Debunking the Myths
From the prior two posts we have the inflation myths that provide cover for monetary manipulation and the gold myths deflecting attention from the basic issue of what money is. Given that both myths deal with money we should consider their relationship to each other.
Let’s start with the bizarre circumstances of negative interest rates that arose during the Great Recession, and apparently is still the case in Europe. In recent articles in Bloomberg News, the NY Times and the Wall Street Journal, there were discussions about ECB Euro Bonds with a negative yield, meaning you are as the lender paying the borrower to take your money. The ostensible reasoning offered is that the ECB needs to provide liquidity to the market to prevent a recession. Similarly, we hear the same from the Fed as they propose moving the USA in the same direction.
What is not offered is an explanation as to why this requires such an incredible perversion of capital markets, undermining the very incentives that provide for investment. These articles also importantly note that this phenomenon is no longer isolated to sovereign debt, but has also spread to corporate bonds. So why would anyone pay someone to take their money? The answer on the sovereign side is a bit more complex, but on the corporate side the answer is few are; without these investment sources for growth there’s little wonder why Europe is technically if not virtually back in a recession.
On the sovereign side, if you’re a pension fund, you are usually legally obligated to invest in the least risk related investments, such as was the case with sovereign bonds; those that have contributed to the fund are not only losing money on negative yields, but also due to inflation. Little wonder that they are angry about that as the stress in these funds has diminished their future income, and in some cases may eliminate it if there are defaults such as happened in Greece.
These government manipulations are really perversions of capitalism, and in fact not capitalism at all. A basic tenant of free markets is that when you lend money it is a reasonable expectation that by deferring its current use you expect compensation from the borrower in the form of interest, which in the case of investments such as bonds is generally referred to as yield.
So in order to perpetuate these myths, the first step is to pervert money by eliminating the basis for its actual value, diminishing restrictions on its manipulations. That took time to do and it began with the creation of a central bank. If there were diversity, it would be difficult to accomplish this, so the Fed was the logical first step. With that you now have the means to expand the money supply with the stroke of a pen, or now with a few strokes on a keyboard.
But you still have a constraint in that there was a standard. No problem, overtime that was also addressed; simply corrupt the standard, and starting in the late twenties, through to the FDR era, this idea took hold until you have the coup d’etat on the standard itself, i.e. simply make it illegal to own gold and confiscate it. Brilliant, but not quite there yet. After a few more perversions of the standard you come to Tricky Dick, and presto you take the standard and kill it altogether. Ah, relief at last, the USA enters the age of fiat currency, what a game saver!
But not so fast, we’re behind a little as all other countries have had a head start and have manipulated their currencies relative to the dollar. A grand scheme is devised, making the dollar the reserve currency of the world, some countries even directly linking their currency to the dollar. International trade is conducted in dollars, and currency exchange rates are allowed to “float”. Now you have currency wars wherein various countries blatantly devalue their currencies against the dollar without constraint as after all, fiat literally means “by decree”. Now there are “trade imbalances” as prices are no longer a reflection of market value, only relative value, as in who can make something cheaper than someone else via currency exchange, which now is less a production issue but a monetary one. The cost of labor is now relative more to what a worker in any country is being paid in that currency rather than a stable market value.
Now I’m all for free trade and I feel that it has done good for the consumers in all countries and has even helped raise many above the poverty level in many third world countries, but with the destruction of sound money and the free float of fiat currencies, it is inevitable that the country with the strongest currency will export the least, in this case the USA as compared to Asia and South America.
This may have happened over time even with policies of real sound money as more advanced economies moved on to higher technological production and away from industrial and agricultural production, but the exasperating issue is that the absence of sound money made the evolution needlessly risky and unstable, causing dislocations in labor and resources that are chaotic and not true market reflections, and inevitably unsustainable.
So when you hear Powell talk about the likelihood of the Fed cutting rates despite record stock evaluations, low unemployment and inflation, compare that to the Fed’s statutory mandate to direct monetary policy in order to provide for maximum employment, stable prices, and moderate long-term interest rates, and you can see why I previously called that mandate in contradiction of itself. If we truly have record unemployment unmatched in 50 years, and stable prices due to little inflation, then why cut interest rates which are at the very least already “moderate”? Pardon me for stating the obvious, but it appears to be a case of liars doing the figuring, and so the figures lie.
Consider last fall when the Fed raised rates and deleveraged its balance sheet and the stock market fell hard; Trump trashed the Fed and Powell caved, stopped the rate hikes and deleveraging, and stocks took off. Here again we see the revolving door between Wall Street and Washington, cronyism at its worst. This again is a perversion of capitalism, but what you hear instead on the political front is a need for more “progressive” policies, yet more myths at work deflecting what any reasonable observation should expose.
The Fed is in a hole that it just can’t stop digging deeper. If it stops its manipulation, in this case cutting rates further, the lies about unemployment , inflation, growth, etc. will show up as they did in the past as the credit bubble bursts; but that will eventually happen anyway as it has happened in the past, so the trick is how to spin it.
What we hear from our leaders in government and aspiring presidential candidates regarding all this is alarming; raise the debt ceiling, lower interest rates, more military interventions, free health care and education, and other proposals the like of which got us in to this mess to begin with; depending on how this plays out, including the elections, we will get some of that, and the spin will be that those who are not on board with it are to blame. In politics, when you are caught in a lie, the reaction is to lash out and blame those that expose it.
When Senator Rand Paul proposes such a common sense bill to balance the budget, a bill actually based on the Senate committee plan to address deficits and the debt crisis, the Republican controlled Senate doesn’t even allow it to get to the floor for debate, denouncing their own idea as “unworkable”. Keep in mind these are the same Republicans who have criticized previous administrations for this very problem and who tell their constituents back home that they want to stop deficit spending. All this in the face of a record trillion dollar deficit for 2019.
The fact that neither party has the common sense and/or political courage to do the right thing does not provide for much optimism for the future economic health of the USA. Add to this a questionable tax law, a trade war that no one can win, war mongering that will destabilize already shaky markets, growing nationalism and socialism on all political fronts, and you can be forgiven if you see little which would contribute to a positive outlook.
Thoreau once said that “Only that day dawns to which we are awake.” I believe, or at least still hope, that Americans are capable of awakening to the facts, and pull the plug on political regimes that have given us not only a welfare state, but also a warfare state. The alternative is to repeat the failures of the last century where the world was subject to growing authoritarianism, economic chaos, and multiple catastrophic wars; we seem to be already heading down that road.
But why are there so few voices calling us to awake to these realities and change the misguided direction that both major political parties are so bent on pursuing? Sounds like something to discuss in another post.