November 17, 2019

The Federal Reserve has crossed the balance sheet Rubicon

Fed balance sheet (2)Federal Reserve Chairman Jerome Powell tried once more to tell U.S. markets what they wanted to hear, saying the Fed would ‘soon announce measures to add to the supply of reserves over time.”

A little history lesson for my younger readers:

Back in January 2008, the Fed’s balance sheet was approximately $880 billion in assets.Those were mostly securities (exclusively or mostly U.S. Treasury bonds) purchased in the past during monetary expansions (when the Fed buys a security from a member bank, it takes in the security and gives the member bank U.S. dollars, meaning there are more dollars available to lend out into the economy).

During its various rounds of “quantitative easing” and other inflationary programs in the years after the 2008 crisis, the Fed’s balance sheet increased to over $4.4 trillion. This was a once-in-a-lifetime thing, said the Fed at the time, and the balance sheet would quickly be “normalized” when the once-in-a-lifetime crisis was past.

Well, the Fed began normalizing its balance sheet in late 2017 (with the president screaming bloody murder the whole time) and got down to about $3.7 trillion – still over four times what it was in January 2008.

The normalization effort didn’t last long. Despite Powell’s comments, the Fed actually began adding to its balance sheet again in August. It’s now back to $3.945 trillion – a $200 billion increase in just two months. In other words, the Fed just added to its balance sheet in those two months 1/4 of what it added during its first 95 years of existence (1913 – 2008). This in an economy the Fed says is strong.

The Rubicon is in the rear view mirror. Where this monetary mayhem will take us is anyone’s guess.

Tom Mullen is the author of Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty and the Pursuit of Happiness? Part One and A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.

Why Aren’t Automation and Baby Boomer Retirements Driving Consumer Prices Down?

thinkingkid“When I was your age, I used to go to the movies for a dime. I’d get a big bag of candy for a nickel.”

I still remember my father saying those words as I headed off to the movies in the 1970s when the afternoon matinees cost $1.75 per ticket, more than 10 times what my father had paid 35 years earlier. I remember because my father said that every time I went to the movies for my entire childhood and all my teenage years. I doubt I’m alone on this.

There isn’t an American alive for whom steadily rising prices haven’t been a fact of life for all his or her life. Most employed Americans risk their savings in the stock market, through 401ks or other tax-deferred investments, because everyone knows merely stockpiling cash is useless. It will lose all its value because of inflation.

Just imagine if it were the other way around. Imagine if you could simply put your cash savings in the bank, and without even considering any interest it would earn, see it gain value over time. Imagine if your father or grandfather repeatedly told you that something you were purchasing today used to cost him a lot more when he was your age.

Well, for America’s first full century, that was exactly how it was. Prices fluctuated year to year, but over the course of the 19th century, prices fell dramatically. A basket of goods that cost $100 in 1800 cost less than $50 in 1900. That means one could buy twice as much with the same amount of dollars. Average Americans could simply stockpile dollars over the course of their working lives and realize a return on their investment in the form of dollar appreciation.

Read the rest at Foundation for Economic Education…

Tom Mullen is the author of Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty and the Pursuit of Happiness? Part One and A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.

I, Interest Rate

interestIt is often said, “Don’t kill the messenger,” but that is precisely what everyone seems to want to do in my case. I’m not sure why because the news I bring is neither good nor bad. It is simply the truth; and it is a very sad day when telling the truth can foster such ill will. There are some who go so far as to declare my very existence wicked simply for providing information people use to engage in a specific type of voluntary exchange that, although of immense benefit to society, has somehow acquired an unsavory reputation.

As you may have surmised, I am the rate of interest, the price difference between present goods and future goods. Now, many economists mistakenly identify me merely as the price of borrowing money over time, but that is only one of the many messages I carry. I also represent the price spread in the various stages of production, where capitalists purchase present goods in the form of factors of production in the hopes of selling what is produced by those factors for a higher price than what they spent. I am also this difference in price.

Nobody but me can gather the information I gather, for my message is determined by billions of individual transactions occurring simultaneously all over the economy. I consider the individual supply and demand schedules of hundreds of millions, sometimes billions of individual consumers and producers, along with the uncertainty involved in every time transaction, to determine the current price levels for transactions that involve time at any given moment.

In the case of individual borrowers, the uncertainty I mentioned includes that borrower’s previous behavior, which is generally called a “credit rating.”

