Do you know whose birthday it is?
Why, it's the birthday of the fiat U.S. dollar!
Or perhaps it's the anniversary not of a birth but of a divorce...the divorce of the U.S. dollar from gold.
Six of one, good patrons, half a dozen of the other...
It's been forty years to the day. On August 15, 1971, President Nixon admitted that the U.S. government could not live up to its obligations. After all, the social spending of the fifties had been expensive and the war spending of the sixties just pushed the whole wagon over a cliff, then blew it up with dynamite.
Paying in gold-backed money just wasn't an option for the U.S. government anymore. If all the foreign dollar-holders in the world (Americans themselves hadn't been allowed to own gold since 1934) had shown up to redeem their dollars for gold, only the first few to arrive would have gotten what they came for. There just wasn't enough gold in the U.S. coffers to go around.
So President Nixon gave the U.S. currency what it needed: flexibility! Gold a government can run out of when they spend more of it than they earn. No such problem exists with a currency no longer tied to gold, one that they can print at whim.
Such a currency is "flexible", willing to be a team player. And if you can get the entire world to pretend each new piece of currency you issue somehow doesn't decrease the value of the existing stock, then you would do very well indeed. Just ask the U.S.!
The world was already on a dollar standard. With the last shaky ties to gold severed, the entire world for the first time in history was entirely on a paper money standard, based on the U.S. dollar. Forty years of not just U.S. fiat...but fiat all over the world. What a ride it's been!
Gold meanwhile has since gone from the official (though unrealistic) $34 per ounce in 1971 to a recent high last week of $1813. And this was only a nominal high. The real high in terms of purchasing power was hit in January of 1980 with a nominal price of $850.
The number of dollars it would take to equal 850 of those circa 1980 bucks keeps changing...growing. It used to be about $2000 in 2008. It's maybe $2400 or $2500 now in 2011. We suspect gold's nominal price has an awful lot more room to grow.
It's a small shame that gold didn't hit its recent high over $1800 on the anniversary of its divorce from the dollar. It would have been...poetic.
But the Fed stepped in in time to reassure the stock markets that it would keep driving people out of savings and into speculation, and thus keep stock prices relatively high. In the FOMC August 9, 2011, statement we find this...
Why, it's the birthday of the fiat U.S. dollar!
Or perhaps it's the anniversary not of a birth but of a divorce...the divorce of the U.S. dollar from gold.
Six of one, good patrons, half a dozen of the other...
It's been forty years to the day. On August 15, 1971, President Nixon admitted that the U.S. government could not live up to its obligations. After all, the social spending of the fifties had been expensive and the war spending of the sixties just pushed the whole wagon over a cliff, then blew it up with dynamite.
Paying in gold-backed money just wasn't an option for the U.S. government anymore. If all the foreign dollar-holders in the world (Americans themselves hadn't been allowed to own gold since 1934) had shown up to redeem their dollars for gold, only the first few to arrive would have gotten what they came for. There just wasn't enough gold in the U.S. coffers to go around.
So President Nixon gave the U.S. currency what it needed: flexibility! Gold a government can run out of when they spend more of it than they earn. No such problem exists with a currency no longer tied to gold, one that they can print at whim.
Such a currency is "flexible", willing to be a team player. And if you can get the entire world to pretend each new piece of currency you issue somehow doesn't decrease the value of the existing stock, then you would do very well indeed. Just ask the U.S.!
The world was already on a dollar standard. With the last shaky ties to gold severed, the entire world for the first time in history was entirely on a paper money standard, based on the U.S. dollar. Forty years of not just U.S. fiat...but fiat all over the world. What a ride it's been!
Gold meanwhile has since gone from the official (though unrealistic) $34 per ounce in 1971 to a recent high last week of $1813. And this was only a nominal high. The real high in terms of purchasing power was hit in January of 1980 with a nominal price of $850.
The number of dollars it would take to equal 850 of those circa 1980 bucks keeps changing...growing. It used to be about $2000 in 2008. It's maybe $2400 or $2500 now in 2011. We suspect gold's nominal price has an awful lot more room to grow.
It's a small shame that gold didn't hit its recent high over $1800 on the anniversary of its divorce from the dollar. It would have been...poetic.
But the Fed stepped in in time to reassure the stock markets that it would keep driving people out of savings and into speculation, and thus keep stock prices relatively high. In the FOMC August 9, 2011, statement we find this...
