Wednesday, August 7, 2019

Another Reason to End the Fed

The sad truth about debates and arguments concerning government is usually that they all end with a governmental choice. Time moves on. Years later, the opposing sides are buried somewhere and the living have to deal with the outcome of their conflict. Does anyone recall those conversations? Does anyone know that the city of Mosul, Iraq sits on the west bank of the Tigris river and the ancient city of Nineveh use to sit on the east bank in the same location? Did they argue about the city name change? This is my point. There was opposition to the idea of creating a central bank in the US.

Fiat v. Gold

The founders went back-and-forth over what currency to establish in our new nation. The compromise was a central bank for one side and a strong currency backed by gold on the other. Cheap money favors borrowers. They already have some wealth, but with cheap money, they could expand and increase their holdings. Read greed. A strong currency protects citizens from inflation. It allows them to save and grow their wealth through time, knowing it has a sound foundation. It retains value. Eventually, the first citizens realized that bankers favored fiat. They did nothing for ordinary people. They voted for officials who ended the central bank.

Didn't end 

The debate continued. The banks had the resources to continue the fight. A second central bank was created with a sunset law. By the way this is a great way to pen controversial issues into law. Put a time limit. See how it affects society. Good old, Andrew Jackson ended it. He ran by saying he would end the bank. The opposing party put up a pro-central banker. He lost. This is the voice of America. It gets labeled as "Populism" today. By the way, it was also called populism back in the day.

The story did not end

It laid low. It was discussed behind closed doors. It needed a moment, a crisis. It found the seeds in 1893. The nation had experienced rapid growth. Railroads crisscrossed the country. Manufacturing exploded on the backs of wage earners who were exploited. What developed was overproduction along with excess government spending. This is how it reads in history books. The real sin besides low wages and foreclosing of family farms was the banking institution and the US treasury. When citizens realized that deflationary effects from the civil war was destroying the value of present dollars, the idea of converting silver to dollars would stimulate the economy and help them meet financial obligations, basically the mortgage on the farm. This put a run on banks to redeem dollars with their silver. The banks could not cover and they got government to end the convertibility of silver for dollars. This violated the constitution. In addition, notes were no longer allowed to be used to get gold. The government did not have enough gold on hand to redeem. Together, this led to a panic, a run on banks. This led to the recession of 1893. Five hundred banks failed and citizens lost their entire life savings. There was no FDIC.

Enter 1907

This depression was caused by greed. Some ding-dong decided that he could manipulate the stock market. He got a bank to back him up. He tried to corner copper through a copper company. He failed, but he crushed the stock market and began a run on banks. Again, banks lacked enough funds to meet withdrawals. The liquidity problem was solved by John Pierpont Morgan who provided funds that ended the bank runs. Behind the scenes he got the government to give him US Steel through an acquisition. Again, banks, government and corruption are never blamed in history books. However, this time the elite bankers used the concept of a strong central fund. It was central to their argument. They said it was the source to end the problem of bank runs. They lobbied (read bought politicians) to accept their view. Another phony was in the White House. President Wilson joined their side. Just before Christmas in 1913 the devils got their way. Wilson signed the act to establish the Federal Reserve. This was even better for banking. This central bank is not part of the government. Fiat money was coming. Again, the constitution was violated, but not in so many words but more in direction. Gold would be out and fiat in. The original argument for cheap money which favors spenders and the rich over sound money which favors citizens and savers. This is the Anopaia Path. It kills the American Dream. This is the road where we find ourselves today.

Where it leads

The Fed just cut interest rates in an economy that is growing with low unemployment. If you recall their lies and BS, they stated that they would seek to normalize interest rates. They could not even get the 10-year rate to 3.75%. They realized that all the cheap money that they had provided had grown exponentially. Government debt would soon not be serviceable. Japan knows this as they use negative money to maintain face. The EU can read the tea leaves. They will play manipulation all the way down to zero. Switzerland is already there. Negative rates means that your purchase price will lose value over the life of the bond. This asset declines in value like a new car that you drive off the lot. The charts say that our 10-year note will fall to 1.31%.
Dear Reader, the government is saying that you give them your present money and in 10 years they will give you 1.31% profit. Keep that in mind when your rental lease is up and the landlord raises your rent 5% or your insurance company or your medical or gasoline, food, etc.
If I'm right and the ten year falls to test the lows, the problem could get worse. Japan, China, the EU all will manipulate their rates to maintain their export levels. This is a race to zero which is actually the real value of paper. This could cause the Fed to continue lowering interest rates and all the while, never admitting failure. It will be too late after a currency crisis to offer the opposing side to fiat and sound money that favors savers and ordinary citizens. We will all suffer. End the Fed!