Tag: federal reserve

From High Inflation To Hyperinflation: How Close Are We?

The Federal Reserve is now entering a monetary easing and rate-cutting cycle in an environment of elevated inflation.

The last time this happened was during the 1970s, a decade that saw inflation spiral out of control.

The 1970s: An Optimistic Scenario

In the early 1970s, under Chairman Arthur Burns, the Fed faced rising inflation and concerns about economic growth and unemployment.

Despite elevated inflation, the Fed cut interest rates multiple times until 1972 to stimulate economic growth.

Inflation soared to over 12% in the months that followed.

In response to the rising inflation, the Fed raised rates aggressively in 1974, pushing the federal funds rate from around 5.75% to 13%.

However, as the economy entered a deeper recession, the Fed began cutting rates again in 1975 despite inflation remaining elevated at around 9%.

By the end of the decade, inflation had reached double digits again at over 11% in 1979 and peaked at 13.5% in 1980.

The raging inflation of the 1970s and early 1980s is a stark illustration of the danger of cutting interest rates in an environment of elevated inflation… such as the one we are in today.

However, as bad as the 1970s inflation was, I believe it’s an optimistic scenario.

That’s because the out-of-control inflation then was only tamed when Paul Volcker hiked rates above 17%… an option that is not available to the Fed today because of the skyrocketing federal interest expense.

In fact, the Fed could only raise rates to about 5.25%—less than a third of what Volcker had to do—before capitulating recently.

In other words, the higher the debt load, the less room the Fed has to raise rates because of the interest expense.

As the debt pile and accompanying interest expense grow exponentially, I am skeptical of their ability to hike rates to even 5.25% again; forget about higher than that.

Imagine what could have happened in the 1970s and early 1980s if Volcker could have raised rates to only 5.25% instead of over 17%.

This is the environment the US now finds itself in.

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Governments must tax or ban Bitcoin to maintain deficits: Minneapolis Fed

A recent research paper by the Federal Reserve Bank of Minneapolis suggests that assets such as Bitcoin should be taxed or banned to help governments maintain deficits. 

In an economy where the government tries to maintain permanent deficits using nominal debt, the presence of Bitcoin BTC$66,910 creates problems for policy implementation, the Minneapolis Fed said in a working paper released on Oct. 17.

Bitcoin introduces a “balanced budget trap,” an alternative state where the government is forced to balance its budget, the Fed wrote. 

The researchers used Bitcoin as an example of a fixed-supply “private-sector security” without “real resource claims.” They concluded that it should be banned or taxed to solve the conundrum. 

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No Compromise With the Fed!

Some people argue like this: Although the Fed as it now exists is very bad, a nation needs a central bank to regulate its money supply, and the Fed is better than nothing. That being so, we should try to urge the Fed to adopt a non-expansionary monetary policy. In this view, calls to “End the Fed” are mistaken. I’m sure most of my readers already know what I’m about to say, but, just to be clear, that view is disastrously wrong. We do not need a central bank, and to argue in the way indicated is to betray the great Murray Rothbard and the great Dr. Ron Paul, whose slogan “End the Fed” has galvanized so many of us.

What we need is the classical gold standard, based on 100% reserve banking. There is no need for an expansion of the monetary system, even a gradual expansion. In fact, monetary expansion is inflationary and dangerous. As the leading Rothbardian authority on money, Professor Joseph Salerno, explains: “Under the classical gold standard, [which prevailed in the nineteenth century before World War I] if people in one nation demanded more money to carry out more transactions or because they were more uncertain of the future, they would export more goods and financial assets to the rest of the world, while importing less. As a result, additional gold would flow in through a surplus in the balance of payments increasing the nation’s money supply.

Sometimes, private banks tried to inflate the money supply by issuing additional bank notes and deposits, called ‘fiduciary media,’ promising to pay gold but unbacked by gold reserves. They lent these notes and deposits to either businesses or the government. However, as soon as the borrowers spent these additional fractional-reserve notes and deposits, domestic incomes and prices would begin to rise.

As a result, foreigners would reduce their purchases of the nation’s exports, and domestic residents would increase their spending on the relatively cheap foreign imports. Gold would flow out of the coffers of the nation’s banks to finance the resulting trade deficit, as the excess paper notes and checks were returned to their issuers for redemption in gold.

To check this outflow of gold reserves, which made their depositors very nervous, the banks would contract the supply of fiduciary media bringing about a monetary deflation and an ensuing depression.

