Liberty Forged

the State has no money of its own, so it has no power of its own. ` Nock

Posts Tagged ‘cpi’

Harking back to the beginning of the economic “crisis”

Posted by Jesse on November 27, 2008

[Ben Bernanke: “The U.S. government has a technology, called a printing press, that allows it to produce as many dollars as it wishes at essentially no cost.”]

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(An artificial conversation with a few authors….my comments are in bold text and my guests’ are italic.)

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Did you hear about Bear Stearns Mr Whitney ?

·The New York Times summed it up like this in Saturday’s edition:

“If the Fed hadn’t acted this morning and Bear did default on its obligations, then that could have triggered a widespread panic and potentially a collapse of the financial system.”

What? There’s a financial crisis because of one company?!

That’s the question that will be addressed in the next couple weeks and people are not going to like the answer. For the last decade or so the markets have been reconfigured according to a new “structured finance” model which has transformed the interactions between institutions and investors.

Derivatives trading which, according to the Bank of International Settlements, now exceeds $500 trillion, has sewn together the various lending and investment institutions in a way that one failure can set the derivatives dominoes in motion and bring down the entire financial scaffolding in a heap. That’s why the Fed got involved and (I believe) approached Congress in a closed-door session (which was supposed to be about FISA legislation) to inform lawmakers about the growing possibility of a major economic meltdown if conditions in the credit markets were not stabilized quickly.

Hmm. Sounds like a big big mess. How the heck would one handle a situation like that?

Washington mandarins and financial heavyweights had to decide whether to sit back and let one small investment bank take down the whole equities market in an afternoon or stealthily buy a few futures and live to fight another day? Tough choice, eh?

Heh. That makes sense. So what can we expect then?

The ongoing massacre in real estate has left the structured investment market frozen, which means that the foundation blocks (i.e., mortgage-backed securities) upon which all this excessive leveraging rests; is starting to crumble. It’s a real mess.

The CDS market is roughly $45 trillion, whereas, the aggregate value of the US mortgage market is only $11 trillion; four times smaller. That’s a lot of leverage and it can have a snowball effect when the CDS trades begin to unwind.

Now, in capitalism’s extreme crisis Bernanke, acting beyond his mandate, invokes a law that hasn’t been used since the 1960s so the Fed can become the creditor for an institution that attempted to enrich itself through wild speculative bets on dubious toxic investments which are now utterly worthless.

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(I wonder what the Doc has to say about this?)

What’s the Fed’s role and policy regarding the economy in the 1st decade of the new millenium Dr Paul?

Mr. Bernanke views our system of fiat currency as a tool for creating wealth out of thin air by producing more dollars, whether paper or electronic.

How does this affect the holders of dollars?

It’s called monetary inflation, which destroys the value of the dollar and punishes those who save and invest. The money supply, as measured by the Fed’s own M3 figure, has increased about 5 times since 1980.

Inflation is not in check, as anyone who examines the cost of housing, energy, medical care, school tuition, and other basics can attest. In one sense the remarkable rise in housing prices over the last decade really just represents a drop in the value of the dollar. The artificial boom in the 1990s equity markets, engineered by Mr. Greenspan’s relentless monetary expansion and interest rate cutting, ended badly for millions of Americans holding overinflated stocks. What will happen when the same thing happens with housing?

Right. How about Bear Stearns and what we see in the news today?

The current market crisis began because of Federal Reserve monetary policy during the early 2000s in which the Fed lowered the interest rate to a below-market rate. The artificially low rates led to overinvestment in housing and other malinvestments. When the first indications of market trouble began back in August of 2007, instead of holding back and allowing bad decision-makers to suffer the consequences of their actions, the Federal Reserve took aggressive, inflationary action to ensure that large Wall Street firms would not lose money. It began by lowering the discount rates, the rates of interest charged to banks who borrow directly from the Fed, and lengthening the terms of such loans. This eliminated much of the stigma from discount window borrowing and enabled troubled banks to come to the Fed directly for funding, pay only a slightly higher interest rate but also secure these loans for a period longer than just overnight.