"The committee currently anticipates that economic conditions - including low rates of resource utilization and a subdued outlook for inflation over the medium run - are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013."See, Bernanke wants YOU to shoulder the risk. You're supposed to seek yield elsewhere and flood the stock market with your dollars, propping it up, so they feel like they're doing their jobs. That's the ol' Bernanke recovery.
Our newest Whiskey contributor, former U.S. investment bank insider and Austrian sound money author, Detlev Schlichter, follows Bernanke's moves while safely holed away from the riots of London (which he usually calls home).
Instead, he's sitting in Tuscan villa with a glass of Vino Nobile di Montepulciano. "Although bankrupt, Italy is a very sunny and calm place at present," he assures us by e-mail after we asked how the London riots were treating him.
Are Bernanke and his ilk truly evil or just wrong? That's just one of the questions setting debate afire at his blog http://papermoneycollapse.com. And we're inviting Whiskey readers to weigh in on what he has to say.
Whiskey & Gunpowder
by Detlev Schlichter
Somewhere in Tuscany, Italy
You want to know what really scares me? That the money-printer-in-chief -- the man in charge of the printing press for the world's dominant paper currency -- the chairman of the U.S. Fed is so completely beholden to the mainstream macro consensus that he is entirely incapable of even comprehending that his policy could do more harm than good.
Case in point: The July 13, 2011 exchange between the Austrian-schooled Republican who "gets it" Whiskey bar favorite Congressman Ron Paul and the Fed chairman.
What strikes me is not Bernanke's struggle to explain the monetary
function of gold, but something else. It's something that scares the
living bejesus out of me whenever I hear Bernanke testify.
Before I say what it is, let me stress that I don't much like the widespread demonization of the Fed chairman. I think he was sincere when he said that he never cared about the management or the shareholders of the Wall Street firms he invariably bailed out and is generously subsidizing. He really believes that what he is doing is helping the U.S. economy and the U.S. people.
The problem is not that he is evil or dumb - I think he is neither - the problem is much bigger. You can deal with people who are evil and dumb. Deeply-convinced do-gooders in positions of almost unchecked power, those are the ones we should worry about. The good intentioned can suffer from tunnel-vision, incurably in awe of their own theories and are incapable of even grasping how what they are doing could make things worse.
Market manipulations -- keeping rates artificially low and bank reserves expanding - are creating momentous dislocations, vast problems with as-yet incalculable consequences - even if they do not generate instant hyperinflation or intolerable expansion in the wider monetary aggregates. This only looks deceptively harmless through Bernanke's narrow prism of national account statistics.
Mr. Bernanke suffers from a blind side: He can't see that 'elastic' money is always destabilizing. In my forthcoming book, Paper Money Collapse, I show how any expansion in the money supply (including bank reserves) distorts relative prices, always and everywhere. Even if some fortuitous rise in money demand cushions some inflationary impact and if inflation measures therefore remain contained.
Every money injection disrupts the market's setting of interest rates, thus disorienting the process of coordination between true savings and investment and capital formation.
Bottom line: Interest rates are market prices, Mr. Bernanke, and you interfere with them at your peril!
I didn't discover this, of course. I owe much to Ludwig von Mises and the young F.A. von Hayek. Ron Paul understands them, Bernanke doesn't.
Bernanke: Man on a Mission - To the Wrong End
Bernanke upholds the original mission of the Federal Reserve: to avert credit contraction and debt deflation at all costs. During the Q&A, he reminded the laissez-faire Congressman Paul of the bank runs of the 19th century. Instability in banking -- and in the wider economy as a result of banking -- should come as no surprise to anybody who understands the practice of fractional-reserve banking.
Today, banks are money-producers. But here's the problem: whenever the economy slows, the nervous public ditches deposit money for 'real' money. In fact, we want money that is not somebody else's liability, such as gold or, even, state paper tickets. The banks then have to contract the supply of deposit money -- shrinking the supply of what is used as money in the economy -- thus exacerbating the recessionary forces in the economy.
The Fed Reserve wanted to avoid recessions -- or shorten them --and avoid credit contraction. What they thought was needed is some form of elastic money so that in economically challenging times the banks do not have to contract the supply of credit.
