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Central Bankers are Paid to Lie - Buy Corn

Politics / Central Banks Oct 06, 2010 - 03:59 AM GMT

By: Fred_Sheehan

Politics

Best Financial Markets Analysis ArticleI assure this committee that, if I am confirmed, I will be strictly independent of all political influences and will be guided solely by the Federal Reserve's mandate from Congress and by the public interest." -Prospective Federal Reserve Board Chairman Ben Bernanke, confirmation hearing, 2005

"The last duty of a central banker is to tell the public the truth." -Federal Reserve Board Vice Chairman Alan Blinder, Nightly Business Report, 1994


"If we exerted our 'independence' we'd certainly lose our independence." -Former Federal Reserve Board Chairman Arthur Burns, 1981 (possibly paraphrased)

Federal Reserve Chairman Ben S. Bernanke has talked about the 1970s, the decade associated with "stagflation." This word (originally applied to the United Kingdom in 1965) fuses recession with price inflation. He brushes off comparisons between then and now, as he should, but not for the reasons he gives.

The 1970s were a relative paradise. Prices rose, but so did wages. The 1970s did not open with an unserviceable level of debt. (It was during that decade when Americans unbalanced their balance sheets.) In 2010, real wages are falling and real estate, both residential and commercial, is not close to a bottom. Central bankers will do what they can to restore wages and asset prices, no matter the cost. One cost will be much higher prices.

Exploiting Bernanke is a chronology of how Chairman Bernanke remained baffled, and baffled his camp followers, during the food- and energy-price boom from 2006 through 2008. Those were his first three years of his Fed chairmanship. Simple Ben will continue to pretend our cost-of-living is not rising, even when prices are increasing at double- and triple-digit rates. Some already are. Courses of protection include buying farms (including machinery companies, grain commodity funds, water rights, and desalinization companies), as well as precious metals, mining and drilling companies, and freeze-dried food.

As discussed in Exploiting Bernanke, the degree to which asset prices (stocks, bonds, currencies, commodities) are influenced by the Federal Reserve's public opinion of inflation confirms our degraded mental state. Bernanke has been consistently wrong. He might be ignored, but that is difficult given the influence of a speech by any Fed governor in the media and in the markets.

To help remain aloof from the noise, and to possibly preserve one's living standard along the way, what follows is a look at how Federal Reserve Chairman Arthur Burns fibbed his way through the 1970s. In that decade, as will probably be the case in the years ahead, money was made by those who sold what the central bank destroyed: the dollar.

Like Bernanke, Burns was an academic. He co-authored a significant economic tract, Measuring Business Cycles, in the mid-1940s. He taught at Columbia University. One of his students was Alan Greenspan. The latter is not germane to the current discussion other than as a receptacle of learning. On the first day of Greenspan's doctoral training, the professor asked his students, "What causes inflation?" Silence followed. Burns enlightened the class: "Excess government spending causes inflation." According to one of Greenspan's colleagues, this statement made a powerful impression on the students.

Burns was not persuaded by the then-current Keynesian fashion. "Burns was an empiricist; Keynes a theorist." It might be closer to the truth that Burns wanted to protect his turf, not his beliefs. As it turned out, he did what he was told. This is the standard course of academics placed in a position of responsibility. They follow orders and rationalize their betrayal as a means to acquire more influence on policy.

Inflation was a problem by the mid-1960s. Burns' stated culprit, excess government spending - as expressed in the federal deficit - had risen from $3.7 billion in 1965 to $25.2 billion in 1967. He stated his prognosis to a Joint Economic Committee hearing in 1967: "Once an inflationary spiral gets underway, I am afraid there isn't a great deal that can be done constructively."

President Nixon awarded Burns the chairmanship of the Federal Reserve in 1970. At his confirmation hearing in December 1969, Burns created the template copied by Ben Bernanke that was quoted at the top of the article. Burns' prototype: "We must rely on sound fiscal policy and not leave it to the monetary authorities to do it all themselves." Burns went on: "I fully believe the Federal Reserve should not become the handmaiden of the Treasury. We may have to go to war with Treasury, but hope it will not happen."

