classical economics
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Ahead: Worst Crisis Ever

Bank of England Governor Speaks
Wayne Jett © October 10, 2011
    If you think economic recovery is proceeding, though slowly, you are badly misled. Readers here have long known that government policies put the U. S. into economic depression and continue to make the crisis worse. The Bank of England now confirms this is closer to understatement than hyperbole. Reality approaches even those marginally affected to date.
    The Bank of England traditionally is masterful, as the British are, in understating financial concerns. Yet on October 6, BOE governor Sir Mervyn King declaredThis is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever. We’re having to deal with very unusual circumstances ….”
    The only comparable declamation by BOE occurred in 1933 when its governor Montagu Norman received word U. S. President Franklin Roosevelt would proceed to buy gold in foreign exchange. Norman described the news as “the worst thing that has happened yet,” and further stated: “The whole world will be put into bankruptcy.”1
    Perhaps Norman knew FDR’s full intentions regarding gold, which were never disclosed to the American public. During his first eight years as president, 1933-1940, FDR bought more than twice as much gold as had been acquired in all previous U. S. history.2  Roosevelt’s secretive actions violated the gold standard and virtually assured Americans and other nations would be impoverished so long as the conditions he created continued.
The Looming Crisis
     What crisis does Sir Mervyn see now? Central banks and governments have created debts beyond capability to repay. To achieve a de facto default of U. S. debt, the Federal Reserve and Treasury devalued the dollar sharply. Other central banks, particularly the European Central Bank, were unwilling to devalue as quickly out of fear of inflation. The resulting shift in currency exchange rates made European products uncompetitive in the U. S. and even in their own markets. Falling production and increased unemployment there hurt tax revenues so badly governments cannot pay their bills. Their common currency Euro is about to come apart.
     Europe’s financial crisis will hurt Americans no matter how it is resolved. The same may be said of the U. S. financial crisis hurting Europeans. The question is whether peoples’ interests will be best served by international compacts made among governments and central banks which, it must be said, were the perpetrators of the current morass.
     Banks and governments, certainly including the U. S., call for “recapitalizing” the banks – meaning to give banks money from taxpayers, current and future. Failing this, they say, global trade is at risk.
Global trade is very important. Specialization in production of resources, goods and services lowers costs and increases production, thereby raising standards of living in participating nations. The U. S. played a primary role in shutting down global trade during the Great Depression by passing the Smoot-Hawley Tariff Act of 1930. Global trade was cut by more than two-thirds within 18 months. Americans and the rest of the world were worse off for it.
     Supporting global trade, however, does not mean allowing central banks and governments to make deals as they wish as we hope for the best. This has been the “non-system” of global trade since 1971, when President Richard Nixon gave the Federal Reserve power to manipulate the dollar’s value at will. Global trade and standards of living are much worse off for Nixon’s action.
     Those who see 21st Century America as more prosperous than ever before should take a closer look. Giant leaps in science, technology and development have improved efficiency in many respects, but living standards have not risen commensurately. In fact, living standards are lower, despite wages and prices having risen sharply during the past 40 years.
An American Vignette
     Consider a personal experience. I began work as a law clerk in 1969 in a major metropolitan area where housing and living expenses were relatively high. My monthly salary was $1,000. By year-end 1970, after briefly advancing as a lawyer, I earned $25,000 annually.
     My beginning salary plus savings from past employment enabled me to rent a small (1,300 ft2) house in an outlying suburb, one with no air conditioning, a steep drive-way and a garage door badly needing new paint. My salary did not create a feeling of wealth and opulence, but $1,000 would buy about 28.5 ounces of gold in 1969.
     Today 28.5 ounces of gold costs $47,143. During the past quarter, the same amount of gold cost as much as $54,286. Thus, measured by the unchanging nature of gold, one might say in 1969 as a beginning law clerk, I earned between $47,000 and $54,000 monthly, stated in 2011 dollars. This equates to an annual salary of $564,000 to $660,000.
Inflated Reality in 2011
     No law clerk earns so much purchasing power in 2011 in his or her wildest dreams. Perhaps they earn a tenth as much, if fortunate enough to have a job. No wonder young people marry later in life, if at all, postponing children and home-buying. The 2011 dollar is worth about two cents of the 1969 dollar.
     This explains partly why young people, and Americans of every age, see less opportunity to earn a living and prosper in 2011 as compared to people in comparable positions 40 and 50 years ago. The value of capital produced by their efforts has been stolen by hidden machinations of central banks and government officials with similar objectives. The rest of the explanation involves capital looted through gargantuan fraud carried out in U.S. financial markets.
     The drastic fall in dollar value was orchestrated by the Federal Reserve in secret deliberations while Fed chairmen and U. S. officials misled the public at every juncture.
•    They pretended to “fight inflation” while intentionally devaluing the dollar.
•    They pretended to modulate monetary liquidity by adjusting overnight interest rates on bank reserves, while actually setting anti-competitive lending rates for big banks – something that was a federal crime if done by the banks themselves.
•    They pretended a principle of economics (the Phillips Curve) required them to destroy jobs to keep prices from rising, while knowing their dollar devaluation inevitably required prices to rise.
Oversee International Entanglements
     With this history of malfeasance on the part of governments and central banks – particularly the Federal Reserve – Americans should not trust the privately owned central bank or the U. S. Treasury to handle the looming financial crisis they have brought on us. Congress should exercise close oversight of international discussions to assure that neither the Fed nor Treasury entangles American taxpayers in obligations to “re-capitalize” either European or U. S. banks.
     Stated briefly, too-big-to-fail banks should not exist. Any such bank should be dismantled under dictate of law without delay and prohibited from doing business in the U. S. Rather than acting to that end, the Dodd-Frank Act moved in precisely the opposite direction, obviously influenced dominantly by those very banks, enabling the TBTFs to go coast-to-coast.
   Above all, no additional taxpayer or central bank funds should flow to such firms. Middle class advocates, whether inclined towards OccupyWallStreet or the Tea Party, should press political officials towards these ends. ~

[1] Wayne Jett, The Fruits of Graft – Great Depressions Then and Now, 146 (Launfal Press, Los Angeles: 2011).

[2] Id., 158-159.