While it is only one of the many prices I make available to the market, an inordinate amount of attention is paid to the price of borrowing money. That is likely for two reasons. One, as I said, is that most people erroneously believe it is the only information I impart. Two, people seem to be borrowing a lot more than they did previously in history for reasons I will explain shortly. As a result, it is regarding the price of borrowing money where I am most slandered and abused.

Because this price of borrowing is above zero, there are some who consider my existence alone as evil. They say I’m a party to a crime they call “usury,” which is a very strange concept. When everyone is acting honestly, money is a scarce commodity, so any loan by Person A to Person B requires a sacrifice on the part of A. Person A must forego consumption in the present in order to lend to B.

It is no different than if A were saving for a new car or some other expensive item for himself. He must forego eating out as much, or buying new clothes, or going on vacation this year in order to put aside money to buy the expensive item next year.

By loaning money to B, A is allowing B to skip this sacrifice and purchase the expensive item now. It seems a very peculiar notion that A should forego spending his own money on himself only to let B use it for free when needed. How did this obligation to serve B free of charge come about? Aren’t all men created equal?

Read the rest at Foundation for Economic Education…

Tom Mullen is the author of Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty and the Pursuit of Happiness? Part One and A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.

Thought for the day March 30, 2016 Free Trade, the New Deal and the Federal Reserve

NewDealThought for the day: Free trade agreements haven’t hurt Americans; they’ve helped. They just aren’t enough to overcome the combined economic destruction wrought by the Federal Reserve System and the New Deal, both of which must be abolished root and branch before there is anything resembling a free market in the USA.

Tom Mullen is the author of Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty and the Pursuit of Happiness? Part One and A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.

No one really believes the Federal Reserve or the BLS

Federal ReserveLast Friday was anything but good for news on the economy. The Bureau of Labor Statistics (BLS) released a dismal jobs report that missed expectations by fifty percent. This followed a press conference two weeks ago by Federal Reserve Chairman Janet Yellen during which she indicated rate hikes might not come as soon as expected because “room for further improvement in the labor market continues.”

Yellen’s statement would be fairly unremarkable if it were not for one troublesome fact: the U.S. economy is supposedly at “full employment,” according to the measures the Fed uses to guide their interest rate policies. The Bureau of Labor Statistics has it at 5.5% as of today. That is the rate most economists consider full employment for the U.S. economy and we’ve supposedly been there since February.

How could there be room for improvement in the labor market if we’re at full employment? There can’t be. But everybody knows real unemployment is much higher than the manipulated BLS statistics represent. Janet Yellen knows it. The markets know it. Tens of millions of unemployed Americans know it.

Yet everyone keeps talking about the BLS unemployment rate as if it were true.

Tom Mullen is the author of A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.

Read the rest of the article at Rare…

The Federal Reserve runs the economy, not Congress or the President

federal-reserve-building.top

BUFFALO, March 18, 2015 – Janet Yellen told the markets what they wanted to hear today and the indexes rocketed out of negative territory to finish up over 1 %. As usual, speculation abounds on precisely what was in the minds of investors.

Journalists tend to overstate the causal importance of breaking news when the market makes big moves. Often, those moves were predicted months in advance by serious traders and what happened that day had little to do with what the market did. Not true for the Fed’s announcements. They do move the markets immediately.
What most people don’t know, or at least don’t acknowledge, is that the Federal Reserve really runs the entire economy. When the Fed inflates the supply of money and credit, indexes go up, growth occurs and the economy “improves.” When it deflates the supply of money and credit, indexes go down, contraction occurs and the economy “slows.”

That’s really the whole story of the American economy. Think about that for a moment.

It doesn’t matter who is president, which party controls Congress or what any of those people do or don’t do. Yes, regulations and tax rates have some effect on the economy. Liberals might say more regulation is a good thing, conservatives might say it is bad.

But taxes and regulations haven’t really had much effect at all in the past 40 years. Before that, when taxes were at 90%, they mattered, but not when the top rate fluctuates between 35% and 39%. Do the math. It’s not that significant.

Read the rest of the article at The Huffington Post…

 

Tom Mullen is the author of A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.

 

The Mullen Minute: Audit the Fed

Audit the Fed first shot in Ron Paul’s revolution

TAMPA, August 3, 2012 – “When I was your age, I went to the movies for a dime and bought a big bag of popcorn and a soda for a nickel.”

