In The Belly of A Horse
"If a nation expects to be ignorant
and free in a state of civilization, it expects what never was and never
will be." Thomas Jefferson
If the Fed didn't exist…
Profits might. There may have
been a tech boom, only profit, rather than "too much money" would have
driven it. The difference is that in one case economic actors are making
the correct choices.
If there were no Fed, consumers might save
more of their money, and the economy might be less prone to the unintended
imbalances between consumption and savings. In fact, the economy may not
need to depend on foreign savings at all.
If there were no Fed, bureaucracy and debt
could not outgrow the contributions that are made by capitalism. Neither
could ignorance and corruption.
If there were no Fed, our bank deposits
couldn't be insured by the government. But maybe they wouldn't need to
if the market quickly disciplined reckless banks. There certainly would
be no petty cash fund for the bankers and government to dip into as the
result of their own screw-ups.
If there were no Fed, over hedging might
not be possible. But then, it may not even be necessary.
If there were no Fed, the value of our
money would not necessitate its management, and the layperson wouldn't
have to worry about debasement and excessive taxation.
If there were no Fed, deflation would be
possible even in terms of money substitutes.
If there were no Fed, investors would have
nobody to subsidize their stupidity, and thus wouldn't be so keen to offer
themselves up as a sacrifice for the big wealth transfer. What I mean
here is that the stock market isn't for everyone, but the Fed makes it
seem so, for a while anyway.
If there were no Fed, the invisible hand
wouldn't have arthritis and markets wouldn't be "inherently unstable."
If there were no Fed, Bush would really
be the President, and Gore would have been too afraid to run.
If there were no Fed, other countries would
not need a central bank of their own to finance the accumulation of dollar
reserves so that they can trade and sustain the US dependent global economy
(or inflation scheme).
If there were no Fed, the same nations
might finally be persuaded to legislate private property rights as a means
to achieve the same ends they only think they are today.
If there were no Fed, OPEC wouldn't need
to exist to protect its monetary interests, and the world might never
run out of oil.
If there were no Fed, we wouldn't have
to save the stock market to keep the country from going to war, or from
being fully employed.
If there were no Fed, the individual's
word might be as good as gold, in business or in politics. Maybe even
in law (joking here).
That's fifteen benefits the Fed interferes
with and there are more, but time is limited.
I can think of no convincing justification
for the existence of a central bank except for in its role as lender of
last resort. But I can think of no compelling reason that would necessitate
a lender of last resort, save where monetary policies or lending becomes
profligate.
Sure, some believe markets are inherently
unstable. We disagree, and propose that those claiming so have helped
to justify the Fed. How does a lender of last resort ply its trade? Does
it have an inexhaustible source of funds? It does, in our collective ignorance.
Nearly every time the Fed whisks its safety
net onto the economy it leads to a new financial boom. Hmmm. I wonder
what we should make of that?
I'll tell you what I think. Those condemning
the market for its instability, completely disregarding the Fed's influence
in this drama, provide the main support for the Fed's charter, and they
may even benefit from the volatility or wealth transfer.
"Mankind soon
learn to make interested uses of every right and power which they possess
or may assume. The public money and public liberty, intended to have
been deposited with three branches of magistracy but found inadvertently
to be in the hands of one only, will soon be discovered to be sources
of wealth and dominion to those who hold them; distinguished, too, by
this tempting circumstance: that they are the instrument as well as
the object of acquisition. With money we will get men, said Caesar,
and with men we will get money." --Thomas
Jefferson: Notes on Virginia, 1782.
Think about that quote the next time there
is a crisis worthy of the Fed's help, in so far as it is only too happy
to help. I wonder at what point they
will get the idea to initiate the crises? It's only logical after all.
Did I say that out loud...
The Greenspan Horse
A central bank can in theory act in the capacity of a gold standard (using
the term loosely), but then why would we need the central bank at all?
Well for one, a central bank that claims to be acting in such a capacity
is asserting its superiority to gold-as-money. It claims to be better.
It may or may not see gold as its natural enemy. In a perfect world it
could even be an ally. But the central bank that does not strive to better
gold-as-money must by definition be its enemy, if gold is in fact the
better money. Else, how else could it survive?
Some people may need to beat up on other
people to feel better about themselves. If gold is the better money, a
central bank's survival would depend on its ability to either demonstrate
its superiority, or to beat up on gold. If it chooses to employ the latter,
it is no longer simply an opponent of gold. It becomes an enemy of money,
and thus by extension, to capitalism.
If a central bank refutes the principles
of sound money should we be surprised it is in support of too much of
it? Should we be surprised at the legitimacy of terms such as elastic
money, fractional reserve lending, or that growth requires more money?
Money doesn't breed greed and corruption
by itself. Too much money does. It also breeds malinvestment. It should
be no surprise who is ultimately responsible for that. It is the same
institution we all are most afraid to banish. It is the institution whose
currency we are trained to need.
