Theft By The Federal Reserve

I am thoroughly disgusted at the "legalized embezzlement" that is going on through repressed interest rates.  ["Legalized embezzlement":  A phrase originally used by E.C. Harwood, founder of the American Institute for Economic Research.]

Take a look at the following figures:

By way of illustration, let's say you are someone who has $100,000 to put aside at age 20.  Here are your savings after 40 years with 4% interest compounded daily:

$495,259.82, i.e. five times as much.

Here are your savings at today's savings rate at your local bank, about 0.01%:

$100,400.80, i.e. pretty much the same amount as you started with, in fact below the probable rate of price inflation.  (Keep in mind that $100,000 forty years ago had the same purchasing power as $350,427 today, according to AIER's Cost-Of-Living Calculator.  This means you will have LOST purchasing power even with interest on your savings.)

[Data from CalculatorSoup.com and Wells Fargo]

The formerly common 4% versus Wells Fargo's current 0.01% represents a loss of $394,859.02, stolen directly from your pocket by the U.S. Federal Reserve.  Counter-intuitively, it's not really the bank's fault, because the Fed is the one fiddling with interest rates and paying interest on bank reserves, making Wells Fargo less hungry for your money.

'Nuff said.

Disgusting.  Why do we say nothing and let this go on?  We really are a bunch of useless, blind, mindless lemmings.

[Image from Britannica.com]

Bloated Government Still a Problem After All These Years

What a pleasure today to open the Wall Street Journal and find a full-page open letter to the President signed by Cato Institute. It scolds him, like Alice shaking the King, that in November of 2008 he promised to eliminate waste in the federal budget "page by page, line by line"; and that so far he had not yet begun.


[Thanks to Mr. John Tenniel, illustrator for Alice in Wonderland.]

On the contrary, he and our profligate Congress (both sides of the isle) have been responsible for expanding our budget to a precarious size never seen before.

This letter reminds me of the good old days. Back in the 1950s, 1960s, and 1970s my father, Edward C. Harwood, published such open letters to the standing president, over the byline of his research organization, the American Institute for Economic Research. Very few have the guts to do this anymore.

Rereading from one of my Dad's open letters published in February of 1961 on the subject of inflation, I'm struck by the parallelism with today:

"The great inflation of the past two decades [1940-1960] has shifted about $200,000,000,000 [equivalent to $1.5 trillion in 2010 dollars] worth of assets from the Nation's thrifty citizens and from endowed institutions, in addition to an incalculable but perhaps even larger amount from all whose incomes have been relatively fixed (such as retired individuals ...), to those who have benefited from inflation's progress. One of the chief beneficiaries has been the Government, whose tax revenues have increased greatly; other beneficiaries have been the holders of monopoly privileges including some elements of organized labor as well as numerous others.

"Thus have been fostered dreams of an affluent society able to afford global foreign aid, costly Government intervention in agriculture with accompanying waste of resources, and expansion of business enterprises without sufficient consideration of costs here compared with those abroad.... By cutting in half the buying power of elderly retired persons, they have been stripped of the means to provide for illness and other economic burdens of old age. In these and other ways too numerous to list here economic growth has been retarded and the Nation's economy has been seriously distorted.

"Now, consequences of past money-credit follies confront us. Some Keynesian economists ... recommend more inflation by monetizing more Government debt. Although some Keynesians favor more spending, others favor tax reductions; but the basic notion is the same, i.e., that Government deficits should be monetized to restore prosperity....

"In addition to the dedicated Keynesians, convinced that their nostrum is a useful remedy, various pressure groups will clamor for what they think will promote their interests. Labor leaders who can see only the short-run benefits of more increases in wages instead of decreased wage rates in some industries, speculators in real estate and stocks (especially those speculating on thin margins), bankers whose investment-type assets are excessive and largely 'frozen,' and others who hope to gain from more inflation or fear to lose if deflation occurs will join in the clamor. And adding their not inconsiderable bit will be many intellectuals whose education in verbal facility failed to make them wary of perpetual-motion schemes such as those proposed by the Keynesian inflationists."

[Quoted from "An Open Letter to President Kennedy," 2/19/1961, the final proof document of either the NYT or the WSJ version.]

Ah, that I had the wherewithal to republish much of what he wrote when he was alive. It's all still valid today.

PS: By sheer coincidence, on the page opposite Cato's letter was a huge ad for gold investment in iShares. The ad comes from BlackRock, the gold trust's sponsors and one of the biggest hedge funds, now apparently investing in gold. This also brings back the old days when my Dad brought all his investment clients into gold. He began to do that in 1958, and judging from the results in 1980 when he died, his clients did well.

Central banks have been purchasing gold within the last few months. Would BlackRock be trying to position themselves to get in on a developing business of gold trading, involving bigger and bigger players?

The Evils of Fiat Money: Voice from the Past

[Thanks to the-gold-market.blogspot.com for the image.]

In doing some research I came upon the following quote:

"Whenever commodity prices are far removed from a stable relationship with the alleged gold content of the monetary unit concerned, there is something, probably more than one thing, seriously wrong. Included in the maladjustments may be extensive abuse (misuse, unwise use) of the banking system with resulting inflation, serious overexpansion of capital facilities in various lines, unwise speculation in tulip bulbs, commodities generally, Florida lots, common stocks, Canadian mining stocks, or what have you, and possibly serious distortions among wages with steel workers getting more than college professors, etc.

"How anyone can imagine that all such distortions, maladjustments, abuses, etc. can be miraculously cured by devaluation is beyond me. Devaluation simply satisfies the most ardent pressure groups for the time being and greases the skids for the next slide by gradually destroying the stable middle-class element of society; it confirms all the unwise in their unwisdom; makes unsound banking look like sound banking; and, after two or three doses, virtually assures the ultimate destruction of the monetary unit as the strengthened pressure groups demand more and more. Such, in my opinion, is the obvious lesson of history, ancient, medieval, modern, and recent. Perhaps things will some day be different, but I doubt that."

As I read this I couldn't help but think how right he was. Everything he described has come to fruition today.

The date? 1953. The writer? Edward C. Harwood, founder of the American Institute for Economic Research. Would that such wise men were still around today.

The More Things Change ...

Gold has just hit $1,000 and seems to be staying there. China has revealed that it is divesting its dollar holdings into gold and other assets in order to save their sovereign-fund investments. Even the UN is getting into the act. (Do they see a future role for themselves?)


[Thanks to Wikipedia/commons for the photo.]

The more things change, the more they stay the same. So this seems as good a time as any to recall what was said by a subsidiary of the American Institute for Economic Research back in July of 1975 when the Institute's founder, E.C. Harwood, was still alive. Much of it is still relevant today.


"Removal of the gold reserve requirement for Federal Reserve notes (your paper money) in March 1968 and closing of the so-called gold window in August 1971 eliminated the last barriers to inflating continually the Nation’s purchasing media. As long as a substantial gold reserve was required by law, the money-credit managers were confronted with a restraining influence.