My father said that to me a hundred times when I used to pay $2.75 to go to the movies and another $1.25 for the popcorn and soda. For five generations, Americans have understood steadily rising prices as an immutable law of nature. Yet history shows that this just isn’t true.

The Federal Reserve of Minnesota publishes historical inflation figures on its website going back to 1800. The attached chart from that website shows annual inflation rates from 1800 through 2008. I added the last column to calculate the price movements of a basket of goods that cost $100 in 1800.

You don’t need a Ph.D. in finance for the numbers to jump off the page. The basket of goods that cost $100 in 1800 only cost $58.10 in 1913 (the year the Federal Reserve System was created). For that entire first full century of American history, steadily decreasing prices were something Americans took for granted.

In the ninety-nine years since the creation of the Federal Reserve System, that same basket of goods has risen to $1,265.14.

Continue at Washington Times Communities…

How the Fed Steals for the 1% (Tom Mullen on the Huffington Post)

It is ironic that Occupy Wall Street is reportedly very low on cash. This is something that Wall Street itself never has to worry about. They have ready access at all times to as much cash as they need. The Occupiers mistakenly blame capitalism, but it is not capitalism that is behind this inequity. It is the completely anti-capitalist Federal Reserve System.

The Fed purports to stimulate economic growth by expanding the volume of money and credit. This forces down interest rates and makes more money available to start new businesses or expand existing ones. However, while the currency units are created out of thin air, the purchasing power is not. The purchasing power has to come from somewhere.

As I’ve explained before, the expansion of money and credit really redistributes wealth from the holders of existing currency units to whoever receives the new money. When an individual “redistributes wealth” without the consent of its current owner, most people call it “stealing.” Now, the Occupy movement may not have a problem with that if it results in less disparity between rich and poor. However, that’s not what the Federal Reserve System is all about. The Fed steals for the 1%.

Read the rest of the article at The Huffington Post…

Gilligan, The Skipper, and the Federal Reserve

Now here’s another tale of our castaways.

Imagine if life on the island were different. Instead of seven stranded castaways, there were only four: Gilligan, the Skipper, Mr. Howell, and Ben Bernanke.

Besides non-existent ratings without Ginger and Mary Ann, some other things would be different. Imagine that there was only one thing to buy on the island, coconuts. Now, of course, this takes a willing suspension of disbelief, because we know that these four people would need more than just coconuts to survive. They would need clothing and shelter and might want other comforts that the island might conceivably provide. They would all provide different services to each other and trade them for the services of their fellow castaways. But in this example, the only thing that they trade for are coconuts.

Mr. Howell owns the coconut orchard, which produces 100 coconuts per year. Mr. Bernanke is in charge of the currency, the Island Reserve Notes (IRNs). In order to purchase the only available product for sale on the island, one must use IRNs. Barter or the use of other commodities to make this purchase is prohibited. Each coconut costs 1 IRN.

Gilligan and the The Skipper each perform different services for each other and the other two which they trade for these paper notes in order to buy coconuts. At a given point in time, Gilligan and The Skipper each have 50 IRNs.

There are a few things that are true. The first is  that the IRNs held by Gilligan and the Skipper have no value of their own. Their value is wholly derived from the coconuts that they can buy with the IRNs. Neither do the ISNs have any value off the island. Back in civilization, the currency is not recognized, although if a mainlander were to acquire some IRNs, he would be able to purchase coconuts with them if he ever found himself stranded on the island.

Secondly, Gillligan and the Skipper are equally wealthy, not because they both have the same amount of IRNs, which don’t have any intrinsic value, but because they are both able to buy an equal quantity of the available products. They are each able to buy one half of all coconuts produced in one year in Mr. Howell’s orchard. In other words, each has the same purchasing power in the island economy.

Now, suppose Mr. Bernanke decided to print 5 additional IRNs and give them to the Skipper. The Skipper would immediately be wealthier, as his  purchasing power has now increased by 10 percent. He can now buy 55 coconuts instead of 50. But where did this new purchasing power come from? Was it really created out of thin air just by printing additional IRNs?

