March 19, 2010
Publix Supermarket is selling Federal Reserve "Bunny Bucks" for $2.50. Publix assures us that the bunny money is legal tender everywhere in the United States.
We all like bunnies and it is very nice of the FED to help out charity by selling us a one dollar Federal Reserve note for $2.50 but todayís Federal Reserve note is worth 3 cents in 1913 dollars thanks to the FEDs many years of "fighting inflation".
What would we do with out the FED?
The FED was born in 1913 as the result of the machinations of Jewish Bankers who wanted to get the US into World War I in order to destroy the Ottoman Empire so that the state of Israel (New Khazaria) might be born.
The FED has not only given us the Great Depression and the Volker Recession but almost every recession since then.
"On the occasion of Friedman's 90th birthday, Ben Bernanke (the current Fed Governor) remarked: 'I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.'"
But it is not responsible for the current downturn in the economy. Data from the FED website and Grolierís Encyclopedia clearly show that interest rates and the national debt exhibit a 54 year cycle (called a Kondratieff cycle).
Nickolai Kondratieff was a Soviet economist who was banished to a Siberian concentration camp by Trotsky for his blasphemy against the Marxian prophesy that capitalism would fall of its own weight. He suggested that the capitalist economy ran on long wave cycles of 50 to 60 years.
Real increases in price (not merely due to inflation but due to increasing demand) affect interest rates. It is no coincidence that Paul Volker triggered the recession which bears his name when public debt was at its lowest since the end of the Second World War. Old debt was being retired faster than new debt was replacing it so the FED decided to crash the economy. The economy was weak because it was in a transition between increasing and decreasing demand. It was at a plateau, an inflection point, where an increase in treasury bill returns above that which was being paid by AAA corporate bonds would cause the economy to crash, which it did. Jimmy Carter paid the price, he was not re-elected. Carter was the Herbert Hoover of the second price production cycle in the 20th Century.
You can think of business cycles as the humming of the machines which make the economy work. The problem is not in business cycles as the boot licking establishment economists have claimed but in the manipulation of the money supply by the FED.
The gold standard is often blamed for the "Great Depression" but if we ever had a true gold standard during the FED's now nearly century reign over the money supply then the price of gold would be historically correlated with the consumer price index (cpi). This clearly has not been the case. Indeed, it is only after the US went off the "gold standard" that we see a correlation between gold prices and inflation.
(The cpi is given as a fractional change over previous year.)
What we see instead is the FED depressing the gold market to give us the illusion that the US is on a gold standard when it is really not. Controlling the price of gold is not the same thing as a gold standard.
If gold was being used as a currency then its price would have been tied to the demand for money. Instead we see the real price of gold slowly declining or remaining constant regardless of the state of the economy while the money supply continues to grow. This manipulation of the gold market has made gold one of the worst investments in history. This can be seen when we adjust the historic price of gold to 1913 dollars.
As can be seen, the real price of gold has been either on the decline or stable between 1913 and 1970 except for an abrupt rise in the early 1930s during the depression. Even then it only rose back to its previous 1913 level. The next 35 years saw a slow decline in real gold prices until the US went off the "gold standard" in 1970 when it rose to above its 1913 value and then began a sharp decline catching many investors with their pants down. It then fell below its 1913 value and began an abrupt increase to almost 3 times its 1913 value and then fell just as abruptly back down to its 1913 value. After another sharp increase it began a slow downturn in real value to about 60% of its 1913 value.
This was accomplished by Executive Order 6102 and the Gold Reserve Act of 1934 which limited the amount of gold which Americans could own and fixed its price.
But the dollar was not based on the amount of gold that the Federal Reserve had in its vaults. Its value was tied to other national currencies which were controlled by the same bankers who ran the FED.
Not to be outdone by the FED in the smoke and mirrors department is the US government. A careful analysis of the unemployment and inflation data shows curious cycles of about 4 year and 8 years.
What could be causing this? Well, we know that a reduction in demand can cause firms to lay off workers and an increase in the price of goods and services can cause a reduction in demand. Could it be that in their never ending efforts to cure unemployment with Keynesian economics the US government has been increasing the money supply using the FED to delay the inevitable inflationary effects?
An increase in the money supply may reduce unemployment initially but invariably it also results in reduced demand because of an increase in the price of goods and services which, as we know, reduces demand and leads to an increase in unemployment.
All this results, of course, in a continual devaluation of the dollar with the FED making money on each turn of the merry-go-round.
But it creates the illusion of enormous growth there by justifying the inflationary policy.
(GDP is given in billions of dollars.)
As shown in the above graph, over the last 60 years the real GDP of the US has grown ony about as much as the increase in the size of the US population (proportionally).
Today if you say someone is "sound as a dollar" someone might be prompted to call an ambulance.
The incredible shrinking dollar owes its diminutive powers to the wars made possible by the FED: The First World War, The Second World War, the "Cold War" and now the phony "War on Terroism".
The vast majority of people in America, of course, do not want this wasteful and from their point of view stupid spendingon war but they seem powerless to stop it, perhaps because it has been written
"The rich ruleth over the poor, and the borrower is servant to the lender."
