Source Of The Fed’s Power

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SOURCE OF THE FED’S POWER

We have become pawns in the game of Chess being played by the Federal Reserve Bank.  Who is their opponent?  Anybody else who makes a move.

We have become pawns in the game of Chess being played by the Federal Reserve Bank.  Who is their opponent?  Anybody else who makes a move.

Week in, week out, everyone’s eyes and ears seem fixed on what the Federal Reserve Board will say or do.  Mostly, it is about what they say. That’s because they can’t really do much of anything.

Except inflate the supply of money and credit.  Which they have been doing for over one hundred years.  And they are good at it, too.  The historic erosion in value of the US dollar should merit more acclaim – or outrage.  Unfortunately, the Fed is good at shifting the focus of concern to their opponent(s).

In their various statements, members of the Federal Reserve Bank often refer to their policies, decisions, and efforts in ways that make them sound sincere about their attempt to “manage the economy”.  And, admittedly, they are sincere in that attempt.  The trouble is, it is an impossible task.

The US Federal Reserve has led us down a primrose path by virtue of their self-proclaimed intention to manage and modify the stages of the economic cycle (prosperity, inflation, recession, depression).

Federal Reserve Bank policies are a repudiation of fundamental economic principles. The consequences of those policies and actions are evident in the historical results and the final resolution will be ugly.

On the face of it, that should be enough to discourage anyone from taking upon themselves such a hopeless task.  But the problem is much worse than that. The inflation created by the Federal Reserve is intentional. And their efforts have brought about a ninety-eight percent decline in the value of our money.

The cumulative effects of their ‘success’ have made their job even more difficult.  Now their efforts are almost solely focused on containing the effects of their own inflation.  The stages of the economic cycle mentioned above are skewed in ways which alter their duration and hugely increase their volatility.

So why does the Fed do the things they do?  For that matter, why does the Federal Reserve Bank even exist?

From my article, The Federal Reserve And Interest Rates – Definitely Not What You Think:

In addition, the Federal Reserve Bank is also charged with ensuring the financial operation of the US Government. Or, in other words, maintaining their (the US Government’s) ability to borrow money by issuing more and more debt in the form of Treasury securities. In my opinion, this is the sole and overriding purpose behind the existence of the Federal Reserve. And it drives every decision they make. It is not about the economic effects of their policies on US citizens (individually or collectively). It is ALL ABOUT KEEPING THE US GOVERNMENT SOLVENT. The US Government is not solvent, of course, but maintaining and reinforcing the confidence in their financial viability is absolutely essential. And nothing else takes precedence.

Alan Greenspan was noted for his verbiage.  Other Federal Reserve Board chairs and members make frequent comments about various things related to the economy and financial matters.  And the official reports and statements given for public consumption are usually crammed with facts and figures deemed to be part of a credible basis for the decisions and actions taken.

But, whereas there is a great deal of information related, you won’t hear anything referring to the above reason for the existence of the US Federal Reserve Bank.

The responsibility of “keeping the US Government solvent” may sound ‘laudable’ to some. I certainly would prefer that the US Government be able to return to solvency and maintain it. But something seems amiss.

It isn’t so much about keeping the government solvent as it is facilitating the government’s ability to borrow more and more money.  This is done  by issuing more and more Treasury bills, notes, and bonds.  When the US Government needs money, the Federal Reserve creates deposits of Treasury securities in the accounts of certain ‘primary’ banks/dealers. Those institutions are then responsible for placing the securities with numerous other dealers and so on, down the line.

The largest amounts are sold to foreign governments and (very) large investors.  Some are held by dealers as part of their investment inventory and some by banks who hold them as part of their reserves.  The proceeds of those placements, of course, flow back to the US Treasury.

Acting for and in behalf of the US Government in the placement of US Treasury securities is the primary role of the Federal Reserve Bank.  And it is the source of their power.

Buying from and selling to certain primary dealers in Treasury securities is an ongoing function of the Fed.  It is done for the purpose of expanding and contracting the supply of money and credit already in the system.  Which is an active way for the Fed to execute their mandate to “manage the economic cycles”  and ‘hopefully’ ensure that economic conditions and operation of the financial system allow for continued issuance of more and more debt by the US Government (i.e., more U.S. Treasury Bonds).

This has supposedly worked reasonably well for several decades. But since the supply of money and credit is always expanding, the value (purchasing power) of the US dollar continues to suffer. Which is precisely why “a dollar today doesn’t buy what it used to” or “doesn’t go as far”.

