Tag Archives: inflation

In FED we trust?

Representative Ron Paul (R- TX) has introduced a bill in congress entitled HR 1207 Federal Reserve Transparency Act.  The FED, according to it’s own website is an institution which is “Independent within the government”.  Created on December 23rd 1913 under the Federal Reserve Act, it functions as a self funding semi-autonomous entity responsibile to report periodically in front of congress.  The FED’s site states “The Federal Reserve’s ultimate accountability is to Congress, which at any time can amend the Federal Reserve Act.

Currently, the Federal Reserve is audited annually by an independent auditor and can be audited by the Government Accountability Office (GAO) under the Federal Banking Agency Audit Act of 1978.  The question is if the FED is created by Act of congress and is subject to independent audit then what is the purpose of the new Federal Reverse Transparency Act, and why has the Act gained such broad support in congress thus far?

The Washington Post ran a story on July 24th which stated that the Federal Reserve Transparency Act would “subject the Fed’s decisions to a full-blown audit by the Government Accountability Office, the investigative arm of Congress.”.  Additionally Bloomberg.com reported that on July 22nd “Bernanke told Paul at a House Financial Services Committee hearing last week that GAO audits, often initiated at the request of members of Congress, could be used as a club against the Fed.”  But if, as we’ve seen, the FED’s own website states that it is already subject to audit by the GAO what is the real issue here?

 

Ron Paul questions Ben Bernanke

Ron Paul questions Ben Bernanke

The principle on which the FED’s independence rests is its mandate to regulate monetary policy free from the influence of politics.  This fact is actually quite strange when we think that the foundation of this nation was the dependence of all institutions on civil society as opposed to the dependence of the government on institutions such as the Church or the Central Banks of Europe.

Now the regulation of the monetary system is something which we seem to take for granted.  It has only been the recent expansion of the FED into areas not traditionally under it’s domain in response to the financial crisis which has cause the backlash behind the Federal Reserve Transparency Act.  The recent attempts to have the FED regulate financial markets, oversee consumer protection, purchase distressed structured assets in order to support the markets, and intervene in the support of businesses from brokerages, investment banks, manufactures, and mortgage lenders have all contributed to the general impression that the government has ceded too much power to an entity which is self described as an “independent entity within the government”.

Prior to this financial crisis it was commonly understood that the dual mandate of the FED was to balance price stability and full employment.  It did this through it’s regulation of short term interest rates and its control over monetary policy.  Basically, the FED would lower or raise interest rates or, in conjunction with the US Treasury, reduce or increase the amount of currency in circulation.  Thereby, in theory, the FED was able to add a layer of control over the economic cycles of boom and bust which all nations and economies are subject to.

It is open for debate as to the effectiveness of the FED in this regard.  A mere 16 years after its creation the FED was unable to (or even contributed to) the Great Depression.  We generally assume that the marvelous expansion of the economy in the 20th century was proof of the effectiveness of the FED.  Certainly the American Economy is many many times larger now at the beginning of the 21st century than it was at the beginning of the 20th.  But, as this financial crisis has made clear, so is the balance sheet of the government many many times larger as well.

We see today that the FED has done everything possible to achieve so called “price stability” at the expense of its other assumed mandate of “full employment”.  There are many who openly question whether it wasn’t the FED’s own policies of artificially low interest rates and artificially cheap credit which caused the current crisis.  In this regard, with years of FED supported asset price growth and a short period of asset price crash the term “price stability” seems incorrect, the more correct term would be “price control” or lack thereof.  With the official unemployment rate at almost 10% and the unofficial unemployment rate projected to be much higher, we hear that such is the necessary sacrifice in order for “the markets to heal”.  As if markets were human beings who bleed and heal and human beings are just workers whose place is analogous to red blood cells rather than individual citizens.

I think this really is at the heart of the debate over the Federal Reserve Transparency Act.  On one side there are those who believe that the economic system is paramount and from it comes the health of the nation, while the other side believes that individual citizens in representative democracy are the ultimate source of the State’s continued existence.

This philosophical debate goes to the core of our ideas of government and the individual and its history is as old as human civilization.  Where does our individual responsibility lie? Is it to us, or our family, or our friends? Is it to our city, or our state, or our nation?  Where does the FED’s ultimate responsibility lie? Is it to itself and its member banks, or the United States government, or to the other central banks of the world?

It remains to be seen whose best interests are being served here; but I can only trust in the knowledge that anytime attempts at transparency are resisted it can only mean one thing… fraud.  Can we afford to trust the same individuals, the same organizations, and the same system to fix the societal ills which they have caused?  Transparency will never be tolerated when it comes to the FED, regardless of what their website claims.  If it were, the American people would know that they are only cogs in the machine, and the owners of capital mean to continue to impose the silent tax upon them… inflation.  Just as the revolutions of representative democracies were wagged on the basis of “no taxation without representation”, so the public knowledge of the silent tax of inflation would demand a response in kind and in measure.

 

Ben Bernanke

Ben Bernanke

So here it is…

So call me a conspiracy theorist but here it is:   Why the fuck is the price of oil so damn high?!?  Like some sort of fever it just keeps going higher.  When will it stop and how much more can people take?  Fortunately there is a cure.  Unfortunately, its a long and painful withdrawal process.  From a national addiction to debt fueled by oil can we still change our government as a people? Or are we to remain junkies to the world, a democracy in name only where our own government is our dealer. 

