Discussions of Mormons and Mormon life, Book of Mormon issues and evidences, and other Latter-day Saint (LDS) topics.

Friday, October 26, 2007

In Case of Burglar, Close Your Eyes (If You Are Unprepared)

Thieves are near. What to do? Close your eyes. Tighter. Stop listening for footsteps - that will just make you nervous. Turn up the rap. Hide. There, feel better?

Thieves? Yes, you've been robbed.

If you finally open your eyes, don't check your wallet. It will have a lot less than it did before. Let's just not talk about that. Let's talk about sports. Anything besides the reality of insane inflationary spending and the devaluation of our currency by creating vast amounts of money out of thin air to pay for reckless spending all over the globe, for purposes completely unauthorized by the US Constitution.

In the past year your money has lost 10% of its value - a conservative estimate. If you're getting 5% interest on your life's savings, you don't have 5% more - you have 5% less during this past year. And that's based on the US Dollar Index, which compares the dollar to the a batch of other world currencies - all of which are subject to inflationary pressures themselves as their central banks print up loads of paper money making their currencies worth less each year.

The printing of fiat money and the associated inflationary expansion of the money supply is a hidden tax, an act of robbery, in which your government and our generous central banking system reduces the value of what you earn and save in order to finance their own agendas.

The talking heads of Wall Street keep taking about the strength of the economy, the wisdom of stocks, the joy of the status quo, without letting you know that you're being robbed. Made 10% in stocks this year? You may not even have broken even. And if China and the Arab world grows weary of being on the losing end of the dollar, the sell-off of US treasuries could drive the dollar down rapidly and fiercely, disrupting far more than your plans for a European vacation. This is the time to be frugal, to build a food storage and emergency preparedness program for your family, and to consider investments that won't be sure to lose 20% or more of their value in the next couple of years. Naturally, I'm speaking to those of you in the US. If you're in Canada, for example, congratulations on the resurgence of the Loonie!

What we are experiencing in the US now is not new. We are on the brink of what has happened many times. It happened in Rome. It happens all over the world. When a government assumes the power to create money without anything backing the money, when nothing but printing presses are needed to create and fund the dreams of politicians and bankers, when nothing but hope and trust is behind the printed bill, then the devaluation of that currency is inevitable, and the toppling of markets and even governments is sure to follow. It may take decades, but the end game can be swift and terrible. Rome, Weimar, Zimbabwe, even Kirtland - there are lessons to be learned.

Our Founding Fathers learned that lesson. They knew history. That's why gold and silver were specifically spelled out as the basis for money. Congress had power not to print money, but to "coin" it, and no state would have power "to make anything but gold and silver coin a tender in payment of debts." Indeed, the details of the Constitutional Convention show that the Founding Fathers were ardent opponents of paper money. If we had stuck with that, we couldn't just print up money today, and all the advances in technology and productivity each year would make our dollar progressively more valuable, not less. Ah, what dreamers those men were! But they had their eyes wide open when it came to the danger of thieves. They did all they could to limit the size of government that we might be free, and free from the thieves that naturally gravitate to offices of power.

The monopoly power to print money backed by nothing has got to be the most corrupting power of all. Who can resist that kind of fun? No thief can, that's for sure.

29 comments:

Kathleen said...

"If you're in Canada, for example, congratulations on the resurgence of the Loonie!"

Hey, thanks! ;)

Steve said...

Have you seen the film "America: Freedom to fascism"? I recommend it, you can watch it on google video.

KC said...

This being a Mormon blog, I appologize in advance to all the Mitt Romney supporters, but the only man that can pull this country out of the mess we're in is Ron Paul.

He's been well aware of the founders' visions and the dangers of fiat money for a long, long time.

Have a look here: http://thenewliberty.com/?p=25

Brian D. said...

Don't worry, Jeff. Haven't you been watching the credit card commercials? Cash is so yesterday! Time to whip out the plastic and use money you don't even have!

I'm less concerned with our paper money and more concerned about our "plastic" money (debt).

