Federal Reserve vs. Widows
by Gary North: The
Needless Lack of Self-Confidence of Most Home-Schooling Mothers
will not get the deal my mother has. My father started working for
the Federal government in 1951 at the age of 33. He had served in
the military from 194145. He retired at age 53 in 1971. For
the next 38 years, he received a pension that covered all of his
expenses. It was indexed to price inflation. He lived in middle-class
comfort. He also had a unique medical care plan: 100% of all expenses.
My mother is 93. She receives 55% of his pension and full medical
coverage. She lives in a comfortable retirement facility.
this is available to the vast majority of Americans. There are a
few Federal pension programs like this, at least for senior officials
and high-ranking officers in the military. The question is: Will
these pension obligations be fulfilled? There are good reasons to
believe that they will not be.
millions of retired bureaucrats living on pensions issued by state
and local governments. It is becoming clear that most of the obligations
will not be met. The governments will experience tax revolts from
voters who will find it easy to elect officials who will formally
take the governments into bankruptcy protection. The public employees'
union lawyers will fight this. The judges will fight this. But the
reality is this: democracy will triumph. Tomorrow's voters will
decide to stiff yesterday's employees. That's the easy way to get
rid of $3 trillion in unfunded liabilities. Several states are already
in deep trouble. If you want to see how bad it is in your state,
use the interactive
ON A STRING
Reserve System has begun another round of monetary inflation, as
we know. This "quantitative easing" program is officially supposed
to hold down U.S. Treasury bond rates. The opposite has happened.
Department's own chart tells all!
policy is based on the idea that the free market cannot be trusted.
This means that the decisions of lenders and borrowers cannot be
trusted. The FED exists because the bankers who run the largest
commercial banks want to be relieved of any threat of bankruptcy
due to a refusal of large institutional depositors to roll over
short-term deposits at their banks. The FDIC insures the little
people's deposits. It does not insure the institutional deposits.
The Federal Reserve System does that unofficially. This was
why the FED intervened in October 2008 to swap its liquid Treasury
bills for illiquid, now-unmarketable IOUs held by the top ten banks.
It supplied no such swaps for the other 8,000 or so. It bailed out
Fannie Mae and Freddie Mac, recently nationalized by Hank Paulson.
FED is monetizing Treasury bonds. The FED's holdings of all sorts
of debt has turned up since early November. This is not confined
So, what we
have here is not what the FED had in mind. It has increased the
monetary base in order to buy government debt, all in the name of
creating jobs. Traditionally, economists have offered this explanation
of cause and effect. The Federal Open Market Committee buys Treasury
debt. This lowers the rate of interest: greater supply of money
flowing to the Federal government, which spends it, thereby increasing
employment. Also, this reduction of rates is supposedly followed
by reduced rates in the market for private bonds. This leads to
greater borrowing by businesses, which leads to greater employment.
bond rates are rising.
The FED is
trapped. Its traditional policy of increasing the monetary base
is not working as expected, i.e., as Keynesian textbooks predict
that it will. It is behaving as if lenders are expecting rising
price inflation, and therefore refuse to lend the government money
unless they are compensated for a falling dollar by rising rates.
is not yet experiencing rising prices because commercial banks refuse
to lend. The money is not flowing into the hands of entrepreneurs.
Businesses are still either refusing to borrow or else are unable
to persuade bankers to lend.
So, the FED
gets the benefit of not being blamed for price inflation. It can
continue its program of monetary inflation. But the number of people
at work today is no greater than in 1999. Bernanke
never mentions this fact.
If the FED
can inflate the monetary base without raising price inflation, it
will . . . and is.
can borrow $1.5 trillion a year for the foreseeable future, without
raising interest rates so high that the economy slows, it will .
. . and is.
If the largest
commercial banks can make their money by borrowing at 0.15% (the
federal funds rate) and lending long-term at (say) 4%, they will
. . . and are. That's called the carry trade. It is risky if runs
begin at these banks, as they did in 2007 and 2008, but the Federal
Reserve is there to bail out the biggest banks.
So, what is
the threat? Why not just keep doing more of the same?
Will it be
Zimbabwe or Japan? (Sing
approach to the retired widows problem is to continue to borrow
money from households still in the labor force. The wives of workers
lend at low rates to the government. This goes on, decade after
decade. So, Japan runs a trade surplus. It does not rely on foreign
central banks to roll over its debt. The United States relies on
foreign central banks, mainly Japan's and China's, to roll over
half of its publicly held debt.
bank has refused to expand the money supply by very much. So, retail
prices in Japan have been flat for almost two decades, though not
deflationary, contrary to Keynesian hype in the English-language
ever-increasing debt has raised concerns about its ability to repay
this debt. It owes twice the annual GDP. Yet the Japanese government
has almost always repaid its debts. This is why the housewives trust
it. At some point, there will be a default in Japan, as in all other
nations in the West. But Japan has resisted this scenario for two
decades. This default is unlikely to be inflationary. The central
bank resists the government's rhetoric to expand the money supply.
