Ron Paul, the Fed and the Need for a Stable Dollar
inlet13
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From the WSJ:
Ron Paul, the Fed and the Need for a Stable Dollar
The central bank should take note when a popular presidential contender calls for limits on its power.
By DAVID MALPASS
On Wednesday the Federal Reserve shared its thoughts on the course of interest rates—but not on the implications for the value of the dollar. The two can't be disconnected. The Fed's rationale on interest rates determines the stability of the dollar, which is the economic bedrock for price stability, capital inflows, growth and jobs.
Obfuscation on the dollar works fine for Wall Street, which reaps billions in profits from the Fed's unstable dollar policy. It trades currencies and volatility, and makes a bundle protecting investors from the Fed by selling complex derivatives, interest-rate swaps, even triple-leveraged gold and currency funds pitched on television.
After the Fed's statement, markets bid gold above $1,700 per ounce, the latest insult to the Founders' clear intent for the dollar's value to be strong and stable relative to gold and silver over the life of our republic.
Dollar weakness doesn't work at all for economic well-being. The corollary to the Fed's policy of manipulating interest rates downward at the expense of savers is declining median incomes. It's no coincidence that inflation-adjusted median incomes rose in the sound-money booms of the Reagan and Clinton administrations and fell in the weak-dollar busts during the Carter, Bush and Obama years. When the currency weakens, the prices of staples rise faster than wages, hurting all but the rich who buy protection.
The economy and median incomes would do much better if the Fed said simply that it would set interest rates as best it could in order to keep the dollar's value strong and stable in coming decades, with the goal of attracting capital, maintaining price stability and encouraging full employment.
Yet the Fed is adamant that somehow business confidence will benefit by the Fed sharing its guesses on equilibrium interest rates—which after all are far from a science—but not its vital thinking on the future value of the dollar.
The Fed's status in Washington is unique and practically unassailable. It alone is a colossal self-funder operating outside the congressional appropriations process. Even the CIA and Navy Seals don't enjoy the Fed's unlimited spending power, checked only by its handpicked board and senior leadership.
Americans know this is a big problem but can't stop it. Texas Congressman Ron Paul has created an intensely popular presidential campaign around the need for stable money and limitations on the size (the Fed employs 22,000 people) and power of the Fed.
Yet legislation is moving in the opposite direction. Dodd-Frank's open-ended mandate has added another layer to the Fed's power, instructing it to control bank risk (good luck), protect the financial welfare of consumers, and even advise on mortgage bailouts.
Wednesday's meeting result could have been worse. The Fed might have announced more purchases of U.S. Treasurys and mortgage securities. It already owns nearly $2 trillion worth and has no limit on its expenditures, which fall completely outside the federal budget. Bond traders have been pleading with the Fed to announce further purchases so they can buy first and score big profits.
Stopping Fed asset purchases would help growth by allowing market distortions to subside. Its clear there's been no benefit from the Fed's unprecedented balance-sheet expansion, up 250% since 2008: no increase in private-sector credit (flat since 2009) and no impetus to the economy, which has been particularly weak in the quarters following Fed asset purchases.
Near-zero interest rates penalize savers and channel artificially cheap capital to government, big corporations and foreign countries. One of the most fundamental principles of economics is that holding prices artificially low causes shortages. When something of value is free, it runs out fast and only the well-connected get any. Interest rates are the price for credit and shouldn't be controlled at zero. It causes cheap credit for those with special access but shortages for those without—primarily new and small businesses and those seeking private-sector mortgages.
The economy's exit from Fed dominance of bond markets wouldn't be traumatic. The Fed has been fully sterilizing its asset purchases, meaning all the cash it has used to buy bonds is still contained at the Fed, not multiplied in the private sector. The Fed accomplishes this through bank regulation and by borrowing from banks at above-market interest rates—$1.5 trillion as of Jan. 18.
The Fed can reverse this process, letting its bond portfolio mature and the private sector smoothly reabsorb the debt by drawing down the excess reserves it has on deposit at the Fed. Other bond holders may see price pressure as the Fed finally sells its portfolio, but principal losses on bonds are small compared to fluctuations in equity markets. If the Fed adopts the pro-growth stance of letting markets allocate capital and the dollar stabilize, equity market gains will heavily outweigh bond market losses, lowering the cost of capital in the private sector.
The Fed's responsibility is to create confidence in price stability and the dollar, thus providing the best monetary policy environment for full employment. Most central banks operate on this principle. Instead, the Fed has systematically undermined economic confidence by promising to maintain zero interest rates for privileged borrowers. That policy will have to stop if the U.S. is to again achieve impressive growth.
Mr. Malpass, a deputy assistant Treasury secretary in the Reagan administration, is president of Encima Global LLC.
