That’s right. Bernanke is taking his easy money message to the streets.

According to Bloomberg:

“Now that the weather is nice, I’m half-expecting Ben Bernanke to set up a lectern outside Federal Reserve headquarters on Constitution Avenue so he can enlighten passersby about the need for easy money. He’s been delivering the message lately to anyone who will listen–including a couple dozen lucky students at the nearby George Washington University School of Business. The Fed chairman is worried that the economic recovery could stall out if the Fed yanks monetary stimulus too soon.”

Source

Dan Denning continues:

“He is returning to his roots as a professor. But professors must profess. So what is Dr Bernanke? Obviously he’s repeating the claptrap that to simulate growth you need to lower interest rates. But according to the rather nauseating article (which isn’t much more than an appeal to authority) Bernanke is going after Herbert Hoover’s Treasury Secretary Andrew Mellon.

“Mellon was asked by Herbert Hoover how to deal with the Great Depression. According to Hoover’s memoirs, Mellon replied:

‘Liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.’

“Now there is some doubt as to whether Mellon actually said this. The only source is Hoover, who was trying to make himself look compassionate and enlightened by comparison. But if Mellon didn’t say it, he should have. This is a common sense view, which is probably why so many people oppose it. Time does not make bad investments go good. The recession/correction/liquidation is the cure for the disease of inflation.

“Mellon, if he actually said those words, certainly didn’t mean liquidation in the sense that say, Stalin, would have meant it. He wasn’t suggesting Hoover go out and shoot the farmers the same way Stalin liquidated the Kulaks who opposed his collectivist agrarian policies. But Bernanke reportedly called Mellon’s prescription, ‘pretty heartless’.

Isn’t that big of him?

“The ‘liquidation’ of bad investments is another way of saying that there comes a time when you must give up on the belief that an investment will come good. The sooner you do this, the better it will be for everyone. Resources like capital and labour will no longer be tied up in unproductive investments. But more importantly, human lives will no longer be engaged in activity that doesn’t make anyone more productive, wealthier, or happier.

“Bernanke is the heartless one in all of this, even if he thinks his heart is in the right place. He represents an idea that has destroyed the life savings and purchasing power of millions of people. The control of money by central banks has sucked even more people into investment and borrowing decisions that will take them years to recover from, if they ever do.

“It’s not only heartless to believe in fiat money. It’s brainless. Maybe that’s why the centralisation of the money supply by people who have infinite confidence in the technology of the printing press receives so much popular support. People who support it aren’t really thinking. They’re believing…and following orders. ‘Nothing to see here… move along.’”

We think it’s fair to say that Ben Bernanke is willing to destroy the economy and your standard of living.

We don’t know if he’s part of a deliberate coordinated effort to transfer your wealth to the political and banking elite…if he does what he does knowing full well the destruction he’s causing.

Or maybe he just has a head full of bad ideas. Like a medieval “scientist” whose considerable knowledge all rests on the faulty premise of geocentricity.

No matter what Bernanke says, no matter how much the masses put their faith in his words, low interest rates and unbacked money creation cannot cause economic growth. Not the sustainable kind anyway.

All this interest rate manipulation causes are distortions. It may seem to create wealth and the appearance of economic vitality. But that activity is just misallocation of resources. And the misallocations will correct themselves soon enough. These corrections are attended by the disappearance of jobs in industries that should never have flourished (remember, these were misallocations).

Low interest rates distort economic signals. They tell producers that money is plentiful. Interest rates are the cost of borrowing money and when they are naturally low, it means that there is plenty of money looking for borrowers. The market is making borrowed money more available to both consumers and producers. This saved capital can be put to work to generate economic activity. Consumers will borrow to buy. Producers will borrow to expand start or expand production.

Artificially low interest rates, however, send a false signal to those consumers and producers. They get the economic juices flowing when capital is actually scarce.

Sure the economy may appear to grow. But they mask the reality, like when beer improves the appearance of the homely women at the bar. There are really no nutrients to support this growth. There is no saved capital. Low interest rates give the illusion of plenty of savings looking for investment. But it is just an illusion.

Also in an artificially easy money environment there are few corrective signals. This leads to malinvestment and to financial bubble. More nail salons and transgender studies degrees than there would have been without the easy money. Houses and company stocks may find they fetch a higher price than they otherwise would have, too.

And there we have it. The conceit of the Keynesians. They believe that good, honest growth can come by inducing borrowing with easy, greasy new money. Austrian school types insist that there must be savings first from which to borrow. Any boom based on low interest rates must necessarily result in a bust when the reality — There was no accumulated capital upon which to draw! — asserts itself.

