Week in Review
The Democrats like to talk about income inequality. Which they say isn’t good. So they want to raise the minimum wage. To reduce income inequality. Even President Obama said during the State of the Union address that he wanted to raise the minimum wage. To $10.10. To give them a living wage. Because they can’t make it on the current minimum wage. Of course, there’s a reason for this. And it’s not because of the wage rate. It’s about the depreciation of the dollar (see Hiking wages with worthless dollars by Seth Lipsky posted 1/29/2014 on the New York Post).
The most startling thing about President Obama’s State of the Union message is what he failed to say about the minimum wage. “Today the federal minimum wage is worth about 20 percent less than it was when Ronald Reagan first stood here,” he declared Tuesday night.
But wait, wasn’t the minimum wage $3.35 an hour throughout Reagan’s two terms? Isn’t it now $7.25 an hour? How does that add up to a drop in value by 20 percent? The president glided right past that point. Maybe he thought nobody would notice.
It strikes me that the president owed the country more of an explanation. After all, he spoke exactly on the 100th anniversary of the start of the Federal Reserve System. The central bank is about to begin its second century. Obama made no reference to any of that history.
Yet a century ago Congress refused to agree to a Federal Reserve until there was a promise about the value of the dollar: It insisted on having the Federal Reserve Act state that it would not lead to an end of the convertibility of the dollar into gold.
That legislative promise came to an end in a series of defaults that started in the Great Depression and ended under President Richard Nixon. By the mid-1970s, America had moved to a fiat currency, meaning a dollar that is not redeemable by law in anything of value. Only what one critic calls “irredeemable electronic paper ticket money.”
The minimum-wage crisis is a sign that fiat money is not working. It’s not, after all, that the nominal minimum wage has failed to go up (it’s been raised seven times since Reagan). It’s that the value of the dollar has collapsed. Today it has a value of only a 1,250th of an ounce of gold, a staggering plunge from an 853rd of an ounce on the day Obama took office.
Back in 1907 some people tried to manipulate the stock price of a copper company and long story short the Knickerbocker Trust Company collapsed and caused a panic in the banking system. Enter the Federal Reserve System (the Fed). A central bank that can inject liquidity during a banking crisis. And forever eliminate these banking crises. Or so went the theory. But central banks have a nasty habit of devaluing their currency. Because they can print money. Fiat currency. Well, the deal with the Fed was that they would not succumb to the central bank disease. But, alas, they did. Which is why minimum wage workers have less purchasing power today than they did during the Reagan administration. Even though they are paid more dollars.
Tags: banking crisis, central bank, depreciation, dollar, Federal Reserve, Federal Reserve System, fiat currency, gold, income inequality, living wage, minimum wage, President Obama, State of the Union
Week in Review
Governments love it when people buy houses and cars. Because building houses and cars generates a lot of economic activity. So much economic activity that central banks will flood their economies with money to keep interest rates artificially low. To encourage people to go into great debt and buy these things. Even if they don’t want them. Especially if they don’t want them. Because if you add in people buying things who don’t want them with the people who do that’s a lot of economic activity. Which is why central banks keep interest rates artificially low. To get people to buy things even when they don’t want them. But do because those low interest rates are just too good to pass up.
Automotive jobs are union jobs. At least with the Big Three. Which is another reason why the Federal Reserve (America’s central bank) keeps interest rates artificially low. To save union jobs. Because they support Democrats. And the Democrats take care of them. By enacting legislation that favors union-built cars. Placing tariffs and quotas on imports. And doing whatever they can to encourage the Fed to keep interest rates artificially low. So the Big Three keep building cars with union labor. Even if they’re not selling the cars they build (see Spending on new cars may break record in December by Joseph Szczesny posted 12/25/2013 on CNBC).
Total vehicle sales are expected to be up at least 4 percent year over year, with the industry anticipating all-time record consumer spending on new vehicles, according to a forecast.
While new car sales started the month slowly, they are expected to finish strong, according to a monthly sales forecast developed jointly by J.D. Power and LMC Automotive. That would be a welcome development for industry planners concerned about a recent bulge in dealer inventories, which has led several manufacturers to trim production…
Vehicle production in North America through November is up 5 percent from the same time frame last year, with nearly 700,000 additional units. Even as inventory has increased, production volume remained strong last month, at 1.4 million units—a 4 percent increase from November 2012.
But there are some concerns that the industry may be turning up production faster than the market can handle. General Motors, Ford Motor and Chrysler continued to build inventories last month, and their combined supply climbed from 87 days at the beginning of November to 93 days by the end…
Some of the buildup can be traced to dealers’ ordering pickup trucks and utility vehicles before the planned shutdowns for model changes at GM and Ford. But those two makers also have decided to take more downtime at some of their plants this month in an effort to reduce excess stock.
Automotive news is often contradictory. Sales are up they tell us. Even when inventories are growing. A sign that sales are not growing. Because when people buy more cars than they build inventories fall. But when people buy fewer cars than they build inventories rise. So when inventories are rising typically that means sales are falling. So this isn’t a sign of a booming economy. But one that is likely to slip into recession. Especially when the Fed finally begins their tapering of their bond buying (i.e., quantitative easing). The thing that is keeping interest rates artificially low. And once they do those inventories will really bulge. As they do during the onset of a recession.
Tags: Big Three, cars, central bank, Democrats, economic activity, Federal Reserve, interest rates, inventories, keep interest rates artificially low, sales, union jobs
The Gold Standard prevented Nations from Devaluing their Currency to Keep Trade Fair
You may have heard of the great gamble the Chairman of the Federal Reserve, Ben Bernanke, has been making. Quantitative easing (QE). The current program being QE3. The third round since the subprime mortgage crisis. It’s stimulus. Of the Keynesian variety. And in QE3 the Federal Reserve has been ‘printing’ $85 billion each month and using it to buy financial assets on the open market. Greatly increasing the money supply. But why? And how exactly is this supposed to stimulate the economy? To understand this we need to understand monetary policy.
Keynesians hate the gold standard. They do not like any restrictions on the government’s central bank’s ability to print money. Which the gold standard did. The gold standard pegged the U.S. dollar to gold. Other central banks could exchange their dollars for gold at the exchange rate of $40/ounce. This made international trade fair by keeping countries from devaluing their currency to gain a trade advantage. A devalued U.S. dollar gives the purchaser a lot more weaker dollars when they exchange their stronger currency for them. Allowing them to buy more U.S. goods than they can when they exchange their currency with a nation that has a stronger currency. So a nation with a strong export economy would like to weaken their currency to entice the buyers of exports to their export market. Giving them a trade advantage over countries that have stronger currencies.
