Why Weimar Ben Can't Put the Inflation Genie Back in the Bottle

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Why Weimar Ben Can't Put the Inflation Genie Back in the Bottle

An axiom of our current 'economic state of emergency' is that the Federal Reserve's balance sheet will be rolled back to its pre-crisis level after the storm passes, to prevent inflation. Holding at around $2.1 trillion in assets, the balance sheet is more than double its level of 12 months ago. I believe this promised rollback is a fantasy. Let's examine some of the previous outings.

Historically, the U.S. and Europe suspended the gold standard during wartime. Paper money is an instrument of war finance, removing the fiscal constraints imposed by gold. The U.S. suspended gold during the War Between the States, issuing its first greenbacks in 1863. Of course, prices inflated sharply during the war. Afterward, Congress voted in 1871 to reinstitute the prewar gold standard by 1879.

Our culture was different then, in a couple of ways. Financially, bonds were the mainstream investment, not stocks. Both the plutocracy and the upper middle class were primarily income-oriented rentiers. Check out Jane Austen's novels for a view of how deeply ingrained such thinking was in the U.K. Second, unlike today, gold ranked right alongside God as an obvious and obligatory source of goodness. Thus, after the war, the rentier class wanted its prewar purchasing power restored, regardless of the social cost.

That cost proved to be huge. Sweating out the wartime inflation provoked an 1873-1879 recession pegged by the NBER at 5-1/2 years, the longest in U.S. history. The word 'recession' is a retrospective 20th century label. Contemporaneously, 1873-1879 was called a Depression, and it was. Economic growth resumed in the 1880s, but mild 1 percent deflation lingered on into the Nineties. After a final panic in 1893, the deflation finally burned itself out around 1896. Overall, 25 years had passed, in an a-b-c pattern -- a severe initial panic and depression; a mild, deflation-tinged recovery; and then a final recession.

World War I saw another gold suspension, and another wartime inflation. The economy held up for a few months after the war ended in 1918. Then a savage deflation (wave 'a') took hold, which chopped the wholesale price level in half by 1921. A deflation-tinged recovery (wave 'b') took hold during the 1920s. Even during the great stock bubble, a land bubble collapsed in Florida in 1925, providing a clue as to what was coming.

The depressed 1930s (wave 'c') contained its own three-wave subdivision, for reasons that deserve attention: a deflationary stock bubble collapse from 1929 to 1932; a five-year recovery into 1937 after a revaluation of gold during 1933-34; and a final five-year slide after the Federal Reserve doubled the discount rate and reserve requirements in early 1937 to counter rising prices. Stocks made their final bottom in 1942, twenty-four years after the war ended in 1918. The opposite economic responses to the gold revaluation and the hike in reserve requirements both exhibited a roughly 4 to 5 year dynamic reaction to step-function changes in the effective monetary base.

But a different approach was followed in Germany after the disastrous Weimar inflation of 1923. Obviously, it would have been insane to restore the preinflation price level, when prices had been millions of times lower. Instead, twelve zeros were lopped off the inflated currency, to reestablish realistic units. Although bondholders were wiped out, the plan worked. What proved to be important was the credibility of stable prices going forward, not the reestablishment of some arbitrary pre-inflation price level.

As a student of the 1930s Depression, Ben Bernanke learned one big lesson: deflation is bad. Deflation destroys debtors, because their incomes go down with falling prices, but the value of their debts and debt service do not. As a pertinent example, the U.S. government is a huge debtor now, and has seen its income fall sharply during the current recession, while its debt service has risen thanks to heavy debt issuance.

Strangely, despite the fact that the U.S. economy goes through well-defined cycles charted by the NBER back into the 19th century, classical economics is a static discipline. Every recession is a surprise to economists, who have NEVER succeeded as a group in forecasting one. They might as well be loincloth-clad hunter-gatherers, screaming in incomprehension at a lunar eclipse.

Yet from the examples adduced above, it can be seen that attempting to reestablish an arbitrary pre-inflation parity -- whether in terms of the gold price or the monetary base -- has long-lasting effects, which typically play out in a 25-year a-b-c pattern, which in turn breaks down into roughly a 5-15-5 year sequence. By contrast, even after a gross inflation, a credible commitment to stable prices can restore a even keel promptly, without the vertiginous aftershocks involved in trying the claw the entire price level back downward . This was done not only in Germany in 1924, but in Latin America many times since, into the 1990s.