Jakob said...

First of all, the dollar's value relative to other currencies is irrelevant. What is important is how much consumers can buy with a dollar. This is measured by things like the CPI and GDP deflator. It really doesn't matter, from an inflationary point of view, what the exchange rate is.

That said, a weak dollar could be good for the US: http://www.marketwatch.com/news/story/dollar-follows-paulson-around-bad/story.aspx?guid=%7B62B7B7DC-8BCC-41F5-9F2F-AF5882A28ED0%7D.

In fact, a strong dollar may be what got us into this situation in the first place, since we can buy so many imports, and the imbalance of trade stemming from that creates a surplus of foreign investment. This makes loans very easy to acquire and could have contributed to the subprime problems.

Jakob said...

A couple more things: a constant money supply, which I think is what you propose, is probably not very good for the economy, since prices will have to decrease as demand for money increases. Deflation, which is just about as damaging to the economy as inflation, results. A little bit of inflation, in fact, is probably good, as it allows employers to refrain from giving raises when they come upon periods of financial difficulty rather than laying off workers.

The change in the CPI from September 2006 to September 2007 was 2.8%. That is not the same as a 10% inflation. Unless you can give me some reason to disbelieve the CPI, I'm going to disbelieve your 10% inflation figures, especially since they seem based on irrelevant foreign currency rates.

Mormanity said...

Whoa, Jakob - is there any reason to believe the CPI? Talk about manipulated statistics to try to make things look better than they are! Energy is left out. Huh? Food is left out. Eh? Well, sure - those prices are going up so much that it would, uh, skew the results to include them. Right. So, inflation isn't a problem for those who don't eat, drive, heat their homes, cool their homes, or use power tools.

And then when the prices of other things go up, they are adjusted down using a "hedonics" factor to explain that the price increase is due to better performance.

And to show, beyond any shadow of a doubt, that the CPI is aimed at manipulating the numbers down, on top of all that manipulation, averages are computer not as the mathematical mean one would expect (e.g., average of 2 and 50 = [2+50]/2 = 26), but as the geometric mean (e.g., the geometric average of 2 and 50 = square root of 2 * 50 = 10). Huh?? Is there any sane explanation for using a geometric mean - other than the fact that it lowers the reported numbers to allow the government to hide just how bad they are ripping us off with inflationary spending of fiat money? So for price increases of 2 and 50, we can report the normal average of 26, or the much healthier geometric average of 10. Sweet!

And even with all that distortion and neglect of reality, the 3% a year inflation means you're barely breaking even with a typical CD, and the money in your checking account or under your mattress will be worth much less after a few years.

I didn't call for a constant money supply, but for one backed with gold and silver as the Founding Fathers specified. Not fiat money.

But remind me why decreasing prices would be such a hardship? Computer prices have dropped a lot in the past couple of decades - what's the trouble with that?

Mormanity said...

Warning: Plugs for politicians may result in instant deletion. So watch it, KC. A few dozen more slips like that and no more Mr. Nice Blogger.

Jakob said...

I'm not sure what CPI numbers you are using. CPI numbers can have food and energy taken out, but the number I cited did not. Look at this page: http://www.bls.gov/news.release/cpi.nr0.htm. Notice how there is an "All Items" category and an "All Items less food and energy" category. I cited the "All Items."

The "hedonics" factor is something that's used to calculate the GDP deflator, but not the CPI, as far as I know. And it's typically used to account for increases in the capabilities of technology.

If you use numbers with a high standard deviation, yes, the geometric mean will be much different from the arithmetic mean. But for numbers that are closer together, the geometric mean is very close to the arithmetic mean. Since this averaging is only done within each category, where expenditures through different sources aren't likely to vary much, this isn't much of a problem. Regardless, geometric means weight the average down, but so does normal human behavior. If the change in price of two substitute goods is not the same percentage-wise, consumers will buy more of the cheaper one. It's not hard to understand.