So how bad is it? Is there a way to stem the negative effects?

After the massive increase in discount window lending proved to be ineffective, the Fed became more and more creative with its funding arrangements. It has since created the Term Auction Facility (TAF), the Primary Dealer Credit Facility (PDCF), and the Term Securities Lending Facility (TSLF). The upshot of all of these new programs is that through auctions of securities or through deposits of collateral, the Fed is pushing hundreds of billions of dollars of funding into the financial system in a misguided attempt to shore up the stability of the system.

Do they recognize the fault in their attempts?

The Treasury Department has recently proposed that the Federal Reserve, which was responsible for the housing bubble and subprime crisis in the first place, be rewarded for all its intervention by being turned into a super-regulator. The Treasury foresees the Fed as the guarantor of market stability, with oversight over any financial institution that could pose a threat to the financial system. Rewarding poor-performing financial institutions is bad enough, but rewarding the institution that enabled the current economic crisis is unconscionable.

I hear that. Thanx Dr Paul

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But what about all the deregulation?. How does all that play into such a highly regulated atmosphere? Prof. Rozeff, would you enlighten us please?

Deregulation was part of a general movement during the 1990s, approved by piecemeal government regulations and deregulations, that allowed both investment banks and banks to become universal banks.

The Gramm-Leach-Bliley Act of 1999, or the Financial Services Modernization Act, loosened control over banking while leaving the rest of the regulated system intact. This heightened the moral hazard. Banks then extended many more questionable loans and entered into complex financial agreements that they never should have been allowed to make. All of this was to our detriment.

So the free market is to blame?

The system we have is the furthest thing from lawful free markets. It is not “financial capitalism,” as France’s President Sarkozy would have it.

There is no excuse for regulators to allow such banks to write inordinate mounts of insurance via credit default swaps, or to extend inordinate amounts of loan guarantees that are another form of insurance. There is no excuse for government to have encouraged home loans to people who could not afford them. There is no excuse for government to encourage people to take on excessive amounts of debt, period. Insured banks shouldn’t have had large obligations hidden away in off-balance-sheet subsidiaries. These banks shouldn’t be so highly levered. Government is fully responsible, not only for the welter of regulation but also for the inept deregulation and the resulting financial tragedy that has unfolded.

So you agree with Congressman Paul when he mentioned moral hazard. Government is both responsible for the regulations they have imposed and for the deregulation they allowed.

(In) depository institutions with insured deposits, the depositors (who are the creditors of the bank) have no incentive to control the moral hazard. It is left up to the government. Whether or not it was recognized at the time, there is good reason why the New Deal put in bank regulation that separated banks from investment banks at the same time that it put in deposit insurance. It helped to control moral hazard by ruling certain activities as off limits for insured banks.

When the government deregulates bank lending without simultaneously removing deposit insurance, the moral hazard increases exponentially. The “too big to fail” doctrine amplifies the moral hazard even more. Uninsured deposits then become quasi-insured, and managers are less likely to lose their jobs. Raising deposit insurance limits and extending them to all types of deposits increase the moral hazard still more. These are steps Congress recently took.

Great.

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Let’s ask Robert Blumen over at Mises.org….

What investments are necessary in-so-far as the US gov’t is concerned

The economic meaning of investment is the employment of real resources toward the construction of more productive capital yielding more consumption goods in the future. Treasury debt is fundamentally different from private savings in that it is simply a claim on the taxing power of the government that issued it with no productive capital behind it. The money that was borrowed upon the issue of the bond has already been spent to fund government consumption for its favored welfare and warfare programs, while the taxpayers were burdened with the obligation to repay.

While the problems with central banks holding Treasury debt are bad enough, the problems with these institutions going into the market for private sector equity are even greater.

So not only is it a matter of moral hazard, but pure economic reasoning proves it’s foolishness.

