Posts tagged Central Bank
Bank of England Drops a Bombshell on Parliament: It Shredded Its Crisis Era Records
No reason to keep records of what happened at one of the world’s most powerful central banks during the height of the 2008 Crash. Nothing important to know there. No reason to look back and remember what worked and what didn’t. No reason to keep the evidence.
Oh I’m sorry. Did I say evidence?
(From Wall Street on Parade)
The bombshell came in the following exchange between the Chair of the Treasury Select Committee, Andrew Tyrie, and a very frightened appearing Paul Fisher, the Executive Director of Markets at the BOE, who has served in that position since 2009. Apparently neither Parliament nor the public knew prior to this exchange that the records of the pre-crisis year of 2007, the financial collapse in 2008, and the monetary policy maneuvers in subsequent years to prevent another Great Depression had been destroyed in one of the world’s most important financial centers; not to mention the fact that critical recordings potentially relevant to the Foreign Exchange probe are also gone.
Image credit: http://www.againstcronycapitalism.org
By Ron Paul
At the Fed, The More Things Change, the More They Stay the Same
Last week, Federal Reserve Chairman Janet Yellen testified before Congress for the first time since replacing Ben Bernanke at the beginning of the month. Her testimony confirmed what many of us suspected, that interventionist Keynesian policies at the Federal Reserve are well-entrenched and far from over. Mrs. Yellen practically bent over backwards to reassure Wall Street that the Fed would continue its accommodative monetary policy well into any new economic recovery. The same monetary policy that got us into this mess will remain in place until the next crisis hits.
Isn’t it amazing that the same people who failed to see the real estate bubble developing, the same people who were so confident about economic recovery that they were talking about “green shoots” five years ago, the same people who have presided over the continued destruction of the dollar’s purchasing power never suffer any repercussions for the failures they have caused? They treat the people of the United States as though we were pawns in a giant chess game, one in which they always win and we the people always lose. No matter how badly they fail, they always get a blank check to do more of the same.
It is about time that the power brokers in Washington paid attention to what the Austrian economists have been saying for decades. Our economic crises are caused by central bank infusions of easy money into the banking system. This easy money distorts the structure of production and results in malinvested resources, an allocation of resources into economic bubbles and away from sectors that actually serve consumers’ needs. The only true solution to these burst bubbles is to allow the malinvested resources to be liquidated and put to use in other areas. Yet the Federal Reserve’s solution has always been to pump more money and credit into the financial system in order to keep the boom period going, and Mrs. Yellen’s proposals are no exception.
Every time the Fed engages in this loose monetary policy, it just sows the seeds for the next crisis, making the next crash even worse. Look at charts of the federal funds rate to see how the Fed has had to lower interest rates further and longer with each successive crisis. From six percent, to three percent, to one percent, and now the Fed is at zero. Some Keynesian economists have even urged central banks to drop interest rates below zero, which would mean charging people to keep money in bank accounts.
Chairman Yellen understands how ludicrous negative interest rates are, and she said as much in her question and answer period last week. But that zero lower rate means the Fed has had to resort to unusual and extraordinary measures: quantitative easing. As a result, the Fed now sits on a balance sheet equivalent to nearly 25 percent of US GDP, and is committing to continuing to purchase tens of billions more dollars of assets each month.
When will this madness stop? Sound economic growth is based on savings and investment, deferring consumption today in order to consume more in the future. Everything the Fed is doing is exactly the opposite, engaging in short-sighted policies in an attempt to spur consumption today, which will lead to a depletion of capital, a crippling of the economy, and the impoverishment of future generations. We owe it not only to ourselves, but to our children and our grandchildren, to rein in the Federal Reserve and end once and for all its misguided and destructive monetary policy.
No Janet Yellen, The Economy Is NOT “Getting Better”
On Tuesday, new Federal Reserve Chairman Janet Yellen went before Congress and confidently declared that “the economic recovery gained greater traction in the second half of last year” and that “substantial progress has been made in restoring the economy to health”. This resulted in glowing headlines throughout the mainstream media such as this one from USA Today: “Yellen: Economy is improving at moderate pace“. Sadly, tens of millions of Americans are going to believe what the mainstream media is telling them. But it isn’t the truth. As you will see below, there are all sorts of signs that the economy is taking a turn for the worse. And when the next great economic crisis does strike, most Americans will be completely and totally unprepared because they trusted our “leaders” when they told us that everything would be just fine.
It is amazing how deceived people can be. Just consider the case of 56-year-old Brian Perry. He is a former law clerk that has applied for nearly 1,500 jobs since 2008 without any success. But he says that he is “optimistic” that he will get another job soon because he believes that the economy is recovering…
By his own count, Brian Perry has applied for nearly 1,500 jobs since being let go as a law clerk in 2008. The 56-year old Perry lives in Rhode Island, where the 9.1 percent unemployment rate is 2.5 percentage points above the national average.
Perry remains optimistic that a job is forthcoming. He thinks a more robust economy would create better opportunities for the long-term unemployed like him.
Let us certainly hope that Perry does find a new job soon. But if he does, it won’t be because we are experiencing an “economic recovery”. Just consider the following facts…
-In January, we were told that the U.S. economy “created” 113,000 new jobs. But that figure was arrived at only after adding a massive seasonal adjustment. In reality, the U.S. economy actually lost 2.87 million jobs in January. During the past decade, the only time the U.S. economy has lost more jobs in January was during 2009. At that time, the U.S. economy was suffering through the peak of the worst economic downturn since the Great Depression.
-Prominent retailers are closing hundreds of stores all over the United States. Things have gotten so bad that some are calling this a “retail apocalypse“…
- JC Penney, which lost $586 million in three months in 2013, is planning to close 33 stores in 19 states and lay off 2,000 people. JC Penney’s stock has lost 84 percent of its value since February 2012.
