Since October the stock markets have been on a ride of ridiculous levels of volatility enough to make those closing in on retirement squeamish. Volatility showcased its’ unpredictable nature as the Dow Jones Industrial plunged more than 600 points on Christmas Eve only to rebound with a more than 1000 point surge to close out the holiday week.
During this insanely cataclysmic trading week, President Donald Trump was cozy with his cell phone and his television as the tumultuous market events unfolded. You see, the government has been shut down since the Saturday before Christmas so President Trump has some extra time on his hands, especially during the holiday season, to enjoy his favorite activity…tweeting.
In the midst of President Trump’s Christmas Eve tweet storm, I found a jewel. He tweeted something that some people hope signals not necessarily a change in policy but a modification for how our economic and financial systems operate as a whole. I’m giving you advance warning, wading through our President’s Christmas Eve tweets can be a treacherous journey that isn’t beneficial for the timid at heart.
So, what did President Trump tweet that could be at least encouraging, at most inspirational, to certain segments of our political society?
The only problem our economy has is the Fed. They don’t have a feel for the Market, they don’t understand necessary Trade Wars or Strong Dollars or even Democrat Shutdowns over Borders. The Fed is like a powerful golfer who can’t score because he has no touch – he can’t putt!
Our President narrows all of our economic issues down to only one problem: The Fed. For those who aren’t sure what this Fed is that Trump is referencing, it is the Federal Reserve Bank, which is not a government bank, but rather a private bank that sets our federal monetary policy. It was invented out of thin air by Congress in 1913, although many of its concepts were already working in the economy in an unofficial capacity.
The Fed functions in a sort of private-public collaboration that is designed to prevent recessions and curb inflationary pressures that hurt the economy. Basically, the Fed can affect our economy and is practically unaccountable to Congress, or the President, for the decisions it makes. The Fed’s driving concept is that a politically independent Fed will lead to solutions that aren’t politically motivated and thus better for the nation in its entirety.
President Trump’s tweet threatens and undermines the state of independence the Fed has enjoyed since it’s inception. I think this, and President Trump’s Syria move, expose what may be a secret relationship which could generate a lot of excitement in the liberty movement. Taking on the Fed would be a move right out of Senator Ran Paul’s playbook, just like a less-interventionist foreign policy.
Maybe Senator Paul has been working behind the scenes to shift President Trump toward more libertarian solutions to the variety of issues our nation faces. Paul has been working on Trump about auditing the Fed since the bill began working through Congress in the Spring.
If President Trump’s tweet signals his desire to bring the Fed under Congressional oversight and accountability, then it is definitely a threat to the autonomy under which the bank has operated.
A turning point in how our elected leaders deal with the Fed could lead to more unstable and volatile markets in the days to come since those markets are naturally uncertainty-averse. However, the long-term benefits of restoring control of our monetary policies to a more accountable and constitutional process could secure our economic stability for generations to come.
Yet, we have to leave the possibility open that President Trump’s tweet was just a momentary ventilation of his frustration with Fed chair Jerome Powell’s rate hikes and their impact on the markets. If so, this means that nothing will change structurally in that relationship and that President Trump will rely on the bully pulpit he has as President that includes his Twitter account to influence the future monetary decisions of the Fed.
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President Donald Trump and Ron Paul actually agree on something: Americans need to audit the fed. Trump has said recently, “I really disagree with what the Fed is doing” on the topic of raising interest rates. Of course, both political leaders have reasons for concern: the U.S. dollar has lost over 96% of its value since the inception of the Federal Reserve in 1913.
Paul has also repeatedly called for an audit of the Federal Reserve. His son, too, shares this same belief. Rand Paul has put forth legislation to audit the fed and it indeed includes an exception for cryptocurrencies.
The first steps are passing the Audit the Fed bill, allowing people to use alternative currencies, and exempting all transactions in precious metals and cryptocurrencies from capital gains taxes and other taxes. -Ron Paul
Spending cuts are probably the next thing Americans need, next to aggressive tax cuts. The inclusion of these tax cuts, however, will not entice Democrats standing on the opposite side of the aisle, preparing to resist. Generally in favor of higher taxes than Republicans, their support for capital gains exemptions may be low.
The Federal Reserve has never had an audit before, in its more than 100-year history. In past votes, Democrats have shown little support for the plan. However, some have dissented and shown support, including left-leaning Independent Bernie Sanders.