Thus, the lesson for Ben Bernanke: cutting the Fed's $2.1 trillion balance sheet back to say, $1 trillion, would produce a horrific deflationary recession, a la 1873, 1920, and 1937. As a man who fears deflation, Ben Bernanke is not going to have the discipline to stick to such hairshirt policies, even if he even should try them (which I view as unlikely).

At best, as a gesture toward stable-price credibility, the Fed may revert to augmenting its balance sheet by 'only' $50 to 100 billion annually, at it was doing before the crisis. Indeed, such a policy seems to be de facto in effect now. What will be the result?

Just as it takes five years to 'sweat out' an inflation in reverting to a prewar gold peg, the effects of the Fed's doubled balance sheet will likely play out during 2009-2014 -- slowly at first (bearing in mind the 12 to 18-month lag time of monetary policy), then with frightening rapidity early in the next decade.

Specifically, doubling the price level in five years implies an average annual inflation rate of 15 percent. I would expect that level to be hit about midway through, say 2011 to 2012. As 15 percent is roughly the high watermark established in three previous inflationary bouts -- the 1910s, 1940s and 1970s -- the question is whether 'another Volcker' will emerge with a political consensus to stop it.

I don't think so. The awful spending dynamics of escalating debt service, coupled with the tertiary phase of the entitlements Ponzi scheme, point toward a serious likelihood of hyperinflation. After all, the alternative is hard default, with an ensuing complete withdrawal of confidence in government.

Of course, some of us feel that way now.

 

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Re: Why Weimar Ben Can't Put the Inflation Genie Back in ...

Machinehead,

 

Excellent post. It certainly makes sense. One wonders how the people at the top can keep fooling so many people.

 

Ken

 

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Re: Why Weimar Ben Can't Put the Inflation Genie Back in ...

 

They might as well be loincloth-clad hunter-gatherers, screaming in incomprehension at a lunar eclipse.

Some things money cant buy - for everything else there is MasterCard the Fed-who by the way just hired Enron's lobbyist.

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Re: Why Weimar Ben Can't Put the Inflation Genie Back in ...

Keep taking your vitamins or whatever it is that has caused your recent flurry of excellent posts.  They are really really good.

-LYS

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Re: Why Weimar Ben Can't Put the Inflation Genie Back in ...

This morning Adam Hamilton has an essay at SafeHaven which covers the same themes as my post, and reaches similar conclusions --

Since the beginning of 2008, absolute annual MZM growth on a weekly basis has averaged 12.9%! This is a staggering expansion rate. Remember the old Rule of 72 from college finance? At this 13% compounded growth rate something will double in 5.6 years or so.

http://safehaven.com/article-13530.htm

Hamilton says 13% for 5.6 years for doubling; I say 15% for five years.

Close enough for government work

 

p.s. Thanks LWS; it's the spinach I reckon ...

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Re: Why Weimar Ben Can't Put the Inflation Genie Back in ...

 Thanks for the link, machinehead.  There are so many eye-popping charts and articles these days, I'm going to have to start keeping a spoon around for putting them back in.

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Re: Why Weimar Ben Can't Put the Inflation Genie Back in ...

machinehead - I always learn something from your articles and this was no exception.

Respectfully, I offer an alternative view on how you described Lincoln's "greenbacks."  

machinehead said:  Historically, the U.S. and Europe suspended the gold standard during wartime. Paper money is an instrument of war finance, removing the fiscal constraints imposed by gold. The U.S. suspended gold during the War Between the States, issuing its first greenbacks in 1863. Of course, prices inflated sharply during the war. Afterward, Congress voted in 1871 to re-insitute the prewar gold standard by 1879.

I suggest that the return of Lincoln's greenbacks must be considered as a viable solution to our financial crisis and a positive force  towards the future.  Conventional history often characterizes greenbacks as being "inflationary" but do the facts really support this belief?  The Baltimore Chronicle ran a recent article by Steve Lendman, here's an interesting comment:

In 1691, Massachusetts became "the first local government to issue its own paper money...." called scrip. Other colonies followed, Pennsylvania most effectively by issuing new money without inflation or need for taxes. For over 25 years, it collected none, and at the same time, its population grew and commerce prospered. The "secret was in not issuing too much (credit), and in recycling the money back to the government in the form of principal and interest on government-issued loans."

