Saving the Global Economy – Part 3
Central banks forever blowing bubbles
By Dene McGriff
I just came up with Part 2 of my recent article on saving the global economy, and it turns out that the major central banks of the world (European Central Bank, Bank of England, Switzerland, the U.S., Canada, Japan) got together with their own plan.
“The central banks of the U.S., the euro region, Canada, the U.K., Japan and Switzerland agreed to cut the cost of providing dollar funding via swap arrangements, the Federal Reserve said, and agreed to make other currencies available as needed. China said earlier today it will cut the reserve requirement ratio for banks by 0.5 percentage points, while data on U.S. business activity and the employment and housing markets topped economists’ estimates.”
And the Daily Reckoning opined,
“Big news out of the gate today is that the central banks of the world are about to do more. More what, you ask? More of what central banks do best, of course…more money printing!
They don’t call it that, obviously. They call it “swapping” or “easing” or “recapitalizing” or “saving us from the abyss.” Or they call it “bolstering financial markets,” as The New York Times breathlessly explains…”
People had already started writing me asking if this is what I had in mind. No, not at all. This is basically a big bailout of banking and the Eurozone and we are going to become responsible for it! If you read on in the article cited above, you will see that derivatives are involved – credit default swaps which is insuring against losses. This allows the system to dig a deeper debt hole.
So some are asking if this is what I had in mind in the first article (Part 1) “How the Economy is Saved.” Absolutely not. Very far from it. However no one was aware that the Kuwaiti Dinar revaluation even occurred resulting in Clinton’s balanced budget. They do not want the revaluation of 133 currencies including the Iraqi Dinar or the Vietnamese Dong to be made public. This could be the perfect cover and it would make America look like the hero. I’m not saying this is going to happen – just speculating. A Central Bank bailout is not what I was talking about in Part 2: “Can the World Economy be Saved” (and Part 1).
I was referring to the IMF and the revaluation of world currencies. The idea that the Central Banks are going to collude to lower interest rates is only adding more fuel to the fire. Please ask yourself. Who is this helping? We the people? NO! THIS IS NOTHING MORE THAN ANOTHER BANKING BAIL OUT! I wouldn’t blame the “Occupy Movement” if they went ballistic with this (if they grasp what it means – which in all likelihood they don’t in that that booming noise that just went through the roof is the Wall Street Stock Markets soaking up them cheap dollars).
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Throwing a “Hail Mary” Pass…
This is called “increasing liquidity” to stimulate the economy – a great Keynesian move! Didn’t low interest cause the housing bubble to begin with? Did it work in the past 21 years in Japan? We’ll come back to Japan later. The entire stimulus in the past 2 or 3 years has done nothing to help the economy or make more money available to the average Joe but it has paid for big bonuses for Wall Street money men.
So what are people thinking? The stock market jumps nearly 500 points (after gains of several hundred points the past two days) and the world cheers – problem solved. The consumer confidence is up nearly 16 points in the month of November (2011). I am going to carefully explain why this won’t work but it will actually make matters worse, much worse! Frankly, I view this as a desperate move by Central Banks, the equivalent of a “Hail Mary” pass. If the Central Banks move to lower interest rates to practically zero in order to stimulate the world economy, it will merely create more bubbles, more debt and ends in hyperinflation.
First of all, what is a central bank? Is the Federal Reserve “federal” or does it even have “reserves.” What an oxymoron! It is not a part of the “Federal” government. It is a private banking cartel, owned and run by and for the banks. Read Creature from Jekyll Island – and “creature” it is! These are foxes guarding the hen house! These are central banks bailing out their member banks! If anyone knows how to bail out a bank, it’s another bank!
Now let’s back up for a moment. There are two major streams of thought in banking, economics and politics. For the past 70 years most western governments have been proponents of the Keynesian Economics practiced by Franklyn Delano Roosevelt. The key is to stimulate the economy by low interest, public spending, public works, etc. In other words, the government has been seen as the protector of the people and the Central Bank the way to manipulate the economy into growth. We have all been taught that it was government stimulus and spending that brought us out of the Great Depression. This is pure fabrication and historic revisionism. It was war that brought the world out of the Great Depression, not public works projects and so-called stimulus, no matter how hard big government spenders try to make us believe.
The other school of economics was championed by Ludwig von Mises and is known as the Austrian School of Economics. (See expanded definition here.) They believe that it is the role of the private sector to invest and produce for a society. Government is viewed as non-productive and a drain on society. This is what Ron Paul and Senator Paul (his son) propose and why they are gaining so much traction with thinking people. And yes, I mean to be sarcastic here because most people are like sheep that blindly follow, trust and believe what they are told. I mean really! If we acted like our government does thinking they can drag all of us into debt indefinitely without ever paying it back, we’d all be in the poor house, flat broke, zero credit rating. The difference between a business or an individual and the government is that they can print money. The more money that is printed, the less value it has. Is the hamburger my parents bought on sale for 25 cents a pound any different or better than the hamburger we pay $5.00 a pound for? No, the money is worth 5% of what it was 60 years ago.
The Great Depression and Japan
Did government stimulus get us out of the Great Depression?
“Let’s start with the New Deal. Its various alphabet-soup agencies—the WPA, AAA, NRA and even the TVA (Tennessee Valley Authority)—failed to create sustainable jobs. In May 1939, U.S. unemployment still exceeded 20%. European countries, according to a League of Nations survey, averaged only about 12% (unemployment) in 1938. The New Deal, by forcing taxes up and discouraging entrepreneurs from investing, probably did more harm than good.”
In spite of the facts, we continue to demand more government action as if it helps. Only after the war when taxes fell and the private sector was encouraged, did America enter a period of unprecedented prosperity. But the myth of the magic of government spending and intervention continues to this day.