Now, only the wisdom and determination of the Nation’s money-credit managers can prevent the ultimate decline of the buying power of the dollar until it becomes nearly worthless. To what extent the citizens can rely on the wisdom and courage of those 'responsible men' can be judged by events of the past [seven] decades, including loss of 70 percent [how much today?] of the buying power of savings and life insurance, the increasing rate of depreciation in recent years, loss of much of the Nation’s gold, and the fact that several of these managers have been among the most persistent in advocating the removal of all restraints. Truly wise and responsible men would not want to be without the guidance of such an objective criterion as a gold reserve requirement; and unwise, irresponsible men should not be relied upon to act properly without such guidance.

The dollar appears doomed to continue losing buying power, the only question being, 'How long before it will be practically worthless?'

We, as well as others, have foreseen this possibility for many years. [Six] decades ago advising investors how to protect themselves against substantial depreciation of the dollar was relatively easy. Most domestic common stocks then were available at prices approximating the prewar level, and a long continued upward trend of windfall profits for U.S. corporations was practically assured by the World War II inflating.

Now, however, the situation is different. No longer is there a large reserve of idle purchasing media such as that accumulated during World War II, which was used to augment business expansion during the earlier postwar decades. Rather, there now exists a huge amount of debt incurred during the prolonged period of inflating. Debt liquidation may have a cumulative effect on business failures.

CONCLUSIONS

We have concluded:

1. … Recently Government authorities have been more concerned with attempting to avoid a severe depression than with reducing the rate of inflating.

2. That the various “welfare state” obligations, including the unfunded Social Security obligations, constitute a self-destruct mechanism reducing the standard of living, and consequently the birth rate as well, for a majority of the Nation’s population.

3. That prolonged past inflating has fostered initiation of innumerable businesses lacking adequate capital, widespread speculation “on margin” in real estate and securities, and installment borrowing on an unprecedented scale by individuals.

4. … Even if [there are] chances of a temporary recovery induced by deficit spending … the adverse possible consequences of a severe depression are so great that we do not recommend gambling on a near-future cyclical recovery.

5. Finally, that continuation of the international financial crisis justifies placing much of one’s funds abroad before exchange controls are ordered, which may occur at any time….

RUPTURE OF ECONOMIC RELATIONSHIPS IN WESTERN CIVILIZATION

The consequences of nearly four decades [make that seven in 2009] of almost continuous inflating are becoming more evident with each successive international monetary crisis. All currencies have been and are being degraded steadily. All now have lost about three-fourths, at least [nine-tenths as of 2009 for the U.S. dollar], of their pre-World War II buying power, and all seem destined to depreciate much more in the next several years, perhaps for as long as a few decades before they become practically worthless.

Clearly, what the world needs is a relatively stable money or accounting unit. In the absence of such a unit long-term promises including bonds, life insurance, and pension plans are like a mirage in the desert and business depreciation schedules are misleading distortions of alleged facts. Unfortunately, the world is getting a continuing flood of paper 'money' that has neither a reliable exchange value nor any assurance that it will retain future purchasing power. Without these two essential ingredients, confidence in fiat paper 'money' will continue to diminish, until the flight from currencies overwhelms the efforts of monetary and political authorities to cope with the chaos.

Politicians generally insist on remaining in their Politicians’ Paradise where lavish promises in order to obtain votes are fulfilled with inflationary purchasing media created to finance government deficits. Their accomplices in embezzling the savings and life insurance of the people in Western civilization are the central bankers of the leading nations. Without exception they choose to remain in their Banker’s Heaven, where promises to pay are, as John Exter pointed out, simply 'I owe you nothings.' And the people of Western civilization are beginning to endure the Hell that has been paved with the good intentions of those who would save the world (and incidentally retain power, or is it vice versa) by the money-credit manipulations.

We see little possibility that there will be a return to sound money-credit procedures until after some bitter lessons have been learned during a future depression.

Meanwhile, each succeeding crisis in the foreign-exchange markets for currencies will tend to spread the realization that paper profits are more easily reaped than retained, and that the purchasing power of hard won savings is ephemeral unless those savings are invested in a tangible asset whose exchange value is not subject to manipulation by the monetary and political authorities. Among such tangible assets, gold has proved throughout the centuries of history to be unsurpassed both as a unit of account and as a store of value. Therefore, projecting an increasing demand for gold in its various forms during the period of unstable monetary conditions that almost surely lies ahead appears to be warranted in the light of both recent experience and earlier history.

The more the politicians and central bankers struggle to free themselves from the so-called 'tyranny of gold,' the more that governments endeavor by controls of one kind or another to counteract or conceal the consequences of their money-credit follies, the more they endeavor to seize the wealth of citizens by increased taxes of all kinds in the hope of maintaining a semblance of monetary order, the greater is the incentive of the citizens of every country to get gold. As a safe and sure means of holding wealth, of avoiding the grasp of the tax collector, and of assuring the economic future of families, gold never has had a peer in the history of mankind. Those who would demonetize gold in order to facilitate their embezzlement of private wealth and maintain their positions of power in governments and central banks are following policies that must inevitably teach every intelligent citizen the usefulness of gold. The money-credit managers are defeating their own ends at a price that almost surely will include serious retrogression within Western civilization."


Aren't these remarks still valid today? I'll just leave you with my mantra:

You can take gold out of the standard, but you can't take the standard out of gold.

Interview with William Black re fraud in financial services

Just a short post today to point you to an interesting interview of William Black at American Institute for Economic Research on the topic of fraud in the financial services industry. He discusses techniques for prosecuting fraud and also the characteristics of your typical fraudster, including Madoff and how the SEC missed him.

Interview with William Black is linked at AIER.

Hyperinflation Not an Option, Say Some

Friday I attended a Symposium on hyperinflation at the American Institute for Economic Research. Participants were Thomas Glaessner of ICG at Citigroup, Peter Heller of the International Monetary Fund, Gerard Caprio, Professor of Economics at Williams College, and Joshua Rosner of Graham Fisher & Co.


[Thanks to Virginmedia.com for the image of Zimbabwe's 100-trillion dollar notes.]

Glaessner had much experience with the hyperinflations of Brazil and Argentina; Heller did also but from the angle of the IMF. Rosner gave his own analysis, and Caprio served as moderator.

Glaessner and Heller both felt that hyperinflation was only a remote possibility due to the strength of various factors within the U.S. They both expect inflation at some point, but think that the Fed will somehow pull it off. Glaessner pointed out that the EU was in no better shape, in fact was worse off, and that the euro was not a real competitor to the dollar.

Rosner was more pessimistic in that he felt the Fed had lost some credibility and that the underlying problems that got us where we are today have not yet been addressed. He had predicted our current trouble well before it began, but no one would take him seriously. He now expects another strong deflationary downturn before things get better but also thinks inflation is a distinct possibility once the next downward swing has had a chance to run itself out. After questioning, he did agree that there existed a possibility that there might be a flight from the dollar. They all agreed that China might just find another medium of exchange with some of its trading partners.

Rosner pointed out that the securitization market had become the principal avenue of financing over the last dozen or so years, and he thinks that the recovery will depend upon the revival of this market, because the banks must accumulate capital and are not in a position to take back that function. They all agreed that the reforms of the OTC marketplace will be helpful if they are done correctly (and useless if done incorrectly), and the major OTC market participants are very active currently in trying to see that it is done well.

