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
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
Gold and money have an intimate relationship. Sort of a love/hate thing. Because, in general, if you love one, you hate the other. Actually, those are pretty strong words. Let’s just say it’s a like/disinterested relationship.
During times of reckless, irresponsible monetary/fiscal policy, many people prefer gold over hard cash. Why? Two reasons. Monetary inflation. And currency depreciation. Actually, these are two sides of the same coin. No pun intended. Well, maybe a little.
When the government spends more money than they have, they have to get more money. They can increase taxes. They can borrow it. Or print it. And we the people ultimately get poorer when they do.
If they increase our taxes, we grow poorer. And…, well, I guess that’s self-explanatory.
If they borrow it, they have to pay interest on what they borrow. And, ultimately, we pay that. When they borrow, they sell government securities. And when they do, there’re more securities on the market. They have to compete with corporate and municipal bonds (and other debt offerings). And these have to compete with the government securities. And how do you do that? You attract investors with higher interest rates. And we grow poorer when we have to pay those higher interest rates on our mortgages, car loans and credit cards.
If they print money it means they can no longer borrow. Meaning they are so far in debt or so un-creditworthy that no one wants to buy their securities. This is bad. Real bad. Because ‘printing’ is really their only option. I put ‘printing’ into single quotation marks because most money is electronic these days. Just numbers in columns. In the old days, though, more of the money was paper. And they really printed it. Like in Weimar Germany following World War I. Depression and reparations caused their printing presses to spit out cash at staggering rates (inflation). So much so that the value of each individual note plummeted (currency depreciation). The Germans actually used it for firewood. Why? It took less cash to burn than it took to buy firewood to burn. And when Germans got any cash that they didn’t burn, they tried to spend it as fast as they cold before it became worthless.
This is how we get poorer with inflation. It makes our money worth less. Which makes everything cost more in dollars.
This is why gold is attractive during times of reckless, irresponsible monetary/fiscal policy. It’s a lot harder to ‘inflate’ the quantity of gold. You just can’t flick a switch. You gotta mine it. Process it. Transport it. Then introduce it into the market. This takes time. And involves a lot of costs. It just doesn’t happen overnight. So gold is a relatively safe asset to park your wealth in. It holds its value. And, in dollar terms, it increases its value the more money is depreciated. As the dollar loses its value, it takes more and more dollars to buy the same amount of gold.
So, a high gold price is basically a rejection of a government’s monetary/fiscal policies. And governments don’t like this. Especially the Obama Administration. Which has raised the bar on being irresponsible. Gold prices are up. So Rep. Anthony Weiner, Democrat of New York, is investigating. And he wants to regulate (see Weiner, Waxman Set Gold Hearing from the Future of Capitalism website). Because gold-selling companies advertise on conservative, cable programming. Thus he can kill two birds with one stone. He can try to hide the consequences of the administration’s irresponsible policies. And he can hurt the advertising revenue of the news outlets that report on those irresponsible policies, thus muzzling the ‘free press’.
Rep. Weiner can say what he wants to about the gold-selling companies and the conservative outlets but that doesn’t change one significant fact. The price of gold is up. And there is a reason for that. The current monetary/fiscal policies are heading in a very bad direction. A politician can lie all he wants about that fact. But the market, left to its own devices, can’t. And that’s why they want to regulate it. So they can make it lie.
(Note: PITHOCRATES does NOT offer investment advice. Whether or not gold is a good investment is up to you and your financial adviser.)
Tags: Anthony Weiner, Big Government, currency depreciation, depreciation, fiscal policy, gold, gold-selling companies, government securities, hard cash, high gold price, higher interest rates, increase taxes, inflation, interest rates, irresponsible monetary/fiscal policy, monetary inflation, monetary policy, money, Obama, Obama administration, park your wealth, print money, safe asset, Weimar Germany