In other words, keeping everything proportionally in balance and not having to pay interest to predatory private lenders - the very system wrecking America today and other economies run by private central banks.

Lincoln did the same thing in spite of assassination threats before his inauguration as well as "treason, insurrection, and national bankruptcy" during his first year in office. Considering what he faced, his accomplishments were remarkable, including:

  • building the world's largest army;
  • defeating the South;
  • turning the country into the world's "greatest industrial giant;"
  • launching the steel industry, a continental railroad system, and a new era of farm machinery and cheap tools;
  • establishing free higher education;
  • giving settler ownership rights and encouraging land development through the Homestead Act;
  • having government support all branches of science;
  • standardizing methods of mass production;
  • increasing labor productivity by 50 - 75%; and
  • still more "with a Treasury that was completely broke and a Congress that hadn't been paid."

    He did it by nationalizing control over banking so government could print its own money - interest free without paying usurious rates that private bankers demanded, from 24 - 36%. As a result, "the economy was jump-started with a 600 percent increase in government spending and cheap credit directed at production" - done with government-issued Greenbacks. They financed the war, paid the troops, and spurred the nation's growth - free from the system wrecking the country today to let parasitic private banks prosper.

Lincoln looked at monetary policy as a tool for the prosperity of the people "The government should create, issue, and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers. The privilege of creating and issuing money is not only the supreme prerogative of government, but it is the government's greatest creative opportunity. The financing of all public enterprise, and the conduct of the treasury will become matters of practical administration. Money will cease to be master and will then become servant of humanity."

For example, what if the US would abolish the Fed, and issue the money directly - the interest yield could be used in lieu of all federal taxes.    

Larry

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Re: Why Weimar Ben Can't Put the Inflation Genie Back in ...

Larry,

I don't know this author or where he researched the information for this article, but it is practically a complete fabrication.  The part about the colonies issuing their own scrip is true, but that's as far as it goes.  All the scrip versions issued went up in flames, due to the same problems inherent in all fiat currencies - there is no restraint to keep the issuer from printing more.

The part about Lincoln might make a good April Fool's biography.  Leaving the real reasons for war aside (slavery having nothing to do with the beginning of the war), Lincoln wasn't even alive when most of the other purported feats were accomplished.  He did scrap together an army that eventually beat the south, and after assuming tyrannical powers never authorized by the Constitution.  He did issue greenbacks, and they threw inflation into full throttle.  After the war, TPTB immediately deflated the currency and started to put the economy back on a gold standard.

I am not really sure how the concept of credit-free money solves the central problem of fiat currency.  As long as there is no natural constraint on increasing supply, it will be inflated and rob those who must use it of all previously saved wealth (if they're stupid enough to store that wealth in the currency).

 

Quote:

The government should create, issue, and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers. The privilege of creating and issuing money is not only the supreme prerogative of government, but it is the government's greatest creative opportunity. The financing of all public enterprise, and the conduct of the treasury will become matters of practical administration. Money will cease to be master and will then become servant of humanity."

The founding fathers, and the Constitution, obviously couldn't disagree more with this quote.  The last thing they wanted was government controlling the supply of money, which is why they outlawed anything but gold and silver.

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Re: Why Weimar Ben Can't Put the Inflation Genie Back in ...

The privilege of creating and issuing money is not only the supreme prerogative of government, but it is the government's greatest creative opportunity.

You're describing the problem we already have.  Government created the mess we have.  Aside from specifying what it considers acceptable forms of payment for its revenue, government should not issue, create, or control money whatsoever.  The US Constitution specifies gold or silver and there hasn't been an amendment to the Constitution in respect to what is to be considered money.  But look where we are now.

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Re: Why Weimar Ben Can't Put the Inflation Genie Back in ...

Patrick,

Let me first answer a question:

I don't know this author or where he researched the information for this article, but it is practically a complete fabrication.

