source: Tyler Durden
Yesterday we presented Dylan Grice's thoughts on why economists and their opinions should be summarily dismissed as nothing but mere noise on the steep downward slope of a series of failed "authoritarian" policy decisions, which seek to validate one false choice after another, by presenting a hypothetical and fallacious counter-outcome as a certain reality (just consider the "apocalypse" we would be living in if Goldman had failed: of course, there is no justification for this except for what Bernanke et al claim is the one true alternative reality based on nothing but their own conflicted interests), which does nothing but discredit the "science" of economics more and more with each passing day. Yet in the grand scheme of things economists are merely pawns in the hands of the landed elite: the financial system set only on perpetuating the status quo of capital and wealth reallocation from the lower classes onto itself (until there is eventually nothing left), and a government whose only prerogative is to usurp ever more control and authority, until the entire system is one of central planning in economics, social affairs, religion, and every aspect of people's daily lives, all the while pretending to operate under the guise of a democracy, which, at least in America, died long ago. Today, we present the observations of Bill Buckler from his Privateer report, which picks up where Grice left off and demonstrates why one must not only never rely on economists but on form of "authority" in general. Putting it all together is Buckler's close analysis at the glue that makes it all possible: the Federal Reserve, also known as the fourth branch of government, and the entity that provides the endless funding for all of the system's failed policies. As Buckler points out, any reversion to a system that follows the constitutional precepts of the founding fathers will need to do away with the Fed first and foremost, as "the issue is not the political will of the US government to go on spending beyond its means, it is the political will of the rest of the world to go on accepting the unworkable global system indefinitely. They will not do it." In other words, in the step leading up to the last and most important defection in the global prisoner's dilemma, it is up to the American people to take the necessary step to restore the systemic balance (which will happen regardless eventually, only in a far more violent fashion). Everything else that happens on a day to day basis is completely irrelevant.
From Bill Buckler's The Privateer report, Number 661.
NEVER RELY ON “AUTHORITIES”
On the evening of November 23, 1942, Adolf Hitler was deep in “consultation” with the chief of staff of the Luftwaffe (the German air force) on the possibility of supplying the surrounded German 6th army in Stalingrad by air. On hearing of this consultation, Reichsmarschall Goering, the head of the Luftwaffe, promptly contacted Hitler and assured him that the air force could maintain the 6th army for as long as necessary.
All of Goering’s officers on the spot near Stalingrad knew that this was absolutely impossible. So did Goering’s chief of staff. So did Goering. And so did Hitler. Goering had already been proven wrong a little over a year earlier when he insisted that his Luftwaffe could clear the way for an
invasion of Britain. That was not even considered. What WAS considered was that no matter how fanciful or how contradictory to the FACTS on the ground, a method had been found to prolong the illusion that the war could still be won. And besides, how would any of them know that it could not and would not work if they didn’t try it?
They did try it. It didn’t work. The fate of the 6th army in Stalingrad is history. So is the fate of the Nazi regime.
The March Of Folly:
The American historian Barbara Tuchman published a book with that title in 1984. She lists four kinds of what she calls “misgovernment”. There is misgovernment by tyranny or oppression, by excessive ambition, by incompetence or decadence or both, and finally by folly or perversity. The author concentrates on government policies afflicted by folly or perversity, a rich field of enquiry stretching back to the dawn of history. Mrs Tuchman makes the point that folly is “independent of era or locality, is timeless and universal ...and is unrelated to type of regime. Monarchy, oligarchy or democracy produce it equally.”
She has one further principle for the study of government folly. “...The policy in question should be that of a group, not an individual ruler, and should persist beyond any one political lifetime.” That brings us into the realm of political economy, more precisely the dogged clinging to the central role of government in the economy, and particularly in the financial system upon which the economy rests. That policy has been clung to for far more than a political lifetime. It has been clung to at the highest levels of government for almost a century.
The Fed’s March Of Folly:
This road has been taken ever since the Fed was created in 1913. Specifically, the “final frontier” was entered with the FOMC’s decision on August 10. It’s all downhill from there.
