The release of the updated paperback edition of Charles Goyette‘s The Dollar Meltdown couldn’t be more timely. I just got off the phone with Mr. Goyette. The first thing I asked about was Federal Reserve Chairman Ben Bernanke’s plan to spend an additional $900 billion on Treasury Bonds, the plan known as “Quantitative Easing II” (QE2). Goyette calls it an “absolute disaster.” He said it’s nothing more than a wealth transfer to Wall Street, from the rest of us.
Goyette told me that the first round of quantitative easing (QE1) was worth $1.7 trillion – money that the Federal Reserve in essence “just made up.” They bought all sorts of bad investments (like mortgage bundles) and transferred them to the Fed, making those losses our losses. The full effects of QEI are only now starting to be felt. Take a look at this chart tracking commodity prices over the past year.
And now the Fed is doubling down on the same bad policy. This is just the beginning!
Ben Bernanke all but admitted the move is to boost stock prices, what he didn’t tell us that it was at the cost of our purchasing power. These higher prices are like a huge tax on the American people. Mr. Goyette pointed out how Americans have taken to the streets to protest the growth of the government and the out of control spending, and then sent a loud message on election day. “Think about this. The election was on Tuesday. They have such a brazen attitude – the American people have had enough. Three dozen who voted for the Bush bailout were voted out of office, yet the very next day the Federal Reserve announced this Wall Street Bailout.”
I asked Mr. Goyette why the cost of food and oil aren’t included in the official inflation numbers. He said it goes back, he believes, to the Nixon years, when inflation was high and it looked bad. So the politicians cooked up a new indicator to make the numbers look better. And we’re stuck with the same formula today.
Goyette believes it’s probably too late to avoid the pain caused by this out of control spending. He said the money’s already been spent, but now is a good time to start paying some of it back, since interest rates are so low. The big problem is that so many Americans have become accustomed to, and dependent on, the entitlement programs. We have about 100 trillion dollars in unfunded liabilities, and nobody in government has done anything to meet those obligations. No Democrat or Republican wants to appear on television and tell the truth. So they try to “patch things together” to make it work. They’ll keep upping the retirement age and destroying our currency while not addressing the underlying problem.
Goyette believes Rep. Ron Paul is right in his quest to “end the Fed.” I told him that many on our side argue that we can’t do away with the Federal Reserve because we don’t have anything to replace it with. Goyette scoffed at such a notion, saying that since the Federal Reserve was created 98 years ago, 94% of the dollar’s purchasing power has been destroyed, and that we’ve had the worst inflation and depressions in history. He likened it to a family business. If your family business was run by a management company that destroyed 94% of its value, would you say “Well, we can’t find new managers!”?
He said we’ll know early next year if the Republicans are serious about doing something about this debt. There will be a vote early in the year to increase the national debt ceiling (which will be President Obama’s 4th increase in two years). If they vote for the increase they will need serious budget cuts to go along with it. He said the proposed $100 billion per year just won’t cut it when a 1% interest rate hike will come to 100% of those cuts in service of our debt. “Watch what they do along the way,” Goyette told me.
I’ll be watching, he can count on that.
For more from Charles Goyette visit his website. You can buy his book Dollar Meltdown below.
(Note – I will receive a very small commission on any sale made through the link below.)
Update: A few items I meant to get to but have just run out of time. Sarah Palin is also talking about this issue, and has called on Bernanke to “cease and desist!” One of the Wall Street Journal’s reporters sniffed that Palin had no idea what she was talking about regarding inflation. Palin shot back that he must not read his own paper. This morning, the Wall Street Journal posted an editorial praising Sarah Palin for her intervention into the global monetary debate. Does this mean Sarah Palin is smarter than a Federal Reserve Chairman and an MSM reporter? Heh! (When I asked Goyette about Palin, he said he read the headline, and was happy to hear it but wished she had brought it up during the 2008 presidential campaign.)
Tags: Charles Goyette, commodities, Dollar Meltdown, Federal Reserve, gold, inflation, QE1, QE2, Wall Street
QE is the last policy resort for the Fed. In theory, this buy of treasury bonds should result in higher inflation. As I understand it, if inflation goes up, the banks and corporations currently holding cash will be more likely to spend it. Spending will then spark the economy and help bring down unemployment. Now some of the fed chairmen worry it will drive up inflation too high, but with inflation rates running near historical lows, high inflation seems to be a less likely outcome.
The inflation rate is around 1-2%, which is well below the 1913-2007 average of 3.42%. This lends credence to reported motivation of the Fed: they want to boost consumer spending.
While your chart of prices may be accurate, you should provide context. As pointed out in the WSJ of 11/4, this year has been the “tamest year of food pricing in nearly two decades.” Further, how much of a correlation can be made between Fed policy and commodity prices? I can remember steel prices being at historical highs in 2007 – 2008 as the economies in China and India demanded steel. Fed policy had little influence.
This move was not a whim. The Fed is always quite deliberative. This link supports their motivation to help ease unemployment:
(http://www.theatlantic.com/business/archive/2010/10/3-reasons-why-the-fed-will-take-action-in-november/64166/).
I believe it also belies the notion that the timing had anything to do with the recent election. This action has been anticipated for months.
I don’t know which “inflation” numbers you are using, but gasoline, heating fuel and food products are in the CPI, the most popular measure of consumer inflation. These calculations have been provided by the US Department of Labor Bureau of Statistics since 1919. The current CPI measures some 200 goods and services. The contents of the “basket” are based upon consumer surveys, not what makes the “numbers” look good.