- Sears has decided to shut down its flagship store in Downtown Chicago, and it has closed 300 stores in the United States since 2010. Stock analyst Brian Sozzi noted that Sear’s inventory levels have fallen by 23.7 percent since 2006. He also noted that Sears had $4.4 billion in cash and equivalents in 2005 but $609 million in cash and equivalents in 2012. Sozzi, who calls himself a guerrilla analyst, has a blog full of disturbing pictures of empty Sears stores.
- Macy’s, one of the few retail success stories, is planning to close five stores and eliminate 2,500 jobs.
- Radio Shack is preparing to close 500 stores, according to The Wall Street Journal.
- Best Buy recently closed 50 stores and eliminated 950 jobs at stores in Canada.
- Target announced plans to eliminate 475 jobs and not fill 700 empty positions to reduce costs.
- Aeropostale is planning to close 175 stores.
- Blockbuster has closed down all of its stores.
-McDonald’s is reporting that sales at established U.S. locations were down 3.3 percent in January.
-In January, real disposable income in the U.S. experienced the largest year over year decline that we have seen since 1974.
-Only 35 percent of all Americans say that they are better off financially than they were a year ago.
-What is happening to the U.S. stock market right now very closely resembles what happened to the U.S. stock market just before the horrific stock market crash of 1929. Just check out the chart in this article.
Meanwhile, things continue to unravel all around the rest of the globe as well.
In previous articles, I have detailed how the reckless money printing by the Federal Reserve has inflated massive financial bubbles in emerging markets all over the planet. Now that the Fed is “tapering”, those bubbles are starting to burst and we are witnessing a tremendous amount of economic chaos. Here are three more examples…
Ghanaian Economist Dr. Theo Richardson says Ghana’s economy will crash by June this year if the Bank of Ghana continues with its kneejerk measures to rescue the cedi.
“The government is facing liquidity problems and if we don’t get the appropriate remedies to address the issues at hand the situation may worsen and by June the economy may crash,” Dr. Richardson said.
With only $24.5 billion left in FX reserves after valiantly defending major capital outflows since the Fed’s Taper announcement, the Kazakhstan central bank has devalued the currency (Tenge) by 19% – its largest adjustment since 2009. At 185 KZT to the USD, this is the weakest the currency has ever been as the central bank cites weakness in the Russian Ruble and “speculation” against its currency as drivers of the outflows (which will be “exhausted” by this devaluation according to the bank). The new level will improve the country’s competitiveness (they are potassium heavy) but one wonders whether, unless Yellen folds whether it will help the outflows at all.
In the wake of a global stock market sell-off driven by worries over slower growth in emerging markets, the head of India’s central bank, Raghuram Rajan, criticized the U.S. Federal Reserve as it pressed on with plans to dial back its monthly bond purchases: “International monetary co-operation has broken down,” said Rajan, who added that “the U.S. should worry about the effects of its polices on the rest of the world.”
We have reached a “turning point” for the global financial system. Things are beginning to fall apart both in the United States and all around the world.
But at least the dogs at the White House are eating well. Just consider the following photo that was recently tweeted by Michelle Obama…
This article first appeared here at the Economic Collapse Blog. Michael Snyder is a writer, speaker and activist who writes and edits his own blogs The American Dream and Economic Collapse Blog. Follow him on Twitter here.
Image credit: http://theeconomiccollapseblog.com
By Peter Schiff
Dark Gold: Shedding Light on a Mysterious Market
Gold is the simplest of financial assets – you either own it or you don’t. Yet, at the same time, gold is also among the most private of assets. Once an individual locks his or her safe, that gold effectively disappears from the market at large. Unlike bank deposits or stocks, there is no way to tally the total amount of gold held by individual investors.
I like to call this concept “dark gold.” This is the real, broader gold market that exists below the surface-level transactions on the major exchanges. It’s impossible to know precisely how much dark gold exists around the world, but we do know that it is enough to render “official” gold holdings insignificant. That’s why I don’t buy and sell gold based on the decisions of John Paulson, or even J.P. Morgan Chase. It is a long-term investment that requires a deep understanding of the nature of money – and how little Wall Street’s media circus really matters.
Observing Dark Gold
Think of dark gold like dark matter. Dark matter is a mysterious substance that scientists hypothesize is an essential building block of our universe. All we know is that the universe is a certain size and that a huge amount of its mass is unobservable – this is what we’ve come to call dark matter.
We haven’t yet looked directly at dark matter. We can only observe phenomena that suggest there is a substance we aren’t seeing and can’t quite measure.
Likewise, dark gold is an essential building block of global financial stability. But the extremely private nature that makes it so valuable also makes it nearly impossible to directly observe.
But every now and then, we get a glimpse into the hidden undercurrents of dark gold. In the past year, the Federal Reserve slipped up in a big way and momentarily poked a hole that we can peek through to see what’s happening with some of the largest stores of dark gold in the world.
Gib Mir Mein Gold!
A year ago, the big news was that the Bundesbank, Germany’s central bank, would begin the process of repatriating a portion of its foreign gold reserves, including 300 metric tons stored at the New York Federal Reserve Bank.
The controversy really started in late 2012, when Germany simply wanted to audit its gold reserves at the Fed. They were denied this access, so the Germans switched their approach. If they weren’t allowed visitation with their holdings, they would instead demand full custody. In response, the Fed said it would oblige – within seven years!
As of the end of 2013, a Bundesbank spokesman reported that only 5 tons had been transported from New York to Germany so far, leaving the repatriation far behind schedule.
“But wait,” some might argue, “the repatriation process might be delayed, but we know the gold is there. Central bank holdings constitute the most visible gold in the world. These institutions report their holdings to the world regularly. The gold at the Fed isn’t dark gold at all!”