And therein lies the rub.  Confidence in the dollar is critical to the US Government.  If that confidence is not sustained, then all bets are off.

The US Government must be able to sell enough Treasury securities. Otherwise, they will not have enough money to operate.  If they don’t have the money to operate, they lose control – and power.  And they will do whatever they can to avoid that outcome.

Any policy or ‘action’ by the Fed is always taken with this objective in mind:  Maintain the viability of the market for US Treasury Securities.  This enables the ongoing operation and function of the US Government.

As long as people continue to “look to the Fed” for direction, then they are demonstrating a degree of confidence that keeps things from unraveling.  And it helps the Fed maintain a semblance of status quo.  Which in turn benefits the US Government.

The Fed’s power lies in their manipulation and ongoing expansion of the supply of money and credit.

Unfortunately, expecting, wishing, and hoping that an isolated few individuals can control, avert, or stop the economic consequences that have been brought to bear on their own citizens and the rest of the world is a pipe dream.

Sooner or later, the dam will burst.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

Inflation – What It Is, What It Isn’t, And Who’s Responsible For It

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INFLATION – WHAT IT IS

Inflation is the debasement of money by the government. Period.

It is not an increase in the general level of prices for goods and services.

The above statements are critical to an understanding and correct interpretation of events which are happening today – or expected to happen  – that are casually attributable to inflation.  So, let’s go one step further.

There is only one cause of inflation: government.  The term government also includes central banks, especially the US Federal Reserve Bank.

Inflation is not caused by “greedy” businesses, excessive wage demands, or accelerated consumer spending.  Even government’s own propensity to spend, as reckless as it is, does not cause inflation.  And that does not contradict my earlier statement that government is the only cause of inflation.  They are.  But not because of their spending habits.

Economic growth does not lead to higher inflation.  There are statements made often that imply a link between growth in our economy and inflation.  And that we have to “manage the growth” so the economy doesn’t “grow too quickly” and “trigger higher inflation”.  These statements are false and misleading.

Also, inflation will not “accelerate over the next couple of years due to higher energy prices and stronger wage growth that leads firms to raise prices”…Gus Faucher/PNC Bank/WSJ  (It is possible that inflation will accelerate over the next couple of years, but it can’t/won’t be for the reasons stated.)

So how does the government cause inflation?  It’s time for a bit of history…

Early ruling monarchs would ‘clip’ small pieces of the coins they accumulated through taxes and other levies against their subjects.

The clipped pieces were melted down and fabricated into new coins. All of the coins were then returned to circulation. And all were assumed to be equal in value. As the process evolved, and more and more clipped coins showed up in circulation, people became more outwardly suspicious and concerned. Thus, the ruling powers began altering/reducing the precious metal content of the coins. This lowered the cost to fabricate and issue new coins. No need to clip the coins anymore.

From the above example it is not hard to see how anything (grains and other commodities for example) used as money could be altered in some way to satisfy the whims of government. But a process such as this was cumbersome and inconvenient. Of course it was. What a shame. There had to be a better way. And there was.

Enter: Paper Money

With the advent of the printing press (moveable type) and continued improvements to the mechanics of replicating words and numbers in an easily recognizable fashion, paper money was now in vogue – big time.

However, people viewed the new ‘money’ with healthy skepticism and coins with precious (or semi-precious) metal content continued to circulate alongside the new paper money. Hence, it was necessary, at least initially, for government to maintain a link of some kind between money of known value vs. money of no value (in order to encourage its use).

Over time, eventually, that link was severed; partially at first, then completely. And it was done by fiat (a decree or order of government).

Not only does our money today have no intrinsic value, it is inflated (and therefore debased) continuously and ongoing through subtle and more sophisticated ways such as fractional-reserve banking and expansion of credit. The printing press is still at the core and is humming 24/7 but the digital age has ushered in new and ingenious ways to fool the people.

Government causes inflation by expanding the supply of money and credit.  And that expansion of the money supply cheapens the value of all the money.  Which is precisely why, over time, the US dollar continues to lose value.  It takes more dollars today to purchase what could have been purchased ten years ago, twenty years ago, etc.  And it has been going on for over one hundred years.  It dates back to the origin of The Federal Reserve Bank in 1913.

