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Central Banks Are Irrelevant
by Shelby Moore III September 27, 2007
Hopefully someday the following will be recognized as a canonical essay in the field of economics.
I will explain, that Central Banks are powerless to stop the boom and bust cycles, which are instead caused by society's insatiable desire to save (and borrow) with interest. The usury saver is no less culpable than the borrower.
A global, debt-based boom has been caused by declining long interest rates since 1982. The chart of the 30 year US Treasury Bonds shows a steady decline in yield (interest rate) since 1982. This is an accelerating secular, declining interest rate trend (a bubble), caused by fact that owners of bonds earn increasing capital gains when future bonds are sold at declining yields. Human nature tends to believe that the longer a trend has existed, then more confidence can be placed in the trend continuing. Thus everyone wants to pile in as the trend becomes popular over time.
This secular, declining interest rate trend that began in 1982, was caused by the (or caused the) end of the Cold War and the resultant "globalization", in which billions of people exited socialism to compete for jobs, thus driving global prices down. The very high interest rates just prior to this, were due to the end in 1971 of the exclusive debt bubble in the USA. I will explain below why debt bubbles always end with high interest rates. Under Bretton Woods, US citizens were on a fiat money system (were not allowed to own gold), while the rest of the world was on a gold dollar standard (could trade their paper dollars for gold that had been confiscated from US citizens in 1933).
There is nothing the US Federal Reserve (the "Fed") can do which would prevent the coming bottom of this secular, declining interest rate trend, and the subsequently rising long interest rates.
If Fed Raises Short-Term Rates
If the Fed were to significantly raise short-term fiat interest rates (i.e. decrease or hold steady the fiat money supply), the ensuing fiat credit crisis would (after an initial stampede into government bonds) drive savers out of long bonds, and into gold. Thus, long bond yields (interest rates) would rise, due to decreased demand for long bonds. Let me explain the process. As of Sept 2007, a fiat credit crisis would be induced or accelerated by rising short-term interest rates, because the debt boom (at least within the USA, with rest of world highly entangled to US debt) has peaked and can no longer service it's debts without an accelerating supply of fiat money. In the initial stages of a fiat credit crisis, savers stampede from defaultable bonds and businesses, into the perceived safey of government-backed bonds. Business defaults domino because they can only borrow money at very high interest rates. Also, fear of defaults discourages private investment. The government (i.e. collective society) will always choose to borrow and spend more, in order to offset the spiraling loss of jobs which results from a spiraling credit crisis. The increasing spiral of government borrowing thus increases the supply of government bonds for sale, which outspirals the increasing demand for government bonds. Thus government bond yields (interest rates) rise. The spiraling of government borrowing exceeds the stampede into government bonds because of the failure of an increasingly collective economy (Russia tried socialism already). In short, the government as a central manager of the economy, will failure miserably, thus government borrowing would become incessant. For one thing, just imagine all the incentive for corrupt waste of money ("hands in the cookie jar"), when the economy is increasing managed by politicians. So as all interest rates rise (private and government borrowing), causing spiraling failure, the government and it's fiat money is no longer perceived to be safe. The secular trend of rising interest rates causes the existing bonds to lose value, as future bonds are sold at increasing yields. This causes a spiraling stampede out of all long bonds, even government backed bonds. Thus, a stampede into gold is the ultimate result of spiraling upward long interest rates.
If Fed Lowers Short-Term Rates
If the US Fed were to significantly lower short-term fiat interest rates (i.e. increase the fiat money supply), the ensuing fiat credit boom would increase the size of the debt bubble, which will require even lower rates to sustain in near future. This induces a blow off peak in the secular global debt bubble trend. Prices hyperinflate once all feasible unproductive sectors of the global economy have been saturated with debt (and thus made "productive"). Price hyperinflation drives interest rates higher, because borrowers demand more loans so their lifestyles can pace with rising prices. Saving at interest rates lower than the price hyperinflation results in a loss of net worth. So even if savers are fooled (by hedonics, etc) into holding savings with negative real interest rates, their demand for bonds decreases (relative to the increasing demand from borrows) as the size of savers' net worth decreases in real terms. Thus, due to the rising imbalance between supply and demand, then as long interest rates increase, the blow off peak has occurred. Then the result and logic is the same as the prior section-- private business defaults domino, government attempts to borrow and spend, there is stampede into gold, etc..