"Give me control of a nation's money and I care not who makes the laws. "
"Deuteronomy|15:6 For the LORD thy God blesseth thee, as he promised thee: and thou shalt lend unto many nations, but thou shalt not borrow; and thou shalt reign over many nations, but they shall not reign over thee.
Grolier's Electonic Encyclopedia
Federal Reserve Website
It is claimed by a Wikipedia article that Milton Friedman dismissed Edward R.Dewey's "Cycles the Science of Prediction" as "pseudoscience".
"In 1947 Edward R.Dewey and Edwin F. Dakin published their book Cycles: The Science of Prediction which argued the United States economy was driven by four cycles of different length. Milton Friedman dismissed their theory as pseudoscience"
I have read the book. This is not true. It is true that the book has no bibliography nor are references cited at the end of chapters but Dewey does give footnotes. And despite the fact it that Cycles was written in 1947 one can predict the current downturn in the economy and in the real estate market by extrapolating the predicted curves into the future.
Milton Friedman claimed on the Charley Rose show that the FED "broke the back of inflation" in the 1980s. Does this look like a broken back to you?
As far as cycles theory being a "pseudoscience", I can only say that while cycles theory has not yet been perfected it beats the hell out of all the other economic theories including the "monetarism" of Milton Friedman.
"The jokes are almost as old as the profession itself.
Friedman's monetarism went out of style when Paul Volker crashed the economy in the early 1980s on Friedman's advice. The Volker Recession was the worst economic disaster since the Great Depression. Perhaps it was the snubbing by his fellow economists that made Friedman spill the beans on the FED.
The problem that cycles theory has in gaining a following is not in the theory but in the misrepresentation of the theory by its opponents and proponents. The Great Depression is often cited as an example of the down side of a Kondratieff cycle but this is not true. The Great Depression was caused by the same thing which caused the Volker recession: the manipulation of the money supply by the FED. In both cases the FED reduced the money supply when credit was needed the most causing the economy to crash. This can be seen in the quick recovery of the economy when the Federal government went into hock to the FED because of an increase in military spending during the Second World War and in the quick recovery from the Volker Recession during the Reagan military build up. In both cases, only when the FED got what it wanted, a massive increase in public debt, did it ease its strangle hold on the money supply.
There used to be a very well known business cycle in the rag market when paper was made out of rags. It can be called the beggars-bankers cycle. It goes something like this:
We can see here that the supply of money in this fiat-based currency system is dependent on the number of beggars which is in turn dependent on the number of banks. As banks make loans the supply of beggars decrease. As the supply of beggars decrease less and less money is made. As the money supply dries up the interest on the debts can not be paid causing bank failures and increasing the number of beggars. As the number of beggars increase the money supply starts back up again.
From the data collected on interest rates and public debt over the last century we can make the hypothesis that the money demand - public debt cycle is basically a beggars- bankers type of cycle but it is a little bit more complicated than the pun.
Increasing demand for goods and services results in increasing profits and increasing capital investment. This requires money so the demand for money and interest rates also increase. Real prices go up and debt is retired.
As demand becomes satiated, profits and interest rates increase more slowly, level off, and eventually begin to decrease. Debt mounts and real prices go down.
Demand may start back up again as the result of durable goods wearing out but what goods last 54 or 55 years?
Perhaps there is a generational component here. Waves of young people with unmet wants may be produced in 55 year intervals.
Goldstein has suggested that long waves may have something to do with wars but perhaps the 55 year cycle of war and peace which he has detected may only be the result of a 55 year cycle in population density followed by population dispersal.
As the population density increases fewer people want to have children. Instead of becoming monks or using traditional birth control methods the baby boomers of the 1950s slaughtered their progeny in abortion clinics. Abortion was made legal because of the increasing burden of welfare costs on the state.
States which have a low population density and rural areas tend to be more conservative and opposed to abortion and sexual behaviors which prevent pregnancy, while states which have a high population density and cities tend to be more liberal and more violent.
The baby boomers were produced during the down turn of the last 55 year cycle and they are reaching retirement age now. 55 years is about the working lifetime of a human being.
It could be argued that the inverse public debt - interest rate cycle represents only the interaction between government and the FED and is not a real Kondratieff cycle. Public debt was virtually non-existent before the FED was created. But the public debt figures before 1913 may not include private debt. Edward R.Dewey argues that the excessive government spending during wars only distort business cycles and that the cycles snap back into place after the wars are over. The decline in public debt after the Reagan military build up in the 1980s supports this point of view. World War II increased US public debt to 120% of GNP, the highest it has ever been, but according to Dewey it would have been high even if there was no war.
In any case, it is argued here that the inverse public debt - interest rate cycle of the 20th century is basically a demand driven phenomena and that real prices reflect supply and demand in a classical Adam Smith kind of way. Adam Smith is still the best economist who has ever lived; he can rightfully be said to be the founder of the science.
Adam Smith was a Scott. President Andrew Jackson was also of Scottish descent. Like Smith, Jackson had a very good grasp on economic principles.
"Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank.