marxbites

Impact of Commodity ETFs on Prices: An Update

The GSE's are unconstitutional Democrat boondoggle rent seaking scams, like ALL govts interventions into what once were fairly free markets.

The threat of negative govt regulations & legislations, or the promise of special favors, are what keep corps buying reelections for the quid pro quo.

If the Fed's sole raison d'etre was to level out the boom/bust the "business" cycles that were ALWAYS caused by banks anyway, then it has failed miserably.

The FED IS the business cycle as plain as day.

PLUS it unconstitutionally charges interest on fiat it creates from nothing, plus it's printing press robs the people's buying power in a secret fashion that confuses the average gullible stupid pathetic govt indoctrinates like yourself dlaw!

Get Out of Commodities - Barron's

The only REALLY scary thing is how indoctrinated ignorance has fooled Americans into accepting fiat currencies that throughout ALL history eventually met demise in hyperinflated worthlessness.

And yet the lowly oz of gold still buys today what it did 100 or 2000 years ago - a damn fine suit & shoes, or the finest toga and sandals to be found on the streets of the Roman Empire.

The PURE definition of inflation is: more "currency" units each with less purchasing power, period.

Prices do not rise vis gold. More dollars, worth ever less, requires more of them to purchase the same amounts of goods or sevices.

According to Marx, Lenin, and ideological pal Keynes; inflation, along with graduated taxes, are the millstones with which to grind away the wealth of the people - and which not one man in a million could detect because of it's invisibility.

It's the EXACT reason the Constitution calls for ONLY gold or silver money, and NO fiat toilet paper a la the 2nd Reich or Imperial Rome, because elites can diddle with it for their own benefit to the people's impoverishment, as stated by too many founders to EVER be quibbled over.

Does ANYONE know that Hamilton was married to a Rothschild? Or that Rothschilds were behind Rockefeller & Morgan who conspired to create the FED, the author of the FED being Paul Warburg, Hitler's banker Max's brother?

Read Murray N Rothbard's "Wall Street, Banks and American Foreign Policy" for the eyeopener of your lives:

mises.org/resources/12...

an excerpt from the intro:

The New Deal economic policy was, as Rothbard demonstrated, prefigured by Herbert Hoover, champion of big business, and foreshadowed in the reforms of the Progressive era. As the
revisionist economic historians, such as Gabriel Kolko, have shown, those who regulated the great industries in the name of progressive "reform" were recruited from the very cartels and
trusts they were created to tame.

And of course the monopolists didn't mind being tamed, so long as their competitors were tamed (if not eliminated). Every giant leap forward of economic planning and centralization—central banking, the welfare state, "civil rights," and affirmative action—was supported if not initiated by the biggest and most politically powerful business interests in the country. The House of Morgan, the Rockefellers, and the Kuhn-Loebs must take their place alongside the First, Second, and Third Internationals as the historic enemies of liberty.

Giant multinational corporations, and their economic satellites, in alliance with governments and the big banks, are in the process of extending their influence on a global scale: they dream of a world central bank, global planning, and an international welfare state, with American troops policing the world to guarantee their profit margins.

After the long battle to create a central bank in the U.S., the high priests of high finance finally seized and consolidated control of domestic economic policy. It only remained for them to extend their dominance internationally, and for this purpose they created the Council on Foreign Relations, and, later, the Trilateral Commission.

These two groups have been seized upon by the new populist Right as the virtual embodiments of the Power Elite, and rightly so. It is only by reading Rothbard, however, that this insight is placed in its proper historical perspective. For the fact of the matter is that, as Rothbard shows, the CFR/Trilateralist network is merely the latest incarnation of a trend deeply rooted in modern American history.

Long before the founding of the CFR or the Trilateral Commission, there was a power elite in this country; that elite will likely endure long after those organizations are gone or transmuted into something else. Rothbard's unmasking of the historical and economic roots of this trend is vital in understanding that this is not a "conspiracy" centered in the CFR and the Trilateralist groups, as such, but an ideological trend traditionally centered in the Northeast, among the upper classes, and deeply rooted in American history.