The gold standard prevented nations from devaluing their currency and kept trade fair. In the 20th century the U.S. was the world’s reserve currency. And it was pegged to gold. Making the U.S. dollar as good as gold. But due to excessive government spending through the Sixties and into the Seventies the American central bank, the Federal Reserve, began to print money to pay for their ever growing spending obligations. Thus devaluing their currency. Giving them a trade advantage. But because of that convertibility of dollars into gold nations began to do just that. Exchange their U.S. dollars for gold. Because the dollar was no longer as good as gold. So nations opted to hold gold instead. Instead of the U.S. dollar as their reserve currency. Causing a great outflow of gold from the U.S. central bank.
Going off of the Gold Standard made the Seventies the Golden Age of Keynesian Economics
This gave President Richard Nixon quite the contrary. For no nation wants to lose all of their gold reserves. So what to do? Make the dollar stronger? By not only stopping the printing of new money but pulling existing money out of circulation. Raising interest rates. And forcing the government to make REAL spending cuts. Not cuts in future increases in spending. But REAL cuts in current spending. Something anathema to Big Government. So President Nixon chose another option. He slammed the gold window shut. Decoupling the dollar from gold. No longer exchanging gold for dollars. Known forever after as the Nixon Shock. Making a Keynesian dream come true. Finally giving the central bank the ability to print money at will.
The Keynesians said they could make recessions a thing of the past with their ability to control the size of the money supply. Because everything comes down to consumer spending. When the consumers spend the economy does well. When they don’t spend the economy goes into recession. So when the consumers don’t spend the government will print money (and borrow money) to spend to replace that lost consumer spending. And increase the amount of money in circulation to make more available to borrow. Which will lower interest rates. Encouraging people to borrow money to buy big ticket items. Like cars. And houses. Thus stimulating the economy out of recession.
The Seventies was the golden age of Keynesian economics. Freed from the responsible restraints of the gold standard the Keynesians could prove all their theories by creating robust economic activity with their control over the money supply. But it didn’t work. Their expansionary policies unleashed near hyperinflation. Destroying consumers’ purchasing power. As the greatly devalued dollar raised prices everywhere. As it took more of them to buy the things they once did before that massive inflation.
The only People Borrowing that QE Money are Very Rich People making Wall Street Investments
The Seventies proved that Keynesian stimulus did not work. But central bankers throughout the world still embrace it. For it allows them to spend money they don’t have. And governments, especially governments with large welfare states, love to spend money. So they keep playing their monetary policy games. And when recessions come they expand the money supply. Making it easy to borrow. Thus lowering interest rates. To stimulate those big ticket purchases. But following the subprime
mortgage crisis those near-zero interest rates did not spur the economic activity the Keynesians thought it would. People weren’t borrowing that money to buy new houses. Because of the collapse of the housing market leaving more houses on the market than people wanted to buy. So there was no need to build new houses. And, therefore, no need to borrow money.
So this is the problem Ben Bernanke faced. His expansionary monetary policy (increasing the money supply to lower interest rates) was not stimulating any economic activity. And with interest rates virtually at 0% there was little liquidity Bernanke could add to the economy. Resulting in a Keynesian liquidity trap. Interest rates so close to zero that they could not lower them any more to create economic activity. So they had to find another way. Some other way to stimulate economic activity. And that something else was quantitative easing. The buying of financial assets in the market place by the Federal Reserve. Pumping enormous amounts of money into the economy. In the hopes someone would use that money to buy something. To create that ever elusive economic activity that their previous monetary efforts failed to produce.
But just like their previous monetary efforts failed so has QE failed. For the only people borrowing that money were very rich people making Wall Street investments. Making rich people richer. While doing nothing (so far) for the working class. Which is why when Bernanke recently said they may start throttling back on that easy money (i.e., tapering) the stock market fell. As rich people anticipated a coming rise in interest rates. A rise in business costs. A fall in business profits. And a fall in stock prices. So they were getting out with their profits while the getting was good. But it gets worse.
The economy is not improving because of a host of other bad policy decisions. Higher taxes, more regulations on business, Obamacare, etc. And a massive devaluation of the dollar (by ‘printing’ all of that new money) just hasn’t overcome the current anti-business climate. But the potential inflation it may unleash worries some. A lot. For having a far greater amount of dollars chasing the same amount of goods can unleash the kind of inflation that we had in the Seventies. Or worse. And the way they got rid of the Seventies’ near hyperinflation was with a long, painful recession in the Eighties. This time, though, things can be worse. For we still haven’t really pulled out of the Great Recession. So we’ll be pretty much going from one recession into an even worse recession. Giving the expression ‘the worst recession since the Great Depression’ new meaning.
Tags: as good as gold, Ben Bernanke, Bernanke, central bank, consumer spending, currency, devalued, devaluing, Federal Reserve, gold, gold standard, hyperinflation, inflation, interest rates, Keynesian, Keynesian economics, monetary policy, money supply, Nixon, print money, QE, QE3, quantitative easing, recession, reserve currency, rich people, stimulus, subprime mortgage crisis, trade advantage, U.S. dollar
Wise Men in Governments can Do Anything but Pay for their Nanny States
Economics changed in the early Twentieth Century. America once again had a central bank. Progressives were expanding the role of government. And a new economist entered the scene that the progressives just loved. For he was a macroeconomist who said government should have an active role in the economy. A role where government tweaked the economy to make it better. Stronger. While avoiding the painful corrections on the downside of a business cycle. Something laissez-faire capitalism caused. And could not prevent. But if wise men in government had the power to tweak the private sector economy they could. At least this is what the progressives and Keynesian economists thought.
That economist was, of course, John Maynard Keynes. Who rewrote the book on economics. And what really excited the progressives was the chapter on spending an economy out of a recession. Now there were two ways to increase spending in an economy. You can cut tax rates so consumers have bigger paychecks. Or the government can spend money that they borrow or print. The former doesn’t need any government intervention into the private sector economy. While the latter requires those wise men in government to reach deep into that economy. Guess which way governments choose to increase spending. Here’s a hint. It ain’t the one where they just sit on the sidelines.
