So far in this series, we’ve seen how the United States has taken the same steps towards economic doomsday that Europe has; made the same blunders that are now bringing Europe to its knees:
First, Washington spent everything in could collect in taxes …
Second, it borrowed all it could from citizens and spent that as well …
Third, it borrowed even more from foreign governments, banks and investors and blew that, too …
Fourth, with the economy now slowing and tax revenues plunging, it has just called its own ability to pay into question.
Now, in its fifth step toward financial doomsday, Washington is cutting its own throat — by stiffing the very people who lend it the money it needs to survive …
Washington has declared WAR on the U.S. dollar.
When Fed chairman Ben Bernanke cranks up the printing presses, every dollar in circulation loses some of its value. The more the Fed prints, the more the dollar’s buying power plunges.
And the more the dollar falls, the less incentive foreign investors have to continue loaning us money — let alone to hang on to the Treasuries and dollars they already own.
For the past few years, the Federal Reserve has been totally, completely, and unambiguously out of control: It’s spewing out dollar bills like a malfunctioning ATM.
In 1999, to prevent the Y2K bug from torpedoing the banking sector, the Fed printed $73 billion.
After the 9/11 attacks, the Fed did it again — printing $40 billion in new, unbacked dollars.
But that was nothing compared to what the Bernanke Fed is doing now!
Since Lehman Brothers blew up in 2008, the Fed has flooded the world with a whopping $1.6 trillion in newly printed greenbacks!
That’s 22 times more than back in the Y2K days …
And a whopping 41 times more than the Fed printed after 9/11!
Moreover, Bernanke launched the $1.7 trillion QE1 program in 2009. Then he promised to print another $600 billion as part of the QE2 effort launched in the fall of 2010.
Neither money-printing escapade managed to spark real, sustainable economic growth or provoke a surge in hiring. All they did was inflate asset prices and send commodities through the roof — decimating Main Street America while enriching Wall Street fat cats!
But that isn’t stopping Ben. No sirree!
Bernanke and his buddies at the Fed just said they “discussed the range of policy tools” they have on hand and pledged they were “prepared to employ those tools as appropriate.”
That’s Fed-speak for “Watch out! It’s almost time to fire up the printing press again!”
Albert Einstein famously said the definition of insanity was doing the same thing over and over again and expecting a different result. But at the Fed, this insanity is considered sound monetary policy!
Look folks, if printing money was an easy, painless way to prosperity, wouldn’t every country in the history of mankind have just done it?
But we know what it accomplishes. We know that it destroys national wealth … and in extreme cases, helps lead to revolution.
Heck, it was the Weimar Republic’s disastrous money-printing campaign in the 1920s and 1930s that helped lay the groundwork for the rise of Adolf Hitler!
Is it any wonder the dollar just fell to an all-time low against the Swiss franc? Is it any wonder the dollar has plunged against the Japanese yen, or Singapore dollar? Is it any wonder that gold — the ultimate form of money — exploded to a fresh all-time high of over $1,822 yesterday?
Now imagine that you are a foreign investor. You own U.S. Treasuries. They are denominated in U.S. dollars. Your yield is paid to you in U.S. dollars. And when your Treasuries mature, your principal will be repaid in U.S. dollars.
But thanks to the Fed’s money-printing addiction, those dollars are losing their value at a rate that dwarfs the paltry yields you’re earning.
The simple act of buying a U.S. Treasury bond GUARANTEES you’ll lose money!
So how much longer do you think you would continue buying and holding U.S. Treasuries? How much longer would you continue throwing good money after bad?
Do NOT miss tomorrow’s special edition of Money and Markets for the shocking answer!
Best wishes,
Mike Larson
{ 8 comments }
“US dollars have value because everybody thinks they have value. Everybody thinks they have value because in everybody’s experience they have had value.†– Nobel laureate economist Milton Friedman
Very true, but with apologies to Dr. Friedman, I would add that the experience has been a declining value. Unfortunately, most Americans only think in terms of rising prices, not falling dollar values.
What’s the difference between a $100 bill and a napkin? Faith. Both are intrinsically paper, but as Professor Friedman states, people believe that one has more value than the other. This may change.
Well, what is your suggestion…that the FED should do? Stop printing money; and, in fact, remove some cash from circulation? As far as the Federal Govn’t and “spending”: stop all entitlements…SS, Medicare & Medicaid…at once. Just leave it all to Big Business to fix things…you know, the way they’ve been fixing it for the last five years, or so?