Temporarily chastened by the experience, banks would refrain from again expanding credit for a while. If the Treasury tried to issue convertible notes only partially backed by gold, as it occasionally did, it too would face these consequences and be forced to restrain its note issue within narrow bounds.

Thus, governments and commercial banks under the gold standard did not have much influence over the money supply in the long run. The only sizable inflations that occurred during the 19th century did so during wartime when almost all belligerent nations would ‘go off the gold standard.’ They did so in order to conceal the staggering costs of war from their citizens by printing money rather than raising taxes to pay for it.”

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The Big Collapse Awaits

In the 1970s when I served in the congressional staff and in the 1980s when I served in the executive branch, there was still some intelligence in the US government, with the exception of the Federal Reserve, where there has never been any intelligence.

Today there is no sign of intelligence anywhere in the US government. That fact is documented every day on my website.

As I recently reported, about 900,000 new jobs that had been claimed over the preceding year have just disappeared in a revision. A further downward revision could follow.

These non-existent jobs were the Federal Reserve’s evidence for a hot inflation-prone economy justifying high interest rates. All the time the Fed was preaching inflation, the Fed was contracting the money supply, a contraction that has been underway for 2.5 years. This in itself is proof that the “inflation” was really higher prices caused by the shortages the senseless Covid lockdowns caused. In other words, the higher prices were due to mandated shortages, not to inflation. A central bank too stupid to recognize this is too stupid to justify its existence.

Whenever the Fed contracts the money supply recession follows. If the contraction is too large and lasts too long, as it was following the 1929 stock market crash, the result is a decade of depression and high unemployment.

A contraction in the money supply means that the same level of economic activity and employment cannot be maintained at the same level of prices. Either economic activity and employment fall or prices fall. Historically, it has been economic activity and employment that fall first, and prices follow. Generally, that means profits fall.

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The Federal Reserve Does Not Own Gold

Historically—as during the days of the classical gold standard—central banks maintained stocks of gold to facilitate the conversion of gold-backed national currencies. Those days are long gone, but in modern times, many central banks continue to own gold, and many central banks buy gold as part of their open-market operations. For example, in his article last week— ”Central banks purchase gold to offset their own money destruction“—Daniel Lacalle writes:

The rising purchases of gold by central banks are an essential factor justifying the recent increase in demand for the precious metal. Central banks, especially in China and India, are trying to reduce their dependence on the dollar or the euro to diversify their reserves.

The US’s central bank, the Federal Reserve, is not among these banks buying gold. Obviously, the Fed has no interest in buying up gold as a means of “de-dollarization.” Moreover, the Fed is presently concerned with purchasing more dollar-denominated government debt to keep interest rates low on the Federal government’s huge deficits.

But we must also note that another reason the Fed isn’t buying gold is that the Fed hasn’t been in the gold-owning business for a very long time.

That is, the Fed has owned no gold since 1934, when the Fed handed over all its gold in exchange for gold certificates. This is how the Fed’s Board of Governors summarizes the situation:

The Federal Reserve does not own gold.

The Gold Reserve Act of 1934 required the Federal Reserve System to transfer ownership of all of its gold to the Department of the Treasury. In exchange, the Secretary of the Treasury issued gold certificates to the Federal Reserve for the amount of gold transferred at the then-applicable statutory price for gold held by the Treasury.

Gold certificates are denominated in U.S. dollars. Their value is based on the statutory price for gold at the time the certificates are issued. Gold certificates do not give the Federal Reserve any right to redeem the certificates for gold.

The statutory price of gold is set by law. It does not fluctuate with the market price of gold and has been constant at $42 2/9, or $42.2222, per fine troy ounce since 1973. The book value of the gold held by the Treasury is determined using the statutory price.

Although the Federal Reserve does not own any gold, the Federal Reserve Bank of New York acts as the custodian of gold owned by account holders such as the U.S. government, foreign governments, other central banks, and official international organizations. No individuals or private sector entities are permitted to store gold in the vault of the Federal Reserve Bank of New York or at any Federal Reserve Bank.

A small portion of the gold held by the U.S. Treasury (roughly $600 million in book value)–about five percent–is held in custody for the Treasury by the Federal Reserve Banks, as fiscal agents of the United States. The vast majority of this gold is located in the vault at the Federal Reserve Bank of New York, and a very small portion is on display in several Federal Reserve Banks. The remaining 95 percent of U.S. Treasury gold ($10.4 billion in book value) is held in custody for the Treasury by the U.S. Mint.