Gold was only mentioned in passing and time ran out before I could bring it up, which is a pity. I'd have liked to ask whether they thought there might be some more action. In my view, this deflationary cycle is the result of the previous inflationary cycle, and trying to buck the trend to preserve the price level is not going to solve the problem, but in fact make it worse. Judging from past idiotic government attempts to do so, such frontal conflict with deflationary momentum always ends in distortions, and I don't see why this time will be any different.

What does this mean? It means that the deflation will continue until the market finds its sea legs again, but because the underlying problem hasn't been solved, the market will not get those legs until the toxic cancer has been cut out and the financing channels are reestablished. When that will be is anyone's guess.

Meantime, government meddling with interest rates, the dollar, spending, and credit will backfire as usual. The interesting part will be to observe what happens this time. The country and the world might just not accept another inflationary spiral as they did in the 1950s, the 1960s, the 1970s, the 1990s, and the 2000s. Then again, I suppose there is a chance they will.

Rosner argued that there were too many debtors in the country who would all be quite happy with inflating their debt away. But I argue that this only works when wages rise, and I don't think businesses will let wages rise this time, all the more because unemployment doesn't look like it'll moderate any time soon and it'll be an employers' market (except on Wall Street). Non-banking business is getting too savvy about inflation. Rather than pass through any profits to labor, the extra cash will flow back to speculating (as it has already started to do), and we'll get even more disequilibrium between Main Street and Wall Street. (Seen those bonuses?)

We are in a 1929 situation with 2009 tools and a 2009 government mindset, but also with a 2009 public and business mindset. Whatever we get, whether it be deflation, inflation, or a mix of the two with or without hyperinflation, this is going to be interesting.

Quick Speculative Thoughts about Possible Future Trends

In reading the daily commentary of the American Institute for Economic Research for April 29, 2009, my speculative little crystal ball began to light up. AIER is the only serious business cycle analyst group that points out reality, and reality is that contraction is everywhere in the stats, in spite of the recent "good news" in the stock market. (Desperate exuberance, anyone?)

So let's think it over.

We all agree that the government and the Federal Reserve think they are doing their best to prevent a deflationary spiral, to un-freeze credit, and to save major industry players from precipitating us all into a deep depression. Money supply creation is high, and we can see that the Fed's balance sheet has never been in a more inflated state.

According to some signs, these policies seem on the surface to be taking effect. Sales of existing homes are turning around, and the stock market is maintaining its rally. Meanwhile, the money supply is expanding by an annual 8.1 percent, while at the same time the CPI is stable or falling.

If past experience is any indication, it would seem logical that we are headed for an arrest--and perhaps even a reversal--of price deflation; and if the money creation continues unabated, as would seem inevitable given current Fed policy and the expansionary will of the administration, inflation should be the outcome. Some are even talking about hyperinflation.

But I have a slightly different crystal-ball image (which could of course change tomorrow). Keeping in mind that this is just a game, and that no one's fortune telling is better than anyone else's, just for fun I thought I'd throw this out on a rainy Sunday afternoon.


[Thanks to Crystal-cure.com for the photo.]

Hyperinflation is not in my crystal image. This is not post-WWI Germany or Zimbabwe, in spite of the way things look. What is the reason? It's certainly not because there is no monetary excess going on; it's because, unlike the world of speculative finance, a good part of American industry is too savvy to get caught up in the exuberance.

In fact, American industry has been savvy for a long time, at least one century or more. In pre-1929, over-issued money supply did not all pour into consumers' hands, where it must be before it can create hyperinflation. In the decade leading up to 1929, prices were relatively stable, yet money supply grew. Where did it all go? It flowed into the stock market, for one, which experienced a huge run-up that subsequently burst and started a cyclical downturn.

Why didn't the country experience general price inflation? Economists speak of nominal inflation versus real inflation. Nominal inflation can remain low or non-existent, even as real inflation grows. Prices are stable, whereas they should be falling. This is what happened in the 1920s. And American industry knew this, while the Fed governors pretended not to (or were too inexperienced to realize it).

Later, during the long inflationary run of the second half of the 20th century, industrial market players and their public adjusted to chronic price increases. It's similar to what we do as we grow older (if not wiser): We get used to living with low-grade arthritis pain. This chronic inflating, however, culminated in another stock run-up and the acute crisis of the 1970s, which some say was deeper than that of the 1930s in real terms.

But we got over it and it didn't take too long to get back to our arthritic monetary ways during the 1990s, helped by urgencies in the savings bank industry and in the commercial banking industry's politically motivated foreign investments. This time, the inflationary run popped in 2000 and 2001, having inspired another stock market bubble. By now, we were so good at putting up with pain that we returned immediately to our bad habits, creating the real estate and credit-speculation bubbles that have dropped us to where we are today.

Instead of taking our medicine once and for all, we're off to the races again. Today's crystal ball tells me that we will get a renewed stock market mini-hyperbubble, along with a government stimulus maxi-bubble targeted to specific groups of rent-seekers (special interest groups like financiers, government workers and programs, construction conglomerates, unions, and the like). While this is going on, general prices will remain fairly stable, and banks and investment houses will go right back to their speculative games. Gold and commodities may go through a mini-hyperbubble as well.

But the business cycle really wants to contract. This time, the arthritic pain is too acute. Look at the stats at AIER. It's possible that real industrial GDP may not progress, even though government stimulus money may creep in, pushing up the digits for a while. But keep in mind that government stimulus must be paid back by future capital, depriving us in the coming years of investment in real industrial GDP. The figures will mislead us all. But American industry knows this.

So to conclude, we could get some short-lived hyperbubbles in the stock market and commodities, but they might deflate and run out of exuberance for a while. The maxi-stimulus fake bubble will run out of public support for sure. GDP will eventually dive again and will become chronic stagflation as the increasingly impotent government and Fed blow stimuli through the system like air bubbles in a fish tank. Most of the new air will dissipate through short-lived financial speculation. (Japan, anyone?)

Keep in mind that, having exposed my insights to you today, I'll probably rethink this whole crystal vision by my next blog. But if the deflationary business cycle fights back and ultimately wins this contest between it and our desperate government and Fed efforts, expect bubbly stagnation for a good while, until industry decides it's time to make a come-back. Then we'll probably get the inflation we've been fearing.

The Inflation Boat Is Leaving the Dock

Last night we learned that the Federal Reserve is going to put into practice its announced plan to buy US government debt. Today's Financial Times article by Krishna Guha gives the gory details.

Everyone knows that this action by the Fed increases money supply, and most are aware that it increases the probability that at some point in the future the amount of money created will be excessive with regard to the actual needs of the marketplace, which in turn will tend to lead us towards a state of price inflation, or bubble inflation. Another article by Javier Blas on the early signs of this in the commodities markets is a fun read on the subject.

As the Fed sees the problem, then, they must feed us with money supply while the banks are frozen in a state of rigor vivus, and then in future, just at the right moment, they will take steps to prevent the normal outcome of price or bubble inflation by reversing the process.


[Thanks to 1stchoicecufflinks.com for the nice photo.]