Note if other fiat currency central banks do not lower their interest rates, then the dollar could fall precipitously in relative fiat value. This would also cause price hyperinflation within the dollar economy. Since the dollar economy is the global economy, this would cause widespread price hyperinflation. If the other central banks lower their interest rates, then they also induce price hyperinflation.
If Fed Holds Steady
Although this is what Bernanke is attempting to do, he is just riding the waves of what the public does. When the public stampeded out of private debt into government debt in August 2007, then the public effectively raised the private sector interest rates, and temporarily lowered the government interest rates. The Fed had no choice but to lower it's short-term interest rates in order to keep private business from failing.
In a futile attempt to prevent hyperinflation, the Bernanke Fed is attempting to manage the distribution of the increased money supply, retiring money supply from the private sector by selling government bonds that the Fed owned (1), while simultaneously loaning new money supply to the largest banks. The big banks then buy up defaulted private sector assets at pennies on the dollar. The Fed is forced to do this, because it must prevent a precipitious drop in the government bond yields, else the 25 year secular trend of declining yields could be reversed. As I explained above, once that secular trend is reversed, there is stampede out of government bonds due to spiraling capital gains losses. The Fed has been forced by the public into a more centrally managed economy. The public caused this by selling private debt and buying more govenment debt.
Usury Leads to Socialism
I have thus explained that saving (and borrowing) with interest forces society towards centrally managed economies, i.e. socialism.
The US Federal Reserve came into existence, because of increasing saving (and borrowing) with interest in the 1800s, thus creating an increasing demand for a fiat economy. The Fed is what society has demanded with it's desire to use interest rates as means of false "productivity" and "prosperity". Society refuses to invest and reap a return on it's investment, then spending from that return on investment. This is because people want to enjoy without risk. I have proved that there is no such thing as a guaranteed rate of return (i.e. interest rates), rather only a guaranteed socialism. Thus society demands socialism. I wish society would stop blaming the Fed, and look in the mirror. Maybe then we could make progress towards real capitalism, where one reaps (harvests) what they sow (invest).
The astute reader will realize that I have just explained why hyperinflation is unavoidable.
Saving versus Borrowing
Society that borrows to consume will eventually get rising long-term interest rates, due to the insatiable addiction of the society to that excessive consumption. Addictions are only broken with rising (or even infinite, i.e. illiquidity) interest rates. Borrowing addictions (dependence) are induced by low interest rates, when there is excessive saving with interest. From 1982 forward, the developing world increasing saved in western bonds, and the west became increasing indebted by the "free" drug. Deflation and falling interest rates can return when rising interest rates have choked off borrowing and consumption. Society can move directly to deflation, e.g. Japan, if usury saving is excessive without sufficient consumption feedback loop. In Japan's case, the bubble was due to big banks buying real estate with the excessive usury savings of it's patrons. Japan has insufficient human and natural resources to be a low cost exporter. In China's case, the usury savings is borrowed for capital infrastructure and by westerners for consumption, which feeds back to China's income from exports. China is attempting to diversify the players in this feedback loop (e.g. big, centrally managed infrastructure loans, to other developing countries, not diverse risk investment by liberating the yuan exchange rate and capital flows for all it's citizens), but the income and debt saturation levels are orders-of-magnitude too low in the developing countries to offset the high-level western consumption. And China's popular usury saving rate is very high. Thus deflation is on the horizon for China, similar to USA in early 1900s, when the western consumption is finally suffocated by higher interest rates and/or Weimer-style hyperinflation. Interest rates are determined by the balance between production and consumption in an economy. Optimum balance is obtained via investment and risk. Capitalism requires many diverse successes and failures in order to avoid large/long trend misallocation. The guaranteed "return" of usury savings and borrowing is antithetical to natural functioning of a free market with success and failure, and instead creates long trend booms and busts, with each boom/bust cycle increasing the government's share of the economy. Thus, usury equals socialism.