Hey, I’ll be the first to tell you that govn’t isn’t the whole answer to the problem; the govn’t is the problem! And all 545 people who have the power to make the decisions that changed laws, regulations, and policies that allowed this problem to morph into what we have now. Yes, 545 member choir that ,we the people, gave the authority and power to govern us are responsible for this mess. They are the folks…Congress (current and past), President (current and past), and Supreme Court…that have allowed the their own personal greed and the whims of lobbyist set the course to the economic situation we are in now.
They are the folks who caved into manipulation and changed laws and policy that allowed for multinational corporations to evolve, which evaporated all the meaningful, living wage, jobsa–carring their cash overseas, not investing in the US creating jobs. And only they are the folks that have the power to change that and create jobs here in the US. Only they are the folks that are fighting two wars with a home-front unemployment rate that exceeds 9%–and not selling “War Bonds” to their multination corporate friends to offset some of this cost! Only they are the ones who are silly enough to believe that it’s not insane to spend trillions rebuilding infrastructure in these places their fighting the wars, while America literally falls apart. Only they are the ones who figure they gonna borrow from the rest of the world to fund these wars and objectives…and their own personal salaries and fringe benefit packages…along with ordinary domestic expenses. And only they are the ones corrupt enough to shelter their corporate friends from financial responsibilities at the expense of the middle class, and silly enough to believe the middle class (now working retail C-Store jobs) can maintain the 2/3rds domestic economic spending activity to keep everything alive and well.
Friend, you know as well as I…and every other reader…that if Mr. Bernanke stopped the printing dollars and those 545 bazar ones, given the power of our Federal Govn’t, were to stop entitlements, there would be time for a depression to take hold, because an Armageddon would break-out before the stock market could react!
There have been 3 dominant monetary theories in economics in the history of the USA. Throughout the 19th century the Quantity Theory (QT) of money and the Real Bills Doctrine (RBD) vied for dominance. A century ago RBD was dominant and provided the argument for the formation of the Federal Reserve. The failure of RBD in the 1920’s through the 1940’s led to a better model called Chartalism. Chartalism was a key component of the economic policies of Eccles and Keynes.
QT was best described by David Hume (which influenced his colleague Adam Smith) as the cause of the downfall of the Spanish Empire. Driven by Mertantilist ideas, the Spaniards were determined to plunder the world’s gold by way of their “explorers.” They conquered and brought back vast quantities of gold to Spain only to cause destructive inflation. The lesson learned is that it doesn’t matter what is used for money — wampum, rocks, sticks, cattle, metals, paper — so long as the quantity of that money is not too small or too great relative to the demand for it. However, since controlling that supply of money has proven to be difficult — there is a BEST type of money.
Marriner Eccles had Bernanke’s job from the mid 1930’s to the late 1940’s. He clearly described his views and the FISCAL and TAX policy causes of the Great Depression. Hint: it had nothing to do with federal budget deficits or monetary policy. Eccles was an ultra conservative Republican and successful regional banker from Utah. He was also the oldest son of the his father’s junior wife. Yes his father was an old school Mormon. (Although Eccles was the primary mover of FDR’s policies a few years into the Depression, he was not some left-wing socialist as many propagandists would have you believe, today. He was an intelligent pragmatic businessman that adapted his policies once new empirical evidence presented itself!)
Today’s Modern Monetary Theory (MMT) is a renaissance of Chartalism. It acknowledges that money is, most of time, ENDOGENOUS to the economy and acquires its value when the government demands its use in paying taxes. Although debtors’ prisons no longer exist for failure to pay private debts as promised, debtors’ prisons certainly still exist for failure to pay one’s tax debts to the government! That power to force compliance with the TAX POLICY of the country and to pay those taxes in OFFICIAL CURRENCY is what gives paper money its value.
When one gets the reality of what money is and how it derives its value, then it becomes obvious that the analysis and predictions made by Mike in this series is flawed. Mike is relying on a kludge of economic theories that includes Austrian and Friedmananite QT ideas that is grossly incomplete.
— The USA has NEVER BEEN RICHER and WE ARE NOT GOING BROKE!
— The current level of deficit spending is NOT THE CAUSE OF OUR CURRENT ECONOMIC WOES!
— Deficit spending is unavoidable unless TRADE DEFICITS and NET PRIVATE SAVING is mitigated!
