Posts Tagged ‘john mauldin’

John Mauldin touches on the monetary system

April 11, 2010

Just as I celebrate a new internet connection that is working efficiently (provided the ISP doesn’t drop the ball… which it does… often), I am pleasantly surprised to see Mr. Mauldin bring up the issue of the monetary system. Few in the main stream media have done that. I suspect that of two things one must be right; either the monetary system appears too arcane a subject for most, or most do not understand the logical implications of choosing one system over another. Of course, both options may also be true.

Little old me has in previous months mailed Mr. Mauldin asking whether he would bring up the matter for, at the very least, public discussion. I’d like to think that my missives have struck a chord with Mr. Mauldin though I know better. Still! The fact that a well known and well connected luminary of economics and finance should find it worthwhile to raise the issue even if indirectly (Mr. Mauldin offers the views of Milton Freedman rather than his own) is an important step forward.

Below and with permission, I’ll copy the part of Mr. Mauldin’s text that is relevant to the monetary system and will intersperse my comments prefixed by “GR“:

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore

” […] Let me be clear. There are a lot of things not to like about the Federal Reserve System. I think it was Milton Friedman who said we would be better off with a computer determining monetary policy. A quote from an interview with him is instructive. When asked “Do you still think it would be a good idea to have a computer run monetary policy?” he answered:

jm040910image002 “Yes. Of course it depends very much on how the computer is programmed. I am not saying that any computer program would do. In speaking of that, I have had in mind the idea that a computer would produce, for example, a constant rate of growth in the quantity of money as defined, let us say, by M2, something like 3% to 5% per year. There are certainly occasions in which discretionary changes in policy guided by a wise and talented manager of monetary policy would do better than the fixed rate, but they would be rare.

“GR” The reason a computer program would do better than a human counterpart is because the software could be programmed to manage monetary policy towards expansion or contraction purely on technical data without emotional interference thus making full use of the beauty of fiat money. The human counterpart on the other hand, is by necessity beholden by political considerations particularly in a political context characterized by personal freedoms. Thus, a fiat monetary system managed by politicians not only will always and everywhere be expanded at rates far in excess of economic growth but will also guarantee that the largest and most connected entities will be saved from bankruptcy (several times if needed) thus guaranteeing a finale characterized by a bloated, inefficient and corrupt economy and state.  – end GR comment

“In any event, the computer program would certainly prevent any major disasters either way, any major inflation or any major depressions. One of the great defects of our kind of monetary system is that its performance depends so much on the quality of the people who are put in charge. We have seen that in the history of our own Federal Reserve System. Surely a computer would have produced far better results during the 1930s and during both world wars.

“That raises a question about the desirability of our present monetary system. It is one in which a group of unelected people have enormous power, power which can lead to a great depression or which can lead to a great inflation. Is it wise to have that power in those hands?

“An alternative would be to eliminate the Federal Reserve System; to reduce the monetary activities of the federal government to the provision of high-powered money, that is, currency and bank reserves, and to constitutionalize, as it were, what is to be done with high-powered money. My preference is simply to hold it constant and let financial developments produce the growth in the quantity of money in the form of bank deposits, a process that has been going on for many decades. But that is, of course, politically impossible.”

( http://www.opinionjournal.com/extra/?id=110009561)

As much as I acknowledge how intriguing an idea the above is, in the end Friedman is right; it is politically impossible. We are stuck with this system. But what would be far, far worse is a system that was directly controlled by Congress or the President, whether Republican or Democrat. Politicians think in very short election cycles.”

“GR” Here Mauldin is tentative in that he finds the idea of fixed money or of the abolition of the Fed “intriguing” without giving too much away as to his reasons for being intrigued for or intrigued against the idea.

You can read the rest of the article here at the link you will find in the acknowledgment blurb:

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore

There you have it. The monetary system is upstream of all our social and economic decisions but even in the ostensibly democratic West, society has no say in what system should be chosen nor how it should be managed. Worse still, since the choice of monetary system is intimately related to the concept of raison d’etat, the state has a vested interest in encouraging and providing a type of education that steers away from understanding what is effectively the central issue of economic and social development and political logic.

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A quick note

February 22, 2010

I am in wine country and have found an internet connection. This is a quick post on some events I have heard/read about in the past few days.\

Joe Stack flew his plane into the Austin IRS building ostensibly in a fit of frustration at the taxman and the government in general. This is exactly the type of individual action that will become more commonplace across segments of society. Eventually, the logical progression is for individuals that want to make a statement to band together. You see where this could be going. 

The problem is that no Western government has yet done anything sensible or moral with regards to tackling the crisis. Certainly, the political and business elite are exceptionally busy trying to refute and deflect any degree of responsibility trying to make the masses believe that more spending will make things right again provided we give all this money to the banks.

Which brings me to another commentator: John Mauldin. In his latest piece “The Pain in Spain”, Mr. Mauldin digs out a graph carried by the Wall Street Journal that, though under a different angle, shows what this entire blog has been about (i.e. here) since inception:

http://frontlinethoughts.com/gateway.asp

Excerpt – (to read the entire article you must give Mr. Mauldin your email address. In return you will get his letter free of charge. John Mauldin does raise some interesting points in his letters so it is worth it.)

 How Much Is Too Much?
And to close, I want to show a chart from today’s Wall Street Journal, from a column by Daniel Henninger.
 
This is the definition of an unsustainable path. Spending has grown 7 times as much in real (inflation-adjusted) terms as median household income over the last 40 years. Like Greece and Spain and much of the rest of the developed world, we will be forced to make hard choices. We cannot afford to do everything that even conservatives would like, let alone liberals. We cannot fight two wars, increase spending on health care, stimulate a faltering economy, and fun a 20% explosion in federal employees in just one year, etc., etc.
Pay attention to Greece and Spain and especially Japan over the next few years. Unless the US gets its fiscal house in order, we will be next. It will not be any easier for us in five years than it is for Greece today
.”