If this is a true and certain fact, then why was the Bundesbank denied a third-party audit of its gold in the Fed’s vaults? The closest we’ve seen was an internal audit by the US Treasury last year. Of course, the US government holds the sovereign privilege of answering to no one but itself, but that hardly makes for reassuring statistics on which to base one’s investments.
The truth is that we have no clue of the official gold reserves of any central bank in the world. All the Fed has to do to convince me otherwise is let an outside party into its vaults and count the gold. They’ve shown lots of paper; now show us the money!
It is very simple to count bars of gold where they exist. And it is clearly moral (and generally good business) to return assets that are held in trust when the creditor demands them. The Fed’s reluctance on both counts suggests that there is more to this story than meets the eye.
Fortunately, the veracity of the Fed’s claimed gold holdings has little bearing on the long-term precious metals investor. It’s the same with gold futures contracts and the daily spot price. These have no effect on whether or not you have a chest of real money buried in your backyard.
So why is it important that intelligent investors do keep some gold “buried” in their possession? Germany’s repatriation scandal begins to answer this question. The maneuverings of the New York Fed are like the patter and flourish of a magician – it distracts you from the real trick being played.
Or, in this case, where the most impressive piles of dark gold reside.
China Going For Gold
I’d bet that Western central banks are very pleased that the media has latched onto the dustup between Germany and the Fed. It means they are paying much less attention to the massive unreported stores of gold that many observers believe China has been accumulating, and which could have dire repercussions for the US dollar reserve system.
China last reported its gold reserves in 2009, clocking in at 1,054 metric tons. In the official rankings, this makes China’s reserves the sixth largest in the world. Germany comes in second with 3,387 metric tons (or so they hope), and all nations trail the United States’ claimed 8,133 metric tons.
Many speculate that China’s reserves have grown far beyond its official number in the past five years. However, the People’s Bank of China (PBOC) is playing its cards close to its chest.
Last year, a deputy governor of the PBOC tried to convince the world that its reserves have not changed much since 2009. He explained that the Chinese government is keeping a limit on its gold reserves, because “if the Chinese government were to buy too much gold, gold prices would surge, a scenario that will hurt Chinese consumers.”
But a quick look at the numbers coming from the Chinese government shows that they just don’t add up.
China is the largest producer of gold in the world, pulling an estimated 437 metric tons of gold from the earth in 2013 – way more than runner-up Australia, with only 259 metric tons.
On top of this, China imported far more gold than any other country in the world in 2013. Via Hong Kong alone, China imported 1,158 metric tons of gold last year – a more than 107% increase from 2012.
This gold is not leaving the country in large quantities. Sure, China is the biggest exporter of gold jewelry to the Western world, but the value of these trinkets is negligible compared to the thousands of tons of bullion they are creating and importing.
Jim Rickards has estimated that China has probably added at least 1,000 metric tons to its reserves every year since 2010, meaning it has well over 4,000 metric tons today.
This is a conservative estimate. Wikileaks documents claim that China actually imported more than 2,000 metric tons from Hong Kong in 2011 alone.
If this is the case, when China does finally reveal how much gold it’s holding, it will leap from the sixth largest reserves in the world to the second, easily surpassing Germany in a single bound.
They might even give the US a run for its money.
Out From Under
It’s no longer a secret that China would prefer a “de-Americanized world.” Whether it’s the PBOC or average Chinese consumers hoarding all this dark gold, the effects will be the same when China decides it is fed up with the funny-money central banking system long dominated by the US dollar.
It certainly seems like the East is preparing for this endgame. Several new physical gold vaults have opened in Singapore in the past year, Moscow recently launched a spot gold exchange, and Dubai is planning a new spot gold contract for this year. Let’s not forget that the Hong Kong Exchange bought the London Metals Exchange in 2012, and there have been rumblings of physically moving it to Hong Kong.
If China were to initiate a gold-backed currency attractive to international trade partners, its government and citizens are poised to become extremely wealthy and powerful overnight. Americans, on the other hand…
Are You Afraid of the Dark?
Some investors avoid the gold market because of its innate unofficial nature. But in a time when governments are in a race to tax anything that moves and inflate anything that prints, gold’s privacy becomes the difference between preserving wealth or facing destitution.
I challenge my readers to worry less about the short-term movements in the gold futures market, or even which central bank has what holdings. Understand that gold is a deep, global market that has witnessed the rise and fall of countless empires. Your decision is simple: you either own it, or you don’t.
Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.
Top Adviser To The Chinese Government Calls For A “Global Currency” To Replace The U.S. Dollar
The former chief economist at the World Bank, Justin Yifu Lin, is advising the Chinese government that the time has come for a single global currency. Lin, who is also a professor at Peking University, says that the U.S. dollar “is the root cause of global financial and economic crises” and that moving to a “global super-currency” will bring much needed stability to the global financial system. And considering how recklessly the Federal Reserve has been pumping money into the global financial system and how recklessly the U.S. government has been going into debt, it is hard to argue with his logic. Why would anyone want to trust the United States to continue to run things after how badly we have abused our position? The United States has greatly benefited from having the de facto reserve currency of the planet for the past several decades, but now that era is coming to an end. In fact, the central bank of China has already announced that it will no longer be stockpiling more U.S. dollars. The rest of the world is getting tired of playing our game. Our debt is wildly out of control and we are creating money as if there was no tomorrow. As the rest of the world starts moving away from the U.S. dollar, global power is going to shift even more to the East, and that is going to have very serious consequences for ordinary Americans.
Sadly, most Americans don’t even realize what is happening. These comments by a top adviser to the Chinese government should have made front page news all over the nation. I had to go to China Daily to find the following excerpt…
The World Bank’s former chief economist wants to replace the US dollar with a single global super-currency, saying it will create a more stable global financial system.