— BERNANKE AND FED POLICY IS ONLY REACTIVE AND IS DOING EXACTLY WHAT THEY SHOULD BE DOING!
— AS ECCLES AND KEYNES NOTED DECADES AGO, THE PROBLEM IS ABOUT THE DISTRIBUTION OF WEALTH AND INCOME!
— The solution is PRIMARILY about TAX POLICY!!!!
Eccles described the causes of the Great Depression in his book “Beckoning Frontiers.”
@ steve loebs
Stop drinking bong water en get real! The theory you mention provided no single answer nor usable prediction of the current market movements.
Your theorie works only in a prisoned society where everybody is mindcontrolled. MMT is a theory / model with only the sad parameters and factors of the macro economy and in a world where people only makes perfect rational decisions. That’s utopia. That’s even stupid to thing so. MMT uses models without humans. Humans with a free will and with emotions, who are making many mistakes and are not acting pure rational most of the time. MMT swaps causes with consequences. Taxation is by no means building societies, rather the opposite. Again, look at history in Europe. MMT believes the myth of the engineered society, with is proven wrong.
We on the otherside of the ocean see clearly that your country is in very severe danger, despite our eurotroubles. I think you better wake up before it’s too late.
Here in the Netherlands, an historian has publiced in 2005 a book about deflation, which is called ‘Deflatie in aantocht’ (English: Deflation on the way). His study about the years 20 and 30 of the previous century gives lots of facts and examples that the same situation since 2000 is going on. In the years 20 there was also a ‘Madoff’ and an ‘Enron’. His analyses based on historical facts gives a proper understanding of what’s going on. You better have to study history and prepare yourself instead of being proud of unbeatable USA; pride comes before a fall.
If you remains ignorant (especialy of history), you have only yourself to blind!
Some points to consider about your conclusions that Americans are richer than ever before.
1) Americans have been sold a lot of crap about off shoring manufacturing jobs in exchange for lower priced consumer items. Along this line of thinking, we were told (by Govt. elected representatives) that Americans would not these lower skilled jobs and we should focus on IT / software positons and the service markets for employing the masses. If you belived that Americans are richer now than ever before, consider these issues:
1) When we had a strong manufacturing base, we did not have unemployment across the states ranging between 18% to 22%
2) Poverty rates were 11% but now they are 15% and 44 MILLION Americans live in poverty
3) Two years ago the Baby Boomers generation started to retire and they are realizing that thier financial planners were wrong about an average 6-8% return on thier investments. CD yeilds are a far cry from what people had expected to see for thier safe money and bonds are at bet 5%.
4) Fed deficits should be an important matter. The accelerating debt spending is a desperate attempt to cover the liabilities which have resulted from a reckless govt that has continued to spend beyond our means. Social security surpluses were borrowed (raided) and never invested to cover future commitments. Other harmful govt policies dealing with deregulation of the banking industry has allowed for speculation and unrestrained liquidity to pump up the tech. bubble and the recent real state debacle, both have led to huge losses in many Americans 401K’s. Not to forget to mention, that most Americans seem unfazed that our govt continues to spend over $800BILLION on an unending series of military conflicts. Did we forget candidate Obama’s promise to end the Middle East fighting?
We seem to be sleep walking as a country but our Govt’s debt ceiling is experiencing exponential increases! Prior to 5 years ago, we were conditioned to accept annual debt ceiling increases of 30Bn to 100Bn. The water is getting warmer for us frogs. What is happening now is pure madness. We just increased the debt ceiling over the past two years by over $3 trillion dollars. If unchecked, it is simply unsustainable and will lead to hyperinflation.
I hope it is not too late. The cancerous financial problems have more to do with past govt. mistakes such as deregulating the banking industry throug the repeal of Glass-Steagall and (not-so-fair) trade agreements that expedited the offshoring of US manufacturing capability & jobs over to Asian countries. To have a redistribution of weath, it will need to start by reversing these failed govt. policies. Only then we will begin to see a transfer of foriegn based factorires back into US.
Watch what the government does when no one buys our bonds. They are going to trick/force the American people to buy them as part of their retirement plans. I say pay the politicians with them.
Temporary solution to save the global economic slowdown as rising oil prices, lower gold prices. when gold prices dropped to the bottom 1458usd/oz example, the Fed implemented QE3, gold will rise again 1585usd/oz. Russian economy and the U.S. both have thrust. U.S. dollar temporarily retain its value. As long as gold prices remain high, global economic recession also threatened.