But how do you go about monkeying with interest rates? Ah, that’s where having a monopoly on the money supply comes in really handy! You just create a boatload of new money and shovel it into the bond market.

And here the plot thickens. You see, a lot of this newly created money can buy up government bonds. That is to say, the central bank can lend the new money to the government through their preferred brokers.

Two birds, one stone. Interest rates are lowered (inducing “growth”) and the government has more borrowed money to play with. It’s a central planning jackpot.

Not enough tax money to cover the costs of all those wars and wealth transfers? No problem! Deficits don’t matter when the central bank is willing to keep lending you money…and keep the cost of borrowing (interest rates) down to boot!

Of course, these sorts of shenanigans can’t go on forever. It just seems like they can while your in their midst. But the reckoning must come. Anyone who is not prepared will be wiped out.

Interest rate manipulation and the creation of unbacked new money…it’s all part of a great con. We’re all told it spurs economic growth. But what it really does is destroy the things upon which growing economies rely: accumulated capital in the form of savings, and clear economic signals in the form of prices, both for goods and for the use of money itself.

We suspect that there are people who benefit from this degenerate non-market, central banking system and who know that they benefit from it at the expense of billions of their fellow humans. We’re not sure Ben Bernanke, however, is in the know.

Perhaps Greenspan was. But we think Bernanke really believes his lines. He is as fervent in his belief in artificial control of interest rates and fiat money as any free marketer is about his gold and silver. Ben Bernanke is a “fiat bug”.

Our advice is to stay as far away from Bernanke and the supply of paper he controls as you possibly can. That means physical gold and silver.

But “paper” gold and silver, along with other “paper” commodities may greatly benefit from Bernanke’s tender ministrations. At least for a little while before the whole house of cards comes down.

As the dollar goes down gold, silver and oil will obviously go “up”. But the stocks in the companies that look for and mine these things may benefit even more from a falling dollar.

In fact, the price of mining and oil companies and may be the only place Bernanke may be able to reach his stated goal of fighting deflation.

Bernanke considers your standard of living expendable. He’s willing to wreck the economy by sticking to his easy money claptrap.

Your employer or your customers will hand you Federal Reserve Notes for your labors. They have to by law. But you don’t have to keep those notes.

Protect your purchasing power and standard of living. Trade those notes for real money. Bernanke may only think something is “money” when its supply is under central bank control. But you know better.

After you get your gold and silver, however, be sure to get ready to profit even more from Ben’s efforts to fight price deflation. Get the right mix of gold and silver miners and energy companies.

Regards,

Gary Gibson

Ben Bernanke Considers Your Happiness and Security Expendable was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

People were honoring his memory by looking back at the timeline of his life, seeing the change in his face and appearance from the youngest age when he played the Artful Dodger to his last year, in which he was still singing (and actually, he looked great!).

The same now happens when every major culture figure passes on. We see a lifetime of pictures. We see the change, the aging process, the gradual graying, the weight gain, the other intriguing responses of our physical appearance to the passage of time.

The digital age has brought us many new things, but the least expected is a new awareness of time and the inevitability of decline and death. Digits have a way of collapsing it all so we can view it in a much sped-up process. We can see performances from decades ago as easily as we can see one from yesterday.

It’s never been this easy to observe the phrase “ashes to ashes” play itself out before our eyes. The analog age generally gave us only what was going on at the time, or rather, we could go to some lengths to get the full picture of past and present The digital age, with its penchant for giving us every bit of information we could possibly want, puts the passage of time at our fingertips and burns the reality of mortality into our brains.

The passage of time is newly fashionable. Facebook, used by nearly one-sixth of humanity, has recently changed its default layout from displaying random stuff to organizing it all in a timeline. Software widgets show what we will look like in 50 years. Our email archives keep a running chronicle of our lives, day by day, thought by thought, friend by friend.

It’s all symbolic of a new embrace of the most-relentless force in the universe, more powerful than all states and all private markets put together: the inevitability of change embedded in the passage of time. It is unstoppable, undeniable and omnipresent and a constant reminder that no matter how much power humankind accumulates, it will never be more powerful than time itself. There is some comfort in that.

What economic institution most embodies the inescapability of time’s relentless march? Ludwig von Mises, in his wonderful treatise Human Action, tells us that it is the interest rate. Interest rates reflect our degree of valuation of present goods over future goods. Everyone prefers the same good now, rather than later, all else being equal. However, in the same sense that we choose which goods and services we want to buy or decline to buy, we also choose our time horizon: acting for now or acting for later to achieve our ends.

If we want a car today and don’t want to defer our consumption for a year or two down the line, we have to pay someone else who has deferred that consumption to loan us saved money. If we are starting a business and think its near-term profits are going to be higher than the expected interest charges, we make the deal. If we save money and make it available to others to use, we expect a reward in the form of interest.

