Posted on 09/28/2005 4:09:54 PM PDT by hubbubhubbub
For over four decades, observant and open-minded individuals have become deeply concerned about the future of our great nation. They refused to accept the rosy official and media testimony regarding our nation's fiscal and monetary integrity. Similarly, they did not believe the negative rhetoric directed towards gold. Just as these independent thinking and far-sighted people recognized that one plus one would always equal two they also knew that no one, nor no nation, could create something from nothing. Throughout this period they witnessed the U.S. government and the Federal Reserve banking system work together to create U.S. dollars from thin air, in order to finance our growing national budget deficits. It was not only obvious to these people that inflation must result from our government's actions, but that numerous economic and financial distortions would occur and likely ultimately spawn a serious economic decline. They had learned from history of the damage that accrued to the lives of the common man, whenever a nation debased its currency.
Stable prices within an economy are produced when there is a balance between the purchasing media in its financial system, and the amount of goods and services offered on its markets. However, when the dollar value of the available items and services remain essentially constant, but a country's money stock is increased, the additional monetary units will over time act to bid up their domestic prices. This is what has occurred in America during the past six decades, since the U.S. left the Gold Standard. It is the underlying cause of the loss of the dollar's purchasing power.
According to extensive research performed by the outstanding American Institute for Economic Research (AIER, Great Barrington, Massachusetts), "For roughly 150 years after the Mint Act of 1792, by which Congress established and defined the Nation's currency, the purchasing power of the dollar fluctuated in a relatively narrow range. At the end of World War II, the price level was close to the peaks (and the purchasing power close to the troughs) reached after the War of 1812, the Civil War, and World War I".
During the preponderance of this period the dollar was defined as being worth a fixed amount of gold. Under the Gold Standard, dollars could not be created unless there was sufficient gold held by our government to redeem them. Further, during most of this era gold and dollars could be readily exchanged for one another by our government. This all changed with the signing of the Bretton Woods Agreement in1944.
After 1944, the dollar's purchasing power began to decline. This accelerated after President Nixon "closed the gold window" in 1971. With the stroke of a pen he severed the final link of the dollar to gold. Later, in the words of the AIER, "By 2000, the dollar had lost more than 90% of its original purchasing power."
The term "doom and gloomers" was likely coined by a member of the Establishment. It was done in an effort to discredit those who recognized this condition as well as their beliefs. This occurred because the "doom and gloomers"recognized early that the excessive issuance of dollars effectively cheapened those that already existed, and would lead to a number of damaging results. First, it would create inflation. Next, the higher prices and inflated money supply would excessively stimulate the economy. These events, in turn, would foster a number of other economic and financial distortions. Businesses and individuals would make poor economic and financial decisions. They would base their actions upon an economy which was artificially stimulated by excessive monetary creation. Their judgements and actions would be predicated upon fleeting, exceptional business conditions that were largely created as the newly issued dollars worked their way through the system. Businesses would expand their workforces, factories and products. Additionally, they and individuals would enter into far greater debt than was truly warranted because they believed that the "good times" would last longer than they should. The excessive monetary creation, in turn, would ultimately destroy the dollar's value on the world's markets, and further exacerbate the price inflation within our borders as the cost rose of imported goods.
Now, conditions have worsened to a far greater extent that anyone could have dreamed possible prior to the 1990's. Each recession since the Great Depression was met with greater amounts of monetary and fiscal stimulus in order to extricate the economy from any economic reversal. Whenever the economy began to flounder, the money supply would be rapidly expanded and interest rates would be cut by the Fed, while the government enacted tax reductions and spending increases. Importantly, during the past several years, the Fed appears to have become hell-bent upon creating as many dollar credits as are necessary. This, in order to prevent the economy from lapsing into any sort of extended or even minor recession, for fear of it snow-balling into something of far greater consequence.
Finally, the "doom and gloomers" are being joined by other voices. However, now they are emanating from the Establishment! Comments and declarations are now being espoused by those who are not only highly respected and authoritative, but who also hold among the most powerful positions in the world's governing and cooperative bodies.
This morning's New York Times contained an article entitled "I.M.F. Warns of Imbalance in World Consumption". The piece contained quotes from a recent IMF report. It began with "The United States is likely to experience slower economic growth next year, and its rapidly rising foreign debt is at the heart of dangerous global imbalances...". The Times then continued and stated, "The fund said that global economic growth had become too dependent on a handful of countries, led by the United States, that consume far more than they produce. That imbalance, it warned in its semiannual World Economic Outlook, could lead to a wrenching correction".
For the International Monetary Fund to use phrases such as "dangerous global imbalances" and "wrenching correction" when referring to the possible outcome of today's global economic and financial condition, is truly unprecedented! They could have used far more subtle terms, as they have in the past to get their point across, if they did not deeply believe that the world's economy was at great risk.