I don't know about your CD, but my 1-year is chugging along at a healthy 4.6%, yielding me 1.8%/year. Keeping money under a mattress is not the best investment you could make, and a checking account is meant to be liquid, not to be a high return on your money.

And what would the BLS's motivation to skew the CPI be? They have absolutely no relation to the Fed. And the Fed is run mostly by banks, who hate inflation, so what motivation would they have for causing inflation?

A money supply based on gold and silver would be absurdly tied to successes in gold and silver mining. If a new highly productive mine was found, the value of the dollar would go down.

The problem with "sound" money is that its supply cannot rapidly adjust to meet demand. Government will always be reluctant to buy new bullion. As demand for money increases, supply does not. Deflation results: Bankers and savers benefit. Businesses lose because they don't get as much revenue. Then they either have to lower wages or lay off workers. And if there is a minimum wage law...

Computer prices have not dropped due to deflation. Deflation only applies if it covers the aggregate market of a country. It stems from a reduction in supply or increase in demand for money, holding all else equal. Computer price drops have come from technological advances, and reflect a real reduction in production costs.

The point is that price uncertainty in the future is a bad thing, whether deflationary or inflationary. Money is meant to be a fairly stable store of value. Both deflation and inflation hurt that goal if they get out of control.

Biff Boffo said...

It's not just the dollar that is being destroyed. Most Americans have the bulk of their assents represented by the equity in their homes. The housing market is in a severe recession and will probably not recover for many years. The government is only making the pain more protracted by artificially manipulating interst rates and bailing out institutions that made bad loans to unqualified buyers. For a good overview of what is happening to housing check out this link.
http://housingdoom.com/2007/10/26/op-ed-friday-is-the-sky-falling/#comments

KC said...

Sorry for the plug, Jeff...I'm not one to engage in political spamming, but I only did so since I found it particularly relevant to the post, especially your comments about the founders (who happened to be politicians, among other things) and their economic views.

Sorry for breaching the policy, I'll be more careful in the future.

cayblood said...

Jakob raises some great counter-arguments, Jeff, and I'd be interested in hearing your response. I have been on both sides of this debate, but you guys are more informed than I am.

Mike Parker said...

Thank you for bringing this up, Jeff. This is a critical issue that most Americans aren't even remotely aware of (mostly because they don't know how our central banking system works).

The Federal Reserve has tried to cushion Americans from the effects of the subprime mortgage meltdown and out-of-control spending in Washington DC by keeping interest rates low and printing more currency. The effect of this has been to drive down the value of the dollar in comparison to other currencies.

Wonder why you're paying nearly $3 a gallon at the pump? Because the Arab governments we buy oil from get paid in dollars, and the dollar is worth less (a lot less) than it was 4 or 5 years ago.

Fiat money also allows governments to manipulate the value of their currencies to their own advantage. Why is everything we buy coming from China? In part because the Chinese have devalued their money in comparison to the dollar to prop up their own manufacturing base.

Putting the world monetary system back on gold-based currencies is not a perfect solution, but it would prevent this type of internal and external manipulation that harms us.

Anonymous said...

I don't care for your money posts. You come off as an alarmist.

Mormanity said...

But I am alarmed. When the dam is beginning to burst, a little alarmism can be rather healthy. In other words, RUN!!!

What's beginning to happen now with the mortgage market will make Enron look like a blip. There are times to be alarmed. That's what alarms are for. Ding ding ding . . .

OK, OK, how about those Red Sox! Hey, that feels a lot better . . .

Jakob said...

Mike,
Oil prices have risen more than 400% in the last 4 years. The dollar has not fallen by nearly that much in relation to any currency. What we're seeing now is not caused by US inflation. It's a market bubble. It will eventually pop. And while high oil prices are never good, they don't mean doom for the economy. See http://www.cato.org/pub_display.php?pub_id=8726.

And importing a lot of stuff from China isn't necessarily bad--it just means that we get lots of inexpensive products and can spend more money on other things. Yes, it's bad that China has artificially been keeping the yuan low, but by doing so, it has also artificially kept the dollar high.