Steve's bio:

Raised in a modest middle class family, attended public schools, received a BA from Harvard University in 1956 and an MBA from the Wharton School at the University of PA in 1960 following 2 years of obligatory military service in the US Army. Spent the next 6 years as a marketing research analyst for several large US corporations before becoming part of a new small family business in 1967,Also co-hosting The Global Research News Hour, occasional public talks, and frequent appearances on radio and at times television.

If you google Steve, I think you will find his articles are often posted through-out the web.  Steve often references Ellen Brown's book, "The Web of Debt - exploding the myths about money."  The basic concept is that the people should issue and control their monetary system and benefit from the proceeds. 

Thomas Edison said:  "But here is the point: If our nation can issue a dollar bond, it can issue a dollar bill.  The element that makes the bond good makes the bill good.  Look at it another way.  If the Government issues bonds, the brokers will sell them.  The bonds will be negotiable; they will be considered as gilt edged paper.  Why?  Because the government is behind them, but who is behind the Government?  The people.  Therefore it is the people who constitute the basis of Government credit.  Why then cannot the people have the benefit of their own gilt-edged credit by receiving non-interest bearing currency..?

For example - if the interest rate is determined to 3%, then why not allow the people to collect the yield rather than to give a monopoly to private banks?  Federal income tax came within months of the Federal Reserve Act - to directly collect their usury.  The difference between paying 3% and collecting 3% is of course double, 6%.

On top of that, the people have the right to lend money free of all debt - principal & interest.  For example mass transit and home energy upgrades may be secured by their calculated savings in receiving 0% loans.  The point is not how to spend it, but rather, the people should decide - free from the parasitic load of scamers.

Why not eliminate all federal taxes in allowing the people to benefit from the money that only they have the power to issue?

Larry

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Re: Why Weimar Ben Can't Put the Inflation Genie Back in ...

Larry,

The Fed is just a mechanism for getting around the Constitution.  However, it really makes no difference if the government issues bills directly or sells bonds through an intermediary in terms of the inherent Achille's heal of all fiat monies - that there is no restraint on their issue, and therefore no way to satisfy one of the three essential characteristics of money - that it hold its value.

Also, having "free" money does not seem like a good idea.  If history is any indicator, that would fuel speculation and malinvestments.  Aren't low interest rates what got us into the real estate bubble to begin with?  Also, it would discourage savings since no interest would be paid on deposits.

I fail to see how this would solve any of the problems of fiat debt-based money, but am open to further elaboration.

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Re: Why Weimar Ben Can't Put the Inflation Genie Back in ...
Lemonyellowschwin wrote:

Machinehead,

Keep taking your vitamins or whatever it is that has caused your recent flurry of excellent posts.  They are really really good.

-LYS

Second that!  I LOVE LEARNING!

Viva -- Sager (just back from another DJ gig...)

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Re: Why Weimar Ben Can't Put the Inflation Genie Back in ...

Patrick,

Thanks for the response.

Patrick said:  The Fed is just a mechanism for getting around the Constitution.  However, it really makes no difference if the government issues bills directly or sells bonds through an intermediary in terms of the inherent Achille's heal of all fiat monies - that there is no restraint on their issue, and therefore no way to satisfy one of the three essential characteristics of money - that it hold its value.

First, there is a huge difference between nations issuing and controlling their money versus contracting a private bank.  We become a client state to the monopoly bank (in my case, the Fed) - we must borrow every dollar into existence from them and they control our financial policy.  Why do we need or want them?

Second, I agree that there must be some "restraint on their issue."  But I don't see how our current system is any better than us controlling our money.  I think the restraints are much easier to find if there is no profit to anyone but the people.

Patrick said:  Also, having "free" money does not seem like a good idea.  If history is any indicator, that would fuel speculation and malinvestments.  Aren't low interest rates what got us into the real estate bubble to begin with?  Also, it would discourage savings since no interest would be paid on deposits.

We have free money now; the difference is that we may creatively decide how the people may benefit as opposed to adding profit relinquishing control to international bankers.  

Interest rates are secondary to credit worthiness - that's where the problem lies.  If one qualifies, and we have the ability to issue money for free, why not offer the best rate possible?