Ron Paul, the Fed and the Need for a Stable Dollar
The central bank should take note when a popular presidential contender calls for limits on its power.
By DAVID MALPASS
On Wednesday the Federal Reserve shared its thoughts on the course of interest rates—but not on the implications for the value of the dollar. The two can't be disconnected. The Fed's rationale on interest rates determines the stability of the dollar, which is the economic bedrock for price stability, capital inflows, growth and jobs.
Obfuscation on the dollar works fine for Wall Street, which reaps billions in profits from the Fed's unstable dollar policy. It trades currencies and volatility, and makes a bundle protecting investors from the Fed by selling complex derivatives, interest-rate swaps, even triple-leveraged gold and currency funds pitched on television.
After the Fed's statement, markets bid gold above $1,700 per ounce, the latest insult to the Founders' clear intent for the dollar's value to be strong and stable relative to gold and silver over the life of our republic.
Dollar weakness doesn't work at all for economic well-being. The corollary to the Fed's policy of manipulating interest rates downward at the expense of savers is declining median incomes. It's no coincidence that inflation-adjusted median incomes rose in the sound-money booms of the Reagan and Clinton administrations and fell in the weak-dollar busts during the Carter, Bush and Obama years. When the currency weakens, the prices of staples rise faster than wages, hurting all but the rich who buy protection.
The economy and median incomes would do much better if the Fed said simply that it would set interest rates as best it could in order to keep the dollar's value strong and stable in coming decades, with the goal of attracting capital, maintaining price stability and encouraging full employment.
Yet the Fed is adamant that somehow business confidence will benefit by the Fed sharing its guesses on equilibrium interest rates—which after all are far from a science—but not its vital thinking on the future value of the dollar.
The Fed's status in Washington is unique and practically unassailable. It alone is a colossal self-funder operating outside the congressional appropriations process. Even the CIA and Navy Seals don't enjoy the Fed's unlimited spending power, checked only by its handpicked board and senior leadership.
Americans know this is a big problem but can't stop it. Texas Congressman Ron Paul has created an intensely popular presidential campaign around the need for stable money and limitations on the size (the Fed employs 22,000 people) and power of the Fed.
Yet legislation is moving in the opposite direction. Dodd-Frank's open-ended mandate has added another layer to the Fed's power, instructing it to control bank risk (good luck), protect the financial welfare of consumers, and even advise on mortgage bailouts.
Wednesday's meeting result could have been worse. The Fed might have announced more purchases of U.S. Treasurys and mortgage securities. It already owns nearly $2 trillion worth and has no limit on its expenditures, which fall completely outside the federal budget. Bond traders have been pleading with the Fed to announce further purchases so they can buy first and score big profits.
Stopping Fed asset purchases would help growth by allowing market distortions to subside. Its clear there's been no benefit from the Fed's unprecedented balance-sheet expansion, up 250% since 2008: no increase in private-sector credit (flat since 2009) and no impetus to the economy, which has been particularly weak in the quarters following Fed asset purchases.
Near-zero interest rates penalize savers and channel artificially cheap capital to government, big corporations and foreign countries. One of the most fundamental principles of economics is that holding prices artificially low causes shortages. When something of value is free, it runs out fast and only the well-connected get any. Interest rates are the price for credit and shouldn't be controlled at zero. It causes cheap credit for those with special access but shortages for those without—primarily new and small businesses and those seeking private-sector mortgages.
The economy's exit from Fed dominance of bond markets wouldn't be traumatic. The Fed has been fully sterilizing its asset purchases, meaning all the cash it has used to buy bonds is still contained at the Fed, not multiplied in the private sector. The Fed accomplishes this through bank regulation and by borrowing from banks at above-market interest rates—$1.5 trillion as of Jan. 18.
The Fed can reverse this process, letting its bond portfolio mature and the private sector smoothly reabsorb the debt by drawing down the excess reserves it has on deposit at the Fed. Other bond holders may see price pressure as the Fed finally sells its portfolio, but principal losses on bonds are small compared to fluctuations in equity markets. If the Fed adopts the pro-growth stance of letting markets allocate capital and the dollar stabilize, equity market gains will heavily outweigh bond market losses, lowering the cost of capital in the private sector.
The Fed's responsibility is to create confidence in price stability and the dollar, thus providing the best monetary policy environment for full employment. Most central banks operate on this principle. Instead, the Fed has systematically undermined economic confidence by promising to maintain zero interest rates for privileged borrowers. That policy will have to stop if the U.S. is to again achieve impressive growth.
Mr. Malpass, a deputy assistant Treasury secretary in the Reagan administration, is president of Encima Global LLC.
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good find
Ron Paul sure is crazy.