Politics and Economics:
The present global monetary system (on life support as it is) remains the one that was hammered out in Bretton Woods in 1944 with the US Dollar as the world’s SOLE reserve currency. As long as this remains the case, the follies of the US government will remain the most important in the world and the follies of their central bank - the Federal Reserve - will remain paramount. By Barbara Tuchman’s criteria, a folly worth examining must “persist beyond any one political lifetime”. In June this year, Senator Robert Byrd, the longest serving politician in US history, passed away at the age of 92. Senator Byrd entered the Congress in 1953. Bretton Woods was in 1944. The Fed was created in 1913.
The other point which needs to be made concerns what could be called the dynastic nature of the Fed. Mr Bernanke is the fourteenth Chairman since the creation of the Fed almost 97 years ago. That’s not many - over the same period there have been seventeen US Presidents. Here we get down to the divide between the political and the economic aspect of political governance.
The Politics Of It All:
There was a time when a president and his party could be and were voted out of office because the people preferred the policies offered by the opposition. That ended in the 1930s, when the “criteria” became which party could almost literally “buy” the majority of votes by directing the redistribution of funds where it would do them the most good. That became entrenched by the late 1960s. Since then, the “platforms” of the major contending parties have been all but indistinguishable. Most US elections have been decided either on the “lesser of two evils” principle or on disgust with the incumbents.
Both sides of US politics have been equally assiduous in their major task as they see it. That task is to safeguard and increase (as far as they are able) the involvement of government in as many aspects of the lives of the people as possible. That is why the euphemism for modern politicians, especially those in the US Congress, is “lawmakers”. It is only VERY recently that politicians from either party have given serious consideration to the problem of paying for it all or whether they CAN pay for it all. For most of the past century, they have not concerned themselves with that. That is what the Federal Reserve is for.
The Economics Of It All:
In essence, the Fed (like any central bank) is the “fourth arm of government”. The executive branch makes policy. The legislative branch translates it into legislation. The judicial branch is supposed to ensure that legislation is permissible under the Constitution - the law which GOVERNMENT must obey. Originally, the system was set up to ensure a division of power between the branches. A “government bank” or “central bank” was not deemed necessary because the powers of government were thought to be limited by the Constitution to the extent where “financing” these operations would not be necessary. They weren’t (except for the post Revolutionary and Civil War periods) for well over a century. But by the turn of the twentieth century, the US government, like so many governments before them, decided that their reach should extend beyond the borders of the nation they governed. This promised to be expensive.
The Fed was initially set up under the pretense that an institution was necessary to provide an “elastic currency” to meet the needs of business. An elastic currency was deemed necessary alright. But it wasn’t to meet the needs of business, it was to meet the needs of government. And that is what the Fed has been doing ever since. As the powers of government expanded and as the COST of government soared, the Fed was always there, the banker of last resort, the branch of government which would “pay” for whatever government chose to do. The government needs the Fed as a guaranteed buyer of its debt.
It is obvious to anyone who takes the time to EXAMINE the situation that the Fed is the fourth and specifically, the economic/financial branch of the US government. It should be equally obvious that this marriage of convenience has been progressively impoverishing the American people. Apparently, it isn’t.
When A Folly Comes Out Of The Closet:
For many decades, the “co-operation” between the US government with their Treasury requirements and the Fed has been taken for granted. Whole systems of “economics” (notably the one popularised by J.M. Keynes in the mid 1930s) have grown up around the practices of “financing” the ever increasing “needs” of government. The terms “inflation” and “deflation” have been moved from defining movements in the amount of money being created to movements in the prices influenced by this manipulation. A vast pile of books has been written and post-graduate university courses designed around the alleged difference between debt incurred by government and debt incurred by the dwindling “private sector”.
Through it all, the quality of the money has declined in lock step with the increase in the amount of money (of all descriptions) in circulation. There have been two defining moments in the entire process. The first came in 1933-34 when Americans were prohibited by law from owning Gold. The second came in 1971 when the final constraints on government fiscal discipline were removed as the final promise to redeem the US Dollar in Gold was jettisoned. On August 15, 1971, the folly came out of the closet. That lasted a decade, during which funded government debt rose by 150 percent. Then came a quarter century of “serial” debt bubbles which lasted until 2007. Over that period, government debt grew by 1000 percent. With the onset of the GFC in 2007 and the near death financial experience of 2008, the closet door opened again. And this time, in stark contrast to the end of the 1970s, it CANNOT be closed.
