Federal Reserve
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Is Gold Money?… Don't Ask Ben Bernanke, Examine the Federal Reserve
If you really care about your financial future, here's something you need to know.
It's about a story that received almost zero coverage from the mainstream press. I can't say that I am surprised.
It involves gold.
Thanks to requests by Bloomberg News under the Freedom of Information Act, the Federal Reserve has revealed unprecedented details concerning the personal holdings of its regional bank presidents.
What they found is nothing short of stunning ...
Ben Bernanke on Gold
But let me back up a little.
There's an exchange between Fed Chairman Ben Bernanke and Congressmen Ron Paul you need to hear first.
During a monetary policy report delivered to Congress last summer, Congressman Ron Paul asked Bernanke if he thought gold is money.
After a clearly uncomfortable pause Ben said, "No. It's a precious metal." [By the way, if you haven't seen Ron Paul questioning Bernanke about gold, click here. It's already had over half a million views.]
Paul went on to ask Bernanke why it is then that central banks hold so much gold. Bernanke answered that it was simply a tradition.
Well, congrats Ben, you did get that one right, just for the wrong reasons. (Deep down, you surely know the true reasons).
The fact is gold has been a monetary tradition for millennia.
Nearly 2,000 years ago Aristotle laid out what characteristics make for good money. According to Aristotle:
- It must be durable.
- It must be portable.
- It must be divisible.
- It must be consistent.
- It must have intrinsic value.
You might want to reread that: the most common basis for money - in all of human history - has been gold. It's no accident.
After all, only gold meets all five of those requirements for sound money.
It is only in the past century that fiat money has supplanted gold or gold-backed currencies on a worldwide basis.
What makes today's central bankers and their system of printing fiat currencies and setting interest rates so special? It is hubris and nothing more.
Fiat currencies are just a relatively recent, and failing, experiment in economics. So much so, it's become exceedingly dangerous to hold them of late.
Here's why.
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Ben Bernanke is Every Gold Bug's Best Friend
After prices fell 10% in December, many investors wondered if the bull market in gold was running out of steam.
That was before Federal Reserve Chairman Ben Bernanke swooped in with a "red cape" and fired the bulls back up.
Since the Fed reassured the world that interest rates will remain at "exceptionally low levels" for another two years, gold has jumped more than 3%.
UBS AG (NYSE: UBS) described the situation simply, "if investors needed a (further) reason why they should be long gold now, they got it yesterday ... a more accommodative policy is a very good foundation for gold to build on the next move higher."
To gold bugs, two more years of near-zero, short-term interest rates means negative real interest rates are here to stay, and this has historically been a strong driver for higher gold prices.
Bernanke and the Fed aren't the only central bankers in the fiscal and monetary bullring.
Brazil has cut its benchmark interest rate a few times and China lowered its reserve rate for banks in December. According to ISI Group, 78 "easing moves" have been announced around the world in just the past five months as countries look to stimulate economic activity.
One of the main weapons central bankers have employed is money supply, which has created a ton of liquidity in the global system. Global money supply rose 8% year-over-year in December, or about $4 trillion, according to ISI. I mentioned a few weeks ago how China experienced a record increase in the three-month change in M-2 money supply following China's reserve rate cut.
Together, negative real interest rates and growing global money supply power the Fear Trade for gold. The pressure these two factors put on paper currencies motivates investors from Baby Boomers to central bankers to hold gold as an alternate currency.
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Are Federal Reserve Presidents Gaming the System?
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Insider Trading Ban: Congress Really Wants You to Like Them
In an attempt to end plunging approval ratings - and win favor in an election year - the Senate passed an insider trading ban yesterday (Thursday) preventing Congress members from profiting from non-public information.
The Senate passed the bill in a 96-3 vote. U.S. Rep. Eric Cantor, R-VA, said the House would consider the bill next week. U.S. President Barack Obama pledged to sign it immediately.