“The dominance of the greenback is the root cause of global financial and economic crises,” Justin Yifu Lin told Bruegel, a Brussels-based policy-research think tank. “The solution to this is to replace the national currency with a global currency.”
Lin, now a professor at Peking University and a leading adviser to the Chinese government, said expanding the basket of major reserve currencies — the dollar, the euro, the Japanese yen and pound sterling — will not address the consequences of a financial crisis. Internationalizing the Chinese currency is not the answer, either, he said.
And this is not the first time that we have heard these kinds of comments coming out of China. For example, Xinhua News Agency called for a “de-Americanized world” back on October 14th…
“It is perhaps a good time for the befuddled world to start considering building a de-Americanized world.”
That particular news agency is controlled by the Chinese government, and if the Chinese government did not approve of that statement it never would have made it into the paper.
Then in November, the central bank of China announced that it is going to stop stockpiling U.S. dollars.
Most Americans don’t want to hear this, but what we are witnessing is a massive shift in global power. China is catching up to us in a multitude of ways, and they are getting tired of playing second fiddle to the United States. In fact, China is already surpassing the U.S. in a number of key areas…
-China accounts for more global trade than anyone else in the world.
-China imports more oil from Saudi Arabia than anyone else in the world.
-China imports more oil overall than anyone else in the world.
-It is now being projected that Chinese GDP will surpass U.S. GDP in 2017.
When the rest of the world quits using U.S. dollars to trade with one another and quits lending our dollars back to us at ultra-low interest rates, things are going to start changing very rapidly.
In a previous article, I discussed why having the reserve currency of the world is so important to the United States…
The largest exporting nations such as Saudi Arabia (oil) and China (cheap plastic trinkets at Wal-Mart) end up with massive piles of U.S. dollars.
Instead of just sitting on all of that cash, these exporting nations often reinvest much of that cash into low risk securities that can be rapidly turned back into dollars if necessary. For a very long time, U.S. Treasury bonds have been considered to be the perfect way to do this. This has created tremendous demand for U.S. government debt and has helped keep interest rates super low. So every year, massive amounts of money that gets sent out of the country ends up being loaned back to the U.S. Treasury at super low interest rates.
And it has been a very good thing for the U.S. economy that the federal government has been able to borrow money so cheaply, because the interest rate on 10 year U.S. Treasuries affects thousands upon thousands of other interest rates throughout our financial system. For example, as the rate on 10 year U.S. Treasuries has risen in recent months, so have the rates on U.S. home mortgages.
Our entire way of life in the United States depends upon this game continuing. We must have the rest of the world use our currency and loan it back to us at ultra low interest rates. At this point we have painted ourselves into a corner by accumulating so much debt. We simply cannot afford to have rates rise significantly.
As the rest of the globe moves away from the dollar, demand for the dollar is going to go down and that is going to cause a lot of inflation – especially for imported goods. So the days of piling lots of cheap plastic stuff made in China into your shopping carts is coming to an end.
And as the rest of the globe moves away from U.S. debt, interest rates are going to go much higher than they are today. Eventually, the U.S. government will be paying out more than a trillion dollars a year just in interest on the national debt and all loans throughout our entire financial system will have higher interest rates. This is going to cause economic activity to slow down dramatically.
On the global economic stage, China is playing checkers and we are playing chess, and we are getting dangerously close to checkmate.
Meanwhile, China is also rapidly catching up to us militarily.
At a time when U.S. military spending is actually decreasing, China is spending money on the military aggressively.
In 2014, Chinese military spending will rise to $148 billion, which represents an increase of 6 percent over 2013.
The balance of power is shifting right in front of our eyes.
For example, at one time the U.S. Navy reigned supreme and the Chinese Navy was a joke.
But now that is rapidly changing. The following is from an article posted on military.com…
The Chinese navy has 77 surface combatants, more than 60 submarines, 55 amphibious ships and about 85 missile-equipped small ships, according to the report first published by the U.S. Naval Institute. The report explains that more than 50 naval ships were “laid down, launched or commissioned” in 2013 and a similar number is planned for 2014.
Of particular concern is the growth of the Chinese submarine fleet. The Chinese now have submarine launched ballistic missiles with a maximum range of about 4,000 miles…
ONI raised concerns about China’s fast-growing submarine force, to include the Jin-class ballistic nuclear submarines, which will likely commence deterrent patrols in 2014, according to the report. The expected operational deployment of the Jin SSBN “would mark China’s first credible at-sea-second-strike nuclear capability,” the report states.
The submarine would fire the JL-2 submarine launched ballistic missile, which has a range of 4,000 nautical miles and would “enable the Jin to strike Hawaii, Alaska and possibly western portions of CONUS [continental United States] from East Asian waters,” ONI assessed.
In addition, China is also working on “hypersonic glide vehicles” that can travel “at speeds of up to Mach 10 or 7,680 miles an hour”. The following is an excerpt from a recent Washington Free Beacon article…
The Washington Free Beacon first disclosed China’s Jan. 9 flight test of a hypersonic glide vehicle that the Pentagon has called the WU-14.
The experimental weapon is a new strategic strike capability China’s military is developing that is designed to defeat U.S. missile defenses. China could use the vehicle for both nuclear and conventional precision strikes on targets, including aircraft carriers at sea.
U.S. officials said that, while the glide vehicle test was not an intelligence surprise, it showed China is moving much more rapidly than in the past in efforts to research, develop, and test advanced weaponry.
The world is changing, and the United States is not the only superpower anymore. China is thriving and Russia is also on the rise. Five years from now, the world is going to look far, far different than it does today.
In the end, most Americans will have no idea what is happening until it is far too late to do anything about it.