Shutting The Door On An Empty Room:
In the era of “stagflation” (the 1970s), there was actually an extensive debate about the nature of the money which was fuelling an obviously dysfunctional system. The main reason for this was that the concept of “risk” was still one which was current in investment markets. The steady increase of interest rates, which accelerated as the 1970s were coming to a close, was a contributing factor. So was the cost of living - which was accelerating along with interest rates. So was the “price” of Gold, which now had a “price” since it was no longer “fixed” to the US Dollar. As the 1970s ended, the price of Gold in US Dollars accelerated along with US interest rates. This was not and is not supposed to happen. High interest rates are said to be “bad” for Gold. They certainly weren’t in the last three years of the 1970s.
The door was slammed shut by Chairman Volcker in late 1979 when he took his hands off the Fed’s interest rate controlling mechanisms. US rates skyrocketed, “stagflation” turned into (deep) “recession”, Gold soared and then slumped. And, finally, the world was lured back into the paper US Dollar.
The US government had jettisoned the concept of “risk” as far as their borrowing “requirements” were concerned in the aftermath of the 1929 stock market crash. They did so just as the ensuing depression elevated risk aversion in the private US economy to a level it had never seen before and has not (yet) seen since. It took 50 years, the abandonment of Gold and an attempt to combine a welfare state with a war for the fear of “risk” to resurface - in the 1970s. It took interest rates which reflected that fear of risk in the MARKET to get it to subside. It did, in the early 1980s. Then came the era of serial credit “bubbles”.
Blowing The Door Off Its Hinges:
The Global Financial Crisis (GFC), and particularly the “authorities’” reaction to it, has done more than just open the door again to the money machinations which are built into the foundation of modern government. It has laid that entire mechanism bare for anyone to see. But look at what has happened during most of the three decades since the beginning of the “Reagan Bull” in 1982. Twenty-five years of recurrent market booms anaesthetised an entire generation. In the process, the obvious truths that savings must precede investment and that wealth is not a function of the creation of money were buried beneath an avalanche of transfer payments and “bull” (in BOTH senses of the word) markets.
It is hard to awaken from such a long period under the influence of “authorities”. These things take time.
The Mechanism Itself:
To illustrate how pervasive the mechanism is and how it has long since been taken for granted, only one fact is necessary. Since 1931, there have been a grand total of SIX financial years when the funded debt of the US Treasury did not increase. These were fiscal 1947, 1948, 1951, 1956, 1957 and 1960. The US federal government has not run a budget surplus for 50 years. Under the original theory concocted by the “authorities” and elevated to economic holy writ by Mr Keynes, governments can compensate for any slowdown in the economy by spending more than they tax. Then, when the magic bullet of government “stimulus” has done its work, they can pull in their horns and diminish their debt. Governments “can” do that, but the US government hasn’t actually done it for 50 years. The Clinton “surpluses” of the late 1990s are a myth, of course, concocted by applying the “surplus” generated by social security funds to the government’s bottom line. There are no social security “funds”, the entire pile is composed of non-marketable Treasury IOUs which can only be serviced and/or repaid by the productive capacity of this and future generations.
For many years, we here at The Privateer (and many others) have been explaining the mechanism by which the production of real wealth has progressively been taken over by the production of “purchasing power”. The onset of the GFC exposed these mechanisms to public scrutiny to an extent not seen since the 1970s, or before that, the 1930s. The GFC itself, especially in nations (such as the US) where its impact has been most sorely felt, has greatly increased two things so far. One is the ever growing unease and indignation of the public. The other is the lengths to which the “authorities” will go to keep the REAL reasons for the present malaise away from pubic view and, above all, from public understanding.
The first answer to that question was given on August 10 when the FOMC announced that the Fed would NOT be shrinking its balance sheet as it has promised to do ever since it massively expanded it almost two years ago. On top of that, the FOMC let it be known that the Fed would resuscitate its quantitative easing QE) program of directly monetising Treasury debt.
On August 27, Ben Bernanke expanded on the Fed’s future plans at his Fed symposium speech at Jackson Hole, Wyoming. Mr Bernanke began by startling his listeners, telling them that the Fed would do “all that it can” to rekindle confidence in the “mechanism” (financial system). His listeners, both inside and outside the conference room, had long since assumed that there is nothing that the Fed can’t do. The Fed’s “omnipotence” is a foundation stone in the entire edifice of trust in the “authorities”. Nothing would rock this more than a revelation that there ARE things the Fed can’t do.