After Arthur Burns was sworn in as chairman, President Nixon told the assembled: "I respect his independence. However, I hope that independently he will conclude that my views are the ones that should be followed." After the crowd cheered, Nixon added: "You see, Dr. Burns, that is a standing vote for lower interest rates and more money."

Understanding his position, Arthur Burns displayed the characteristic most noteworthy of intellectuals in public life. That is, he was a coward.

Blame for state interference did not lie entirely with Nixon. On August 6, 1971, a congressional report by the Reuss Commission ("Action Now to Strengthen the U.S. Dollar") concluded, "The dollar is overvalued." Ergo, it was time to weaken it. Nine days later, Nixon announced the United States was defaulting on its promise to redeem dollars under the Bretton Woods gold exchange standard.

The wheels were off, and economists, to retain their high-grade government rating, made preposterous claims. Arthur Burns fell easily into the role of state apparatchik. Before the Joint Economic Committee in February 1972, Burns intoned that unbalancing the budget by $40 billion only "gives me some pause." At his December 1969 confirmation hearing, Burns had been asked what he would recommend if the budget could not be balanced: "We must raise taxes, as unpopular as they may be." The Consumer Price Index rose by 3.3% in 1972, 6.2% in 1973, 11.0% in 1974 and 9.1% in 1975.

It is often said that when a novitiate to Washington succumbs to its allures, he "has grown." Burns was now a giant among trimmers. His acrobatics grew more offensive to common logic. After his chairmanship, Burns wrote: "When the government runs a budget deficit, it pumps more money into the pocketbooks of the people than it withdraws from their pocketbooks...This is the way the inflation... first got started and later kept getting nourished."(Published in Federal Reserve Bulletin, September 1979.)

Burns was disingenuous. The U.S. Treasury "prints" money but Burns' Fed bought deficit-funding Treasury securities at a price convenient to the national purse. This is the chief mechanism available to a Federal Reserve chairman that fulfills Burns' warning to his students: "Excess government spending causes inflation."

Fed officials, including Bernanke, have taken to blaming the federal deficit for our ills, but the same holds true today. Bernanke has bought over a trillion dollars of mortgages and continues his "quantitative easing". This is a deceptive name to fulfill the Fed's role as waste dump for discredited securities and euthanasist of the People's currency. These are crimes against humanity.

As inflation rose, Burns applied tactics then current among Stasi counterintelligence colonels. After oil prices quadrupled in 1973, Burns told his staff to remove energy costs from the Consumer Price Index. Burns' rationale was the Yom Kippur War, over which the Fed had no control. A few months later, with food prices raging, Burns told his staff to remove them from the CPI calculation. Burns claimed the disappearance of anchovies off the coast of Peru was the cause of food inflation, and beyond the Fed's jurisdiction. In time, Burns discarded used cars, children's toys, jewelry and housing - about half the costs consumers battled in their daily struggle with rising prices.

The corruption of the consumer price index today is far worse and is only worth watching to record the deprivation it causes to social security recipients and those who own Treasury Inflation Indexed Securities.

To put an end to this, Arthur Burns resigned on March 31, 1978. The dollar was the most hated currency in the world. It was on its way to annihilation, but, just as we see today, no other country wanted a strong currency. The Consumer Price Index rose from 5% in 1970 to 9% in 1978 and to 13% in 1979. Given Burns' malicious manipulation of the CPI, consumer prices were probably rising by 50% in 1979.

Arthur Burns was named ambassador to West Germany by President Ronald Reagan in 1981. This was a prestigious position during the Cold War and is an example of how so-called policy makers who operate within the academic-political cocoon are never held responsible for their words or actions.

Click Here to Listen to Fred's latest interview with the Political Chick

By Frederick Sheehan

See his blog at www.aucontrarian.com

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, November 2009).