So lowering the dollar helps solve this problem: since we can't buy as much from foreign countries, we rely more on domestic production. Which do you want: a strong dollar or less foreign trade? You can't have both.

You're right, gold-based currencies are not a perfect solution. Instead of tying the value of money to a body that actually tries to regulate its value reasonably, you tie the value of money to a commodity. This commodity's value fluctuates with demand and supply: If dentists need more fillings, the value of your money goes up, but if someone discovers a new gold mine, the value of your money goes down. How is this any better than the Federal Reserve System?

Even worse, there is not enough gold in the world to fund even the US's money supply. Even at current gold prices, even if the government bought every single ounce of gold in the world, there would not be enough to cover the circulation in the US.

Jakob said...

By the way, Jeff has been making this argument since long before the subprime mortgage problems. (His earliest Mormanity post on it is from March 2006.) So I'm not so sure "the dam is beginning to burst" as he says.

Mormanity said...

Some good discussions of the manipulated and nearly worthless nature of the CPI are found in at Money Central, Financial Sense, and others.

Jakob, it is true that the BLS and other Federal offices that report economic statistics are not part of the Federal Reserve Bank, but to assume that there is therefore no motivation to tweak the statistics misses some major driving forces for the Federal government. The ability of the US government to engage to spend trillions of dollars and wield vast economic clout in the world depends heavily on the US dollar as the global currency of choice. Foreign investment in US treasuries and foreign acceptance of US dollars is essential for the status quo. The Federal government - including the BLS office or the Federal Reserve Bank - has every interest in the world in making the US dollar look strong to maintain investment in treasuries and to allow printing of dollars - creation ex nihilo at its best - to result in something of value that can be used to finance its expansion. But much more immediate pressure comes from the fact that government payments to Social Security recipients (COLA) and owners of TIPS bonds (inflation adjusted treasuries) are a direct function of CPI. When CPI goes up, the government has to give out a lot more money that it would rather spend elsewhere. So there are several obvious sources of pressure to adjust CPI downward. And believe me, they are good at it.

Tremendous political pressure is behind all the tweaking of inflation numbers and the suppression of reports on M3 that describe the real expansion of the money supply (around 8-10% a year based on the last estimates). Once we understand that - "follow the money" - it's not hard to understand why CPI can't be trusted.


And yes, I did err: it's the widely reported "Core CPI" that completely leaves out energy and food. The number Jacob cited was the overall CPI. But as I stated, hedonic factors actually are used in tweaking CPI. See Hedonic Regression at Wikipedia. Also go to Google and search the BLS Web site with this term: "site:bls.gov hedonics cpi". One of those BLS papers from 2001 reports this: "The Bureau of Labor Statistics (BLS) is continuing research into extending the use of hedonic regression models for quality adjustment purposes to additional items within the Consumer Price Index (CPI). The CPI already uses hedonic models for apparel, televisions, and personal computers. Recently, the CPI began using hedonic models for camcorders, VCRs, DVD players, and audio products. Refrigerators were selected for hedonics research in order to assess the use of hedonics on appliances." That was when they were just getting started with hedonic trickery. Such a game!

It is vital to understand that the US government is under great pressure to prop up US treasuries - but it may eventually become impossible to do so since the fundamentals of inflationary spending cannot be sustained forever by foreign purchasing of US treasuries that continue to lose real value. Interest rates may need to escalate to the outrageous levels of the 70s or the dollar may face collapse, and either way, it's going to be ugly. Alarmed? Yes, very.

Yes, I raised the alarm in March 2006. At that time, 580 US dollars could buy an ounce of gold. Now it takes 780 of them. At that time, the US Dollar Index was around 90. Today it's around 77. A dollar was worth 0.83 euros, today it's 0.70 - a loss of 16%. This "dam beginning to burst" phenomenon may take years of slow erosion before you see dramatic spikes from market chaos. At the current rate, if I keep whining about the "dam beginning to burst" over the next five years, a lost of 30-60% in the buying power of your money would not be terribly comforting to those who don't want to face the reality of the reckless fiscal mismanagement of our government. A slow leak like this can wash away the shores of many.