This article first appeared here at the The American Dream. Michael Snyder is a writer, speaker and activist who writes and edits his own blogs The American Dream and Economic Collapse Blog. Follow him on Twitter here.
Image credit: http://endoftheamericandream.com
Shadows falling in China? Credit tightens, desperate municipalities seek funding from “alternative” sources0
Shadows falling in China? Credit tightens, desperate municipalities seek funding from “alternative” sources
This could be a good thing overall for China as the “alternative sources,” trusts, what is often called the “shadow banking system,” might actually be a stabilizing and limiting force in the economy. The rates of interest on loans through the shadow banking system are much higher than what municipalities can obtain through traditional lenders, and probably more accurately reflect the real risk of loans. (Which are considerable it appears.)
Economic information coming out of the ultimate crony capitalist state should always be taken with a grain of salt. If the official numbers say Chinese municipalities are in trouble and scurrying around for credit which is drying up, the unofficial numbers, the real numbers, the shadow numbers, probably tell an even more troubling story.
But to date the Chinese have been able to avoid going off the rails despite what appears to be widespread malinvestment spurred by a stimulus happy central bank. Maybe they can keep the balls in the air for a bit longer.
Why should we be concerned about widespread municipal defaults in China, aside from the general impact on the world economy anyway?
Because both China and Japan are facing serious economic challenges right now. Both countries don’t like each other and both have rising domestic social unease. Also both countries are looking beyond their post World War II spheres of influence.
When normally inward looking Asian countries start looking abroad for political and economic “solutions” bad things often occur.
“As banks tightened their purse strings, local governments had no choice but to resort to shadow banking and incur more expensive borrowing costs,” said Tang Jianwei, a Shanghai-based economist at Bank of Communications Co., the nation’s fifth-largest lender. “That will further constrain their repayment ability and eventually overwhelm some lower-level entities which have borrowed way beyond their means. I won’t rule out some defaults in 2014.”
Image credit: http://www.againstcronycapitalism.org
Federal Reserve Ducks Public Scrutiny During Centennial Anniversary
Published by NextNewsNetwork
90 Years Ago: The End of German Hyperinflation
On 15 November 1923 decisive steps were taken to end the nightmare of hyperinflation in the Weimar Republic: The Reichsbank, the German central bank, stopped monetizing government debt, and a new means of exchange, the Rentenmark, was issued next to the Papermark (in German: Papiermark). These measures succeeded in halting hyperinflation, but the purchasing power of the Papermark was completely ruined. To understand how and why this could happen, one has to take a look at the time shortly before the outbreak of World War I.
Since 1871, the mark had been the official money in the Deutsches Reich. With the outbreak of World War I, the gold redeemability of the Reichsmark was suspended on 4 August 1914. The gold-backed Reichsmark (or “Goldmark,” as it was referred to from 1914) became the unbacked Papermark. Initially, the Reich financed its war outlays in large part through issuing debt. Total public debt rose from 5.2bn Papermark in 1914 to 105.3bn in 1918. In 1914, the quantity of Papermark was 5.9 billion, in 1918 it stood at 32.9 billion. From August 1914 to November 1918, wholesale prices in the Reich had risen 115 percent, and the purchasing power of the Papermark had fallen by more than half. In the same period, the exchange rate of the Papermark depreciated 84 percent against the US dollar.
The new Weimar Republic faced tremendous economic and political challenges. In 1920, industrial production was 61 percent of the level seen in 1913, and in 1923 it had fallen further to 54 percent. The land losses following the Versailles Treaty had weakened the Reich’s productive capacity substantially: the Reich lost around 13 percent of its former land mass, and around 10 percent of the German population was now living outside its borders. In addition, Germany had to make reparation payments. Most important, however, the new and fledgling democratic governments wanted to cater as best as possible to the wishes of their voters. As tax revenues were insufficient to finance these outlays, the Reichsbank started running the printing press.
From April 1920 to March 1921, the ratio of tax revenues to spending amounted to just 37 percent. Thereafter, the situation improved somewhat and in June 1922, taxes relative to total spending even reached 75 percent. Then things turned ugly. Toward the end of 1922, Germany was accused of having failed to deliver its reparation payments on time. To back their claim, French and Belgian troops invaded and occupied the Ruhrgebiet, the Reich’s industrial heartland, at the beginning of January 1923. The German government under chancellor Wilhelm Kuno called upon Ruhrgebiet workers to resist any orders from the invaders, promising the Reich would keep paying their wages. The Reichsbank began printing up new money by monetizing debt to keep the government liquid for making up tax-shortfalls and paying wages, social transfers, and subsidies.
From May 1923 on, the quantity of Papermark started spinning out of control. It rose from 8.610 billion in May to 17.340 billion in April, and further to 669.703 billion in August, reaching 400 quintillion (that is 400 x 1018) in November 1923. Wholesale prices skyrocketed to astronomical levels, rising by 1.813 percent from the end of 1919 to November 1923. At the end of World War I in 1918 you could have bought 500 billion eggs for the same money you would have to spend five years later for just one egg. Through November 1923, the price of the US dollar in terms of Papermark had risen by 8.912 percent. The Papermark had actually sunken to scrap value.
With the collapse of the currency, unemployment was on the rise. Since the end of the war, unemployment had remained fairly low — given that the Weimar governments had kept the economy going by vigorous deficit spending and money printing. At the end of 1919, the unemployment rate stood at 2.9 percent, in 1920 at 4.1 percent, 1921 at 1.6 percent and 1922 at 2.8 percent. With the dying of the Papermark, though, the unemployment rate reached 19.1 percent in October, 23.4 percent in November, and 28.2 percent in December. Hyperinflation had impoverished the great majority of the German population, especially the middle class. People suffered from food shortages and cold. Political extremism was on the rise.