Congress members hope the new law will change growing American disgust with Congressional perks and partisanship, which has hammered approval ratings down to the teens.
"The numbers of people who have a favorable impression of this body are so low that we're down to close relatives and paid staff. And I'm not so sure about the paid staff," Sen. Joe Lieberman, I-CT, said earlier this week.
Insider Trading Ban Run Down
The insider trading ban prevents members of Congress, top aides, and administrative officials from using non-public information when trading. Any stock bought or sold must be disclosed in a public report online within 30 days.
Several last-minute amendments added to the insider trading ban include:
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Not Much of a Debate: Inflation is Part of the Plan
Forget about lost decades. Forecasts that we'll be turning Japanese couldn't be further from the truth.
Here's why.
It's simple, really. Deflation is not in the interest of anybody in power, so it's very unlikely to happen.
The U.S. Federal Reserve's policy move to target inflation last week just re-emphasizes this point.
That's not to say deflation is a bad thing for everybody.
For savers and those living on fixed incomes, deflation would be a very good thing indeed.
Their income would gradually increase in real terms, and their savings would become steadily more valuable. Holders of Treasury bonds would also gain mightily from deflation.
However, the very people who would gain from deflation are not in power.
The People's Bank of China can't vote in the U.S. (yet!), Ron Paul is not president, and there is not an organized and powerful savers' political movement. After all, this is not Germany or Japan!
Meanwhile, in the real world, the U.S. government is spending far more than it takes in, and its debt is rising to dangerous levels. This has been happening on a bipartisan basis since at least 2001.
The Tea Party may have elected a Congress committed to reducing spending, but none of the battles of 2011 actually reduced spending - they just slowed the rate of growth somewhat.
Since much of the debt is borrowed long-term at low interest rates, the best way to reduce its burden on future generations is to encourage inflation.
Savers may lose out on the deal, but to those in Washington, the idea of inflating our way out of debt is irresistible.
Of course, sometimes we can depend on an independent central bank to resist this temptation. But at present, Fed Chairman Ben Bernanke is committed to near-zero interest rates in his fight against deflation.
Now you don't have to be a conspiracy theorist to realize that, if the power structure is committed to at least moderate inflation, inflation is what you are going to get.
In fact, it is already brewing.
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How Presidential Candidate Ron Paul's Campaign Could End the Fed
Led by presidential candidate Ron Paul's "end the Fed" mantra, Republicans have made their attacks on the U.S. Federal Reserve into an election year rallying cry.
It's one that could turn ugly in November if the GOP manages to score big.
Where Paul has been the lone voice in the wilderness criticizing the central bank for years, others in the GOP recently adopted the Fed as a scapegoat for the financial crisis of 2008.
Many of the Republican attacks include calls to fire Fed Chairman Ben S. Bernanke and to scale back the Fed's mandate - or in Paul's case, eradicate it altogether.
And while Paul - who actually wrote a book called "End the Fed" in 2008 - has little chance of becoming the nominee, his campaign does have a larger philosophical objective.
"It is Paul's goal to permanently establish within the Republican Party a group that is dead set on not having the Fed," Douglas Holtz-Eakin, chief economic adviser to Sen. John McCain, R-AZ, during his 2008 run for the presidency,told MarketWatch. "This is not going away."
Ron Paul Scores Big With Younger Voters
Although Paul's overall support generally hovers in the low double digits, his message is very popular among younger Republican voters.
Paul won 48% of the under-30 vote in Iowa, 47% of the under-30 vote in New Hampshire and 31% in South Carolina. It's a demographic every candidate covets.
Paul's resonance with young voters, combined with the public's dim view of the Fed has set off an all-out GOP assault on the central bank.
For added juice, Republicans in general have sought to tie their criticisms of the Fed to U.S. President Barack Obama and the Democrats.
