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It has been a few weeks since I've written on the
subject of deflation, and in the meantime Mish has
had a couple of good articles (here and here) on deflation
that have answered just about every question anyone could ask on the subject.
But after mulling all this over, I've got another more fundamental question
that I'm looking for an answer to: Does the Fed really want to prevent
deflation?
As Mish points out, there
is near complete confidence that the Fed can and will be able to stop
deflation simply by "printing money." Under this inflationist view,
the Fed is obliged to stop deflation simply because it is in the best
interest of the system -- American consumers, businesses, and the government.
As the thinking goes, all of these entities are in so much debt that they can
simply never pay it all back. Therefore, not only the easy way out - but the
only possible way out - is through continued inflation of the currency - the
printing press solution. Bernanke shouted this
intention loud and clear in his "It" speech
that I discussed last time. As part of the
new and improved, Clear-speak program at the Fed, Bernie didn't mash or mince
words the way his predecessor Greenie did, and judging from what everyone
seems to think, the message has gotten through. Mission accomplished, Ben! The threat of
deflation has been dispelled and we've seen red hot inflation since 2003.
But deflationists argue that this inflation cannot
continue forever, and the trend will ultimately reverse. At which point, try
as it might, the Fed will be helpless to prevent or reverse deflation for a
variety of reasons. What the two camps share in common is the underlying
assumption that the Fed is terrified of deflation. But why should it be? Why
does everyone think the Fed wants to prevent deflation in the first place? The
common wisdom is that deflation would simply be too detrimental. But for
whom?
Ah, there is the rub.
A Brief History of the Fed
Nearly everyone thinks that the Federal Reserve and the Federal Government
are one and the same, but this is not the case. The Fed is a private,
for-profit banking cartel and the government is, well, the government. The
reason for the confusion is clear because it is, in fact, quite deliberate. The
formation of the Fed in 1913 was and continues to be one of the greatest Statue of Liberty plays in American
history. "The Federal Reserve is no more Federal than Federal
Express" says Michael Ruppert in America
From Freedom to Fascism. But separate as they may
be, these two powerful institutions are joined in an unholy matrimony - a
powerful marriage of convenience in which each party benefits tremendously.
Elected officials (i.e. the government) love to
spend money and hate to raise taxes. If anything, they want to spend more
money and levy fewer taxes. This is surely the path to reelection.
Bankers love to make money with as little risk as possible. Voilà! An opportunity is seen, and a partnership
is struck. The government hands over monetary responsibilities to the Fed,
the Fed loans money back to the government at interest and each party is
happy. The Fed reaps profits, the Government spends money thereby providing
the people with pork and programs, and taxes are not raised a dime. It is a
win, win, win situation, right? Right!
Except for the little matter of the Federal debt
which grows and grows and grows. Oh, and also the small matter of inflation
that eats away at the savings, buying power and quality of life of the
American people. The buying power of the dollar has dwindled so far since the
formation of the Fed in 1913 as to leave it practically worthless. So the
question of whether we will have hyperinflation is the wrong question - we've already had hyperinflation! It
takes a full dollar today to buy what a nickel
would have bought in 1913, according to the Fed's own
CPI calculator!
The Fed is not Stupid
This level of inflation cannot continue indefinitely without dire
consequences, and the Fed knows it. Anything us regular folks know about
inflation, deflation, fiat money and the gold standard (not because we
learned it in school, or heard it on the news but because we read it on the
internet!) - the Fed certainly already knows, too. Like
us, they too understand that every fiat currency throughout history has ended
the same way - in a hyperinflationary blowout, and
despite what Ben has said about the magic printing press, they want to avoid
such an outcome with the Dollar. Such an end is not good for anyone, least of
all them. The bank gets its power from the ability to issue dollars - it
would do them no good to kill their golden goose.
So what can they do?
In football, it's called the Statue of Liberty play.