It occasionally loosens, but it always returns to slow-growth policies.
that the housewives in Japan at some point will find that they get
short-changed by the government. The government will raise the age
for collecting the government's pension program. The debt cannot
go on forever. Politicians kick the can in Japan, just as they do
here. Voters never catch on. But they will at some point.
will not accept price inflation. They also will not accept outright
default, which would be dishonorable. But the government refuses
to cut back on spending. Thus, we can see what is coming: default
in stages. The government will raise the retirement age, thereby
taxing younger families to support existing recipients. There is
no other way out, given Japanese attitudes toward inflation and
suffered from low economic growth. Capital that has been absorbed
by the government does not become available for investment. Japan's
miracle of 195090 has been an ever-more-distant memory for
hit the brick wall before any other Western nation because of its
low population growth. Unlike other Western nations, Japan refuses
to solve its demographic problems by allowing immigration. Europe
imports Muslims from North Africa and eastern Europeans in search
of higher wages. The United States lets immigrants from Mexico cross
the border illegally. There is no concerted effort to put a stop
to this. But Japan has no way to fill empty jobs with cheap labor.
So, productivity has stalled. Japanese businesses can export jobs
to Asia, and they have. This lets businesses defer the day of reckoning.
But those jobs are not going to younger Japanese workers. The remaining
workers' ability to support the aging population will continue to
is the last piece of the puzzle. In Japan, it is normal for the
son's mother to live in his tiny Japanese home. This is unthinkable
in the United States. While sons' mothers do live with their sons
in some cases, they live in separate parts of the house. The garage
apartment is mother-in-law central in the United States. In Japan,
there are few garages, and Japanese park cars in them.
Is this America's
future? It could be. That decision is in the hands of commercial
bankers for as long as the FED allows banks to pile up excess reserves
at the FED. If the FED finally decides to place a penalty fee on
excess reserves, the banks will lend, M1 will rise, the M1 money
multiplier will rise, and prices will rise. But, until then, we
seem to be on Japan's pathway: no price deflation, but slower economic
growth, and the de-capitalization of industry due to the money pit
known as Congress.
This is the
fear of most hard-money analysts. They see the Federal Reserve as
the ultimate engine of hyperinflation. It could become this, if
its senior decision-makers use Robert Mugabe as the model. I do
not think The FED's Board will do this. Mugabe is the laughing stock
of the world. No one in the West wants to go down in history as
the equivalent of Mugabe.
The many books
that predict hyperinflation ignore this. They assume that what happened
after World War II in Hungary or after World War I in Germany and
Austria is in some way typical of what Central banks do. It is in
Latin America. It is in African tribal cultures. But it isn't in
Western industrial societies. To be labeled a South American central
banker would be a mark of failure in the West. No central banker
wants to wind up in the footnotes as his country's equivalent of
Dr. Gono, the head of Zimbabwe's central bank in its time of hyperinflation.
(He received his honorary doctorate from the University of Zimbabwe.)
Its website barely functions. It
tells you what its policy is in a series of PDFs that download very
slowly and which provide such wisdom as this:
full recovery and growth prospects are bright. 13.2 Concerted efforts
must be invested in cultivating the sustenance of a conducive environment
for the deepening of business and investor confidence.
In short, it
is a joke. The only person in the West who does not get the Joke
is Ellen Brown, the Greenbacker. She is an apologist for the bank.
Gono has done
very well, of course. Wikipedia describes his lifestyle.
and his wife live in Borrowdale Brook, a northern suburb of Harare.
They have just completed on construction of a new "castle-like"
house, equipped with: 47 en-suite bedrooms; a glass swimming pool
with underlights; a gym; mini-theatre; and landscaped gardens. Estimated
to have cost USD $5 million, it is equipped with iris-scanning security
measures as well as extensive camera coverage aiding perimeter control.
It is also, perhaps conveniently, just a short drive away from (and
indeed larger than) President Robert Mugabe's own private residence.
Like many of Mugabe's inner circle, Gono also owns numerous farms
which were confiscated from localised white farmers. One is near
Norton, which, when the seasonal weather is dry, draws clean water
through a 25-mile-long pipeline linked to a reservoir, which is
supposed to supply water for the people of Harare. Gono also owns
property in Malaysia.
There is no
way that Dr. Bernanke has profited, or will profit, to this degree.
What is standard practice in Zimbabwe is not acceptable in the West.
So, central bankers must satisfy their plans for personal success
with applause from their academic peers, plus the legislature.
that the Federal Reserve is not going to serve as the lender of
last resort to the government only to the four largest banks,
which control over half of the nation's bank assets. The FED is
not going to oversee the destruction of the dollar, along with the
purchasing power of the FED's retirement portfolio fully
vested of its employees. They know where their bread is buttered.
Take a look at
the FED's retirement plan's portfolio.
a parable of the poor widow, who was reduced to poverty. She gave
her last two coins not much more than pennies to charity.
She was a holy woman.
what if she had planned on a secure retirement? Who will be to blame
if the government cannot afford to pay what it owes her?
in every Western nation insist that this can never happen. But the
statisticians all report figures that say it will happen, unless
the government finds other ways to raise revenue or cut expenses.
The widow seems to be politically untouchable, but push has not
yet come to shove.
is clear: there will be a bankruptcy in every Western industrial
nation, including Japan. There is no pathway out that voters will
accept today. But they will accept major changes when the government
digs too deeply into their wallets.
will go after the wealthy first: means testing. "No promised benefits
for you!" Then the government will keep lowering its definition
will be relentless, because all of the governments' deficits are
relentless. Promises were made when promises were cheap. They are
getting more expensive.
better figure this out before they are widows.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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