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Wednesday, July 8, 2009

Why the Fed is More Dangerous than China

Update on this story: Senate is discussing auditing the Fed. Over half the House has cosponsered HB 1207, which would allow for such an audit.

President Franklin Roosevelt famously said, “the only thing we have to fear is: fear itself.” Exaggerated fears drive us to often accept political acts that empower politicians and ultimately make things worse. So, is there a divergence between what we fear, and what is actually dangerous to us?

I recently saw the Chernobyl nuclear disaster listed as the greatest man-made disaster of all time. But I remembered something from my undergrad days: that the only deaths that could definitely be attributed to the incident were from incompetent Soviet Socialist firefighters who killed themselves trying to save people. Otherwise, disease and environmental effects remained at normal levels. The IAEA even concluded, in the Chernobyl Forum Booklet, that “a greater risk than the long-term effects of radiation exposure, is the risk to mental health [due to] exaggerated fears about the effects of radiation.”

Yet today, fear has made it virtually impossible to build a nuclear power plant in America, despite that fact that they are the safest and cleanest way to produce mass energy by far. For example of this silliness, look at France, which is 100% nuclear powered. In light of this, some say the U.S. got its education on nuclear power through “The Simpsons,” and “Teenage Mutant Ninja Turtles.”

New York City Mayor Michael Bloomberg put the problem very eloquently, saying, “Nobody knows exactly what they should do, but anything is better than nothing.” New Yorker’s should note that a combination of fear and Bloomberg’s “do something” argument was used to support the Iraq War, the Sarbane-Oxley Act, Campaign Finance Reform and countless other acts which merely accomplished the exact opposite of their stated intent.

At the 1932 Republican convention, Herbert Hoover spoke of his reaction to the 1929 Great Depression saying, “We might have done nothing. That would have been utter ruin. Instead, we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action.” Of course, the depression only got much worse. He did a lot, but it had more to do with making sure his friends did not suffer from the depression.

As Roosevelt warned, we Americans are hardly above absurd pandemonium. During the 1950’s “Red Scare,” Senator Joseph McCarthy showed off the power of fear. He used aggressive random accusation by exclaiming that he had a list of communists in the U.S. government. Richard Nixon soon began building a whole career around a more politically-acceptable version of this approach, which became known as “McCarthyism.” These were certainly scary men; but some wonder whether the real problem was the men who abused the Red Scare, or those whose fear compromised their judgment and allowed such abuses.

Today, based on 9/11, the U.S. government spends hundreds of billions on homeland security. But you’re more likely to be struck by lightning twice in your life, than hit by international terrorism. Similarly, here’s one that really confuses liberals: the government also spends hundreds of billions on gun control – however, unless you’re in the illicit drug business, you are far more likely to be injured by household furniture than a gun.

Also: fear sells. Reason Magazine recently ran a story chronicling the “Most Absurd Time Magazine Covers.” They included ominous warnings of: the Occult Revival, the Porno Plague, the Population Curse, Dirty Words, Cyberporn, and Pokemon. All of which were either bogus or greatly overstated. Of course, these are all things to be concerned about. But its pretty absurd to spend all day making sure junior doesn’t watch Pokemon; if you yourself are behaving violently and irresponsibly right in front of the child. Both common sense and research show that children mimic the behavior of their parents far more than the TV (try showing this evidence to TV censorship advocates and see what happens).

So it would seem there is often a gap somewhere. A gap that exists between what we’re afraid of and what actually threatens us most. When we look at America’s financial situation, what is the difference between what we fear, and what is actually dangerous? I’ll call this the “Fear Divergence from Reality Gap;” the FDR Gap.

The Exaggerated Threat

When I was in high school, my shop teacher spoke of the most dangerous machine in his shop. It was not the loud, powerful rip saw or the sawdust-flinging table saw. It was not any of the big machines that my peers treated with absolute fear, as one might expect. Rather, it was the little, silent, slow-cutting band saw. The danger arose, not from its ferociousness, because it had none. The band saw was dangerous because nobody realized it was; due to its quaint nature. Mr. Benton ended up being correct. In my four years there, it was the only machine I ever saw cut into a person – which I saw twice.

Many people ask, “what will we do about all this China debt?” Politicians are increasingly voicing concern over China “calling in its debt.”

The United States federal government owes China somewhere around 750 billion dollars. Now that’s somewhere around 1/10 of U.S. yearly revenues. Its like a person who makes $1oo thousand a year taking out a loan for $10 thousand dollars. A good chunk of change, but payable. Heck, since last fall the U.S. has dropped over twice the China debt on bank bailouts and – what the Democratic Party calls – “economic stimulus.” Now, are you telling me we couldn’t come up with money to pay off China?

The real problem – that the media rarely talks about – is that quaint, silent, little bank in D.C.. The United States federal government owes the U.S. Federal Reserve Bank (aka The Fed) over 4.2 trillion dollars.

This makes the debt to China look small. Its right around half U.S. yearly revenue and is 6 times what the federal government owes China. The Bush/Obama spending binge is likely to increase the debt. In fact, if all goes as planned, the U.S. would soon be barred from joining the European Union due to its debt to GDP ratio.