For those of you who don't know football, this is a trick play designed to
fool the opposition. In it, the quarterback - the one who normally throws the
ball - instead hands it off to a running back. The running back, who normally
runs with the ball, instead motions to throw it. But just as he is getting
ready to throw, another player sneaks around from behind, grabs the ball, and
takes off running down the field! (The running back is left standing in a
pose like the Statue of Liberty - thus the name of the play.)
If executed properly, this is a masterful play of
deception. The defense is in a state of complete
disarray, having no idea what is going on. Is the other team passing? No -
running! No, passing! No! Running! What the hell is going on?! By this time
the play is over and the offensive team has scored a huge gain, capitalizing
on the opposition's confusion. Wikipedia's
definition of it adds: "The phrase has also come to represent any bit of
desperate trickery or misdirection outside of sports…" Though it
adds that the play is rarely used in professional leagues, but more often in
pee-wee or high school football because "...a professional player is
less likely to be tricked..."
Unfortunately, it has become all too easy to trick
the average American when it comes to the subject of money. Just watching the
first few minutes of Fiat Empire gives you a taste of how woefully unsophisticated
Americans are when it comes to the subject our money. Because of this woeful unsophistication, the Fed can talk relentlessly about the
war against inflation, yet all the while be the primary culprit behind inflation. Ron Paul, who serves on the
Congressional Banking Committee, has said many times that some members who
sit on the committee with him still
believe the dollar is backed by gold! It is not. But this
demonstrates just how effective the Statue of Liberty play that the Fed has
been running since its creation truly is. The Fed was born of deception in
1913 and yet most people still to this day solemnly take what it says at face
value.
In a PBS
interview in 2000, the late Milton Friedman was very clear about where the
blame lies for the first great depression:
We had repeated recessions over hundreds of years,
but what converted [this one] into a major depression was bad monetary
policy.
The Federal Reserve system had been
established to prevent what actually happened. It was set up to avoid a
situation in which you would have to close down banks, in which you would
have a banking crisis. And yet, under the Federal Reserve system, you had the
worst banking crisis in the history of the United States. There's no other
example I can think of, of a government measure which produced so clearly the
opposite of the results that were intended.
And what happened is that [the Federal Reserve]
followed policies which led to a decline in the quantity of money by a third.
For every $100 in paper money, in deposits, in cash, in currency, in
existence in 1929, by the time you got to 1933 there was only about $65, $66
left. And that extraordinary collapse in the banking system, with about a
third of the banks failing from beginning to end, with millions of people
having their savings essentially washed out, that decline was utterly
unnecessary. At all times, the
Federal Reserve had the power and the knowledge to have stopped that.
And there were people at the time who were all the time urging them to do
that.
So it was, in my opinion, clearly a mistake of
policy that led to the Great Depression. (all emphasis mine)
Mistake? Really? For whom? 75% of the
banks that failed were not part of the Federal Reserve System. Those
banking failures went a long way towards eliminated the Fed's competition. The
American people were devastated, but the Fed and the Government came out of
the Great Depression stronger than ever. Gold was outlawed, confiscated from
the American people and once it was safely in the hands of the government,
the official price was raised. The greatest power couple in world history
consolidated their gains.
Today's common wisdom is that the Fed didn't know
what it was doing back in the 30's and ineptly caused deflation and the
Depression. But now - thank God -- we know so much more and that will never
happen again! Lest you have any doubt, Bernanke
spelled it out for us loud and clear in his tribute to
Milton Friedman on his 90th birthday. "Regarding the Great
Depression," Bernanke said, addressing
Friedman. "You're right, we (the Federal
Reserve) did it. We're very sorry. But thanks to you, we won't do it
again."
Great job, Ben! A command performance, complete with
an admission of guilt, a show of contrition and a loud proclamation that it
won't happen again. You may as well have used a megaphone. And followed up,
no less with a rousing encore in the form of the now infamous printing press
speech just two weeks later.
