Monday, October 6, 2008

the real cause of the "crisis"

sorry for the lack of posts recently. things have been very busy around here and posts are likely to continue to be erratic for a couple of weeks.

i've seen so many explanations about what caused the current so-called "crisis" in the financial sector. virtually every one has been either dead wrong, mostly wrong or wrong-headed. no report on this situation can be taken seriously if the federal reserve is not prominently mentioned as the root cause of the problem.

we need to be clear that the boom and bust or the "business cycle" is not a naturally occurring phenomenon of the marketplace. it is the sole creation of the federal reserve's printing of money. as loosely discussed in this previous post, the central bank prints money for political purposes under the guise of maintaining "price stability". the artificial lowering of interest rates dupes investors into making capital investments when there is no increase in demand to sustain them. there is a short term boom, followed by a bust when values are deflated to meet actual market value. this is inevitable! fake prosperity driven by monetary inflation is unsustainable and we are seeing now that this is true in real time. ultimately, the market will prevail. it is important to realize that printing money does nothing to increase wealth. making more green pieces of paper, or adding decimals to numbers in a computer do not increase the amount of wealth in an economy. wealth is created by production and exchange, not by printing pieces of paper. money should be a medium of exchange representing a store of wealth, like gold or silver. then the money is an exchange of value for value in market transactions. if one so chose, one could exchange that money for the medium it represented, like gold, silver or other. the federal reserve, on the other hand, prints money that represents nothing. because the market would tend to stop using such dubious currency, for something more stable and predictable, laws are passed (called legal tender laws), forcing market participants to accept such money.

once this monetary regime is in place, the federal reserve is free to print as much money as it desires for the purposes of political expedience. but this comes with a consequence for you and i. this creation of money (called counterfeiting if you or i did it) dilutes the existing money in circulation, reducing the value of each dollar - except for the people who get it first. those who get the money straight from the printing press, usually bankers in the fractional reserve system, get to spend or loan the money at its current value. only after they put the money into circulation, does it dilute the existing pool of money. this acts as a vacuum sucking the wealth out of your pocket and putting it into the pockets of those receiving the money from the fed - the politically connected banks and defense contractors. this gives politicians a way to pay for extravagant programs and projects without having to raise taxes. the effect is still that the people pay for such things, but in a way they generally don't understand. taxation is easy to understand and readily apparent - inflation of the money supply is not.

because inflation is so poorly understood by the mass populous, they will go blaming a poor economy on all sorts of scapegoats like greedy businessmen, "capitalism", predatory pricing, foreign competition, etc. a good illustration of this is in the recent run up of oil prices. blaming greedy, heartless oil companies (which are not entirely blameless, but for other, mostly unrelated issues) was the mantra of mainstream america. "they're making record profits, while we suffer!", were the complaints at the pump. but, if people understood inflation they would see the real culprit - the federal reserve and the politicians who influence it. paul van eeden of cranberry capital produced a study showing that the price of oil based soley on demand rose from $3/barrel in 1972 to $13/barrel in 2008. the difference in the adjusted demand price at $13 and the observed price of $142 ($129 difference) was due to the inflation of the money supply. that's right, another inflationary bubble. not oil companies, not OPEC, not anyone but the federal reserve. all the record profits of oil companies? all those profits are in dollar amounts - not percentages. the dollars that made up those profits were seriously diminished in value through the inflationary process and not, in adjusted terms, nearly as impressive as they seemed.

this all fits into the plan of politicians. as long as the uneducated populous is busy blaming each other for the problems caused by politicians and bureaucrats, they will always be blind to the real issues and therefore unable to remedy them. as the citizenry fights amongst itself, the pols will continue to sheer the flock's wool.

the bailout plan by congress will not only fail to help anything outside of politically connected bankers, but it will increase the impoverishment of americans in general. instead of doing the healthy thing and allowing poor companies to fail and be replaced by better ones, these bad companies are propped up, stifling the market and thus hurting consumers, but also the propping is being done with value stolen from the very people the plan's implementation hurts. so the value of the citizen's money is reduced and they have to continue to deal with poorly managed companies instead of those better companies rising to take their places. it's basically and contra-robin hood plan - steal from the poor to give to the rich. this is a good illustration of the modus operandi of the state: transfer wealth and power from the citizens to the political class and the politically connected.

it works perfectly.

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