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[Markets] Stockman: What Inflation Would Look Like In A True Free-Market Economy Stockman: What Inflation Would Look Like In A True Free-Market Economy

Authored by David Stockman via,

There is nothing more substantive than Bernanke’s original finger-in-the-air proposition that the Fed needed a 200 basis point cushion in the inflation rate in order to steer the economy clear of the dreaded 0.0% inflation line, the other side of which allegedly amounted to a black hole of deflationary demise.

But here’s the thing. There is not a shred of historical evidence that the US economy needs a 2.00% inflation guardrail to thrive, or any fixed rate of inflation at all.

For instance, even during the most difficult period of the 20th century—from 1921 to 1946 when the US economy experienced the Roaring Twenties boom, the Great Depression bust and the WWII rebound—there was abundant net economic growth over the period as a whole, accompanied by zero inflation.

In fact, the US economy nearly tripled in size during that quarter-century period. Real GDP expanded at a robust 3.64% per annum rate, and real GDP per capita rose by 2.55% per annum.

By contrast, between the 2007 pre-crisis peak and 2021, real GDP grew at only half that rate (1.72% per annum), while per capita real GDP increased by just 1.04% per year. That was just two-fifths of the rate of annual gain during 1921-1946.

Needless to say, it didn’t take any 2.00% inflationary guard rails to generate the salutary outcomes cited above for 1921-1946. The CPI index shown below posted at 542 in February 2021 and 541 a quarter century later in May 1946.

Purchasing Power of the Dollar, 1921 to 1946

As it had unfolded, there was zero CPI inflation during the Roaring Twenties; a severe deflation during the Great Depression, which merely reversed the war inflation of 1915-1920; and then a return to the 1921 price level during the booming but regimented economy of WWII.

Still, by the spring of 1946 the dollar’s purchasing power was 100% of what it had been in early 1921. It had not taken any net inflation at all to generate a near tripling of the nation’s economic output.

The implication is straightforward. To wit, the Fed doesn’t need a pro-inflation target of 2.00% per annum. Nor does it need any of its other macroeconomic targets for unemployment, jobs growth, actual versus potential GDP or the rest of the Keynesian policy apparatus. All of those variables are the job of the people interacting on the free market, producing whatever outcomes their collective actions happened to generate.

Indeed, macro-economic outcomes are not properly the business of the state at all. The Fed’s job is far more narrow. As originally conceived by its great architect, then Congressman Carter Glass, its mission was to keep the purchasing power of the dollar as good as the gold to which it was to be linked, and the banking system liquid and stable, as driven by the free market of borrowers and lenders.

As we have explained on other occasions, Congressman Glass called this a “bankers’ bank” and the term could not be more diametrically opposed to the central planners’ bank of Greenspan, Bernanke, Yellen, Powell and Brainard.

As Carter Glass saw it, no academician needed to stick his finger in the air and divine an inflation target. Nor did any modeler need to goal-seek his/her equations until they suggested the optimum U-3 unemployment rate relative to an arbitrary inflation target.

The fact is, the free market operating with sound gold-backed money was never inflationary. In that context, interest rates were also not a policy “tool” of the central bank, but the result of a market-clearing balancing of supply and demand.

As Carter Glass had arranged it, the Fed was not allowed to own government debt, nor did it have an activist arm now known as the FOMC empowered to intervene in the money and capital markets by buying and selling debt securities.

To the contrary, its avenue of operation was the discount window at the 12 regional Federal Reserve banks. The latter were authorized to advance funds to member banks, but only at a penalty spread above the free market interest rate, and also only on the basis of sound, self-liquidating collateral in the form of commercial paper that matured within a matter of months.

Given this mechanism, the dynamics of Fed policy were the opposite of today. Under the Glassian arrangement, the Fed’s balance sheet was the passive consequence of free market activity by commercial bankers and main street borrowers, not a mechanism to proactively steer the level of aggregate commerce and business activity.

Accordingly, the Fed’s value added stemmed not from wild-ass guesses about the inflation rate by PhDs like Lael Brainard, but from the grunt work of green-eyeshade accountants. Their job was to verify that bank loan collateral presented for funding at the discount window represented the obligations of sound borrowers, not speculators and high flyers, who would reliably repay under the terms of the underlying bank loan, thereby ensuring that the Fed’s discount loans would be repaid at term, too.