I put the word "conspiracy" in quotes because it has become the favorite swearword of the Respectable Right and the "extremist"-baiting Left.

If it is conspiracy-mongering to believe that human beings engage in purposeful activity to achieve their economic, political, and personal goals, then rational men and women must necessarily plead guilty. The alternative is to assert that human action is purposeless, random, and inexplicable. History, in this view, is a series of discontinuous accidents.

Yet it would be inaccurate to call the Rothbardian world view a "conspiracy theory." To say that the House of Morgan was engaged in a "conspiracy" to drag the U.S. into World War I, when
indeed it openly used every stratagem, every lever both economic and political, to push us into "the war to end all wars," seems woefully inadequate. This was not some secret cabal meeting in
a soundproof corporate boardroom, but a "conspiracy" of ideas openly and vociferously expressed. (On this point, please note and underscore Rothbard's analysis of the founding of The New Republic as the literary flagship of "the growing alliance for war and statism" between the Morgan interests and liberal intellectuals—and isn't it funny how some things never change?)

A conspiracy theory attributes virtually all social problems to a single monolithic agency. Radical feminism, which attributes all the evil in the world to the existence of men, is a classic conspiracy theory; the paranoid views of the ex-Communists in the conservative movement, who were obsessed with destroying their ex-comrades, was another.

But the complexity and subtlety of the Rothbardian analysis, backed up by the sheer mass of rich historical detail, sets Rothbard on an altogether different and higher plane. Here there is no single
agency, no omnipotent central committee that issues directives, but a multiplicity of interest groups and factions whose goals are generally congruent.

In this milieu, there are familial, social, and economic connections, as well as ideological complicity, and none is better than Rothbard at ferreting out and unraveling these biographical details. Taken together, the author's small and studied brushstrokes paint a portrait of a ruling class whose ruthlessness is surpassed only by its brazen disloyalty to the nation. It is a portrait that remains unchanged, in its essentials, to this day. Wall Street, Banks, and
American Foreign Policy was written and published in 1984, during the Reagan years.

Reagan started out by denouncing the power elite and specifically the CFR and the Trilateralists, but wound up with that epitome of the Establishment, Skull-&-Bonesman George Bush as his vice president and successor. Bush is a longtime CFR director, and Trilateralist; most of his major cabinet officers, including his chairman of the joint chiefs, Colin Powell, were CFR members.

The Clinton administration is similarly afflicted, from the President (CFR/Trilateral) on down through Donna Shalala (CFR/Trilateral) and George Stephanopoulos (CFR), with the CFR honeycombed (as usual) throughout the State Department. In addition to Secretary of State Warren Christopher, other CFR members in the Clinton cabinet include Laura Tyson, chairman of the Council of Economic advisors, Treasury Secretary Robert Rubin; Interior Secretary Bruce Babbitt, HUD honcho Henry Cisneros; and Alice Rivlin, OMB director.

The other side of the aisle is equally co-opted at the leadership level, as vividly dramatized by Gingrich's retreat before the power and majesty of Henry Kissinger. One naturally expects cowardice from politicians, but the indictment also includes what passes for the intellectual leaders of the Republican free-market "revolution."

mises.org/resources/12...

----Both parties are rotten to the core and serve the very same masters who tap, groom & place their puppets in govt, media and academe's top slots, and is why Rothbard's 40 pg essay is a MUST read for ALL Americans in understanding what this corrupt establishment LEAST wants Americans to know, having wasted billions of our tax dollars to make sure we don't via the state's compulsory educrats.----

Almost ALL media is controlled w/few exceptions - thank goodness for the WWW while we still have it!

Did Barron's Really Pan All Commodity Investing?

The only REALLY scary thing is how indoctrinated ignorance has fooled Americans into accepting fiat currencies that throughout ALL history eventually met the demise of hyperinflated worthlessness.

And yet the lowly oz of gold still buys today what it did 100 or 2000 years ago - a damn fine suit & shoes, or the finest toga and sandals to be found on the streets of the Roman Empire.

The PURE definition of inflation is: more "currency" units each with less purchasing power, period.

Prices do not rise vis gold. More dollars, worth ever less, requires more of them to purchase the same amounts of goods or sevices.

