by Morgan Reynolds by Morgan Reynolds
It was Sunday morning and I was trying to digest some of the Arkansas Democrat Gazette along with my coffee and the best pork sausage in the state. Turning to the business page the headline read, "New Fed chief to start amid growing Asian sway." The article, courtesy of Marilyn Geewax and the Cox News Service, was laugh-out-loud funny, better than Jay Leno or David Letterman stand-up. OK, I exaggerate but an Austrian economist sometimes finds amusement in strange places, even the business section.
Cox News delivers the 10 Fed lines below but they do not appear any different from those of other scribes.
- "The Fed's goal is to keep the economy and prices stable." I'm torn: laugh or cry? This is the biggest lie of all. The Fed was hatched to supply an "elastic currency" for the nation in the language of a bygone era, that is, to coordinate expansion of cheap bank credit on behalf of Wall Street and bankers. Overall, it's done a bang-up job of pushing new dope through the banking system, and America has suffered the effects via price inflation, boom-bust cycles and a growing mountain of debt. The once-good-as-gold dollar has slumped to 4–5% of its purchasing power since the politicians pushed a shiny new central bank under America's Christmas tree that long-ago December in 1913.
- "On Greenspan's watch, the United States experienced only two relatively mild recessions…" True, but deferring or moderating corrections means building up to a bigger, better future crisis. The bust is curative. The market seeks quick liquidation of investments and companies exposed as uneconomic during the downturn. The bust occurs because the Fed's credit boom misled entrepreneurs and investors on which projects were viable and which not. Bail-outs, like those in Japan and elsewhere, delay restoration of healthy conditions for sound expansion. The current U.S. recovery seems distorted and artificial because the excesses of the previous credit boom were never wrung out. When Bernanke fights the market by injecting newly created credit in the next financial crisis, any success will sustain unsound debt, weak debtors, unsound companies and malinvestments, thereby "moderating" but prolonging depression. It is the opposite of "putting it behind us." Naturally it would be far better if recession therapy was never necessary, but that would require the Fed to refrain from credit expansion and fueling booms. Not gonna happen.
- "…even though [the United States] was hit by a number of shocks, such as the 1987 stock market crash, two wars in the Persian Gulf, the 1997 Asian financial crisis, the bursting of the stock bubble in 2000 and terrorist attacks in 2001." These so-called shocks were not purely exogenous but consequences of the Fed and its lender-of-last-resort status. Credit inflation inflates asset prices and the self-correcting market tries to bring them back into line with reality, as witnessed in 1987 and 2000. The same medicine awaits housing prices. Wars would be rare if governments did not have access to fresh, new money. Asian financial crises could not be independent of the Fed in a dollar-based world, awash in liquidity and debt, with faith in the maestro and his magic checkbook. Risk-taking, yes! Too big to fail, yes! And terrorist attacks in 2001? Whether an inside or outside job, they immediately became the pretext for military invasions and enormous government expansion, and that leads back to the Fed and its enabling operation.
- "Bernanke's job will be to keep the good times rolling." Marilyn stumbled into some truth here. Before B.S. Bernanke finishes with us, we may pine for Greenspan's "tight-money" policies. Heck, gold has risen $100 an ounce since Cheney's front man announced Bernanke's nomination. The new prince of paper says he fears falling money prices as the biggest risk of all, so he stands ready with "an invention called the printing press" to combat this evil. He promises faster inflation in response to the next financial crisis, supplying the "liquidity" the system needs. "Helicopter Ben" has even promised to drop money from the air, but he won't. Insiders must get it first.
- "Core inflation – excluding volatile food and energy prices – has been rising a moderate 2.2 percent rate." Ok, don't eat, travel, heat or cool your house and things aren't so bad. Last year the consumer price index rose 3.7 percent and somehow I don't believe government intentionally overstated price inflation. Bernanke reassures us that he wants to set a price inflation target of 2 percent annually. So what? I have a 190-pound weight target and I haven't been close in three decades.
- "In theory, Bernanke should be able to keep the economy moving along at a healthy pace the same way Fed chairmen always have, by adjusting short-term interest rates up or down." Why should a central planning board set vital prices like interest rates instead of the market? If this is so wise, government boards should set all prices. Whatever level the Fed chooses for its so-called Fed funds rate (no politics here, of course), it must play around with the supply of credit to make it happen. That's the heart of this destructive beast.
- "…earlier this month, China's state media reported that the country's foreign currency reserves rose by more than one-third last year to a record $819 billion." Two things here. State media is an honest term. Let's call Cox News and others in our faux free press "quasi-state" or "wanna-be-state" media. On China's continued absorption of greenbacks, what cannot be sustained will not be sustained. Stand by for dollar implosion, especially if Iran or another oil-rich nation begins to trade oil for Euros. That decision brought Saddam a U.S. invasion. International demand for oil-backed dollars ("petrodollar") would plunge if some oil were denominated in an alternative medium of exchange. Among other effects of a dollar collapse, Americans would have to earn all their imports through exports of real goods and services. What a pain!
- "In the short term, it's good for U.S. taxpayers that the country can borrow money at a low cost." The more money government borrows and spends, the bigger its debt, the better off taxpayers are? Ah, you lost me there.
- "And the low interest rates have been good for the economy." Have you asked retirees and savers if they agree? Regardless, artificial prices are bad because they mislead everybody and distort production and consumption decisions.
- "…Bernanke was asked about the massive accumulation of U.S. securities in Asia banks. Whether this is good or bad, he answered, it is u2018a global phenomenon created by global forces' that U.S. policy makers cannot dramatically alter anytime soon." The dollar-based world money system crumbles due to U.S. government profligacy and Fed mismanagement and Bernanke blames "global forces." Fed Speak lives!
"Money," said playwright and Fabian socialist George Bernard Shaw, "indeed is the most important thing in the world." Politicians and the Fed do not want the public to understand money and the Cox News Service obliges. But it boils down to a simple question: Where would you rather do business? In a country with paper money issued by Greenspan or Bernanke, backed by nothing, or a country with no central bank where money is silver and gold coins, silver and gold warehouse receipts 100% redeemable in silver and gold, and electronic digits 100% redeemable in silver and gold? That should not be a tough question to answer.
Morgan Reynolds, Ph.D. [send him mail], is professor emeritus at Texas A&M University and former director of the Criminal Justice Center at the National Center for Policy Analysis headquartered in Dallas, TX. He served as chief economist for the US Department of Labor during 2001–2, George W. Bush’s first term.