Carving the Currency

Carving the Currency


I hope everyone is enjoying their Thanksgiving holiday weekend, traditionally a time to count our blessings. Speaking for myself, I am particularly thankful that the electorate has seen fit to restore divided government a full two years before I thought possible.

I am less thankful about what our leaders are doing to our currency. Last year I introduced a new tradition on Thanksgiving – watching the carving of our currency as it is sliced by administration fiscal policy and diced by Fed monetary policy.

Your 2010 Thanksgiving dollar dinner leftovers are served:

For our main course, let us check in with Peter Schiff, who you may recall was right in 2006-07 predicting the impending recession and crash of the real estate bubble. He was right in 2008 about the dollar and early in 2009 when he warned President-elect Obama about the folly of trying to borrow and spend ourselves into prosperity. Monotonously he was right again one year ago when he told us to keep buying gold at $1,084 /oz (up 27% to Wednesday’s close of $1,372/oz) as a hedge against the devaluing dollar.

We cannot expect this remarkable record to continue. Schiff is an economist a financial consultant* – a profession second only to economists with a reputation for being more wrong than right (Paul Krugman being a notable high profile example, having correctly predicted eight of the last one recessions). But, while he is on a hot streak, it behooves us to pay attention to what he has to say.

Serving up the meat and potatoes – Schiff on the insanity of Congress mandating a two headed Fed charter. They are required to manage monetary policy to maintain a stable currency, and also to promote maximum employment by umm.. devaluing the currency:

The Chimera of the Fed’s Schizophrenic Mission – Peter Schiff

“Prior to 1977, the Fed only had one job: maintaining price stability. However, the stagflation of the 1970s inspired politicians to assign another task: promoting maximum employment. This “mission creep” has transformed the Fed from a monetary watchdog into an instrument of social policy. We would do well to give them back their original job.

The imposition of the “dual mandate” was informed by the Keynesian belief that inflation and unemployment don’t mix. An economic concept known as the ”Phillips curve” postulates that low levels of one cause high levels of the other. But, like many things in modern economics, the curve is a fiction. There is no real reason why low inflation would produce unemployment or full employment would create inflation…

The real reason that prices rise, for both goods and wages, is that the Fed creates inflation. This policy undermines the economy by destroying both current savings and the incentives to accumulate future savings. Since savings finance capital investment, lower savings equal weaker economic growth.

So, the best way for the Fed to create maximum employment is to focus on the single mandate of price stability. While a few elected officials seem to be figuring this out, most are just as clueless as the Fed. Unfortunately, even if Congress succeeds in changing the Fed’s mandate, there is not much chance that monetary policy will change significantly. Keynesian thinking is so ingrained in Bernanke and his colleagues that they will exploit any wiggle room in their directives to jump back in the driver’s seat and send us ever faster toward the edge of an economic cliff.”

For a side dish, Peter Schiff checks in with CNBC and browbeats the usual suspects on Fast Money:

For dessert, we recommend a particularly amusing and insightful animation created by Ornid Malekan to explain the Fed’s recently announced second serving of an aggressive quantitative easing policy – aka QE2:

Tasty. The most amazing thing about this video – it is closing in on almost 3 million views after being posted on YouTube for only 3 weeks. After knocking this out in an afternoon, its creator is in demand by the media, being interviewed by the likes of Slate and CNBC.

C’mon. A six minute long primitive animation about economics, Fed policy, and quantitative easing – going viral? Three million views? How does that happen?

Finally, for a relaxing after dinner smoke – Enjoy “The Bernanke” as he hits the road to defend the QE2 policy to the world. Good luck with that, Ben.

Cross=posted from Divided We Stand United We Fall

  • gerryf

    Schiff is not an economist; he is a financial consultant.

    And while he did indeed say that the economy would tank in 2006 and 2007, he also said it would do that in 2002, 2003,2004 and 2005.

    In short, if I say it will rain tomorrow and I am wrong, and then say it for the next 10 days until it does rain, does that make me a meteorologist?

    Schiff is yet another proponent of the the Austrian School of Economics a “discipline” that is completely lacking in any scientific substance.

    I mean, just the basic tenant that markets will always do just fine unless they are interfered with by government is complete balderdash.

    Leaving markets to themselves is EXACTLY why we are in the mess we are in. With regulation and oversight, we saw almost 70 years without a major economic collapse.

    But as regulations became loser and loser for the last 30 years, culminating in banking deregulation and Commodity Futures Modernization Act in the late 1990s it took less than 10 years for the wealthy elite to raid the cupboards and leave us all in the hole we now call the Great Recession.

