Wednesday, March 7, 2012

Jim Grant Explains Why Fed Policy is Failing

Here's the link

Jim also reminds us that in the depression of 1920, the Fed and Treasury behaved much differently and got very different results than today or in the 1930's. Remarkably, economists seem to have forgotten this valuable lesson.

When Jim refers to returning to capitalism he is referring to the hyper intervention in markets that we've seen since 2008 (And arguably for the past 30 years). The financial crisis of 2008 has been the both the catalyst and excuse for constant intervention whether it be in housing prices, energy prices, interest rates, currency, and as we saw during the Leap Year Massacre, that alternative currency: Gold. Make no mistake, just as central banks periodically "intervene" in currency markets, the Fed was almost certainly behind the gold/silver intervention. 

How else do you explain the sudden sell off of gold on absolutely no news? 10,000 contracts were sold within a few minutes without any regard for "best execution" of the trade. Any rational seller of that many contracts would normally seek the best price and sell gradually so as not to move the market and end up with lower and lower prices. This seller dumped them all at once, knowing that it would drop the market immediately and trigger the computer algos of HFT's setting off further cascades of selling. It was no accident. It was premeditated. And I suspect Ron Paul knew it was coming when he was talking to Ben Bernanke on TV and brandishing a Silver Eagle. The two coincided with each other.

Why do they feel a need to do this? Because gold and silver are currencies that they can not control. Every rise in the price of gold exposes the money printing of the Fed and central banks of western economies. Gold had been approaching an important technical level that if breached, would have led to a much higher price. If gold rises too far too fast then even the sheeple will take notice and start buying. When that happens you then have a self-reinforcing cycle of higher prices and greater interest in buying, just as you did with tech stocks in the 90's. The central banks know they cannot stop the prices of gold and silver from rising, but they can manage their ascent to a more reasonable rate that will not panic the sheeple and wake them to the massive devaluation of the currency they get their paychecks or government benefits in.

As Jim points out, the recognition of the crisis in 1920’s prompted the Federal government to reduce spending to match the lower revenues (Just as any business does today). It did not interfere with the market. The result was a violent downturn followed by a relatively quick recovery. In 2008 we chose instead to “extend and pretend”. We saved the banks, allowed them to ignore loan losses by changing accounting rules and flooded the economy with cash. By saving the banks instead of allowing them to fail, we have delayed that point in time where poor investments, like sub-prime loans, are wiped off the books and new lending can begin anew. 

Until we let the market function, we are merely extending the pain and malaise.

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