It is terrifying when you are too stupid to know who is dumb
- Joe Rogan
I believe "bat shit" is the term.
I consider this issue to have a great deal of weight. I think more and more people are realizing how important monetary policy is, and that is a major reason why Paul has gotten so popular over the past 4 years.
Here's the thing - it's better than what we know is bad.
But, that being said - the country, is still unfortunately with its head in the sand. At some point, we will either have to get really lucky (i.e. someone wins by not saying what needs to be done, but then actually does it), or we will hit absolute rock bottom, and we'll be ready for someone like Ron Paul. One would think we're already staring at that abyss. But, my only assumption is it must get worse for some folks. Scary hypothesis.
I actually happen to AGREE with the Fed on this decision.
To be fair to them, in CONTEXT, it is probably the SMARTEST decision they could have made.
ANY uncertainty is PAIN for the market right now, and being told WELL UPFRONT what the plan is was a SMART SMART SMART move by the Fed.
I am going to be keeping my eye on gold spot price today, hoping to see it move sideways and then DOWN by the end of the day.
In reasonably balanced and non-panic-induced markets news related plays are often extremely short lived and reverse themselves (more often than not) by the end of the next business day. Gold shot up $60 yesterday on the Fed announcement. If it can manage to LOSE $30 today, I would take that as a sign that this was an overall NET POSITIVE for the market ... IN THE "NEAR" TERM (less than 5 years).
The article raises a worthy point regarding dollar value security, but I think it is out of touch with reality to assume that super low interest rates (which we have essentially had for over a decade now) are going to suddenly (or even over the course of the next 2 or 3 years) drive the dollar to the brink.
If the security of knowing rates will stay low for the foreseeable future gives business the confidence to borrow and expand, and thus allows the economy to grow\rebound with less restraint then I SEE THIS AS A GOOD THING.
Why am I not concerned with the dollar tanking at this point?
A. The rest of the world is just as \ if not more fucked as the USA is.
The Dollar is valued against all other currencies (or at least in pairs) in the market. So i see no imminent threat of us suddenly becoming "more less better" than say Europe, and having the dollar slip on that account.
B. The economy is stagnant as hell in the first place. This move by the Fed is an attempt to RESTORE CONFIDENCE by giving business a glimpse well in to the future of interest rates. We are NOT in a super-confident economy, and risk virtually NO CHANCE of seeing a "housing bubble" or "stock bubble" ANY time soon. Banks aren't even approving most mortgages these days so rule that out up front. Stocks may be fumbling back upwards, but calling it a "bubble" anytime soon seems pretty laughable.
C. There is no inherent inflation created by this move. Certainly there is POTENTIAL for "inflation" (the effect we perceive as lowered dollar "value") but all this "move" does is allow "certainty" on the part of business to make borrowing decisions out further than they normally would be able to without having to use their FedRes Crystal Ball. Does "easy" money have the potential to DRIVE inflation? Of Course. But the economy is NOT "HOT" right now, and I just don't see low interest rates tipping the scales from Little-To-No Consumer Spending to All-Out-Cash-Bananza-Sale-Sale-Sale-Spend-Spend-Spend ANYTIME SOON.
Remember you can have "inflation" WITH THE SAME AMOUNT OF DOLLARS ***BEING SPENT FASTER*** just the same as you can have with MANY MORE DOLLARS being spent at the same or SLOWER speeds. Maybe right now we are setting ourselves up for "Many more dollars" but the SPEED\VELOCITY of that money is MOOOO-LASSS-ESSS right now!
Just saying.
If I opened it now would you not understand?
http://www.growpac.com/
This is outright fantasy \ hogwash right here. Well, ok, the first sentence is arguably correct.
The rest of it is just propaganda.
Consider this. The "unprecedented balance-sheet expansion" that occurred "since 2008" is made up largely of BAD DEBT from the private sector. Do I (or most of you) INHERENTLY agree with this policy? HELL NO.
HOWEVER. Can you HONESTLY say that REMOVING OVER-BURDENING BAD DEBT from the major financial institutions OF THE WORLD provided "no impetus to the economy" ???
Here is more hogwash: "the economy, which has been particularly weak in the quarters following Fed asset purchases." ... we could re-write that sentence to say "the economy, which has been particularly weak in the quarters following one of the largest stock market collapses and evaporations of wealth in the history of free market economics" and one would BEGIN to get a better understanding of why the economy was "particularly weak" in those following quarters. Trying to use words to assign blame to the Fed (at least their actions following the crisis) for those economic conditions is beyond the pale.
We can argue the sense of the Federal Reserve system all day, but some of the shit in this article is ridiculous.
"Dollar weakness doesn't work at all for economic well-being."