Among the many confused
enemies of money there is one group that fights with other theoretical
weapons than those used by its usual associates. These enemies of money
take their arguments from the prevailing theory of banking and propose
to cure all human ills by means of an "elastic credit system, automatically
adapted to the need for currency." It will surprise no one acquainted
with the unsatisfactory state of banking theory to find that scientific
criticism has not dealt with such proposals, as it should have done,
and that it has in fact been incapable of doing so - Mises in "The
Theory of Money and Credit," pp. 112, in the section, "The Enemies of
Money; Money Cranks."
Mises spent the next page or two doing
so - by summarizing the illegitimacy of this concept - and also devoted
several hundred pages to it along with the many other banking theories
of the day. The point is that many of today's popular generalist economic
doctrines have already been scientifically rejected at least 75 years
ago. It's just that most people are too lazy to know it. I hate that conclusion
just as much as you may, but it's true.
Ignorance is not bliss. On the contrary,
our leaders count on it.
Federal Reserve Chairman Greenspan is not
ignorant. He was, or is a student of von Mises', and it is more than likely
his mastery of the subject is what makes him such a worthy opponent to
gold, capitalism, and money. Who better to take charge of the agents of
inflation than one who knows why gold is consistently the better money?
A central bank is to capitalism what the
Trojan horse was to the mythological city of Troy. It's not a safety net,
but rather a tool for plunder. It's certainly not a gift, but then, neither
was the big wooden horse.
It's Value Not Quantity
In a final note on inflation I'd like to share with you an email that
I'd sent to a friend of mine asking our take on the (overall) debt issue
and its consequences for prices. I've edited it a little since sending
it originally:
I think most everyone perceives this debt
issue as ultimately deflationary due to the quantitative aspects of
currency and money that determines their values. As the credit cycle
busts the money supply is expected contract, etc. Only, the proper
phrase should be "currency supply," not money supply, because
applying the latter term to M1, M2, M3, etc, is what convinces us that
deflation is the natural consequence to an unbridled credit expansion,
as if the value of the so called money only depended on its supply.
If it did, the Fed would've been out of business long ago.
Thus, as these aggregates decrease in quantity
we are persuaded to believe that the 'money' has become scarcer. Some
of us contend that as the deflation becomes an increasing threat the
rate of growth in this 'money' supply will be forced to grow and eventually
result in hyperinflation as an unintended overreaction. We don't really
disagree with that scenario, but I think it will happen as the Fed becomes
increasingly desperate. Not about deflation, but about the value of
the currency its banks produce in profligate quantities.
Mises showed years ago that the monetary
aggregates were really only money substitutes. The value of those money
substitutes is what we believe will fall against most everything else,
and the supply of them will not matter because people will simply not
want them (remember all talk about supply and demand is relative to
each other) if they no longer qualify as money. An economy has certain
requirements of money, and at some point during any inflation in it
the substitute currency no longer does that job. The money is no good,
if you will.
Despite the fact that process is ultimately
set off by inflation it will matter increasingly less that the supply
increases or decreases except to the extent those changes sway or lag
a deterioration in the value of the currency or the demand for it relative
to whatever qualifies as real money. In the end, it's all about the
value of the dollar, not simply its supply, which is why I have become
so convinced the inflation breakdown is upon us - almost regardless
of what happens to money "supply."
The reason is that the value of the assets
that kept demand alive for the currency has been falling for 2 years,
finally uprooting the value of the currency itself. The next stage (after
the attempted manipulation to save the day) is panic. And not just by
the market. But predominantly in the highest offices of our land, when
they find that the value of the dollar lies outside their control and
when they are convinced it will devalue regardless of what they do.
At the moment I think they still believe they can do something to prevent
that outcome.
I believe the final decisions that will
be made will involve creative ways to increase the so-called money supply
for many reasons. But it will I think least involve desperation about
deflation at the time. It will probably just be simple blank desperation
- the kind that comes when you don't know what else can be done. In
other words, the kind that will result when they realize that even less
of the currency won't help it from becoming worth less.
Imagine the value of your own 'money' falling
and there is nothing you can do about it. I mean nothing. Assume you
have zero options except to control the supply of it, but you know that
even decreasing its supply will not support its value. You might find
that a large part of its utility was in how generally available it was
and that by decreasing its quantity you'll simply help it become less
desired, if anything.
That's what I believe the Fed will one
day feel.
So they will increase its supply, and increase
it, hoping that they can still come out ahead. At that point in the
monetary cycle you've got something that looks like 1920 Germany.
There is no end to the ways the money supply
can be persuaded to grow. It is true that we can't really push on a string.
But the string analogy doesn't apply in the new economy. The reason is
there are many strings and some of them are designed to pull along the
value of certain assets, and thus push (influence) the demand for new
currency.
The "money" supply is an important gauge
to the extent too much of it undermines the prevailing system of production,
for it's the efficacy of that system which ultimately determines demand
for the currency. The current state of the system of production is such
that it has been corrupted by too much currency. And more of it isn't
going to make it all better.
Productivity can't save a society or system
corrupted by easy money any more than it could've helped the city of Troy
defend itself against the quiet army hidden in the belly of the wooden
horse.
Ed Bugos
Editor - The GoldenBar Report
www.goldenbar.com
July 11, 2002
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