Business

Carving the Currency

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I hope everyone is enjoying their Thanksgiving holiday weekend, traditionally a time to count our blessings. Speaking for myself, I am particularly thankful that the electorate has seen fit to restore divided government a full two years before I thought possible.

I am less thankful about what our leaders are doing to our currency. Last year I introduced a new tradition on Thanksgiving – watching the carving of our currency as it is sliced by administration fiscal policy and diced by Fed monetary policy.

Your 2010 Thanksgiving dollar dinner leftovers are served:

For our main course, let us check in with Peter Schiff, who you may recall was right in 2006-07 predicting the impending recession and crash of the real estate bubble. He was right in 2008 about the dollar and early in 2009 when he warned President-elect Obama about the folly of trying to borrow and spend ourselves into prosperity. Monotonously he was right again one year ago when he told us to keep buying gold at $1,084 /oz (up 27% to Wednesday’s close of $1,372/oz) as a hedge against the devaluing dollar.

We cannot expect this remarkable record to continue. Schiff is an economist a financial consultant* – a profession second only to economists with a reputation for being more wrong than right (Paul Krugman being a notable high profile example, having correctly predicted eight of the last one recessions). But, while he is on a hot streak, it behooves us to pay attention to what he has to say.

Serving up the meat and potatoes – Schiff on the insanity of Congress mandating a two headed Fed charter. They are required to manage monetary policy to maintain a stable currency, and also to promote maximum employment by umm.. devaluing the currency:

The Chimera of the Fed’s Schizophrenic Mission – Peter Schiff

“Prior to 1977, the Fed only had one job: maintaining price stability. However, the stagflation of the 1970s inspired politicians to assign another task: promoting maximum employment. This “mission creep” has transformed the Fed from a monetary watchdog into an instrument of social policy. We would do well to give them back their original job.

The imposition of the “dual mandate” was informed by the Keynesian belief that inflation and unemployment don’t mix. An economic concept known as the ”Phillips curve” postulates that low levels of one cause high levels of the other. But, like many things in modern economics, the curve is a fiction. There is no real reason why low inflation would produce unemployment or full employment would create inflation…

The real reason that prices rise, for both goods and wages, is that the Fed creates inflation. This policy undermines the economy by destroying both current savings and the incentives to accumulate future savings. Since savings finance capital investment, lower savings equal weaker economic growth.

So, the best way for the Fed to create maximum employment is to focus on the single mandate of price stability. While a few elected officials seem to be figuring this out, most are just as clueless as the Fed. Unfortunately, even if Congress succeeds in changing the Fed’s mandate, there is not much chance that monetary policy will change significantly. Keynesian thinking is so ingrained in Bernanke and his colleagues that they will exploit any wiggle room in their directives to jump back in the driver’s seat and send us ever faster toward the edge of an economic cliff.”

For a side dish, Peter Schiff checks in with CNBC and browbeats the usual suspects on Fast Money:


For dessert, we recommend a particularly amusing and insightful animation created by Ornid Malekan to explain the Fed’s recently announced second serving of an aggressive quantitative easing policy – aka QE2:


Tasty. The most amazing thing about this video – it is closing in on almost 3 million views after being posted on YouTube for only 3 weeks. After knocking this out in an afternoon, its creator is in demand by the media, being interviewed by the likes of Slate and CNBC.

C’mon. A six minute long primitive animation about economics, Fed policy, and quantitative easing – going viral? Three million views? How does that happen?

Finally, for a relaxing after dinner smoke – Enjoy “The Bernanke” as he hits the road to defend the QE2 policy to the world. Good luck with that, Ben.

Cross=posted from Divided We Stand United We Fall