Posts Tagged ‘Federal Reserve’

“Can It Happen Here?”

Posted: April 1, 2013 by ShortTimer in Economics, Government
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Real Clear Politics asks the question:

The decision of the government in Cyprus to simply take money out of people’s bank accounts there sent shock waves around the world. People far removed from that small island nation had to wonder: “Can this happen here?”

Whether in Cyprus or in other countries, politicians tend to think in short run terms, if only because elections are held in the short run. Therefore, there is always a temptation to do reckless and short-sighted things to get over some current problem, even if that creates far worse problems in the long run.

Seizing money that people put in the bank would be a classic example of such short-sighted policies.  After thousands of American banks failed during the Great Depression of the 1930s, there were people who would never put their money in a bank again, even after the Federal Deposit Insurance Corporation was created, to have the federal government guarantee individual bank accounts when the bank itself failed.

But who guarantees the government?

One of the big differences between the United States and Cyprus is that the U.S. government can simply print more money to get out of a financial crisis. But Cyprus cannot print more euros, which are controlled by international institutions.

And here we have the reason why, yes, it happens here, every damned day, to the tune of $85 billion stolen per month.

This new money buys just as much as the money you sacrificed to save for years. More money in circulation, without a corresponding increase in output, means rising prices. Although the numbers in your bank book may remain the same, part of the purchasing power of your money is transferred to the government. Is that really different from what Cyprus has done?

So what’s the solution?

Realistically, Milton Friedman pointed out on many occasions that there really is no way to combat inflation, as it’s created by government.  You have to control the government to reign in spending.  If you can’t, it’s best to buy things because things hold their value, and if their price is set at pre-inflation prices, you don’t lose as much purchasing power as you pay it off in weaker and weaker fiat currency.

And because quantitative easing really only works until it collapses the nation, the best advice is still this:

Congress and the $1 Bill

Posted: November 30, 2012 by ShortTimer in Democrats, Economics, Government, hot chicks, Music, Republican
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From the AP:

WASHINGTON (AP) — American consumers have shown about as much appetite for the $1 coin as kids do their spinach. They may not know what’s best for them either. Congressional auditors say doing away with dollar bills entirely and replacing them with dollar coins could save taxpayers some $4.4 billion over the next 30 years.

Vending machine operators have long championed the use of $1 coins because they don’t jam the machines, cutting down on repair costs and lost sales. But most people don’t seem to like carrying them. In the past five years, the U.S. Mint has produced 2.4 billion Presidential $1 coins. Most are stored by the Federal Reserve, and production was suspended about a year ago.

The latest projection from the Government Accountability Office on the potential savings from switching to dollar coins entirely comes as lawmakers begin exploring new ways for the government to save money by changing the money itself.

How about telling the Federal Reserve to stop printing it, geniuses?  Or how about you stop spending it on everything, inflating the currency, and devaluing that dollar bill to begin with?

$4.4 billion over 30 years is meaningless for several reasons.  First, it’s projected savings that’s contingent on other economic policies staying the same.  With inflation, that $4.4 billion could be higher or lower.  Second, that’s $146 million per year, which won’t amount to a drop in the bucket, but will have extensive costs for consumers to adjust; as well as setting us up for greater inflation where $1 is a coin and not a bill.  There’s a tangible feeling in how going from coins, which are fractions of the dollar, to a dollar being a coin is showing that the money is devalued.  Third, that’s projected savings… that Congress is just going to spend elsewhere.

It’s like a fat guy saying “well, I’m going to cut out Twinkies since Hostess is gone, so now I’ve got an extra 500 calories a day”.  Y’know what the fat guy is going to do?  He’s going to eat 500 calories worth of something else.  Congress is going to change something for the sake of changing it, subtly contribute to inflation of goods and services (think pumping meaningless $1 coins into a vending machine for an $8 soda like in The Running Man).  Coins are fractional accouting of bills.

Also, it’s not rocket science why vending machine operators want to change over to coins.  It’s their pet industry.  It means they can charge more and it’s more convenient for customers to use the new coins to pay higher prices.  A 20 oz soda for $1.25 is 5 quarters… that is, 5 small fractions of a real unit of currency (the dollar) in the form of 5 physical coins.  A 20 oz soda at $3 is 3 dollar coins, that is, 3 real pieces of a real unit of currency in the form of 3 physical coins, but perceived as 3 meaningless fractions of real currency.

Rep. Bill Huizenga, R-Mich., affirmed that Canadians have embraced their dollar coins. “I don’t know anyone who would go back to the $1 and $2 bills,” he said.

While I’m not averse to pointing out good things Canada has done, Canada has also done some stupid things, and what works for Canada doesn’t necessarily work for the US.  The reason dollar coins fail in the US is because folks in the US view the split between dollar bills and coins as something that is substantive.  Paper money carries value – it’s a note indicating its value (no matter how devalued it may be now).  Coins are for fractional accounting.

