Video: End the Fed Rally

Lloyd Sloan was one of the speakers at Saturday's End the Fed Rally in downtown St. Louis. From the YouTube description:

St. Louis, Missouri - Jeffersonian Whig Lloyd Sloan gives a speech on ending the Fed at the Federal Reserve downtown.

The Federal Reserve is at the heart of U.S. economic problems. They are responsible for the debasement of our currency, a large part of the economic collapse of 2008, manipulating markets, and extreme corruption making secret decisions to reward the few at the expense of you and me.

80% of the American people support auditing the Fed. Mitt Romney is CLUELESS - and Barack Obama's worst nightmare would be having to VETO an audit the fed bill!

The constitutional issue here in the United States goes all the way back to George Washington where Thomas Jefferson opposed the formation of a national bank on the grounds it was unconstitutional. That issue remained strong all the way up through Andrew Jackson. This issue of a central bank, of paper money, and inflation is as old as the country itself. And the progressives have won... until recently.

The Audit The Fed bill passed in the House of Representatives 3 to 1 and now it's in the Senate and they're trying to block a vote on it as we speak.

We can wait on Congress to get their act together, but there is a better way. A way that allows the people of the United States to have a direct influence over what laws are good and what ones should be struck down when our representatives don't want to act. It's called Madison's Lost Amendment and Lloyd talks about it in this video starting at around 11:11

Related articles

• Nationwide Protests to "End the Fed" This Weekend (washingtonsblog.com)
• Audit the Fed? (project-syndicate.org)
• Group protests at End the Fed Rally (wtvr.com)

Video from Saturday's End the Fed Rally

Thanks to kinoxxbb for the video above. Supporters of sound money gathered in downtown St. Louis to protest the Federal Reserve at the third annual End the Fed rally.

Ron Paul may have Oversight of the Federal Reserve

Earlier this week, The Wall Street Journal reported that Ron Paul may oversee the Fed in the new Congress:

One of the most exciting features of the new Congress is the prospect that the chairmanship of a House subcommittee that oversees the Federal Reserve will go to Ron Paul. Final assignments are still being worked out, and the leadership may yet shy away from giving the position to a congressman who doesn't believe the Fed should exist. But Dr. Paul, an obstetrician, has been the ranking Republican of the Domestic Monetary Policy and Technology subcommittee, and tradition suggests he will be the next chairman.

...

More far-reaching still is the prospect that Dr. Paul might use the committee to open up the deepest monetary issues, pressing for audits of America's gold holdings and of the Fed itself. At one point this week, the congressman's book, "End the Fed," ranked No. 2 on Amazon's list of the best-selling business books dealing with money and monetary policy, ahead of volumes by such luminaries of the right and left as Milton Friedman, George Soros and John Maynard Keynes himself.

Most exciting is the prospect that Dr. Paul will be able to bring into the national conversation such figures as, say, Edwin Vieira Jr., the visionary lawyer who has become the sage of the idea of constitutional money. That's a reference to the unit of account to which the Founders were referring when they twice used the word "dollars" in the Constitution, and which they codified in the Coinage Act of 1792 as 371¼ grains of pure silver, the same as in a then-ubiquitous coin known as the Spanish Milled Dollar, or its free-market equivalent in gold.

If Dr. Paul does accede to the chairmanship of the monetary subcommittee, he will, in but a few months, gavel it to order on the 40th anniversary of the summer in which President Nixon closed the gold window and brought an end to Bretton Woods. Yet a few weeks ago, former Fed Chairman Alan Greenspan himself, speaking at the Council on Foreign Relations, warned that "fiat money has no place to go but gold." Even the president of the World Bank, Robert Zoellick, has just called for restoring a role for gold in the monetary system.

The great debate is finally starting up again. Who better to host it in Congress than the diminutive doctor who, more faithfully than anyone else on the Hill, has for more than a generation stood for the idea of sound money?

That quote from Greenspan is interesting for two reasons. First, gold bugs think his tenure at the Fed was something of a disaster for monetary policy. And, second, Greenspan wrote a pro-gold essay back in the 60's.

You might want to show your support for Ron Paul or simply help get out the "audit the Fed" message this weekend. End the Fed rallies are being held across the county including one here in St. Louis.

End the Fed Rally this Saturday

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake‐up homeless on the continent their fathers conquered.