But the chaos in the subprime mortgage area is related and shows an ugly and frightening scene that is still just beginning to unfold. The Federal Reserve Bank created massive amounts of equity several years ago, flooding the markets with cheaply available cash that banks could loan out at a profit to almost anyone with a pulse. And now that irresponsible market gaming has encountered reality. Suddenly we are in a recession. Home sales are plummeting, jobs are being lost, the value of your home has eroded, billions of dollars in certain hedge funds have vanished (Bear Stearns is just the beginning), foreign banks are facing unexpected pressures and even bank runs in some cases, and this is just the beginning. And the solution? Rather than shot down the addiction of inflationary creation of money, the solution from Helicopter Ben Bernanke is to bring out the helicopters (so to speak) and dump more cash into the economy. This is just the beginning, and this time we may not have the soft landing of gradual, sustained slow erosion of your wealth. Some things may shake out with terrible rapidity. But in either case, this inflationary erosion of our dollar and economy is not going to prove mysteriously healthy.

In Zimbabwe, their dollar was at parity roughly with the US dollar a few years ago. But thanks to inflationary spending without the benefit of massive foreign investment in their dollar, the realities of basic economics have caught up with them. Today you are allowed to only withdraw 500,000 Zimbabwe dollars a day from your bank account. You wait in line for hours to do this and pay a fee. If you do this on Monday, Tuesday, Wednesday, and Thursday, you will then have enough money to buy a small tank of gasoline. The country is being devastated by hyperinflation. The problem is not evil foreign business, as Mugabe claims. It's basic economics. For a given amount of goods, if you double the money supply, the value of the currency is under pressure to drop by half. The behavior isn't always that simple, but the fundamental driving forces are there. And that's the relationship our government wants you to forget. We've been very lucky that the US dollar has been the international standard for exchange and the foreigners have been willing to buy trillions of our dollars, but that can change overnight. Don't bet your future on sustained Chinese and Arab acceptance of the mighty dollar.

Anonymous said...

Also see The Fuzzy CPI for some further insights into CPI zaniness. It's from 2000, but things haven't become more logical since then.

Mormanity said...

KC, I was hoping you'd notice the hint at a double standard here with the threat to start deleting if you do that a couple dozen more times. A plug for most candidates might have been instantly deleted - maybe there's a hint there about my personal biases. But I do want to avoid politics per se, while leaving room open to rant about politicians and their failure to regard the Constitution.

Anonymous said...

With so many people in debt and a recession here, eventually the cost of credit and/or the dollar will be driven up by the costs of that debt. The demand will not go away.

Many complex factors will make this dollar crisis very different from others. Foreigners hold a large chunk of our notes, they are already dumping them which devalues our credit score as a nation, and increases the costs of borrowing while driving down the value of the dollar in foreign trade (which is everything we buy anymore since we import much and export little and even that is largely under foreign corporate control). Foreign investors are rapidly buying up U.S. interests in order to get the most bang for their buck.

These trends will continue unabated and may well accelerate rapidly.

The net effect will be increasing isolation and irrelevance for the U.S. economy. We are becoming a third world economy.

Can the global markets make a go of it without us? That stands to be seen, but rest assured, our debt is fast approaching levels that ensure default on every level from the consumer, to municipalities, to the federal level.

Anonymous said...

"the solution from Helicopter Ben Bernanke is to bring out the helicopters (so to speak) and dump more cash into the economy."

There are a few economists that have been noting monetary deflation in the fed policy despite the press.

From Gary North,"Bernanke and the Federal Open Market Committee (FOMC) have done something extraordinary. They have publicly lowered the FedFunds target rate, and have forced down the actual FedFunds rate to meet the target rate, while deflating the money supply."

From Mike Shedlock,"The above chart speaks for itself. On the basis of base money supply (actual monetary printing) no claim can be made about rampant Fed printing. It just can't be done."

