Yesterday, Federal Reserve Chairman Ben Bernanke got all confused when asked whether gold is money and why central banks hold gold instead of diamonds. Watch the last 32 seconds of this youtube clip:
I know I am not the Chairman of the Federal Reserve, but at least I’ve heard about fungibility. Heck, even wikipedia mentions:
Diamonds are not fungible because diamonds’ varying cuts, colors, grades, and sizes make it difficult to find many diamonds with the same cut, color, grade, and size.
In contrast to diamonds, gold coins of the same grade and weight are fungible, as well as liquid.
If the Fed Chairman needs more information about why gold is money, he should google “why gold is money.” Now, I just need a good answer as to why pieces of paper with pictures of Presidents on them are considered money.
Fed’s Rosengren: Higher gas prices may hurt growth:
Rising energy prices are a concern not that they will lead to higher inflation but that they will subtract from household income and thus weaken the economy, said Eric Rosengren, the president of the Boston Federal Reserve Bank on Friday. Rosengren said the lasting effect on energy prices on overall inflation “has been surprisingly small in recent years.” The surge in oil prices in mid-2008 were followed by significant declines in core inflation, he noted. Rosengren said the Fed’s innovative monetary policy has not been inflationary. “It has been more than two years since the Fed’s balance sheet expanded dramatically. Sine that time core inflation has fallen to something like 50 year lows, he said. Rosengren is not a voting FOMC member this year. He spoke to an event hosted by the Connecticut Mortgage Bankers Association.
Maybe Mr. Rosengren can explain to me how rising oil prices leads to falling household income? Spending money on oil is spending, obviously, not a change in income. I assume he meant that the rising prices eats up a larger portion of household income; in other words, non-discretionary spending rises. But there’s a term for this phenomenon of rising prices: INFLATION.
Trying to give the Fed President the benefit of the doubt, I thought maybe the article was misconstruing what he said. So I searched Google and found his actual words:
My primary concern about rising energy prices is not so much that they will lead to higher inflation, but that they will subtract from household income and thus weaken the economy.
Apparently, we live in a new economic reality. In the new economics, rising prices weaken the economy (by somehow hurting “household income” but I assume he meant income available for discretionary spending) but does not lead to inflation. Get that? I admit, this new economics is confusing so here it is in simple English: rising prices cause deflation or, at the least, disinflation.
We really are living in George Orwell’s 1984. “WAR IS PEACE, FREEDOM IS SLAVERY, and IGNORANCE IS STRENGTH.” And now, INFLATION IS DEFLATION.
According to Marketwatch, Federal Reserve Chairman Ben Bernanke warned against deflation:
He also said the risk of deflation, a steady decline in prices and wages, remained a threat.
He stressed to the Senate panel that deflation would increase debt burdens and lower living standards.
If prices and wages declined at the same rate, how would that hurt us? We’d make less, but our expenses would go down. Yes, it would hurt somebody in debt, but it would help the person holding that debt, i.e. savers.
Now, who would get hurt the most? Who owes the most money of anybody? THE UNITED STATES GOVERNMENT.
What the Federal Reserve fears is the real value of the government’s debt increasing, making it harder to pay back. Furthermore, in a deflationary environment, the Fed would lose its ability to keep rates low and inflate the money supply. How so? Currently, if inflation is about zero, the Fed can keep interest rates near zero as well. But if we have deflation of two percent, the Fed can’t really lower rates below zero, so the inflation adjusted interest rates would be two percent. In effect, the government will be paying a two percent interest rate, increasing its deficit and expanding the debt, and the Fed will lose control of interest rate policy.
Apparently, I’m not the only one concerned about the Fed’s quantitative easing.
Yesterday, I wrote a piece: Quantitative easing. What is it good for? Absolutely nothing!
Today, we get similar sentiments from around the world:
Could this move turn out to be a modern-day Smoot-Hawley? For those of you who are too young to remember, the Smoot–Hawley Tariff Act was passed in 1930, raising tariffs, and being a major contributor to the Great Depression.
Posted in Elections, Federal Reserve, Quantitative Easing
Tagged Ben Bernanke, Brazil, China, Federal government of the United States, Federal Reserve, Federal Reserve System, Great Depression, Great Recession, history, Money supply, Quantitative easing, Smoot–Hawley Tariff Act, Treasury Department, United States Department of the Treasury, United States Treasury security
The Federal Reserve “unveiled plans to purchase $600 billion of Treasurys by the end of June 2011 to revive the economy.“
Maybe one of my readers can explain to me how the Federal Reserve buying Treasury bonds will “revive the economy.” I just don’t get it. The Federal Reserve will be doing nothing more than printing Dollar bills and exchanging those Treasuries. Nothing of value will be created. No new goods will appear on the market. No jobs will be created. Simply put, Treasury bonds owned by individuals or corporations will be replaced by Dollar bills.