What most people refer to as ‘inflation’ or its causes are neither. They are the effects of inflation.   The increase in the general level of prices for goods and services is the result of the inflation that was already created.

More history…  The Arab Oil Embargo in 1973 and the demands for more money for oil which led to the formation of the Organization Of Petroleum Exporting Countries (OPEC) followed close behind then President Nixon’s severance of all ties of the US dollar to Gold.  The underlying fact of the matter was that the dollars which they were receiving for their oil were worth less (not quite ‘worthless’) and had been losing value for several decades.  And the price had been fixed for decades.

To understand this better, imagine that you were a company selling widgets for $1 each and according to your contract you cannot receive any more than that. Fast forward twenty or thirty years.  You are still selling lots of widgets and  still receiving $1 for each one you sell.  But your costs over the years have continued to climb.  And it also costs you more for everything you buy to maintain your standard of living.  And it’s not just you.  Everyone is paying more for everything.  Yet, on an ongoing, year-to-year basis, things seem reasonably normal.  But prices now are rising more frequently and the rate of increase is higher than before. What is going on?

The effects of inflation are showing up.  Those effects can be very subtle at first, or not noticed at all.  But at some point in time the cumulative effects of inflation become more obvious and everyone starts acting differently.  Businesses try to plan for it and individuals invest with inflation in mind.

If your dollars were freely convertible into equivalent amounts of gold based on the prices in effect at the time of your original contract to produce widgets – or sell barrels of oil – then you could just exchange your dollars for gold.  Which is exactly what happened.  Foreign governments in the late sixties began to demand the gold to which they were legally entitled.  And countries which produced and sold oil wanted a higher price for their oil.  Wouldn’t you?

As people become more aware of the effects of inflation they start looking for reasons.  And for guilty parties.  Government is quick to act of course.  They start by implementing wage and price controls.  This is like setting the stove burner on ‘high’ and putting a lid on the pot with no release for the pressure.  And they talk a lot.

They have talked enough over the past thirty years to frighten us into thinking that our own spending and saving habits are the problem.  Sometimes the blame is directed at foreign countries and their currencies (China/Yuan for example).

Our sense of ‘unfairness’ over China’s attempts to weaken the Yuan seem to be misplaced.  We criticize them for doing the same things the US government and Federal Reserve have been doing for over one hundred years.

The inflation (expansion of the supply of money and credit) produced by the Federal Reserve is deliberate and intentional. And ongoing.  The effects of that inflation are volatile and unpredictable.

Even with the hugely, inflationary response of the Federal Reserve in 2008 and afterwards we did not see the “obvious substantial increase in the general level of prices for goods and services” that some expected and predicted.  But we did see a resurgence of higher prices for financial assets like stocks and real estate.

During the seventies, prices for basic necessities were rising on a weekly, even daily, basis.  But things eventually settled down and we had an extended period of stability and relative US dollar strength for a couple of decades.

And yet, the effects of inflation are very clear.  How much are you paying  for things today compared to fifteen years ago?  Ten years ago?

As time marches on, the effects of government inflation will become more extreme and more unpredictable.  And the loss of purchasing power of the US dollar will reflect that.

 

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

Analysis Of Gold Is Lacking

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Any analysis of gold must have a correct premise.  And terms used in that analysis must be clearly understood.  For example…

“Are you pro-gold?”  Just exactly what does that mean?   Is it a political or moral issue?  In other words, does someone’s position on gold indicate ideology or lifestyle choice?  Can a political liberal be pro-gold? And if someone answers the original question in the affirmative, does that mean they are anti-something else?

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Gold And Interest Rates – A Mass Of Confusion

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Over the past several months there have been numerous articles referencing a relationship between gold and interest rates. Most of them are well-meaning attempts to convey information about recent changes in the markets as interest rates head higher.

In several instances, however, the author(s) have tried to explain a ‘perceived’ correlation between rising interest rates and the value of the US dollar – in a very positive manner. And they have imputed a similar correlation – albeit negative – in other statements with respect to Gold.  In both cases they are incorrect.  

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Gold Price $700 Or $7000? (revised and updated 1/13/2019)

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GOLD PRICE $700 OR $7000?

Does either of the above preclude the other?  In other words, if we expect gold to reach $7000.00 per ounce, and we are correct, does that mean that we can’t reasonably expect gold to go as low as $700.00 per ounce? Conversely, if we are predicting or expecting gold to continue its current decline, and even breach $1000.00 per ounce on the downside, can $7000.00 per ounce, or anything even remotely close to that number, be a reasonable possibility? 