According to Marx, Lenin, and ideological pal Keynes; inflation, along with graduated taxes, are the millstones with which to grind away the wealth of the people - and which not one man in a million could detect because of it's invisibility.

It's the EXACT reason the Constitution calls for ONLY gold or silver money, and NO fiat toilet paper a la the 2nd Reich or Imperial Rome, because elites can diddle with it for their own benefit to the people's impoverishment, as stated by too many founders to be quibbled over.

Does ANYONE know that Hamilton was married to a Rothschild? Or that Rothschilds were behind Rockefeller & Morgan who conspired to create the FED, the author of the FED being Paul Warburg, Hitler's banker Max's brother?

Read Murray N Rothbard's "Wall Street, Banks and American Foreign Policy" for the eyeopener of your lives:

www.mises.org/resource...

an excerpt from the intro:

The New Deal economic policy was, as Rothbard demonstrated, prefigured by Herbert Hoover, champion of big business, and foreshadowed in the reforms of the Progressive era. As the
revisionist economic historians, such as Gabriel Kolko, have shown, those who regulated the great industries in the name of progressive "reform" were recruited from the very cartels and
trusts they were created to tame.

And of course the monopolists didn't mind being tamed, so long as their competitors were tamed (if not eliminated). Every giant leap forward of economic planning and centralization—central banking, the welfare state, "civil rights," and affirmative action—was supported if not initiated by the biggest and most politically powerful business interests in the country. The House of
Morgan, the Rockefellers, and the Kuhn-Loebs must take their place alongside the First, Second, and Third Internationals as the historic enemies of liberty.

Giant multinational corporations, and their economic satellites, in alliance with governments and the big banks, are in the process of extending their influence on a global scale: they dream of a
world central bank, global planning, and an international welfare state, with American troops policing the world to guarantee their profit margins.

After the long battle to create a central bank in the U.S., the high priests of high finance finally seized and consolidated control of domestic economic policy. It only remained for them to extend their dominance internationally, and for this purpose they created the Council on Foreign Relations, and, later, the Trilateral Commission.

These two groups have been seized upon by the new populist Right as the virtual embodiments of the Power Elite, and rightly so. It is only by reading Rothbard, however, that this insight is placed in its proper historical perspective. For the fact of the matter is that, as Rothbard shows, the CFR/Trilateralist network is merely the latest incarnation of a trend deeply rooted in modern American history.

Long before the founding of the CFR or the Trilateral Commission, there was a power elite in this country; that elite will likely endure long after those organizations are gone or transmuted into something else. Rothbard's unmasking of the historical and economic roots of this trend is vital in understanding that this is not a "conspiracy" centered in the CFR and the Trilateralist groups, as such, but an ideological trend traditionally centered in the Northeast,
among the upper classes, and deeply rooted in American history.

I put the word "conspiracy" in quotes because it has become the favorite swearword of the Respectable Right and the "extremist"-baiting Left.

If it is conspiracy-mongering to believe that human beings engage in purposeful activity to achieve their economic, political, and personal goals, then rational men and women must necessarily plead guilty. The alternative is to assert that human action is purposeless, random, and inexplicable. History, in this view, is a series of discontinuous accidents.

Yet it would be inaccurate to call the Rothbardian world view a "conspiracy theory." To say that the House of Morgan was engaged in a "conspiracy" to drag the U.S. into World War I, when
indeed it openly used every stratagem, every lever both economic and political, to push us into "the war to end all wars," seems woefully inadequate. This was not some secret cabal meeting in
a soundproof corporate boardroom, but a "conspiracy" of ideas openly and vociferously expressed. (On this point, please note and underscore Rothbard's analysis of the founding of The New Republic as the literary flagship of "the growing alliance for war and statism" between the Morgan interests and liberal intellectuals—and isn't it funny how some things never change?)

A conspiracy theory attributes virtually all social problems to a single monolithic agency. Radical feminism, which attributes all the evil in the world to the existence of men, is a classic conspiracy theory; the paranoid views of the ex-Communists in the conservative movement, who were obsessed with destroying their ex-comrades, was another.

