The Fed's Newest Trick

Gary Gibson, Introduction…

Does the Fed’s latest colorfully named plan amount to anything more than money printing and legerdemain? Will it not punish savers and interfere with oh so vital capital accumulation?

Jeffrey Tucker is on hand to take a look in today’s feature article.

And then we get real in today’s Parting Shot with a look at real estate in the world the Fed has wrought. There’s actually a way to play it to your great benefit.

Keep reading below…

The Fed’s Newest Trick

The money masters at the Federal Reserve have done a splendid job, haven’t they? Well, no, and all the more reason to End the Fed, in the legendary slogan of Ron Paul.

Every few months since the great meltdown of 2008, there’s been some announcement that appears in the financial press about the latest fancy-pants move that the Fed will undertake to save the day.

These guys aren’t just printing money! They are engaged in amazingly technical maneuvers that mere mortals can’t fathom. The catchphrases are multiplying: quantitative easing, Operation Twist, sterilized QE, ZIRP (zero interest rate policy) and now reverse repo.

Stay tuned for other amazing tricks. They could pull out the camel clutch, the bite of the dragon, the hammerlock, the bridging chickenwing, the gorilla press, the octopus hold, the sunset flip, the inverted figure-four three-quarter leglock and finally, if they really get desperate, the Tree of Woe.

These names are all, of course, drawn from the world of professional wrestling. Sadly, the world of central banking is not nearly as entertaining, mainly because instead of just hurting each other, the bankers are hurting the rest of us.

You know this when you look at your bank statements and see that all your efforts to save money are for naught: Your money is losing more value through higher prices than it earns in cash.

The Fed is sending the message: If you save, you are fool. What message is it sending to investors? It is telling them to put their money in something, anything, besides short- and long-term bonds. In this way, it hopes to stimulate some kind of artificial boost of stocks and any form of financial arbitrage besides buying and holding debt. (See the Cleveland Fed for a wicked picture of what has happened.)

This is outright market manipulation of the sort that the government criminalizes if done by the private sector. For example, the Justice Department has said it is looking into charges that book publishers are manipulating the price of e-books and also said that it might force a settlement that could wreck this wonderful emerging market. Thanks a lot!

But how does pushing up the download fee of e-books by a buck or two compare with completely wrecking the price-signaling mechanism of interest rates, the very thing that every human soul relies to estimate the profitability of long- and short-term economic planning? As a result, no one knows for sure what is real and what is not.

This is not only perfectly legal, but it has also become the job description of the Federal Reserve itself. It is nothing more than an elaborate and insanely contorted central plan designed to manipulate prices. But because the Fed has the legal monopoly and claims to be doing this in the public interest (thanks for wrecking my reward for saving!), they get away with it.

Worse, they demand our respect and deference to their brilliance. But do they deserve it? The Fed set out in 2008 to rescue the credit markets, boost the housing industry, save the employment sector from stagnation and boost the economy.

It has failed on all four fronts. Bank lending for industrial and commercial purposes is still at 2007 levels. Housing price pressure is still pushing downward, there’s no end in sight to the foreclosure fiasco and Fed is the proud owner of as much as a trillion dollars in mortgage-backed securities. The unemployment picture is grim: Jobless claims are up, and labor force participation is at 1980 levels!

As for economic growth, it is so sparing that the whole financial press celebrates over the slightest good news like prisoners of war cheering the arrival of scraps of bread. Meanwhile, China, India, Argentina, Indonesia, Vietnam, Mongolia and even Botswana are managing growth rates between 6 and 10%. And this in times when economic growth ought to be as easy as breathing, giving the digital revolution that has blessed us with astonishing productivity gains.

The Fed couldn’t possibly have screwed up more than it has. It’s zero interest rate policy (ZIRP) has been a complete failure by any standard but one: It has kept the borrowing costs to the federal government at the lowest possible levels. Even then, the fiscal budget crisis is never ending. Should interest rates come back up to something approaching a human and realistic level, the budget will blow, which the Fed surely knows and which further gives some indication that the Fed knows who and what butters its bread.

But let’s say a quick word on this new trick called reverse repo. The Fed prints money to buy long-term bonds. But then the Fed “locks” the use of the new money by borrowing it back again for short periods at lower rates. It can conduct this operation with institutions other than banks, such as money-market funds. As James Grant has said, borrowing short and lending long is a great way to go broke.

There’s a line from the Hayek-Keynes video made by John Papola and Russ Roberts put into the rap by F.A. Hayek: “You’ve got to save to invest, don’t use the printing press.” That sums it up. There is no sound investment that is not preceded by savings. To save, you have to forgo consumption. Once saved, the money can be loaned out for future-oriented projects and pay higher returns than one could experience without the initial steps of saving. That’s how capitalism grows the economy: an evermore complex expansion of the division of labor sitting on a rising stock of capital.

The Fed’s claim to be spurring economic growth rests on a doctrine that gets this whole process backward. We are supposed to consume more and save less. If that works, the ticket to good bodily health is to be a beer-guzzling couch potato and avoid the gym like plague. Or maybe the plague is exactly what all these fancy Fed moves are actually bringing us.


