Central banks are often justified on the basis that a complex, modern economy requires top-down management by experts. These people, it is said, can study the markets and then “fine-tune” the economy to keep it humming along.
As if the last few years haven’t provided evidence enough that such notions are pure folly, newly released transcripts of 2006 Federal Reserve meetings offer further proof. The transcripts show that the “experts” — members of the Federal Open Market Committee (FOMC) — were so clueless that even as late as December, when the housing market was displaying serious signs of decline, most showed little concern that the bursting bubble could take down the entire economy.
One of the unintended consequences of the ongoing and accelerating crisis in the eurozone is that ordinary citizens are taking their money out of the banks and burying it. Lack of both confidence in the stability of the European economy and credible solutions to the crisis have led to the exit of currency from banks in Greece, Italy, and other European countries.
Former Massachusetts Governor Mitt Romney won the first-in-the-nation New Hampshire primary January 10 with 38 percent of the vote, and Texas Congressman Ron Paul placed a strong second with 23 percent (with 78 percent of the precincts reporting).
"The president has run out of ideas," Romney said in his victory speech. "Now he's running out of excuses. And tonight, we're asking the good people of South Carolina to join the citizens of New Hampshire and make 2012 the year he runs out of time."
"He had a victory," Ron Paul said of Romney. Regarding his own second-place showing, Paul said, "We had a victory for the cause of liberty tonight."
Paul's speech had a different substance than Romney's partisan speech. Paul focused upon ideas in his talk. "I sort of have to chuckle when they describe you and me as being dangerous," Paul told his supporters. "We are dangerous to the status quo in this country. And we will remain a danger to the Federal Reserve system as well." The mostly young audience broke out in loud chants of "End the Fed! End the Fed!" Paul had predicted the housing and financial crisis as early as 2001, and warned that the United States was currently in the midst of a currency crisis.
In the clearest indication yet, a high French government official confirmed last week that an FTT — Financial Transaction Tax — will be implemented by the European Union by the end of 2012, a year earlier than planned. Jean Leonetti, France’s minister for European affairs, said on television that “This is on the program for the next European summit [on January 30th]. Nicolas Sarkozy and Angela Merkel have decided on this and it will be put in place before the end of 2012.”
The tax would be levied, initially at least, on every financial transaction taking place by any entity with a connection to the Eurozone, and would be levied at the rate of 0.1 percent on shares of stock and bonds, and 0.01 percent on all derivatives transactions. It is estimated that the FTT would cover about 85 percent of all transactions between financial institutions such as banks, investment firms, insurance companies, pension funds and hedge funds. It is expected to raise, in the beginning, about $70 billion annually to help fund the EU.
It’s being touted as punishment for the banks that were allegedly instrumental in causing the economic meltdown, but would have no impact on ordinary citizens or small businesses. According to the European Commission, the FTT “would help to reduce competitive distortions in the single market, discourage risky trading activities [such as high frequency trading and highly leveraged derivatives contracts] and complement regulatory measures aimed at avoiding future crises.”
Republican presidential candidate Ron Paul noted on Tuesday that efforts to rein in government spending appeared to be in vain, due to an agreement reached with the White House during the recent debt ceiling negotiations. Congress would have to pass a joint resolution to oppose any extension of the debt ceiling, which President Obama is free to veto. Said Paul: “A default is becoming more mathematically unavoidable with ... every debt ceiling increase.”
Not only is the word “default” becoming commonplace but also the words “economic collapse.” A study conducted by Leflein Associates and published by EcoHealth Alliance showed that of the 1003 individuals interviewed for the survey, 63 percent — or more than six out of ten of them — feared an “economic collapse” more than a natural disaster, a terrorist attack or a global outbreak of disease. This study was picked up by Michael, the author of his Economic Collapse Blog, who piled on by adding a long list of reasons why concerned citizens should be afraid of such an event:
In her article on Monday, financial journalist Jessica Mortimer said that the euro had just set a new record low against the Japanese yen: Its value is now the lowest it’s been in 10 years. The irony wasn’t lost on her as she also noted that it was just 10 years ago that the euro was first denominated in coins and currency, three years after being introduced electronically among the member states.
And she sees further weakness in the euro, now trading below $1.30 versus the dollar, and likely to move ever lower into the New Year: “In the absence of a comprehensive European policy response to the debt crisis, the euro could test its 2010 low of $1.18.” This would imply at least another nine-percent loss in value in less than a year.