As Mises showed in his famous critique of central planning, only private owners of capital allocate it in an economically rational way. Prices are only economically meaningful when they are the outcome of individuals risking their own wealth to purchase the asset in competition with other private owners of wealth.

Ownership of capital ultimately requires control over its use in order to realize its economic value. Once government entities hold private sector equities, there can be no doubt that rent-seeking leeches would start to lobby for the politicization of corporate decision making.

So what can be done?

The only exit from this process is a renunciation of monetary interventionism itself: the dissolution of central banks and a return to sound money.

As long as the policy of interventionism is pursued, new “solutions” are required in order to solve the problems caused by the prior interventions. If not stopped, the end of this progression is a system of total central planning.

Sources:

Fractional Reserve Banking Murray Rothbard

More of the Same at the Federal Reserve Ron Paul [Nov 29, 2005]

Bailing out Banks Ron Paul [Apr 16, 2008]

Deregulation Blunders and Moral Hazard Michael Rozeff [Nov 2008]

Bearly Alive Mike Whitney [Mar 2008]

Will Bankers Become Central Planners? Robert Blumen [Jul 2007]

Essential Reading:

The Bailout Reader, The Depression Reader, Understanding the Crisis, So Much for Diversity, The Dollar Crisis, Bernanke: He’s Reviewing the Situation

what-hascase-fed-newknow-inflationt_tmc

Posted in anarcho capitalism, anarchy, barack obama, books, business, campaignforliberty, capitalism, central banking, collectivism, economics, economy, Education, federal reserve, free market, Gold, government, history, international, LvMInstitute, Mine, Mises, Politics, Pro Market, republican, Rights, Ron Paul, socialism, the fed, writing | Tagged: , , , , , , , , , , , , , , | Leave a Comment »

OMG! Voting is like, so Awesome!

Posted by Jesse on October 19, 2008

You see this?! It’s a sickness I think. Actors, politicians, whats the difference?

That’s right. If you don’t vote, you don’t care. There’s a nice message. If you do vote, you care. I didn’t know it was so easy! You mean to tell me If i vote, then all the problems in the world get solved? Why didn’t you say so?!

Of course, If I think critically for a moment, as in quality not quantity, why couldn’t it work the other way around? Don’t vote. Send this to 5 friends.

Posted in Current Events, economy, Education, free market, Mine, Politics, Rights | Tagged: , , , , , , , , , , , , , , , | Leave a Comment »

Ah yes. The clairvoyant media. Yeah right.

Posted by Jesse on January 17, 2008

Worst inflation rate in 17 years.
Read all about it over in yahoo money.

I love how they start out. “higher costs for energy and food last year pushed inflation up”

Well they are catching on slowly. But lets go into that for a moment.
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Alan Greenspan: Gold and Economic Freedom
“The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit… In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value… Deficit spending is simply a scheme for the ‘hidden’ confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”

Hmmmmmm……..

As Ron Paul points out here
“Mr. Greenspan has become one of those central planners he once denounced, and his views on fiat currency have changed accordingly………I had an opportunity to ask him about his change of heart when he appeared before the House Financial Services committee last week……….In short, he claimed he was wrong about his predictions of calamity for the fiat U.S. dollar, that the Federal Reserve does a good job of essentially mimicking a gold standard, and that inflation is well under control. He even made the preposterous assertion that the Fed does not facilitate government expansion and deficit spending. In other words, he utterly repudiated the arguments he made 40 years ago. Yet this begs the question: If he was so wrong in the past, why should we listen to him now?”

