Why the Federal Reserve Exists

Here we go with the vocabulary thing again.  I promise to make this easier than your last root canal.  The Federal Reserve Bank is a central bank.  Central banks are created to control and manipulate the money supply.  The money supply is the aggregate total of all the money in circulation in an economy.  It is often referred to in the media and the industry as M.  Controlling the money supply frees governments from the responsibility of living within their means.  It makes it possible for them to counterfeit money.  All governments have laws making counterfeiting their currency illegal.  That is because all governments have a monopoly on counterfeiting and do not tolerate competition in the business.

Governments counterfeit money in the exact same way all counterfeiters do; they print it, and slip it into circulation into the economy.  They spend it.  They spend more money than the economy produces because they do not want to live within their means.  They do not want to live within their means because they use money to buy votes.  They give out goodies in return for favors; favors in the form of legislation that promotes the welfare of one group over another group; favors that line their individual pockets, reward their friends, punish their enemies, and above all, favors that get them re-elected.

Other reasons are given, of course, for the existence of the Fed.  But it is axiomatic that all governments seek continual expansion of their powers, and control of the public purse and the power to tax is the Holy Grail for power seekers.  The founding fathers of this country feared government more than anything, and the Constitution they framed was to protect us, not from foreigners, and not from each other, so much as from our elected government itself.  The debates about economic policies are a sideshow and a distraction; the main event is the relentless expansion of executive power and the quiet transfer, not only of wealth, but of personal liberties as well.  Without economic freedom based on individual rights, private property, and the right to keep and dispose of our earnings as we choose, there is no freedom at all. Read more..

Financial Literacy: Measuring the Mood of the Mob by the Price of Gold

At various times throughout history money, or currency, has been based on metals, usually silver or gold.  This created an objective value to the currency of the period.  A dollar, for example, was worth an ounce of gold, or 1/10 of an ounce of gold, or 1/20 of an ounce of gold.  Governments and rulers, who always want to spend more money than they take in, either for their own enrichment or in order to bribe voters, usually try to debase their currency.  Kings about once a generation used to re-mint their coins (paper currency wasn’t invented yet), using the need to have their own image on the coin as the excuse, and they would dilute the gold content by mixing other metals with the gold, or slightly downsize the coin itself, but calling it by the same name as its predecessor.  When governments became well established, they usually did a ‘bait and switch’ routine and substituted printed money for metal coin, and again called it by the same name attached to a unit of its metal predecessor.  So a gold dollar was now called a paper dollar, as if their value were the same!

Once governments discovered the delights of the printing press, they would print as much money as they felt they could slip past their gullible and unaware subjects.  Acceptance by the herd was essential, and when the debased currency was widely rejected, it was not uncommon for a ruler to create stiff penalties, including the death penalty, for not accepting the paper currency as legal tender.  The reason governments prefer to print money is first of all so they are not bound by the usual principles of fiscal discipline (Don’t spend more than you make) but also every time they print money, they are actually lowering the unit value of that currency, reducing its purchasing power.  They are actually picking the pockets of their citizens, especially the most conservative ones who save.  The money these citizens save will not buy as much when it is finally spent as it would have immediately upon their having received it.

When citizens get nervous about the stability of the banking system, their political system, or their own personal safety, they are inclined to buy gold.  Gold does not pay interest, and it is still only worth what a buyer is willing to pay for it, but because there is a fixed quantity of it at any given point in time, its value tends to be very stable.  This is why nervous people buy gold as a hedge against inflation.  Gold is not without risk, however.  At times when the madding crowd is enamored of another of its periodic manias, interest in gold will wane as the herd stampedes in a new direction.  When demand falls off, the price of gold drops, like anything else.  Even in times of rising price of gold, there is always the possibility of the government confiscating it (that has been done by OUR government, as well as many others.)  Ultimately the government has the guns, and whatever we have is pretty much by permission.  A democracy, as I have written many times, is no guarantee of anything more than mob rule.  All people, in any period of history, need protected most from those they elect over themselves.  Inevitably their public servants become their masters.  Even here, the freest nation on earth, the Constitution guaranteeing both individual rights and the limitation of government’s powers, has been under steady attack for well over a hundred years by many activists who resent its restrictions.  They want to harness the coercive power of government to an endless list of programs to protect us from ourselves, and of course, with them at the levers of distribution and power.