—Thomas Jefferson

Campaign for Liberty and End the Fed are organizing a protest this Saturday at the St. Louis Federal Reserve. The rally runs from 11AM to 2PM at One Federal Reserve Bank Plaza.

Bring your homemade signs! I have a feeling that quantitative easing (QE) will be a popular topic. If you're looking for inspiration for your sign  this video explaining QE is worth watching. I hope someone re-purposes the President's quote: "I do think at a certain point, you've made enough money."

Below is the flyer that I was sent.

Quantitative Easing Explained

Absolutely hilarious! There's some strong language so it's probably not appropriate for the homeschooling set.

At a Certain Point You've Made Enough Money

The day after the midterm elections, the Federal Reserve announced that it would begin a second round of quantitative easing: "the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month." Quantitative easing is a term that was recently created to replace the more familiar term printing money. Because the historical record of printing money is so grim, that term developed a negative connotation. Of course, printing money was coined specifically to replace the older jargon debasing the currency for largely the same reason. All three mean the same thing: the government is going to create money to pay its obligations and, in so doing, your money is going to become less valuable.

China doesn't like this. Germany doesn't like it which is important because they're the ones responsible for making the term printing money so unfashionable. Brazil, Thailand, and South Korea are also opposed.

In a different context, President Obama has said: "at a certain point, you've made enough money." In the context of this second round of quantitative easing, I want to know have we reached that point?

Global Borrowing Boom Hits Your Wallet

The Wall Street Journal is reporting on the Number of the Week: $10.2 Trillion in Global Borrowing:

As the debts of advanced countries rise to levels not seen since the aftermath of World War II, it’s hard to know how much is too much. But it’s easy to see that the risk of serious financial trouble is growing.

...

In the U.S., domestic investors could pick up the slack. The Federal Reserve has committed to buy an added $600 billion in U.S. government debt over the next eight months. Demand from households has been very strong as U.S. consumers boost their savings rate. Tighter regulations could push banks to buy more safe assets such as U.S. Treasurys.

Got that? If things get really bad, the government will force banks to buy bonds with your savings. The country is in the very best of hands.

The entire Western world has for voted itself a lifestyle it is not willing to pay for

Kevin Libin examines the connection that Mark Steyn makes between demographics and our economy:

For one, [Mark] believes [the] latest economic crisis represents “the first great demographic recession.” The scheme of Western nations to gorge on entitlement programs financed by debt to be paid for by children that, diminishing birth rates prove will not materialize, is rapidly unravelling.

“The entire Western world has for some time now voted itself a lifestyle it is not willing to pay for,” he says. The riots in Greece and France are the refusal of those societies to give up their freebies. In the United States, the interest payments on public debt borrowed from Beijing will in just five years be so large as to finance the entire budget of the Red Army which, it so happens, is becoming increasingly muscular in challenging American dominance in the Indian and Pacific oceans and the sea routes to the Middle East.

“This is the most ridiculous moment in global history where the dying empire is, in effect, funding the dominance of the would-be successor power.”

While I like Steyn's directness, I do take exception with him with respect to China. It's popular to bash China, but the fact is that they're no longer the main purchaser of our debt:

MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES
                                                 (in billions of dollars)
                                               HOLDINGS 1/ AT END OF PERIOD


                       Aug     Jul     Jun     May     Apr     Mar     Feb     Jan     Dec     Nov     Oct     Sep     Aug
Country               2010    2010    2010    2010    2010    2010    2010    2010    2009    2009    2009    2009    2009
                     ------  ------  ------  ------  ------  ------  ------  ------  ------  ------  ------  ------  ------

China, Mainland       868.4   846.7   843.7   867.7   900.2   895.2   877.5   889.0   894.8   929.0   938.3   938.3   936.5
Japan                 836.6   821.0   803.6   786.7   795.5   784.9   768.5   765.4   765.7   754.3   742.9   747.9   727.5
United Kingdom 2/     448.4   374.3   362.2   350.0   321.2   279.0   233.5   208.3   180.3   155.5   108.1   126.8   104.3

Follow the link above for information about other foreign holders of US bonds. The key points from the data above are that between Aug 2009 and Aug 2010:

1. China's holdings decreased by $68B
2. Japan's holdings increased by $109B
3. The United Kingdom's holdings increased an astounding $344B

Obviously, China still holds more of our debt ($868.4B) than the second largest foreign investor in US Treasuries, Japan ($836.6B). Perhaps China's unwilling to be the first nation to own $1T or more of our debt and they're just waiting for someone else to cross that line before buying more. I don't know.