From 1972 until 1978 prices of oil had shot up by almost 50% however that was dwarfed by the next accelerated spike in 1978.  For the next 8 years the price of oil on a nominal basis, which is measured against a constant currency value, drops in measured steps.  However on an inflation adjusted basis the drop is significant and steep.  The reason the two measures diverge during this period is inflation. 

   Let’s face it, the last time oil prices shot up lasted from ’72 to ’86 peaking around ’78.  The below chart is as of April 2008.  The price of oil at that time was $117 a barrel.  Today, June 20th 2008 the price of a barrel of oil is $135.  So what’s next? Does the price of oil come down as fast as it went up? Not so fast, because From 1978 to 1982 the rate of inflation averaged 11% and was as high as almost 15%.  As much as the price of oil will come down following the spike, so much more will everything else begin to cost.

   So here it is… when the price rises in oil come to a stop, don’t celebrate.  Look carefully because by then whatever is saved is lost on price increases elsewhere.  The great unspoken tax, levied through federal interest rate policy and US Treasury money supply controlled increasingly by executive powers which are bailing out the major banks at the expense of the American people.  Watch the money trail and notice who benefits and who suffers as the economy “recovers”. 

   A radical shift is needed which will stop the Fed policies of artificially low interest rates and stem the tide of money which the Treasury has let loose.  Until the government is stopped from bailing out the financial interests behind their politics, the American people will be robbed with a silent tax. 

   Will the cure be worse than the disease? As painful and financially damaging as price increases in the US will be, it is nothing compared with the effects in countries around the world.  The question remains if the US is still strong enough as a nation to take the necessary steps to start curing its national addiction.  Interest rates higher than most people under 30 years old can imagine and years of tough economic times are the cure.  Will the US be able to get clean? Probably.  Will the US be able to stay clean? Probably not, but it’s time to start trying.

inflation adjusted oil prices chart

Crack Economics (originaly posted Sept. 3rd ’07)

Generally, political and social events are preceded by economic ones.  While this may grate against people’s sensibilities that they act as free individuals, there are large systematic forces individuals exist within.  When society is governed rationally and in the service of its citizen, these forces lift individuals up and provide them with the basis to make choices that benefit both society and themselves.  When society is governed poorly these forces serve the ends of those with the power to chose, at the expense of the vast majority who have only the means to serve.

            We may think that grand economic and social movements are forces beyond our control, like laws of nature.  It is this illusion that is perpetuated by those in power as a way to keep the majority convinced of their own impotence.  The fact is that history is not like gravity and current world events are not like the weather.  Society and economics are nothing more than the sum of human activity, and therefore under the control of humanity. 

            As powerful as we believe we are as a people to create and sustain wealth, we are yet nothing in the face of the forces of nature.  As powerful as we believe the leaders of our nation and the world’s economies are, they are nothing in the face of the truth of the economic realities of the individuals upon whose backs the powerful rest.  It is in this context that we should understand the effect economic events will have on society over the coming years. 

The relationship between the U.S. dollar and the price of oil illustrate a larger picture of the nature of our economy and the relationship between the state and its citizens.  Since oil is priced in dollars, a rise in oil prices would be tied to a fall in the U.S. dollar relative to other major currencies.  A weaker dollar means more serviceable national and consumer debt, but it also means higher inflation, more expensive goods from overseas including oil, less buying power for the average American.  As long as the price increases are not too dramatic, nobody seems to notice.  What we had owned is now worth less, but so is what we had owed.

Prices increase to compensate for the loss of value in the dollar. Inflation rises and the cycle continues, effectively transferring the wealth from the citizens to the government.  As the government creates more money, the value of the dollar falls as does the wealth of the individuals; and the government’s debt effectively shrinks in relation to the currencies that hold our debt.  The government in effect is in the business of producing Americans, shares of which are sold to private and foreign investors. 

The owners of this country have a vested interest in devaluing the U.S. dollar just enough to continue to expand the generation of wealth, but not enough to jeopardize their investment.  Individual Americans experience the real value of their money decrease through inflation while the government as a result must take on more and more responsibility.  The government then treats any threat to this economic order as a threat to the national security of its citizens.  It is a deal with the devil in which we implicitly agree to cede our power as citizens over to the government in return for the life we have created for ourselves.    

In 2000, Iraq converted all its oil transactions under the Oil for Food program to euros. The U.S. invasion of Iraq has more to do with the fear of losing control of the universal denomination of oil the US dollar enjoys, than it does with 9-11 and the war on terror.  When the U.S. invaded Iraq in 2003, it returned oil sales from the euro to the USD.  Similarly, Iran planned to begin selling oil denominated in euros in March of 2006.  Wars continue to be fought to protect the transfer of capital from the U.S. middle class to the owners of the U.S. Government’s debt. 

We have been convinced that we have had a healthy and strong economy.  In actuality, what we now have is an economy in which credit functions like a cancer; and where we cannot stop growing our debt because it is the thing that sustains us.  The gradual devaluation of the US dollar since the 1970s has been the means by which we have achieved growth; the true cost of which has yet to be fully realized.

Each economic revolution whether agricultural, industrial, or digital is a form of the reorganization of society in fundamental ways.  While there are powerful economic currents which individuals must navigate, the source of all wealth is still the activity of individual human beings.  While the culture of debt is powerful, the individual always has a basic ability to choose.  Economic events generally precede social and political ones.  We have felt but a momentary fix of the withdrawal that awaits.  It is our national addiction, getting high off a pawned future. In crack economics, you either get clean or die a slow death.

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