same headlines. All week long we hear about the most recent Fed meeting, or the release of minutes from the last meeting, or what to expect at the next meeting, etc., etc. And the cycle repeats itself every month. (I’m not Bill Murray and this is not Ground Hog Day.) 

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Inflation Is Not Our Biggest Threat

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You wouldn’t know that by listening to current commentary on the economy.

There is a bigger threat, though. But first, there is some clarification about inflation that is necessary.

Most people infer rising prices when they hear the term inflation. That is not correct. The rising prices are the ‘effects’ of inflation. The inflation, itself, has already been created.

It is not created, or caused, by companies raising prices. And it is not created by ‘escalating wage demand’.

When someone says “inflation is back”, they are referring to rising prices. Yet they are wrong on two counts.

First, as we have previously said, the rising prices, generally, are the effects of inflation.

Second, the inflation isn’t back; because it never went away.

From my book INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT:

“Inflation is the debasement of money by the government. 

There is only one cause of inflation: government. The term government also includes central banks; especially the U.S. Federal Reserve Bank.” 

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 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.

There are two specific terms which describe our own actions and relationship with the Federal Reserve – obsession and dependency.

We are bombarded daily with commentary and analysis regarding the Fed and their actions. Almost daily we are treated to rehashing of the same topics – interest rates, inflation – over and over. And we seemingly can’t read or hear enough, i.e. obsession.

But are we reading or hearing anything which will help us gain a better understanding about the Federal Reserve? And what, if anything, can we realistically expect them to do?

We are also hooked on the liberally provided drug of cheap credit. Our entire economy functions on credit. We are dependent on it. And without huge amounts of cheap credit, our financial and economic activity would come to a screeching halt.

A credit implosion and a corresponding collapse of stock, bond and real estate markets would lead directly to deflation. The incredible slowdown in economic activity leads to severe effects which we refer to as a depression.

Deflation is the exact opposite of inflation. It is the Fed’s biggest fear. And it is a bigger threat at this time than progressively more severe effects of inflation.

The U.S. Treasury is dependent on the Federal Reserve to issue an ongoing supply of Treasury Bonds in order to fund its (the U.S. government’s) operations. During a deflation, the U.S. dollar undergoes an increase in its purchasing power, but there are fewer dollars in circulation.

The environment during deflation and depression makes it difficult for continued issuance of U.S. Treasury debt, especially in such large amounts as currently. Hence, the resulting lack of available funds for the government can lead to a loss of control.

The U.S. government is just as dependent on debt as our society at large.

The following excerpt is from my new book ALL HAIL THE FED!:

“When something finally does happen, the effects will be horribly worse. And avoidance of short-term pain will not be an option. The overwhelming cataclysm will leave us no choice.

As severe as the effects will be because of previous avoidance and suppression, they will also last longer because of  government action. The cry for leaders to “do something” will be loud and strong. And those in authority will oblige. 

But don’t look to the Federal Reserve for a resolution. They are the cause of the problem.”

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!

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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New Fed Chairman, Same Old Story

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President Trump nominated Jerome H. Powell as the new Chairman of the Federal Reserve Bank. Don’t look for much to change. And Janet Yellen’s announcement that she will resign from the board upon Mr. Powell’s induction as board chair is pretty much a non-event.

Where we are today is the culmination of decades of irresponsible financial/fiscal policies and a complete abdication of fundamental economics.

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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!

Gold, Mansa Musa, And Inflation

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GOLD AND MANSA MUSA  

From Wikipedia…

 Musa Keita I (c. 1280 – c. 1337) was the tenth Mansa, which translates as  “sultan” (king) or “emperor”, of the wealthy West African Mali Empire. 

During his reign Mali may have been the largest producer of gold in the world at a point of exceptional demand. One of the richest people in history, he is known to have been enormously wealthy; reported as being inconceivably rich by contemporaries, “There’s really no way to put an accurate number on his wealth” (Davidson 2015). 

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Gold Is Still About The US Dollar

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GOLD IS STILL ABOUT THE US DOLLAR

The US dollar is the world’s reserve currency.  And that isn’t likely to change in any radical way, anytime soon.  Unless there is some kind of calamitous implosion of the dollar.  I am talking about outright rejection and repudiation.  And that could happen.  The problem is that there isn’t another currency that could likely take its place.  By the time that possibility becomes a reality, any possible candidates would likely be in worse shape. This includes the Euro and Chinese Yuan.