Lincoln was right when he said "The privilege of creating and issuing money is not only the supreme prerogative of government, but it is the government's greatest creative opportunity.

Larry

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Re: Why Weimar Ben Can't Put the Inflation Genie Back in ...

 

Quote:

 We become a client state to the monopoly bank (in my case, the Fed) - we must borrow every dollar into existence from them and they control our financial policy.  Why do we need or want them?

I think this exact same quote could be applicable to a system run by what you term, "us", i.e., "the people".  In a fiat system, someone has to issue and exert control over the issuance of money.  Whoever that is, they have all the power.

Quote:

  I think the restraints are much easier to find if there is no profit to anyone but the people.

I would agree.  Much like a Credit Union.  However, lots of things have been and will be done in the name of the people and for the "common good".  What you describe does sound good, as most such ideas do, but the fact is, someone, specifically a human, has to be entrusted to run it and therefore the system is susceptible to greed and corruption.  

Quote:

Second, I agree that there must be some "restraint on their issue."  But I don't see how our current system is any better than us controlling our money.

I don't think it is any better than the system you are proposing or vice versa, which is why I think they are both inherently flawed.  
 
In order for money to act as a store of value, it must itself be valuable.  Paper money just cannot do that, no matter who guards the henhouse (or printing press) or how much is charged for the magical eggs.  Just my opinion, but also the experience of at least 2,000 years of recorded history and hundreds of defunct paper currency experiments. 
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Re: Why Weimar Ben Can't Put the Inflation Genie Back in ...

To me, greenbacks and FRNs are the same thing. Although it's outrageous that FRNs are issued by a bank cartel which collects interest from the Treasury on its assets, the Fed -- so we are told -- turns over its profits to the Treasury. So the Fed is just the government's designated agent for issuing greenbacks, if you will. Hard monetary assets such as gold tend to limit the growth of the monetary base because they are scarce. Whereas debt paper can be, and IS, being issued in unlimited quantities.

In his monthly investment commentary, Bill Gross of Pimco provides some eye-popping data on the likely path of future deficits and debt. Excerpts --

To zero in on the U.S. of A., its annual deficit of nearly $1.5 trillion is 10% of GDP alone, a number never approached since the 1930s Depression. Five more years of those 10% of GDP deficits will quickly raise America’s debt to GDP level to over 100%, a level that the rating services – and more importantly the markets – recognize as a point of no return.

At 100% debt to GDP, the interest on the debt might amount to 5% or 6% of annual output alone. ... Federal spending for Social Security, Medicare, and Medicaid will collectively increase by 6% of GDP over the next 20 years, leading to even larger deficits unless taxes are increased proportionately.

The Chinese and other surplus nations cannot fund the deficit even if they were fully on board – which they are not. Someone else has got to write checks for up to $1.5 trillion of additional Treasury notes and bonds. The buyer of last resort in recent months has become the Federal Reserve, with its publically announced and near daily purchases of Treasuries and Agencies at a $400 billion annual rate. That in combination with a buy ticket for over $1 trillion of Agency mortgages ... results in an expansion of the Fed’s balance sheet, which ultimately could have inflationary implications.

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2009/IO+June+...

To get a sense of how game-changing these numbers are, consider that federal revenue as a percentage of GDP typically runs in the high teens, while government spending usually is in the low to mid twenties percentagewise. Entitlements currently produce a tiny cash flow surplus, while net interest is perhaps a couple of percent of GDP. So net debt service currently comprises only a minor portion of federal spending -- a tenth or so, roughly.

Bill Gross is projecting a future in which debt service and entitlements deficits EACH gobble up close to 6 percent of GDP, for a total of 12%. He doesn't even mention so-called health care 'reform,' which could take the entitlements-plus-interest deficit to 15% of GDP. Unless the U.S. morphs into a Swedish-style 50/50 gov't/private mixed-socialist economy, the huge leap in entitlements-plus-interest deficits from 2% to as much as 15% of GDP implies PERMANENT 10% of GDP deficits.

Combine this with Bill Gross's forecast that lacking sufficient foreign buyers, the Fed will be obliged to add as much as $1.5 trillion a year to its $2.1 trillion balance sheet. I only disagree with his soft-pedaled conclusion that such huge monetary base expansion 'could' have inflationary implications. Absent a fresh downturn in the economy this fall -- which might delay for a year, but not ultimately prevent the onset of inflation -- it IS having inflationary implications as we speak.

