I’ve had a couple of days to digest this, and wanted to make some observations.
1) When you devalue a currency, it is like putting your nation on sale. How do you increase exports? Cut your price and your margin. This works both ways: for those with money, all tangible assets in this country get cheaper.
What should have happened is that when the Fed announced the devaluation of the currency was a run on the dollar. Problem is, inflation is always relative, isn’t it? And the Europeans have screwed up more royally than we have, and the Chinese have had their country on sale for some time.
Thus the dollar is strengthening, ironically. What those who came up with this policy, though, could have reasonably expected was an immediate discount. Which leads to
2) In concrete detail, we have to grasp what is actually happening. First, the quote from Keynes that should be burned into everyone’s mind, since it was quite honest, rare for him:
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
Well, the number is now more than one in a million, is it not?
Who gets this money? How does this process work? The fact is, we can’t know for sure, since the Fed is–when it wants to be, and breaks no law in so doing–as secretive as the CIA, and less supervised.
But it seems safe to say that what will happen is that checks will be written to large member banks, say Goldman Sachs and JP Morgan Chase. In December, a $50 billion check will be written to each, in exchange for Treasury Bonds they hold, at what may or may not be (likely not) their actual market value. Self evidently, if they could sell them more dearly, they would. They haven’t, ergo. . .
Now, it is far from clear those bonds were not purchased initially with money ALSO provided by the Fed. My suspicion is that they were.
Remember, we are not even privy to who all the stockholders are in the system, much less who is given money for what. We do know that the people voting the money out are collecting it as well. They vote themselves money over an expensive breakfast, then figure out how to spend it over an expensive dinner, with cigars and brandy, and hookers and coke, according to their taste.
Anyway, they get these huge checks, and then, what? Well, the skies the limit. GE sits on the Board of Governors of the Federal Reserve Bank of New York, by design the de facto head of the system. Why not buy a bunch of GE stock? Jeff’s a good guy, they got a lock on the lightbulb market, and tons of Federal dollars flowing to their green technologies. GE stock goes up, and now these banks have a larger position in GE. They now, to be clear, OWN a part of GE which they have purchased with fiat money.
And the price of GE stock is higher than it would have been, had the number of dollars in circulation remained constant. This is inflation in the stock market, which will affect the valuation of other stocks in unpredictable but real ways.
Maybe they buy a bank in China, if the Chinese will let them. They start making loans to Chinese corporations, and in so doing get an ownership claim on them.
Maybe they buy a diamond mine somewhere.
Maybe they buy a Brazilian energy company. Or Mexican. Or Nigerian.
Whatever they do, they now own things that they didn’t earn. The money was given them.
I want you to be clear on this. This is literally like me giving you a checkbook with effectively no limit, that you can use to write checks to anybody for anything. Anything. Do you think you could make money like that? Find some winners? And what if you don’t? What if your trip to the racetrack flops? Well, you just write more checks. This is what the Fed does for its core members.
And yet all of us suffer from this process, as Keynes pointed out. This is a formal system for wealth transfer and economic dislocation. Inflation can only happen when somebody gets something for nothing.
3) My suspicion is that the timing was intended to disrupt Republican momentum. If my thesis is correct, that our recovery is jobless since those with capital are scared of Obama and his policies, then we should have seen a collective sigh of relief in the form of hiring in the immediate aftermath of the election. Yet what has happened? A new doubt has been introduced, which will mute this effect considerably, lessening the ability of Republicans to point to the manifest connection of conservatism and economic dynamism and growth.
4) The effect of this money injection will be to keep interest rates on the debt artificially low. This will make the trainwreck we are heading towards less obvious. Currently, we are paying some $400 billion annually on our debt. Given fixed interest rates and our current annual deficits, that is expected to be some $600 billion annually by 2012.
But given our debt, rates should be rising. Given the risk of default over the long term, what we have to pay investors to get them to buy our bonds should be going up. Thus, absent this action, that $600 billion might have been $800 billion, or even a trillion.
Yet, we are still being taxed, through inflation. We will still, in effect, be paying that $800 billion, since the buying power of our currency has been debased. As Keynes noted, this form of taxation, of property confiscation is very subtle, and understood by very few. He himself understood it to perfection. He made a fortune on currency trading. He was a genius, just one committed an evil doctrine, that of Fabian Socialism.
5) It occurred to me this morning that when a debt is paid, that is deflationary, since money lent is inflationary only as long as it is out. This is an open thought I will have to develop further in some cigar smoke, but you can follow my logic in my piece on Money Creation.
Net: it is hard to know who these people really are, and what their real intentions are, but it is plainly obvious that getting and staying really, really rich is a key element.
As I have stated in other essays, it seems to me that the quest for power and the quest for righteousness really are the two primary forces in our political world. Leftism is just one particularly vicious iteration of an age-old desire to rule the world. America is the best-run experiment in world history of a nation based on sincerely held ideals. We have many enemies in our midst, but we can still prevail, in my view.
It all starts with awareness. Share this link if it made sense to you. Copy it and call it your own. Restate it in your own words. Modify it to correct what you see as my mistakes. Above all, though, keep the spirit of wanting the truth and understanding foremost in your mind, and act on it by doing what you can to educate everyone around you.