For a short video on how the price of gold is a measure of the mood of the mob, go to http://www.youtube.com/watch?v=yuDZQFPgXCw

“All Men Would be Tyrants if They Could”

It was Abigail Adams who wrote the words of my title to her husband John Adams in a letter dated March 31, 1776.  She also wrote in that same letter “I am more and more convinced that man is a dangerous creature; and that power, whether vested in many or a few, is ever grasping, and like the grave, cries, “Give, give!”  Apparently the English historian Lord Acton concurred when he wrote in a letter to a colleague in 1887 “Power tends to corrupt, and absolute power corrupts absolutely.”  All of written human history boils over with our obsession for power over our fellow humans.  It surfaces in every organized human endeavor, from who will lead a Boy Scout troop, to the high handed behavior of the President of a small Homeowners Association, to sports and business competitions, and most obviously, to the naked desire for political power.  The motivations may vary:  a love of indolence; a desire to outshine others in our pack or tribe;  an expression of envy of the position, respect, obedience, or reverence another may receive;  a desire to compensate for low self-esteem and personal inadequacies;  a desire for access to unearned wealth and deference and the trappings of power;  a sense of duty; or an ideological certainty that we personally are better equipped to tell others how to live their lives.  We behave as pack animals do, and in every society known to history, humans have been preoccupied with their status within their group.  In many cases it is nothing more than mating behavior,  a desire to win the best available mate.  In every society we develop totems to publicize our status and power.  A beautiful, striking, or powerful mate enhances our standing within the tribe.  Think about it:  what is the first thing every celebrity or drug lord looks for?  A trophy mate.  On the other hand, many of the conflicts endemic to the smallest group known to civilized society, the  married couple, often devolve around the sharing of power.  The moral of all power seeking is that it is easier to obtain than to keep, and that all power is constantly in flux and eventually fades.  

Even cows going out to pasture have a queen, who routinely leads the way out and back each day.  And when an up-and-coming cow displaces the queen of the herd, the queen becomes neurotic and often stops giving milk.

During the Ottoman Empire, so paranoid were the sultans about retaining their power that immediately upon their ascendancy to the top position of power, they ordered the massacre of all their brothers and half-brothers, who were the most likely future threats to the new Sultan. 

In today’s world of business, the greatest challenge to the young and bright MBA coming out of the gate is going to be his immediate supervisor in the corporate world.  Why?  Because that individual, with his small level of power, will feel threatened by the newcomer and move to protect his “domain”.  The term “office politics” is so common as to be cliched.  For simplicity’s sake I have used the male gender in this paragraph, but there is no biological reason to believe that female behavior in similar contexts would be any different than a man’s.  Almost all species show a remarkable focus on power and territory.  It is about survival, control of resources, mating advantages, and status in the herd.

What has this got to do with financial literacy, dear Reader?  One of the greatest forms of power is the Power of the Purse.  Ultimately, all politics works to the end of controlling the economy.  And what is an economy, if not the trade of what one person produces with another?  So he who controls the economy controls the productive effort of the slaves, uh, I mean, citizens.  Free trade is voluntary, and power is not an issue.  When what one person produces is controlled, regulated, and redistributed by another, without their consent, it is called coercion and confiscation.  Democracy, without protection of individual rights, is nothing more than a fancy word for mob rule.  The great achievement of the U.S.  Constitution was that it guaranteed the freedom of  anyone we don’t agree with, don’t like, envy, or whose property we covet.  In protecting the smallest minority in existence, the individual, the Constitution  protected everyone.  For the last 100 years that Constitution has been under political assault so that the social engineers and political activists can finally “fix” everything that is wrong with the world we live in–according to them.  Also during this last 100 years over  100,000,000 people have been slaughtered in the most organized, systematic way in the name of imposing a better world order–on people who disagree.  This concatenation of circumstances is no accident of history.  The vast majority of the mass murdering has been done in the name of socialism, whether of the national socialism of the Nazi’s or the socialism of the Communists, or the socialism of Social Democrats; there is creeping socialism brought about by peaceful measures and democratic processes, and there is socialism brought about by armed revolutions and brutality.  There is socialism that is brought about by wage and price controls, and there is socialism that is brought about by the nationalization of industry.  What is this monster, and why is it dangerous?  Socialism is the government ownership of the means of production.  That’s it?  That doesn’t sound very sinister, does it?  Or does it?

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