As a general rule, the most successful man in life is the man who has the best
information
In my article The Politics
of Personal Destruction I presented
the case that the Federal
Reserve was responsible
for the Great Depression because
of its extremely tight monetary policy.
In 1963 Friedman, and coauthor Anna J. Schwartz, published
A Monetary History of the
United States, 1867–1960. In it, the authors claimed that the Great Depression would have been a typical downturn had it not been for policy errors made by the Federal Reserve. US Federal
Reserve head Ben Bernanke
also believes if the Fed had provided enough money to banks and bought US securities the Great Depression
would not of happened.
All the Fed had to do, back then, to turn the US economy around was do what it was
suppose to do - be a lender
of last resort and add to
bank’s reserves by purchasing government securities - this would have expanded the money supply.
But the Federal Reserve, on top of allowing
the money supply to contract,
deliberately contracted
the money supply further
by raising interest
rates. Yesterdays Federal
Reserve had no interest
in increasing the money supply
and saving banks because:
- Fed officials
subscribed to Treasury
Secretary Andrew Mellon's
liquidationist thesis
- Most of the failing
banks were small banks and not members of the Federal
Reserve System
- Large banks
did not protect the smaller banks feeling the
Fed should do it,
and that the weeding
out of small competitors
was a good thing
“Mellon advocated
weeding out "weak"
banks as a harsh but necessary prerequisite to the recovery of the banking system.
This "weeding out" was
accomplished through refusing to lend cash to banks (taking loans and other investments as collateral), and
by refusing to put more cash in circulation. He advocated spending cuts to keep the Federal budget balanced, and opposed fiscal stimulus measures.”
Wikipedia
As an aside, Executive Order 6102 was signed on April 5, 1933, by
U.S. President Franklin D. Roosevelt "forbidding the Hoarding of Gold
Coin, Gold Bullion, and Gold Certificates
within the continental United States". Could an argument be made that Mellon’s policies, adopted and followed by the Fed, and the subsequent
results - turning a
simple recession into the
Great Depression - were
the cause of the US abandoning the gold standard?
Roosevelt’s “New Deal” (a series of economic
programs between 1933 and 1936 designed
to bring; Relief to the poor
and unemployed, Recovery
of the economy, Reform of
the financial system, the 3R’s) meant the end of the Gold Standard. To accomplish his goals FDR needed the Federal Reserve to
have complete control over the money supply.
FDR’s “New Deal” was in direct response to economic conditions at the time
– the Great Depression. Conditions that this author
believes were brought about, or at least made
much worse, by Treasury Secretary Andrew Mellon’s advocacy of letting banks fail and a tight monetary policy.
Between 1929 and 1933 the US
money supply contracted
by 31 percent.
Today, unlike
in the late 1920’s and early
1930’s, the Federal Reserve is providing liquidity and increasing the
money supply.
Bernanke is
putting into practice what
he believes to be the fix for our current economic
woes:
- Giving money to the banks
- Cutting the prime interest
rate the Fed charges commercial banks
- Buying treasuries
Many economists
believe the boom and bust
effects of the business cycle can
be largely smoothed over by government increasing or decreasing the
money supply.
If this is true,
the questions we have to be
asking ourselves are;
Q: How did
we get into this predicament
in the first place?
A: Our political
masters have been printing our way
to prosperity.
“Government intervention begets government controls and regulations. When you replace the automatic workings of the gold standard with
a government controlled
fiat standard, you must regulate
and control things like
money supply and financial
leverage, since the
discipline of the market has been replaced with the discipline of
the government.” Paul Nathan, paulnathan.biz
All we need to know about politicians is 1. It isn’t their money and 2. Nothing is more important to them then getting
reelected. Asking for
fiscal discipline from them
is akin to asking John Dillinger to guard Fort Knox. In regards to Dillinger,
congress and Ben Bernanke’s
actions we know what’s
going to happen – Dillinger would rob Ft. Knox and both congress and the Federal
Reserve are going to create,
give away and spent money in unbelievable amounts to keep the system afloat.
As soon as the QE program, part’s
1 & 2, ended in June
of this year, the markets had to get by on a lot less money and liquidity. Today the dollar is up because the EU, and the
world, have an acute shortage of dollars for the necessary bailouts and needed liquidity. These strange market conditions (the dollar up, markets
down) are temporary and are providing
a huge buying opportunity, here’s why:
- China will
implement another
stimulus program. China, even if growth slows, is still predicted to grow at nine percent and the urbanization
of both China and India
and the astounding prospects of Africa are far from over
- The US will
soon start QE3 and initiate a massive stimulus program via an
infrastructure maintenance and build program
- Britain started
QE2, British bank’s exposure
to continental Europe is equivalent
to about 250 percent of their Tier 1 capital. The assets
of British banks are equivalent
to four times GDP, if the Euro Zone were to
collapse it’s not likely
Britain's banks would survive and the country would
immediately go into recession
- The European
Union will vastly increase the size of their
bailout fund, the European Financial Stability
Facility (EFSF), to purchase
bonds and recapitalize banks
- A global coordinated
bailout effort will begin
- The US 2012 budget projects that the deficits total $7.2 trillion over the next 10 years with the shortfalls never coming in below $607 billion.
Conclusion
What does
a US, that should read almost all governments, lack of discipline
mean to investors?
A soon back to falling, and much weaker dollar, will push up the price of commodities, rising commodity prices tend to push
bond prices lower. A falling dollar is bearish for bonds and stocks because
it is inflationary.
Coming higher
commodity prices should be on every investors radar screen. Is how to gain the most
leverage from investing in higher inflation
and commodity prices on yours?
If not, maybe it should
be.
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