With low interest rates, the cost of borrowing is low. Debt is cheaper now than its been in a while. Dollars spent today to acquire new debt will go further than dollars spent now to retire old debt. If inflation does increase (and given its low point, its almost certain to) debt purchased today will be paid in dollars that have lower value, adding more value to debt purchased today.
The Fed was established in 1913. Now its true that it did not prevent the depression of the 1930′s or the current crisis, but it was created following financial failures in 1819, 1837, 1873, 1901 and 1907. That’s 5 in less than a hundred years. It would appear that we have had a 3/5′s reduction in financial upheavals since the Fed was established. Would new managers do better? And exactly how would we replace the Fed?
Our largest structural debt is comprised of commitments in Social Security and Medicare: IE, the economic lifeblood of our senior citizens.
I agree that we have to look at remedies. I would recommend we start by being specific and refrain from using general words like, “entitlement programs” when we discuss where spending cuts are coming from. Some entitlements are programs like agricultural subsidies or tax breaks to oil companies. An argument could be made that the highway system is an entitlement program for the trucking, oil and auto industries.
Also remember that wage earners have been paying into Social Security and Medicare; I have paid in for nearly 40 years!
And please do some more research on the debt ceiling. Yes, it becomes a political football every time it comes up, but failing to raise it will not remedy our debt problem.
Update to your update: Palin made the same correlation regarding consumer prices and the Fed action. Yes, some prices went up in the past year but overall prices did not. Sudeep Reddy, the WSJ writer of the article in question, posted this in response to Sara:
“A broad measure of food prices from the Labor Department shows prices rose at an average annual rate of less than 0.6% in the first nine months of the year. September’s increase in food prices — 1.4% for food and beverages at an annual rate — was low by historical standards.(In fact, the lowest average annual inflation rate on record was 1.4%, in 1992.) Commerce Department inflation data show a similarly slow year-over-year increase for food prices, 1.3%. ”
Again, Palin may have an argument that the Fed’s action will lead to unbearable inflation, but by historical standards, our current inflation is low and is not in the range that usually accompanies a healthy economy. It may be that some groceries are higher. But most of us have less to spend on groceries!
And I for one would prefer financial advice from Ben Bernanke rather than Sara Palin.
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Mr. Reddick, the health of the US economy is not a tug-of-war between Sarah Palin and Ben Bernanke. Ben Bernanke=Benedict Arnold. Deflation benefits all; inflation benefits the bankers. FYI, the Wall Street Journal is not God. Editor Paul Gigot and Ben Bernanke, plus many others in media, finance, technology, etc. attend the same internationalist meetings. Ben Bernanke originally told Congress that he would not monetize the debt. Now he’s doing QE2. Ben Bernanke said he carefully studied the Depression and its causes, and it appears he learned well how to create and perpetuate a failing economy. The US would do well to end the Fed. The Fed is not controlled by the federal government. It is a private institution, only needing to report to Congress what it has decided. US adoption of a Central Bank, income taxes, and the election of Senators (instead of their appointment by their State) were all the result of Progressive policy, which as discussed earlier in this blog today is infiltrated by the CPUSA who undoubtedly contributes much to the bent of the Democrat Party.
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Mr. Soldier4110 – The US story of central banking is varied. The first US central bank was established under George Washington’s administration with a charter to operate for 20 years. It was not renewed when it expired in 1811. Madison revived it in 1816 but it was not renewed when it expired in 1836. From 1837-1913 there was no central bank in the US. During that time a series of panics in 1873, 1893 and 1907 led to the current system. Prior to the Fed, there were as many as 30,000 currencies used in the US to facilitate trade. Small wonder then that panics, caused by runs on currencies, occurred 3 times in 30 some odd years.
I do not agree that Ben Bernanke is a traitor. He was nominated to his post by President Bush and confirmed by the Senate all in accordance with the Federal Reserve Act. To my knowledge, he has not done anything that is not proscribed by law.
The Fed is a quasi private enterprise in that the reserve banks are comprised of capital from private banks, but the Board of Governors and the Fed Chariman, who make the policy, are all nominated by the President and confirmed by the Senate. These private reserve banks do not make loans or do other things normally associated with banks. They are the instruments through which the Fed affects changes in the money supply and the interest rates. They have a very narrow charter as was the intent of the Federal Reserve Act of 1913.
The economic mess was not created by the Fed. It had little to do with collateralized debt instruments and the overselling of US real estate. One could make a reasonable argument that the Fed helped prevent the current economic meltdown from escalating into a depression.
Income taxes are typically instituted as a way of funding the federal government. They were first instituted in the Lincoln administration in order to pay for the Civil War. They were relied upon less after 1868. At that time, most of the Federal government’s income came from tariffs, with the majority of these coming on alcohol. With prohibition and the loss of alcohol tariffs, the Federal government relied more upon income taxes. They have been with us ever since.
Even if you don’t agree with the Fed, income taxes or the election by the people of senators, all of these came into being through the lawful democratic process and have survived judicial scrutiny. Are there better ways? I am certain of it. These approaches came about in response to the times they were a part of. I am certain these times will leave a similar mark.
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[...] fiscal path we’re on will lead to hyperinflation. It’s a near certainty. Apparently, Time Magazine’s “Curious Capitalist” is aware of the looming [...]
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[...] fiscal path we’re on will lead to hyperinflation. It’s a near certainty. Apparently, Time Magazine’s “Curious Capitalist” is aware of the looming [...]
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