(For a bigger picture, click on the bill)
On November 6, 2002, the Fed cut the Fed Funds Rate (by 0.50%) to its present level of 1.25%. Two weeks after that, on November 21, 2002, Fed Governor Bernanke gave a speech to the National Economists Club. The title of his speech was" "Deflation: Making Sure It Doesn't Happen Here". Mr Bernanke was careful to define his terms. He defined deflation as: "A general decline in prices, with emphasis on the word general".
Now, here is the truly scary part of Governor Bernanke's speech, the part that ensured that the speech would be remembered. This is a direct quote from the speech:
"...U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
"Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior). Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities."
It was this speech, and a speech given by Alan Greenspan later on in the same week to the Council on Foreign Relations, where he too stressed that the Fed had "ways and means" of combatting "deflation", which led directly to the sudden leap in the $US Gold price (from $US 320 to $US 380) which took place in December 2002-January 2003.
Please re-read the quote from Mr Bernanke's speech. Having done so, please realise this. All the means cited by Mr Bernanke to combat "deflation" have been and ARE BEING used today by the Fed to an extent unparalleled in the history of money.
It is in THIS situation that the Fed has now chosen to bring to the fore, once again, the "deflation beast". Their reason for doing so is simple. The Bush Administration is deficit spending to an extent never before matched in US history. The Treasury cannot raise the money needed by "normal" methods because it has been bumping its head against its debt limit of $US 6.4 TRILLION since February 20. This being the case, the Fed has no alternative but to (in Mr Bernanke's words - see above): "cooperate with the fiscal authorities.. The Fed is shovelling money into the commercial banks to allow them to "buy" the debt paper which the Treasury must sell, but which it can't sell by "normal" means because of the debt limit.
Next week, the US Senate considers raising the debt limit. It MUST act before it stands in "recess" next Friday (May 23). If it does not, the Treasury will stand in DEFAULT on ALL its debt, no matter what the Fed chooses to do.
The present situation is utterly extraordinary. No sane, or even insane, economist of the past two or three centuries could have dreamed it up as a possible scenario to be studied. The US Dollar is plummeting, right along with Treasury yields. The prices of SOME goods which the US imports, and SOME "consumer durables" is falling, while the prices for housing and services of all descriptions is SOARING. The US stock of money is blowing out (textbook INFLATION) while REAL economic activity (read manufacturing) is hitting lows unseen since WWII.
What we have is something which has never been seen before in economic history. We have a global liquidity crisis in a GLOBAL FIAT MONEY SYSTEM. Liquidity crises are anything but new, there have been dozens affecting individual nations or groups of nations over the last decade. Japan has had one for more than a decade. A global fiat money system is not new, it just "celebrated" its thirtieth birthday (global currencies "floated" in March 1973). But the present combination of events - a liquidity crisis affecting the nation whose currency supports the global fiat money system - IS new.
The US is pumping UP its money supply at the same time as it is forcing DOWN its interest rates. It is creating a situation in which holding its currency is an "all risk - no reward" proposition. It's fiscal and monetary bureaucrats and its government actually profess to believe that a currency treated in such a manner can not only remain viable, but will remain acceptable globally as the world's "RESERVE CURRENCY". We have news for them - IT CAN'T AND IT WON'T!
In the face of this, Gold cannot help but rise, and it is indeed rising in US Dollar terms. But so far, the rise is in no way keeping pace with the path of destruction which the US Dollar is following, desperately aided and abetted by both the Treasury and the Fed. To profess "concern" with the prospect of falling prices, as the Fed is now doing, is preposterous. What the Fed is REALLY concerned about is that the credit-creating profligacy of the past decade is about to turn and savage its author.
The great fear now is what will happen when the Treasury DOES get a new debt limit and can legally go back to its "normal" methods of selling its debt paper. At that point, the UPWARD pressure on US market rates will be let loose. And at that point, the task of keeping the $US Gold price "under control" will prove impossible. THAT is what the Fed is trying to distract the markets from by yelling about the dangers of "deflation".
The Bureau of Engraving and Printing, are proudly trumpeting the unveiling of their "safer, smarter, more secure" $US 20 bill. Here it is:
(For a bigger picture, click on the bill)
The new $US 20 will be introduced into circulation later on this year. The $US 50 and $US 100 will follow in 2004 and 2005.
This is what Treasurer Snow had to say as his part in the gala unveiling of the new $US 20:
"U.S. currency is a worldwide symbol of security and integrity. This new design will help us keep it that way, by protecting against counterfeiting and making it easier for people to confirm the authenticity of their hard-earned money."
Yep, it's 20 US Dollars alright! BUT IS IT ("authentic") MONEY?
The official URL of the Treasury's Bureau of Engraving and Printing is http"\\www.moneyfactory.com. That is, of course, precisely what it is. To quote one of the pages which introduces The Privateer: "Nowadays, an economy grows, not through the production of goods, but through the 'production' of money." Nuff said.