This sounds logical. As an obscure economist named Edward C. Harwood wrote during our last episode of purposefully inflationary Federal Reserve intervention ("the ill-fated Operation Twist in the 1960s"), during a time when we were still trying to adhere to a modified form of the global gold standard:

"Once inflationary purchasing media have been placed in circulation, there are two ways in which sound money-credit relationships may be restored: (1) by means of devaluation, that is, reducing the gold weight of the monetary unit so much that the increase in the number of (smaller) gold dollars equals or exceeds what had been the inflationary portion of total purchasing media; or (2) by means of deflation, that is by removing inflationary purchasing media from circulation." [See this article from the American Institute for Economic Research website [AIER.]

Let's take these in order. In the 1960s during the last years of the gold standard era, the word "devaluation" had by definition a specific political action attached to it. We could say it was an official public confession to a previously committed inflationary crime, the central bank's admission of guilt and acceptance of their incapacity to rectify the situation. To devalue a currency was ripe with ominous significance, and central banks were supposed to take pains to avoid the embarrassment by not inflating the currency in the first place.

Today, however, the devaluation of our currency takes place painlessly for most of us (except for importers), and effectively the Fed gets away with it on a regular basis. In fact, without a gold or any kind of standard, the inflationary purchases of debt instruments that the Fed has already made, plus those it intends now to make, are already devaluing the dollar as I write. We don't have to wait for an official recognition and adjustment of any standard; it just happens on a day-to-day basis.

Under these circumstances, an official announcement of devaluation, therefore, will have no corrective effect. Quite the contrary, inflation will take place simultaneously with the devaluation of the dollar--a double whammy, if you will.

But we don't want prices to skyrocket, so the inflation will still need correction. Let's turn to the other option, deflation. Paradoxically, the Fed is taking its present inflationary action to fight fear of deflation. They are afraid that a banking panic and a lack of credit could cause the system to collapse in what is called a "deflationary spiral." So it will be a while before they feel comfortable with using the deflationary tactic.

Nevertheless, the Fed scientists and governors do believe that it will be possible for them, at some appropriate moment in the future, to begin a controlled deflation of money supply that will not upset the apple cart.

Harwood does write this about the possibility of a controlled deflation:

"That a period of gradually declining prices can be a period also of great economic growth has been amply demonstrated in the past. For example, between 1875 and 1895 while prices decreased substantially, the Nation's productive capacity and output of goods and services increased at a very rapid rate. The often heard assertion that an economy cannot grow unless prices are rising has no basis in fact....

"With gradual deflation, a longer time would be required to eliminate all inflationary purchasing media and reach an equilibrium between the remaining (noninflationary) purchasing media and prices and wages, but the traumatic events that are a feature of rapid deflation would not occur. The Nation would 'outgrow' the inflationary condition as part of the savings of individuals, businesses, and perhaps of the Government were used to pay off inflationary bank loans and thereby cancel both the loans and the checking deposits that the loans had created. Although gradual deflation would be accompanied by decreasing prices, wages almost certainly would decline less or might even be sustained by greater productivity due to technological and other developments."

(For more on why deflation is not always bad thing, read this research by David Beckworth at Cato.)

So it would seem that a gradual well-timed deflation is what Bernanke and his cohorts are counting on. But... there are a few minefields here. One is that we are no longer on a gold standard. We have no point of reference as to where the dollar should end up. I won't go into the reasons why this makes Bernanke's task more difficult, but it does.

Second, how will we know when prices begin to inflate or when bubbles start to form? Alan Greenspan is famous for having remarked that it is impossible to detect when a bubble is appearing. It's true that we all knew the real estate mania was a bubble (or at least I did; didn't you?), but our financial wonks at the Fed either preferred not to recognize it or couldn't prove it to their own satisfaction, at least not to a point where it would have forced them to take action. (I'd add that they may have had incentives not to want to find reasons to take that action, but that would be unfair speculation, so I won't.)

And what if prices remain the same? Does this necessarily mean that we don't have an inflationary maladjustment in the money supply that maintains prices at an artificially stable but too high level? What if the stimulus package spending turns out to be wasteful to some significant degree? Isn't that like blowing bubbles? Example: Bailout-funded Wall Street bonuses.

Third, and here's the real rub, we have not practiced what Harwood calls "sound money-credit principles" since the Fed was created. These principles mandate a specific equilibrium in the commercial banking system between true reserves, deposits, savings, and short-term commercial paper on the one hand; and loans and investments that are speculative and/or based only on some form of collateral, on the other, where these more risky activities would be allowed only outside the strict commercial banking system. (For more on sound commercial banking, find a copy of Harwood's book "Cause and Control of the Business Cycle," 1974 edition, at your local library, or in the AIER catalog. I will delve into the idea of sound money-credit banking in a future blog.)

Fourth, the Fed cannot reverse its current trajectory and start to take deflationary action until the time is right and the worst of the credit crisis is past. Will nothing unexpected disturb their plans? They are relying on deflationary scenario computer models where "all else is equal," meaning when outside factors remain stable. What if the market does something surprising that will make a controlled deflation either inadvisable or even impossible, at the very moment when it must happen? For example, US treasury bonds could become radically less popular among our foreign buyers as a result of the dollar devaluation the inflation will cause; and as nations all over the world scramble to inflate their own currencies, we may find that we have a lot of competition in the bond market.

Personally, I'm betting (and I disclose that I have put a little money where my mouth is by investing in gold-related products) that the Fed will be hard-put to time and measure the controlled deflation.

Why gold? Because, as I've said many times: You can take gold out of the standard, but you can't take the standard out of gold.

Resuscitating Keynes: Oh No, Not Again

Dr. John Maynard Keynes must get tired of being dug up over and over again by economists looking for a mentor in times of crisis.


[Thanks to "Return of the Living Dead" for the image.]

I must say, his mistaken formulas sure do have staying power.

Dr. Martin Wolf, writing today in the Financial Times, goes digging again; but it's useless. Why? Because we are not all Keynesians now, even if a US president and Milton Friedman once said we were, probably in a moment of frustration.

In fact, the opposite is true: Keynes's unfounded notions of pushing on a string will subject us all to its deleterious effects today, just it did our ancestors back in the 1930s.

Bailouts, debt financing, government spending, inflating the money supply to save debtors and attempt the futility of restoring failing demand--all have been tried, and all have done much more harm than good.

No, Dr. Keynes did not teach us the following "three broad lessons" in spite of what Dr. Wolf says:

Non-Lesson No. 1

"... [Keynes believed] we should not take the pretensions of financiers seriously. ... Not for him, then, was the notion of 'efficient markets.'"

This is a non sequitur if I've ever seen one. Keynes may have been cynical about bankers; but I bet he'd love to rise from the dead to confirm that he always believed in efficient markets. Where does Wolf get the connection?

Non-Lesson No. 2

"The economy cannot be analysed in the same way as an individual business. For an individual company, it makes sense to cut costs. If the world tries to do so, it will merely shrink demand. An individual may not spend all his income. But the world must do so."