© 2010 Copyright Frederick Sheehan - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Liz
06 Oct 10, 21:38
Bernanke Tells the Truth

TUESDAY, OCTOBER 5, 2010

Bernanke Tells the Truth: The United States is on the Brink of Financial Disaster

Yesterday, Federal Reserve Chairman Ben Bernanke delivered a speech before the the Annual Meeting of the Rhode Island Public Expenditure Council in Providence, Rhode Island. In the speech, he warned about the current state of the government finances. His conclusion, the situation is dire and "unsustainable".

It is remarkable that mainstream media has given this speech no coverage. I repeat, the central banker of the United States says in his own words:

Let me return to the issue of longer-term fiscal sustainability. As I have discussed, projections by the CBO and others show future budget deficits and debts rising indefinitely, and at increasing rates. To be sure, projections are to some degree only hypothetical exercises. Almost by definition, unsustainable trajectories of deficits and debts will never actually transpire, because creditors would never be willing to lend to a country in which the fiscal debt relative to the national income is rising without limit. Herbert Stein, a wise economist, once said, "If something cannot go on forever, it will stop."9 One way or the other, fiscal adjustments sufficient to stabilize the federal budget will certainly occur at some point. The only real question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people plenty of time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis.

This is as close as you are ever going to see a central banker admit that his country's financial situation is so dire that it could breakup at any time.

Here's more from Bernanke's remarkable speech:

The recent deep recession and the subsequent slow recovery have created severe budgetary pressures not only for many households and businesses, but for governments as well. Indeed, in the United States, governments at all levels are grappling not only with the near-term effects of economic weakness, but also with the longer-run pressures that will be generated by the need to provide health care and retirement security to an aging population. There is no way around it--meeting these challenges will require policymakers and the public to make some very difficult decisions and to accept some sacrifices. But history makes clear that countries that continually spend beyond their means suffer slower growth in incomes and living standards and are prone to greater economic and financial instability.

Now, get this, he warns that it is not only the Federal government that has financial problems, but also states and local governments:

Although state and local governments face significant fiscal challenges, my primary focus today will be the federal budget situation and its economic implications.

Does Bernanke see the tsunami hitting or what?

Then, he put things in historical perspective:

The budgetary position of the federal government has deteriorated substantially during the past two fiscal years, with the budget deficit averaging 9-1/2 percent of national income during that time. For comparison, the deficit averaged 2 percent of national income for the fiscal years 2005 to 2007, prior to the onset of the recession and financial crisis. The recent deterioration was largely the result of a sharp decline in tax revenues brought about by the recession and the subsequent slow recovery, as well as by increases in federal spending needed to alleviate the recession and stabilize the financial system. As a result of these deficits, the accumulated federal debt measured relative to national income has increased to a level not seen since the aftermath of World War II.

Then, he explains the deterioration and the problems it will create for the entire economy:

For now, the budget deficit has stabilized and, so long as the economy and financial markets continue to recover, it should narrow relative to national income over the next few years. Economic conditions provide little scope for reducing deficits significantly further over the next year or two; indeed, premature fiscal tightening could put the recovery at risk. Over the medium- and long-term, however, the story is quite different. If current policy settings are maintained, and under reasonable assumptions about economic growth, the federal budget will be on an unsustainable path in coming years, with the ratio of federal debt held by the public to national income rising at an increasing pace.2 Moreover, as the national debt grows, so will the associated interest payments, which in turn will lead to further increases in projected deficits. Expectations of large and increasing deficits in the future could inhibit current household and business spending--for example, by reducing confidence in the longer-term prospects for the economy or by increasing uncertainty about future tax burdens and government spending--and thus restrain the recovery. Concerns about the government's long-run fiscal position may also constrain the flexibility of fiscal policy to respond to current economic conditions.