Let’s look at a modern example. Japan was the economic miracle in the 70’s and 80’s with double digit growth. Suddenly in 1989, their stock and real estate markets crashed losing three quarters of their value. Twenty years has passed; they have not recovered at all. They lowered interest rates to zero, bailed out sick banks, had massive deficits, huge public works programs – all to no avail.
The US has been mirroring Japan’s experience. The US now finds itself in much the same fiscal boat as Japan. America’s “stimulus” efforts have become permanent, structural elements of the economy.
“Since November, the Fed has injected about $4 billion a day into the economy through its QE2 program. And the federal government gives the economy almost another $5 billion worth of deficit spending a day. Together, this is $63 billion going into the economy each week.
Not surprisingly, these massive stimulus efforts require equally massive borrowing efforts. Talk about crowding out! The government has completely displaced the private sector from the credit markets. As the chart below shows, as of last year public sector borrowing had been more than 100% of total domestic credit for two consecutive years.
This presents a problem. To fund this public sector borrowing, Washington must either borrow someone else’s savings (or borrow directly from the Federal Reserve by way of debt monetization). The Japanese are a “go-to buyer” of US Treasuries (and the second largest holder of US government paper after China). But in view of the recent devastation (earthquake/tsunami), as well as the decline in savings and the rise in its own deficits, Japan is unlikely to continue to be a major source of financing for the US. Rebuilding the quake-damaged country will surely take priority.
If we look at the US government’s massive spending as an investment, the payoff is obviously and hugely negative. GDP growth – albeit largely phony – comes to only about $500 billion this year. That’s a net loss to the economy of $1.5 trillion, more or less.
Of course, it’s not an investment at all. It’s a subsidy. And like all subsidies, the economy adapts. And then becomes dependent.”
(Excerpt from The Daily Reckoning)
The questions are profoundly simple: Do we trust the government to do what is right? Do we trust the banks to act in our interest? What interest do we have in saving the world?
Okay, kind of grandiose questions but bear with me a minute. Does Congress or the Fed care if there is inflation? After all, your dollar has devalued down to 2 percent of its original worth since the creation of the Federal Reserve in 1912. Do they care about balancing the budget? If you look at the chart below, it doesn’t look like it. The temptation is just too great. All the protestations about leaving a pile of debt for our grandchildren aside, it doesn’t appear that way – what it appears is that we’re drunk on inflating our dollars and taking the grandkids for a joy ride to prove we really care for their safety – say what?
We can certainly trust the banks to act in their own interest. If you look at the revolving doors between banks and investment houses such as Goldman Sachs and Treasury, Congress and the Federal Reserve, they certainly have a tight relationship. Oh did I mention John Corzine (senator, governor, CEO of Goldman Sachs and finally Chairman of MF Global) who only lost clients $1.2 billion in the collapse of MF Global. The bailouts create even more risk for the system. According to Bloomberg, US taxpayers are risking $9.7 trillion in bailouts and that was before today’s announcement.
Stupid question number three is: What is our interest in saving the world? There is an obvious advantage in being the world’s only reserve currency. But beyond that, there possibly is a more sinister question and that is: Why does America have to have an interest in nearly every corner of the world, both economic and military? This little inquiry I pursue in a prophetic and down-to-earth e-book entitled: “In Search of Prophetic Babylon?” Revelation 17 to 19 describes a powerful “end times” religious (Christian-oriented?) nation that is apostate (falling away from the faith); a great consumer/economic powerhouse among the nations of the world from whom all the nations trade and are made rich; and, of course, and a nation possessing great military powers.
The Hebrew prophets also describe a nation that is a great end-times’ world power; a nation befriending Israel regathered in her land; one who “enforces a defense pact” on Israel’s leadership, but who eventually ends up turning against her. It is this nation, possibly “the little horn” that came out of Europe but is not in Europe that was raised up in the last days to bring the One World Government we read so much about. I examine this possibility in that book. What nation is European in terms of race, culture, language, legal system and even religion? What nation came out of Europe and became the greatest superpower the earth has ever witnessed? A nation with vast economic, military, political and even considered being a force for righteousness because of its relatively huge Christian population? Finally, but tragically, she it is who is described as once a “Golden cup in the hand of the Lord.” (Jeremiah 51:7) America was used of the Almighty but has, as the late David Wilkerson of Times Square Church once preached, become “full of abominations.” These questions are also explored in “The Rise or Fall of American Empire” by my associate, Doug Krieger, who, as I, dearly love America but, alas, and as Ruth Graham told her husband, Billy, after reviewing a chapter in one of her husband’s books (World Aflame) on the sinfulness of America (and that was in 1965), she exclaimed to Billy: “If God doesn’t judge America, He’ll have to apologize to Sodom and Gomorrah.”
I don’t know about you – but we’re almost there. The mercy of God is from everlasting but at a certain point the “system” just snaps and what’s ever in that cup is poured out. There’s something very captivating about American exceptionalism, but something very disturbing as well. More and more we’re witnessing the manipulation of vast sums of money and clever leveraging by the “merchants of the earth” in forever blowing bubbles.
I leave you with this little ditty that was popular at the close of World War I as a part of America’s legacy and somber war reflection…just consider:
I’m dreaming dreams,
I’m forever blowing bubbles,
Copyright 2011 Dene McGriff
Presented with permission
PS Printing Money
What about money printing? Is the Fed just printing money?
Yes. That’s what expanding its balance sheet means. It is creating previously non-existent dollar credits out of thin air and placing them on its balance sheet to buy financial assets.
“Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation. Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior).” – Ben Bernanke, National Economists Club, Washington, D.C. November 21, 2002 Federal Reserve
Remarks by Governor Ben S. Bernanke Before the National Economists Club, Washington, D.C. November 21, 2002
What is the difference?