To stave this off, Mr Bernanke listed three things that the Fed can still do. It can buy “more” long-term securities. It can reduce the interest rate it charges on excess reserves to get the banks to lend them instead of storing them with the Fed. And finally, it can “modify the Committee’s (the FOMCs) communication”. Let’s take the first two. When the FOMC announced that the Fed WAS going to buy more long-term securities on August 10, they admitted that the first foray into QE hadn’t worked. When Mr Bernanke talked about reducing rates charged on Fed reserves, he neglected to mention that existing rates have been at 0.25 percent ever since the Lehman scare of 2008.
The third future task for the Fed , “modifying communication”, is one known by “authorities” in all ages and times. Today, when they speak about doing it themselves they call it “public relations” or, less politely, “spin”. When they speak about other authorities doing it, they call it “propaganda”, or more impolitely “disinformation” or still more impolitely “lies”.
The Fed’s real message was delivered on September 1 by departing White House chief economist Christina Romer. She said that the US needed to find the “political will” for more economic stimulus.
The Only “Solution” Left?:
For months now, Nobel prize winning economists, eminent educators, individuals in charge of $US TRILLIONS of investment “capital”, and political “authorities” of all sizes, shapes and descriptions have been unanimous in one message. The “system” can be fixed easily. We have discovered that we didn’t print enough money. No problem. Just print more, preferably MUCH more!
Here’s how Christina Romer put it during her speech to the National Press Club: “The only sure-fire ways for policymakers to substantially increase aggregate demand in the short run are for the government to spend more and tax less. ...I desperately hope that policymakers on both sides of the aisle will find a way to finish the job of economic recovery”.
Ms Romer, one of the chief architects of President Obama’s 2009 stimulus package, has resigned her position as the chair of the President’s Council of Economic Advisors, effective on September 3. Once an “authority”, always an “authority” - she is returning to “academe” by returning to her old job as an economics professor at the University of California, Berkeley. While she was there, she was engaged in research on fiscal and monetary policy from the 1930s to the present. Mr Bernanke would approve.
The Political Will:
Yahoo in the US described the speech as a plea that the US find the “political will” for further stimulus. This is in itself very revealing indeed, especially given Ms Romer’s contention that the only way to “fix” the problem is for the US to “spend more and tax less”. Politically, this has been the only solution resorted to in the US for at least half a century. What is never mentioned by all those who so glibly push this solution to the problem is the reason why the US has been able to get away with it for so long.
To do so would risk moving the debate to the area where the “authorities” dare not go. That is the area of the nature of the global financial system and, even more fundamentally, the nature of the “money” which underpins it. When a government spends more and taxes less, they go ever more heavily into debt. For a “normal” government, this process can only continue until the obvious risk factor shows up in the interest rates they have to pay on their borrowings. At that point, they have no choice but to pull in their horns.
The US government is different because the US Dollar is the world’s reserve. Because it is the world’s reserve, it has a global demand as the underpinning for financial systems everywhere. Yes, it is true that non US central banks are holding increasing amounts of other currencies in their reserves. But the basic system as hammered out at Bretton Woods in 1944 has NOT been altered. The US Dollar remains the world’s only official reserve currency. That means that the US is the only country that can buy goods with debt paper created by their Treasury and payable in “money” created by their central bank.
You have likely read this before - in The Privateer and in many other places. No matter how many times it is repeated, this remains the most important FACT which is never discussed by “authorities”. The issue is not the political will of the US government to go on spending beyond its means, it is the political will of the rest of the world to go on accepting the unworkable global system indefinitely. They will not do it.
A Vested Interest In AUTHORITY:
From time immemorial, the “authorities” in charge of political and economic policy in a nation have clung to “remedies” that would not work - even though they KNEW they would not work. We started this essay with one example. There are countless more. Once you understand this, you will know that “authority” is NEVER to be trusted, no matter how many adhere to it or how long it seems to have “worked”. The only viable alternative to more authority is LESS authority, and therefore more freedom.
Today, no “authority” in the world wants to discuss that. Least of all the ones in the USA.