classical economics
for analysis,  forecasting
and policy design

Historic Monetary Instab

Endangers International Relations
By Wayne Jett © October 10, 2010
     Fear was not the only thing Americans had to fear in 1933, as Franklin Roosevelt well knew. High tariffs shut down trade and production; high taxes stripped private capital; and rampant fraud in financial markets looted capital and drove survivors to gold shelter. Those were job-killers in 1933, and economic conditions are just as poisonous now.
      Currency devaluation today is a more potent weapon of trade war than the Smoot-Hawley Tariff Act was. The prospect of automatic repeal of the Bush tax cuts has destroyed business investment and production, much as did the income tax hike of 1932. Nuclear-tipped securities derivatives (naked credit default swaps, crude oil swaps, intentional failures-to-deliver, etc.) combine with computer-driven front-running of all securities trades to out-do by far the bear attacks and “stock watering” of 1929 in driving private capital (even bank proprietary trading, apparently now passe) from financial markets.
      Regulators telegraph the warning to bank executives: do not lend! Bank reserves in 2010 are incredibly high – above $1 trillion – more than 23 times the $44.6 billion in bank reserves at the end of August, 2008. The Federal Reserve System creates new money to buy Treasury securities and accommodate the federal government’s intent to create debts beyond the nation’s capacity to repay.
      With the Federal Reserve and Treasury/President/Congress doing these things, historic monetary instability is the prompt, unsurprising result. The dollar’s value is dropping to all-time lows as proved by the gold price rocketing past $1,350/oz, up 386% since achieving equilibrium value of $350/oz in 2003.
     This means the Fed has devalued the dollar about 75% in the past seven years, an average annual monetary inflation rate of 10.7%. That is trade war, done to price foreign producers out of the U. S. market in favor of U. S. monopolists.

      Monetary inflation is an accomplished fact, and product prices will adjust accordingly as an added variant of supply-demand signals. So far, the CPI has adjusted only 16.6% since 2003, leaving nearly 60% in price rises still to be realized. This means price inflation of 6-12% annually over the next five to ten years is already built into the dollar. Talk of “deflation” is either ignorant or deceptive, because any downward pressure on prices comes not from monetary policy but from falling demand in relation to supplies of goods and services.
Whip-sawing China (and U. S. Consumers)
      China pegs its currency to the dollar to avoid loss of U. S. markets. Duplicating the Fed’s money creation causes worse inflation in China than the Fed creates in the U. S. Congress was set to make matters worse in September by voting on a bill to allow penalties to be imposed on Chinese producers to compensate U. S. producers for China’s “weak” currency, but adjourned to avoid voting on extension of the Bush tax cuts.
      The world’s best monetary theorist, Robert A. Mundell, declared such U. S. penalties would create a “disaster” which would create even greater instability in international relations. He further warned that the China penalty bill distracts from attention to the primary source of monetary instability, which is devaluation of the dollar relative to the euro. The recent dollar/euro ratio, Mundell declared, “is a terrible thing for the world economy. We’ve never been in this unstable position in the entire currency history of 3,000 years.” Since Mundell spoke in September, the dollar/euro ratio has worsened to $1.40, provoking European retaliation. Japan, too, is being priced out of the U. S. market, with the dollar now worth only 82 yen.
      The U. S. press treats the problem as created by everyone else but the Fed, its Wall Street owners and their federal vassals. Japan is said to be leading the global charge to devalue currencies when dollar devaluation is clearly way out ahead. Far from moving towards monetary stability, the Obama government has federal spending up 9% year-over-year in 2010, which has the Fed buying Treasuries hand-over-fist with newly printed dollars.
The Supporting Chorus
Egging on this outrageous theft of Americans’ savings value are the usual suspects. George Soros, hedge fund mogul and financial angel to Obama and the Democratic Party, says spend more (to help the little people, of course). Keynesian economists assure Obama all he needs for a political comeback is a weaker dollar. The Fed plans “limited inflation” as some insiders publicly advise doubling the official inflation target from 2% to 4%.
      This continuing financial gamesmanship leaves the private economy mired in economic depression. U. S. financial markets presently enjoy an upward blip to DJI 11,000 (equal to about 2860 on the DJI when the dollar is corrected to its 2003 value) due to perception of a “refilled punchbowl.” Goldman Sachs, always trustworthy in telling the truth about such matters, forecasts the U. S. economy will be either “fairly bad” or “very bad” in 2011, depending on how things play out. If ever the San Fernando Valley colloquialism “well, duhhhh!!!” has an economic application, this may be that occasion.
Another Mother of All Frauds
    Meanwhile, back at the big banks, another “biggest financial fraud in history” has surfaced as home foreclosures are halted across the country due to widespread faking of documentation filed in courts to prove mortgage ownership by the foreclosing entity.          
Ever so slowly, public awareness of the scope and nature of financial fraud is raised by book and film, but government response has been nil due to its capture by the predatory elite.
    All of this is presented to provide context for contemporary events within the structure of classical economic theory. Financial fraud emanating from Wall Street and hedge funds remains undeterred as the over-riding macro-force in the global economy, as monetary policy of the Federal Reserve and fiscal policy of the Treasury play supporting roles to advance the same interests. ~