It is almost comical how Mr. Bernanke seems to say, why are you criticizing me? I am spending all this money, but it doesn't add to the federal deficit. I am printing this myself. I just press a button. Money printing is costless. And I can help the economy.
The Austrians know that such a powerful threat to the banks is brought about by the banks themselves! The lowering of reserve ratios and the creation of deposit money leads to a credit boom which always creates imbalances -- in the saving-investment equation -- and thus must end in bust.
What the Fed is trying to do is destined to fail. It cannot solve the problem. It must exacerbate the problem. Bernanke believes that with his all-powerful printing press he can always buy another recovery. For him his job appears to require an astute balancing act between the two things his macro-tunnel vision allows him to see: the trade-off between growth and inflation, both -- so he believes -- neatly observable with macro-statistics (the fetish of the economics profession). He cannot grasp the distortions in prices he creates, the misallocations in capital he furthers, and the accumulation of debt he encourages. None of them register on his statistical radar.
The debt-ceiling debate in the U.S. is trivial. What matters is this: as long as there is a Federal Reserve and as long as it is run by men like Mr. Bernanke -- dedicated, smart but hopelessly committed to a flawed belief system -- the economy will not be a capitalist one, benefiting fully from saving, entrepreneurship and true capital accumulation but will always be addicted to easy money, cheap credit and propped up asset markets.
What Will Happen Next?
Like a little hamster in his hamster wheel, Mr. Bernanke will only run faster and faster. Next, the interest rates that banks get on their deposits at the Fed will be cut to encourage more lending. The Fed will conduct QE3, and then QE4, and so forth. Maybe they will not call it that, but in effect that is what the Fed chairman's own belief system will force him to do.
The size of the accumulated dislocations is already too gigantic today to allow any politically acceptable correction. Nobody had the stomach for it during Lehman. Nobody has the stomach for it today.
In
the monetary environment the Fed maintains, deleveraging will never be
accomplished. Mr. Bernanke digs himself deeper into a hole that he won't
get out of when the market demands higher interest rates to maintain
confidence in the paper dollar.
Paper money systems collapse -- and they have all collapsed, throughout history and without exception -- not because the money printers don't understand inflation. They simply always reach a point when they fear the immediate impact of turning off the monetary tab more than the further printing of money. Of course, the disaster in the end is only bigger.
Bernanke is no James Bond villain out for world domination or even a big Wall Street payout. He is more the mad professor in some sci-fi B-movie, unwittingly in cahoots with the forces of destruction not out of mean-spiritedness but out of intellectual hubris and infatuation with his own theories and technical wizardry.
Utterly convinced that he has worked out all the effects of his manipulation of the money supply and of interest rates, Bernanke can't see why anybody would not want him to go on manipulating. In the meantime, debasement of paper money continues...
Regards,
Detlev Schlichter
Detlev Schlichter is author of Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown
Editor's Note: What's Ron Paul saying now? He told CNBC what he worries about most is "the consequence of currency destruction is violence. And boy, every day there is more violence, whether it's in London, demonstrations in Israel, all around the world, revolutions are going on."
Before I say what it is, let me stress that I don't much like the widespread demonization of the Fed chairman. I think he was sincere when he said that he never cared about the management or the shareholders of the Wall Street firms he invariably bailed out and is generously subsidizing. He really believes that what he is doing is helping the U.S. economy and the U.S. people.
The problem is not that he is evil or dumb - I think he is neither - the problem is much bigger. You can deal with people who are evil and dumb. Deeply-convinced do-gooders in positions of almost unchecked power, those are the ones we should worry about. The good intentioned can suffer from tunnel-vision, incurably in awe of their own theories and are incapable of even grasping how what they are doing could make things worse.
Market manipulations -- keeping rates artificially low and bank reserves expanding - are creating momentous dislocations, vast problems with as-yet incalculable consequences - even if they do not generate instant hyperinflation or intolerable expansion in the wider monetary aggregates. This only looks deceptively harmless through Bernanke's narrow prism of national account statistics.
Mr. Bernanke suffers from a blind side: He can't see that 'elastic' money is always destabilizing. In my forthcoming book, Paper Money Collapse, I show how any expansion in the money supply (including bank reserves) distorts relative prices, always and everywhere. Even if some fortuitous rise in money demand cushions some inflationary impact and if inflation measures therefore remain contained.