The interest rate is supposed to signal to investors how to handle time commitments. A low rate of interest is supposed to signal vast savings available in a society that has deferred consumption and planned for the future. A high rate of interest suggests a relative scarcity of savings and a scramble to use what is available. In this way, interest rates carefully sync present and future.

The passage of time also instantiates itself in the institution of capital — goods produced not for immediate consumption, but rather for making other goods. If there were not time structure of production, capital would have no unique value, no real contribution to overall prosperity. But it does because its very existence points to how property owners are able to plan for the future.

In societies in which there is no planning for the future, either because the culture is present oriented or because the law is too unstable to permit planning, no capital formation takes place. No time structure of production exists. And there are no savings to back the wide availability of credit.

In developed economies, the capital structure reflects a huge variety of time commitments. Every production process has an endpoint of consumption, but those endpoints are all over the map. I can make soup to eat now. Or I can save to buy some grapevines and build a vineyard to make wine that might only be drinkable and marketable 10 or 15 years from now.

The Austrian economists tell us that other economic theories are nearly brain-dead when it comes to thinking about the passage of time and its role in the institution of capital. This is one of many reasons that they miss an extremely important point about Federal Reserve policy. That is, by manipulating the interest rates, the Fed is playing with the signaling system that tells investors and capitalists how much they can plan ahead — how much “real stuff” is available to cause their plans to work out.

In this way, a manipulated rate like we have today is nothing but a lie. It tells capitalists to borrow and plan when the resources aren’t really available to justify that. It tells us that there are huge reserves available to support future consumption, whereas they aren’t really there. As a result, the finely calibrated singling system of capital markets isn’t really functioning as it should.

In a strange way, then, the Fed is in denial about something that we’ve all embraced in the digital age.

Even Facebook is on board with acknowledging that all its accounts will go the way of all flesh. The Fed seems to think that its powers allow itself to live as if time doesn’t matter.

Bernanke might be powerful, but he can’t achieve what no one ever has: the abolition of time as a undeniable factor of economic life. It is the ultimate act of arrogance to act as if the relentless forward march of time is pure illusion.

Regards,

Jeffrey Tucker

Economics of the Timeline was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Households, like businesses, will have to pay as they go from earned income. The house as ATM is over. Credit cards are maxed out and credit ceilings are lowering like the ceiling in “The Pit and the Pendulum,” preparing to slice-and-dice the old “normal” of family life in America. Bankruptcy will be the new Nascar. A lot of families will lose everything. They will sift and disperse into the housing owned by other family members — parents, siblings — and a strange new not-altogether comfortable kind of togetherness will become common. Over time, a lot of people will go looking for casual work “under-the-table” (and probably low-paying). To some degree, these workers will begin to look and act like a new servant class, and before too long they may be absorbed into the households of people who employ them. There will be plenty of room for them there.

Counties, municipalities, and states will join in the bankruptcy fiesta. It would be reasonable to expect collapsing services as a result. This would be a situation fraught with danger — of rising crime, of public health emergencies as water systems are not kept up and sewage treatment becomes unaffordable. I don’t imagine the federal government stepping into every Podunk or Metropolis from sea to shining sea and propping up these services. People will have to cope with danger and deprivation.

2009 may be the point where we begin to understand what kinds of places will be more hospitable to human society further ahead. I maintain that our giant urban metroplexes have way overshot their sustainable scale and will contract severely. With all the economic hardship, we ought to expect a lot of demographic churning, people leaving hopeless places and moving on to something more promising. I believe we will see them move to smaller towns and smaller cities. The reorganization of the rural landscape into smaller-scaled farms has not begun to occur — though 2009 might be very hard on agribusiness, given the shortage of capital and if oil begins to march up in price by late winter. Eventually, the rural landscape will require the labor of many more people than is currently the case. Whatever else happens, 2009 will surely see a massive return to home gardening as budgets become strained to the extreme. As the New Urbanist Andres Duany said recently, “Gardening is the new Golf!”

The Oil Scene

Many were stunned this year to witness the parabolic rise and fall of oil prices up to nearly $150 and then back around $36 by Christmas time. Quite a ride. I said in The Long Emergency that volatility would be the hallmark of post peak oil because it was obvious that advanced economies could not absorb super high prices and would crash in response; that at some point after crashing, these economies would respond to the new lower oil price, resume their cheap oil habits, and build to another price rise. . . and crash again. . . in a declension of ever-lower industrial activity.