    So please, if you have a point to make, try not to rely too much on a hack of a financial consultant who is more wrong than right.

  • mw

    Schiff’s bio says he has a degree in finance, accounting, and is an expert on economic theory. Whether you want to call him a financial consultant or economist makes no difference to me, as I hold both professions in equal contempt as far as their ability to accurately forecast the real world economy. In general they all get it wrong more often than they get it right. But, if it makes you happy, I’ll edit the nomenclature in the post.

    I’m not in the habit of quoting scripture, and it is not even from my testament, but I think it is pretty good advice to “Beware of false prophets.. You will know them by their fruits.” Matt. 7:15.

    The converse is also true. What I find compelling about Schiff, is that he has been consistently right over a period of at least four years in a very public forum, with a high degree of specificity in his forecasts.

    I can see that you have a burr under your saddle about Schiff, but that’s your personal problem. I don’t give a rat’s ass about Schiff except that he has been consistently right since at least 2006 and I’ll continue to pay attention for exactly as long as his forecasts “bear fruit”. As soon as he makes a bad call, I’ll lose interest.

    If you want to call him a hack, and that makes you feel good, hey – whatever blows your skirt up. But if you expect anyone else to accept your characterization you’d have to back that up. For me, you’d have to start by documenting anyone else who in 2006 was predicting the ’08 recession, the collapse of the housing bubble, and the extent of the sub-prime crisis with the same degree of specificity as Schiff in the linked video. Then show how they have continued to make good forecasts for ’08,’09. and ’10 as Schiff has done. If you can’t do that, I hope you don’t mind if I just ignore your content-free rant.

    Regarding your characterization of the Austrian school of Economics, you are just talking nonsense. You might agree with it or not, but no one claims that it is discredited or lacking in scientific substance. You description is much more revealing of your bias and ignorance of the Austrian school than it reveals anything about the Austrian theory of the business cycle.

  • gerryf

    So to buttress your argument that the Austrian theory of the business cycle has credibility, you cite an article that concludes:

    Okay. Let me say that this is a slightly modified version of the Austrian theory of business cycles.

    and then goes on to say the slight modifcation is removing all the stuff that its proponants think is important,

    And then the column admits it left out a CRUCIAL aspect of the austrian theory of business cycles.

    Instead of accusing me a of ranting and dismissing my opinion, maybe you should find a credible source that doesn’t dismiss your own point…

  • mw

    So I guess you are saying that for schools of economic thought, only unchanging unmodified un-evolved versions of a theory are permitted. I guess that means that only the original work of John Maynard Keynes can be used when invoking Keynesian thought. Well, that is a relief since that means I don’t have to pay attention to anything that Krugman says about the macro economy. I can’t remember the last time he was right about anything anyway – he does not even get over the stopped clock threshold.

    In any case, I was not trying to raise a defense of the Austrian school per se (I am more Chicago School), but rather taking issue with your dismissal of the economic school as unscientific, unsubstantial and not credible. The article points to the reason why the Austrian Business Cycle model is none of those things, and may be the best model to utilize in understanding what transpired in the most recent boom and bust cycle.

    It is however – a model, and a map is not the territory and a model is not reality. Maps and models are tools. To be useful they must adjust to reality, as it seldom works as well to try to force reality to change and fit the model (see East Anglia climate change studies). Science is about using tools and deduction to form theories that are tested by making predictions about reality. Right now, the ABC model is doing a better job at making accurate predictions and hence as a tool for understanding what happened than other economic schools and that is why it is getting more attention now.

    To be sure, the Austrian school is a distinctly minority and heterodox view among academia. That does not mean it is wrong or not credible. Science is not about majority rule. Some additional fodder for the point that the school of thought is scientific, credible, and substantial – this from wikipedia “Currently, universities with a significant Austrian presence are George Mason University, Loyola University New Orleans, and Auburn University in the United States”. It represents a minority but serious and substantial view. Again – I am not defending all aspects of the Austrian school – nor am I qualified to do so in any case. You’ll also find plenty in that Wiki article to argue against the Austrian School. I am just saying your dismissal of Austrian economics as unscientific, unsubstantial, and not credible is false.