The Times article went on: "In an evident reference to the United States, with its big budget deficits and relentless consumer spending, the I.M.F. warned that the world's consumption is 'fueled by increasingly unsustainable fiscal stimulus, as well as housing prices that are ignoring the laws of gravity".
With these strong statements of concern, if not outright fear, I believe that the IMF is sending a scathing message. It is not only to the United States but to the rest of the world, that the worst fears of the "doom and gloomers" not only have validity, but that they may come to fruition if major structural changes in the U.S. do not occur. This stern warning was for the United States to limit its dangerous monetary expansion, increase its taxes, and force its consumers to reign in their wonton spending. Or, not only the U.S. but the world would suffer the consequences.
These alarming statements by one of the world's preeminent organizations followed a similar statement by the president of the Federal Reserve Bank, Alan Greenspan. In a recent speech, Mr. Greenspan discussed the historical precedent that resulted whenever investors became overly excited about certain investments. This occurred when buyers threw caution to the wind and ignored the risks produced by their actions, by driving prices to unsupportable high levels. He stated , "Thus, this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. ... But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums."
Greenspan, with his statement, "vast increase in the market value", is referring to the current enormous overvaluation of the housing market and, I believe, stock prices. He appears in total agreement with the IMF statement that, "housing prices that are defying the laws of gravity". Do you remember Greenspan's famous 1996, "irrational exuberance" speech regarding the stock market? At that time, the Dow Industrials were in the mid-6000 range. Do you believe that he views the market as being less overvalued and less dangerous with the Dow today in the mid 10,000's?
Greenspan's reference to "history has not dealt kindly with the aftermath of protracted periods of low risk premiums" is his "fed-speak", sugar-coated fashion of addressing the likely severe and damaging economic fall-out when price levels return to normal.
I believe that these unnerving observations by Alan Greenspan and the IMF are likely the tip of the iceberg! As time passes, I feel that similar statements will be espoused by more and more conventional economists and government officials. They will be preparing the world for a potential economic melt-down that was created by our nation's prolonged, egregious, deficit spending campaign, and the creation of the enormous amount of dollar credits that they fostered.
The voices of the "doom and gloomers" will be increasingly joined by those emanating from mainstream America. They will be vindicated! However, just as all Americans benefited from the higher standard of living generated by the decades-long artificially induced boom, we may all have to suffer the consequences when the business cycle turns down, and the contrived boom turns to bust.
I realize that my analysis of the comments by the IMF and Alan Greenspan are disconcerting. However, I believe that it is better to face the reality and truth of a situation and prepare for its consequences, than to put one's head in the sand and ignore its reality and its potential damaging effects. My hope is to help the reader recognize our nation's precarious condition, and prepare for the difficult times that lie somewhere ahead.
Because the CPI is a fraud used to steal from Americans.
Bull Pucky, The Family income purchasing power is now based on buying McMansions and having a color TV in every room and two 40K SUVs in the garage.
If we would live as we did 50 years ago (or even 30 years ago) we would have waaaaaay more disposable income and one parent could work and support the family. When apples and apples are compared we are actually far ahead in this day and age in the wealth game.
So if it were measured correctly CPI would be 8%? And everyone in the bond market is stupid enough to buy 10 year Treasuries yielding 4.25% despite 8% inflation?
The bond market is dominated by other government's central planners. Yes, I question the wisdom of Chi-Com central bankers. Same that to yourself, Communist Bankers. Banking Communists.
How do you define dominated? Do they buy more than 50% of new issues? More than 75%? How much of total outstanding Treasury issues do they own?
IIRC there is a very small spread between Treasury yields and corporate yields. Between Treasury yields and junk bond yields. Do these central planners dominate those markets as well?
Interest is the price of money. Right now, money is essentially free.
You claim this is because the bond market is dominated by other government's central planners. I claim that you are incorrect. Please define dominated. Use percentages. Or admit you're wrong.
Did they really commission a 52-page study? Or perhaps they commissioned a study that just happened to end up 52-pages long.
WOW!
You ALL got together and came up with that one didn't you? Amazing.
Have fun with that.
How do you measure GDP and do you measure money supply?