What this meant was that the Fed’s balance sheet was intended to reflect the ebb-and-flow of decentralized commerce and production on main street, not a centralized judgment by 12 people gathered on the banks of the Potomac about whether inflation and unemployment were too high, too low or just right.

That is to say, under the bankers’ bank arrangement the free market put an automatic check on CPI inflation. That’s because unsound speculative loans could not be easily made in the first place, since they were not eligible for discount at the Fed window.

And if demand for even sound loans got too frisky, interest rates would rise sharply, thereby rationing available savings until more of the latter could be generated or demand for the former was curtailed.

*  *  *

The truth is, we’re on the cusp of an economic crisis that could eclipse anything we’ve seen before. And most people won’t be prepared for what’s coming. That’s exactly why bestselling author Doug Casey and his team just released a free report with all the details on how to survive an economic collapse. Click here to download the PDF now.

Tyler Durden Fri, 02/03/2023 - 13:00
Published:2/3/2023 12:12:44 PM
[Entertainment] Casey Wilson and Husband David Caspe Welcome Baby No. 3 Via Surrogate Casey Wilson, David Caspe Casey Wilson is embarking on a new chapter of motherhood. The Happy Endings star has welcomed her third child—a baby girl named Francis Rose—with husband David Caspe, she announced on the Jan. 26...
Published:1/26/2023 7:53:47 PM
[World] New national debate on abortion has begun The infamous holdings in Roe v. Wade and Casey have been reversed by the Dobbs decision -- conveying to lawmakers at the federal, state and local levels the authority to regulate abortion. Published:1/19/2023 4:04:43 PM
[Entertainment] Casey Anthony to Break Silence on 2011 Trial in New Docuseries Casey Anthony, Casey Anthony: Where The Truth Lies, Peacock Peacock's new docuseries is diving into one of the most polarizing trials in recent history. Eleven years since she was found not guilty of the murder of her two-year-old daughter, Caylee, Casey...
Published:11/8/2022 12:17:37 PM
[Markets] Marx's 5th Plank: What You Need To Do As The Fed's Credibility Evaporates Marx's 5th Plank: What You Need To Do As The Fed's Credibility Evaporates

Authored by Nick Giambruno via,

International Man: First, the Federal Reserve told us there was no inflation.

Then, they told us not to worry when inflation became undeniable because it was only “transitory.”

Then, when it became apparent that it was not merely transitory, they told us not to worry because inflation is actually a good thing.

Then, when it became obvious that inflation was not good, they told us not to worry because they had it under control.

Do you think the Federal Reserve has lost its credibility?

Nick Giambruno: The Fed should have lost credibility long ago for anyone with gray matter between their ears.

The Fed is discrediting itself because of the ridiculous lies they’ve been spewing for the past couple of years, like “inflation is good.”

What kind of person thinks higher grocery, gas, clothing, rent, and medical care costs are good?

The only ones who do are fools or those who benefit from lowering the standard of living of everyone else. It’s like saying America needs more tapeworm infections. It’s repugnant.

Please don’t believe the Fed’s absurd deceptions.

They’re spitting on your boots and telling you it’s raining. It’s gaslighting.

The reality is that inflation is out of control, nothing can stop it, and it’s poisonous for individuals and the economy.

Here’s the correct way to think about the problem.

Did you know the US government has printed more money recently than it has for its entire existence?

Since the outbreak of the Covid hysteria in March 2020, the US government has inflated the money supply by around 41%.

That amount of extreme money printing has never occurred before. So here’s what it means…

If your after-tax wealth has not increased by 41% since then, you are not keeping up with the Fed’s monetary debasement and are losing ground. You’re on the road to serfdom.

It’s just an anecdote, but I don’t know anyone whose after-tax wealth has grown by 41% since March 2020. I imagine that most people don’t know anyone, either.

Here’s the bottom line.

Most people are getting poorer, and the Fed is to blame.

International Man: Do you think the Fed can get inflation under control?