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Warren Buffett Is Right (And Wrong) About Gold

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Warren Buffett is right – and wrong – about gold. And many others are, too.

Among their various characterizations of gold are the following:  it is an unproductive asset; it doesn’t ‘do’ anything; it just sits there; it’s too volatile; stocks are a much better investment.

And, of course, they are right.  Up to a point.  

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Silver Is Not Real Money

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Is silver real money?  I don’t think so.  But I know that my proclamation will likely draw vociferous contradictions  from others who consider themselves “hard-money advocates”.

That’s okay.  Let’s look at the facts.   

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Gold In The Headlines (a different perspective)

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GOLD IN THE HEADLINES…

Investors Ditch Gold After Trump’s Win  (Wall Street Journal 14Nov2016)

“Investors piled into gold when polls showed Donald Trump’s chances for victory were improving.  Now that he has won the presidential election, they are selling.”

It is true that the US dollar price for gold increased as much as three percent on foreign markets when early election results here in the US indicated a substantial improvement in President Elect Trump’s odds.  However, at that particular time, it likely heightened – in some people’s eyes – the possibility of a contested election.  As the evening wore on, and it became apparent that Mr. Trump would win the election,  the uncertainty lessened and prices retreated from those higher levels.  By early morning at the opening of the US markets the price of gold was back to where it closed the day before.  The entire activity was pretty much a non-event.

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Gold: It’s All About the US Dollar

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GOLD: IT’S ALL ABOUT THE US DOLLAR 

The relationship between gold and the US dollar is similar to that between bonds and interest rates.  Gold and the US dollar move inversely.  So do bonds and interest rates.

If you own bonds, then you know that if interest rates are rising, the value of your bonds is declining.  And, conversely, if interest rates are declining, the value of your bonds is rising.  One does not ’cause’ the other.  Either result is the actual inverse of the other.

When you were a kid you probably rode on a see-saw or teeter-totter at some time.  When you are on the ground, someone on the other end of the see-saw is up in the air.  And, vice-versa, when you are up in the air, the other person is on the ground.  Again, one does not ’cause’ the other.   Either position is the inverse of the other.

Gold is stable.  It is constant.  And it is real money.  Since gold is priced in US dollars and since the US dollar is in a state of perpetual decline, the US dollar price of gold will continue to rise over time.

There are ongoing subjective, changing valuations of the US dollar from time-to-time and these changing valuations show up in the constantly fluctuating value of gold in US dollars. But in the end, what really matters is what you can buy with your dollars which, over time, is less and less.

The US dollar has lost ninety-eight percent of its purchasing power over the last one hundred years.  And over that same one hundred years, what you can  buy with an ounce of gold remains stable, or better.  (See my article  A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold)

Gold’s value is not determined by world events, political turmoil, or industrial demand. The only thing that you need to know in order to understand and appreciate gold for what it is, is to know and understand what is happening to the US dollar.

And what is happening to the US dollar?  It is in a constant state of deterioration, punctuated with periods of temporary strength and stability.  This is reflected directly in the US dollar price of gold.

The value of gold as priced in US dollars is a direct reflection of the value of the US Dollar. Remember, gold is the constant.  The value of the US dollar is continually declining over time but always fluctuating (both up and down).

From my article Gold Is Real Money :

The Federal Reserve Bank of the United States was established in 1913. At that time the U.S. dollar was fully convertible into gold at a rate of twenty ($20.65) dollars to the ounce. You could exchange paper currency of twenty dollars for one ounce of gold in coin form. The coins were minted by the U.S. government. Gold in other forms (dust, flakes, nuggets, etc) also had circulated as money at the same ratio of twenty dollars to the ounce once its purity and weight was established. Fast forward one hundred years. The U.S. dollar has lost 98% of its purchasing power over the last century. In other words, it takes fifty times as many dollars to buy today what one dollar would buy a hundred years ago. Whereas one ounce of gold will still buy today what it would a hundred years ago.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

Gold Mining Shares Are A Lousy Investment

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This year’s turnaround in Gold Mining shares had helped to buoy the hopes and dreams of investors who were ‘betting’ that their long, agonizing wait for euphoric, exponential gains is over.  They continue to believe that the future for the Gold Mining Industry is quite rosy. Unfortunately, they are probably wrong.

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