It don't pay for mainstream investment managers to broach doom-'n-gloom themes such as the risk of hyperinflation. However, Gross does -- with a suitable hypothetical clause in front -- compare a future 300% debt-to-GDP U.S. economy to 20th century Argentina and Brazil, both of which experienced hyperinflations. Argentina shed 13 zeros from its currencies during the 20th century.

Throwing around numbers such as '10% of GDP deficits' and '300% debt-to-GDP' is somewhat like a cruise ship captain announcing 'barometric pressure is 27.50 in Hg and falling' ... or a doctor observing that 'blood pressure is 60/40 mm Hg and falling.' It sounds like technocratic jargon. But those who understand the implications of such numbers will recognize them as gravely life-threatening.

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Re: Why Weimar Ben Can't Put the Inflation Genie Back in ...

One of the primary messages to draw from your initial post is that the source of the economic contractions  we call "recessions" or "depressions" and which we have typically attributed to "economic cycles" is in fact manipulation of the exchange money supply and its purchasing power.  Whether accomplished after the Federal Reserve Act of 1913 by Open Market Operations and modifications of the Reserve ratios or by historical monetary authorities by issue of subsidiary currency systems or modification of the price of the reserve asset, the result is the same.  The monetary authorities cause the problem.

The argument that a specie money system in which gold and silver are the money is insufficient to support a commercial economy is an apologist position for a government run money system for the benefit of the financial establishment. That's simply wrong. 

And whatever Machinehead may think, there is as yet no evidence of an end to the deflationary liquidation which by definition would precede any inflationary price increases.  To the contrary, liquidation of credit money supply by default continues to reduce the actual money supply.  The aggregates simply include significant amounts of credits that no longer exist.  To date, the fed has been limited to borrowing money to fund spending schemes designed to avoid balance sheet solvency interruptions in the banking and derivative system.  New money creation, so far, has been limited. 

Sufficient juice to support inflation at 15% by 2011 is not out there yet and we do not expect it because we are not able to define a mechanism in which it would be created.  Bernanke may have learned that deflation is bad in a fiat credit system such as the one created in 1913 but what he did not learn is what causes it. 

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Re: Why Weimar Ben Can't Put the Inflation Genie Back in ...

machinehead said:  To me, greenbacks and FRNs are the same thing. Although it's outrageous that FRNs are issued by a bank cartel which collects interest from the Treasury on its assets, the Fed -- so we are told -- turns over its profits to the Treasury. So the Fed is just the government's designated agent for issuing greenbacks, if you will. Hard monetary assets such as gold tend to limit the growth of the monetary base because they are scarce. Whereas debt paper can be, and IS, being issued in unlimited quantities.

I think there is a world of difference between greenbacks (USNs, US notes) and FRNs (Federal Reserve notes).  FRNs benefit private banks while USNs benefit the people.  If the Federal Reserve actually backed their notes an argument could be made that they "earn" the interest that they collect.  But they don't, every dollar they issue is solely backed by the people of the US through bond collateral.  I think it is common sense that the party that provides the backing should also be the beneficiary. 

The Fed has never been audited by the GAO or any independent body - how can anyone say what their profit really is and btw, they are allowed to keep a 6% return - tax free.  The Federal Reserve is a tool rather than just a profit center.  The owners of the Fed use their money making monopoly to drive profits to their banks and partners.  These schemes include the FOMC, the PPT and back window lending.  Ellen Brown "Web of Debt" claims that the banks "30% of the money created by banks with accounting entries is invested for their own accounts" (Chapter 18).

Lincoln was right when he said that "The privilege of creating and issuing money is not only the supreme prerogative of government, but it is the government's greatest creative opportunity.   

Here are some creative examples of what may be done:

  • The interest on money loaned could be used to eliminate all Federal income tax
  • Fractional banking could be eliminated since banks would be lending USNs, if a bank wanted to lend their own money then they would earn the interest with 100% backing.
  • Money for many public projects could be issued free of interest and/or free of all debt
  • We could eliminate almost half our national debt instantly and the balance relatively quickly
  • USNs would allow us to "de-centralize" the system as states could form their own banks - this is being done right now in North Dakota and currently the "Minnesota Transportation Act" (MTA), state issued money, is being debated in state congress.

machinehead - Sorry if I am straying too far from your thread.  Patrick, thanks for the great discussion, I always learn something from you.