Footnote (1): the following link explains that the Fed has been selling government bonds:
http://www.lewrockwell.com/north/north568.html
by Shelby Moore III September 27, 2007
Hopefully someday the following will be recognized as a canonical essay in the field of economics.
I will explain, that Central Banks are powerless to stop the boom and bust cycles, which are instead caused by society's insatiable desire to save (and borrow) with interest. The usury saver is no less culpable than the borrower.
A global, debt-based boom has been caused by declining long interest rates since 1982. The chart of the 30 year US Treasury Bonds shows a steady decline in yield (interest rate) since 1982. This is an accelerating secular, declining interest rate trend (a bubble), caused by fact that owners of bonds earn increasing capital gains when future bonds are sold at declining yields. Human nature tends to believe that the longer a trend has existed, then more confidence can be placed in the trend continuing. Thus everyone wants to pile in as the trend becomes popular over time.
This secular, declining interest rate trend that began in 1982, was caused by the (or caused the) end of the Cold War and the resultant "globalization", in which billions of people exited socialism to compete for jobs, thus driving global prices down. The very high interest rates just prior to this, were due to the end in 1971 of the exclusive debt bubble in the USA. I will explain below why debt bubbles always end with high interest rates. Under Bretton Woods, US citizens were on a fiat money system (were not allowed to own gold), while the rest of the world was on a gold dollar standard (could trade their paper dollars for gold that had been confiscated from US citizens in 1933).
There is nothing the US Federal Reserve (the "Fed") can do which would prevent the coming bottom of this secular, declining interest rate trend, and the subsequently rising long interest rates.
If Fed Raises Short-Term Rates
If the Fed were to significantly raise short-term fiat interest rates (i.e. decrease or hold steady the fiat money supply), the ensuing fiat credit crisis would (after an initial stampede into government bonds) drive savers out of long bonds, and into gold. Thus, long bond yields (interest rates) would rise, due to decreased demand for long bonds. Let me explain the process. As of Sept 2007, a fiat credit crisis would be induced or accelerated by rising short-term interest rates, because the debt boom (at least within the USA, with rest of world highly entangled to US debt) has peaked and can no longer service it's debts without an accelerating supply of fiat money. In the initial stages of a fiat credit crisis, savers stampede from defaultable bonds and businesses, into the perceived safey of government-backed bonds. Business defaults domino because they can only borrow money at very high interest rates. Also, fear of defaults discourages private investment. The government (i.e. collective society) will always choose to borrow and spend more, in order to offset the spiraling loss of jobs which results from a spiraling credit crisis. The increasing spiral of government borrowing thus increases the supply of government bonds for sale, which outspirals the increasing demand for government bonds. Thus government bond yields (interest rates) rise. The spiraling of government borrowing exceeds the stampede into government bonds because of the failure of an increasingly collective economy (Russia tried socialism already). In short, the government as a central manager of the economy, will failure miserably, thus government borrowing would become incessant. For one thing, just imagine all the incentive for corrupt waste of money ("hands in the cookie jar"), when the economy is increasing managed by politicians. So as all interest rates rise (private and government borrowing), causing spiraling failure, the government and it's fiat money is no longer perceived to be safe. The secular trend of rising interest rates causes the existing bonds to lose value, as future bonds are sold at increasing yields. This causes a spiraling stampede out of all long bonds, even government backed bonds. Thus, a stampede into gold is the ultimate result of spiraling upward long interest rates.
If Fed Lowers Short-Term Rates
If the US Fed were to significantly lower short-term fiat interest rates (i.e. increase the fiat money supply), the ensuing fiat credit boom would increase the size of the debt bubble, which will require even lower rates to sustain in near future. This induces a blow off peak in the secular global debt bubble trend. Prices hyperinflate once all feasible unproductive sectors of the global economy have been saturated with debt (and thus made "productive"). Price hyperinflation drives interest rates higher, because borrowers demand more loans so their lifestyles can pace with rising prices. Saving at interest rates lower than the price hyperinflation results in a loss of net worth. So even if savers are fooled (by hedonics, etc) into holding savings with negative real interest rates, their demand for bonds decreases (relative to the increasing demand from borrows) as the size of savers' net worth decreases in real terms. Thus, due to the rising imbalance between supply and demand, then as long interest rates increase, the blow off peak has occurred. Then the result and logic is the same as the prior section-- private business defaults domino, government attempts to borrow and spend, there is stampede into gold, etc..