The central problem for sorting out the monetary mess was the Reichsbank itself. The term of its president, Rudolf E. A. Havenstein, was for life, and he was literally unstoppable: under Havenstein, the Reichsbank kept issuing ever greater amounts of Papiermark for keeping the Reich financially afloat. Then, on 15 November 1923, the Reichsbank was made to stop monetizing government debt and issuing new money. At the same time, it was decided to make one trillion Papermark (a number with twelve zeros: 1,000,000,000,000) equal to one Rentenmark. On 20 November 1923, Havenstein died, all of a sudden, through a heart attack. That same day, Hjalmar Schacht, who would become Reichsbank president in December, took action and stabilized the Papermark against the US dollar: the Reichsbank, and through foreign exchange market interventions, made 4.2 trillion Papermark equal to one US Dollar. And as one trillion Papermark was equal to one Rentenmark, the exchange rate was 4.2 Rentenmark for one US dollar. This was exactly the exchange rate that had prevailed between the Reichsmark and the US dollar before World War I. The “miracle of the Rentenmark” marked the end of hyperinflation.
How could such a monetary disaster happen in a civilized and advanced society, leading to the total destruction of the currency? Many explanations have been put forward. It has been argued that, for instance, that reparation payments, chronic balance of payment deficits, and even the depreciation of the Papermark in the foreign exchange markets had actually caused the demise of the German currency. However, these explanations are not convincing, as the German economist Hans F. Sennholz explains: “[E]very mark was printed by Germans and issued by a central bank that was governed by Germans under a government that was purely German. It was German political parties, such as the Socialists, the Catholic Centre Party, and the Democrats, forming various coalition governments that were solely responsible for the policies they conducted. Of course, admission of responsibility for any calamity cannot be expected from any political party.” Indeed, the German hyperinflation was manmade, it was the result of a deliberate political decision to increase the quantity of money de facto without any limit.
What are the lessons to be learned from the German hyperinflation? The first lesson is that even a politically independent central bank does not provide a reliable protection against the destruction of (paper) money. The Reichsbank had been made politically independent as early as 1922; actually on behalf of the allied forces, as a service rendered in return for a temporary deferment of reparation payments. Still, the Reichsbank council decided for hyperinflating the currency. Seeing that the Reich had to increasingly rely on Reichsbank credit to stay afloat, the council of the Reichsbank decided to provide unlimited amounts of money in such an “existential political crisis.” Of course, the credit appetite of the Weimar politicians turned out to be unlimited.
The second lesson is that fiat paper money won’t work. Hjalmar Schacht, in his 1953 biography, noted: “The introduction of the banknote of state paper money was only possible as the state or the central bank promised to redeem the paper money note at any one time in gold. Ensuring the possibility for redeeming in gold at any one time must be the endeavor of all issuers of paper money.” Schacht’s words harbor a central economic insight: Unbacked paper money is political money and as such it is a disruptive element in a system of free markets. The representatives of the Austrian School of economics pointed this out a long time ago.
Paper money, produced “ex nihilo” and injected into the economy through bank credit, is not only chronically inflationary, it also causes malinvestment, “boom-and-bust” cycles, and brings about a situation of over-indebtedness. Once governments and banks in particular start faltering under their debt load and, as a result, the economy is in danger of contracting, the printing up of additional money appears all too easily to be a policy of choosing the lesser evil to escape the problems that have been caused by credit-produced paper money in the first place. Looking at the world today — in which many economies have been using credit-produced paper monies for decades and where debt loads are overwhelmingly high, the current challenges are in a sense quite similar to those prevailing in the Weimar Republic more than 90 years ago. Now as then, a reform of the monetary order is badly needed; and the sooner the challenge of monetary reform is taken on, the smaller will be the costs of adjustment.
About the Author:
Thorsten Polleit is chief economist of the precious-metals firm Degussa Goldhandel GmbH. He is also an honorary professor at the Frankfurt School of Finance & Management. He is an adjunct scholar of the Ludwig von Mises Institute and was awarded the 2012 O.P. Alford III Prize in Libertarian Scholarship. His website is www.Thorsten-Polleit.com. Send him mail.
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25 Fast Facts About The Federal Reserve
As we approach the 100 year anniversary of the creation of the Federal Reserve, it is absolutely imperative that we get the American people to understand that the Fed is at the very heart of our economic problems. It is a system of money that was created by the bankers and that operates for the benefit of the bankers. The American people like to think that we have a “democratic system”, but there is nothing “democratic” about the Federal Reserve. Unelected, unaccountable central planners from a private central bank run our financial system and manage our economy. There is a reason why financial markets respond with a yawn when Barack Obama says something about the economy, but they swing wildly whenever Federal Reserve Chairman Ben Bernanke opens his mouth. The Federal Reserve has far more power over the U.S. economy than anyone else does by a huge margin. The Fed is the biggest Ponzi scheme in the history of the world, and if the American people truly understood how it really works, they would be screaming for it to be abolished immediately. The following are 25 fast facts about the Federal Reserve that everyone should know…
#1 The greatest period of economic growth in U.S. history was when there was no central bank.
#2 The United States never had a persistent, ongoing problem with inflation until the Federal Reserve was created. In the century before the Federal Reserve was created, the average annual rate of inflation was about half a percent. In the century since the Federal Reserve was created, the average annual rate of inflation has been about 3.5 percent, and it would be even higher than that if the inflation numbers were not being so grossly manipulated.
#3 Even using the official numbers, the value of the U.S. dollar has declined by more than 95 percent since the Federal Reserve was created nearly 100 years ago.
#4 The secret November 1910 gathering at Jekyll Island, Georgia during which the plan for the Federal Reserve was hatched was attended by U.S. Senator Nelson W. Aldrich, Assistant Secretary of the Treasury Department A.P. Andrews and a whole host of representatives from the upper crust of the Wall Street banking establishment.