Rep. Lacy Clay, D-Mo., said men don’t like carrying a bunch of coins around in their pocket or in their suits.

This will be one instance in the future where I’ll have to go back and cite myself as agreeing with a Democrat.  I don’t know Clay’s other policies – they may well be abhorrent, but I’ll agree with the representative here.  No one likes carrying coins.  And no one wants to get change at McDonalds for a $5 bill in the form of a bigger pile of change.  Coins are often inconvenient and obnoxious, and they don’t fit in wallets, and even folks who carry a change purse or pouch will get very sick of carrying around a pocketful of $1 coins.

Even bored D&D players who really liked to pay for things in gold coins when the Sacajawea dollar coins came out found the novelty wore off rather quickly.  Not that I’m speaking from direct, personal experience.

And Rep. Carolyn Maloney, D-N.Y., said the $1 coins have proved too hard to distinguish from quarters.

And we’re back to Democrats being idiots.  No, they aren’t hard to distinguish, unless you’re senile, handicapped, or a Democrat congresswoman.   But they are obnoxious.  Maloney goes on:

“If the people don’t want it and they don’t want to use it,” she said, “why in the world are we even talking about changing it?”

Hey, we said the same thing about Obamacare, the bailouts and Stimulus, and a dozen other issues and you didn’t listen!  Can you figure this out, Maloney?  NO MEANS NO!

“It’s really a matter of just getting used to it,” said Diehl, the former Mint director.

No, it’s not.  We don’t want it, we don’t want to get used to it, we don’t like it, we don’t want or like your changes, leave us alone!

Rep. Steve Stivers, R-Ohio, said a penny costs more than 2 cents to make and a nickel costs more than 11 cents to make. Moving to multiplated steel for coins would save the government nearly $200 million a year, he said.

$200 million which out of a $1.6 trillion dollar deficit and a multi-trillion dollar budget will mean almost nothing, but will make things more difficult for the public, will give a physical indicator of the devaluation of the dollar, will piss off the public, and is only embraced by people who want to be more like the basketcase of Europe.  Historically devaluation of currency was also done by mixing cheaper metals with issued coins.  Maybe it’s more important to figure out why the coins are devalued first.  Though if he’s just talking penny, nickel, dime, and quarters, and not talking about changing the $1 bill over to a $1 worthless obnoxious coin, I could see Stivers’ point.

A working man’s dollar cannot be changed into a coin.

And coins and strippers don’t mix.

Nursing school?

Update: Looks like HotAir just got wind of this story.  They point out there’s one company that gets all the bill paper contracts.  Doesn’t change any of the practicality arguments against it, or the way it psychologically devalues currency by turning a full unit (the dollar) into a denomination that acts like a fractional unit (the coin); and how it enables higher prices for vending machine operators – who of course favor it.

At video on HotAir, Geithner is asked if we should get rid of the debt ceiling.

Interviewer: Do you agree with Alan Greenspan that we ought to just eliminate the debt ceiling?

Geithner: Oh absolutely.

Tim Geithner can’t pay his own taxes, so there’s zero reason he should’ve been Treasury Secretary to begin with, but that’s just another in the long string of Obama appointments that are glossed over entirely by the media.  Just a reminder, though.

ZeroHedge asks what Geithner will do now, as it seems he’s leaving the Obama administration, and briefly recaps his past, which also ties in with his statement above:

Tim Geithner’s public “servant” tenure has not been without its blemishes: from his deplorable run as the (figure)head of the New York Fed (from 2003 until 2009), when the entire financial system literally imploded under his watch, to his epic failing up as Hank Paulson’s replacement as treasury Secretary of the United States, despite his legendary inability to navigate the Minotaurian labyrinth that is the TurboTax income tax flowchart, the Dartmouth alum has had his share of run ins with adversity (and adversity won). Of course, Geithner’s tenure in charge of the Treasury in the past 4 years has been somewhat mollified by the fact that here too here was merely a figurehead, and the true entity that runs the US printing presses is none other than the JPM and Goldman Sachs co-chaired Treasury Borrowing Advisory Committee (for more on the TBAC read here and especially here as pertains to the former LTCM trader and current head of JPM’s CIO group), meaning that the US Treasury, just like the Fed, are merely branches of the one true power in US governance: Wall Street. Geithnerian figureheadedness aside, the one undeniable fact is that Tim Geithner’s days as head of the Treasury are now numbered: he has made it quite clear that he will not accompany Obama (should the incumbent be reelected) into his second term. So what is a career “public servant” to do once the public no longer has any interest in retaining his services? Bloomberg’s Deborah Solomon has some suggestions…

First, it may come as a surprise to some, that just like virtually every other central planner currently in charge of deciding the fate of billions of people in US and around the world, Geithner has never really had much interaction with real life:

Despite the fact that much of the public — not to mention some lawmakers on Capitol Hill — assume Geithner worked on Wall Street, he never has. Instead, he has spent most of his career in public service. Before taking the Treasury post in 2009, Geithner headed the Federal Reserve Bank of New York for six years and worked at the International Monetary Fund. His main private-sector job was at Kissinger Associates Inc.

