How the Federal Reserve will lose control of inflation

Over at Economicpolicyjournal, Robert Wenzel is reporting that the Fed is seriously considering another round of quantitative  easing (QE). The reason they’re considering it is that their gauge of inflation, a formula which changes on a whim depending on whether they like the result of their calculations or not, is still low, so there is room to print more money without affecting prices too much.

The reason inflation is low is that in times of economic slowdown, debt becomes liquidated. Debt that once represented dollars becomes nothing. So let’s say Jay owes Mike $10,000 that Mike lent to Jay to start a business in a time of economic boom, say in 2007. Jay got his business off the ground just before the 2008 crash. Mike owns $10,000 worth of Jay’s debt, and as long as the economy is going, that debt is still worth $10,000 because the debt will be paid back. So that $10,000 still exists in the economy in the form of Jay’s debt.

Now the crash happens. Jay’s business fails. He can’t pay back the $10,000. So the value of his debt goes to zero. $10,000 is erased from the economy. The amount of money in the economy goes down, the value of the dollar goes up. Prices go down, so printing money will keep the prices stable.

Problem is, when there is less money in the economy because the Jays in the world can’t pay their debts, the Mikes of the world have less money, so keeping prices stable while people lose money is equivalent to raising prices while people have the same amount of money. Either way they can’t afford to buy as much with the money they have.

The economy naturally wants to deflate now because people cannot pay their debts. And the Fed keeps pulling it the other way and trying to inflate it. What you have here is a massive tug of war, and someone is going to win. That someone is the Fed, because as much as debt can be liquidated and money erased from the economy, the Fed can always, always just print more.

What will happen? After some round of QE or another, probably after the Euro collapses, gold and silver will suddenly become the only preserver of value that exists anymore. Dollars will be erased from the economy, which should push the value of the dollar up, but the Fed will have printed so many of them that it can no longer increase in value. With no Euro, everyone will pour into gold and silver simultaneously.

That’s when those who own gold and silver will escape with their wealth, and those holding paper will be in serious, serious trouble.

Gold and silver are not investments – they’re money

Last Friday the stock market experienced a sea change. Perhaps even a game changer. Gold suddenly skyrocketed $66 (about 3.5%), and gold stocks went up almost 7% in one day. You can look at this in one of two ways. Either the value of gold went up, or the value of the dollar went down.

The truth is probably somewhere in between, leaning heavily towards the dollar losing value. Gold and silver generally don’t gain or lose value so rapidly with such volatility. After all, it’s not silver and gold that is being magically produced by a Federal Reserve computer. The increase in the stock of gold and silver is rather slow. Watch this ingenious video and you’ll see that the cost of almost everything has pretty much stayed constant since the 1960’s in terms of silver and gold.

Except, of course, for education, which has been so grossly inflated because of government loans that even in terms of silver the price has skyrocketed.

This tells you several things. First, a silver dime or silver quarter from 1964 or earlier (all dimes and quarters were made of 90% silver before 1965) can buy the same thing today that it could buy in 1964. Second, if you had saved all your money in silver dimes and quarters, then you’d have the same purchasing power today that you would have had in 1964. If you had saved in pieces of paper called dollars, you would be able to buy very very little.

Here’s more: The price of gasoline has actually gone down since 1964, not up. If you want to see that in practical terms, then take 10 dimes from 1964 or older. That’s one lousy dollar in legal tender, and go fill up your tank. One dime will buy you a gallon of gasoline. One dollar in silver dimes will buy you 10.

Owning dollars is opening yourself up to government theft, because the government can just print them. Imagine if there was a magical elf that could simply conjure silver out of thin air. Don’t you think the price of silver would go down? Sure it would. You wouldn’t want to own it anymore. Well, there is a magical elf that can conjure up dollars out of thin air. It’s called the Federal Reserve. So why would you ever want to own dollars? After all, they grow on trees.

Fiat Money or a gold standard – either way it’s backed by work

Thinking about paper currency lately, money backed by nothing so to speak. This is in contrast to money backed by gold. Meaning, first people passed around gold or silver, then they got tired of carrying it so they started passing around paper that could be redeemed for a certain amount of gold or silver.

It hit me today. There really isn’t such a thing as money backed by gold either. Gold only represents something. That something is called work. Gold doesn’t and cannot create prosperity in itself. All it can do is sit somewhere and look shiny. Gold only represents the prosperity achieved by people who do work.

Gold represents work better than paper because no self respecting person will give you his gold without you giving something for it in return that he wants. So when you are paid in money that is backed by gold, that gold is definitely backed by work done by somebody somewhere.

Can paper represent prosperity? Sure it can, in theory. But just like gold, it only represents prosperity that already exists.  One dollar not redeemable for gold can theoretically represent the same amount of work that a dollar redeemable for gold can represent. But the problem is, one dollar not redeemable for anything can be printed really really easily. And when someone, say the fed, puts another dollar into circulation, that dollar still represents something.

It represents work that someone else did. There’s no other way to see it. When the Federal Reserve puts money into circulation at the push of a button, and people take that money and use it, that money is work stolen from someone else by the government.

So what is “stimulus”? What is government “spending”? Stimulus is when the government collects all the work done by the population of the United States, steals a part of that work, and uses whatever it stole to give it to a sector they like or deem important.

