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The Federal Reserve: You Just Can't Make This Stuff Up

Friday, October 17, 2014

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Oh. My. God.  You just can't make this stuff up.

Fed Chair Janet Yellen just said she was "greatly concerned" about income inequality, and the inability of people to advance economically because it is harder to get an education and start a business.

The truth of this is depressing enough.  What is depressing in the extreme is to hear no less than the Chair of the Federal Reserve sit there and wring her hands, wondering why.  Let's review:

In her speech, Yellen did not attempt to answer what she called the 'difficult questions of how best to fairly and justly promote equal opportunity.'

Uh, madam Chair, I can answer that supposedly difficult question with one word.


When the money supply is constrained by a hard asset like gold held in reserve by the Treasury, a fundamental equality between the creditor and debtor is enforced by nature and mathematics.  The creditor, because they know no one will be able to come to their rescue by printing more money, is forced to actually assume risk when lending.  The debtor is forced to think twice before borrowing because they cannot count on the value of their debt going down as more money is printed.  What this does is force a preference for actual production in the allocation of the nation's money supply.  (Credit is part of the money supply - not just the currency in our wallets.)

Right now the nation's money supply is allocated to politically preferred uses (government debt).  Make no mistake, this is true under both parties.  Under Republicans, defense programs metastasize into bureaucracies looking for ways to spend money at the end of each fiscal year.  Under Democrats it is social programs scurrying about throwing money around come "use-it-or-lose-it" time.  Either way, this is allocation toward political preferences, not towards the improvement of products and services or to the delivery of those products and services - also known as wealth creation.

The money supply is also allocated to speculative uses, also known as the Blackjack table of the commodities markets where hedge funds use Big Data to count the cards and place their bets when the count is in their favor.  Prices of end user products (like gasoline) spike higher and faster as the markets register the false demand of these bets.  The purchasing power of ordinary people in terms of the things produced with these commodities is stolen and then traded on the options market as a discount to the spot price of the commodity being contracted for.

Kinda hard to get your head wrapped around that, but at the end of the day it's called theft - pretty sophisticated theft, but theft just the same.

Consider a possible choice: I have figured out how to make a better mousetrap.  I have done my research and figure I can borrow some money, build a factory, acquire the raw materials, build my better mousetrap and make about a 5-10 percent margin.  That margin is real wealth because it results from actually improving something - the mousetrap.  But why would I bother when I can borrow that same money essentially for free and drop it in a hedge fund and make 20% speculating on oil?  That 20%, though, comes at the cost of the purchasing power of ordinary people in terms of things like a tank of gasoline.  I am getting richer stealing that purchasing power than I would otherwise get actually producing/improving things in the real economy.

And our dear Fed Chair sits there and wonders why income inequality is getting worse, kids can't go to college and small businesses cannot get loans?  As my kids would say: Really?


As she leads the Fed in their money printing enterprise - and now they're talking about keeping it up because of the market's recent volatility - she actually sits there and wonders why college is out of reach for more and more people?  Home prices skyrocketed before that bubble burst in 2008 because excess credit - made possible by an unrestrained money supply - forced lending standards down.  There is over $1T in student loans outstanding - borrowed by banks for free, lent out at 6-odd percent, guaranteed by tax-payers and not dischargeable in bankruptcy - and Yellen sits there and wonders why tuition has skyrocketed?


The Federal Reserve has turned the temple of the free market into a den of thieves.


  1. This is simply ridiculous. In another column, you complain about deflation as eroding confidence in money itself, and correctly note the corrosive effect of the deflationary spiral on the economy as everyone hoards currency.

    Don't you see that this is exactly what would happen with a gold standard? The supply of gold doesn't expand at the same rate as the economy, which means that it's either going to be inflationary or deflationary based on how much is being produced.

    There's a good reason that no modern economy uses gold as its currency.

  2. It is only ridiculous if 1) by 'gold standard' I mean 'gold exchange standard' - which I don't; and 2) if the price of gold were set at a ridiculously low level vis-a-vis the base money supply - which is how we got the Great Depression.

    The reason no modern economy uses gold is because it restrains the politicians' ability to make promises which cannot otherwise be kept without ever increasing the public debt.

    As I have written here: it is possible to use our oil and gas reserves to execute an equity for debt swap between the Treasury and the Fed to soak up some of the excess money without destroying the bond market. By securitizing royalty revenue, we can effectively monitize oil/gas reserves over five years and use that info to then calibrate the price of gold and silver such that we do not execssively deflate the money supply.


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