Governments changed in the Twentieth Century. Socialism swept through Europe. And left social democracies in its wake. Not quite socialism. But pretty close. It was the rise of the nanny state. Cradle to grave government benefits. A lot of free stuff. Including pensions. Health care. College educations. And a lot of government jobs in ever expanding government bureaucracies. Where wise men in government made everything better for the people living in these nanny states. And armed with their new Keynesian economic policies there was nothing they couldn’t do. Except pay for their nanny states.
According to John Maynard Keynes raising Tax Rates reduces New Economic Activity
The problem with a nanny state is things change. People have fewer babies. Health care and medicines improve. Increasing lifespans. You put this together and you get an aging population. The death knell of a nanny state. For when those wise men in government set up all of those generous government benefits they assumed things would continue the way they were. People would continue to have the same amount of babies. And we would continue to die just about the time we retired. Giving us an expanding population of new workers entering the workforce. While fewer people left the workforce and quickly died. So the tax base would grow. And always be larger than those consuming those taxes. In other words, a Ponzi scheme.
But then change came. With the Sixties came birth control and abortion. And we all of a sudden started having fewer babies. While at the same time advances in medicine was increasing our lifespans. Which flipped the pyramid upside down. Fewer people were entering the workforce than were leaving it. And those leaving it were living a lot longer into retirement. Consuming record amounts of tax money. More than the tax base could provide. Leading to deficit spending. And growing national debt.
Now remember those two ways to increase spending in the economy? You either cut tax rates. Or the government borrows and spends. So if cutting tax rates will generate new economic activity (i.e., new spending in the economy) what will a tax increase do? It will decrease spending in the economy. And reduce new economic activity. Which caused a problem for these nanny states with aging populations. As the price tag on their nanny state benefits eventually grew greater than their tax revenue’s ability to pay for it. So they increased tax rates. Which reduced economic activity. And with less economic activity to tax their increase in tax rates actually decreased tax revenue. Forcing them to run greater deficits. Which added to their national debts. Increasing the interest they paid on their debt. Which left less money to pay for those generous benefits.
President Obama’s Non-Defense Spending caused a Huge Spike in the National Debt not seen since World War II
It’s a vicious cycle. And eventually you reach a tipping point. As debts grow larger some start to question the ability of a government to ever repay their debt. Making it risky to loan them any more money. Which forces these countries with huge debts to pay higher interest rates on their government bonds. Which leaves less money to pay for those generous benefits. While their populations continue to age. Taking you to that tipping point. Like many countries in the Eurozone who could no longer borrow money to pay for their nanny states. Who had to turn to the European Union, the European Central Bank and the International Monetary Fund for emergency loans. Which did provide those emergency loans. Under the condition that they cut spending. Money in exchange for austerity. Something that just galls those Keynesian economists. For despite all of their financial woes coming from having too much debt they still believe these governments should spend their way out of their recessions. And never mind about the deficits. Or their burgeoning debts.
But these Keynesians are missing a very important and obvious point. The problem these nations have is due to their inability to borrow money. Which means they would NOT have a problem if they didn’t need to borrow money. So austerity will work. Because it will decrease the amount of money they need to borrow. Allowing their tax revenue to pay for their spending needs. Without excessive tax rates that reduce economic activity. Making the nanny state the source of all their problems. For had these nations never became social democracies in the first place they never would have had crushing debt levels that cause sovereign debt crises. But they did. And their populations aged. Making it a matter of time before their Ponzi schemes failed. Something no nation with a growing nanny state and an aging population can avoid. Even the United States. Who kept true to their limited government roots for about 100 years. Then came the progressives. The central bank. And Keynesian economics. Putting the Americans on the same path as the Europeans (see US Federal Debt As Percent Of GDP).
With the end of the Revolutionary War they diligently paid down their war debt. Which was pretty much the entire federal debt then. As the federal government was as limited as it could get. Then came the War of 1812 and the debt grew. After the war it fell to virtually nothing. Then it soared to pay for the Civil War. Which changed the country. The country was bigger. Connected by a transcontinental railroad. And other internal improvements. Which prevented the debt from falling back down to pre-war levels. Then it shot up to pay for World War I. After WWI the Roaring Twenties replaced progressivism and quickly brought the debt down again. Then Herbert Hoover brought back progressivism and killed the Roaring Twenties. FDR turned a bad recession into the Great Depression. By following all of that Keynesian advice to spend the nation out of recession. From the man himself. Keynes. The massive deficit spending of the New Deal raised the debt higher than it was during World War I. Changing the country again. Introducing a state pension. Social Security. A Ponzi scheme that would struggle once the population started aging.
Then came World War II and the federal debt soared to its highest levels. After the war a long decline in the debt followed. At the end of that decline was the Vietnam War. And LBJ’s Great Society. Which arrested the fall in the debt. Its lowest point since the Great Depression. Which was about as large as the debt during the Civil War and World War I. Showing the growth in non-defense spending. Then came Reagan’s surge in defense spending to win the Cold War. Once the Americans won the Cold War the debt began to fall again. Until the Islamist terrorist attacks on 9/11. Halting the fall in the debt as the War on Terror replaced the Cold War. Then came the Great Recession. And President Obama. Whose non-defense spending caused a huge spike in the national debt. Taking it to a level not seen since World War II. When an entire world was at war. But this debt is not from defense spending. It’s from an expanded nanny state. As President Obama takes America into the direction of European socialism. And unsustainable spending. Which can end in only but one way. Austerity. Painful austerity. Not like the discomfort of the sequester cuts that only were cuts in the rate of future growth. But real cuts. Like in Greece.
Tags: aging population, austerity, bloated government, central bank, Cold War, cut tax rates, debt, defense spending, deficit, deficit spending, Economics, economy, European Socialism, federal debt, federal government, government benefits, Government jobs, Great Depression, Keynes, Keynesian, Keynesian economics, nanny state, Ponzi scheme, private sector economy, Progressives, progressivism, recession, Roaring Twenties, social democracies, socialism, spending, tax revenue, war debt, World War I
Merchants raise their Prices when the Monetary Authority depreciates the Currency
What is inflation? A depreciation of the currency. By adding more money into the money supply each piece of currency becomes less valuable. Let’s assume our currency is whiskey. In bottles. Whiskey has value because people are willing to pay for it. And because we are willing to pay for it we are willing to accept it as legal tender. Because we can always trade it to others. Who can drink it. Or they can trade it with others.
Now let’s say the monetary authority wants to stimulate economic activity. Which they try to do by expanding the money supply. So there is more money available to borrow. And because there is more money available to borrow interest rates are lower. Hence making it easy for people to borrow money. But the monetary authority doesn’t want to make more whiskey. Because that is costly to do. Instead, they choose an easier way of expanding the money supply. By watering down the bottles of whiskey.
