A History of Central Banking In the United States

What the Road to Hell is Paved With....

by Bill Bonner

Improving the world costs money. When you have it, your efforts either bear fruit. Or they don’t. But when you don’t have it, when you have to change the world on credit, then what?

John Maynard Keynes revolutionized the economics profession in the early 20th century. It was he more than anyone who changed it from a being a refuge for observers and willowy philosophers into a hard-charging phalanx for men of action. But Keynes’ big insight, like all the useful insights of economics, was based on a story with a moral.

In the Book of Genesis, Pharaoh had a dream. In it, he was standing by the river. Out came 7 fat cattle. Then, 7 lean cattle came up out of the river and ate the fat cattle. A similar dream involved ears of corn, with the good ones devoured by the thin ears.

Pharaoh was troubled. His dream interpreters were stumped. So, they sent for the Hebrew man who was said to be good at this sort of thing — Joseph. Pharaoh described what had happened in his dreams. Without missing a beat, Joseph told him what they meant. The 7 fat cattle and 7 fat ears of corn represented years of plenty with bountiful harvests. The 7 lean cattle and thin ears of corn represented years of famine. Joseph wasn’t asked his opinion, but he gave his advice anyway: Pharaoh should put into place an activist, counter-cyclical economic policy. He should tax 20% of the output during the fat years and then he would be ready with some grain to sell when the famine came. Genesis reports what happened next:

Central bank policies and the Ireland and Iceland 2008-12 financial crises

By Dr Frank Shostak.

There were a lot of commentaries regarding the Ireland and Iceland 2008-12 financial crises. Most of the commentaries were confined to the description of the events without addressing the essential causes of the crises. We suggest that providing a detailed description of events cannot be a substitute for economic analysis, which should be based on the essential causes behind a crisis. The essential cause is the primary driving force that gives rise to various events such as reckless bank lending (blamed by most commentators as the key cause behind the crisis) and a so called overheated economy.

Now in terms of real GDP both Ireland and Iceland displayed strong performance prior to the onset of the crisis in 2008. During 2000 to 2007 the average growth in Ireland stood at 5.9% versus 4.6% in Iceland. So what triggered the sudden collapse of these economies?

Central bank policy the key trigger for economic boom



What set in motion the economic boom (i.e. a strong real GDP rate of growth) in both Ireland and Iceland was an aggressive lowering of interest rates by the respective central banks of Ireland and Iceland. In Ireland the policy rate was lowered from 13.75% in November 1992 to 2% by November 2005. In Iceland the policy rate was lowered from 10.8% in November 2000 to 5.2% by April 2004.

Contra Richard Koo and the Keynesians: It is not about ‘aggregate demand’ but about real prices

by Detlev Schlichter


I do not want to waste your time and my energy with shooting down misguided Keynesian schemes all the time, schemes that have been refuted long ago and should by now be instantly laughed out of town whenever put forward. But arch-Keynesian Richard Koo’s latest attempt in the commentary section of the Financial Times to justify out-of-control deficit spending in the United States as a smartly designed and necessary policy that will keep ‘aggregate demand’ up and lead to recovery, is making the rounds on the internet. Koo’s article is a mechanical and naïve exposition of the 101 of Keynesian stimulus doctrine, clearly aimed at those who still perceive the economy as a simple equation with Y, C, I and lots of G in it. If private demand falls out from under the bottom of the economy, it can be replaced with the government’s demand. Simple.

And wrong, of course.

But the piece is not without some educational value. I promise this will be shorter than my attack on the new money mysticism at the IMF.

Fiscal suicide as recovery strategy

I am not sure if even in Washington there is anybody left who still seriously claims that $1trillion-plus deficits year-in and year-out are anything but a sure-fire sign of a public sector out of control – a public sector that despite generous and growing staffing levels is simply running out of fingers to put into the many holes from which the money is leaking. Yet Richard Koo wants us to believe there is a method to the recklessness, that this is a finely calibrated strategy to save the economy.

"We're Flying Blind," Admits Federal Reserve President

Eric S. Rosengren, the president of the Boston Federal Reserve Bank, recently gave a speech at Babson College on November 1. That was a good place to give it. Founder Roger Babson in September, 1929, warned of a stock market crash. Wikipedia reports: "On September 5, 1929, he gave a speech saying, "Sooner or later a crash is coming, and it may be terrific." Later that day the stock market declined by about 3%. This became known as the "Babson Break". The Wall Street Crash of 1929 and the Great Depression soon followed."