Wolf talks of "the world" as if we were all parts of one entity acting in concert. In fact, each nation is acting as an individual; and each nation's government should act as an individual, i.e. should cut costs, indeed must cut costs when the money is no longer there to pay for them.

A government can only spend money it doesn't have in three ways: borrow it, confiscate it through taxes, or create it. Because we are already a debtor nation we should not do the first; the second will exacerbate the current shortage of discretionary income; and the third will eventually cause the dollar to collapse, thereby leading up to the confiscation of all dollar-holders' purchasing power--not something to do when foreigners hold a good chunk of your debt.

Of course demand is shrinking. You may not have noticed, but the bubble has burst. The demand we once had was a mirage. And you can't revive a nation's economic demand by stuffing it with borrowed or artificial money like the foie gras of some goose--or rather, you can, but it won't work because this goose is dead. You'll get nothing to show for your efforts except a bag of ruffled feathers.

And Dr. Wolf is forgetting that it is not for lack of will that we or our governments cannot "spend all our income." It is the "income" that simply isn't there, unless we attempt to fabricate it out of more monetary helium, which is how we got the bubble in the first place. (See my article, plus page 2 and 3 linked on my blog, for my view on how this happened.)

Non-Lesson No. 3

Now, this is the one that really gets my blood boiling, so I'm going to have to breathe deeply as I punch my keyboard.

"In the 1930s, two opposing ideological visions were on offer: the Austrian; and the socialist. The Austrians--Ludwig von Mises and Friedrich von Hayek--argued that a purging of the excesses of the 1920s was required. Socialists argued that socialism needed to replace failed capitalism, outright. These views were grounded in alternative secular religions [my italics]: the former in the view that individual self-seeking behaviour guaranteed a stable economic order; the latter in the idea that the identical motivation could lead only to exploitation, instability and crisis."

I don't have enough room here to analyze the error in Wolf's statements about the Austrians, but I'll say that the Austrian view of the 1920s is shared by more than one empiricist. I'll just name one: Edward C. Harwood of the American Institute for Economic Research.

To call the Austrians a "secular religion" may have a scrap of truth to it; but that doesn't mean they are wrong about their analysis of the 1920s. Dr. Wolf's criticism is more a statement about their description of their own methodology, rather than their theories; and in fact, the Austrians are quite empirical in their methodology in spite of themselves.

Even if they weren't, the Doctor mustn't throw out the baby.

More erroneous statements

Both Wolf and Keynes continue to err with the following affirmations:

- "[Keynes recognized] that the minimum state was unacceptable to a democratic society with an organised economy." Nothing could be further from the truth. Such a minimum state is unacceptable only to those who claim humans have the capability of organizing such a society's economy, which we can't, to wit our present mess.

- "Keynes would have insisted that ... [m]arkets are neither infallible nor dispensable. ... [T]hey can also go seriously awry and so must be managed with care." Keynes may indeed have so insisted; but no one has yet proven that humans can manage markets, in fact quite the contrary; the more we try to macromanage them, the more markets rebel.

- "The election of Mr. Obama surely reflects a desire for just such pragmatism." The election reflects no such thing. It reflects a slight majority's secular-religious belief in the spread-the-wealth Obama-Messiah, and/or shows an aversion to Bush and anyone like him.

- "The shorter-term challenge is to sustain aggregate demand, as Keynes would have recommended." You cannot sustain what doesn't exist. You can try to recreate it; but you will fail, just as Roosevelt did back in the 1930s. (See "pushing the string," above.) Roosevelt, with Keynes's encouragement, began the monetary inflating that is the scourge of the fiat-money 20th Century.

- "Also important will be direct central-bank finance of borrowers." This is a good way to transfer solvency problems from the private sector to the taxpayer; nothing more, nothing less.

- "A debt-for-equity swap is surely going to be necessary." Bailouts for special interests; nothing more, nothing less--and one of those special interests is politicians themselves, because it reinforces the electorate's belief in the politicians' capacity to "do something about it."

And on and on the good Doctor goes, making one Keynesian mistake after another.

Wolf finishes with a most sappy and hubristic "We must do better. We can do so, provided we approach the task in a spirit of humility and pragmatism, shorn of ideological blinkers."

Oh, gag me with a spoon. Who is the secular-religious one now?

Keynesian economists lack an understanding of simple market dynamics, and of how far the world has distanced itself from them. To blame the free market for 1929 or for our current turmoil is like blaming a train wreck on the train itself, instead of on the inebriated engineer.

Yes Virginia, The Big Recessions and Depressions ARE the Same

Here we go again. Although every recession is unique in the details, this one and those the country has experienced since the 1800s have at least one fundamental underlying similarity: The boom that preceded them.


[Thanks to Themeparks.about.com for this image of Tatsu, a new ride at Magic Mountain.]

Let’s compare what is happening today to what happened during the Great Depression. In the 1920s after World War I inflating of the currency, Florida underwent a damaging real estate boom and bust cycle. Florida’s experience was so violent that one contemporary economist in 1928 called it "the Florida gamble."

"When Florida land first started its upward course there were good substantial reasons for advancing prices ... [but] advancing prices drew those individuals who were speculatively inclined as molasses draws flies. ... Large building projects gave an appearance of substance and worth to the whole affair. In 1924, pessimists were nearly all united that the Florida boom must soon end. But the mass of people, than whom there are no greater gamblers, had Florida fever. ... Then the bubble broke, as they always have and always will. In the wake of the boom followed disaster, defunct banks, and depression."


Hmm. Real estate bubble. Sounds familiar.


In 1925 through 1928 as the Florida gamble unwound, the concomitant US stock market boom was showing foreboding signs of euphoria. The article continues:

"The [stock market] boom has not collapsed, and, from all appearances, is stronger than it has been for some time. That seeming invulnerability and capacity for unlimited progress is a market feature of all such speculative periods as they near an end. It is to be hoped that the Florida bubble will not be completely paralleled [in the stock market]. Banks all over the country have entered on a new experiment in the past few years, the practice of loaning large amounts against securities [italics added]. [Also sound familiar?] A collapse in the stock market would make thousands of banks unwilling investors, very much as the Florida banks found themselves in the real estate business after 1925. Such an experience, with the inevitable blood-letting at the hands of receivers for the least fortunate, would be a blow to our progress that would force upon the country many months of painful convalescence." [Quote from an unpublished paper, "Stock Speculation Versus Florida Memories," E.C. Harwood, 1928.]

As we now know, the Florida real estate bust of 1925 was followed by the stock market crash months after Harwood wrote this prescient article.


Hmmm. Stock market bubble. Again, sounds familiar.

Between 1800 and 2008, Americans have experienced boom and bust cycles; yet economists as a class are known for their disagreement about the cause, with two notable exceptions.

One is the Austrian school of economists, scholars like Von Mises and Hayek, to whom our attention seems to turn cyclically after every recession, but of whom we tend to lose sight as soon as we get another taste of easy credit. They've been warning about credit imbalances and poor banking practices for over a century.