Federal Reserve Danger
Ron Paul is able to point out the apparent near danger that the Fed’s fiat currency manipulation has caused:
In contrast to market money, government-created fiat currency is anything but stable. Central banks constantly increase and decrease the money supply in an attempt to control the economy by controlling the interest rates. This causes individuals to misread market conditions, and … eventually, reality catches up to the Federal Reserve-created fantasies.
Paul’s words come at a time when cryptocurrency is, relatively speaking, stagnant. However, many market analysts suggest that the rest of this year and 2019 will bring a revival.
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Donald Trump, as reported in Bob Woodward’s new book “Fear: Trump in the White House”, told Gary Cohn, the Director of the National Economic Council, to just “run the presses– print more money” when addressing the insurmountable US Federal Debt. Donald Trump, the same man who ran a campaign to the White House that pledged to “eliminate the [$19 trillion national] debt over a period of eight years”, thinks we can print our way out of this mess.
Bob Woodward, an investigative journalist and Editor at the Washington Post since back in the Nixon days of 1971, wrote a full book exposure of the Trump White House in comparison to the other administrations he’s seen in his tenure at WaPo. In the book, Woodward describes a back-and-forth between the National Economic Council and Trump that is truly telling of how out of the loop President Trump is. While the book dates the quotes and conversations back to 2015 and 2016 during his campaign, it is hard to believe the stances on this economic issue have changed in the slightest. With the signing of reckless spending bills and omnibus budgets that only increase the forecast of US government expenditures, it is clear that President Trump is all talk and no walk on the subject of the current economic crisis that is the National debt.
Whether or not it was already known that Trump’s words bleed insincerity when it comes to spending cuts or a balanced US checkbook, it is evident now that the current POTUS has no viable long-term solution for the issue, which could cause the worst depression yet. His “solution” if it could be considered as such, of printing more money to offset the effects of the ever-growing now $21 trillion national debt is not just infeasible, but is admittedly extremely popular in Washington D.C. and the White House itself, with past Presidencies.
We see in the Obama administration, the idea of printing more money caught wildfire throughout the EU and G-20 with direction by former President Obama himself. In fact, there was a specific occasion during a G-20 meeting where Obama and Biden called on Angela Merkel of Germany to start “pulling their weight in the global effort of economic stability” by “printing” more money. As much of an oxymoron as that sounds to even the most amateur economist, it is a legitimate belief that has spiraled many countries to insurmountable debt.
The Basis of Economics
The principles of economics rest on responsibility with the money you own. It would be foolish for the average person to go out and buy a $350 Xbox One when after my checkbook is cleared, I only have $150 to spend. Why do we not ask this much culpability from our Federal Government?
It all started back in the days of Woodrow Wilson, and the creation of the Federal Reserve as an entity itself in 1917. The overarching power of a central bank to be the authority on all things money related can be a powerful responsibility, and in most times, a detriment to the economy it attaches itself to. Before the creation of the Federal Reserve, only $20 billion in debt had accumulated in the years after the Civil War. When adjusted to inflation, this comes out to around $51.7 billion, just barely 25 percent of what the US National Debt is today. Since then, we’ve seen the ability to print money used as a weapon to over tax citizens, and justify wars overseas where the US frankly should not be involved in at all.
In the case of George W. Bush, the National Debt was increased 101%, tacking on $5.849 trillion to pay for the (ongoing) War on Terror in Afghanistan and Iraq. Military expenses rose to all-time highs, and when the US taxpayers couldn’t chip in the yearly $600-800 billion necessary to fund it, Bush and the Federal Reserve created the money out of thin air to respond to the 9/11 attacks over a span of 8 years that hasn’t stopped since. When will we be done with this intervention? The question has yet to be answered, and President Trump hasn’t made progress in that regard either.
Bad economic habits and fiscal irresponsibility is prevalent across the board, no matter party denomination. President Obama raised the debt 74% in his tenure in the White House, adding $8.588 trillion from fiscal years 2008-2016. Whereas Bush picked his poison with military spending, Obama focused more on tax cuts, unemployment benefits, and public works projects to recklessly spend more money than the US Government could even think about obtaining. That’s not to say that Obama didn’t have his fair share of military spending checks sent to the Department of Defense consisting of artificially printed money, because the War on Terror persisted throughout his Presidency as well. These bad values will lead us to the next depression at the expense of the taxpayer and common folk, while the people who got us in this mess leave untouched.
Hyperinflation is defined as the monetary inflation that occurs at a high. uncontrollable rate. When the economy sees an influx of money in circulation, prices rise as the natural tendency of the free market sets out to do. When the government steps in to pay for it’s mistakes or overspending by printing money out of thin air is where the problems really start to occur. As Kimberly Amadeo of The Balance describes: “Instead of tightening the money supply to stop inflation, the government keeps printing more. With too much currency sloshing around, prices skyrocket. Once consumers realize what is happening, they expect continued inflation. They buy more now to avoid paying a higher price later. That excessive demand aggravates inflation. It’s even worse if they stockpile goods and create shortages.”
