The Discipline of Government

By: Richard Mills | Fri, Oct 14, 2011
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As a general rule, the most successful man in life is the man who has the best information

In my article The Politics of Personal Destruction I presented the case that the Federal Reserve was responsible for the Great Depression because of its extremely tight monetary policy.

In 1963 Friedman, and coauthor Anna J. Schwartz, published A Monetary History of the United States, 1867-1960. In it, the authors claimed that the Great Depression would have been a typical downturn had it not been for policy errors made by the Federal Reserve. US Federal Reserve head Ben Bernanke also believes if the Fed had provided enough money to banks and bought US securities the Great Depression would not of happened.

All the Fed had to do, back then, to turn the US economy around was do what it was suppose to do - be a lender of last resort and add to bank's reserves by purchasing government securities - this would have expanded the money supply.

But the Federal Reserve, on top of allowing the money supply to contract, deliberately contracted the money supply further by raising interest rates. Yesterdays Federal Reserve had no interest in increasing the money supply and saving banks because:

"Mellon advocated weeding out "weak" banks as a harsh but necessary prerequisite to the recovery of the banking system. This "weeding out" was accomplished through refusing to lend cash to banks (taking loans and other investments as collateral), and by refusing to put more cash in circulation. He advocated spending cuts to keep the Federal budget balanced, and opposed fiscal stimulus measures." ~ Wikipedia

As an aside, Executive Order 6102 was signed on April 5, 1933, by U.S. President Franklin D. Roosevelt "forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates within the continental United States". Could an argument be made that Mellon's policies, adopted and followed by the Fed, and the subsequent results - turning a simple recession into the Great Depression - were the cause of the US abandoning the gold standard?

Roosevelt's "New Deal" (a series of economic programs between 1933 and 1936 designed to bring; Relief to the poor and unemployed, Recovery of the economy, Reform of the financial system, the 3R's) meant the end of the Gold Standard. To accomplish his goals FDR needed the Federal Reserve to have complete control over the money supply.

FDR's "New Deal" was in direct response to economic conditions at the time - the Great Depression. Conditions that this author believes were brought about, or at least made much worse, by Treasury Secretary Andrew Mellon's advocacy of letting banks fail and a tight monetary policy.

Between 1929 and 1933 the US money supply contracted by 31 percent.

Today, unlike in the late 1920's and early 1930's, the Federal Reserve is providing liquidity and increasing the money supply.

Bernanke is putting into practice what he believes to be the fix for our current economic woes:

Many economists believe the boom and bust effects of the business cycle can be largely smoothed over by government increasing or decreasing the money supply.

If this is true, the questions we have to be asking ourselves are;

Q: How did we get into this predicament in the first place?

A: Our political masters have been printing our way to prosperity.

"Government intervention begets government controls and regulations.  When you replace the automatic workings of the gold standard with a government controlled fiat standard, you must regulate and control things like money supply and financial leverage, since the discipline of the market has been replaced with the discipline of the government." ~ Paul Nathan, paulnathan.biz

All we need to know about politicians is 1. It isn't their money and 2. Nothing is more important to them then getting reelected. Asking for fiscal discipline from them is akin to asking John Dillinger to guard Fort Knox. In regards to Dillinger, congress and Ben Bernanke's actions we know what's going to happen - Dillinger would rob Ft. Knox and both congress and the Federal Reserve are going to create, give away and spent money in unbelievable amounts to keep the system afloat.

As soon as the QE program, part's 1 & 2, ended in June of this year, the markets had to get by on a lot less money and liquidity. Today the dollar is up because the EU, and the world, have an acute shortage of dollars for the necessary bailouts and needed liquidity. These strange market conditions (the dollar up, markets down) are temporary and are providing a huge buying opportunity, here's why:


Conclusion

What does a US, that should read almost all governments, lack of discipline mean to investors?

A soon back to falling, and much weaker dollar, will push up the price of commodities, rising commodity prices tend to push bond prices lower. A falling dollar is bearish for bonds and stocks because it is inflationary.

Coming higher commodity prices should be on every investors radar screen. Is how to gain the most leverage from investing in higher inflation and commodity prices on yours?

If not, maybe it should be.

 


 

Richard Mills

Author: Richard Mills

Richard (Rick) Mills
www.aheadoftheherd.com

Richard Mills

Richard lives with his family on a 160 acre ranch in northern British Columbia. He invests in the resource and biotechnology/pharmaceutical sectors and is the owner of Aheadoftheherd.com. His articles have been published on over 400 websites, including: SafeHaven.com, WallStreetJournal, USAToday, NationalPost, Lewrockwell, MontrealGazette, VancouverSun, CBSnews, HuffingtonPost, Beforeitsnews, Londonthenews, Wealthwire, CalgaryHerald, Forbes, Dallasnews, SGTreport, Vantagewire, Indiatimes, Ninemsn, Ibtimes, Businessweek, HongKongHerald, Moneytalks, SeekingAlpha, BusinessInsider, Investing.com and the Association of Mining Analysts.

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