Owners of Treasury bonds own them because they want to save/invest their money. Buying the bonds from these people won’t convince them that they need to spend what they had been saving. They will simply invest their money elsewhere: in stocks, corporate bonds, overseas, gold, or in cash. No real wealth will be created through this so-called quantitative easing and it will not encourage any wealth-creating activities. It is simply moving money from one pocket (Federal Reserve cash) to another (Treasuries bonds) from the government’s perspective and the converse from Treasuries to cash from the people’s perspective.
The argument is that buying Treasuries will help keep interest rates low. But who benefits from this? Investors/savers will earn less on their deposits/bonds, but creditors (corporations, mortgages) will pay less interest. But those two will largely offset each other. No net benefit.
In the end, there is one entity that has so much debt that it will be the largest beneficiary: the United States government. Instead of paying interest on bonds, the government is choosing to print money instead. On $600 billion of intermediate-term debt yielding between 0.33 (2-year yield) and 2.57 (10-year yield) percent, the government would “save” about $600 million a month. That’s it? With a deficit running at about $125 billion a month, that’s just 0.5% if the deficit. Again, what for?
The Federal Reserve is simply manipulating the economy for no real purpose. Oh yes, it has the purpose of enabling the government to spend with reckless abandon and run large deficits because it now has a ready market for its debt. But to do so, it must print all those Dollars, and that is driving down the value of the Dollar which is very evident by the huge rally in gold since the “Great Recession” began.
The government is destroying OUR long-term prosperity for ITS short-term gain. A good deal for the Federal Reserve and the Treasury Department, but not for you and me.
Posted in Economics, Federal Reserve, Quantitative Easing
Tagged Ben Bernanke, Federal government of the United States, Federal Reserve, Federal Reserve System, Great Recession, Money supply, Quantitative easing, Treasury Department, United States Department of the Treasury, United States Treasury security
Fed vice chairman Janet Yellen acknowledges that the Fed’s low interest rate policy is creating a moral hazard and may cause companies to take too much risk but that the Fed will pursue this policy any way. AP reports:
Record-low interest rates may give companies an incentive to take excessive risks that could be bad for the economy, the Federal Reserve’s new vice chairwoman warned on Monday.
Janet Yellen has supported the Fed’s policy of ultra-low interest rates to bolster the economy and to help drive down unemployment. Her remarks, which don’t change that stance, may be aimed at tempering critics. They worry she’ll want to hold rates at record low levels for too long, which could inflate new bubbles in the prices of commodities, bonds or other assets.
Yellen, who was sworn in as the Fed’s second-highest official last week, made clear she is aware of the risks.
“It is conceivable that accomodative monetary policy could provide tinder for a buildup of leverage and excessive risk-taking,” Yellen said in remarks to economists meeting in Denver. It marked her first speech since becoming vice chairwoman.
Yellen has a long history with the Fed. Before taking her current job, she served as president of the Federal Reserve Bank of San Francisco since 2004. She also was a member of the Fed’s Board of Governors from 1994 to 1997, when Alan Greenspan was chairman.
As vice chairwoman, Yellen will help build support for policies staked out by Ben Bernanke, the current chairman.
The Fed at its November meeting is expected to take new steps to energize the economy. It’s likely to announce a new program to buy government bonds. Doing so would lower rates on mortgages, corporate loans and other debt. The Fed hopes that would get people and companies to buy more, which would strengthen the economy.
The new effort is expected to be smaller than the $1.7 trillion launched during the recession. Under that program, the Fed bought mostly mortgage securities and debt, although it did buy some government bonds, too.
The Fed has held its key interest rate at a record low near zero since December 2008. Because it can’t lower that rate any more, it has turned to other unconventional ways to pump up the economy.
By now, we all know that low interest rates created the housing bubble. And before that, the tech bubble. Almost all bubbles are created by the Fed lowering interest below the market rate and encouraging companies and individuals to take on excess risk. They are at it again.
So where is/will be the next bubble? Treasuries? Gold and silver? Equities? All of the above?
Posted in Economics, Federal Reserve, Unintended consequences
Tagged austrian economics, Ben Bernanke, Chairman, economics, Federal Reserve, Federal Reserve System, Inflation, Interest rate, Janet Yellen, Risk, yellen