#5 In 1913, Congress was promised that if the Federal Reserve Act was passed that it would eliminate the business cycle.
#6 The following comes directly from the Fed’s official mission statement: “To provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.”
#7 It was not an accident that a permanent income tax was also introduced the same year when the Federal Reserve system was established. The whole idea was to transfer wealth from our pockets to the federal government and from the federal government to the bankers.
#8 Within 20 years of the creation of the Federal Reserve, the U.S. economy was plunged into the Great Depression.
#9 If you can believe it, there have been 10 different economic recessions since 1950. The Federal Reserve created the “dotcom bubble”, the Federal Reserve created the “housing bubble” and now it has created the largest bond bubble in the history of the planet.
#10 According to an official government report, the Federal Reserve made 16.1 trillion dollars in secret loans to the big banks during the last financial crisis. The following is a list of loan recipients that was taken directly from page 131 of the report…
Citigroup – $2.513 trillion
Morgan Stanley – $2.041 trillion
Merrill Lynch – $1.949 trillion
Bank of America – $1.344 trillion
Barclays PLC – $868 billion
Bear Sterns – $853 billion
Goldman Sachs – $814 billion
Royal Bank of Scotland – $541 billion
JP Morgan Chase – $391 billion
Deutsche Bank – $354 billion
UBS – $287 billion
Credit Suisse – $262 billion
Lehman Brothers – $183 billion
Bank of Scotland – $181 billion
BNP Paribas – $175 billion
Wells Fargo – $159 billion
Dexia – $159 billion
Wachovia – $142 billion
Dresdner Bank – $135 billion
Societe Generale – $124 billion
“All Other Borrowers” – $2.639 trillion
#11 The Federal Reserve also paid those big banks $659.4 million in fees to help “administer” those secret loans.
#12 The Federal Reserve has created approximately 2.75 trillion dollars out of thin air and injected it into the financial system over the past five years. This has allowed the stock market to soar to unprecedented heights, but it has also caused our financial system to become extremely unstable.
#13 We were told that the purpose of quantitative easing is to help “stimulate the economy”, but today the Federal Reserve is actually paying the big banks not to lend out 1.8 trillion dollars in “excess reserves” that they have parked at the Fed.
#14 Quantitative easing overwhelming benefits those that own stocks and other financial investments. In other words, quantitative easing overwhelmingly favors the very wealthy. Even Barack Obama has admitted that 95 percent of the income gains since he has been president have gone to the top one percent of income earners.
#15 The gap between the top one percent and the rest of the country is now the greatest that it has been since the 1920s.
#16 The Federal Reserve has argued vehemently in federal court that it is “not an agency” of the federal government and therefore not subject to the Freedom of Information Act.
#17 The Federal Reserve openly admits that the 12 regional Federal Reserve banks are organized “much like private corporations“.
#18 The regional Federal Reserve banks issue shares of stock to the “member banks” that own them.
#19 The Federal Reserve system greatly favors the biggest banks. Back in 1970, the five largest U.S. banks held 17 percent of all U.S. banking industry assets. Today, the five largest U.S. banks hold 52 percent of all U.S. banking industry assets.
#20 The Federal Reserve is supposed to “regulate” the big banks, but it has done nothing to stop a 441 trillion dollar interest rate derivatives bubble from inflating which could absolutely devastate our entire financial system.
#21 The Federal Reserve was designed to be a perpetual debt machine. The bankers that designed it intended to trap the U.S. government in a perpetual debt spiral from which it could never possibly escape. Since the Federal Reserve was established nearly 100 years ago, the U.S. national debt has gotten more than 5000 times larger.
#22 The U.S. government will spend more than 400 billion dollars just on interest on the national debt this year.
#23 If the average rate of interest on U.S. government debt rises to just 6 percent (and it has been much higher than that in the past), we will be paying out more than a trillion dollars a year just in interest on the national debt.
#24 According to Article I, Section 8 of the U.S. Constitution, the U.S. Congress is the one that is supposed to have the authority to “coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures”. So exactly why is the Federal Reserve doing it?
#25 There are plenty of possible alternative financial systems, but at this point all 187 nations that belong to the IMF have a central bank. Are we supposed to believe that this is just some sort of a bizarre coincidence?
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Illogic in Fractional Reserve Banking
If there was one business venture the leftist and forgotten “Occupy” movement was right to distrust, it was the banking industry. In the wake of the 2008 financial crisis and subsequent bailing out of the world’s financial system by fascist states, taxpayers – especially the progressive types – were correct to feel amiss. But rather than take a scrutinizing look into the privilege afforded to the banking class, the outraged took to political action in the callow hope of correcting a wrong.
Like any popular uprising, the goal was quickly smothered in favor of further rent-seeking. Instead of aiming consternation at the incestuous relationship between government and the money-changers, occupiers wanted the quick-fix of redistribution. The cries of “this is what democracy looks like” might as well have been “this is what panhandling looks like.” Centralized banking went unquestioned. The nature of fractional reserve practices was ignored – or likely not understood by the pea-brained philosophers. Still, the radical levellers who set-up camp in Zuccotti Park were on to something by asking why their precious public officials voted to shore up the balance sheets of a disproportionately small member caste.
Banking is, to put it bluntly, a strange and unique business. The industry is centuries-old, and the legality of its operations has been questionable since inception. I am referring specifically to the practice of bankers lending out claimed reserves – a contentious issue among libertarian theorists. If the larger public were to become privy to this business model, it may spark a troubling curiosity in the less-moneyed class. But then again, this author never ceases to be amazed by the bounds of common apathy.