Now pretend you are a merchant. And people are coming in with the new watered-down whiskey. What do you do? You know the whiskey is watered down. And that if you go and try to resell it you’re not going to get what you once did. For people typically drink whiskey for that happy feeling of being drunk. But with this water-downed whiskey it will take more drinks than it used to take to get drunk. So what do you as a merchant do when the money is worth less? You raise your prices. For it will take more bottles of lesser-valued whiskey to equal the purchasing power of full-valued whiskey. And if they water down that whiskey too much? You just won’t accept it as legal tender. Because it will be little different from water. And you can get that for free from any well or creek. Yes, water is necessary to sustain life. But no one will pay ‘whiskey’ prices for it when they can drink it from a well or a creek for free.
It was while in the Continental Army that Alexander Hamilton began thinking about a Central Bank
During the American Revolutionary War we had a very weak central government. The Continental Congress. Which had no taxing authority. Which posed a problem in fighting the Revolutionary War. Because wars are expensive. You need to buy arms and supplies for your army. You have to feed your army. And you have to pay your army. The Continental Congress paid for the Revolution by asking states to contribute to the cause. Those that did never gave as much as the Congress asked for. They got a lot of money from France. As we were fighting their long-time enemy. And we borrowed some money from other European nations. But it wasn’t enough. So they turned to printing paper money.
This unleashed a brutal inflation. Because everyone was printing money. The central government. And the states. Prices soared. Merchants didn’t want to accept it as legal tender. Preferring specie instead. Because you can’t print gold and silver. So you can’t depreciate specie like you can paper money. All of this just made life in the Continental Army worse. For they were hungry, half-naked and unpaid. And frustrating for men like Alexander Hamilton. Who served on General Washington’s staff. Hamilton, and many other officers in the Continental Army, saw how the weakness of the central government almost lost the war for them.
It was while in the army that Hamilton began thinking about a central bank. But that’s all he did. For there was not much support for a central government let alone a central bank. That would change, though, after the Constitutional Convention of 1787 created the United States of America. And America’s first president, George Washington, chose his old aide de camp as his treasury secretary. Alexander Hamilton. A capitalist who understood finance.
Despite the Carnage from the Subprime Mortgage Crisis the Fed is still Printing Money
At the time the new nation’s finances were in a mess. Few could make any sense of them. But Hamilton could. He began by assuming the states’ war debts. Added them to the national war debt. Which he planned on paying off by issuing new debt. That he planned on servicing with new excise taxes. And he would use his bank to facilitate all of this. The First Bank of the United States. Which faced fierce opposition from Thomas Jefferson and James Madison. Who opposed it for a couple of reasons. For one they argued it wasn’t constitutional. There was no central bank enumerated in the Constitution. And the Tenth Amendment of the Constitution stated that any power not enumerated to the new federal government belonged to the states. And that included banking. A central bank would only further consolidate power in the new federal government. By consolidating the money. Transferring it from the local banks. Which they feared would benefit the merchants, manufacturers and speculators in the north. By making cheap money available for them to make money with money. Which is the last thing people who believed America’s future was an agrarian one of yeoman farmers wanted to do.
They fought against the establishment of the bank. But failed. The bank got a 20 year charter. Jefferson and Madison would later have a change of heart on a central bank. For it helped Jefferson with the Louisiana Purchase. And like it or not the country was changing. It wasn’t going to be an agrarian one. America’s future was an industrial one. And that required credit. Just as Alexander Hamilton thought. So after the War of 1812, after the charter of the First Bank of the United States had expired, James Madison signed into law a 20-year charter for the Second Bank of the United States. Which actually did some of the things Jefferson and Madison feared. It concentrated a lot of money and power into a few hands. Allowing speculators easy access to cheap money. Which they borrowed and invested. Creating great asset bubbles. And when they burst, great depressions. Because of that paper money. Which they printed so much of that it depreciated the dollar. And caused asset prices to soar to artificial heights.
Andrew Jackson did not like the bank. For he saw it creating a new noble class. A select few were getting rich and powerful. Something the Americans fought to get away from. When the charter for the Second Bank of the United States was set to expire Congress renewed the charter. Because of their friends at the bank. And their friends who profited from the bank. But when they sent it to Andrew Jackson for his signature he vetoed the bill. And Congress could not override it. Sensing some blowback from the bank Jackson directed that they transfer the government’s money out of the Second Bank of the United States. And deposited it into some state banks. The president of the bank, Nicholas Biddle, did not give up, though. For he could hurt those state banks. Such as calling in loans. Which he did. Among other things. To try and throw the country into a depression. So he could blame it on the president’s anti-bank policies. And get his charter renewed. But it didn’t work. And the Second Bank of the United States was no more.
National banks versus local banks. Hard money (specie) versus paper money. Nobility versus the common people. They’ve argued the same arguments throughout the history of the United States. But we never learn anything. We never learn the ultimate price of too much easy money. Even now. For here we are. Suffering through the worst recession since the Great Depression. Because our current central bank, the Federal Reserve System, likes to print paper money. And create asset bubbles. Their last being the one that burst into the subprime mortgage crisis. And despite the carnage from that they’re still printing money. Money that the rich few are borrowing to invest in the stock market. Speculators. Who are making a lot of money. Buying and selling assets. Thanks to the central bank’s inflationary policies that keep increasing prices.
Tags: Alexander Hamilton, Andrew Jackson, asset bubbles, banks, central bank, central government, cheap money, Continental Army, Continental Congress, currency, depreciation, depressions, federal government, Federal Reserve System, First Bank of the United States, Hamilton, inflation, interest rates, James Madison, Jefferson, legal tender, Madison, merchant, monetary authority, money, money supply, paper money, prices, printing money, Revolutionary War, Second Bank of the United States, specie, speculators, subprime mortgage crisis, Thomas Jefferson
Food Surpluses allowed Everything that followed in the Modern Age
Humans were hunters and gatherers first. When the environment ruled supreme. Then something happened. Humans began to think more. And started to push back against their environment. First with tools. Then with fire. Bringing people closer together. Eventually settling down in civilizations. When the human race embarked on a new path. A path that would eventually usher in the modern age we enjoy today. We stopped hunting and gathering. And began farming.