A more scientific thinker, this time from among the empirical economists, is the author of the articles noted above. Through extensive study of banking statistics, Harwood concluded that markets in general, and international markets in particular, work best when unhampered; but that they can only function well when the trading medium is staid. Like the Austrians, he concluded that fluctuating fiat currencies and/or poor banking standards are a catalyst for excessive credit creation, resulting in speculative boom/bust cycles. Using his analysis, he predicted the 1929 crash as evidenced in his articles published in The Annalist of 1928 and early and mid-1929. He also predicted the devaluation and flight from the dollar of the 1970s.

Furthermore, he maintained that the world would continue to suffer damaging speculative peaks and crashes until voters realize that it is our incompetent monetary policymakers who create them. Legislators must acquire enough humility to admit that human agents cannot micromanage the quantity of money—a failing even Milton Friedman feared—and that government’s only role should be to support the natural money-creation process through the establishment and maintenance of sound banking principles and of some form of currency measuring stick.

Both Harwood and the Austrians believe that, to date, the only such device that has succeeded for any length of time is the gold standard in one form or another. The duty of our economic wizards is to find the version of it that fits today’s parameters.

What are the chances our present or future administration will see fit to look for this solution? About zero. Expect more rides in the future.

See more about Edward C. Harwood at the American Institute for Economic Research.

Talk About A Gold Standard? Naaahhhh.....

Oh yes there is.


[Thanks to www.babycup.com for this photo of a 14 carat gold cup.]

My friend Walker Todd, former collaborator at the Federal Reserve Banks of New York and Cleveland and now a researcher at the American Institute for Economic Research is talking about it loud and clear.

Read his piece at the Christian Science Monitor.

I mentioned another gold standard proponent Larry H. White in the past, and I write a lot about the gold standard and also here, and you'll remember my mantra:

"You can take gold out of the standard, but you can't take the standard out of gold."

I really believe it.

Too bad there's little chance of it happening.

Where's a Good Economist When You Need Him?

Since 1929 and up to this moment, well-known economists have yet to come to a truly useful explanation of how and why the Great Depression happened. Modern economic researchers would all agree, I think, that all they have produced so far is a number of inconclusive conjectures.

I personally believe that a few lesser-known economists did actually get it right, with little variance among them. Among these the one whose name is most familiar to me is Edward C. Harwood of the American Institute for Economic Research. (See his book Cause and Control of the Business Cycle and the monologue-booklet Keynes vs. Harwood by Professor Jagdish Mehra, available at AIER.)



The fact that so few have taken Harwood's ideas seriously is unfortunate, because as I look through his research today I find it irreproachable. The closest he came to valid criticism was the comment that his statistical series did not prove cause and effect any more than any other coincidental movements would. The response to this is twofold:

- Okay, but in order to disprove the theory, you have to prove that this specific cause did not or could not perpetrate the effect, or that something else did (and for you methodology students, his theory is falsifiable, unlike the non-existence of green swans); and

- Harwood's pesky little theory has the annoying habit of correctly predicting all of the recessions since 1929 up to Harwood's demise in 1980, and even thereafter up to today's latest fiasco. (It did give a couple of false positives; but that's statistically acceptable, given that government actions or economic events can forestall busts temporarily.)

The economic phenomena present in today's credit crunch are strikingly similar to those of 1929; and Harwood's theory seems to fit once more. His Institute has been warning of a recession for several months now, and it looks like they're going to "get their wish," even though the marketplace has resisted up to now with less efficacious wishful thinking.

If I understand Harwood's theory correctly, the basic tenets are that two misalignments caused 1929 (and in fact equivalent ones have caused every boom/recession cycle since then):

1. After the First World War, the government purposely inflated the money supply so as to finance the war effort. Instead of allowing that supply to deflate back to gold-standard measures, they chose to allow it to continue. Excess purchasing media therefore circulated throughout the next decade, creating the boom cycle that ended with the 1929 bust.

2. Related to the above-mentioned inflationary actions of the government were the slipping banking standards of the times. Banks had begun to expand credit at an unhealthy rate, as follows:

Harwood believed in what he called "sound commercial banking," whereby banks would operate on a 20 percent or higher fractional reserve system under a federally-defined gold standard, and their functions would be divided into two distinct operations: Commercial operations, and savings & loan operations.

Commercial banks should only function as creators of credit to the extent that they had checking accounts, capital, and commercial paper (real bills) representing goods coming to market within three to four months.

Savings & loans, on the other hand, should only give as much credit (i.e. acquire investment-type assets) as they had deposits and capital (savings-type liabilities). These two quantities should remain in constant balance.

But as it happened in the 1920s, banks' accounts became unbalanced. They had begun to create credit on the basis of things other than those stated above, i.e. upon real estate, stocks and bonds, and other unsound collateral, taking on too much risk. (Sound familiar?)

This excess credit manifested itself as excessive money supply, the proverbial "too much money chasing too few goods." Harwood went to the trouble of calculating the extent of this money-supply overextension, calling the results his Harwood Index of Inflating. He used this Index to predict the coming bust, as witnessed in the 1928 and mid-1929 articles he wrote for the New York Times's weekly journal called The Annalist and other papers of the day. The crisis hit in October 1929.

He went on to use that index and his research to predict just about every single recession and inflationary episode in 20th Century monetary history, up until his death in 1980.

What a pity no one has bothered to dig up this valuable research and vet it through application of modern economic expertise--although one wonders just how much expertise there is, given the mess we're in. (As I've noted before, lots of people knew this mess was coming, most notably the BIS, or Bank for International Settlements, a collection of central bankers; but it has taken them eight years to draw up some ideas of how to impose new banking rules to lessen the dangers--six years too many.)

What a loss that we don't still have Harwood around today, bellowing warnings from the rooftop of his Institute and allowing us all to take protective measures to preserve our purchasing power in the scary months ahead.

(For more on Edward C. Harwood, see my posts starting back in the beginning of this blog in March 2005.)

First Silver, Now Gold Is Being Rationed

I noted an article about a shortage of silver at this previous post.

Today, we have this article at Bloomberg about a shortage of gold coins.


[Thanks to Newworldeconomics.com for the photo.]

This is getting tiresome, but I have to repeat:

You can take gold out of the standard, but you can't take the standard out of gold.

And the world knows it, even if much of the West has forgotten this axiom.

Who placed that huge order from a Swiss bank for Krugerrands? Wouldn't you like to know. Probably some Russian with lots of $100 bills to unload. Or maybe Iran. Or maybe an American! Why not.

Reminds me of the old days, back in the 1960s when my father Edward C. Harwood was investigating ways for investment advisers to suggest to Americans how to hold an interest in gold, when American law forbid direct possession. Yes, my friends, it used to be illegal to hold gold.

He found a way or two, and those investment advisers whose customers took advantage of them were able to preserve the value of their hard-earned savings.

Governments may some day again try to outlaw the holding of gold, under some pretence like "It constitutes hoarding and it's doing harm to our monetary system." The truth is that a panic that causes people to hoard gold is a sign that the monetary authorities (with the complicity of the bankers who should know better, I might add) have mismanaged the monetary system.

Unfortunately, any such immoral effort to outlaw gold would, of course, appease the envy and wrath of those voters who don't understand what their legislators have done to deprive them of their standard of living. (For a better understanding of how this works, please go back to my first posts and read forward.)