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore

In other developments, it is reported that Citibank has mistakenly sent out a note nationwide rather than only to its intended Texas clients.  The note explains that as of April 201o Citi may avail itself of an obscure clause so far never enforced that will allow it, if needed, to delay (or halt?) cash withdrawals at its discretion. Of course, this may be nothing or may be the beginning of something ugly. Either way, where there is smoke… … this most certainly bears watching….

Finally, I take a peek at my favorite indicator the Money Multiplier which tells me that despite the dozen Trillion Dollars of stimulus we have been throwing shoveling into the banks, this gargantuan effor has all been for nought…

http://research.stlouisfed.org/fred2/series/MULT

A housekeeping note.

Although I’ll be back at my desk next Saturday, I am not sure my internet connection will be up and running. So posting may be sporadic for a few more days.

Excellent reading today

August 11, 2009

Some outstanding essays from Gary Shilling via John Mauldin and from Dave Rosenberg via Mike Shedlock.

First Gary Shilling (GS):

http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2009/08/10/slow-long-term-growth-and-government-s-response.aspx

It is a long read packed with insightful information and graphs that are really worth your time. Not withstanding his conclusion and the dynamics that lead him to it, that I tend to wholeheartedly agree with, in my opinion GS too fails to explain the how and why of the dynamics.

For exmaple, in the opening paragraph, GS correctly identifies the problem when he says: “Beyond the current recession, the worst since the 1930s, lies years of slow growth…” . However, GS does not explain how and why we’ve had slow growth for many years. Because to be correct, we’ve had slow “real” growth. But other than real growth, GDP has been chugging along at an average of 4% yoy at a nominal rate. Hence the question I ask in many of my essays. That is, in a service economy that is composed of 70% consumption, how much real wealth is created in a 4% yoy progression? The answer of course is to be found in the quantity of inflation that is induced into the system. Considering that inflation as measured by the growth of credit and money supply has been progressing at an average 10% yoy (with peaks at 20%), it is immediately evident that there has been little “real” wealth generated. However, even identifying the cause of weak “real” growth does not explain why that should have been so. And the answer to this question, of course, is to be found in the choice of monetary system. A choice, I might add, that is arbitrary and unilateral and has never been submitted to the people for ratification. So, by completely disregarding the monetary system, GS still falls for many popular myths on which more later.

Also, although he identifies increased government regulation as a drag on the economy, in reading the paragraph I cannot help but get the feeling that GS may agree with some of the proposed regulation. However, other than forcing derivatives on an exchange, I strongly disagree that any increased regulation might help preventing anything. We do have strong regulation but enshrined in the Fiat monetary logic is the necessity to disregard practices that are initially border line legal but that, as the inflationary dynamic develops, become down right illegal and criminal – (SIVs, off balance sheet entities, mark to model accounting … ). Once again; the fiat monetary logic conforms to the law of diminishing returns. Therefore you always need greater degrees of inflation in order to bring about the same GDP expansion. Once the inflationary logic goes beyond its half way point, fraud is virtually guaranteed by necessity and aided and abetted by government.

Somewhere in the essay GS also believes in the “savings glut” claptrap. There is no such thing of course. What there is instead, is a fiat monetary system that is predicated on inflation and is inherently exponential in nature. Thus inducing ever greater quantities of inflation in the system results in the logical transition from a manufacturing economy to a service economy which, by necessity, becomes an economy based on imports and consumption. That being the case, inflation (as measured by money supply and credit) is exchanged for goods and services overseas. So, the savings glut would not exist if it weren’t for excessive inflation of the global reserve currency: i.e. the US Dollar.

Somewhere in the essay, GS also says that “bankers fear inflation”. To which I can only say: right! Inflation is the conditio-sine-qua-non of the fiat monetary system. Bankers’ only way to make money is to generate inflation. In the absence of inflation, banks would have to create far less credit and money thereby limiting profits. In a fiat monetary system the authority that is charged with creating money does so and charges interest. In the particular case of the USA, the Federal Reserve creates the money and gives it to the Treasury and charges interest in the process. Thus, every Dollar bill that leaves the Fed is devalued by that much. The less intuitive ramification of this monetary system is that debt can never be repaid. That’s because if you rustled up all the coins and $ bills in circulation and gave them back to the Fed, you would still owe them interest on the last bill that was created and delivered. Thus, a fiat monetary system can only survive in an inflationary environment. Absent inflation, the fiat monetary system implodes and with it so do governments.

Also, in chart 9, GS seems to think of inflation in terms of prices. Prices of course are a function of inflation; they are the manifestation of inflation but are not the cause.

Towards the end of the essay, GS states that he sees local government and state spending increasing at 5% and says that as tax revenue dwindles at state level, the money will have to come from Washington. Of course, if you’ve read any of my essays, you will know that there is very little difference between individuals, corporations, local government, state government or, indeed, the Federal Government. That is, when bankruptcy overwhelms individuals and corporations, it will progressively overwhelm local, state and Federal Governments too. So, we may want increased spending from our governments but in a situation of global bankruptcy and rising interest rates, governments will have a hard time borrowing even more than what they already have. Not only that, but how much more production capacity can we really absorb world wide? I mean, considering that industrial capacity utilization has been steadily declining over the years thereby progressively eroding pricing power, why should we create even more of it now?

I have to run now and will polish and add to my comments at a later date. For the time being do read the two essays from Gary Shilling and Dave Rosenberg because they are really worth it.

Dave Rosenberg essay via Mike Shedlock

http://globaleconomicanalysis.blogspot.com/2009/08/us-consumer-credit-shows-steepest.html