Larry

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Re: Why Weimar Ben Can't Put the Inflation Genie Back in ...

Some great points and a good discussion. And this is probably a silly question, but isn't the answer more regulation?

No, not on the people or the bank on the corner but on the Feds.

I don't see giving that kind of ambiguous power to the Bernankes and the Volkers of the world. As it is, they get to cut or raise interest rates and sell or buy treasuries at their whim.

Why not legislatively formulate the process? If there are X amount of dollars chasing Y amount goods and those two indicators get out of whack, adjust the dollars via treasury buys and sells to equalize the economy as dictated by formulas in established law.

If deflation rears it's head, infuse the correct amount of money into the economy to exactly cancel whatever percent of deflation the economy is experiencing. Vise versa for inflation. Seems like common sense to me.

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Re: Why Weimar Ben Can't Put the Inflation Genie Back in ...

Good to see my old acquaintance from another forum, seattlelaw. Since I'm not a lawyer, I'll quote a third economist, Dr. John Hussman, to buttress my inflationist ranting --

Rather than following policies that would have allowed for a sustainable recovery, our policy makers opted for a stunningly unethical strategy of making bank bondholders whole with well over a trillion dollars in public funds ... and doing nothing meaningful with regard to foreclosures, whose rates continue to soar and which face a fresh wave later this year and well into 2010 and 2011.

These policy responses have more than doubled the U.S. monetary base within a period of months, added a trillion more in outstanding Treasury debt, and virtually assure that the value of those government liabilities will be repriced in relation to goods and services over the coming decade. A range of different methodologies suggest a doubling in U.S. consumer prices over the coming decade, though with the majority of this pressure occurring 3-4 years out and beyond.

http://hussmanfunds.com/wmc/wmc090608.htm

Like me, Dr. Hussman equates a doubling in the monetary base to an eventual doubling in the price level, although he sees disinflationary pressure from foreclosures continuing to hold down prices for 3-4 years.

Although we differ on the time scale, the big-picture view is the same. Heavy borrowing and monetization ultimately must 'reprice government liabilities in relation to goods and services.' Liquidation pressure from foreclosures or continued economic contraction could delay the inflationary surge, but won't prevent it. Indeed, another leg down in the economy this fall [if it occurs] likely would provoke Weimar Ben into even more heroic and unprecedented feats of thin-air currency creation.

DOUBLE, DOUBLE; TOIL AND TROUBLE! 

 

agitating prop's picture
agitating prop
Status: Platinum Member (Offline)
Joined: May 28 2009
Posts: 854
Re: Why Weimar Ben Can't Put the Inflation Genie Back in ...

Seattle Law, What you are saying makes a certain amount of sense, if you discount the fact that commodities like oil and most manufactured products have to be imported from outside of the US. with currencies that will strengthen, agains the American dollar. This surely will cause prices to rise, within the U.S.  Also, even if all of the money currently being printed, to bail out banks, etc... is just filling in a deep hole of debt, I fail to see how this is actually deflationary, in the long term. It seems to me that using digitized money, with very little backing, to fill in a financial hole, is akin to using nuclear waste to fill in sink holes. The problem is being contained for the time being, but will have tremendous repercussions, in the near future.

machinehead's picture
machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: Why Weimar Ben Can't Put the Inflation Genie Back in ...

'Using nuclear waste to fill in sinkholes.'  Yes! A perfect metaphor, agitprop. In fact, it reminds me of a science fiction story by Harlan Ellison titled 'A Boy and His Dog.' In the post-nuclear wasteland on the earth's surface, one of the essential uses of a dog is to detect 'screamers' -- hungry, green-glowing wretches hiding out in radioactive sinkholes, waiting to pounce on passers-by.

Ellison didn't say so, but the gaunt spectres probably had equally toxic greenbacks softly fluorescing in their ragged pockets.

PAPER MONEY MOONLIGHT

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