My father was a most interesting fellow. I knew this already; but I am presently archiving his papers with a view to doing some kind of book on him. (You'll find information about him in my earlier posts as well.) He was an economist and founder of the American Institute for Economic Research; but he was also one of an endangered species: A true patriot, i.e. someone who is willing to put his life and livelihood on the line for his fellow countrymen and women.

More on him as time progresses. Meantime, don't sell your gold yet. The dollar may be seeming to make a comeback; but it's only relative to other currencies. The reality is that those currencies are doing even less well than the dollar. What's left? You guessed it.

Anna Schwartz, Still Feisty

I noted the bowed gray head across the library at the American Institute for Economic Research. She was to give a talk to visiting students and fellows on the evolving role of the Federal Reserve.


[Thanks to NBER.org for the image.]

Siding up to her chair, I put a soft hand on her shoulder and she lifted her attention from the Financial Times. I had to repeat my introduction--her hearing isn't what it once was. But as soon as she got the words, a bright smile lit up her face.

I didn't want to tire her before her upcoming effort, so I left her to her collected thoughts. She seemed too tiny to stand up to the demands of improvised talking and questioning, and someone warned me that she would probably simply read a recent paper. So I prepared myself to be a little uncomfortable listening to something I had already read.

Twenty minutes later, I was listening to the booming clear thunder of her voice as she laid on thick her criticism of the Fed's lack of moral backbone (my words--she is much more diplomatic).

Walker Todd, co-writer with Dr. Schwartz of an upcoming article about the legal and economic significance of the Fed's recent actions, would ask a leading question of her, and this uncanny out-of-body voice just took over.

This woman's mind is still as sharp as it ever was. She updates her stats and info daily and--better yet--retains them, analyzes them, and puts them to good use. She is 93 years old.

Even at this advanced age, she'd make a great Fed chairman.

She got her Masters in economics at Columbia, age 19. What a phenomenon.

See this article for her position.

As soon as her new co-authored paper is available, I'll link to it.

Global Warming as Religion

Today, I fell upon this great commentary at the website of the American Institute for Economic Research.

AIER has recently had a conference on Global Warming that scientists and philosophers from all sides attended. You can hear a few podcasts of speeches at this page of their website.

This particular commentary discusses the religious aspects of environmentalism. Boy, do they hit that particular nail where it hurts.


[Thanks to Islamfrominside.com for the image.]

Isn't it true that today's greenies sound just like the religious fanatics they so despise. And aren't those businesses laughable that are kowtowing to them.

I read this article about a huge French supermarket chain named LeClerc that is now publishing the "carbon equivalent value" of items for sale right next to the article's price.

Sounds like having a priest watch every bite you eat at the dinner table.

A young secretary leaving the cash register is informed by her receipt that she has incurred a "carbo equivalent value" of 9.28. She asks herself. guilt-ridden: "Could it be the yogurt containers? Or perhaps it's the transport costs of my imported fruits."

The company has calculated this "value" by estimating the carbon emissions caused by packaging production, transportation, refrigeration, stockage, sales, and discarded by-products.

They probably forgot to include the wasted human effort: It costs 50,000 euros to calculate the carbon impact on one product, making 300,000 euros for 20,000 products.

LeClerc pays only 150,000 euros, because the rest is financed by ADEME ("Agence de l'Environnement et de la Maitrise de l'Energie," or Agency for Environment and Energy Management, a governmental environmental organization) and by the local government of the particular region of France in which the store is located.

LeClerc probably includes their share in their marketing budget.

Some Good Economics Commentary Coming out of AIER

Many think tanks churn out pages and pages of commentary on a daily basis. Of course, the ones advocating "My Side" of the issue are doing a fine job, and those on the side of the "Enemy" are producing hogwash. (And for the most part I do believe that.)

The difference? The good ones are basing their research on at least a modicum of science. The bad are simply writing their propaganda and then finding the pseudoscientific justification for it.

But that's what this tug-of-war of ideas is all about, and may the best player win.


[Thanks to quiltersmuse.com for the image.]

One of the organizations founded on a model of scientific inquiry as opposed to nice-sounding nonsense is the American Institute for Economic Research established by Edward C. Harwood.

Since Harwood's death in 1980, the Institute has preserved the most important aspect of its identity: Its lack of bias and its reliance upon data and the evidence. If the figures to support an argument are not there, they will refrain from making the argument; and this takes a strength of discipline that many economists and thinkers in other fields do not possess.

The funds supporting the work they produce come from readers and from reader donations, not from any particular wealth source with an agenda, like so many of the tanks around, e.g. George Soros's Open Society Institute, or the Pew Charitable Trusts.

AIER's present management has begun to bring their platform into the 21st century and now maintains a rapidly improving website, adding just recently a daily commentary column like this one about the true stats on American manufacturing and jobs in the manufacturing sector. You might be surprised by the conclusion to which the unbiased evidence points.

Add them to your daily read. The RSS feed is hidden here, top left corner.

It's Time to Reconfigure the Fed's Modus Operandi

Our central banking network, called the Federal Reserve System, has several functions one of which is coordinating overnight exchanges between banks around the country and insuring a smooth flow of banking transactions in general. The Fed regulators are also responsible for the oversight of some bank operations (although some have accused them of laxity in this regard).

The job should stop here, but unfortunately there's more. A third thing the Fed does--or at least is supposed to do--is maintain just the right amount of purchasing media in circulation to support the economy's needs, nothing more and nothing less.

The centralized maintenance of the money supply is a superhuman task. Some economists believe that it could be much better performed by a private banking system. (For more on this idea, see Breaking the Banks: Central Banking Problems and Free Banking Solutions, published at the American Institute for Economic Research.)

But there's even more to their job. According to the Federal Reserve Board's Congressional mandate, they are also required "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." (Source.)

That's like handing over to your local supermarket manager the responsibility for maintaining the stability of your job, your salary, the purchasing power of your money, your available credit, and the supply and demand of everything you buy.

Economists are not in agreement regarding the feasibility of centralized control of the money supply, never mind of accomplishing this Congressional mandate, i.e. whether the status of the economic science is competent to allow any person(s) to undertake such responsibilities. The Fed has had to utilize existing "scientific" tools that are of necessity inadequate to achieve these goals, even by their own admission.

Federal Reserve Chairman Ben Bernanke said, in November of last year, "because our knowledge of the structure of the economy is incomplete and future economic disturbances are often unforeseeable, economic forecasting is a highly uncertain enterprise. The only economic forecast in which I have complete confidence is that the economy will not evolve along the precise path implied by our projections." I applaud his openness, revealing courage and humility, two qualities that some former Chairmen have not possessed.

I am not alone in my evaluation of the Fed's incapacity to fulfill its duty. To quote just one other skeptic, here is what economist Milton Friedman has said about this subject:

"Any system which gives so much power and so much discretion to a few men that mistakes--excusable or not--can have such far-reaching effects is a bad system.... Mistakes, excusable or not, cannot be avoided in a system which disperses responsibility yet gives a few men great power, and which thereby makes important policy actions highly dependent on accidents of personality.... [M]oney is much too serious a matter to be left to the Central Bankers." (From Capitalism and Freedom.)