Thats funny because the US uses this logic ALL THE TIME with China, insisting to the world that China is artificially manipulating it's currency, KEEPING IT "ARTIFICIALLY LOW" and thus making it much more attractive to those buying China's exports. Lol. So which is it? [note: i'm not arguing for or against a "weak" dollar. I'm attempting to point out that almost EVERYTHING in economics is relative-as-hell, and that pinning down "blame" or "reasons" or even "ANSWERS" is a very shaky proposition.]
"The economy and median incomes would do much better if the Fed said simply that it would set interest rates as best it could in order to keep the dollar's value strong and stable in coming decades, with the goal of attracting capital, maintaining price stability and encouraging full employment."
The Fed JUST DID THIS.
Their announcement yesterday was a GOD-SEND for anyone in business doing Short-Medium term planning for borrowing, expansion decisions. Now every business in the world KNOWS IT CAN COUNT ON THE FED TO KEEP RATES WHERE THEY ARE UNTIL MID-2014.
Unless you expect the global economic situation to suddenly DRAMATICALLY IMPROVE, for the average consumer to RADICALLY INCREASE THEIR RATE OF SPENDING, or you expect the situation in the US to deteriorate significantly faster than the rest of the world (really? Greece may be leaving the Euro-Zone, but you think the USA has it worse in the near-term?) ... then i find it hard to argue AGAINST the move the Fed just made.
BRAVO, Bernanke.
(ouch, did i just say that?)
If I opened it now would you not understand?
If we’re talking about smart Keynesian decisions, I suppose a Keynesian would agree. But, otherwise, keeping interest rates low for an extended period will either fuel another bubble or lead to other economic disturbances. This is exactly what played out in the lead-up to the housing bubble…. And no, housing did not crash right away… it took years.
Sure, uncertainty is PAIN, but the reason it’s pain is that moves by the Fed (in general) are fairly unpredictable. In other words, the Fed itself creates uncertainty. Anyone who thinks if we had robust growth in 2012/early-2013, the Fed wouldn’t break this promise and raise rates is crazy. In fact, if we’re going by markets, the Fed raising rates would be sign this current PAIN is over. So, I think markets would rejoice, when, if that ever happens.
It’s not the super low interest rates directly. It’s what the super low interest rates do over time. They build bubbles, which crash… when severe… the government responds with stimulus/the Fed prints money. The problem, of course, is that we have to pay for all of that directly ( and we’re broke) and indirectly (through inflation). That and the fact that the EU is even more broke, could drive the dollar off the brink as their problems spill over, recessions occur and more spending to get out pushes our debt/GDP equation even more into their realm.
Great! I see it as a bad thing. Why? Because like they’ve done before it’s just more hair of the dog. Price controls in general are bad. Holding rates low for extended periods is a form of price control. This is played out further because the government pretends like it can actually have a situation where goods are affordable and available. Price controls are the antithesis of this.
I would not say the rest of the world, but I get where you’re coming from here. Everyone thinks “flight to safety” brings money to US… we’re “safe”. That’s the way it’s been… but it’s changing. Despite recent slight volatility, gold is saying we’re not safe. I think Europe will tank first and we’ll be soon behind them. My indicator is debt/GDP.
I semi-agree about housing bubbles, I mean that’s what burst… I’ll remain muted on stock bubbles but completely disagree about bubbles in general. First, it’s difficult to predict where the next bubble will show up. It’s not like housing and stock markets have a monopoly on bubbles. Moreover, I think perhaps, some would argue that the bubble is the dollar’s value. If that’s the case, it runs contrary to your point here. And further, the reason I wouldn’t say there’s no stock bubble is if the dollar crashes, so will the stock market… actually even housing could go lower. Once again, I see US debt as the big catalyst here. I don’t see this unraveling quickly. It’s been surprisingly slow so far. But, eventually Greece will tumble, then other EU countries, then the EU… then us.
The only way I can see your point (in your first sentence) is if you’re saying because they aren’t changing anything, they aren’t creating inflation (right now). But, I’d respond, if they do what they say they are… they will tomorrow and for the next few years. As you know, they’re promising to do nothing for years. So, I’d say, they are creating a force just as bad as inflation by altering inflation expectations. In a generalized sense, they are creating price controls. As you know, forced lowering of a price below market value may not do much today, but overtime it will.
If you’ve worked anywhere in markets, you know people don’t really concern themselves with current inflation,… they care about inflation expectations. Anyone who would argue that keeping rates at 0 for years will not create an inflationary environment is lying to themselves.
This is assuming that the quantity theory of money holds up. In order to make any assumption with that equation, you need to know for certain the money supply, which is not an easy or straight-forward task. In fact, it's been the subject of arguments for half a century amongst Nobel laureates in economics.
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