Dr. Rosengren began:

Today I plan to highlight three main points about the economic outlook. I always like to emphasize that my remarks represent my views, not necessarily those of my colleagues on the Federal Open Market Committee or at the Board of Governors.

A first point is this: while it is still early to gauge the full impact of the Federal Reserve's September monetary policy committee decision to begin an open-ended mortgage-backed security purchase program, the program has so far worked as expected. The initial response in financial markets was larger than many expected. Given that our conventional monetary tool, the fed funds rate, has hit its lower bound of zero, we have turned to unconventional monetary policy. By that I mean policy that attempts to affect long-term interest rates directly, via asset purchases, rather than indirectly by setting the short-term interest rate, as in conventional policy.

The Downside of Debt

by Bill Bonner


Cristina Fernandez de Kirchner, president of Argentina, will never be remembered as a great economist. Nor will she win any awards for ‘accuracy in government reporting.’ Au contraire, under her leadership, the numbers used by government economists in Argentina have parted company with the facts completely. They are not even on speaking terms. Still, Ms. Fernandez deserves credit. At least she is honest about it.

The Argentine president visited the US in the autumn of 2012. She was invited to speak at Harvard and Georgetown universities. Students took advantage of the opportunity to ask her some questions, notably about the funny numbers Argentina uses to report its inflation. Her bureaucrats put the consumer price index — the rate at which prices increase — at less than 10%. Independent analysts and housewives know it is a lie. Prices are rising at about 25% per year.

At a press conference, Cristina turned the tables on her accusers:

“Really, do you think consumer prices are only going up at a 2% rate in the US?”

This Is A Moment In Time That’s Never Been Seen Before

by kingworldnews.com

“Greece is a serial bailout, restructuring, can-kick, and I guess this is going to continue as long as the riots don’t get worse. Maybe eventually Greece will get ejected from the euro. The question (in Europe) is, is Draghi going to get serious about the OMT or not?”

“My suspicion is he is going to. They are going to use the central bank there to make sure the euro doesn’t fracture, in the same way Greenspan and Bernanke have used the printing press to make sure that the United States financial markets don’t collapse.

I suspect Europe will muddle through as long as Draghi is willing to keep buying the government debt and keep the whole process moving.
“The (US) fiscal cliff, near as I can tell, is mostly just a boatload of tax hikes and some proposed spending cuts. But at the end of the day, there is a mood of class warfare in the country which is being fomented by the Democratic Party.
Part of the reason for the disparity of wealth in the country is because the policies of the Federal Reserve have helped eviscerate the middle class, both through losing money in bubbles and inflation, and the misallocation of capital and the ensuing destruction of jobs. So the Fed’s policies have hammered the middle class.

Carlo Ponzi, Alias Uncle Sam

by  Gary North

Carlo "Charles" Ponzi was a con man who was the Bernie Madoff of his era. For two years, 1918 to 1920, he sold an impossible dream: a scheme to earn investors 50% profit in 45 days. He paid off old investors with money generated from new investors. The scheme has been imitated ever since.

Every Ponzi scheme involves five elements:
1. A promise of statistically impossible high returns
2. An investment story that makes no sense economically
3. Greedy investors who want something for nothing
4. A willing suspension of disbelief by investors
5. Investors' angry rejection of exposures by investigators

Strangely, most Ponzi schemes involve a sixth element: the unwillingness of the con man to quit and flee when he still can. Bernie Madoff is the supreme example. But Ponzi himself established the tradition.

The Die Is Cast And Only One Question Remains

by kingworldnews.com

“The Rubicon is a river in Italy that played a major role in the history of Rome and Western Civilization. Prior to Julius Caesar, it was considered an inviolable boundary for a general commanding an army. To cross it with your army was considered an act of treason against the State.

Caesar did just that in 49 B.C. Caesar left Rome to be come the governor of Cisalpine Gaul (northern Italy), Illyricum (southeastern Europe) and Transalpine Gaul (southern France) in 58 B.C.. Actually, he unsuccessfully fled Rome to avoid his mounting debts (he liked to gamble and was a bon vivant). He was only allowed to continue to Gaul after his wealthy friend Crassus paid and guaranteed the debts for him. His conquest of all of Gaul and the details of his military genius are well known, particularly since he wrote it all down in the form of a partial autobiography.

Ambitious men were not welcome to the old Roman order. The Romans had an unpleasant experience with a dictator that led to their founding, and it was in their DNA to despise such men. Caesar was a major threat....