Jeffrey Tucker


A Parting Shot:

Yeah, thanks a lot, Federal Reserve.

Thanks for destroying savings. And thanks a lot for propping up the inflated housing market.

But wait! As Jeffrey points out, the Fed has actually failed in that mission. Housing prices are still moving down. But that’s a good thing.

You know, it really is strange to us that people would want housing prices to go up. The house you buy to live in, after all, is no more an investment than a car you buy to drive.

Sure, if you rent out either the house or the car at a profit, then it’s an investment. But if you are using either, then you are consuming it and it is consumer good, not an investment.

A house is something you use, like any appliance or your own vehicle. It is a very durable good, one meant for long-term consumption. Do you expect your blender or your Ford to go up in price over time? So why would you expect your house to do so?

Sure your house provides you with a very essential function: shelter. But the food you buy provides you with a more immediate function: nutrition. So why is it that of all the goods we consume, we expect houses to behave differently when it comes to price? Does a house’s combination of utility, necessity and durability give it some magical property that makes prices rise?

This is the Whiskey Bar so don’t be surprised when we point the finger at government. The government’s spent a century convincing (conniving?) us that “certain” markets need they’re intervention, particularly education, medical care and housing.

You’ll notice that these are the markets where prices keep spiraling up. In some cases (education), quality simultaneously moves down.

Markets with their competitive forces tend to drive quality up while relentlessly driving down prices. Housing should be — and would be — subject to this as well. Left to market forces, the quality of houses of would march upward over time while their affordability increased.

But the government has spent a century crafting a housing mythology that poo-poos outright renting and encourages increasingly longer term renting-to-own from the bank. We notice that this mythology has been augmented over the generations as real estate came to be seen as one of the ways to fight the savings-destroying inflation in which the central bank almost constantly engages.

We fully believe that in a free market we would get to the point where a decent house would cost less than a year’s salary of the median income. The market would provide the affordable housing that people claim there’s not enough of…even as they salivate over the idea of Fed-manipulated interest rates boosting the price of their own homes.

Who wouldn’t want a world in which a modest 3-bedroom house could be paid off in three or five years…or paid in full in cash after a year or two of saving up while living with parents?

Apparently the Fed doesn’t want that. They tell us to be afraid of that kind of deflation. It may be fine for the constantly booming technology sector, but falling house prices would somehow be the deadly. So the house has become the means by which an unsustainable debt-driven consumption economy flourished.

You see, a free market unweighted by the politically backed monopoly of the Federal Reserve would have competing currencies, gold and silver as money. Competition and precious metals would act as a lid on inflation. Savings in these things would tend to gain value over time as the economy grew while this money supply grew less.

Does a bunch of currencies sound unworkable? It really shouldn’t. The currencies that performed best — those which best did the job of storing and increasing in value — would thrive. Multiple currencies in a region would be no more problematic than multiple currencies across the globe. The alternative is the monopolistic Federal Reserve system we have now. You know. The one that has destroyed over 95% of the dollar’s value in a century.

The Fed would have us believe that the much surer growth to prosperity is for them to have a legal monopoly on the issuance of new money. This may destroy savings, they admit, but it encourages investment in the bubbles the Fed’s policies are constantly germinating.

Fed to savers: “Quit whining about the destruction of your savings and your interest income. Hop on our inflation-fueled asset bubble ride!”

All good bubbles must come to an end, however. Houses are getting cheaper in terms of dollars. And since the Fed has been on a money-creating tear these past few years, houses are getting even cheaper in terms of real, Fed-proof money, like gold and silver.

Another way to play this is to keep an eye on the price of houses in terms of precious metals. Particularly in terms of silver. Houses are one real good that have a lot of downside left because their prices had been flying way too high thanks again to central bank monetary policy (You didn’t think really think it was just because of the wicked commercial banks, did you?).

Houses are below their median price in terms of gold. Even though they’re currently moving lower in terms of dollars as the house-in-terms-of-dollars bubbles deflates, this could easily reverse if the Fed’s easy money policies ignite a hyperinflationary storm. Of course, then the price of everything in terms would explode in terms of dollars.

We’re of the conviction that gold and silver would benefit from this more than any other commodity. Silver in particular would see greatly increased demand for use as a medium of exchange and for the storage of value (which is a basic a function of money as machine lubrication and energy are for oil).

So if you could find some decent, unusually expensive real estate right now (say, in an out of the way town in a state with no income tax and a burgeoning liberty movement where the mills have closed and houses are unusually cheap…like Berlin (rhymes with “Merlin”), New Hampshire, for example…), then you could get an affordable mortgage and keep accumulating silver.


Silver prices are likely to go up no matter what. Even faster than housing prices in case the over-printed dollar tumbles against everything. Then you could pay back your fixed mortgage debt by selling your rapidly appreciating silver for rapidly depreciating dollars.

Of course, the conditions under which this plan would work mean that it’s prudent to hedge your mortgage with silver on a property well removed from big cities and welfare-dependent populations. If you plan to ride out the political and economic storms brewing here in the U.S., this is one way to do it.


Gary Gibson