Throughout history life has been precarious. Due to the uncertainty of the food supply. Especially when the environment ruled our lives. That changed with farming. When we started taking control of our environment. We domesticated animals. And learned how to grow food. Which lead to perhaps the most important human advancement. The one thing that allowed everything that followed in the modern age. Food surpluses. Which made life less precarious. And a whole lot more enjoyable.
Producing more food than we needed allowed us to store food to get us through long winters and seasons with poor harvests. But more importantly it freed people. Not everyone had to farm. Some could do other things. Think about other things. And build other things. Artisans arose. They built things to make our lives easier. More enjoyable. And when these talented artisans and farmers met other talented artisans and farmers they traded the products of all their labors. In markets. That became cities. Enriching each other’s lives. By allowing them to trade for food. For things that made life easier. And for things that made life more enjoyable.
We settled on using Precious Metals (Gold and Silver) for Money for they were Everything Money Should Be
As civilizations advanced artisans made a wider variety of things. Putting a lot of goods into the market place. Unfortunately, it made trading more difficult. Because while you saw what you wanted the person who had it may not want what you had to offer in trade. So what do you do? You look for someone else that has that same thing. And will trade for what you have. And when the second person doesn’t want to trade for what you have you look for a third person. Then a fourth. Then a fifth. Until you find someone who wants to trade for what you have.
This is the barter system. Trading goods for goods. And as you can see it has high search costs to find someone to trade with. Time that people could better spend making more things to trade. What they needed was a temporary storage of value. Something people could trade their things for. And those people could then use that temporary storage they received in trade to later trade for something they wanted. We call this ‘something’ money.
We have used many things for money. Some things better than others. In time we learned that the best things to use for money had to have a few characteristics. It had to be scarce. A rock didn’t make good money because why would anyone trade for it when you could just pick one up from the ground? It had to be indestructible and hold its value. A slab of bacon had value because bacon is delicious. But if you held on to it too long it could grow rancid, losing all the value it once held. Or you could eat it. Which would also remove its value. It had to be divisible. A live pig removed the problem of bacon growing rancid. However, it was hard making change with live pigs. Which is why we settled on using precious metals (gold and silver) for money. For they were everything money should be.
The Key to Economic Activity is People with Creative Talent to make Things to Trade
Money came first. Then government monetary systems. Traders were using gold and silver long before nations established their own money. And when they did they based them on weights of these precious metals. The British pound sterling represented one Saxon pound of silver. The U.S. dollar came from the Spanish dollar. Which traces back to 16th century Bohemia. To the St. Joachim Valley. Where they minted private silver coins. The Joachimsthaler. Where the ‘thaler’ (which translated to valley) in Joachimsthaler became dollar. The German mark and the French franc came into being as weights of precious metals. People either traded silver or gold coins. Or paper notes that represented silver or gold.
We used silver first as the basis for national currencies. Then with new gold discoveries in the United States, Australia and South Africa gold became the precious metal of choice. Using precious metals simplified trade by providing sound money. And it also made foreign exchange easy. For when the British made their pound represent 1/4 of an ounce of gold and the Americans made their dollar represent 1/20 of an ounce of gold the exchange rate was easy to calculate. The British pound had 5 times as much gold in it than the U.S. dollar. So the exchange rate was simply 5 U.S. dollars for every British pound. Which made international trade easy. And fair. Because everything was priced in weights of gold.
The pure gold standard, then, was part of the natural evolution of money. The state did not create it. It does not require an act of legislation. Or political decree. The pure gold standard existed before the state. And states based their currencies on the monetary system that already existed. Using weights of precious metals as money. That is, a pure gold standard. Central banks and fiat money are only recent inventions of the state. And bad ones at that. For the thousands of years that preceded the last hundred years or so there were only traders mutually agreeing to trade their goods for precious metals. Using these precious metals as a temporary storage of wealth. To temporarily hold the value of the things they made. So the key to economic activity is people with creative talent to make things to trade. And a sound money like gold and silver to facilitate that trade. Not a central bank. Or monetary policy.
Tags: artisans, barter, barter system, central bank, coins, dollar, economic activity, exchange rate, farmers, farming, food, food supply, food surpluses, foreign exchange, gold, gold and silver, Joachimsthaler, market place, markets, monetary policy, money, pound, precious metals, search costs, silver, temporary storage of value, thaler, trade
Week in Review
To increase the money supply central banks can do a few different things. To stimulate economic activity. They can lower reserve requirements to stimulate money creation via fractional reserve banking. They can print money. And they can buy bonds with money they create that they inject into the economy with their bond purchases. These actions will put more money into the economy. In hopes people will use it to generate economic activity. Of course there is a tradeoff. Increasing the money supply can also create inflation. And often does. Unless the economy is so far into the toilet that no one spends any money even with all of this new money in the economy (see ECB in ‘panic’, say former chief economist Juergen Stark posted 9/22/2002 on The Telegraph).
“The break came in 2010. Until then everything went well,” Juergen Stark, the German who resigned from the ECB in late 2011 after criticising its earlier round of buying up of sovereign debt, told Austrian daily Die Presse in an interview.
“Then the ECB began to take on a new role, to fall into panic. It gave in to outside pressure … pressure from outside Europe.”
Mr Stark said the ECB’s new plan to buy up unlimited amounts of eurozone states’ bonds, announced on September 6, on the secondary market to bring down their borrowing rates was misguided.
“Together with other central banks, the ECB is flooding the market, posing the question not only about how the ECB will get its money back, but also how the excess liquidity created can be absorbed globally,” Mr Stark said.
“It can’t be solved by pressing a button. If the global economy stabilises, the potential for inflation has grown enormously.”
The European Central Bank (ECB) wasn’t trying to stimulate economic activity with these bond purchases. What they were trying to do was throw a lifeline to those nations in the Eurozone about to go belly up because no one will buy their bonds. Because the chances of them ever repaying their enormous debts are slim to none. Because of this these indebted countries have to offer very high interest rates to entice anyone to take a chance buying their risky bonds. These high interest rates, though, were hurting these countries. Increasing their financial woes. And pushing them ever closer to bankruptcy. So the ECB caved. And bought their worthless bonds. By doing something only a central bank can do. Create money out of thin air.
These additional Euros thrown into the money supply could very well end up depreciating the Euro. And sparking off inflation. Which monetary expansion ultimately does. Unless an economy is so far into the toilet that no one will spend this additional money. And it just sits in the bank. But if the economy does turn around there will be a lot more money available to borrow. At exceptionally low interest rates. So low that some will borrow it because of those low interest rates. Which could spark off inflation. Helping the Eurozone to settle back into recession.