“It’s not enough to question the wisdom of Mr. Greenspan. Americans should question why we have a central bank at all, and whose interests it serves. The laws of supply and demand work better than any central banker to determine both the correct supply of money in the economy and the interest rate at which capital is available – without the political favoritism and secrecy that characterize central banks. Americans should not tolerate the manipulation of our economy and the inflation of our currency by an unaccountable institution.”
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All government spending represents a tax………..The “tax” is paid when prices rise as the result of a depreciating dollar. Savers and those living on fixed or low incomes are hardest hit as the cost of living rises. Low- and middle-incomes families suffer the most as they struggle to make ends meet while wealth is literally transferred from the middle class to the wealthy. Government officials stick to their claim that no significant inflation exists, even as certain necessary costs are skyrocketing and incomes are stagnating………The inflation tax, though hidden, only makes things worse. Taxing, borrowing, and inflating to satisfy wealth transfers from the middle class to the rich in an effort to pay for profligate government spending, can never make a nation wealthier. But it certainly can make it poorer..” The Inflation Tax by Ron Paul
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Jack Douglas has a few words as well. Lies about inflation.

The Real U.S. Economy, which is the Economy adjusted for all the inflation in prices produced by the vast tidal wave of paper dollars printed by the Fed over the past six years and more, has been declining for a great many months now. The Fed and other government agencies Lie about this by not counting the explosion in house prices, education costs, retirement, health and medical care, insurance, energy, and food in their official measure of inflation. The Consumer Price Index does not include house prices at all and this has been the most soaring inflation in the U.S. for about five years now, though the price increases are now down to almost zero because the Housing Bubble is breaking. Education and retirement costs (including the vast abandonment of retirement money owed by Corps. and so on) are grossly undercounted. The same is true of medical and health costs and insurance, which cover fewer of the full services they used to cover. The CPI does include the soaring costs of energy and food, so the Fed and the Big Media have cut them out by referring to the “Core CPI Inflation,” which is a totally ad hoc number they get by cutting out energy and food costs. But have you ever met an American, or any human being, who could live without food or energy? The Fed pretends it is cutting out the heart and core of inflation by cutting out food and energy because these are “variable.” But, of course, all prices are variable and this variability is the very reason one wants to keep measuring them: if they were not variable, it would be absurd to measure them more than one time.”
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and then over at the telegraph they report that the “experts” Goldman Sachs:

“Gold may smash the $1,000 barrier as soon as this summer should the dollar continue its slide and the woes of the US economy deepen”, Goldman Sachs said today.

Flight to gold as investors lose faith in money
The investment bank lifted its forecast for the yellow metal today on expectations of a recession in the US, which the bank expects to take hold in the second and third quarters of this year, could send the dollar to a record low of $1.51 against the euro.”
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Ron Paul
Before the U.S. House of Representatives, April 25, 2006

“The financial press, and even the network news shows, have begun reporting the price of gold regularly. For twenty years, between 1980 and 2000, the price of gold was rarely mentioned. There was little interest, and the price was either falling or remaining steady.

Since 2001 however, interest in gold has soared along with its price. With the price now over $600 an ounce, a lot more people are becoming interested in gold as an investment and an economic indicator. Much can be learned by understanding what the rising dollar price of gold means.”

“……Holding gold is protection or insurance against government’s proclivity to debase its currency. The purchasing power of gold goes up not because it’s a so-called good investment; it goes up in value only because the paper currency goes down in value. In our current situation, that means the dollar.

“Inflation, as exposed by high gold prices, transfers wealth from the middle class to the rich, as real wages decline while the salaries of CEOs, movie stars, and athletes skyrocket – along with the profits of the military industrial complex, the oil industry, and other special interests.”

A sharply rising gold price is a vote of “no confidence” in Congress’ ability to control the budget, the Fed’s ability to control the money supply, and the administration’s ability to bring stability to the Middle East.”

“…..Economic law dictates reform at some point. But should we wait until the dollar is 1/1,000 of an ounce of gold or 1/2,000 of an ounce of gold? The longer we wait, the more people suffer and the more difficult reforms become. Runaway inflation inevitably leads to political chaos, something numerous countries have suffered throughout the 20th century. The worst example of course was the German inflation of the 1920s that led to the rise of Hitler. Even the communist takeover of China was associated with runaway inflation brought on by Chinese Nationalists. The time for action is now, and it is up to the American people and the U.S. Congress to demand it.”
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Michael Rozeff givesa little insight. $10,000 Gold
“We the people have no possible use for the Fed that I can think of, but the State does. The Fed buys a lot of the debt that the State floats. It also seems to be a convenient way for the State to distribute its printing press money whenever it wants to. However, the U.S. government got along without the Fed until 1913.