Jim Rogers Economic Collapse Martial Law Alex Jones

How Central Bank Policy Impacts Asset Prices Part 5: How Far Can They Go?

by Tyler Durden  source : www.zerohedge.com
With the unlimited asset purchase announcements by the Fed and ECB recently, the limits of balance sheet expansion will be put to the test. The current levels would have been seen as inconceivable a mere few years ago and now it seems business-as-usual as investors have become heuristically biased away from the remarkable growth. The problem is - central banks are missing inflation targets and credit growth is still declining - need moar easing, forget the consequences.

Via SocGen:

Balance sheet expansion resumes in advanced countries
Following the unlimited asset purchases announcements by the ECB and the Fed, the limits of balance sheet expansion will be put to the test once again.

Let the Markets Clear!

by Ron Paul - Daily Paul

French businessman and economist Jean-Baptiste Say is credited with identifying the fundamental economic principle that aggregate demand for goods in an economy will equal the aggregate supply of goods when markets are permitted to operate. Or in Say’s words, “products are paid for with products.”

English classical economist David Ricardo, among others, more fully developed this principle into what has become known as “Say’s Law.” Say’s Law, according to Ricardo, leads us to understand that market equilibrium for goods is constant. This simply means that markets, when left alone by government planners or other fraudulent actors, inexorably tend toward an “equilibrium price” which eventually balances supply and demand for any particular good. Thus markets will clearthemselves of any surpluses or shortages in the form of excess supply and demand.

How Central Bank Policy Impacts Asset Prices Part 2: Bonds

by Tyler Durden

The Fed sees the need to reduce interest rates as it takes over the US Treasury and MBS markets; but the ECB's actions are more aimed at reducing divergences between peripheral nations and the core. As SocGen notes, it remains unclear how and when the Fed would exit this situation and in Europe, bond market volatility remains notably elevated relative to the US and Japan as policy action absent a political, fiscal, and banking union remains considerably less potent.

Via SocGen:

Fed action pushes rates to record lows

The Fed bought around $2tn of securities since November 2008, pushing rates to historical lows (US treasuries becoming popular safe havens also contributed to lowering rates).



It remains unclear how and when the Fed would exit this situation. Operation Twist expires at year-end and any extension seems to be put on hold until after the presidential elections.

A potential Romney victory could bring an end to low QE rates in 2014 (when Mr Bernanke’s term expires).

As a result of the very low rate environment, the US equity risk premium is currently extremely high (6.3% in October 2012).

Hurdles in transmission of ECB monetary policy

Simplicity: Part 2

Presentation to the Cambridge House California Investment Conference
Indian Wells, CA

Simplicity: Part 1

Presentation to the Cambridge House California Investment Conference
Indian Wells, CA

The Tragedy of the European Union and How to Resolve It

 

 by George Soros New York Review of Books

Preface: In a fast-moving situation, significant changes have occurred since this article went to press. On August 1, as I write below, Bundesbank President Jens Weidmann objected to the assertion by Mario Draghi, the president of the European Central Bank, that the ECB will “do whatever it takes to preserve the euro as a stable currency.” Weidmann emphasized the statutory limitation on the powers of the ECB. Since this article was published, however, it has become clear that Chancellor Merkel has sided with Draghi, leaving Weidmann isolated on the board of the ECB.
This was a game-changing event. It committed Germany to the preservation of the euro. President Draghi has taken full advantage of this opportunity. He promised unlimited purchases of the government bonds of debtor countries up to three years in maturity provided they reached an agreement with the European Financial Stability Facility and put themselves under the supervision of the Troika—the executive committee of the European Union, the European Central Bank, and the International Monetary Fund.
The euro crisis has entered a new phase. The continued survival of the euro is assured but the future shape of the European Union will be determined by the political decisions the member states will have to take during the next year or so. The alternatives are extensively analyzed in the article that follows.

I have been a fervent supporter of the European Union as the embodiment of an open society – a voluntary association of equal states that surrendered part of their sovereignty for the common good. The euro crisis is now turning the European Union into something fundamentally different. The member countries are divided into two classes – creditors and debtors – with the creditors in charge, Germany foremost among them. Under current policies debtor countries pay substantial risk premiums for financing their government debt and this is reflected in their cost of financing in general. This has pushed the debtor countries into depression and put them at a substantial competitive disadvantage that threatens to become permanent.