What is government “spending”? Well, it should be what a population gives to a government by social contract in order to protect the individuals of that population from other individuals who would try to hurt them. This should NOT cost all that much money, and therefore shouldn’t take much of the population’s work. But in the US, government spending is treated as if it creates prosperity instead of represents prosperity that already exists. So governmnet spending under Obama and Keynes is when the government decides it knows exactly where your work should be invested, and does it for you against your will by pushing the print button.

Screw that. This is insane.

A short lesson on the Gold Standard from the Bible

I’m planning a class on this for Jews for Ron Paul, but here are some initial thoughts on the subject.

Genesis 2:12 always took me for a loop, until I was introduced to Austrian economic theory and the gold standard. After God creates man in the second creation story (yes, there are two), the Bible goes off on a tangent about where the Garden of Eden is located. It maps the rivers that feed the garden, and then talks about the lands the rivers pass, and in case we cared at all, it says that the gold in one of these lands that the river that happens to flow into Eden flows past, is good.

Well OK, the gold in some land that has nothing to do with the man on the moon is good. So what?

Come on! It’s the Garden of Eden for the love of God! There’s no work, no toil, but you have to tell me about some gold and that it’s of good quality before God even puts Adam in the Garden of Eden?

The message, which I finally understand: There is no such thing as a fiat paradise. Back it up with gold.

Keynesian Hubris – Man as an Economic God

Here’s the difference between Keynesian economics and Austrian economics illustrated by example. Austrian economics believes mistakes (money put in the wrong place, aka “malinvestment) have to be paid for by loss of that money. Government, or man, cannot stop the loss of money by mistakes being made. For Austrians, money is real, like gold or silver. Paper money is only representative of gold or silver that exists somewhere, and therefore cannot be wasted on buying mistakes.

Keynesian economics believes that mistakes (money put in the wrong place or “malinvestment”) can be bought by government so no one loses money. Money is created by government by the word of government and paper money represents nothing. Government, therefore, can fix any mistake at any price, and man becomes God of the economy.

Let’s do a case study. Let’s say you need $10. So you sell a piece of paper, a bond, a contract, for $10 to someone that says you owe him $11 one year from now. You now have a $1 deficit and he has $11 in the form of a piece of paper, or a bond, that says you owe him $11 in a year. Let’s say you take his $10, invest it in a business in the private sector that produces, I don’t know, a revolutionary kind of cheese. The business succeeds and gives you back $12 from your original $10, selling the cheese for $15. Then you take that money the cheese company gave you, give $11 of it back to the guy you owe $11 to, and you’re up $1, he’s up $1, the cheese company is up $3, and the cheese people can make their cheese thanks to your $10 investment. Everyone wins. The new money is printed up for the Keynesian, the gold or silver is taken out of reserve for the Austrian. In such a case, the Keynesian is actually better off, because he doesn’t have to find actual gold to back up the new dollars created by the good investment in cheese. If every investment worked out, Keynesian economics would be a great system. Unfortunately, reality does not work this way.

Now, let us suppose that you borrow $10 from a guy who is expecting $11 back in the same way. You take that $10 and hire (purchase) a guy who sits at a government desk filling out unnecessary forms. This is called a “government job” in the “public sector”. He produces no wealth, no cheese he can sell for more money, and just eats up your $10. Now you still owe $11 to the bondholder, but you have nothing. Keynes says, “Print up $12!” So you print it, give $11 to the bondholder, and pocket $1. Well, it looks like everyone wins, but nothing was actually created, so it now takes more money to buy the things that the bondholder was going to buy with his $11 because there are less things of value in the world and more “money” to buy those less things with. He now really only has $9.

The Austrian, in such a case, says that the bondholder should lose his $10 instead of be paid $11 in money off the presses. This keeps the money supply constant, and it requires people to pay for their mistakes and try not to repeat them again.

Man is not an economic god. Since there are mistakes made in this world, those mistakes must be paid for, whether in inflation or loss of investment. Keynes runs to the presses at this point, so all the mistakes made in the world are paid for by ordinary people whose money is affected when the government prints money to paper over mistakes.

If Austrian economics ran the world, the people who made the mistakes would take all the losses, and the people who saved money would be unaffected.

Once government pays for all mistakes, or “bails you out” then people become more encouraged to continue making mistakes. The more mistakes made, the less value there is on the planet, and the more poor people there are. Keynes just spreads the pain around to everyone, 99% of whom do not deserve the pain because they didn’t make the mistake.

Austrian economics clears debt whenever it cannot be paid and takes small losses as they come. Those who made the mistakes are wiped out and must start over, and the rest of society keeps building and creating wealth.

Keynes covers up all mistakes by printing the money to make it look like the mistake doesn’t matter. Keynes hopes to pay for the mistakes through “growth” meaning Keynesians hope that at some point, people will make much less mistakes and eventually pay for the mistakes made in the past by making really good investments in the future. But train people to rely on government to print money in response to mistakes, and they won’t ever make good decisions to pay for past mistakes. So debt goes up and up and up and governments need more and more and more money to cover up the mistakes until at some point, money itself is not trusted as a medium of exchange.

At some point along the way, the big piling mistake that the Keynesians keep piling and piling overflows, and all the pain stored up in that giant pile (aka a “keynesian bubble”) is released in one big wave leading to absolute disaster.

We just saw a bout of “global easing” by central banks (read: money printers) around the world. That means they’re printing more money to paper over the mistakes. The markets skyrocketed because now there’s more money to put into the system. But that money represents no new created wealth at all. It’s just existing wealth more diluted.

At a certain dilution, it just loses all meaning. And that’s when the crash happens. No one knows what dilution is the tipping point. But it’s getting closer, fast.