“It seems that gold has risen in price about in line with other common goods and services. Some people say that it takes about the same amount of gold (about an ounce) to buy an off-the-rack average suit of clothes today as it did 75 years ago.

The cause of these declines in value of the dollar is that the Federal Reserve has shifted the supply of dollars upwards, well beyond the amounts that were warranted by the increases in demand for dollars that have occurred over this period. It bought a lot of things (mainly the debt of the U.S. government), created a lot of phantom reserves, and printed a lot of counterfeit currency called legal tender. These busy printing presses drove the value of the dollar down. The more dollars that were sitting in banks (because of cashing the Fed’s checks), the more that people borrowed and spent. Since the printing presses did not create any real goods or services, these dollars simply bid up the prices of the goods and services. That is (mainly) why a t-bone steak that cost $0.29 a pound in the 1920’s costs $7.99 today.”

“What’s inflation? Some economists define inflation in terms of price rises of goods and services. They use the CPI, but this measure is flawed for a variety of reasons. Alternatively, it may be more clear to say that inflation means excessive growth in the money supply, which then usually translates into rises in prices of various goods and services. Since in our system the State controls money via the Fed, the State is the sole cause of inflation because it controls the supply of fiat money. The Fed, usually doing what the President and Secretary of the Treasury want, causes inflation by increasing the supply of money. The public, however, can affect the rate of increase in prices by how intensively it uses this money (the money velocity).”

“All of these inflation scenarios cause stock and bond prices to decline. Since bonds are contracts that pay off in dollars, they are negatively impacted as dollars are depreciated by inflation. The effects on stocks are more complex and vary across different types of stocks. Usually the markets are disrupted enough by inflation that the overall net effect is negative.”

“Looked at this way, it is evident that gold in the portfolio is equivalent to insurance against some devastating contingencies. Complete or partial insurance are possible. The more gold you have, the more insurance you are buying. Over-insuring is costly because the overall rate of return of the portfolio goes down if nothing happens. That’s because gold historically provides no real return. Everyone has to decide for himself what the odds of these scenarios or ones like them are, how to insure against them as with gold or some other real assets, how high gold will go when other assets decline, and how much to insure against these events. There are no pat answers to these decisions, but they are within the realm of understanding and even sensible computation.

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Posted in antiwar, Constitution, Current Events, economy, Education, free market, Gold, healthcare, Libertarian, Politics, Pro Market, Rights, Ron Paul | Tagged: , , , , , , , , , , , | 1 Comment »

Recession 2008, 2009, 2010

Posted by Jesse on January 12, 2008

This page gets viewed a lot. I wish I had done a better job on it when I first posted it in Jan of this year 2008. Time to put an update in ordersee this pages update here

———UPDATE—-October 19, 2008——UPDATE——-October 19, 2008——-

Another page added to the list. Lots of links about the business cycle and current market conditions. What methods did these economists use to identify the problems in monetary policy?

———UPDATE———UPDATE————–UPDATE———–

Of course, I will start with two indispensable websites. Awesome reads. Easy to understand (sometimes), concise (yup), and gets to the heart of the matter (always).

There is quite a list of goodies and baddies to choose from. There are books, daily articles, journals, audio, etc. Have a laugh or spend your learning about money, inflation, short selling, business cycles, etc. Valuable insights to be had!

The Bailout Reader http://mises.org/story/3128

The Depression Reader http://www.lewrockwell.com/orig9/recession-reader.ht

I think another particularly relevant source in this matter would have to be a certain congressman’s blog. He was in the presidential race and had a respectable showing despite the odds. A lot of individuals helped him raise a bunch of funding for lots of campaigning. Many would argue his words mean more today to more people than they did at the time he spoke them. In fact, the campaigning continues! But first I’d offer to direct you to a crucial economic insight. But it’s your choice!