Extraordinary Popular Delusions And The Madness Of Markets

Whether its new-fangled Japanese stocks, hi-tech internet company valuations, multi-colored flowers, or mansions made affordable by criminally lax lending standards, Grant Williams notes that a bubble is a bubble is a bubble; and citing Stein's Law: "If something cannot go on forever; it will stop." In this excellent summary of all things currently (and historically) bubblicious - whether greed-driven or fear-driven - Williams concludes it is never different this time as he addresses the four phases of the classic bubble-wave: smart-money, awareness, mania, blow-off (or crash) and explains how government bonds are set to burst and gold is only just about to enter its mania phase. This far-reaching and entirely accessible presentation is stunning in its clarity and as he notes, while bubbles are always easy to spot ex-ante, understanding how they come about and why they are popped gives the few an opportunity to profit at the expense of the madness of crowds. From tulips to tech-wrecks, and from inflation to insatiable stimulus, the bubble in 'safe-haven flows' that currently exists has all the characteristics of a popular delusion.

by www.zerohedge.com

Currency Wars Simulation

This short video presents a variety of hypothetical scenarios which would have significant effects on currencies and commodities. See how a geopolitical or black-swan event could give real asset investors a tremendous advantage

Japanese Government Demands BOJ Do QE 9 One Month After Failed QE 8

by Tyler Durden

 Almost exactly a month ago, the BOJ surprised most analysts with an unexpected increase in its asset purchase agreement by JPY10 trillion bringing the total to JPY80 trillion. There was one small problem though: the entire impact of the additional easing fizzled in under half a day, or 9 hours to be precise. This was, as Art Cashin summarized the following day, Japan's failed QE 8. It is now a month later, and with nothing changed in the global race to debase status quo, the time has come for the BOJ to attempt QE 9. Or that's the case at least according to the toothless Japanese government, which has formally demanded that Shirakawa do a nine-peat of what has been a flawed policy response for over 30 years now, this time with another JPY 20 trillion, or double the last month's intervention. Because according to Japanese Senkei, it is now Japan's turn to pull a Chuck Schumer and demand even mor-er eternity-er QE out of monetary authority of the endlessly deflating country. In reverting to the Moore's law of failed monetarism, we expect that a QE 9 out of Japan will have the same halflife as QE 8, if indeed the program size is double the last. At which point it will again fizzle.
From Senkei via Bloomberg:

• Govt. is asking Bank of Japan to increase its asset-purchase program by 20t yen, Sankei reports, citing an unnamed government official.
• Program would be increased to 100t yen from current 80t yen: Sankei
• Increased fund likely to be used to purchase long-term JGBs, ETFs and J-Reits: Sankei
• BOJ is expected to lower economic growth, inflation forecasts in an economic report due Oct. 30: Sankei

In other words, "Get to work, Shirakawa-san." One of these days the trillions and trillions in new fiat injected will actually "work"- at that point Japan will look back at its days of deflation as a fond memory when living through the alternative.
But at least nobody pretends anywhere, anymore that the central bank of a country is apolitical: neither the ECB, which is openly using its various monetary programs to finance insolvent countries, nor the Fed, which is buying up all gross Treasury issuance longer than 10 Years, and now the BOJ, which is openly taking requests from politicians who are totally helpless to do anything to the Japanese economy on their own.
The good news is that the Keynesian singularity, where QE XYZ+1 has to take place every nanosecond just to keep the world in one place (courtesy of the magic of a closed fiat loop in which devaluation is always relative to everyone else, and is limited only by the speed of the central printer and toner inventory), is getting ever closer and closer...

Is deflation a major threat to the eurozone?

By Dr Frank Shostak
source www.cobdencentre.org

In its October 2012 World Economic Outlook report the International Monetary Fund (IMF) said that the European Central Bank (ECB) should keep interest rates low for the foreseeable future and may need to cut them further given the risk of deflation.
Now, even if the IMF is correct and prices in the Euro-zone will start falling, why this is so bad?
The conventional wisdom holds that price deflation causes people to postpone their buying of goods and services at present on the belief that the prices of these goods and services will be much lower in the future.
Hence why buy today if one can buy the same good at a bargain price in the future? As a result a fall in consumer outlays via the famous multiplier will lead to a large decline in the economy’s rate of growth.
In fact deflation could set in motion a vicious downward spiral, which could plunge the economy in a severe economic slump similar to the one that took place during the Great Depression of the 1930’s, or so it is held by most experts.
It is for this reason that the IMF is of the view that the ECB should push the policy interest rate further down.
Now, if deflation leads to an economic slump then policies that reverse deflation should be good for the economy.