Bailouts R us vs. Inflation
“At this point, Congress is being asked to support an uncertain entity, costing an uncertain amount of dollars, for an uncertain duration – a decision that will have implications for generations to come and requires absolute certainty.”
– Congressman Jeb Hensarling, TX, and Chair of the House Republican Study Committee
To truly understand what is going on with the financial problems of the U.S., you must first have an understanding of where it all started. Hopefully I will do justice to this complex problem in such a relatively short explanation. Be sure to follow the links for more detailed information. The most important factor to help determine where it started requires a lesson on how the value of the U.S. monetary system has changed over the years; which can easily be seen by looking at inflation trends.
According to http://www.westegg.com/inflation/:
What cost $1 in 1800 would cost $0.58 in 1913.
If you were to buy exactly the same products in 1913 and 1800,
they would cost you $1 and $1.76 respectively.
That’s an average of -0.51% inflation per year.
Money at this time was based on precious metals, so a dollar in gold was by definition, a dollar in gold, according to Congressional standards (see the U.S. Constitution, Article 1, Section 8, Clause 5). The negative inflation was due to technological advancements that allow products to be made more efficiently.
Historic Gold value was at or near $19.3939 from 1800-1833 and $20.67 from 1879-1932.
What cost $1 in 1913 would cost $4.09 in 1971.
If you were to buy exactly the same products in 1971 and 1913,
they would cost you $1 and $0.25 respectively.
That’s an average of 7.05% inflation per year.
Historic Gold value was at $35 in 1934 and 44.2 in 1971.
What cost $1 in 1971 would cost $5.07 in 2007.
If you were to buy exactly the same products in 2007 and 1971,
they would cost you $1 and $0.19 respectively.
That’s an average of 14.08% inflation per year.
Historic Gold value was at $126.3 in 1973 dollars and over $900 in 2008 dollars.
So what happened in 1913 and 1971?
In 1913 U.S. Congress passed the Federal Reserve Act, on the heels of the 16th and 17th amendments. All three of these go hand in hand, but those who may have orchestrated this would have made sure history only thought it was the latter of the two that go together (along with the 18th and 19th amendments as part of the “progressive area“). In fact most people I’ve talked to, think the Federal Reserve wasn’t created until the Great Depression possibly as part of the Banking Act of 1933. This is simply not true. The U.S. Congress even investigated the Federal Reserve for causing Black Tuesday, which stared the Great Depression; Instead of admitting guilt, and blaming government intervention, for flooding the market with paper money (ultimately causing artificial inflating stock values), the leaders of the Federal Reserve took the opportunity to grab more power through additional legislation and regulations that they hoped would allow them to stabilize this new system of paper money. For more information on this I suggest a book called The Creature from Jekyll Island.
Before 1971, the U.S. dollar had for the majority of its existence, been backed by precious metals, with only a few brief periods when this policy was suspend. After WWII, the U.S. had the largest gold reserves in the world thanks to European nations being highly in debt and transferring large amounts of gold into the United States. From that time on, the U.S. treasury would give one ounce of Gold for every $35 dollars as a foreign exchange rate to other nations, (as part of the Bretton Woods Agreements). Private ownership of Gold, in the U.S., was also outlawed during this time. On August 15, 1971 President Nixon, because The Federal Reserve had printed too many dollars for which there was not enough gold – at $35 per ounce – to back it up with, Nixon put an end to the Gold Standard. Of course the reasons given had to do with the Vietnam war that was currently going on, and the need to raise funds for the war; however, with Gold reserves down to 22% of the outstanding dollars (the dollar was tremendously overvalued with respect to gold), and Nixon wanting more dollar bills printed, one or the other had to be done away with.
For more information on this history and why it caused inflation rates to dramatically increase, see:
In the 1970’s the cost of oil skyrocketed, most likely because the U.S. dollar was no longer backed by Gold. The overseas oil producers obviously wanted more dollars for their oil since they could no longer get gold in exchange. The Federal Reserve had printed too much paper money, and as we all know, thanks to natural laws of supply and demand, the more you have of something the less it’s valued. This, according to some, has forced the U.S. government into doing drastic things to protect its supply of Oil, as well as to hide the true cost of inflation. Technological advancements have made some things much less expensive, but real commodities, like those made with real metals and other natural resources continue to become increasingly more expensive as inflation goes up.
If it wasn’t for trade deficits sending much of the newly printed U.S. Dollars overseas were it gets saved up and taken out of circulation, the inflation within the U.S. would definitely be much higher, due to more money saturating the U.S. economy.
Over the last few decades, the Federal Reserve has simply printed more money every time the U.S. government runs a deficit on spending. This all works by the U.S. congress authorizing the creation of Bonds, which are then sold to investors, many of whom are overseas, but many of the bonds are given to the Federal Reserve as a way to back the dollars they print for the government. In other words, our monetary system, since 1971, has no longer been based on something of real value, but rather on the future obligations of Taxpayers (thanks to the 16th amendment) to pay back those debts. In short, our monetary system is based on usury.