All currencies are substitutes for real money, i.e. gold.  And because all governments inflate and destroy their own currencies, the possibility of gold reasserting itself as the international medium of exchange increases considerably under the aforementioned conditions.

But, a lot of bad stuff has to happen before we get to that point. And governments around the world have too much at stake to capitulate when it comes to ceasing to issue ‘funny money’.

So, for the time being, lets focus on things as they are.  Which leads us back to the title of this article.

Gold is priced in US dollars and trades in gold are settled in US dollars because of the hegemony of the dollar and its role as the world’s reserve currency.  But what does that mean to others around the world?  For example, those who live and work in Germany (euro), Japan (yen), China (Yuan)?

When someone in Switzerland, for example, exchanges Swiss Francs for gold, they are quoted a price in Swiss Francs. That seems pretty straight-forward. But how is the price for gold in Swiss Francs calculated when the international market for gold is priced in US dollars?

The amount that someone pays in Swiss Francs (or any other non-USD currency) is determined by calculating the exchange rate between the US dollar and the specific non-USD currency involved.  Based on that calculation, it is then known how many Swiss Francs are needed to equal the transaction amount in US dollars.

What is particularly important here isn’t necessarily obvious. But it is a critical factor when assessing a transaction of this nature. And here is why.

On December 31, 2013, gold traded at $1210 per ounce. And on that day one euro could be exchanged for 1.3776 USD. Hence, 842 euros ($1210 USD divided by 1.3776 = 842) could be exchanged for $1210 USD which could then subsequently be exchanged for one ounce of gold.

Nine months later, on September 30, 2014, gold again traded at $1210 per ounce.  But the exchange rate for one euro was 1.2629 USD.  Even though the gold price in US dollars was unchanged, the cost for an ounce of gold in euros had increased nine percent to 958 ($1210 divided by 1.2629 = 958).  To be technically correct, the cost of US dollars had increased for holders of euros.

On May 31, 2016, twenty months later, gold was again trading at $1210 per ounce.  The euro had weakened further relative to the US dollar and the exchange rate for one euro was 1.1131 USD. Using the same math as before, the cost for $1210 US dollars had again increased, this time by an additional thirteen percent to 1087 euros.

Over the entire two and one-half year period (twenty-nine months in all) the cost to acquire gold for holders of euros had increased by twenty-four percent. And yet, gold itself, priced in US dollars was the same.

There are several things we can learn from this.

For one thing, there is always a demand for US dollars since they are needed for use in international trade (oil transactions are priced in US dollars, too).

For another, the potential for changes in exchange rates of any other currencies relative to the US dollar must be considered for these transactions.

The possible combinations are numerous and always different. An increase in the value of the euro relative to the US dollar in the examples above would have given us results opposite to those which actually occurred.  And, of course, every currency other than the US dollar would show different results based on their changes in value relative to the US dollar.

Currency exchange rates are continuously changing and so is the US dollar  price of gold. It is possible to have an increasing US dollar price for gold and, simultaneously, a stronger US dollar relative to another currency.  This results in a ‘double whammy’ to the holder of a non-USD  currency – unless you already own the gold.

In our examples earlier, the US dollar price of gold could actually have declined for the periods indicated and still resulted in a higher cost for holders of euros.

The US dollar price of gold does not tell us “what gold is doing”. It tells us what the US dollar is doing.  Or rather, what people think is happening to the US dollar.

But what people think is happening changes all the time. Also, the information we are ‘fed’ by the Fed is suspect and inaccurate. Hence, changes in the US dollar relative to gold are ongoing and can be quite volatile. Over time, however, the gold price in US dollars is a reasonably accurate reflection of the value of the US dollar.

The US dollar price of gold does not tell us anything about other countries and their currencies. To know that we must look at exchange rates of those currencies relative to the US dollar.

Let’s be clear about something. The ‘value’ of gold does not change.  It is original money and its value is constant and stable. And has been for several millenniums.

The value of the US dollar, however, changes all the time. This is precisely because the supply of dollars is manipulated by the Federal Reserve via the ongoing expansion and contraction of the supply of money and credit.  Mostly expansion.

For an historical, real-life example of value and purchasing power as they relate to gold and the US dollar, see my article A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold.  

 

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!