In banking, certain legal doctrines have guided the trade since antiquity, including the nature of contracts. The violation of these distinct forms of lawful guarantees once carried the weight of justice. But no longer; as the deliberately obscuring practice of loaning out deposits meant to be available on-demand has created such instability in the banking system, the incessant teetering on the cliff of insolvency remains an ever viable threat to economic tranquility.
Libertarians – specifically those schooled in the Austrian, causal-realist tradition of economics – are intellectually miles ahead of the Occupy folks when it comes to the study of currency. And while the students of Mises and Hayek are fervently opposed to any central bank management, there remains a sharp divide on the ethics of fractional reserve banking. In a recent missive in the Freeman, economist Malavika Nair questions the Rothbardian ethic that finds the practice of banks creating credit out of thin air fraudulent. The piece, which deconstructs the dean of the Austrian school’s original argument, frames banking away from the supposed cut-and-dry thinking model of anti-fractionalists.
Nair begins with a false choice by asking: “Would fractional reserve banking exist in a world without a central bank? Put another way: Is fractional reserve banking inherently fraudulent?” These statements are not one in the same; they reference two separate conditions. Absent central banking, unbacked credit expansion could still exist. Back in mid-to-late 19th century America where the Federal Reserve was still a twinkle in the centralizers’ eyes, fractional reserve banking and pyramiding credit were common practice. The question at hand is whether such business is based on a fraudulent understanding of the nature of goods.
Nair finds issue with the essence of contracts and how they relate to the duty of those individuals entrusted with safeguarding money. The contract – an extension of humanity’s self-ownership and free will – has been a recognized covenant enforceable by compulsion for as long as man first conceived of himself as an autonomous being. It finds legitimacy in the human understanding of bonds and keeping one’s word. The evolution of common law has dictated that any activity stipulated in a compact cannot entail unlawful activity. To enforce an illegal activity would thereby be a crime in itself – an ipso facto contradiction in reason.
The contract is key for banking operations. Nair argues that bank functions, both deposit and lending, are plainly justifiable; the discrepancy arises in the manner that customer funds are utilized. Currently, bankers freely lend out money that is available on command by both the borrower and depositor. In practice, this is the creation of two goods from one ex nihilo. In a totally isolated instance where a bank were to service only two patrons, the act of creating what Mises called “fiduciary media” would appear as the very perversion of intuitive law it embodies. It would simply come off as no more than a violation of the known rules of the world.
Nair counters by asserting that a “claim to money is not the same thing as the money itself.” This is a confusing affirmation as antagonists to fractional reserve banking hardly make that claim. The point of contention is that promissory notes for bank deposits represent real money, though they may circulate as mediums of exchange and fulfill the role of currency. Should two or more of these “I owe you” certificates be created to represent one unit of bank reserves available on-demand, there is a direct and unquestionable inconsistency. It is certainly true, as Nair points out, that the fungible quality of money dictates it be treated differently than non-substitutable goods. However, the fact that cash is interchangeable does not dismiss its limited character.
If the principle of unbacked expansion of credit were applied to other industries such as automobiles or condominiums, titles to the same good could theoretically be multiplied, but not without controversy. Having two titles for one car is not based on logic or a firm understanding of universal law. You simply cannot create real, definite material by declaration. Nair asserts that this is not true when it comes to the market of money. In his words, the over-issuing of redeemable bank notes “does not mean one thing is in two places at the same time” but that “two different things are in two places at the same time.” This is only so much sophistry, as the claims to bank reserves are still representative of real goods. There may be multiple slips of paper representing one unit of money-proper floating around in the economy, but that does not dismiss the plain and true fact that there are more claims than what is available.
As economist Jesús Huerta de Soto documents in his tour de force Money, Bank Credit, and Economic Cycles, government has played a leading role in fostering this banking fraud for centuries. The state is forever on the search for more resources to carry out its bidding. Cooperation with the leading money-lending institutions was an obvious route for subverting the moral means to wealth creation. Since the days of classical Greece, it was well understood that transactions of present goods fundamentally differed from those involving future goods. In practical terms, deposits for safekeeping were of considerable difference to those made for the strict purpose of lending out and garnering a return. Bankers who misappropriated funds were often found guilty of fraud and forced to pay restitution. In one recorded episode, ancient Grecian legal scholar Isocrates lambasted Athenian banker Passio for reneging on a client’s depository claim. After being entrusted to hold a select amount of money, the sly banker loaned out a portion of the funds in the hopes of earning a profit. When asked to make due on the deposit, the timid Passio pleaded to his accuser to keep the transgression “a secret so it would not be discovered he had committed fraud.”
The underlying chicanery behind fractional reserve banking has existed since the days of Plato. Modern technology has not negated the rationale used to discover and affirm natural law. Binary codes on a computer screen do not create a new reality. The governing doctrines of humanity are, in de Soto’s words, “unchanging and inherent in the logic of human relationships.” While fractional reserve banking could exist in a free market environment and regulate itself through vigorous competition, that theoretical scenario does not prove the entire fulcrum of the business rests on solid ground.
The truth remains, and will always remain, that an organic product is not replicable through any kind of witch doctoring. A thing is a thing is a thing. Any money substitute that represents a real piece of fungible currency cannot pertain to that which is not in existence. Such is the lawful understanding that goes back to the time preceding the Hellenisitc period.
Malavika Nair offers an interesting argument by trying to justify the practice of creating something out of nothing; but it ultimately fails. The free lunch of artificial credit creation is nothing more than slipping out of the baker’s shop without paying. It would have served the Occupy crowd well to have recognized this shaky foundation upon which the modern financial system rests. Perhaps their message of widespread corruption would have been better received – at least more so than by creating shanty towns and defecating on the street. Instead, we were gifted with a muddled and confused political message made by an irate minority who hadn’t a clue of the forces that govern their own lives.
James E. Miller is editor-in-chief of the Ludwig von Mises Institute of Canada. Send him mail
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