This is not going to help anyone in the Eurozone. Especially those staring down bankruptcy. Because this won’t cut spending. This won’t reduce any deficits. And this won’t lower any debt. All of the old problems that caused their problems will still be there. Along with a new problem. Inflation. Guaranteeing that things will get worse in the Eurozone before they get better.
Tags: bond purchases, bonds, central bank, debt, ECB, economic activity, Euro, European Central Bank, Eurozone, inflation, interest rates, monetary expansion, money supply, recession, sovereign debt, stimulate
When Spain came to the New World they Brought Home a lot of Gold and Silver and Turned it into Coin
Our first banks were goldsmiths’ vaults. They locked up people’s gold or other valuable metals (i.e., specie) in their vaults and issued these ‘depositors’ receipts for their specie. When a depositor presented their receipt to the goldsmith he redeemed it for the amount of specie noted on the receipt. These notes were as good as specie. And a lot easier to carry around. So these depositors used these notes as currency. People accepted them in payment. Because they could take them to the goldsmith and redeem them for the amount of specie noted on the receipt.
The amount of specie these first bankers kept in their vaults equaled the value of these outstanding notes. Meaning their bank reserves were 100%. If every depositor redeemed their notes at the same time there was no problem. Because all specie that was ever deposited was still in the vault. So there was no danger of any ‘bank runs’ or liquidity crises.
When Spain came to the New World they brought home a lot of gold and silver. And turned it into coin. Or specie. The Spanish dollar entered the American colonies from trade with the West Indies. As the British didn’t allow their colonies to coin any money of their own the Spanish dollar became the dominate money in circulation in commerce and trade in the cities. (Which is why the American currency unit is the dollar). While being largely commodity money in the rural parts of the country. Tobacco in Virginia, rice in the south, etc. Paper money didn’t enter into the picture until Massachusetts funded some military expeditions to Quebec. Normally the soldiers in this expedition took a portion of the spoils they brought back for payment. But when the French repulsed them and they came back empty handed the government printed paper money backed by no specie. For there was nothing more dangerous than disgruntled and unpaid soldiers. The idea was to redeem them with future taxation. But they never did.
Thomas Jefferson believed that the Combination of Money and Politics was the Source of all Evil in Government
During the American Revolutionary War the Americans were starving for specie. They were getting some from the French but it was never enough. So they turned to printing paper money. Backed by no specie. They printed so much that it became worthless. The more they printed the more they devalued it. And the fewer people would take it in payment. Anyone paying in these paper Continentals just saw higher and higher prices (while people paying in specie saw lower prices). Until some just refused to accept them. Giving rise to the expression “not worth a Continental.” And when they did the army had to take what they needed from the people. Basically giving them an IOU and telling the people good luck in redeeming them.
Skip ahead to the War of 1812 and the Americans had the same problem. They needed money. So they turned to the printing presses. With the aid of the Second Bank of the United States (BUS). America’s second central bank. Just as politically contentious as the First Bank of the United States. America’s first central bank. The BUS was not quite like those early bankers. The goldsmiths. Whose deposits were backed by a 100% specie reserve. The BUS specie reserve was closer to 10%. Which proved to be a problem because their bank notes were redeemable for specie. Which people did. And because they did and the BUS was losing so much of its specie the government legislated the suspension of the redemption of bank notes for specie. Which just ignited inflation. With the BUS. And the state banks. Who were no longer bound by the requirement to redeem bank notes for specie either. Enter America’s first economic boom created by monetary policy. A huge credit expansion that created a frenzy of borrowing. And speculation.
When more dollars are put into circulation without a corresponding amount of specie backing them this only depreciated the dollar. Making them worth less, requiring more of them to buy the same stuff they did before the massive inflation. This is why prices rise with inflation. And they rose a lot from 1815 to 1818. Real estate prices went up. Fueling that speculation. Allowing the rich to get richer by buying land that soared in value. While ordinary people saw the value of their currency decline making their lives more difficult. Thanks to those higher prices. The government spent a lot of this new money on infrastructure. And there was a lot of fraud. The very reason that Thomas Jefferson opposed Alexander Hamilton’s first Bank of the United States. The combination of money and politics was the source of all evil in government. And fraud. According to Jefferson, at least. Everyone was borrowing. Everyone was spending. Which left the banks exposed to a lot of speculative loans. While putting so much money into circulation that they could never redeem their notes for specie. Not that they were doing that anyway. Bank finances were growing so bad that the banks were in danger of failing.
Most Bad Recessions are caused by Easy Credit by a Central Bank trying to Stimulate Economic Activity
By 1818 things were worrying the government. And the BUS. Inflation was out of control. The credit expansion was creating asset bubbles. And fraud. It was a house of cards that was close to collapsing. So the BUS took action. And reversed their ruinous policies. They contracted monetary policy. Stopped the easy credit. And pulled a lot of those paper dollars out of circulation. It was the responsible thing to do to save the bank. But because they did it after so much inflation that drove prices into the stratosphere the correction was painful. As those prices had a long way to fall.
The Panic of 1819 was the first bust of America’s first boom-bust cycle. The first depression brought on by the easy credit of a central bank. When the money supply contracted interest rates rose. A lot of those speculative loans became unserviceable. With no easy credit available anymore the loan defaults began. And the bank failures followed. Money and credit of the BUS contracted by about 50%. Businesses couldn’t borrow to meet their cash needs and went bankrupt. A lot of them. And those inflated real estate prices fell back to earth. As prices fell everywhere from their artificial heights.
It was America’s first depression. But it wouldn’t be the last. Thanks to central banking. And boom-bust cycles. We stopped calling these central banking train wrecks depressions after the Great Depression. After that we just called them recessions. And real bad recessions. Most of them caused by the same thing. Easy credit by a central bank to stimulate economic activity. Causing an asset bubble. That eventually pops causing a painful correction. The most recent being the Great Recession. Caused by the popping of a great real estate bubble caused by the central bank’s artificially low interest rates. That gave us the subprime mortgage crisis. Which gave us the greatest recession since the Great Depression. Just another in a long line of ‘real bad’ recessions since the advent of central banking.