In closing this days update, I will leave you with one more great article: Business Cycle Primer If one can grasp this, and I am sure Lew is as eloquent as ever, you are well on your way to filling in all the other gaps.

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The Kondratieff Cycle: Real or Fabricated?

Don’t forget to check out Jim Cramer on Youtube interviewing Ron Paul!!

And be sure to learn a little more about America’s Bubble Economy
This is the first part of a 5 part video given by Peter Schiff. Newly recruited as part of the Ron Paul Campaign!!

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Inflation- Alive and Well [March 4, 2004

“The Treasury department parrots the Fed line that consumer prices, as measured by the consumer price index (CPI), are under control. The most glaring problem is that CPI excludes housing prices, instead tracking rents. The Fed’s easy credit policies have created an artificial mortgage boom, enabling many Americans who would not have met credit standards 30 years ago to buy houses. So demand for rentals has diminished, causing rental housing prices to drop and distorting the CPI downward. However, everyone knows the cost of purchasing a home has increased dramatically in the last ten years. The prices of many other goods and services, including medical care and energy, also have increased substantially in the past decade.”

Bernanke’s State of the Economy Speech: ‘You Are All Dead Ducks’
by Mike Whitney

“Even veteran Fed-watchers were caught off-guard by Chairman Bernanke’s performance before the Senate Banking Committee on Thursday. Bernanke was expected to make routine comments on the state of the economy but, instead, delivered a 45-minute sermon detailing the afflictions of the foundering financial system. The Senate chamber was stone-silent throughout. The gravity of the situation is finally beginning to sink in.”

……….Bernanke again:

“In part as the result of the developments in financial markets, the outlook for the economy has worsened in recent months, and the downside risks to growth have increased. To date, the largest economic effects of the financial turmoil appear to have been on the housing market, which, as you know, has deteriorated significantly over the past two years or so. The virtual shutdown of the subprime mortgage market and a widening of spreads on jumbo mortgage loans have further reduced the demand for housing, while foreclosures are adding to the already-elevated inventory of unsold homes. Further cuts in homebuilding and in related activities are likely…. Conditions in the labor market have also softened. Payroll employment, after increasing about 95,000 per month on average in the fourth quarter, declined by an estimated 17,000 jobs in January. Employment in the construction and manufacturing sectors has continued to fall, while the pace of job gains in the services industries has slowed. The softer labor market, together with factors including higher energy prices, lower equity prices, and declining home values, seem likely to weigh on consumer spending in the near term.”

“So, let’s summarize. The banks are battered by their massive subprime liabilities. Housing is in the tank. Manufacturing is down. Food and energy are up. Unemployment is rising. And consumer spending has shriveled to the size of an acorn. All that’s missing is a trumpet blast and the arrival of the Four Horseman. How is it that Bernanke’s economic post-mortem never made its way into the major media? Is there some reason the real state of the economy is being concealed from ‘we the people’?”

Bernanke’s candor is admirable, but it is little relief for the people who will have to soldier-on through the hard times ahead. Perhaps, next time he could spare us all the lengthy oratory and just forward a brief cablegram to Congress saying something like this:

“We are deeply sorry, but we have totally fu**ed up your economy with our monetary hanky-panky. You are all in very deep Doo-doo. Prepare for the worst.”

Read the rest here….

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The Recession’s Regulatory Causes
by Michael S. Rozeff

The U.S. economy may or may not be in recession now. But why split hairs? Why use official definitions? Why use official statistics? Why wait for the NBER to anoint the next recession? The fact is that important segments of the economy, such as banking, homebuilding, and real estate, are in recession now. The odds are that they will soon be joined by others.

………….Since the economy is made up of markets, critics of capitalism will now have a field day blaming the market economy for its imagined shortcomings. Do they praise markets when the economy is growing and creating millions of new jobs and vast new wealth? Of course not, because these critics are biased government apologists. They seize any chance to pound the daylights out of free markets.

We can hardly expect the beneficiaries of big government and haters of free markets to communicate the simple truth: Recessions do not and cannot occur on a systematic basis in a diversified economy composed of free markets.

Since the U.S. economy’s markets are typically not free markets, it does experience recessions as a systematic feature, with the banking system being the usual method of propagation. Recessions only can occur when the government curtails free markets by its usual means: direct control and interference, taxes, subsidies, and regulations. They occur when the government, through these coercive means, manages to create pervasive shocks that mislead so many market participants that recession becomes inevitable.

In the 4 years starting in 2001, the Federal Reserve System (the Fed) increased the M1 money supply by about 6 percent a year. This followed a 7-year period in which M1 was basically flat, or stable, not rising at all. Those 7 years were a non-inflationary period for M1. The rapid and prolonged increase in M1 between 2001 and 2005 after such a lengthy period of stability was an important inflationary shock to the U.S. economy.

Suddenly the banking system was flooded with reserves, which is the fuel behind the M1 increase and a vast increase in loans. The Fed had supplied the banking system with the means to increase its loans dramatically. The housing sector took off. Housing prices began to rise.

It should be noted that some foreign central banks have inflated even more since 2001 and created their own real estate booms. This enhances the odds of a severe worldwide recession.

……..Read the rest here

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Dealing with Recession
By Clifford F. Thies

An old joke is that economists have called 19 of the last 16 recessions. Our signal of a recession is three months running of decline in the index of leading indicators. We have not yet had a recession without first having the signal. But, we have occasionally had the signal without the subsequent recession. Well, on January 18th, the Conference Board released its economic indicators and, with this release, we got the signal of the now long-awaited recession. What does it mean?

………….Instead of responding to complaints about the high rate of inflation by saying a 2 percent rate of inflation is pretty close to price stability, we can now say that a rate of inflation of 3 or 4 percent, which has been accelerating recently, is indeed a cause for concern.

For all the talk by the Federal Reserve about “inflation targeting,” we now see that responding to short-run problems is paramount for the Fed. Holding the line on inflation is something the Fed does when it is convenient. Resorting to inflating the money supply when times are tough is predictable, as is a continuing loss of purchasing power of the US dollar. The only uncertainty is how fast the dollar will lose purchasing power. Will it be at a creeping rate, or at a galloping rate, or at a hyperinflationary rate?

You might think that we learned our lesson about inflation during the 1970s, when we moved first from a creeping to a galloping rate, and then risked a further move to hyperinflation. The double-dip recession we then went through starting in 1979 fell in the second tier of economic downturns (below only the Great Depression). There is currently no indication that a severe downturn is on the horizon. But, if we work hard enough at it, with fiscal and monetary policy pumping up the economy and delaying and exacerbating the inevitable, we can make such a severe recession possible in the future.

This brings me to the Austrian approach to the business cycle and the suddenly revived Keynesian approach embraced by the Federal Reserve, the Bush Administration, the Congress, and the popular media. The Austrian approach would call for the quick and even ruthless liquidation of the malinvestments that were made during the misguided prior boom in the economy. In contrast, the Keynesian approach talks in terms of aggregates without differentiating one type of investment from another, as though the spending of tax rebate checks will have a meaningful impact on the particular sectors of the economy that are in trouble.

………..Just as overoptimism and greed come into the booms of the Austrian business cycle, excessive pessimism and fear come into the busts. A free society requires confidence, as well as business entrepreneurship. Fear is antithetical and often comes in the vanguard of some form of authoritarianism. Thus, what is much more important than tax rebate checks is a sound economy that evinces in people confidence that we can and will work through difficult times.