  • theWord


    Realizing that you don’t like Krugman, hard not to notice. Isn’t it unfair to say he’s wrong when we didn’t do what he said was necessary? Seems like blaming a doctor for a patient that doesn’t follow the suggested treatment

  • mw

    Ok. It’s not fair. And I’ll cop to having as big a burr under my saddle for Krugman as Gerry does for Schiff. Interesting that both Schiff and Krugman have fairly apocalyptic views of the future.

    I’ll draw two distinctions one looking back, one looking forward. I did not see anything from Krugman that predicted the crash of the housing bubble and sub-prime crisis with the specificity and accuracy of Schiff.

    Looking forward, if we get the moderation in spending, deficits, and subsequent reduced pressure on the fed to print money, as I would expect from a divided government – the forecasted scenarios diverge.
    The Schiff apocalypse would moderate or be deferred (as spending and deficit restraint is what he says we should be doing) , while the Krugman apocalypse would get worse (as that is the opposite of what he says we should be doing). Although, not really sure how the Krugman prophecy could get worse – maybe he’s thinking cannibal anarchy.

  • Chris

    “Looking forward, if we get the moderation in spending, deficits, and subsequent reduced pressure on the fed to print money, as I would expect from a divided government”

    … Are you on drugs?

  • Tillyosu

    Leaving markets to themselves is EXACTLY why we are in the mess we are in. With regulation and oversight, we saw almost 70 years without a major economic collapse.

    But as regulations became loser and loser for the last 30 years, culminating in banking deregulation and Commodity Futures Modernization Act in the late 1990s it took less than 10 years for the wealthy elite to raid the cupboards and leave us all in the hole we now call the Great Recession.

    This is just a liberal talking point that I’m sick of leaving unconfronted. You want to know why we’re in the mess we’re in? Because of government intervention in the markets. The short story of the “Great Recession” (or what I like to call the Great Interference), is that the government, republicans and democrats alike, developed a vested interest in increasing home ownership. Through the Community Reinvestment Act, and several subsequent GSE mandates, the government warped the housing market by artificially increasing demand. And what happened after that? The housing market skyrocketed and the Wall Street banks bet the farm on it. As would I. Don’t forget that the collapse of Fannie Mae started the entire collapse.

    So the “deregulation/Bush caused this” meme is criminally false. I would challenge you to name a single regulation that was relaxed under Bush that caused the collapse. The bottom line, is that Bush called for stronger regulation of the GSE’s in 2005, but he was blocked by mostly Democrats and few Republicans…including Barack Obama. And the fact that Democrats are using this incident to increase regulation and blame the republicans can only be described a chutzpah.

  • Tillyosu

    P.S. It’s “looser and looser” or, alternatively, “more and more loose.” But “loser and loser” can only describe the author of your post.

  • blackout

    @Tillyosu — yours are just conservative talking points. Deregulation which allowed banks to stop acting like banks was just as much of an issue here. Also, your tone is boorish and immature in the extreme. Try making your point without being a total jerk.

  • Tillyosu

    Also, your tone is boorish and immature in the extreme

    Okay, maybe that last post was a little bit childish. I apologize. But still I’d like to know what specific deregulation you’re referring to that caused the financial crisis?

  • gerryf

    First of Tillyosu, I did not say that deregulation under Bush caused the economic collapse. I said deregulation over 30 years. As for deregulation are significant contributors to the economic collapse, you need look no further than two pieces of legislation shepherded through congress by Phil Gramm: the Gramm–Leach–Bliley Act and Commodity Futures Modernization Act. Anyone who dismissed the impact of these two pieces of legislation on causing the economic collapse just cannot be taken seriously.

    And yes, I absolutely am aware that Bill Clinton signed these into law. But if you’re going to call it Democratic legislation, please. Written by Republicans and rammed through a GOP controlled House and Senate. Don’t expect me to defend Clinton. The hoot is that Republicans hate Clinton so much, when all he ever did was tow the right wing line.

    I do question your lazy smearing of the Community Reinvestment Act and the impact of Fannie Mae and Freddie Mac activity in the mess leading up to the collapse. To paraphrase someone, this is just a GOP talking point that I’m sick of leaving unconfronted.

    The Community Reinvestment Act is a GOP boogeyman that has little to do with the collapse. Anyone stating it does is either misinformed or lying.

    Let me ask you…why do you hate the economically disadvantaged so much?

    The CRA encourages commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods.

    The sum total of all the loans under the CRA would barely make a dent in the economy. We’re talking small loans for economically depressed properties…the argument doesn’t even make any sense. The biggest economy in the world was brought down by some small bad loans to some inner city neighborhoods.