If you look at the bottom line figure for all foreign investors, you might be surprised to learn that between Aug 2009 and Aug 2010 they only acquired about $82B of our debt. Obviously, we ran massive deficits that exceeded $82B by at least $1T during that time frame, so who financed them?

The Fed and by extension our children.

The Folly of Our Economic Policy

"Paper money eventually returns to its intrinsic value—zero."

—Voltaire

While Voltaire lived before Jean-Baptiste Say, the quote above implies that he had an understanding of Say's Law. Say's Law, simply stated, is that supply creates demand. However, that simple statement of it, doesn't really capture the whole story. A better formulation is "the demand for any commodity is a function of the supply of noncompeting commodities."

Within this context, think of dollars as a commodity with few competitors. As a result, the "demand for dollars" will go up if the supply of dollars goes up. This "demand for dollars" is what we commonly call the price tag on each of those noncompeting commodities. This is why debasing the currency/printing money/quantitative easing is inflationary.

Yes, I know the inflation hasn't shown up despite previous quantitative easing. I still expect inflation in the future.

Which brings us to QE2: the next round of quantitative easing. Earlier this week the Fed announced plans to print up $600 billion dollars. This round has made our trading partners nervous. Brazil's President elect had this to say: “The last time there was a series of competitive devaluations. . . it ended in world war two.”

How Fragile is Fractional Reserve Banking?

Drudge has linked to an article about rising foreclosure rates. Apparently, 1 in 8 home owners ended the first quarter late on their payment or in foreclosure.

Can fractional reserve banking deleverage? Looks like we're going to find out!

In a fractional reserve system, banks are only required to hold a portion of their deposits. In the US they're required to hold about 10%. They can loan out the other 90%. That loan has to go somewhere and that somewhere is a bank. Sure, you think of it as going to the guy you're buying that house/car/boat from, but it's really going to their bank account. And once it arrives in that bank account, 90% of it is loaned out. The upshot of this is that $1 creates about $9 more dollars in loans.

Let's say there are $10 in assets at our bank—$1 of reserves and $9 from loans. What exactly happens if there are $2 of defaults? The banks reserves of $1 are wiped out, but then what? Call in the other loans? Declare bankruptcy? Ask congress for a bailout?

What happens to the Federal Reserve when the rate of defaults on mortgages and other debt exceeds the reserve ratio?

Oversight at the Fed

This is a clip of Rep. Alan Grayson (D-FL) talking to Federal Reserve Inspector General about the trillions of dollars lent or spent by the Federal Reserve and where it went, and the trillions of off balance sheet obligation. To my mind, the financial mess is largely a function of over regulation. That was what I implied in an earlier post. At about 2:10, the Fed IG explains to Rep. Grayson that the scope of her oversight is limited to:

direct oversight over [Federal Reserve] Board programs and operations. And are also able to look at Board delegated functions at reserve banks.... We do not have oversight to directly go out and audit reserve bank activity specifically.

She's arguing that the scope of her authority is limited to the loftier echeleons of the Fed, so she doesn't have any clue about the filthe lucre the Representative inquires about. Rep. Grayson comes right back at her at 3:00 and directly asks who does know about the trillions. She helpful reiterates the scope of her responsiblity which does not extend to trillions of dollars in aggregate lending and spending.

Going back to one of my favorite links, The Practical Rules of Bureaucracy, I've been trying to figure out which rule we're seeing here. My initial thought was #6, Pass the Buck, but she never does identify who is responsible—the buck is never passed. Therefore, I'm going with #9, Jerk People Around. Please, leave your analysis in the comments!

Never Forget

Seventy-six years ago today:

By virtue Of the authority vested in me by Section 5 (b) of the Act of October 6, 1917, as amended by Section 2 of the Act of March 9, 1933, entitled "An Act to provide relief in the existing national emergency in banking, and for other purposes," in which amendatory Act Congress declared that a serious emergency exists, I, Franklin D. Roosevelt, President of the United States of America, do declare that said national emergency still continues to exist and pursuant to said section do hereby prohibit the hoarding of gold coin, gold bullion, and gold certificates within the continental United States by individuals, partnerships, associations and corporations and hereby prescribe the following regulations for carrying out the purposes of this order:

Section 1. For the purposes of this regulation, the term "hoarding" means the withdrawal and withholding of gold coin, gold bullion or gold certificates from the recognized and customary channels of trade. The term "person" means any individual, partnership, association or corporation.