It is possible to imagine that the Fed could start buying gold, but it’s hard to see why the Fed would be motivated to do so.

Moreover, given that the Fed’s gold certificates have essentially no connection to the actual market price of gold, changes in the price of gold have virtually no effect on the value of the Fed’s assets.

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The Case for Abolishing Regulatory Agencies

Regulatory agencies are not needed and actually retard whatever good they are supposed to prevent or mitigate. I will give three examples in this essay.

The Centers for Disease Control

The underlying rationale for the Centers for Disease Control and Prevention (CDC) is that one federal agency has the ability to garner all the correct and legitimate medical information about a topic quickly, sift through the data, and recommend appropriate and timely action. On the face of it, this is a ridiculous undertaking. Medical information is scattered widely among scholars worldwide. It is impossible for one agency to know what is true, what is false, what is appropriate, or what is best.

Medical knowledge evolves constantly. Medicine is never a “settled science,” and it never will be. (George Washington’s death was agonizing because his doctors followed the “settled science” that recommended leeches for ameliorating a serious chill.) The best we can do is to allow a free market in medical research and patient outreach, then let the individual decide what is best. After all, this is nothing more than freedom based upon self-ownership. This conclusion would be the same if those at the CDC were not corrupt but honest citizens attempting to honor their mandate.

However, we know that power corrupts, and we saw this demonstrated to our horror with sanctions against respected researchers and doctors who disagreed with the CDC’s recommended approach. We are now learning that these respected researchers and doctors were correct and that the CDC’s recommendations, which became diktats, were harmful.

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Federal Reserve Refuses To Provide Records Of Foreign Gold Holdings

Weeks after Federal Reserve Chairman Jerome Powell evaded a sitting congressman’s questions about the central bank’s foreign gold holdings, the Fed has also declined to comply with a Freedom of Information Act request for records about such holdings.

The Federal Reserve’s lack of transparency comes amidst reports that countries are removing their gold and other assets from the U.S. in the wake of the unprecedented Western sanctions imposed on Russia over its invasion of Ukraine. According to a 2023 Invesco survey, a “substantial percentage” of central banks expressed concern about how the U.S. and its allies froze nearly half of Russia’s $650 billion gold and forex reserves.

Rep. Alex Mooney, R-W.Va., asked Powell about the matter in a December letter, only to have the Fed chair respond last month with evasive non-answers, telling him that the Federal Reserve does not own gold but holds it as a custodian for other entities—a fact that the congressman presumably already knew.

Following Powell’s evasive response, Headline USA filed a FOIA request with the Fed for records reflecting how much gold the Federal Reserve Bank of New York currently holds in its vault, as well as records reflecting the ownership stake that each of FRBNY’s central bank/government clients have in that gold. The FOIA request also sought records about the Fed’s gold holdings prior to Russia’s February 2022 invasion of Ukraine.

However, the Federal Reserve denied the FOIA request on Wednesday.

“Board staff consulted with staff at the Federal Reserve Bank of New York (‘Reserve Bank’) and have been advised that such records, if they exist, would be Reserve Bank records, and consequently, not subject to the Board’s Rules Regarding Availability of Information,” the Fed said.

The Federal Reserve said that this publication could take its request to the New York Fed. However, that institution isn’t subject to FOIA.

Headline USA is working on an appeal.

Meanwhile, sound-money advocates are blasting the Fed’s lack of transparency.

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Federal Reserve Declares CBDC a “Key Duty” to Congress, Despite Public Statements Attempting To Downplay Its Focus

The Fed (US Federal Reserve, the central bank) does not appear to be one of those institutions whose word you could, so to speak – take to the bank.

Just as it is reassuring the public that it is not focusing on introducing a central bank digital currency (CBDC) in the country, the Fed has only recently been telling Congress that steps leading to a digital dollar are among its “7 key duties.”

This is according to Congressman Tom Emmer, who posted a document on X on March 14, explaining that his office received it as the Fed representatives were in Congress for a presentation.

What caused the alarm is the mention of Automated Clearinghouse and FedNow among the “key duties,” as these payment systems are seen as a way to move towards a CBDC.

It’s been two years since the US Central Bank first came out with a paper looking into this possibility, and is also linked with the Digital Dollar Project, so this should not be seen as controversial per se.