. The general view that we have all had over the years, as I've mentioned before to this committee in the past, is while money supply has been a major issue with respect to the American economy, and money obviously is a crucial issue of inflation -- indeed, it is almost by definition in the sense of the relationship between units of money and units of goods. But we have had extraordinary difficulty in trying to find the right proxy to measure money per se, and none of these various measures -- M2, M3, MZM -- as best we can judge, seems to have the characteristics necessary for moneyness that is at the base of concerns that a number of people have with the issue of money expansion and inflation. As a consequence, we no longer report to this committee on money supply targets. And the reason we do not is we have not found, at least for the time being, money supply useful. -Alan Greenspan
Greenspan: The problem we have is not that money is unimportant, but how we define it. By definition, all prices are indeed the ratio of exchange of a good for money. And what we seek is what that is. Our problem is, we used M1 at one point as the proxy for money, and it turned out to be very difficult as an indicator of any financial state. We then went to M2 and had a similar problem. We have never done it with M3 per se, because it largely reflects the extent of the expansion of the banking industry, and when, in effect, banks expand, in and of itself it doesn't tell you terribly much about what the real money is.
So our problem is not that we do not believe in sound money; we do. We very much believe that if you have a debased currency that you will have a debased economy. The difficulty is in defining what part of our liquidity structure is truly money. We have had trouble ferreting out proxies for that for a number of years. And the standard we employ is whether it gives us a good forward indicator of the direction of finance and the economy. Regrettably none of those that we have been able to develop, including MZM, have done that. That does not mean that we think that money is irrelevant; it means that we think that our measures of money have been inadequate and as a consequence of that we, as I have mentioned previously, have downgraded the use of the monetary aggregates for monetary policy purposes until we are able to find a more stable proxy for what we believe is the underlying money in the economy.
Dr. PAUL. So it is hard to manage something you can't define.
Mr. GREENSPAN. It is not possible to manage something you cannot define.
I actually agree with you.
My larger point (which in retrospect was not effectively communicated in any way!) is that we can't predict the future, so we need to be prepared for the worst and ready to take advantage of the best.
I do not believe our children will be worse off financially, although they will have challenges without a doubt. But for me, the jury is still out regarding how well off things will be in the "values" department.
Finally, I teach college and I can tell you that I am generally pretty impressed with the current crop of students. Personal responsibility seems to be a pretty big deal to them. That is a VERY good sign.
The article that started this thread concentrated on material well-being and ignored character -- IMHO the most important part. That's only natural because spiritual maturity is harder to quantify. My impression of the next generation is favorable too. For hard number comparisons that could point to long term trends I'll hang my hat on the falling divorce rate and plunging teenage pregnancy data.
I have to struggle to get business people to agree on the relative importance of different economic indexes. The idea of getting a consensus on character issues --well, maybe my wife would be better at that than me.
Thanks for supplying some numbers. Is that all owned by those foreign central bankers? Or is some owned by foreign individuals?
How much of all dollar denominated debt is owned by foreigners? If you blame foreigners for dominating (I don't think 40% is dominant) the Treasury market are you also blaming them for record low rates on corporates and junk bonds? How about those mortgage backed securities?
I am always confused by this. The barter system requires I have something you want, in exchange for something I want. But a barter system is a little cumbersome in this day and age. So I take something I have (time and knowledge) and exchange it for something my employer has (paper money).
With that paper money I am able to obtain things I want.
Now, I make more per hour then I did in 1970, but true, things cost more as well.
My standard of measurment is how many man hours do I have to work to get something I want.
In 1970 it took me 1 hour of labor to fill my VWs 10 gallon tank (.30 a gallon or $3.00), if I make $30 an hour today, and I pay $3.00 a gallon to fill a tank of gas, the numbers are inflated, but the basic standard, 1 hour labor remains the same.
With my standard unlike gold, the supply is open ended. What happens when we need more "money" in circulation then we have gold to back it?
Wouldn't this cause a hardship on the economy?
Again, I don't know, but can someone explain to me how having a gold stand will make every thing perfect?
I don't. I'll accept the M3 numbers you supplied as correct. I'll take the Feds numbers on GDP as correct as well. Why do you ask?
We have never done it with M3 per se, because it largely reflects the extent of the expansion of the banking industry, and when, in effect, banks expand, in and of itself it doesn't tell you terribly much about what the real money is.
So Greenspan says M3 isn't a reliable measure of money. Are you trying to disprove your point that it is?
It'll make the guys with a 3 year supply of tuna and bottled water in their fallout shelter feel better. Other than that, it'd be a disaster for the U.S. economy
Both. Obviously you know the numbers.
If you blame foreigners for dominating (I don't think 40% is dominant) the Treasury market are you also blaming them for record low rates on corporates and junk bonds? How about those mortgage backed securities?
One need not control the majority of a market to have a profound impact on prices. Just look at Saudi Arabia effects on oil prices. As I stated before the low rates reflect the abundant supply of liquidity. The MBS prices, also heavily consumed by Asia, reflect a false belief on the part on the buyer that the FedGov is willing and able to stand behind GSE paper. Good luck with that.
No I think he's right. Greenspan doesn't know what money is and neither do I.
I, however, am not attempting to manage something I can not define.
The tuna may be more valuable then gold, you can eat tuna.
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