 The years in public service — particularly engaging in diplomacy with domestic and foreign partners — left a deep impression on Geithner, infusing him with a sense of purpose that he might find lacking on Wall Street (see: “Why I Left Goldman Sachs” by Greg Smith).

This by itself isn’t to much of a surprise, but consider what the debt ceiling is.  It’s an artificial limit set by congress that says “we’re not spending money we don’t have past this mark”.  It’s a way (though not a great way) to somewhat reign in spending by government.

Tim Geithner, who can’t figure out how to pay his own taxes, has been a Treasury Secretary who’s functionally done nothing but print more money.  His plan to deal with the economy and government debt has been Quantitative Easing 1, 2, and now Ad Infinitum.  Of course he’d want to eliminate the debt ceiling.  Then the government can just spend spend spend into oblivion without even a hint of restraint.  Besides, Geithner is part of the powerful elite ruling class, and he won’t be living a life impacted by his own decisions, whether he leaves as Treasury Secretary or stays on.

Remember this condemnation from the Chicoms, from last year?

SHANGHAI — China, the largest foreign holder of United States debt, said Saturday that Washington needed to “cure its addiction to debts” and “live within its means,” just hours after the rating agency Standard & Poor’s downgraded America’s long-term debt.

“The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,” read the commentary, which was published in Chinese newspapers.

When the govt. is printing bonds and TIPS and everything else to sell to the Federal Reserve and all the mess that is Quantitative Easing, and especially if the debt ceiling is removed, at best, all this becomes is a longer game of kicking the can down the road, assuming someone wants to solve the problem.

The downright scary part is what FerFal wrote about in Argentina:

As for the rest of the population, nothing has ever worked as well for the peronist party as keeping those families poor and numerous, and the Ks repeat that same recipe. The handouts for one reason or another make sure those votes keep coming. Handouts per child, for political support, its all there if you show up to the rallies or protest against the companies that aren’t “team players” with the government.  If you are a company owner, in the legal or illegal pharmaceutical business, a good amount of donations will go a long way in ensuring the health of your business. We’re (sic) does the money come from? Stealing the retirement funds helped, so does sucking the blood out of what’s left of the middle class through taxes…

What if they really don’t want to solve the problem?  What if they just want to destroy everything?  Fundamental transformation?  The super-rich Democrats have for the last few decades managed to paint themselves as a party that cares about the poor through giving handouts, and they’ve done well politically with it.  There are entire regions in cities that vote exclusively for Democrats, and mostly because they’re areas that are clearly politically defined as handout-recipients and usually along ethnic lines.  Thomas Sowell has written extensively on how the Democrat party has abused the urban black community into poverty and squalor and convinced them that the Democrats will save them, a disturbing mass Munchausen by proxy.  Democrats by their Alinsky playbook mean to go out, create a crisis, and “solve” it; they never let a good crisis go to waste, and instituting a crisis in order to further their own political goals is something that has been done many times before.

And while there are some in the party who do want that, there are others, like Geithner, who are probably just ignoramuses, or insulated “geniuses” convinced of their own superior intellect who don’t understand that spending money you don’t have doesn’t work forever.  Isolating purely the economic side of it and ignoring the political power grabs that are coming from it, you simply cannot kick the can down the road forever.

Apparently there’s a nice term for when this ends, now.  A Keynesian Endpoint.

Keynesian endpoint is a phrase coined by PIMCO’s Anthony Crescenzi in an email note to clients in June 2010 to describe the point where governments can no longer stimulate and rescue their economies through increased government spending due to endemic levels of pre-existing government debt.

“Time, devaluations, and debt restructurings might be the only way out for many nations,” Crescenzi wrote in an e-mailed note titled “Keynesian Endpoint” that referenced the Great Depression era economist John Maynard Keynes. Debt-fueled spending programs aimed at combating the global financial crisis of 2008 are among policy tools now “being seen as a magic elixir that has morphed into poison.”

Margaret Thatcher summed it up well years ago:

Of course, while the financial system may fail on this, there are a lot of scapegoats to go kill and enemies to destroy, and a lot more people to blame.  The Democrats are already gearing up to blame the Republicans for the fiscal cliff – it benefits them to go over the cliff and hurt the country so they can blame Republicans.