However, just one week before the presentation document Congressman Emmer was referring to when he posted, “If you don’t think the Fed is pursuing a CBDC, think again” – the Fed was in the Senate, where Chairman Jerome Powell told the Banking, Housing and Urban Affairs Committee that adopting or even recommending a US CBDC was a something that was “nowhere near (…) in any form.”

“People don’t need to worry about it,” Powell also said.

But people do, and that was true even before this latest development commented on by Emmer. The ability of the state to impose financial surveillance over the population – in the vein of what is already happening in China in earnest – is the main reason for this.

The most vocal opponents in Congress are Republicans, while former President Donald Trump, who is likely to run for office again later this year, has vowed to stop a US CBDC, describing it as “a dangerous threat to freedom.”

However, the Fed – despite its chair appearing to be convincing America that this “danger” is in no way imminent, has had highly positioned officials like Vice Chairman Lael Brainard push for it.

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And the Winner Is…Not You

Of all the government or quasi-government institutions, there is perhaps none as openly opaque in its operations and unaccountable for its failures as the Federal Reserve. For, unlike its top rivals for this most dubious of distinctions, like the CIA, NSA, or DOD, which do their law bending and money wasting largely of sight and out of mind, the nation’s money supply is so ubiquitous, so ever-present in the lives of the ordinary person that its activities must of necessity take place before the public eye. Hence, the gradual development of Fed Speak; that is, the art of speaking so technocratically that none but the most arcanely initiated have any hope of understanding what is being said or done.

Consider a few commonplace examples, which one can find in the regularly published minutes of the Federal Reserve’s meetings:

The Fed will “conduct overnight reverse repurchase agreement operations at an offering rate of 0.8 percent and with a per-counterparty limit of $160 billion per day,” and further “engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency MBS transactions.”

Mm-hm. Yes. Indeed—perfectly clear.

Translated: the Fed intends to “buy and then sell back at a set date and price any qualifying security from any qualifying corporation or institution,” essentially, a futures contract meant to help operations that are either illiquid or overleveraged stay in business; and, further towards that end, the Fed intends to “continue to sell short various portions of its now nearly $3 trillion in mortgage backed security holdings,” again in an effort to help illiquid or highly levered dealers and traders of these securities stay liquid.

That Fed Speak elides more than it illuminates is, of course, intentional and operates on a number of levels: first, no ordinary person understands any of this; second, those who do understand benefit from these arrangements, i.e. the major banks, and consequently love it and have lobbied for it; and, lastly, the above combination along with their desire to pass the buck to anyone else means your congressional reps have no interest in intervening with the Fed’s activities, even when it blatantly violates the rules Congress put in place when it set the Federal Reserve up—all Fed purchases having been statutorily mandated to occur in the “open market,” that is at market prices (i.e. not executed as futures contracts).

Lev Menand’s latest book, which I reviewed last year, for all its sympathy for the Federal Reserve’s activities (having been himself an employee), could not avoid deeming the Fed completely out of control, acting since 2008 and through COVID without any bounds at all: an exploding balance sheet, unlimited credit facilities for troubled banks—this is not “Free Market Capitalism,” but rank corporatism, and a major reason young people increasingly view socialism or populist conservatism as preferable alternatives.

For, much like the national security establishment, it isn’t as though these gross violations of the principles of liberal, capitalist government have even produced any notable successes: quite to the contrary, they have produced little but abject failure.

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Man In Charge of Inflicting Pain on U.S. Economy Indicates He Might Finally Be Satisfied

The chairman of the Federal Reserve announced Wednesday that he was satisfied by what he had seen. At the latest Federal Open Market Committee meeting, Jerome Powell effectively said that he believes the worst of the country’s inflation crisis is likely over, meaning that he was ready to end the era of simultaneous rising prices and interest rates, which has made buying everything from food to homes more expensive while also encouraging mass layoffs.

Prices aren’t likely to return to pre-pandemic levels ever again, at least across the board. But Wall Street doesn’t care much about that, and it pulled out the champagne and started celebrating like it was the 1980s. The Dow Jones Industrial Average hit a record high, and so many other numbers went up that Bloomberg described it as the “the best Fed day across assets in almost 15 years.” Treasuries, currencies, bonds, you name it, it probably went up. 

The vibe on CNBC is being described as “giddy.”  “We’re having a party,” Charles Schwab’s chief fixed-income strategist told Bloomberg. “JEROME’S IN THE HOUSE,” one giddy member of the Wall Street Bets community posted alongside a meme of the Fed chair printing cash. 

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