But after all we know about the Fed, you're telling
me that we're supposed to take this dog and pony show at face value? Ha! As
the old saying goes, fool me
once, shame on you...
Thought Exercise: Now Pretend You're the Bank
Take a look at this quote, which can be found all
over the internet:
If the American people ever allow private banks to
control the issuance of their currency, first by inflation and then by
deflation, the banks and corporations that will grow up around them will
deprive the people of all their property until their children will wake up
homeless on the continent their fathers conquered.
This quote is attributed to Thomas Jefferson, though
it is most certainly apocryphal. However I use it because it is instructive
in many ways. First, don't believe anything just because you read it, even if
you've read it many times. You can find this quote on a hundred web pages
attributed to Jefferson. Second, even though
Jefferson didn't say it, there is still
wisdom in whoever did: "First by inflation, and then by
deflation..."
As I already pointed out, we've already had the inflation. Most
everyone is in debt up to his eyeballs, and the dollar has been inflated to
within 5% of its life. There's not much more room to go before it is
completely dead. These are hard times for many individuals, corporations, and the government itself. Ben
even told the government so recently -- that this is the "calm before
the financial storm." (more on that next time)
But pretend for a moment that YOU are the bank, and
all these entities owe YOU the money. When you look at the problem from this
point of view, something quite amazing happens. Why, there is no problem at
all! Those poor consumers, businesses and the Federal government have all
gone and gotten themselves into debt, haven't they? Well now they are just
going to have to pay it all back. End of story. What is the problem now?
As the Bank, you're power comes from 1) your
monopoly on the issuance of legal tender, 2) your ability to create it out of
thin air and 3) your willingness to loan it out and charge interest on it. In
fact, deflation wouldn't be such a bad thing at all, since it increases the
value the currency you have a monopoly on creating. During deflation it is
best to have a mountain of cash and a positive cash flow to ride it out. The
only problem is if folks start defaulting on you. But that has already been taken
care of with the Bankruptcy Reform Act of 2005. That law was
written by the credit card companies, i.e. the banks, i.e
Federal Reserve members, to keep working people on a treadmill of perpetual
debt.
This reminds me of the stories of economic colonialism
John Perkins told in his book, Confessions
of an Economic Hit Man. First the World Bank would go to some
natural-resource-rich third world country and offer it a fat loan to
"develop" its resources. The loan would be bigger than necessary,
and certainly more than the country could ever afford to pay back - but the
bank would say, "with your new refinery/mine/port/whatever, you'll have
enough revenue to pay it back." When the country eventually did default,
the IMF would sweep in with "fiscal austerity measures" for the
people and the government. All the revenue from the new development would be
siphoned to the banks in order to pay off the huge loan. Tsk
tsk.
Sound familiar? Anyone who bought a house in the
last five years knows that mortgage bankers rarely advocated financial
prudence when buying a house, but instead pushed the idea to "buy as
much house as you can (or can't) afford!" And now with prices coming
down, many of those buyers are stuck right where those third world countries
got stuck. Looks like a fiscal austerity plan is coming down the pike for
many consumers so they can stay on the financial treadmill while the
productive fruits their life - their labor
- are siphoned off by the bank. Because the banks still know that as
much money as they make trading and manipulating paper and financial
"products," there is still only one true source of wealth, and that
is human labor.
No, the Fed is not stupid. Not stupid at all. There
will always be booms and busts, and the best way to position oneself is to take advantage of both sides of the trade. Or
as one responder to my last article put
it so eloquently:
I am fascinated by the common perception that the
Federal Reserve is a proven non-stop inflation machine. Inherently, the
Federal Reserve uses inflation and deflation to whipsaw the average bystander
out of their savings. I don't see how one economic machination is more favored over the other when the goal is to ensure that
the public's savings ends up in the accounts of the shareholders of the
Federal Reserve System.
I couldn't have said it better myself. Don't count
deflation out just yet.
By :
Michael A. Nystrom
Editor, Bull not Bull
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