When you are younger you look to your parents or older siblings to have the answers to your questions, whether they be about the color of the sky or why bad things happen to good people (that is another entry). Then as you grow older you realize that your sibling does not know and was likely messing around with you on several topics. You realize your parents don't have all the answers either as you see things go wrong for them, either through a divorce, arguments, or even a speeding ticket. Then you enter school, college, and the universities. You think to yourself that these people must have the answers. It does not take long for you to figure out that what they know, they know because they have repeated the same course material for the last five years and that few of them really have a passion for their subject matter any longer. Then you enter the workplace and you think your boss or the suits in the administrative office have the answers. Before long they are slashing budgets because they estimated revenue and expenses incorrectly. Then they are releasing staff because they estimated the amount of work coming in wrong. You find out that they company has lost more money in the stock market in one week than it lost on operations in the last five years, yet the belt tightening continues. Obviously, mistakes were made and the people most responsible are not always held accountable or feel the pain that their mistakes cause others.
Politicians and those associated with them are, I feel, most prone to mistakes of judgement. This is because they are not always, "their own man". Some are beholden to special interests that donated piles of money to their (re)election campaigns. Other are beholden to power blocs within their own parties (read: Machine). Yet others are, gasp, beholden to their constituents and their conscience. In the end, they make mistakes because they are thinking, always, about how people will react to their actions rather then acting in accordance to the issue in front of them. Instead of "getting it right", they try to make people happy. The Republicans will come face first into this reality when they start looking into cutting entitlement programs. Many Americans do not realize or understand just how much activity in this country is underwritten or supported by Federal largess, but I digress.
Movies like to portray the government (the Feds) as an all-knowing, all-seeing, all-reaching entity that is always just around the corner (sometimes, they are...); but the reality is that they are admin heavy, and talent-lite. If corporations were run like the government they would never get a product to market, and if they did it would never sell. The idea of an American National Bank, or central bank, was discussed, cussed, and fought over by our Founders. Most did not want one as they felt that it would give the government too much power in the economy. They felt that the central government should not be able to print money at will, in fact they wanted our currency to be based on Silver (not gold). The arguments between Hamilton and Jefferson were legendary. Eventually, a central bank did get created in the early 19th century, only to be abolished again by a later president. Andrew Jackson brought it back, but for very different reasons. He did want to use its power to affect States and companies and his opponents. His banking system was quickly abolished again as the people woke up to the dangers that a central bank presented. Then, the rather evil (in my opinion) Woodrow Wilson resurrected the concept, but compartmentalized it from the government's control (in theory). This made the concept more palatable to the public and the politicians of the day. Of course, the Federal Reserve system was founded around the great bankers, banking family, and banking concerns of the day. Today, much of the Federal Reserve is actually owned by people who are not even American citizens, but that is, again, another blog entry.
So anyhow, the issuing of money, evaluating the amount of currency in circulation, a variety of economic indicators, tools, levers, and tricks needed to "control" an economy have been in place since the second decade of the 20th century and under the control of "The Federal Reserve System". Who works in places like these? Harvard educated economists, Yale, London, Berlin, you name it. Most have advanced degrees in Banking and Finance along with decades of experience in the field. You would think that these people would have the answers to what is troubling the world today? Heck, the Fed Chairman, Ben Bernanke wrote a thesis on the causes of the Great Depression.
When I read that the Federal Reserve is going to continue buying the nations' debt, my heart sank. This is no different than borrowing money from your wife to pay the bills. Money that your wife just happened to print off the computer down in the basement. If you do this in your family, you will go to jail. If you do this as a country you wreak havoc across the world.
The United States does not exist in isolation. The economies of the world, since WWII have become increasingly linked and interdependent. When the United States prints 2 trillion dollars, like it did from 2008-2009, you are going to have issues. The total amount of cash in the world at the time was something like $875 Billion. Big difference in those numbers. Lucky for us, most of that cash has not hit the public. It has stayed locked in the banking system as banks simply bought other banks and refinanced their operations (read: Re-capitalized). Inflation did jump, don't believe what you are hearing from the government. Just compare what you were paying for groceries and energy just last year and you will see it. This latest cash-dump by the Feds is a disaster in the making. This money will not stay contained within our banking system. The banks are loaded with cash (they just are not lending), and companies have easy access to credit if they need it. There simply is little to no expansion going on because of the uncertainty this President has injected into everything. No, this money is going to spill out into the public sector and go around the world. The numbers in the paper are saying that the Feds will "monetize", meaning "print" the debt for the next year or so. The figure they gave was like $600 billion. The real amount will be in the area of $2 trillion or more.
The United States is the largest economy in the world. When we start hosing around trillions of unsecured dollars (that is dollars with no value), we destabilize the world. The $600 billion dollar figure itself is larger than the economies of large blocs of nation-states. American dollars are going to slosh around the financial systems of the world and countries that are fighting inflation will suddenly lose the war. Other countries that are fighting over-development will be over-run with housing and building complexes that will never be used. Just look at what easy credit did to Spain and Greece and you will see my point (some study on your part will be required). Borrowers from around the world will have relatively strong currencies to borrow US dollars at rock bottom interest rates. This will drive building, spending, and consumption around the world, but will have little effect here.
The intent is to drive interest rates down so that people will start borrowing and spending again. Prime the pump so to say. The pump is full of money but now one wants the risk of higher taxes, higher regulatory expenses, and more Federal involvement in their lives. Plain and simple. It is not a credit problem, it is a reliability problem. All those people who cashed out of equities, bonds, stocks, and commodities have just had the value of their cash cut by 20% over the next 18 months because of this monetizing of our debt. China will go ape over this since they hold trillions of dollars of our debt in dollar denominations. This means that they just lost not only any interest payments due to them, but massive amounts of the original dollars they lent. Veeerrrrry bad investment.
This also means that no one will trust us any longer. The fact that we have to monetize our debt could mean one of two things (or both). One, there is no more money around the world to lend to someone that has not already been lent several times over (think about it), and two, no one is willing to risk investing in America because America changes the rules all the time to benefit itself at the expense of its investors (just as GM investors for their thoughts). We will no longer be a "safe place" to park their money.
So you would think that the suits in the various Federal Reserve Bank branches would know the basics of finance and banking. I mean I would think so. So why do something that the world is screaming at us to stop? What do they know that the huge brains at the Fed are overlooking?
I think they are desperate and grabbing at the last plant roots on the cliff before going over. The Federal Reserve system is a failure and always has been. The depression of 1920 was solved without the Fed and it was solved in less than 18 months. Ever heard of the "Roaring 20's".
No, the Feds and Mr. Bernanke are not infallible.
So wake up at the base of the Stoa, the lesson for now is complete. Perhaps I will discuss something less boring next time. Head home and be productive...your government demands it.
Live well.
--Zavost
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