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The More Things Change, the More They Stay the Same

Monday December 02, 2013 15:04

On that November day in 2002 when Bernanke promised Friedman that the Fed would not make the same mistakes that were made in the 1930s, he may have thought he was telling the truth. But in fact, Bernanke’s policies as Fed chairman have not only been a duplication of the 1930s but are even more so! As in the 1930s, the Fed has been pumping money aggressively into the system. The extent to which our current money policy is even more aggressive than that of the 1930s can be seen from the chart on your left, which shows total debt as a percentage of GDP.

Graph of Excess Reserves of Depository InstitutionsGraph of St. Louis Adjusted Monetary BaseAnd like the 1930s, we are afflicted once again with the same kind of “pushing on a string” phenomena as in the 1930s. The two charts above illustrate the point. The chart on your left shows the massive amount of money that has been pumped into the Federal Reserve banking system starting in the mid 1980s around the time of the 1987 stock market crash, but especially rising dramatically as stresses in an over-leveraged banking system rose following the stock market bubble of 2000, and then the granddaddy of all bubbles (so far) the housing bubble that resulted in the deflationary implosion of the Lehman Brothers event.

In fact, Bernanke’s policies have been implemented, just as he promised Milton Friedman back in Nov. ‘02. But what does the chart above look like if it isn’t “pushing on a string?” The fact is that the same policies are bringing about the same results as they did in the 1930s, that being the more active the Fed, the more damaging it is to the economy. 

Why is that happening? I think it’s because fiat money is created by debt so the more money that is created, the more debt is created, with the result being that debt is growing much, much faster than income (GDP). So in fact the policies being carried out by Bernanke, and Greenspan before him, have been counterproductive, at least in the long run. And now we are going to get Janet Yellen, which underscores that the Fed policy is insane. We say that, using the definition of insanity given to us by Albert Einstein as, “conducting the same behavior and expecting different results.”

In fact, I believe citizens as opposed to government are behaving very rationally. As their budgets get cramped with lower real wages and more and more unemployment, people are holding on to whatever money they get their hands on, just to ensure their survival. They are also of course spending less frivolously. This behavior is shown on your left by the massive reduction in monetary velocity, which is plunging below anything else calculated by the Fed since the late 1950s.
As we have been reporting, based on John Williams’s work (ShadowStats), if the government honestly counted the increases in the cost of living, our economy has never escaped the post-Lehman Brothers recession. Unemployment is closer to 25% and inflation closer to 8% or 9% than the government’s 7.5% and 1.7% respective lies.

The government can lie about statistics by changing definitions that the public doesn’t pay attention to. They can simply no longer count workers who are discouraged and stop looking for work, which they do. But the chart below on your left does not lie about the labor markets.  It shows the plunge in the number of people employed in the U.S. now.  It is lower


than when it was first counted in the late 1970s. Also the chart above on your right shows that food is becoming increasingly problematic for Americans as we now have a record number of people on food stamps.

Wall Street is having a party and the banks that own the Fed make sure the party continues at your expense and mine. Washington is having an orgy as well. But mainstream America is hurting, big time. Given the insane policies at the Fed and in our government, I see little or no hope of anything getting better any time soon. In fact, as the equity and bond markets continue on their orgy, the time is likely to be near when the next bubble bursts and it could be this will be even bigger than the housing bubble because the biggest bubble of all is without a doubt the market for U.S. dollar debt, which of course is getting bigger with each new QE. 

None of what I am saying above is good news. But it is what it is and what it is, however, is extremely bullish for the real price of gold if not the nominal price of gold. And as we have demonstrated time and time again, a rise in the real price of gold is bullish for gold mining stocks.

Jay Taylor

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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