This new ability to more freely print money allowed our government to more easily pay for all sorts of things, including wars, and huge bailouts of failing financial institution, corporations, pork belly spending, earmarks, and even foreign entities; essentially making the government for the government and for the corporations who get the bailout and make money off the wars. If it was truly for the people, they wouldn’t be putting financial obligations on us as tax payers and would be providing laws and policies that help us keep our individual wealth instead of having it confiscated through taxation and inflation.
Here are some examples that help further explain our current “crisis”:
Congress passed something called the “Community Reinvestment Act” in 1977, resulting in the creation of bureaucratic regulations designed to encourage, or even compel, financial institutions to make loans to people with lower incomes. In the 1980’s, thanks to the massive devaluation of the dollar, and past deregulation that allowed Savings and Loans to make consumer and commercial loans and to issue transaction accounts, the savings and loan crisis occurred. This essentially ended up in a bailout by the U.S. government and the Federal Reserve to the tune of about $124.6 billion (more then twice that when adjusted for inflation) directly paid for by the U.S. government (meaning tax payers), which contributed to the large budget deficits of the early 1990s. Proponents advocated that without these bailouts the U.S. monetary system and economy would have collapsed, but what it did instead was put more money into the money supply, creating more inflation; and it did nothing to stop the recession of the 1980’s).
Unfortunately we didn’t learn our lesson, and the 1977 lending regulations were amended in 1995 to encourage further lending. Then in 1999 Clinton signed into law what essentially equated to a deregulation on banks and financial institutions that undid much of the Banking Act of 1933; allowing banks to own other financial companies including insurance and investment firms (Practices that had been outlawed because they were believed to be big contributors to the stock market crash on Black Tuesday). This, along with the ability to greatly inflate the money supply, setup the beginnings of the financial crisis the U.S. is facing today.
In the early 2000’s, after the events of September 11, 2001, the U.S. bailed out the Airlines with justification that it was necessary to maintain our ability to move goods and people throughout the nation, so that our economy could keep moving, and we could keep paying our debts. Once again this money came primarily from the government in the form of more budget deficits, and the inflation of the money supply. Other corporations, like Bowing, were also bailed out in the process. However, the airlines still haven’t fully recovered, and we likely would be better off with lower inflation, and having the poorly run airlines go out of business; allowing the stronger airline companies to be much better off than they are today.
In efforts to further boost the economy and simulate growth (code for inflation), once again in 2005, the 1977 mortgage regulations were amended to create different rules for institutions of different sizes, so that various kinds of institutions would be better able to meet the government’s goals for fostering home ownership in lower income communities. To make it easier, the Federal Reserve starting making loans available to the banking systems at extremely low interest rates which also encouraged inflation due to the easy at which money can be re-let, essentially creating more money (and inflation) based on the “assets” these loans created for the banks.
Over the last few years, the U.S. Federal Government has been spending money as if it was going out of style, and incurring the highest deficits in history. This of course has caused more inflation that almost everyone is now starting to notice in a big way. Just as in the 1970s, oil prices are skyrocketing, gold prices are rising fast (and have hit historic highs – not adjusted for inflation), and are expected to go higher. Food and other commodities have also been affected, and it’s become increasingly harder for families and businesses alike to balance their budgets and to pay their mortgages. Of course this trend has been going on in a big way since the 1970’s when a single family income was the norm. Today it takes most families two income to live the same lifestyle their parents did, and we could certainly debate the effect that has on the kinds.
“It started with the $60 billion Bear Stearns bailout, followed quickly by the $300 billion bailout of government’s big mortgage/banker buddies last month. September started with the massive Freddie/Fannie bailout that will end up costing taxpayers somewhere between $500 billion to $1 trillion. On Monday, the Federal Reserve brokered the Bank of America buyout of Merrill Lynch. Then just the other night, the fed announced the $85 billion bailout of AIG insurance” – Chuck Baldwin
In the mean time Congress snuck through an additional $25 billion bailout of Detroit automakers, and today Washington Mutual was just ceased by the government to then be sold off, seemingly in the same day, with the likelihood of more government expenditures threw the FDIC. Today we are talking about another huge bailout to the tune of 700 Billion Dollars threw the creation of a new government entity control by the U.S. treasury to buy up bad debts. Sure they are making promises today that they will eventually regain much of the dept this would incur on the Taxpayers, but even if we do get the money back, will it really do anything to fix an economic problem that has been around for decades? All the other bailouts don’t seem to have helped prevent this, so why should we believe that another bailout will?
