"Occupy Wall Street" Should Have Occupied the Fed

This is not a political blog. And though I have definite political views, I've tried to stay away from partisan opinions here. Both American political parties share some of the blame for the dismal state of our economy.

That said, the policies which have brought the world to its present state of indebtedness and relying on central banks to artificially stimulate economies are much more widely embraced by those on the left. Liberals believe that government can better the lives of people through regulation and manipulation, even to the point of attempting to violate economic laws. Many moderate Republicans have more or less accepted these policies. Richard Nixon himself famously said, "We're all Keynesians now." Even so, most conservatives shy away from these policies. And libertarians loath them.

Keynesianism, conceived by John Maynard Keynes, is an economic philosophy which holds that in times of economic hardship the government should deficit spend and make money cheap (lower interest rates) to stimulate economic activity. This policy more or less works, much like a drug--that is, until the drug itself becomes the problem, which it has. We have reached what is known as the "Keynesian End-Point," that place where its policies no longer work because the problems it is attempting to solve have been caused by the policies themselves.

Whether such policies are always bad is a matter of endless debate. What is no longer a matter of debate is whether our government has abused them. There is no doubt it has. We now own a record $16 trillion debt, and the U.S. dollar has lost 95% of its value in the last 100 years due to the inflationary effects of too much money creation.

Even so, there are those, mostly on the left, who continue to insist that the problem is not government policies, but that we still don't have enough of them. In other words, they want to administer more of the same medicine that got us here in the first place. Because they've cast their lot with government as the ultimate solution, they are blind to the fact that it is government fiscal and monetary mismanagement that brought us to this state. So they continue to blame "Wall Street," and "big business" and "capitalism" and all the other usual suspects, instead of the one entity with the real power to ruin the economy--the government.

So why does the government do these damaging things? Because they seem to work in the short term--that is, just in time to get re-elected! Keynes himself famously scoffed at the long term, saying, "In the long run we're all dead." Well, the long run has arrived, and some of us are still here and have to deal with it.

Wall Street does bears some blame, as does Main Street. And capitalism is not perfect. But none of these could have produced the damage that was done without the cheap money policies brought on by our government. As Peter Schiff told us, Wall Street got drunk, but it was the government that served the free drinks.

Peter Schiff Explains What Caused the Financial Crisis

In this video, financial expert Peter Schiff explains what caused the financial crisis, how the U.S. economy got in such terrible shape, and why the government is just making things worse. Recorded September 12, 2012.

China Has Us by the Ying Yangs

In the second presidential debate with President Obama, Mitt Romney thumped his chest and pledged to call China on the carpet as a "currency manipulator." His assertion is that China is using its peg of its currency, the yuan, to the dollar as a means to gain unseemly economic advantages.

First, what does all this currency talk mean? What does it mean for China to "peg" its currency to the dollar? Basically it means that China is using its economic reserves to buy and sell dollars and dollar-denominated securities to manipulate global currency prices in order to hold the value of the yuan in lockstep with the U.S. dollar. They do this to keep the value of the yuan low in order to make their exports cheaper so that foreigners will buy them.

It is true that China's currency shenanigans are causing artificial imbalances in the world's markets. What's not true is that U.S. politicians really want China to drop its peg and let the yuan rise in relative value as it naturally would. Or at the very least it's not true that these threatening politicians are being completely open about what would really happen if China dropped its peg.

Why? Because China's dropping the peg would spell economic misery for the United States, at least in the short term.

China holds its currency down in part by buying U.S. Treasuries--in other words, loaning us money. If they stopped buying our debt and loaning us money, who would we sell our bonds to? There wouldn't be enough buyers, and interest rates would have to rise to attract new buyers. Rising interest rates are exactly what our government does NOT want. They want to keep rates low in desperate hope of stimulating borrowing in order to jump start the economy. Rising interest rates would not be good for the economy in the short term.

So China knows our woofing about the peg is likely just posturing. They know they have us by the ying yangs. That's where our being the biggest debtor nation and their being the biggest lender nation has gotten us.

However, in the long run, dropping the peg would ironically be good for the U.S., because it would force us to get our economic house in order. China essentially has us strung us out on debt drugs and is profiting from our addiction. In the short term, getting off the drugs (China dropping the peg) would spell hardship for the United States. Romney either doesn't realize that or is keeping it to himself because it's not an attractive election season message.

Meanwhile, China keeps pegging the yuan, and yawning at us.

Inflation = Stealing from Savers

In a previous post I wrote that inflation is a tax. That's one way to look at it. Actually, the more accurate description of it is stealing. It's just governments that are doing the stealing.

One of the biggest misconceptions is that inflation is a natural and inevitable economic phenomenon, a kind of cost of prosperity. This is false. Inflation is the result of government action, plain and simple.

Everyone knows prices are higher than they were twenty years ago. Few actually know why. Well, here's the reason: The government wants them to be higher, so the government creates more money than the economy actually needs, devaluing the currency, causing prices to rise.

Why does the government do this? Essentially inflation is supposed to act as a cattle prod to get the cattle, I mean people, to spend their money rather than save it--because why save if the money will be worth less in the future? Spending supposedly stimulates the economy and makes it hum, so the government feels it is worthwhile to incite people to spend, even at the cost of reducing the value of their dollars. Are they going to tell you that they are intentionally reducing your savings account value? Nope. They'd just as soon you believe it is a natural occurrence, like El Niño or weeds popping up in your yard.

Another factor is that inflation reduces the size of debt. It's a way the government addresses its debt problem. But by using inflation to reduce debt, they are also reducing savings. So it's a tax. It's an unauthorized, regressive, stealth tax.


Where is the evidence that the threat of inflation causes people to spend? Most people buy what they want when they decide they need it. Do you ever say, "I'd better buy a car this year because next year they are going to cost more?" I don't know of many people that do this.

By the same token, the government fears that falling prices will cause people to delay purchases indefinitely. But prices for electronics have been falling for years, and people generally buy them when they want them. Falling prices have not hurt the sales of electronics. In fact, ultimately they should help.

Is any of this moral? If a citizen works hard and saves his money, shouldn't the government be obligated to protect his wealth? Shouldn't the value of the nation's currency be something the government seeks to maintain above all, or even increase the value of? It seems downright dishonest for a government to set up a currency as the sole means of exchange and then year after year systematically debase that currency. It sounds like stealing.

Don't think for a second that inflation is natural or inevitable. It isn't. But the government wants you to think it is.