Nick Giambruno: This is a popular topic in the financial media, but the framing of the question is incorrect and deflects from the actual source of the problem.

The truth is the Fed is the engine of inflation and is incentivized to create much more of it.

Putting the Fed in charge of getting inflation under control is like putting Marlboro in charge of getting lung cancer under control.

Further, it should be self-evident to everyone by now that central planning doesn’t work.

In Marx’s Communist Manifesto, the 5th plank calls for the “centralization of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly.”

That is a perfect description of the Federal Reserve and other central banks.

In reality, the Fed is nothing more than a politburo of bureaucrats attempting to centrally plan the economy by tinkering with the money and interest rates—the most important prices in all of capitalism.

Even if we presume the Fed has benign intentions—which it doesn’t—central planning is an impossible task and failure is inevitable.

That’s why the Fed is in a mission-impossible situation—much like it was an impossible task for the Soviets to centrally plan their economy.

The best thing investors can do is recognize that the Fed can’t save the day any more than the State Planning Committee of the USSR could—and get positioned accordingly.

International Man: Since the Fed can create an unlimited amount of fake money out of thin air, does the US federal government’s debt even matter anymore?

Nick Giambruno: Yes, I think the debt is becoming an urgent problem for the Fed. That’s because of the out-of-control inflation, which the Fed is attempting to combat by raising interest rates.

However, the amount of federal debt today is so extreme that even a return of interest rates to their historical average would mean paying an interest expense that would consume more than half of tax revenues. Interest expense would eclipse Social Security and defense spending and become the largest item in the federal budget.

According to even the government’s own crooked inflation statistics, which understate the problem, price increases are soaring to 40-year highs.

That means a return to the historical average interest rate will not be enough to reign in inflation—not even close. A drastic rise in interest rates is needed—perhaps to 10% or higher.

If that happened, it would mean that the US government is paying more for the interest expense than it takes in from taxes.

In short, the Federal Reserve is trapped.

Raising interest rates high enough to dent inflation would bankrupt the US government.

The Fed could combat rising prices by hiking interest rates in the past. Today, thanks to the extreme debt levels, it does not have that option, which means inflation will continue to spiral out of control.

That’s why the situation is unprecedented and dangerous.

*  *  *

Washington DC politicians and central planners have unleashed the most destructive monetary policies in the country’s history. It’s a foolish financial gamble that will ensure the destruction of the economy, people’s livelihoods, and ultimately the US dollar. There are still steps you can take to ensure you survive the coming turmoil with your money intact. That’s why bestselling author Doug Casey and his team just released an urgent new PDF report that explains how you to survive and thrive in the months ahead. Click here to download it now.

Tyler Durden Wed, 10/19/2022 - 18:25
Published:10/19/2022 5:49:53 PM
[] Casey DeSantis ushers in the Handmaid's Tale by … wearing a green dress Published:10/9/2022 6:53:57 PM
[Politics] WATCH: Gov DeSantis releases new ad about illegal immigration after Martha’s Vineyard… Governor Ron DeSantis, via his wife Casey, released a new campaign ad today on the terrible consequences of illegal immigration. Watch: “My child was killed by someone who should not have been . . . Published:9/19/2022 3:37:51 PM
[Markets] Doug Casey On Class Warfare, 'Eat The Rich' Sentiment, & What Happens Next Doug Casey On Class Warfare, 'Eat The Rich' Sentiment, & What Happens Next


International Man: Politicians looking for ways to finance their extravagant spending increasingly complain that the wealthy aren’t paying their “fair share.”

It’s a trend in motion that is accelerating. This rising anti-wealth sentiment seems to be taking the US into dangerous territory.

Our friend Rick Rule once said, “Eat the rich? Prepare to starve.”

What is your take?

Doug Casey: Once upon a time, government apologists liked to say that the rich had to be taxed in order to help the poor. That’s no longer the case. Nobody in America is starving. Even poor people have flat-screen TVs, air conditioning, and refrigerators. The poor live better than medieval royalty.

What’s going on is the institutionalization of envy, a terrible vice. It’s different from jealousy.

Jealousy says, “You have something that I want. I want one too. Give it to me.”