Section 2. All persons are hereby required to deliver on or before May 1, 1933, to a Federal Reserve Bank or a branch or agency thereof or to any member bank of the Federal Reserve System all gold coin, gold bullion and gold certificates now owned by them...

What's the Carbon Footprint of a Dollar?

This Earth Day I've been wondering what the carbon footprint of a dollar bill is. We certainly have a lot more of our carbon-based currency in circulation. I suppose that on net it's a good thing since it represents sequestered carbon. Still, the average life span of a dollar is less than two years where upon it's shredded. I wonder what they do with all that confetti money? Isn't that bad for the environment?

Forever Stamps

If you're a survivalist or just worried about inflation, you'll want a shoebox full of Forever Stamps next to your toilet paper, canned goods, shotgun shells, and gold coins. From the link:

As the name suggests, Forever Stamps can be used to mail a one-ounce letter regardless of when the stamps are purchased or used and no matter how prices may change in the future.

So the Forever Stamps that you buy today for $0.42 each can be used to mail a 1oz letter after Obama leaves office despite the first-class rate having risen to $4.20 then. Yeah, the last inflation resistant government fiat currency is being printed by the USPS!

BTW, the price is going up on May 11th. Plan accordingly.

Update: Since there are no carbon taxes today and likely will be in the future, Forever Stamps are a hedge against those.

Robert Stacy McCain has a post about the dangers of the Fed buying treasuries. The currency numbers out of the Fed have been signaling problems since last fall. Perhaps he'll establish a position in Forever Stamps to mitigate his inflation exposure!

FWIW, if you're taking my investment advice to go long Forever Stamps, then you've obviously got serious issues that go beyond poor judgment.

Unsupervised!?!

Don Boudreaux quotes a letter by Daniel Gallington. In part Daniel says: "...the economic power of the private sector, especially if unsupervised..."

Unsupervised!?! Are you kidding me? Here's a list of "supervisors" that failed to prevent various and sundry aspects of the financial meltdown:

1. Congress (House and Senate, added 3/7/9)
   
2. US Treasury
3. Federal Deposit Insurance Corporation (FDIC)
4. Federal Reserve ("The Fed")
5. Office of the Comptroller of the Currency (OCC)
6. Security and Exchange Commission (SEC)
7. Bureau of the Public Debt (I bet they're busy these days!)
8. Community Development Financial Institution Fund (CDFI)
9. Financial Crimes Enforcement Network (FinCEN)
10. Federal Inspectors General
11. Office of Thrift Supervision (OTS)
12. National Credit Union Administration (NCUA)
13. Housing and Urban Development (HUD)
14. Office of Fair Housing and Equal Opportunity (FHEO)
15. Federal Housing Administration (FHA)
16. Fannie Mae
17. Freddie Mac
18. Ginnie Mae

Oh, yeah. Yeah. No one was watching the hen house, Danny! Truth is, none of them did a very good job and some of them had conflicts of interest—Freddie and Fannie both gave generously to Obama.

Let's review the second rule of bureaucracy. Rule 1, of course, is: Spend Your Budget. Rule 2 is: Fail. "Why fail," you may ask, because once you've failed you can ask for more money and more power. Failure is how you grow your bureaucratic fiefdom. With failure you get a larger budget next year. If you were to succeed, then someone might want to "improve your efficiency" by reducing your budget.

Update: Director Blue's Meltdown post reminded me of the most important supervisor: Congress. I've added them to the top of my list. Go back to those rules of bureaucracy and pay particular attention to Rule 3: Cover Your Ass.

Questions for Economists

I've been thinking about some things that have passed from the spotlight, but may still be relevant to understanding the financial crisis and the current state of the economy. If you're an economist, or play one on the Internet, please share your thoughts either in the comments below or with a link back from your blog.

1) If it had been available, would M3 data have provided an early warning about the financial mess?

In March of 2006 the Fed stopped publishing M3 data because "the Board judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits." I'm all for fiscal responsibility, but, with the benefit of hindsight, would M3 have indicated a looming disaster? I would think that problems in the credit markets would vacuum up assets in the financial markets causing M3 to fall. Perhaps such an effect would not have been large enough to notice until it was too late.