Every money injection disrupts the market's setting of interest rates, thus disorienting the process of coordination between true savings and investment and capital formation.
Bottom line: Interest rates are market prices, Mr. Bernanke, and you interfere with them at your peril!
I didn't discover this, of course. I owe much to Ludwig von Mises and the young F.A. von Hayek. Ron Paul understands them, Bernanke doesn't.
Bernanke: Man on a Mission - To the Wrong End
Bernanke upholds the original mission of the Federal Reserve: to avert credit contraction and debt deflation at all costs. During the Q&A, he reminded the laissez-faire Congressman Paul of the bank runs of the 19th century. Instability in banking -- and in the wider economy as a result of banking -- should come as no surprise to anybody who understands the practice of fractional-reserve banking.
Today, banks are money-producers. But here's the problem: whenever the economy slows, the nervous public ditches deposit money for 'real' money. In fact, we want money that is not somebody else's liability, such as gold or, even, state paper tickets. The banks then have to contract the supply of deposit money -- shrinking the supply of what is used as money in the economy -- thus exacerbating the recessionary forces in the economy.
The Fed Reserve wanted to avoid recessions -- or shorten them --and avoid credit contraction. What they thought was needed is some form of elastic money so that in economically challenging times the banks do not have to contract the supply of credit.
It is almost comical how Mr. Bernanke seems to say, why are you criticizing me? I am spending all this money, but it doesn't add to the federal deficit. I am printing this myself. I just press a button. Money printing is costless. And I can help the economy.
The Austrians know that such a powerful threat to the banks is brought about by the banks themselves! The lowering of reserve ratios and the creation of deposit money leads to a credit boom which always creates imbalances -- in the saving-investment equation -- and thus must end in bust.
What the Fed is trying to do is destined to fail. It cannot solve the problem. It must exacerbate the problem. Bernanke believes that with his all-powerful printing press he can always buy another recovery. For him his job appears to require an astute balancing act between the two things his macro-tunnel vision allows him to see: the trade-off between growth and inflation, both -- so he believes -- neatly observable with macro-statistics (the fetish of the economics profession). He cannot grasp the distortions in prices he creates, the misallocations in capital he furthers, and the accumulation of debt he encourages. None of them register on his statistical radar.
The debt-ceiling debate in the U.S. is trivial. What matters is this: as long as there is a Federal Reserve and as long as it is run by men like Mr. Bernanke -- dedicated, smart but hopelessly committed to a flawed belief system -- the economy will not be a capitalist one, benefiting fully from saving, entrepreneurship and true capital accumulation but will always be addicted to easy money, cheap credit and propped up asset markets.
What Will Happen Next?
Like a little hamster in his hamster wheel, Mr. Bernanke will only run faster and faster. Next, the interest rates that banks get on their deposits at the Fed will be cut to encourage more lending. The Fed will conduct QE3, and then QE4, and so forth. Maybe they will not call it that, but in effect that is what the Fed chairman's own belief system will force him to do.
The size of the accumulated dislocations is already too gigantic today to allow any politically acceptable correction. Nobody had the stomach for it during Lehman. Nobody has the stomach for it today.
In
the monetary environment the Fed maintains, deleveraging will never be
accomplished. Mr. Bernanke digs himself deeper into a hole that he won't
get out of when the market demands higher interest rates to maintain
confidence in the paper dollar.Paper money systems collapse -- and they have all collapsed, throughout history and without exception -- not because the money printers don't understand inflation. They simply always reach a point when they fear the immediate impact of turning off the monetary tab more than the further printing of money. Of course, the disaster in the end is only bigger.
Bernanke is no James Bond villain out for world domination or even a big Wall Street payout. He is more the mad professor in some sci-fi B-movie, unwittingly in cahoots with the forces of destruction not out of mean-spiritedness but out of intellectual hubris and infatuation with his own theories and technical wizardry.
Utterly convinced that he has worked out all the effects of his manipulation of the money supply and of interest rates, Bernanke can't see why anybody would not want him to go on manipulating. In the meantime, debasement of paper money continues...
Regards,
Detlev Schlichter
Detlev Schlichter is author of Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown
Editor's Note: What's Ron Paul saying now? He told CNBC what he worries about most is "the consequence of currency destruction is violence. And boy, every day there is more violence, whether it's in London, demonstrations in Israel, all around the world, revolutions are going on."
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