But the complexity and subtlety of the Rothbardian analysis, backed up by the sheer mass of rich historical detail, sets Rothbard on an altogether different and higher plane. Here there is no single
agency, no omnipotent central committee that issues directives, but a multiplicity of interest groups and factions whose goals are generally congruent.

In this milieu, there are familial, social, and economic connections, as well as ideological complicity, and none is better than Rothbard at ferreting out and unraveling these biographical details. Taken together, the author's small and studied brushstrokes paint a portrait of a ruling class whose ruthlessness is surpassed only by its brazen disloyalty to the nation. It is a portrait that remains unchanged, in its essentials, to this day. Wall Street, Banks, and
American Foreign Policy was written and published in 1984, during the Reagan years.

Reagan started out by denouncing the power elite and specifically the CFR and the Trilateralists, but wound up with that epitome of the Establishment, Skull-&-Bonesman George Bush as his vice president and successor. Bush is a longtime CFR director, and Trilateralist; most of his major cabinet officers, including his chairman of the joint chiefs, Colin Powell, were CFR members.

The Clinton administration is similarly afflicted, from the President (CFR/Trilateral) on down through Donna Shalala (CFR/Trilateral) and George Stephanopoulos (CFR), with the CFR honeycombed (as usual) throughout the State Department. In addition to Secretary of State Warren Christopher, other CFR members in the Clinton cabinet include Laura Tyson, chairman of the Council of Economic advisors, Treasury Secretary Robert Rubin; Interior Secretary Bruce Babbitt, HUD honcho Henry Cisneros; and Alice Rivlin, OMB director.

The other side of the aisle is equally co-opted at the leadership level, as vividly dramatized by Gingrich's retreat before the power and majesty of Henry Kissinger. One naturally expects cowardice from politicians, but the indictment also includes what passes for the intellectual leaders of the Republican free-market "revolution."

www.mises.org/resource...

----Both parties are rotten to the core and serve the very same masters who tap, back & place their puppets, and is why Rothbard's 40 pg essay is a MUST read for ALL Americans in understanding what this corrupt establishment LEAST wants Americans to know, having wasted billions of our tax dollars to make sure we don't via the state's compulsion.----

A Warning for U.S. Dollar Bears and Commodity Bulls

Is the Fed an Inflation Fighter or Creator?
By Frank Shostak
Posted on 10/25/2005

Every few days, a senior Fed official expresses concern regarding the effect of high gasoline prices on inflation. These comments are always phrased in the way a meteorologist would report on the weather, as if the phenomenon in question is an act of nature. Even stranger, these statements imply that only the Fed can hope to save us from this natural disaster.

To invoke another metaphor, this is like the cook who bakes a poison pie and then arrives on the scene of grave sickness, claiming to be the medic with the antidote.

It is the Fed that creates, not cures, inflation. The surest way to stop it is to stop the printing presses—something that a government with massive debt and the desire to sustain a boom is not likely to do.

The Fed’s latest warnings began on September 5, 2005, when the retail price of gasoline climbed to $3.069 per gallon—an increase of 72.6% from early January of this year.

They believe that the decisive factor in the setting of an inflationary spiral is people’s inflationary expectations. This causes workers to press for higher wages. Businesses try to recoup these wage increases by pushing the prices of goods and services higher. This ignites inflation, or so it is believed.

On October 19, 2005, the President of the Dallas Federal Reserve, Richard Fischer, said at a luncheon in Houston, "I will not waver from advocating policy that discourages expectations of higher core inflation. The object will always be to keep inflation at bay, so that the American business machine can keep on humming."

It is inflationary expectations, so they believe, that keep inflation going once inflation is triggered. Also, once expectations are set in motion it is not easy to get rid of them.

On October 20, 2005, the President of the St. Louis Federal Reserve, William Pool, told reporters, "If confidence in price stability starts to erode and inflation expectations begin to develop, it can be painful and long to reverse those expectations. Undoing inflationary expectations can be a matter of a couple of years."

Consequently, he believes that the Fed must raise interest rates enough to keep inflationary expectations well contained. He also added that, "if we were to end up overshooting on the federal funds rate target on the high side and we found that the economy slowed more quickly than anticipated then cutting rates could restore growth relatively quickly."