From Forbes & ZeroHedge:

President Barack Obama managed to overtake Republican challenger Mitt Romney on the exit poll question “Who is better for the economy?” and a strong majority of Obama voters felt that the economy is better off than four years ago. Indeed, anyone (particularly Bernanke) would concede that without the Fed’s zero interest rate policy we would be experiencing a far worse economy—the true Obama-Keynesian economy.

The danger here, as we have seen in every other bust for a century or more, is that we can only suspend the laws of economics for so long. And in general we are only good at considering immediate consequences, while being very, very bad at considering later consequences. As 19th century French economist Frédéric Bastiat observed, “The bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, at the risk of a small present evil.”

In the short run (and this is what is so insidious about the Fed’s artificially low interest rates), all we are seeing is an illusion of economic progress. Specifically, the Fed has manufactured a distortion intended to trap both consumers into spending more and entrepreneurs into investing more, or lengthening their production periods (becoming more “roundabout,” as the Austrian School economists said), as if savings were more plentiful. This combination would never occur in an unhampered, noninterventionist economy for the simple fact that higher consumption would mean higher interest rates (from less savings), which would discourage longer production.

Thus, investment in this illusory economy is malinvestment, or investment that always unravels with the intervention’s inevitable end, due to either untenable credit levels (such as today’s corporate debt-to-asset ratio, still at historic highs) or a resource crunch (rising commodity prices) that eliminates any advantage from printing money; and one or both of these scenarios is unavoidable.

Economic progress requires a chain reaction from lower time preferences: foregone current consumption and a higher pool of savings lowers interest rates and triggers a natural entrepreneurial response, greater productivity, and subsequent economic growth. (The “Paradox of Thrift” that warns of the hazards of higher savings is the nonsensical stuff of the ivory tower.) By circumventing this process, as we have today, we have built but a temporary façade.

Worth reading more highlights at ZeroHedge or the whole thing at Forbes.

Long story short, we’re kicking the can down the road.  There will be very hard times ahead financially due to this.

Also worth revisiting:

HT to Mike in East Texas.  Mike mentioned tonight that Fisher wanted to break up the big 5 banks in order to end the era of “too big to fail”, due to the ridiculous amount of debt and finance that just 5 banks control.

The Blaze also hit this barely-reported story up:

A recent report by the Federal Reserve Board of Dallas accuses the nation’s largest banks of being “a perversion of capitalism” and “a clear and present danger to the U.S. economy.”

The report titled “Choosing the Road to Prosperity Why We Must End Too Big to Fail—Now“ goes on to say the infamous Dodd-Frank bill, which was supposed to “regulate” the financial industry, “may actually perpetuate an already dangerous trend of increasing banking industry concentration.”

JPMorgan, Bank of America, Citigroup, Wells Fargo and U.S. Bancorp, hold 52 percent of all U.S. deposits, according to the report, which makes that whole “too big to fail” problem seems a lot worse now than it did before Dodd-Frank.

Milton Friedman on economics, inflation, and government decisions.

Friedman begins the piece by outlining what doesn’t cause inflation, like union wages – which don’t cause general inflation, but union contracts can and do raise prices of individual products; foreign imports – which only cause other businesses to compete globally, but tend to reduce overall prices by importing lower cost goods; or energy costs – which do cause increases in prices of goods and services.  Friedman notes that the fallacy is that one price has an effect on all prices.  In the case of energy costs, that does make a difference, but it’s not as substantial as what Friedman goes on to mention.

The true cause, is, as expected, printing more money.  This devalues currency and results in the prices of everything going up.  Prices of everything going up results in increased costs to businesses, who in turn charge more for their goods and services, and whose employees need higher wages to maintain their standards of living, which are on the decline due to wages not keeping up and prices going higher.  It feeds on itself, and its root cause is in printing more money than an economy can sustain as a way for government to pay for itself by in effect, both figuratively and literally, printing money.

Mike In East Texas is quite vehement about the potential for freefall deflation, which is in no small part what Japan suffered during the Lost Decade of the 1990s.  The current system of quantitative easing is basically what the British PM notes as what Britain did for years (minus the lower taxes).  In the US, it’s been an even more Keynesian solution, with selective tax incentives and taxpayer money given to favored businesses, and greater government spending all around, as well as the Federal Reserve and govt spending dumping money into the economy with every intention of kicking the can down the road.

Inflation will occur in small amounts, as noted during the conversation where it’s noted that William McChesney Martin, Chairman of the Fed from 1951-1970, only had inflation go up a small amount in the twenty years he was there.

The keys summed up are the same today.  Runaway government spending means government demands inflation and the monetary policy follows.  Ultimately, the bill comes due – which is what happened when runaway govt programs Fannie Mae and Freddie Mac went bust – and now we’re riding more waves of quantitative easing which kick the can down the road.