"If you are a [Republican] running for Congress - those freshmen in the House - they thought that Bernanke was walking around talking about buying assets for Obama to make it easier for him to spend," Holtz-Eakin told MarketWatch. "It lit the fuse."
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Another Bernanke Market Rally
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What's Different About this Week's FOMC Meeting
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The One Question We Must All Ask Ourselves
Rampant profiteering by Congress and greedy bankers is forcing us to weigh the slings and arrows of outrageous fortune against honesty and transparency - both of which are being trampled by crony capitalists in pursuit of the almighty dollar.
What's at stake is whether gross criminal activity and reckless disregard for the public will continue to be whitewashed by regulators like the Securities and Exchange Commission (SEC), the U.S. Federal Reserve, courts, and Congress, which encourage half-baked civil fraud charges followed by non-prosecution agreements and nickel-and-dime fines.
And even more galling, guilty parties end up neither admitting nor denying wrongdoing.
Let's face it, we have allowed the SEC, the Fed, and Congress to be corralled as a matter of regulatory and legislative capture by the very crooks they are responsible for policing and protecting us from.
We are lying to ourselves if we do not believe that we are all part of this problem. It's not that most of us aren't honest. It's that we venerate money and wealth too much.
Rather than being disgusted by dishonest manipulators, liars and cheats, we excuse the less-than-obvious perpetrators as if their example of cutting corners to get ahead, as far ahead as possible, might clear a path for some of our own pursuits.
What have we become? Are we a nation of people with liberty and justice for all, or just a bunch of money grabbers stepping on each other's liberties to pursue self-centered happiness by becoming filthy rich?
Don't get me wrong. There's nothing wrong with the profit motive driving business. And there's nothing wrong with working hard and trying to make a lot of money. Those are honorable pursuits.
President Calvin Coolidge said: "The chief business of the American people is business."
But in the same speech made on January 17, 1925 our 30th president went on to say: "Of course the accumulation of wealth cannot be justified as the chief end of existence."
Tragically, the fountainhead of greed in America emanates from our own Congress. It has become obvious that the accumulation of personal wealth is their primary civic duty.
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Out of Answers, Federal Reserve Can Only Offer Empty Rhetoric
The Federal Open Market Committee (FOMC) is scheduled to issue a statement at 2:15 pm. today (Tuesday), but don't expect anything other than more empty rhetoric.
Indeed, with few options remaining, the Fed is expected to produce little more than a statement designed to reassure the markets following today's meeting.
"If the Fed were smart, they would use this meeting to take decisive action," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "Sadly, though, I think they'll lay low and issue yet more hollow statements filled with information that at this point constitutes less than fluff."
At this point, few bullets remain in the Fed's chamber; interest rates have been near-zero for almost three years, and two programs of "quantitative easing" over the past two years have pumped $2.3 trillion into the U.S. economy.
In an attempt to show it was doing something to help the economy, the central bank said last summer that it would maintain rates at that level until mid-2013.
And while the Federal Reserve is not expected to announce immediate plans for more quantitative easing - QE3 - many believe some sort of accommodation, probably directed at the housing market, is coming next year.
"There is a 75% chance the Fed will buy mortgage-backed securities in the first half of the year, possibly by January," Lou Crandall, chief economist at Wrightson ICAP LLC, told MarketWatch.
A series of relatively positive economic reports in recent weeks - unemployment recently dropped to 8.6%, while consumer spending and manufacturing have edged upward - has eased the pressure on the Fed to take any more action this year.
As part of its strategy to maintain optimism in the markets, the FOMC will likely promise to pump more money into the U.S. economy at some point next year.
"The numbers are getting better, but not enough to keep [the FOMC] complacent," Crandalltold MarketWatch.
Word Games
Recognizing that its options are limited, the Federal Reserve instead will focus today on the one thing it can provide in near-limitless supply - words. Today's meeting is expected to focus on a new communications strategy that will offer more details on the Fed's goals for inflation and unemployment - its dual mandate - and how it plans to meet them.
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