She touched on only one of the few remaining options open to keep the euro from blowing up altogether: more austerity on the backs of the citizens of the member states who took excessive advantage of lower-than-market interest rates to load up on debt that they can't pay back. She noted the survey that came out over the weekend indicating that a key European manufacturing index remains persistently below recovery levels, with further declines into a full-blown recession in Europe likely. Additional austerity measures would simply hasten that recession. Kathleen Brooks, director of research at FOREX.com, told her clients: “We remain a sell on rallies (with the euro) as we tend to think the euro zone crisis will actually get worse before it gets better.”
The government of Japan and the communist dictatorship ruling mainland China announced a landmark agreement this week to facilitate trade between the two powers without using the U.S. dollar, relying instead on the Japanese yen and the Chinese yuan.
According to the terms of the deal, the two governments agreed to encourage trade directly in yen and yuan without having to use American dollars as an intermediary — the current practice. Companies in Japan and China will soon be able to convert the currencies directly. And the Japanese government also agreed to hold Chinese yuan in its foreign-reserves portfolio.
It remains unclear exactly how and when the agreement will be implemented. But according to news reports, both governments have already set up a working group to iron out the details. Officials said the move was aimed at reducing risk and transaction costs.
The new currency deal comes as the communist Chinese dictatorship has been taking increasingly bold steps to expand the international role of the yuan. The regime’s officials have also become ever-more vocal in attacking the dollar’s global reserve status, calling instead for a more international system managed by a world entity such as the International Monetary Fund (IMF).
On the one hand, “mainstream Republicans” are described by CNN's Jack Cafferty as “apoplectic” over the prospect of Ron Paul winning the caucuses in Iowa. On the other hand, the whole party has fallen captive to the 12-term Congressman's “radical ideology,” according to Gary Weiss on the “progressive” web site Salon.com.
“The Republican Party, falling deeper into the clutches of Ron Paul’s "radical ideology," has a new item on its anti-populist agenda: Castrate the Federal Reserve so that it no longer can promote job growth,” Weiss wrote in Thursday's column. Weiss is, well, appalled at “the extent to which Ron Paul's fixation with the Fed has infected the Republican party. Anti-Fed rhetoric, once the province of "ultra-right" (on popularly cited fallacious political spectrums) groups like The John Birch Society, has gone mainstream with the rise of Paul, who has been surging in the polls and now ranks third behind Mitt Romney and Newt Gingrich. He is actually leading in Iowa, and a victory there would really rev up his famously loyal followers.”
Those loyal followers, as well as other Americans, might also be a little negatively revved up about about the report of a Government Accountability Office on the Federal Reserve Bank, issued in July of this year, showing the Fed had secretly lent some $16 trillion to domestic and foreign banks since 2008.
Is it certain that the nations of the European Union are heading for a hard fall? It certainly looks that way. When the overspending of governments such as Greece, Portugal, and Ireland were involved, the threat to the euro was real, but it could be psychologically contained (an important factor in maintaining the stability of financial institutions). Those three nations, after all, are small. Spain, the fourth member of the “PIGS,” was more than half the size of the Italian economy, but much of the industrialized West has viewed Mediterranean nations as inherently volatile.
Two months ago, however, Italy — one of the largest economies in the world — had its sovereign debt downgraded by Standard & Poor’s and then by Moody’s, which reduced the bond rating for Italian government bonds by three notches. The GDP of those five nations — Portugal, Ireland, Italy, Greece, and Spain — equal about $3.7 trillion, or more than 20 percent of the economy of the European Union.
The latest news is that France could have its AAA credit rating downgraded before Christmas. Standard & Poor’s is expected to make that decision imminently.
When Kyle Bass defended his decision on BBC Radio Hard Talk on November 17th to purchase 20 million nickels, he was just putting Gresham’s Law into operation. Bass, the founder and principal of the hedge fund Hayman Advisors, did the math and discovered that he could purchase 6.8 cents worth of copper in each nickel for just 5 cents. Nickels are 75 percent copper while pennies (minted between 1909 and 1982) are 95 percent copper and the recent spike in copper’s price simply made it too good a deal for Bass to pass up.
This is Gresham’s Law in action. The standard definition is that “bad money drives out good.” Simply put, when coins of lesser value are forced to be accepted alongside coins of greater value, the more highly valued coins will be hoarded. In other words, Gresham’s Law reflects the price-fixing disruption always inherent in legal tender laws. A better definition of Gresham’s Law might be “When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation.”
Prior to 1965 dimes and quarters were made of 90 percent silver and 10 percent nickel but with the Coinage Act of 1965 the silver content was removed and replaced with 75 percent copper and 25 percent nickel. Almost immediately the high intrinsic value dimes and quarters began to be hoarded as Gresham’s Law kicked in. Today a pre-1965 silver dime is worth about $2.40 in inflated Federal Reserve Notes.