When you read Wall Street news tickers like this one from the bond markets, you get a sense of how much the economy's short- and medium-term well-being is dependent upon the Fed. Before making any decisions, stock market players and industry leaders all look to the Fed to see what their next move will be.

Why are the Fed movements so important? Because the use by our central bankers of exceptional powers to affect the supply of purchasing media, and the credit that goes with it, creates an uncertain playing field in which players can no longer make long-term plans. Instead, they must become Fed-watchers.

In other words, our vital economic equilibrium no longer depends upon predictable market parameters but rather upon what the central bankers do--even what the individual members say. One wrong word or action can literally make or break an economy, or at least that's what the Fed-watchers believe.

Friedrich Von Hayek, another great economist, once said in The Road to Serfdom, "If the individuals are to be able to use their knowledge effectively in making plans, they must be able to predict actions of the state which may affect their plans."

Our money managers might do better to replace themselves by a computer, as Friedman himself once remarked only half in jest. Scientists like John B. Taylor have searched for a computer-like formula that might aid the Fed in managing the stock of money. It's possible that a solid rule like his Taylor Rule would furnish much better results than allowing central bankers the discretion to move economic parameters as they see fit.

Even if such a rule would not be perfect (perfection doesn't exist), surely predictability is better than hunch, no matter how educated.

As for what the central bankers think about this idea, here's an excerpt of a speech by Fed Governor Mishkin:

"Monetary policy will [...] never become as boring as dentistry. Monetary policy will always have elements of art as well as science. (That is good news because it will keep life interesting for monetary economists like me.)" (Source.)

Maybe it's time to get rid of the artists and try the Taylor Rule. Even if it doesn't produce perfection, surely the market's renewed capacity to plan ahead would cure much that ills us today.

And if that doesn't work, we should go back to the gold standard or something like it, coupled with a private banking network where reputations count and sound commercial banking controls the money supply. (For more on this, see the chapter on commercial banking in Cause and Control of the Business Cycle by E.C. Harwood, published also by the American Institute for Economic Research.)

Five Speeches from the AIER Global Warming Conference

In my previous post, I mentioned a Global Warming Conference at the American Institute for Economic Research.

Here are links to five of the speeches that, so far, have been posted to YouTube:

Robert H. Nelson - Theological Aspects of Global Warming

Kenneth Green - Cap-And-Trade vs. Carbon Tax

Claudia Rosett - United Nations, Climate Change, and Money Trails

David Henderson - Government and Climate Change Issues

William M. Gray - Hurricanes Frequently Happen

Other speakers were:

Carl Wunsch
David Chapman
Richard Lindzen
Gordon Michaels
Robert Mendelsohn
Gilbert Metcalf
Peter Wilcoxen
Ross McKitrick
Edward Kane

And I may have missed a few.

You might say that a majority of these could be described as skeptics. I don't know if this is true, but if it is, I suspect the reason is that the believers don't see the worth in such scientific discussions, preferring instead to stir up more media frenzy. It's more efficacious, for sure, than some stodgy academic conference.


[Thanks to Newsbusters.org for the image.]

Global Warming: For Once, An Unbiased Evaluation

I don't know about you, but I'm really sick of reading vitriolic statements from one side or the other of this debate.

The Believers

The believers put across a convincing case, but a few admit that they are willing to deform the science in order to convince the unprofessional public.

You don't believe me? Here's what one "scientific" believer named Stephen Schneider said in the Detroit News in 1989:

"On the one hand, we are ethically bound to the scientific method, in effect promising to tell the truth, the whole truth, and nothing but [...] which means that we must include all the doubts, caveats, ifs, and buts. On the other hand, we are not just scientists, but human beings as well. And like most people we'd like to see the world a better place, which in this context translates into our working to reduce the risk of potentially disastrous climatic change. To do that we have to get some broad-based support, to capture the public's imagination. That, of course, entails getting loads of media coverage. So we have to offer up scary scenarios, make simplified, dramatic statements, and make little mention of any doubts we might have."

So much for the believers. And yes, I think most of them would fit into this category. Please be my guest to disagree.


[Thanks to Time Mag for this embarrassing, didactic, rush-to-judgment cover story of April 2006.]

The Skeptics

The skeptics, on the other hand, are media-impotent, i.e. they can't seem to get their message out there in such a way as to make an impact, even though their science is cleaner. I'm not saying they're right, but they're cleaner.

In the spirit of full disclosure, I'll admit I'm a skeptic, but I won't be intolerant of those who are believers--assuming they will return the favor.

What Should We Do?

If even the scientists can't seem to agree on this, then it would seem to be only fair to hold off judgment and action until we know more about the subject.

This is also the conclusion reached by a number of both believers and skeptics at a November 2007 conference at the American Institute for Economic Research.

The AIER is the only "think tank" I know that can honestly claim it is impartial. Most of the others, even places like Cato, have monied donors who are trying to get their point across, albeit a good point in many cases.

AIER has no such donors, relying instead on purchases of their newsletters and publications by the public, and on charitable trust income, the use of which the original donors purposely cannot predetermine.

AIER's recent 2/4/08 Research Reports summary of their November conference on Global Warming should be useful to all impartial thinkers. The article is entitled "Are We Frogs in a Pot," and was written by Michael Rizzo, Ph.D., one of the Institute's researchers.

The conclusion is apt:

"The range of views expressed at our conference suggests that the debate is far from being over, and that there is still time for much-needed rational discussion."

In other words, it is much too early in this scientific debate for governments to be involving themselves in trying to solve a problem that we understand very little about, indeed even whether there really is a problem.

A full run-down of the whole proceedings will come out later this year. Contact AIER for the publication date.

Sometimes we lay people get frustrated with the slow-motion speed of science and with scientists' constant need to "do further research," but it's either accept our human frailty or make huge mistakes that cost us much, much more in the longer run. The public execution of Italian astronomer Giordano Bruno in 1600 comes to mind.

So be impartial, allow others to disagree, and inform yourself. If you do that, you'll be way ahead of the politicians, scare-mongering media, and hysterical, unscientific "scientists" like Schneider.

Correct Predictors of 1929 Depression

My Dad, E.C. Harwood, is getting some long-overdue credit in this article by Gerald Jackson of Brookesnews.com for having predicted the 1929 depression, and for being one of the few who did.


[Thanks to AIER for the photo.]

Yes indeed, there still exist volumes containing the letters he wrote to various periodicals of the day, plus his exchanges with Keynes on the subject. Those interested in finding out more about this interesting economist should go to the site of the economic research organization he founded. I recommend also a booklet called "Keynes vs. Harwood--a Contribution to Current Debate" by Professor Jagdish Mehra, who was at Youngstown State University at the time (and perhaps still is). The book is available through their website.

Personal note: In Mr. Jackson's article, I learn for the first time of the existence of another organization back then, the Austrian Institute for Economic Research. I wonder if my Dad was inspired by this name to call his the American Institute for Economic Research. I wouldn't be surprised, because his views definitely coincide with some emanating from the Austrian School, and he was more than just a casual acquaintance of Professor Hayek.