In the meanwhile, it is a good time for everybody to reconsider his or her own financial situation. Are you, for example, basing your retirement security on “safe” bank deposits and bonds denominated in US dollars, thinking that inflation is a thing of the past? Are you mortgaged to the hilt, maxed out on your credit cards, and otherwise conducting your business as though we will never again have a recession? When used with discretion, debt can be a good thing. But many of us individually, and we as a society, can have too much of a good thing.

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What’s Behind the Fed’s Aggressive Interest-Rate Cut?
By Frank Shostak

……”Bernanke is of the view that changes in financial and credit conditions are important in the propagation of the business cycle through a mechanism that he dubbed the “financial accelerator.”[1]

In his view, it is by means of the “financial accelerator” that a sudden short-lived disruption in financial markets can set in motion a prolonged disruptive and amplified effect on the real economy.

Bernanke suggests that the financial accelerator works through two channels: a credit channel, and a balance sheet channel.”

…….”A key concept in Bernanke’s model is the external premium, which activates the “financial accelerator.” The premium is defined as the difference between the cost to a borrower of borrowing money in financial markets and the opportunity cost of internal funds.

On this Bernanke says:
External finance (raising funds from lenders) is virtually always more expensive than internal finance (using internally generated cash flows), because of the costs that outside lenders bear of evaluating borrowers’ prospects and monitoring their actions.”

…….”In his testimony to the House Financial Services Committee on September 20, the Fed chairman provided the rationale for the hefty cut of 0.5% in the federal funds rate target on September 18:

We took the action to try to get out ahead of the situation and try to forestall potential effects of tighter credit conditions on the broader economy.”

……”In Bernanke’s view a typical financial disruption is associated with:

A weak banking system grappling with non-performing loans and insufficient capital or firms whose creditworthiness has eroded because of high leverage or declining asset values are examples of financial conditions that could undermine growth.

The question that must be asked is what gives rise to the emergence of such conditions? Disruptions in financial markets do not emerge out of the blue.

We suggest that the major cause that sets these disruptions in motion is likely to be the central bank itself.

Whenever the Fed loosens its stance, it sets in motion rising growth in the money supply. Conversely, whenever the Fed tightens its stance it sets the foundation for declining growth in money. It is this that drives the GDP rate of growth and sets in motion the so-called boom-bust cycles.”

……”We suspect that a key factor behind the large cut of 0.5% in the federal funds rate target on September 18 by the Fed was Bernanke’s view that financial-market shocks can produce a severe economic recession.

According to the model that Bernanke follows a sudden disruption in financial markets can set in motion a disruptive amplified effect on the real economy. Hence, to counter this, the Fed chairman is of the view that the central bank must always be on guard to pump enough money to neutralize the negative effect from various shocks. We suggest that by attempting to counter various shocks that are predominantly the product of Fed’s own policies, Bernanke’s Fed has likely made things much worse as far as real economic fundamentals are concerned.

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CPI excludes housing prices

Posted by Jesse on December 3, 2007

Inflation-Alive and Well by Ron Paul
“Austrian- school economists demonstrate that true inflation is monetary inflation. True inflation therefore can be measured by an increase in the money supply. Mr. Greenspan and Fed policy makers have more than doubled the M3 money supply in less than ten years. While Treasury printing presses can print unlimited dollars, there are natural limits to economic growth. This flood of newly minted US currency can only increase consumer prices in the long term, as more and more dollars chase available goods and services.”
“The Treasury department parrots the Fed line that consumer prices, as measured by the consumer price index (CPI), are under control. But even some Keynesian economists admit that CPI grossly understates true inflation. The most glaring problem is that CPI excludes housing prices, instead tracking rents. The Fed’s easy credit policies have created an artificial mortgage boom, enabling many Americans who would not have met credit standards 30 years ago to buy houses. So demand for rentals has diminished, causing rental housing prices to drop and distorting the CPI downward. However, everyone knows the cost of purchasing a home has increased dramatically in the last ten years. Home prices in many regions have more than doubled in just five years. So price inflation certainly is alive and well when to comes to the largest purchase most Americans make.”
CPIAUCNS
Price of Oil

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