On October 21, 2005, the President of the Federal Reserve Bank of Richmond, Jeffrey Lacker, told reporters that he is increasingly worried about inflation and the prospect that higher energy prices will filter through into other goods. "My concern about inflation is distinctly higher now. We are facing the prospect now of the possibility of the energy price surge passing into core prices."

The latest data gives credence to the Fed officials’ concerns. The rate of growth of the producer price index which excludes energy prices jumped to 0.6% in September after falling 0.1% in August. Year-on-year the rate of growth climbed to 2.4% in September from 2.2% in the previous month and 1.7% in June.

Furthermore, year-on-year the consumer price index rose by a massive 4.7% in September. Additionally, according to a closely watched survey by the University of Michigan, consumers' expectation of inflation 12 months ahead jumped to 4.6% in early October from 3.1% in August.

On account of these developments, it is believed, the Fed must show leadership and act as soon as possible against emerging inflation. Once people see that the Fed is a serious inflation fighter this will calm down inflationary expectations and will keep inflation at bay, or so it is held.

What is inflation all about?

In a market economy, money enables the goods of one specialist to be exchanged for the goods of another specialist. For instance John the baker has produced ten loaves of bread, which he has exchanged for ten dollars. He then uses the ten dollars to buy twenty tomatoes from a farmer Bob. Note that in order to acquire twenty tomatoes John had to produce ten loaves of bread first. In short, his consumption of tomatoes is fully backed up by the production of bread. Also, note that the money here is honestly earned and hence fully backed up by John’s production of bread. Or we may also say that here we have a case where something useful is exchanged for money and money in turn is exchanged for some other useful thing—something is exchanged for something else by means of money.

Let us now consider a case of a counterfeiter—call him Charlie—who instead of producing something useful has created ten dollars by means of printing these ten dollars. He then uses these dollars to buy twenty tomatoes from Bob the farmer. His counterfeiting amounts to an "exchange" of nothing (since Charlie hasn’t produced anything economically useful) for ten dollars, which is in turn exchanged for twenty tomatoes.

Consequently, by means of money, which was created out of "thin air," Charlie the counterfeiter can consume without any production. Note that the money here, which was created out of "thin air," is not supported by any production of useful goods or services. Or we can also say that here we have a case where nothing useful is exchanged for money and money is exchanged for useful things—nothing is exchanged for something useful by means of money out of "thin air."

By creating money out of "thin air," Charlie the counterfeiter has in fact boosted or inflated the stock of money. This inflation of money in turn has enabled Charlie to secure tomatoes at the expense of a genuine wealth producer John the baker. In other words, while John the baker has contributed to the pool of funding, i.e., the pool of final goods this is not the case as far as Charlie the counterfeiter is concerned—he is consuming final goods without putting anything useful to the pool of these goods.

It follows then that the diversion of real wealth from wealth generators to non-wealth generators by means of increases in the money supply is what inflation is all about. Or we can say that inflation is about the economic impoverishment of wealth producers, which is set in motion by means of inflating the stock of money.

Through the increase in money supply, Charlie the counterfeiter adds an extra demand for goods and services without making any contribution to the production of goods and services. In short, the new money that Charlie created together with the previous money is now chasing an unchanged stock of goods.

Now, a price is the amount of dollars paid per unit of a good. Hence with more money now chasing a given amount of goods it implies that the price, i.e., the amount of dollars now paid for a unit of a good, has risen. Note that a general increase in prices here took place as a result of the inflation of the money stock.

Observe that the fall in the purchasing power of money, i.e., general increase in prices, is not what triggers the economic impoverishment of wealth generators. The trigger is the creation of money out of "thin air," or the inflation of the money stock. A general increase in the prices of goods and services is merely the symptom of the inflation of money, i.e., the manifestation of inflation. In short, a general increase in prices reflects the fact that increases in the money supply, i.e., money out of "thin air," have given rise to nonproductive consumption.

Note what we are not saying. We don’t say that inflation is the increase in prices caused by increases in money supply. What we are saying is that increases in money supply is what constitutes inflation.