Andrew Jackson became famous for abolishing the American central bank. Earlier, Thomas Jefferson had said, “I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.”

So why should we be concerned that the federal government owes a quasi-private bank a whole lot of money? We should, due to one word: inflation.

The Real Threat

No country has ever been destroyed by paying off its debt. But several have gone through horrible crisis’ because they inflated their currency to pay their debt.

Remember how baseball cards were so valuable in the 90’s? In fact, many collectables like Barbie Dolls and Star Wars toys, are valuable one day and worthless the next. Cards were rare in the 90’s and only a few people collected them. So baseball cards became very valuable when people started wanting them. When everybody and their brother started buying them, the companies increased production.

Baseball cards were coming out of everywhere. Even a poor kid like me had the 1987 complete set of Topps cards. In fact, Topps was the premier brand when I first started collecting. But Topps started printing so many cards that, by the time I became a teenager, they were virtually worthless. Topps became a junk-brand, used in the spokes of bicycles. Topps collectors were robbed of their card’s value as Topps would greedily print more cards.

The same thing happens with money. The dollar was once the world’s premier currency. But the U.S. government wanted to spend more money than it had. When more of it is printed, those who have money – lose buying power. You could say the value in their money is transferred to the newly printed money. Its like Topps deciding to print a million new copies of your rare Barry Bonds card. Part of the value in your card transfers to the newly printed cards – little by little, till all the value is gone except the value of the cardboard its printed on. The more they print, the more you’re taxed. Its called the “inflation tax.”

If you own pennies today, guess what: they’re weight in copper is worth more than 1 cent per penny. (However, its illegal to recycle them). So if you saved pennies back when we were kids – when a penny was worth its weight in copper – you’ll find that the government has printed tons of money since then. Your pennies were taxed, through inflation, till they were worthless.

The only question is how long the U.S. can print money till there is a crisis – like when $100 bills become worthless. Pres. Bush and Obama think we can go pretty far. If the Fed keeps increasing the amount of money we trade – like Topps cards – our currency could become worthless.

Adolph Hitler came to power harnessing the fear and humiliation created by inflation. In the 1920’s, Germany printed tons of money to pay the reparations of World War I. This inflation eventually made the paper more valuable than the denomination it was printed on. When German people’s money became worthless, mass starvation began. They turned to a charismatic man who’s promises of restoring peace and dignity seemed to be the only solution. Hitler later recalled, “The people are more amendable to the appeal of rhetoric than any other force.”

The U.S. is no stranger to inflation. President Gerald Ford wore campaign buttons that said, “Whip Inflation Now (WIN).” He declared inflation “public enemy number 1.” He failed to defeat this enemy. Luckily, President Jimmy Carter’s Fed Chairman Paul Volker and President Ronald Reagan did whip inflation in the 1980’s. But it is coming back again today because of all the current spending, which is reminiscent of the 1960’s “Guns and Butter” policies.

Milton Friedman’s classic saying always holds true: “There is no such thing as a free lunch.” For all you free-spenders who blindly support the government’s spending binges, you are the problem. Your compassion is admirable, and I share it, but its greatly outweighed by your naivety. You’re being taken advantage of. The notion that we should “do something” because we are in fear of economic crisis, is ludicrous. The great irony is in how the government portrays itself kinda like alcohol; as the cause of, and solution to, all life’s problems.

Has the recent Bush/Obama spending binge really done any good, or has it gone to benefit those with political access in Washington? The problem in Washington is that the government treats money like a heroin addict treats heroin – and President Bush and Obama’s solution have been to feed the government more of its heroin.

Government officials know that recessions are necessary to clean the system of bad debt and unproductive activities. The government knows it can only start recession, not stop them. They know that recessions historically last 1-2 years regardless of government “doing something.” Government officials are more acutely aware of their inability to fix society’s alleged ills than they advertise. You see, nobody could seriously run on a platform of “I promise to be aware that I really cannot solve your problems, and frankly, your problems are good because they teach you what you’re doing wrong.”

Their real goal is to use fear of recession and job loss to justify printing more money for their pals. These politicians also know the power fear gives them to accomplish their goals. Most think the way Pres. Obama’s Chief of Staff Rham Emanuel does, who said, “never let a good crisis go to waste.” This would explain the mountains of wasteful pork in the so-called “Economic Stimulus Package.”

Don’t let politicians distract you with the China debt, when the Fed Debt is the real problem. It is the government’s real heroin. There are many things the government could and should be doing. But, if you want the government to save us from ourselves, maintain an international military presence, and spend money on us from cradle to grave, you have to realize the power you cede to the government in allowing them to try it; and its propensity to abuse that power. Furthermore, don’t say nobody warned you that we simply cant afford it.

Does the New Deal Prove Me Wrong?

Here’s a parting message for all you big spenders, who think I am wrong based on the fears and New Deal response to the Great Depression that began in 1929. The Great Depression and New Deal, by any account lasted until World War II in the mid-1940’s. Franklin Roosevelt began the New Deal programs in 1932.

In May 1939, before an important House committee, Roosevelt’s Secretary of the Treasury, Henry Morgenthau, Jr. said, “We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong…somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises….I say after eight years of this Administration we have just as much unemployment as when we started…And an enormous debt to boot.”

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