For more information on how got here, into this mess, see: http://www.downsizedc.org/blog/what_you%27re_not_being_told_918
Will this “crisis” destroy the U.S. Economy? In the Great Depression 40% of homes went into foreclosure. Today the foreclosure rate is only 6%, and the trend is toward fewer foreclosures not more. The fact is that some politicians, bureaucrats, and various hysteria mongers, are misleading us. They tell us that the market is frozen, but the fact is that commercial loans are at an all-time high, and even the number of real estate loans may be higher than they were last year! Further expanding the money supply (creating more inflation) through all these bailout “loans” – causing the largest spending deficient in U.S. history – will only make it more difficult, in the long run, to get the whole situation under control. Sure they might help in the short term, but what’s the real solution to “fixing” this “crisis”?
Financial Accounting Standard 157 is a regulation imposed on businesses by the quasi-private Financial Accounting Standards Board (FAS). This rule is also incorporated into the regulations of the IRS and is further enforced by the SEC and the FDIC. FAS 157 requires businesses to mark down assets to the lowest price for which similar assets have been sold in the market. The jargon term for this regulation is “mark-to-market.” Mark-to-market forces good securities to be valued at the same price as bad securities.
Another solution might be for the greedy banking system to accept some losses and work with the lendees they allowed to barrow more than they could afford, to reduce their rates, put some of the interest already paid towards lowering the principle owed on the loan, and essentially giving them an affordable mortgage payment.
Others have suggested that we simply let these banks go under or rely on already existing mortgage insurances that were required in the first place on many of these high risk loans. Or are those insurance companies failing as well because they invested all their reserves into these high risk loans? Certainly the Insurance companies have some responsibility in this matter. They’ve made billions from people who have been forced by law to pay them. AIG just got an $85 billion bailout loan, hopefully so they could cover their obligations in this matter. Has it helped? It doesn’t seem to have. On the other hand, the banks can’t really make an insurance claim until they’ve foreclosed and auctioned off the property, and know what their actual losses are. Also many of these loans didn’t even have PMI to begin with as they got around it with 80/20 loans. In the mean time the bank’s and mortgage lender’s cash flow has becomes limited, and the whole banking system in the U.S. relies heavily on the ability for banks to barrow from each other all day long, “keeping the cash flowing” so to speak; because they don’t have enough reserves on hand to pay their expenses. It all comes back to being spread to thin while at the same time getting involved in risky business.
Do I want us to give up our current economic system and go back to a gold or precious metals standard? Not necessarily, as I don’t think it’s the tools we use that matters, but how we use them that counts. However, I do believe our current monetary system in the U.S. (and many throughout the world) is very susceptible to greed and corruption much more so then gold would be. On the other hand using a gold standard has been proven to have its problems as well; especially when one country is able to hoard all of the precious metals through trade surpluses. The real problem that I see is one of failing integrity and moral values throughout the world, and government leaders who don’t understand the consequences that deficit spending and poor regulations have on our economy; particularly with how inflation creates instability.
The best thing that Bill Clinton ever did for the U.S. was to balance the Federal Government’s budget. The worst thing he did was to sign the financial reformation law in 1999; allowing the same kinds of activities to occur that greatly contributed to Black Tuesday. His indiscretions also created an attitude of non-enforcement of laws (i.e. immigration laws) to permeate the country and prevent good regulations form being enforced.
The best thing that George Bush did for this country was to stand up to a man that Bill Clinton failed to imprison despite having the opportunity to do so (Osama Ben Laden). The worst thing he’s done for the U.S. is created the biggest U.S. government entity in history in the name of “homeland security”, and incur the highest deficit spending in U.S. history, which of course creates a great deal of inflation; further endangering the integrity and stability of the financial markets.
I also believe the Federal Reserve’s monopoly on the monetary systems in America today is unconstitutional, because of the laws that force us to accept Federal Reserve Notes as legal tender violating the fact that congress is constitutionally responsible for setting standards and coining money, not the Federal Reserve. I don’t have a problem with Federal Reserve Notes (i.e. dollars), but I’d like to see the U.S. treasury also creating coins that contain real Gold, Silver, and copper that would then be allowed to also be used as legal tender based on intrinsic value; off-setting the monopoly of the Federal Reserve (after all competition is essential to a truly capitalistic economy). Ron Paul introduced a bill that would do just that.
The real problem, when it comes right down to it, is really all about integrity and stability. If we want a stable financial system, we have to expect slower growth, more moderate interest rates, and to have basic but effective regulations that actually get enforced. We also need leaders who have the highest levels of integrity and knowhow. We need everyone to be careful, wise and thrifty with their money (which was the law of the land before the 1970s). We have to save up for the things we want to buy, not buy them with fake money called “credit”, which increases the money supply and causes inflation. We need to expect borrowers to put down 10-20% of the cost of what ever they are borrowing to insure that the lenders can easily get their money back should the borrower default on the loan. In the end, however, it’s all about the moral behavior of all those involved in the system that makes the system behave in a manor full of integrity and stability.
– Posted By Seth Hollist