Tags: asset bubbles, Bank of the United States, bank reserves, bankers, boom-bust cycles, bus, central bank, coin, commodity money, Continental, credit expansion, currency, depositor, depression, easy credit, economic boom, fraud, gold, gold and silver, goldsmith, Great Depression, Great Recession, higher prices, inflation, interest rates, monetary policy, money, money and politics, money supply, Panic of 1819, paper money, printing paper money, recessions, silver, Spanish dollar, specie, speculation, speculative loans, Thomas Jefferson, vaults
Government Induced Inflation caused the Panic of 1893 and caused the Worst Depression until the Great Depression
Britain kicked off the Industrial Revolution. Then handed off the baton to the United States in the latter half of the 19th century. As American industry roared. Great industrialists modernize America. And the world. Andrew Carnegie made steel inexpensive and plentiful. He built railroad track and bridges. And the steel-skeleton buildings of U.S. cities. Including the skyscrapers. John D. Rockefeller saved the whales. By producing less expensive kerosene to burn in lamps instead of the more expensive whale oil. He refined oil and brought it to market cheaper and more efficiently than anyone else. Fueling industrial activity and expansion. J.P. Morgan developed and financed railroads. Made them more efficient. Profitable. And moved goods and people more efficiently than ever before. Raising the standard of living to heights never seen before.
The industrial economy was surging along. And all of this without a central bank. Credit was available. So much so that it unleashed unprecedented economic growth. That would have kept on going had government not stopped it. With the Interstate Commerce Act in 1887 and the Sherman Antitrust Act of 1890. Used by competitors who could not compete against the economy of scales of Carnegie, Rockefeller and Morgan and sell at their low prices. So they used their friends in government to raise prices so they didn’t have to be as competitive and efficient as Carnegie, Rockefeller and Morgan. This legislation restrained the great industrialists. Which began the era of complying with great regulatory compliance costs. And expending great effort to get around those great regulatory compliance costs.
Also during the late 19th century there was a silver boom. This dumped so much silver on the market that miners soon were spending more in mining it than they were selling it for. Also, farmers were using the latest in technology to mechanize their farms. They put more land under cultivation and increased farm yields. So much so that prices fell. They fell so far that farmers were struggling to pay their debts. So the silver miners used their friends in government to solve the problems of both miners and farmers. The government passed the Sherman Silver Purchase Act which increased the amount of silver the government purchased. Issuing new treasury notes. Redeemable in both gold and silver. The idea was to create inflation to raise prices and help those farmers. By allowing them to repay old debt easier with a depreciated currency. And how did that work? Investors took those new bank notes and exchanged them for gold. And caused a run on U.S. gold reserves that nearly destroyed the banking system. Plunging the nation in crisis. The Panic of 1893. The worst depression until the Great Depression.
Richard Nixon Decoupled the Dollar from Gold and the Keynesians Cheered
J.P. Morgan stepped in and loaned the government gold to stabilize the banking system. He would do it again in the Panic of 1907. The great industrialists created unprecedented economic activity during the latter half of the 19th century. Only to see poor government policies bring on the worst depression until the Great Depression. A crisis one of the great industrialists, J.P. Morgan, rescued the country from. But great capitalists like Morgan wouldn’t always be there to save the country. Especially the way new legislation was attacking them. So the U.S. created a central bank. The Federal Reserve System. Which was in place and ready to respond to the banking crisis following the stock market crash of 1929. And did such a horrible job that they gave us the worst depression since the Panic of 1893. The Great Depression. Where we saw the greatest bank failures in U.S. history. Failures the Federal Reserve was specifically set up to prevent.
The 1930s was a lost decade thanks to even more bad government policy. FDR’s New Deal programs did nothing to end the Great Depression. Only capitalism did. And a new bunch of great industrialists. Who were allowed to tool up and make their factories hum again. Without having to deal with costly regulatory compliance. Thanks to Adolf Hitler. And the war he started. World War II. The urgency of the times repealed governmental nonsense. And the industrialists responded. Building the planes, tanks and trucks that defeated Hitler. The Arsenal of Democracy. And following the war with the world’s industrial centers devastated by war, these industrialists rebuilt the devastated countries. The fifties boomed thanks to a booming export economy. But it wouldn’t last. Eventually those war-torn countries rebuilt themselves. And LBJ would become president.
The Sixties saw a surge in government spending. The U.S. space program was trying to put a man on the moon. The Vietnam War escalated. And LBJ introduced us to massive new government spending. The Great Society. The war to end poverty. And racial injustice. It failed. At least, based on ever more federal spending and legislation to end poverty and racial injustice. But that government spending was good. At least the Keynesians thought so. Richard Nixon, too. Because he was inflating the currency to keep that spending going. But the U.S. dollar was pegged to gold. And this devaluation of the dollar was causing another run on U.S. gold reserves. But Nixon responded like a true Keynesian. And broke free from the shackles of gold. By decoupling the dollar from gold. And the Keynesians cheered. Because the government could now use the full power of monetary policy to make recessions and unemployment a thing of the past.
Activist, Interventionist Government have brought Great Economic Booms to Collapse
The Seventies was a decade of pure Keynesian economics. It was also the decade that gave us double digit interest rates. And double digit inflation rates. It was the decade that gave us the misery index (the inflation rate plus the unemployment rate). And stagflation. The combination of a high inflation rate you normally only saw in boom times coupled with a high unemployment rate you only saw during recessionary times. Something that just doesn’t happen. But it did. Thanks to Keynesian economics. And bad monetary policy.
Ronald Reagan was no Keynesian. He was an Austrian school supply-sider. He and his treasury secretary, Paul Volcker, attacked inflation. The hard way. The only way. Through a painful recession. They stopped depreciating the dollar. And after killing the inflation monster they lowered interest rates. Cut tax rates. And made the business climate business-friendly. Capitalists took notice. New entrepreneurs rose. Innovated. Created new technologies. The Eighties was the decade of Silicon Valley. And the electronics boom. Powering new computers. Electronic devices. And software. Businesses computerized and became more efficient. Machine tools became computer-controlled. The economy went high-tech. Efficient. And cool. Music videos, CD players, VCRs, cable TV, satellite TV, cell phones, etc. It was a brave new world. Driven by technology. And a business-friendly environment. Where risk takers took risks. And created great things.
History has shown that capitalists bring great things to market when government doesn’t get in the way. With their punishing fiscal policies. And inept monetary policies. Activist, interventionist government have brought great economic booms to collapse. Who meddle and turn robust economic activity into recessions. And recessions into depressions. The central bank being one of their greatest tools of destruction. Because policy is too often driven by Big Government idealism. And not the proven track record of capitalism. As proven by the great industrialists. And high-tech entrepreneurs. Time and time again.