What is wrong with the popular definition of inflation?

According to Mises,

Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term `inflation' to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation.

In short, what today is called inflation is the general rise in prices, which is in fact only the outcome of inflation. Consequently, anything that contributes to price increase is called inflationary and therefore must be guarded against.

Thus a fall in unemployment or a rise in economic activity are all seen as potential inflationary triggers and therefore must be restrained by central bank policies. Some other triggers such as rises in commodity prices or workers wages are also regarded as potential threats and therefore must be always under the watchful eye of the central bank policy makers.

If inflation is indeed just a general rise in prices, why is it regarded as bad news? What kind of damage does it do? Mainstream economists maintain that general price increases cause speculative buying, which generates waste. Inflation, it is maintained, also erodes the real incomes of pensioners and low-income earners and causes a misallocation of resources.

Despite all these assertions regarding the side effects of what they define as inflation, mainstream economics doesn’t tell us how all these bad side effects are caused.

Why should a general rise in prices hurt some groups of people and not others? Why should a general rise in prices weaken real economic growth? Or how does inflation lead to the misallocation of resources? Furthermore, if inflation is just a rise in prices, surely it is possible to offset its bad side effects by adjusting everybody’s incomes in the economy in accordance with this general price increase. However, once it is established that inflation is about the destruction of the process of wealth generation then all the above questions are easily answered.

We have seen that increases in the money supply set in motion an exchange of nothing for something. They divert real funding away from wealth generators toward the holders of the newly created money. This is what sets in motion the misallocation of resources, not price increases as such, which is only the manifestation of this misallocation.

Moreover, the beneficiaries of the newly created money, i.e., money out of "thin air"—are always the first recipients of money, and so they can divert a greater portion of wealth to themselves. Obviously, those who either don’t receive any of the newly created money or get it last will find that what is left for them is a diminished portion of the pool of real funding.

Additionally, real incomes fall not because of general rises in prices, but because of increases in the money supply, which gives rise to nonproductive consumption. In other words, inflation depletes the real pool of funding, which undermines the production of real wealth—i.e., a lowering of real incomes.

General increases in prices, which follow increases in money supply, are an indication that the erosion of peoples’ purchasing power has taken place. It is not the symptoms of a disease but rather the disease itself that causes the physical damage. Likewise, it is not a general rise in prices but increases in the money supply that inflict the physical damage on wealth generators.

Can inflationary expectations trigger a general price rise?

Recall that according to popular thinking, workers' expectations for higher inflation make them demand higher wages. Increases in wages in turn lift the cost of producing goods and services and force businesses to pass these increases on to consumers by raising prices. It is true that businesses set prices and it is also true that businessmen while setting prices take into account various costs of production. However, businesses are ultimately at the mercy of the consumer who is the final arbiter.

The consumer determines whether the price set is "right," so to speak. Now, if the money stock hasn’t risen, consumers won’t have more money to support the general increase in prices of goods and services. (Remember, that a price is the amount of money per unit of a good).

Consequently, a strengthening in inflationary expectations cannot by itself set in motion a general increase in prices. After all the realization of expectations has to go through the monetary channel. So irrespective what people’s expectations are, if the money supply hasn’t increased then peoples monetary expenditure on goods cannot increase either. This means then that no general strengthening in price increases can take place without an increase in the pace of monetary pumping.

By the same token, a strengthening in gasoline price rises cannot by itself set in motion a stronger rate of increase in general prices. Without the strengthening in the rate of growth of money supply relative to the rate of growth of goods there can’t be a general strengthening in price rises.

However, one could argue that a rise in inflationary expectations will cause the lowering of the demand for money, which with all other things being equal, will result in the decline in money’s purchasing power, i.e., a general rise in prices. However, what does a change in the demand for money have to do with inflation?

Inflation as we have seen is an increase in the money supply that leads to economic impoverishment through the increase in nonproductive consumption. There is however, nothing wrong with changes in the demand for money. This is no different from changes in the demand for any good. The fact that people want to hold less money doesn’t give rise to nonproductive consumption that sets in motion a process of economic impoverishment.