    Economists, including those from the Federal Reserve and the FDIC, have repeatedly disputed this contention. The Federal Reserve, having examined the evidence, holds that empirical research has not validated any relationship between the CRA and the 2008 financial crisis.

    It’s a load of crap. Stop making this argument. It’s nonsense.

    On to the second half of the argument–yes, you have a point. Fannie Mae and Freddie Mac did contribute to the economic collapse, particularly in the beginning.

    In order to meet HUD mandates, F&F began mortgage backed securities, which included some low income loans–Wall Street took notice and saw an opportunity. Soon, mortgage companies and Wall Street were engaging in all kinds of risky gambles driving the admittedly too risky practice that F&F were involved in.

    But, yes, F&F got the ball rolling–though they were not the leading cause of the collapse.

    How do we know this?

    First, virtually none of the $1.5 trillion of cratering subprime mortgages were backed by Fannie or Freddie. They did not meet Fannie or Freddie’s strict(er) lending standards. All those no money down, no interest for a year, low teaser rate loans? All the loans made without checking a borrower’s income or employment history?

    All made in the private sector, without any support from Fannie and Freddie.

    When the credit bubble was peaking from 2003 to 2006, the amount of loans originated by Fannie and Freddie dropped from $2.7 trillion to $1 trillion. Meanwhile, in the private sector, the amount of subprime loans originated jumped to $600 billion from $335 billion and Alt-A loans hit $400 billion from $85 billion in 2003.

    Fannie and Freddie, which wouldn’t accept crazy floating rate loans, which required income verification and minimum down payments, were left out of the insanity.

    Don’t take my word for it:

    Does that mean F&F did a good job? Heck no. If you want to say that F&F were dens of cronyism and corruption, I am right there with you–but they were not the main cause of the collapse.

    And, and before I forget….the whole Bush called for STRONGER regulation of the GSEs–poppycock. Bush was not interested in stronger regulations to protect the consumers or the economy. Bush was very clear that he wanted to kill the GSEs so they couldn’t compete with the private sector–the very same private sector that drove the country off a cliff.

  • JimS

    The elimination of Glass-Steagall comes to mind. Refusing to recognize the creation of an entire shadow economy of completely unregulated financial instruments such as CDOs is another one. And that’s without really doing any additional research.

  • gerryf

    That’s two times I typed something and two times it disappeared. Argh.

    Yes, the Gramm–Leach–Bliley Act that repealed Glass Steagle is one, as is the Commodities Future Modernization Act. As Tillyosu will likely point out, though, neither of these were enacted by Bush.

    That said, I never said UNDER BUSH–I said the last 30 years. Tillyuso than pulls out the old GOP trick of not actually responding to what I said and says “under Bush.”

    Also, like a true obfuscator, Tillyuso opted to blur the lines between the Community Reinvestment Act and the part played in the financial crisis by Fannie Mae and Freddie Mac.

    Briefly, and to paraphrase someone else, this is just a conservative talking point that I’m sick of leaving unconfronted.

    Regarding the CRA, there is no evidence to support this claim and it is illogical on its very premise. You can not find one credible source supporting the idea that the CRA was a cause of the meltdown. Logically, how does a modest loan program in low value property tank the entire economy? It doesn’t–especially when study after study shows that most of the loans given out under the CRA stayed in the community–they were not part of the subprime mortgage mess.

    Now, Tillyosu DOES have a point about Fannie and Freddie. As usual, however, its a smokescreen to obscure the reality.

    Yes, F&F indulged in dangerous lending and yes, in an effort to keep up with HUD mandates purchased too many mortgage-backed securities. In fact, it is even fair to say that Fannie and Freddie got the ball rolling down the hill.

    But what happened? Wall Street saw an opportunity and jumped on it. While Fannie and Freddie began backing off after 2003, Wall Street rushed head-long into places even F&F feared to tread pushing the economy closer and closer to the brink.

    As for F&F being crapholes of cronyism, corruption and malfeasence, I gladdly concede that as well. Throw the bums out and in prison.

    But for anyone to claim Bush wanted to enforce stronger regulation (and cite the least honest man in America as the source) is purely laughable. Bush didn’t want stronger regulation–that is classic GOP revisionism. If he was pushing for MORE regulation, they would have had his head.

    Bush wanted to gut Fannie & Freddie and hand over the entire market to Wall Street because Fannie and Freddie were blocking the potential profits Wall Street could have been making.

    Stronger regulations…do you even think about this stuff before you write it? Sheesh.