The economy will crash in the event of Trump printing more money to stabilize the National Debt, and it won’t be a small recession. We will see the closing of businesses as the value of the US dollar declines, leading to lower imports and exports, and a shortage of goods in the US market. With all of this leading to a disaster, we beg the question: Why aren’t we holding these government workers to higher standards? After all, they clearly aren’t looking out for our best interests. On his campaign trail, Trump vowed to be the change in the government bureaucracy that is Washington D.C., but he clearly can’t live up to that.
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The world is sitting on the largest financial bubble ever created. While the economic elite says that we will never see another crisis in our time (just as Keynes said two years before the crash of 1929), we have been living in a bubble for more than a century, and it will inevitably break. This bubble, however, is unlike any economic boom we have dealt with before. The inflated commodity that will cause the future bust is the currency which the US Federal Government forces us to use: the US Dollar, and this is all because of the unnecessary fear of deflation.
Estimates say that as much as 98% of the value of the US Dollar has disappeared since the Federal Reserve claimed a monopoly power over currency in the United States. The only reason the Dollar has not collapsed already is due to legal tender laws, which requires businesses to deal in US Dollars within the US.
So, how did it get so bad? As alluded to in the first paragraph, it is because the government is terrified of deflation. They fear that since prices have a tendency to decrease, people will hoard their money since they can make a profit by simply refraining from spending in the present. Since consumers hold on to their money, firms earn less revenue, which causes them to decrease their spending. This leads to a decrease in employment, and therefore production. With this loss of production, those who make the factors of production also lose revenue, leading them to cut spending, thus decreasing production and employment. With the loss of employment, consumers spend even less. This ultimately leads to a complete collapse of the economy according to the Keynesians (see Chapter 12 of John Maynard Keynes’s The General Theory of Employment, Interest, and Money).
Deflationary Spiral will not destroy the economy
The process outlined in the prior paragraph is known as a “deflationary spiral,” in which deflation causes the entire economy to disappear. This, however, is an economic myth. In truth, a deflationary spiral can only occur under special circumstances. The reason why Keynes is wrong in assuming a deflationary spiral will happen is two-fold.
First, it is not possible for human beings to reduce spending externally. Although money does possess deflationary tendencies when unregulated, this does not mean that people will hoard their money indefinitely. Humans have basic needs, namely food, water, and housing. It simply isn’t possible for the people to cease all forms of economic activity.
The second reason why a deflationary spiral will not destroy an economy is time preference. Time preference is the concept that human beings prefer present goods to future goods. If one offered you one thousand dollars today or one thousand dollars in one month, people will typically take the money today. This is why we have an interest in society. Interest gives an incentive for one to refrain from present consumption so that they may have even more future consumption.
People, however, have varying degrees of time preference. The lower your time preference is, the more willing you are to forego present consumption for future consumption. Simply because something is cheaper in the future does not guarantee that someone will wait to consume it. If the price drop is high enough, then they will wait, but that only applies to those with low enough time preferences to be willing to wait. Those with higher degrees of time preference will still consume and the economy will not totally disappear.
What are the causes of deflation?
There are four immediate causes of deflation.
An increase in the demand for money will cause deflation. If the demand for money increases relative to the demand for goods, then price deflation will occur. Money will have an increased purchasing power due to the increased demand for money.
A decrease in the supply of money will lead to price deflation. If less money is in the system, then people will marginally value money more than goods. Simply put, with less money in the system, people will be able to purchase more goods for less money.
A decrease in the demand for goods. If the demand for goods decreases relative to the demand for money, then money becomes more valuable and deflation occurs.
An increase in aggregate output. In other words, an increase in the supply of goods will cause price deflation because production has become more efficient.
The commonality among these causes is that it leads to the decrease in the price of goods.
Deflation is caused by economic growth
The fourth cause of deflation, an increase in aggregate output, is simply economic growth. Economic growth, in fact, is inherently deflationary. When the people can afford more for less, there is growth. This compels more production, more innovation, and more prosperity, especially among the lower classes.
The only examples in which economic growth was not deflationary was in times of war. In times of war, the State forces an increase in production through inflationary policies that allow the government to “afford” these wars. This inflation, of course, always leads to a bust in the future.
Inflationary growth is unsustainable.