Envy says, “You have something that I want. If I can’t have it, I’ll destroy it, so you can’t have it either.” Envy is the moral flaw that underlies all socialist economic theories. Socialist feelings and morality underly the economic lies, race hatred, class hatred, sex antagonism, and political polarization tearing the US and the West apart. Envy and socialism have become secular religions. The country has been divided into two different and mutually antagonistic worldviews.

It’s a question of what’s right and wrong, what’s good and evil. It’s not a question of economics, about what’s more productive. This is a much more serious division. It amounts to a religious war between the Left, who want to overthrow and transform society, and the Right, who want to more-or-less maintain traditional values, but lack any real ideology.

The Left is proposing all manner of outrageous, destructive, and genuinely stupid ideas. Free stuff for everybody. Not just food, shelter, schooling, and medical care provided at the expense of producers—which they’ve basically achieved. But now a guaranteed annual income. Everybody is supposed to get a thousand dollars a month, according to the silly twit and wannabe US president Andrew Yang. They won’t have to do anything, just exist, presumably hanging out at Starbucks playing with their iPhones all day. They’ll genuinely be what Yuval Noah Harari, the World Economic Forum’s mincing court intellectual, has called a permanent class of useless eaters.

At some point, however, people who work, create, produce, and believe in traditional values will react. Maybe they’ll explode in a violent counter-revolution. Maybe they’ll quietly go on strike, as did Ayn Rand’s heroes in “Atlas Shrugged.” Or maybe they’ll roll over and be transformed into serfs—which is what The Elite would prefer and expect. But something wicked this way comes.

International Man: What do you make of the hiring of 87,000 new IRS agents in the context of this trend?

Doug CaseyThose people aren’t being recruited just to collect taxes, although that’s absolutely one of the things that they will do. They will amount to a national police force, one that has a different mandate than the FBI, the ATF, the DEA, or other Praetorian agencies. The tax authorities have a right to look at any economic activity everywhere and anywhere.

As a moral issue, they’ll try to turn nonpayment of tax on the part of producers into a crime against society. I shudder to think of the type of amoral creatures being recruited—at fat salaries and with immense powers—to investigate the lives of their countrymen. They’ll be exactly analogous to Germany’s Gestapo or Stasi.

These new IRS agents will have little to do with the poor. The poor are increasingly irrelevant, except for their votes. As it’s been throughout history, the uneducated lower classes basically do hand-to-mouth labor. They’re mainly interested in bread and circuses, and that’s what they’ll get. Their numbers are growing in this country for the first time.

The new IRS agents won’t have much to do with the elite either; they can afford tax lawyers and accountants to fend them off. They’ll take a few casualties for show and the sake of “fairness,” but the elite are the main beneficiaries of the hundreds of billions of dollars that the government is pouring on society. This is all going to be paid for by the middle class, the people who actually produce and save.

These new IRS agents are a direct attack on the middle class. The elite hate the middle class and what they stand for—independence, stability, and traditional values. The fact that they’re doubling the size of the tax police is truly extraordinary. As the economy continues to decline, you can expect class warfare—along with race and sex warfare—to increase.

As I explained last week, this is an important part of Modern Monetary Theory (MMT). Hundreds of billions of dollars that the government will spend through their Inflation Reduction Act will be financed—intentionally—by the creation of new dollars.

The reason why they say it’s “inflation reduction” is because the same number of dollars will theoretically be taken out of society through taxes. The new dollars will be placed with the people and companies the government likes. They say it won’t be inflationary because the same number of dollars will be taken out of the economy from people and companies that they don’t approve of. So, theoretically, the net number of dollars in society will stay the same, and the general price level will stay the same because the money supply will stay the same.

That’s their economic argument. But the moral argument is far more important. MMT allocates hundreds of billions to those the Left approves of and will take that much away from the middle class through taxes. It’s diabolically clever. As I said, this amounts to a religious war because the people behind MMT are actually evil.

Unfortunately, “evil” is a word which has been discredited; people no longer take it seriously. It’s been overused by emotional and often corrupt Bible thumpers, hell, and brimstone preachers. But evil really does exist. Evil is the intentional act of destroying something good.

International Man: With financial markets falling and the US dollar’s purchasing power plummeting, many people are feeling poorer and are looking for someone to blame.