2) How can we best balance unemployment, the minimum wage, deflation, and inflation over the coming year or two? (And, what are your expectations?)

The US Department of Labor lists the minimum wage at $5.85 in 2007 and $6.55 in 2008. It is scheduled to rise to $7.25 in 2009. Did the 2007 and 2008 minimum wage rate hikes contribute to our worsening economy? Won't the 2009 bump drive unemployment way up? Perhaps I should ask: what are your expectations about deflation? How many months of deflation are we likely to have? Would it be wise for the Fed to allow greater inflation, perhaps by not taking the newly minted money out of circulation, once the hemorrhaging has stopped?

3) Was it speculation that drove oil to its peak last summer and is speculation driving it down now?

I'm not even sure that I accept the premise that speculation contributes anything (except liquidity) to the oil market. Last summer I scoffed at the speculation argument. Now, I'd like to know how much travel has fallen off, whether vast new reserves of oil have come online, or whether other market forces are driving the oil price. Looking at oil today and last summer, is it possible to quantify speculation? For instance, can we determine that last summer's oil price was driven higher by, say, 20% because of speculation?

They Better Start Teaching Say's Law

Don Surber fields a question about college tuition (via Instapundit):

Question: What fuels college tuition inflation?

Answer: Student loans. From the Chronicle for Higher Education: “The volume of private loans shrank by $173-million, or about 1 percent, to $19.1-billion in 2007-8. That decline reverses years of double-digit growth and does not reflect the recent credit crunch. At the same time, the volume of federal loans rose by 6 percent after inflation.”

You have a volatile mix: Inexperienced borrowers, federally guaranteed lenders and the biggest sharks in capitalism: College presidents. Hence, the double-digit inflation in price.

Say's Law, simply stated, is that supply creates demand. This is why printing money, like the Fed is doing, usually causes inflation: the supply of dollars is larger after the printing but the supply of stuff is not, so the demand for stuff gradually becomes denominated in larger and larger quantities of dollars—prices rise, inflation. But, we have deflation right now, why's that?

The rise in M2 is not as pronounced as what's happened to M0, so the really big measures of our money supply have not moved much. I'm curious what M3 would've shown had it not been discontinued. I think it may have warned of the impending financial mess because, as wikipedia tells us, it includes "institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets." Money-market funds started breaking the buck this past September, so I suspect that M3 data may have indicated the coming storm earlier in the year as it started to decline (well, that's what I think it would've been doing).

Getting back to Say's Law, you have to ask yourself: what is money? The text book answer is that it is a medium of exchange. The greenbacks in your wallet are money. If you've ever rented a car, you've probably learned that credit cards are a better form of money for that transaction. If you've bought a house, then you've learned that reams of legal sized paper signed by several people in triplicate are money.

And why is college tuition going up? Our government, indeed the American people at large based on bond and ballot initiative results, have never seen an educational expense that they do not want. So the supply of money, especially in the form of student loans, for college tuition keeps going up. Many more dollars chasing a few more slots for students, the market clears, inflation.

Fiscal Restraint Returns!

If you look closely at the graph below, you'll notice that the Federal Reserve has slowed the rate of expansion of the money base (M0). I think one of their printing presses broke down under the heavy load and I'm optimistic that more will follow suit. Ah, in the absence of a cogent monetary policy, I'm pinning my hopes on hardware failures to get us through this mess!


See also: Your Tax Dollars at Work, Money Supply

Your Tax Dollars at Work

With declining circulation numbers plaguing most (all?) of America's newspapers, The Fed has developed a rescue package focussed on buying up "unneeded" paper and ink.


See also: Professor Mankiw, Money Supply

Money Supply

Printing Press (noun): Mechanical device used by the Weimar Republic to deter rampant monetary expansion.

Last Friday I saw this graph at the von Mises Institute. Today (Monday), I noticed that the graph had changed—click on the picture to see the latest graph of our Monetary Base. (Update: The Fed dataset is for every two weeks. The picture below ends with the 9/24 data point. You'll see the 10/8 data point after the jump.)

Whew! We can all rest soundly knowing that our (nominal) bank deposits are safe!

If this worries you, I'd recommend the Zimbabwe strategy: buy something of value on your lunch break.