Mr. Bernanke might say yes. However, there are still only 100 coconuts available to purchase. Since there is no way for Mr. Howell’s orchard to produce more than 100 coconuts during the current year, it would seem that Gilligan can still buy 50 coconuts, the Skipper can likewise buy 50 and his 5 additional IRNs are worthless until there are more coconuts available to purchase. How can the Skipper take advantage of the additional IRNs?

Obviously, there is only one way. Rather than trading 1 IRN for each coconut, the Skipper will now offer Mr. Howell more than $1.00 IRN per coconut. While he may offer different prices at different times, depending upon how hungry he is, let’s say that the average price he offers Mr. Howell over the year is $1.05. This is the new market price, which Gilligan has to pay as well. Mr. Howell certainly isn’t going to sell coconuts to Gilligan at 1 IRN apiece when he can get 1.05 from the Skipper. So, with Gilligan and the Skipper each paying on average 1.05 per coconut, the Skipper is now able to buy 52.4 coconuts, while Gilligan can only buy 47.6.

What we have seen is a transfer of wealth. The Skipper is now 2.4 coconuts wealthier. However, this new purchasing power was not magically created simply by printing the 5 extra IRNs. It was transferred from Gilligan, who can now afford only 47.6 coconuts, even though he has the same amount of IRNs that he had before. No one snuck into Gilligan’s hut and removed any of his money. He still has the exact same amount. But he has been robbed nonetheless. Regardless of how laudable the reasons given for printing the new IRNs and giving them to the Skipper – to stimulate the economy, create new jobs, etc. – it was nevertheless accomplished through theft.

It should also be noted that no additional wealth has been created. The total number of coconuts that Gilligan and the Skipper are able to purchase is still 100. The wealth has simply been redistributed from Gilligan to the Skipper. Imagine if this were to go on for decades. At some point, the Skipper would be fabulously wealthy and Gilligan would be destitute.

Now, the only reason that this theft is possible is the law that forces Gilligan to use the IRNs. If he were able to pick bananas and offer them in trade for the coconuts, he might be able to produce enough in bananas to buy more coconuts than the Skipper. Only the power invested in Mr. Bernanke allows him to transfer wealth and it is the only power he has. He doesn’t produce a single coconut himself. He simply decides how those coconuts are going to be distributed.

One might also argue that the Skipper might invest the extra 5 IRNs in capital goods and thus expand production on the island. It is possible. However, it is less likely that the Skipper is going to make wise decisions on what capital goods to invest in with purchasing power that was stolen from someone else than with money he saved himself. After all, if he decides to invest in a scheme that doesn’t pan out, he can go back to Mr. Bernanke and get more IRNs. In reality, these funds are loaned to the Skipper and he must pay them back with interest. However, he is really getting an involuntary loan from Gilligan and using Gilligan’s purchasing power to acquire capital goods. Each time he does, he becomes wealthier and Gilligan becomes poorer. Adding insult to injury, the Skipper gets to retain ownership of the new capital goods and keep all of the profits from the investment – with the cost of the investment provided by Gilligan!

Eventually, production might expand, but it will have expanded far less than if the Skipper had been forced to accumulate his capital by consuming less coconuts. This would put downward pressure on the price of coconuts, making Gilligan wealthier while the Skipper became wealthier still once he realized a return on his investment.

Of course, no economy is this simple. There is never only one product or service to purchase in any economy. Neither have we accounted for the coconuts that Mr. Howell consumes, nor for the presence of Ginger, Mary Ann, the professor, or Mrs. Howell, who could all conceivably produce other products or services to offer each other in the island economy.

However, even if there were seven castaways – or 300 million – the principle would remain the same. There would be some finite amount of wealth that all of their efforts combined could produce. All other factors being equal, printing new IRNs and distributing them unequally among the inhabitants would produce the same increase in prices and the same redistribution of wealth.

The only honest way to expand production would be for some of the islanders to save some of their earnings and invest them in capital goods. This would have the effect of raising the overall wealth of the island and any disparity in individual wealth would be the result of those individuals producing more for the other islanders to consume, not from redistribution through the production of new paper currency.  Moreover, since production could only be expanded by real savings, instead of by a privilege granted by Mr. Bernanke, they would all have an equal opportunity to save themselves and compete with those producing more. All of these factors would tend to make income disparity decrease, instead of increase as it does under the IRN System.

There is only one question that remains. Why does Gilligan allow the IRN System to continue?

Tom Mullen is the author of A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.