What is your view on this dynamic and how it could affect the political situation?

Doug CaseyThe speech Biden gave on September 1 was intended to be shocking and disturbing. It mimicked a scene out of V for Vendetta or 1984. They went out of their way to have Biden deliver it in Philadelphia, where the US was founded, and use red lighting against a dark background to fan emotions. These people are serious. Biden’s words were full of hate and venom, calling out half the country as the enemy—the speech was unprecedented. It was a warning and an overt threat.

Look at the scene. The red background was over the top. Placing a couple of Marines in the background said, “I have power, and I’ll use it against the enemy.” Theatrics such as these are unprecedented. It amounted to a declaration of civil war. It was followed up by the outrageous raid on Trump’s home and the FBI perp-walking about 50 of his prominent supporters, with dawn raids, in subsequent days.

These people truly want to overturn society. They’re actually a reincarnation of the Jacobins and could turn out to be just as violent and dangerous.

They’re working to create an active environment of class warfare in the US. They’ve succeeded in fomenting race hatred, where people identify not as human beings but as people of color and anti-white. And sex warfare, wherein people are no longer either men or women—albeit a few with aberrations of varying degree—but as one or more of 50 or 60 genders.

These people hate the middle class, with their traditional cultural and religious values. This is why Trump is so popular and why they identify with him. It’s not because many of his ideas are particularly good; he’s essentially a populist with no philosophical center.

The elite and wannabe elitists hate Trump because he’s a cultural traditionalist. These people want to overthrow traditional culture itself and eliminate the middle class. In the ideal world of the WEF types, the vast majority of people, the deplorables, would be serfs and the kulaks serving the nomenklatura ruling on the top, assisted by their apparatchiki.

I know it sounds outrageous, but that’s what’s on their minds. We’ve seen this before in history when Leftist intellectuals get control of real power, the apparatus of the State. They truly want to overturn the very basis of civilization. The Jacobins in revolutionary France, the Bolsheviks in Russia, the Nazis in Germany, the Maoists during China’s Great Cultural Revolution, and the Pol Pot regime in Cambodia. It can happen anywhere when conditions are right. It seems to be happening now in the US and other Western countries.

Let’s hope it blows over. But don’t plan your life around that…

International Man: Historically, the size and power of the middle class made the US different from other countries.

But now, the US middle class is shrinking and feeling squeezed.

Where is this trend going, and what can the average middle-class person do about it?

Doug Casey: What was the average man supposed to do when the Jacobins brought out the guillotines in France in 1793? What should the average middle-class person have done in Russia in 1917? What should the average middle-class person have done in Germany in 1933?

There’s not much you can do when actual forces of evil are in control. There’s very little that you can do except get out of Dodge.

Here in the US, we still have a large middle class. Many are fat, dumb, indoctrinated, or addicted to Prozac and Zoloft. But millions of others are, to coin a phrase, mad as hell and aren’t going to take it anymore. The things we’ve been talking about could turn into a genuine civil war.

What to do? Diversify your political jurisdictions. Don’t roll over like a whipped dog; speak up, and resist. But the most important thing you can do personally is become as rich as possible while maintaining your ethics. Being rich can help you to insulate yourself from evil and stupidity.

*  *  *

If you want to navigate the complicated economic and political situation that is unfolding, then you need to see this newly released video from Doug Casey and his team. In it, Doug reveals what you need to know, and how these dangerous times could impact your wealth. Click here to watch it now.

Tyler Durden Thu, 09/15/2022 - 21:40
Published:9/15/2022 9:02:28 PM
[Markets] The View From Unretirement: These are the forces trying to ‘steal your joy’ in retirement Author Joe Casey on how to win the retirement game. Published:9/14/2022 5:32:28 AM
[Entertainment] Pete Davidson's Sister Casey Pays Tribute to Their Dad on 9/11 Pete Davidson, Sister, Casey Davidson, Mom, Amy Davidson, InstagramGone but not forgotten. On the 21st anniversary of 9/11, Pete Davidson's sister Casey Davidson shared an emotional tribute to their dad Scott Davidson, who lost his life in the...
Published:9/11/2022 6:13:27 PM
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