Then, he tells us how powerful the negative trends are and how the aging population and Obamacare are going to make things worse:

Our fiscal challenges are especially daunting because they are mostly the product of powerful underlying trends, not short-term or temporary factors. Two of the most important driving forces are the aging of the U.S. population, the pace of which will intensify over the next couple of decades as the baby-boom generation retires, and rapidly rising health-care costs. As the health-care needs of the aging population increase, federal health-care programs are on track to be by far the biggest single source of fiscal imbalances over the longer term. Indeed, the Congressional Budget Office (CBO) projects that the ratio of federal spending for health-care programs (principally Medicare and Medicaid) to national income will double over the next 25 years, and continue to rise significantly further after that...he aging of the U.S. population will also strain Social Security, as the number of workers paying taxes into the system rises more slowly than the number of people receiving benefits. This year, there are about five individuals between the ages of 20 and 64 for each person aged 65 and older. By 2030, when most of the baby boomers will have retired, this ratio is projected to decline to around 3, and it may subsequently fall yet further as life expectancies continue to increase. Overall, the projected fiscal pressures associated with Social Security are considerably smaller than the pressures associated with federal health programs, but they still present a significant challenge to policymakers.

Then he goes back to warn that the financial mess also exists at the state and local level:

The same underlying trends affecting federal finances will also put substantial pressures on state and local budgets, as organizations like yours have helped to highlight. In Rhode Island, as in other states, the retirement of state employees, together with continuing increases in health-care costs, will cause public pension and retiree health-care obligations to become increasingly difficult to meet. Estimates of unfunded pension liabilities for the states as whole span a wide range, but some researchers put the figure as high as $2 trillion at the end of 2009.5 Estimates of states' liabilities for retiree health benefits are even more uncertain because of the difficulty of projecting medical costs decades into the future. However, one recent estimate suggests that state governments have a collective liability of almost $600 billion for retiree health benefits. These health benefits have usually been handled on a pay-as-you-go basis and therefore could impose a substantial fiscal burden in coming years as large numbers of state workers retire.

Bernanke then breaks the news that the problem is global:

It may be scant comfort, but the United States is not alone in facing fiscal challenges. The global recession has dealt a blow to the fiscal positions of most other advanced economies, and, as in the United States, their expenditures for public health care and pensions are expected to rise substantially in the coming decades as their populations age. Indeed, the population of the United States overall is younger than those of a number of European countries as well as Japan.

Bernanke then re-emphasises, the damage this will do to the overall economy:

Failing to address our unsustainable fiscal situation exposes our country to serious economic costs and risks. In the short run, as I have noted, concerns and uncertainty about exploding future deficits could make households, businesses, and investors more cautious about spending, capital investment, and hiring. In the longer term, a rising level of government debt relative to national income is likely to put upward pressure on interest rates and thus inhibit capital formation, productivity, and economic growth. Larger government deficits increase our reliance on foreign lenders, all else being equal, implying that the share of U.S. national income devoted to paying interest to foreign investors will increase over time. Income paid to foreign investors is not available for domestic consumption or investment. And an increasingly large cost of servicing a growing national debt means that the adjustments, when they come, could be sharp and disruptive. For example, large tax increases that might be imposed to cover the rising interest on the debt would slow potential growth by reducing incentives to work, save, hire, and invest.

He then states that we do not know how much time is left before all hell breaks loose:

It would be difficult to identify a specific threshold at which federal debt begins to pose more substantial costs and risks to the nation's economy. Perhaps no bright line exists; the costs and risks may grow more or less continuously as the federal debt rises. What we do know, however, is that the threat to our economy is real and growing, which should be sufficient reason for fiscal policymakers to put in place a credible plan for bringing deficits down to sustainable levels over the medium term.

From there,Bernanke goes into a bit of wishful thinking by identifying ways Congress can rein in spending and make the tax system more efficient. Good luck with all of that.

The real important part of Bernanke's speech is the first half where he warns of the financial crisis just ahead.


Wags
07 Oct 10, 06:41
Source?

Is there a source for this report?


Liz
07 Oct 10, 11:39
Re source

I have traced the original report back to

http://federalreserve.gov/newsevents/speech/bernanke20101004a.htm


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