What I probably didn’t realize at the time was how destructive this cycling between low-high-and-low oil prices would actually be in the first instance of it, and what a toll it would take right off the bat. We can see now that our first journey through the cycle took out the most fragile of the complex systems we depend on: capital finance. As a result, a huge amount of capital (say $14 trillion) has evaporated out of the system, never to be seen again (and never to be deployed for productive purposes). It will be harder for the USA to rebound from the grievous injury to this crucial part of the overall system, and Europe has foundered similarly — though the European nations are not burdened to the same degree by the awful liabilities of suburbia.

Even if these advanced economies — throw in Japan too — remain moribund, the price and supply prospects for oil look ominous. My own guess is that the price of oil has overshot on the low end just as it overshot on the high end, and that, when all is said and done, we’ll still see an upwardly trending price line over the long haul. The plunge, which began right after the $147 peak in July 2008, was as much the result of banks, hedge funds, and individuals dumping oil investments and positions to raise cash as it was a matter of the markets predicting a sharp fall-off in economic activity (and supposedly oil consumption). The truth is that demand destruction for oil in the USA has been surprising mild compared to the drop in price. Jim Hansen’s Master Resource Report says that gasoline consumption dropped from 9.29 million barrels a day in 2007 to 8.99 million barrels a day for 2008. That’s not much of a fall-off, especially compared to the price drop.

As Julian Darley of the Post Carbon Institute put it recently: “There won’t be any energy bail-out.” And, as many other people have noted, the recent plunge in oil prices strongly implies future supply destruction, since so many planned oil projects have been suspended or cancelled because they are economic losers at $40-a-barrel (or even $70). Even projects well underway, such as Canadian tar sand production, have been scaled back or shut down because they don’t make sense at current prices. Some of these other newer projects will now never get underway — they have missed their window of opportunity with so much capital leaving the system — and so the hope of offsetting very-near-future depletions in old giant oil fields looks dimmer and dimmer.

Those depletions are very serious. For instance, Mexico’s super-giant Cantarell oil field, the second-largest ever discovered after Saudi Arabia’s Ghawar field, has shown a 30 percent depletion rate in the past year alone. (Pemex had forecast a 15 percent rate entering the year.) Cantarell provides over 60 percent of Mexico’s total production, and Mexico is America’s third largest source of imports — just after Saudi Arabia (#2) and Canada (#1). Obviously, Mexico soon will lose its ability to export oil, and as that occurs, America is going to feel more than pinch — more like a two-by-four upside the head. In short, remorseless depletion is underway and we are less likely now than even a year ago, to make up for it.

At some point, then, demand, even if slightly lower, will catch up with declining supply. My prediction for 2009 is that we will see two things occur, possibly at the same time: a resumption of rising prices, and spot shortages. I say this because the global economic fiasco is sure to produce geopolitical friction, and inasmuch as America has to import almost three-quarters of the oil we use, the prospect for trouble is great.

The tragic part of all this, of course, is that the temporary plunge in oil prices has prompted an incurious American public to assume, once again, that the global oil predicament is some kind of a fraud. Given the flood tide of fraud they have been subject to in banking and investment matters, I suppose you can’t blame them from thinking that everything is some kind of a scam. Given feeble car sales this season, there are reports that an increasing percentage of those sold now are trucks and SUVs.

Though I give Boone Pickens high marks for stepping up to the leadership plate, I’m not altogether on board with his energy proposal for swapping natural gas for gasoline in motor fuels while we swap out wind power for natural gas in electric power generation. I don’t believe that the ballyhooed shale-gas-plays of the last few years will prove-out long-term, as some huckster’s claim. They are expensive to drill and run, and they all tend to deplete very quickly — around one year. I’m not convinced we have the capital or the resources even to come up with the steel necessary to drill for it. Anyway, the last thing we need is a way to prolong our car-dependency.

In the meantime, there are still those who hope (as described above) that various alt.energy systems will insure the continuation of Happy Motoring. This is an idle hope, and 2009 will be very sobering for those who imagine that hybrid cars, or electric cars, or “air” cars, or any other kind of car technology are going to save the day. Even if President Obama mounts an “infrastructure stimulus” program, it will not keep up with all the necessary routine road repair that our highway system requires. The extreme financial hardship faced by localities and states insures that they will have to postpone a lot of expensive highway maintenance — even if the federal government fixes a big bunch of bridges and tunnels — and so we face the interesting prospect that our roadway systems will enter their own deadly zone of systemic failure even before the whole car issue is settled.

I am waiting to see whether Mr. Obama will undertake a restoration of passenger railroad service. I’ve said enough about this in the past, but it’s worth reiterating that a failure to get comprehensive passenger rail service going will be a sign of how fundamentally unserious we are as a nation.

Regards,
James Howard Kunstler

January 2, 2009

Less oil, less credit: Forecasts 2009, Part II was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.