Under inflationary growth, the government utilizes their power to dictate the devaluation of their currencies. This leads to vast misallocations of resources. By devaluing the currencies, governments redistribute wealth to political entrepreneurs who position themselves to receive money straight from the printing press. Major banks and corporations are among the most prone to doing this.
The growth these firms experience, however, is vastly unsustainable, whereas it is built upon wealth that did not exist in the first place. In true growth, firms cut their costs in order to produce more efficiently and maximize their profits. Under inflation, however, the exact opposite happens. An inflationary monetary policy, especially one based on a fiat currency in a system that tolerates fractional reserve banking, will lead to a boom that must be corrected.
The idea that inflationary policies can lead to growth in the short run is just another example of the broken window fallacy. As mentioned before, political entrepreneurs who receive money straight from government printers benefit, but those who are not politically connected suffer since they cannot pay the higher wages and other costs. This leads to unnatural growth at the expense of others.
Inflation is fraud.
When the government implements a fiat system, they have the ability to manipulate the currency to deceive the masses into believing out economic condition is better than what it really is.
Fractional Reserve Banking
Perhaps the most egregious form of inflationary fraud is fractional reserve banking (FRB). FRB is a system in which banks loan out the deposits of its customers, keeping only a fraction of their nominal reserves in the bank. This leads to unnaturally low-interest rates and thus high levels of debt.
If a shock in the economy occurs, bank runs will happen. When it comes out that the bank can’t give its customers their money, the bank goes under (or gets bailed out due to government intervention), and the people lose everything.
FRB is a clear instance of fraud in which a bank claims to have more money than it truly has. It is loaning out its customers’ funds, leading to credit expansion, which leads to business cycles.
Of course, we can dodge this by returning to the gold standard and punishing those who partake in fractional reserve banking.
Deflationary Spiral punishes parasitic frauds.
Inflation must come down eventually. And the only way to do that is through deflation. This is not to be feared but celebrated. It is the market’s way of correcting the malinvestments caused by government manipulation of money. Deflation is a means by which the economy returns to the real world. In addition, it halts the centralization of power under governments that have cartelized the monetary system of their nations.
Firms that are deeply in debt, which have certainly taken advantage of the fraudulent fiat and fractional reserve banking systems, will go under. The power elites of the State will be humbled as they will lose the foundation on which they rested. Deflation purges our society of the parasites and frauds that have been manipulating the economy to their advantage since 1913. By this, of course, I mean the central planners and political entrepreneurs who have propped up the Federal Reserve and the federal government. For they have delayed deflation for more than a century. For liberty and prosperity to return, we must have a deflationary spiral to rid us of the wealth that the State holds, which never existed, to begin with.
Switzerland has long been known for being a fiscally responsible (most often caused by internal competition between the Cantons) banker nation. Yet since the EU has grown in influence, so has their unitarian nature. With this comes an extreme blood-thirst for monotony, as well as a lack of competition.
In March 2011, the European Central Bank in Frankfurt, Germany, pressured the Swiss national bank to cap the swiftly strengthening Franc to the Euro. This was the natural conclusion of Switzerland, which already had ditched the gold standard on the first of May, 2000. How ironic is it, that it happened on the communist holiday of 05/01? This capping, whilst certainly hurting the Franc’s fame as a sure way to keep one’s assets intact in cases of war, lasted for 3 years, until 2014.
In a frantic move by Swiss elites, who sensed that EU leaders were too busy with Middle-Eastern immigrants, tried to also force down the partial re-institution of the gold standard via expanding the national bank’s fractional reserve (modern banking system) banking from an 8% coverage of the Franc’s value in gold to 20%. This would lead to investors being more likely to use the Franc and would help their economy greatly. Yet, as Karl Marx said, “Democracy is the road to socialism”. The referendum failed, with only about 20% of the population voting to support the fiscal counter-revolution.
However, citizens do realize when something was better in the past – there is still hope! Switzerland is going to have another referendum in June, this time proposing the complete abolishing of the Fractional Reserve Banking, and the abolishing of debt currency. The referendum, organised by the Vollgeld Initiative, will have a bigger effect on you than you can imagine.
Right now, a bank may lend you money that it does not have. It “creates” it using computer code, automatically stripping away part of the money’s value, and increasing inflation. All the bank needs to hold is a fraction of the money it lends. This was the reason why many irresponsible banks collapsed in 2008. Most international banks have their main headquarters in the ever-neutral Switzerland. If this referendum gets over half the votes, all of these banks will adopt these rules, making a global difference. Expect the value of money to deflate considerably less.