Note if other fiat currency central banks do not lower their interest rates, then the dollar could fall precipitously in relative fiat value. This would also cause price hyperinflation within the dollar economy. Since the dollar economy is the global economy, this would cause widespread price hyperinflation. If the other central banks lower their interest rates, then they also induce price hyperinflation.
If Fed Holds Steady
Although this is what Bernanke is attempting to do, he is just riding the waves of what the public does. When the public stampeded out of private debt into government debt in August 2007, then the public effectively raised the private sector interest rates, and temporarily lowered the government interest rates. The Fed had no choice but to lower it's short-term interest rates in order to keep private business from failing.
In a futile attempt to prevent hyperinflation, the Bernanke Fed is attempting to manage the distribution of the increased money supply, retiring money supply from the private sector by selling government bonds that the Fed owned (1), while simultaneously loaning new money supply to the largest banks. The big banks then buy up defaulted private sector assets at pennies on the dollar. The Fed is forced to do this, because it must prevent a precipitious drop in the government bond yields, else the 25 year secular trend of declining yields could be reversed. As I explained above, once that secular trend is reversed, there is stampede out of government bonds due to spiraling capital gains losses. The Fed has been forced by the public into a more centrally managed economy. The public caused this by selling private debt and buying more govenment debt.
Usury Leads to Socialism
I have thus explained that saving (and borrowing) with interest forces society towards centrally managed economies, i.e. socialism.
The US Federal Reserve came into existence, because of increasing saving (and borrowing) with interest in the 1800s, thus creating an increasing demand for a fiat economy. The Fed is what society has demanded with it's desire to use interest rates as means of false "productivity" and "prosperity". Society refuses to invest and reap a return on it's investment, then spending from that return on investment. This is because people want to enjoy without risk. I have proved that there is no such thing as a guaranteed rate of return (i.e. interest rates), rather only a guaranteed socialism. Thus society demands socialism. I wish society would stop blaming the Fed, and look in the mirror. Maybe then we could make progress towards real capitalism, where one reaps (harvests) what they sow (invest).
The astute reader will realize that I have just explained why hyperinflation is unavoidable.
Saving versus Borrowing
Society that borrows to consume will eventually get rising long-term interest rates, due to the insatiable addiction of the society to that excessive consumption. Addictions are only broken with rising (or even infinite, i.e. illiquidity) interest rates. Borrowing addictions (dependence) are induced by low interest rates, when there is excessive saving with interest. From 1982 forward, the developing world increasing saved in western bonds, and the west became increasing indebted by the "free" drug. Deflation and falling interest rates can return when rising interest rates have choked off borrowing and consumption. Society can move directly to deflation, e.g. Japan, if usury saving is excessive without sufficient consumption feedback loop. In Japan's case, the bubble was due to big banks buying real estate with the excessive usury savings of it's patrons. Japan has insufficient human and natural resources to be a low cost exporter. In China's case, the usury savings is borrowed for capital infrastructure and by westerners for consumption, which feeds back to China's income from exports. China is attempting to diversify the players in this feedback loop (e.g. big, centrally managed infrastructure loans, to other developing countries, not diverse risk investment by liberating the yuan exchange rate and capital flows for all it's citizens), but the income and debt saturation levels are orders-of-magnitude too low in the developing countries to offset the high-level western consumption. And China's popular usury saving rate is very high. Thus deflation is on the horizon for China, similar to USA in early 1900s, when the western consumption is finally suffocated by higher interest rates and/or Weimer-style hyperinflation. Interest rates are determined by the balance between production and consumption in an economy. Optimum balance is obtained via investment and risk. Capitalism requires many diverse successes and failures in order to avoid large/long trend misallocation. The guaranteed "return" of usury savings and borrowing is antithetical to natural functioning of a free market with success and failure, and instead creates long trend booms and busts, with each boom/bust cycle increasing the government's share of the economy. Thus, usury equals socialism.
Footnote (1): the following link explains that the Fed has been selling government bonds:
http://www.lewrockwell.com/north/north568.html
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