Likewise inflation is not about increases in money supply in excess of the demand for money. According to this way of thinking, as long as the increase in money supply is fully backed up by the demand for money there is no inflation. Note also, that in this way of thinking inflation is regarded as a general rise in prices. However, irrespective of the demand for money, once the money supply increases it sets in motion a process of impoverishment, which also sets in motion the dreadful boom-bust cycle.

It follows that the popular view, which asserts that by means of transparency the Fed can prevent rises in inflation, doesn’t hold water. Irrespective of how transparent the Fed is, what matters here is the rate of increase in the money supply. It is rises in the money supply that cause the physical damage to the process of real wealth formation irrespective of the Fed’s transparency.

Imagine that somehow the Fed did manage to convince people that central bank policies are aimed at stopping inflation and maintaining price stability, yet at the same time the central bank also raises the rate of growth of money supply. So even if inflationary expectations were stable the destructive process will be set regardless of these expectations on account of the increase in the rate of growth of money.

Note that people’s expectations and perceptions cannot offset this destructive process. It is not possible to alter the facts of reality by means of expectations. The damage that was done cannot be undone by means of expectations and perceptions.

Is the Fed an inflation fighter?

Between January 2001 and June 2004, the Fed had pursued an aggressive lowering of the federal funds rate target. The target was lowered from 6.5% to 1% by June 2003. To attain a given federal funds rate target, the Fed must constantly manage the flow of money to financial markets. Changes in the Federal Reserve’s balance sheet, also known as Federal Credit, depict the variability in the monetary pumping to sustain a given federal funds rate target.

Thus, to support a lower fed-funds rate target the yearly rate of growth of Fed Credit jumped from 0.7% in January 2001 to 12% by September 2001. Furthermore, during most of the 2003 period the rate of pumping by the Fed stood in excess of 9%.

The effect of Fed’s pumping is manifested by the up-trend in the growth momentum of the CPI since June 2002 (see chart). Note that the general rise in prices as depicted by the rate of growth in the CPI is driven by the past actions of the Fed.


By responding to the symptoms of inflation that the Fed has itself created the US central bank gives the impression that it fights inflation. Once it is realized that inflation is increases in the money supply, it becomes obvious that the source of inflation is the Fed and fractional reserve banking. It also becomes obvious that rather than fighting inflation, it is the Fed itself that generates the inflationary process. On this Mises wrote,

To avoid being blamed for the nefarious consequences of inflation, the government and its henchmen resort to a semantic trick. They try to change the meaning of the terms. They call "inflation" the inevitable consequence of inflation, namely, the rise in prices. They are anxious to relegate into oblivion the fact that this rise is produced by an increase in the amount of money and money substitutes. They never mention this increase. They put the responsibility for the rising cost of living on business. This is a classical case of the thief crying "catch the thief." The government, which produced the inflation by multiplying the supply of money, incriminates the manufacturers and merchants and glories in the role of being a champion of low prices.

It is amazing that almost forty years ago the champion of present inflationary policies, Fed Chairman Alan Greenspan wrote the following,

The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy’s books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

Conclusions


Devastating: $5
For the past several weeks, Fed officials have warned the public about the growing inflation threat. Officials blame the growing risk of inflation on the rising price of gasoline as a result of the rise in crude oil prices and hurricane Katrina. Despite all this Fed officials are resolute that it is their duty to protect the US economy from the inflation menace.
According to officials, what is needed to counter the looming inflation threat is to prevent an acceleration in inflationary expectations. This, it is held, can be achieved by pursuing a transparent and credible policy to counter inflation. It is overlooked by most experts that the source of inflation has nothing to do with the high price of oil and high gasoline prices.

The main source of inflation is the Fed itself. Various measures that Fed officials are promising to employ in the fight against inflation rather than fixing the problem will make things much worse. These policies only generate a further misallocation of resources, which in turn undermines the process of wealth generation.



----------------------...
Frank Shostak is an adjunct scholar of the Mises Institute and a frequent contributor to Mises.org. Send him MAIL and see his outstanding Mises.org Daily Articles Archive. Comment on this article on the Mises Economics Blog.