Time will tell if lowering the cost to borrow during a time of higher risk is a good thing (fed lowering the funds rate during the current crisis). But as to monetary supply (not to be confused with credit supply), the fed is and has been tight.

That will be a crucial difference in the days ahead!

Mormanity said...

Jacob, what do you mean about there not being enough gold to back the US dollar? Rebuilding US gold reserves to back the dollar would drive up the price of gold, to be sure, but the world supply of about 5 billion ounces of gold can accommodate whatever number of dollars you specify. Economists have worked out a number of proposals for a return to the gold standard - the limited physical supply is not a problem and in fact, is what makes it work. You can't just print up gold anytime. And everyone around the world recognizes it as being valuable, unlike uncertain currencies.

The world supply of gold increases by about 1.7% per year, and that number is slowing down because it is increasingly difficult to mine and to find untapped reserves. The chance of a mammoth find that could be exploited rapidly to increase the gold production rate dramatically is minor. Whatever that risk, it's far less than the nearly 100% risk that politicians and bankers while keep using using their fiat money printing press privileges to keep inflating our currency.

Anonymous said...

Here's a very recent gem on this issue, outlining the inherent tendency of central banks to manipulate markets and to try to prop up their currencies.

Jakob said...

"the real expansion of the money supply (around 8-10% a year based on the last estimates)"

That's just fine. It doesn't matter: an increase in the money supply is not the same thing as inflation. This is why a constant money supply causes deflation: economic growth happens. And just out of curiosity, when were those last estimates?

And let's look at your comparison of the dollar and the Euro. The EU also experiences inflation. Look here: someone making similar arguments to yours, but about the British governmetn: http://sandersresearch.com/index.php?option=com_content&task=view&id=1142. Does that mean the Euro is going to collapse and anyone who holds Euros is going to get rid of them? Let's look at the debts of countries in the EU.

If these incentives have been around for so long, why hasn't the economy collapsed sooner? After all, we left the gold standard completely in the 1970s, and were mostly off it by the 30s. Why now?

And your statement about the slow growth rate of gold: the world economy grows at more than 1.7%/year. So does the US economy, usually. So that means you're going to have deflation if you switch to the gold standard.

Can you provide links to these proposals to switch the US to a gold standard?

Does EVERYONE recognize gold as valuable? Only because everyone else does. There is a limited supply of, say, typewriter repairmen, but that doesn't make them valuable. Scarcity does not equal value.

I'd like you to address Anonymous @ 4:50's contributions. If what he says is true, it kind of ruins your entire argument.

Jakob said...

Oops; I forgot to include the EU debt stuff. See: epp.eurostat.cec.eu.int/.../PGE_CAT_PREREL_YEAR_2005/PGE_CAT_PREREL_YEAR_2005_MONTH_01/2-21012005-EN-AP.PDF. EU debt in 2005 was 63.3% of overall GDP. That's comparable with the US's ratio of 64.7%. Do you predict economic ruin for the EU?

Peter said...

I think we need to get rid of money, it's a hindrance more then anything anyway. It breeds the wrong sense of purpose and leads people to be less people orientated. IMO anyway. I am not saying that people always choose money over people, selfishness over selflessness, however I believe this is a byproduct of a capitalist society.

Mormanity said...

Yes, I think the EU will encounter serious problems as well. They are printing currency almost as fast as we are, but have managed to gain strongly relative to the dollar. But history offers little long-term hope for those governments that embark on prolonged and reckless devaluation of their currency. Has there ever been a counterexample?? Our Founding Fathers were wise students of history and had their own experience with the Continental. They were insistent that the US not print up fiat money - as we are now doing. The euro will lose value if the presses don't stop in Europe as well.

Connor said...

Jeff, it's great to see you blog about this topic. I follow the economy closely, and have sent out numerous emails to friends/family in recent weeks alerting them to the horrible condition of our dollar.

It's going to get worse before it gets any better...