Tags: Andrew Carnegie, banking, banking system, Big Government, Business, business friendly, business-friendly climate, capitalism, capitalists, Carnegie, central bank, competitive, computer, debt, depression, dollar, economic growth, economy, efficient, electronic, entrepreneur, farmers, Federal Reserve, gold, gold reserves, government spending, Great Depression, industrial economy, industrialists, inflation, inflation rate, interest rates, Interstate Commerce Act, J.P. Morgan, John D. Rockefeller, Keynesian, Keynesian economics, Keynesians, LBJ, miners, monetary policy, Morgan, Nixon, prices, Reagan, recession, regulatory compliance costs, Rockefeller, Ronald Reagan, run on U.S. gold reserves, Sherman Antitrust Act, Sherman Silver Purchase Act, silver, spending, technology, unemployment, unemployment rate
Monetary Policy created the Housing Bubble and the Subprime Mortgage Crisis
Those suffering in the fallout of the Subprime Mortgage Crisis can thank monetary policy. That tool used by the federal government that kept interest rates so low for so long. Following the old Milton Friedman idea of a permanent level of inflation (but small and manageable) to stimulate constant economic growth. Why? Because when people are buying houses the economy is booming. Because it takes a lot of economic activity to build them. And even more to furnish them. Which means jobs. Lots and lots of jobs.
But there is a danger in making money too cheap to borrow. A lot of people will borrow that cheap money. Creating an artificial demand for ever more housing. And not for your parent’s house. But bigger and bigger houses. The McMansions. Houses 2-3 times the size of your parent’s house. This demand ran up the price of these houses. Which didn’t deter buyers. Because mortgage rates were so low. People who weren’t even considering buying a new house, let alone a McMansion, jumped in, too. When the jumping was good. To take advantage of those low mortgage rates. There was so much house buying that builders got into it, too. House flippers. Who took advantage of those cheap ‘no questions asked’ (no documentation) mortgages (i.e., subprime) and bought houses. Fixed them up. And put them back on the market.
Good times indeed. But they couldn’t last. Because those houses weren’t the only thing getting expensive. Price inflation was creeping into the other things we bought. And all those houses at such inflated prices were creating a dangerous housing bubble. So the Federal Reserve, America’s central bank, tapped the brakes. To cool the economy down. To reduce the growing inflation. By raising interest rates. Making mortgages not cheap anymore. So people stopped buying houses. Leaving a glut of unsold houses on the market. Bursting that housing bubble. And it got worse. The higher interest rate increased the monthly payment on adjustable rate mortgages. A large amount of all those subprime mortgages. Causing many people to default on these mortgages. Which caused the Subprime Mortgage Crisis. And the Great Recession.
The Federal Reserve System conducts Monetary Policy by Changing both the Money Supply and Interest Rates
Money is a commodity. And subject to the laws of supply and demand. When money is in high demand (during times of inflation) the ‘price’ of money goes up. When money is in low demand (during times of recession) the ‘price’ of money goes down. The ‘price’ of money is interest. The cost of borrowing money. The higher the demand for loans the higher the interest rate. The less the demand for loans the lower the interest rate.
So there is a relationship between money and interest rates. Adjusting one can affect the other. If the money supply is increased the interest rates will decrease. Because there is more money to loan to the same amount of borrowers. When the money supply is decreased interest rates will increase. Because there will be less money to loan to the same amount of borrowers. And it works the other way. If the interest rates are lowered people respond by borrowing more money. Increasing the amount of money in the economy buying things. If interest rates are raised people respond by borrowing less money. Reducing the amount of money in the economy buying things. We call these changes in the money supply and interest rates monetary policy. Made by the monetary authority. In most cases the central bank of a nation. In the United States that central bank is the Federal Reserve System (the Fed).
The Fed changes the amount of money in the economy and the interest rates to minimize the length of recessions, combat inflation and to reduce unemployment. At least in theory. And they have a variety of tools at their disposal. They can change the amount of money in the economy through open market operations. Basically buying (increasing the money supply) or selling (decreasing the money supply) treasury bills, government bonds, company bonds, foreign currencies, etc., on the open market. They can also buy and sell these financial instruments to change interest rates. Such as the Federal funds rate. The interest rate banks pay when borrowing from each other. Moving money between their accounts at the central bank. Or the Fed can change the discount rate. The rate banks pay to borrow from the central bank itself. Often called the lender of last resort. Or they can change the reserve requirement in fractional reserve banking. Lowering it allows banks to loan more of their deposits. Raising it requires banks to hold more of their deposits in reserve. Not used much these days. Open market operations being the monetary tool of choice.
There is more to Economic Activity than Monetary Policy
Fractional reserve banking multiplies these transactions. Where banks create money out of thin air. When the Fed increases the money supply a little this creates a lot of lendable funds. As buyers borrow money from some banks and pay sellers. Then sellers deposit that money in other banks. And these banks hold a little of these deposits in reserve. And loan the rest. Borrowers create depositors as buyers meet sellers. And complete economic transactions. When the Fed reduces the money supply a little this process works in reverse. Fractional reserve banking pulls a lot of money out of the economy. Some treat these economic transactions, and the way to increase or decrease them, as simple math. Always obeying their mathematical formulas. We call these people Keynesian economists. Named for the economist John Maynard Keynes.
Big interventionist governments embrace monetary policy. Because they think they can easily manipulate the economy as they wish. So they can tax and spend (Keynesian fiscal policy). And when economic activity declines they can simply use monetary policy to restore it. But there is one problem. It doesn’t work. If it did there would not have been a Subprime Mortgage Crisis. Or any of the recessions we’ve had since the advent of central banking. Including the Great Depression. As well as the Great Recession.
There is more to economic activity than monetary policy. Such as punishing fiscal policy (high taxes and stifling regulations). Technological innovation. Contracts. Property rights. Etc. Any one of these can influence risk takers. Business owners. Entrepreneurs. The job creators. The people who create economic activity. And no amount of monetary policy will change this.
Tags: banks, Big Government, buyers, central bank, demand, deposits, economic activity, economic growth, economic transactions, economy, federal, Federal Reserve, fractional reserve banking, Great Recession, House, housing, housing bubble, inflation, interest rates, jobs, Keynesian, loans, McMansions, monetary, monetary policy, money, money supply, mortgage, mortgage rates, mortgages, open market operations, policy, recessions, subprime mortgage crisis, subprime mortgages, supply, the Fed
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