Monday, August 12

From Economic Collective to Police State: Once Americans ceded control over their financial affairs they lost control of everything else

WANTED for CRIMES against Federal Reserve Mathematical Models

This post follows on America is becoming a police state. What's the solution? (July 18, 2013)

When money talks nobody walks

Mao famously said that all power comes from the point of a gun. Not in a republic it doesn't. All power comes from the peoples' control of their monetary wealth. Here wealth simply means an abundance -- what money earners have left over after meeting all their expenses including taxes. Whoever controls this wealth rules because while taxation provides representation, only the crushing authority of wealth -- how the people decide to spend, save, borrow, and invest their abundance of money -- imposes the discipline on government that insures taxation produces honest and adequate representation.

So here is the bottom line about whether the United States will continue to exist as a republic: Just as there's never been any such thing as a long lived monarch who doesn't control his wealth, a "rule of the people" can't last long unless the people control their wealth.

This control works out in practice to the people controlling their banking system. And by "people" I don't mean "the government of the people." I mean "the depositors." I'll expand on all this later but for any reader who thinks it can't be that simple -- tragically, it is that simple. The clearest indicator of where an independent nation stands on the freedom-oppression index is the state of its banking system, although the indicator is usually viewed, wrongly, as an effect and not a primary cause. But then how many American high school and college graduates have you met who know anything about  banking?

The bottom line was overlooked by political parties in the USA. Instead of focusing on the critical issue for a rule of the people, the parties encouraged voters to engage in distracting arguments about taxation and the size of government. All the while Americans ceded more and more control of their financial affairs by cooperating with fiscal and monetary policies designed to stave off another Great Depression.

For example, if the President appealed to the public to spend for the sake of the economy, Americans dutifully spent, even if this meant going into debt. If the Federal Reserve enacted policy that slashed the amount of interest banks paid depositors -- policy meant to stimulate greater public spending and investment in the stock market -- Americans who depended on income from the interest grumbled but didn't picket the Fed or chain themselves to bank doors in protest.

In short, there was no need for a draconian regulatory regime or what people consider a police state because Americans were so cooperative with policies that eroded their control of their wealth. Then the Great Recession of 2008 struck. After that, everything changed. Many Americans ceased being cooperative. This alarmed the Guardians of the Economy.

Meet the Guardians

The Guardians are the people, chiefly economists and financial regulators, who are tasked with the solemn duty of protecting the United States from another Great Depression. These Guardians are not to be confused with Guardians of Financial Stability, who charged themselves in 2009 with maintaining global financial stability, even though Guardians of the Economy can also be Guardians of Financial Stability. (More about the latter in the next post.)

Protecting the United States from another economic depression requires science, which in this era also requires math -- and here I do mean "require." There was an American economist and economics professor named Hyman Minsky who pointed out that personal debt played a significant role in financial panics but because he didn't create a mathematical model to illustrate the point it couldn't be accepted in mainstream economics, even though everybody realized he had an important point. (Ironically, Minsky had a degree in mathematics. Go figure. Maybe he was too busy teaching to do the math.)

However, one can't construct mathematical models using cheese tostitos. One must first gather and process vast quantities of financial and economic data, then aggregate the data. Then one must filter the aggregates through math that reflects accepted principles of economics. Here is where things get strange.

Economic Collectivism and Anomalies

There is one big problem with the statistical approach as it's applied to putting the social science of economics into practice; i.e., making it an applied science. The problem, as I mentioned in the July 18 post, is that the approach generates a type of collectivist thinking in which the individual has no objective existence apart from aggregates of data. It's this wholly abstract collective entity, usually termed simply "the economy," which determines how policymakers in governments and central banks think about fiscal and monetary issues.

I stress that this collectivism doesn't arise from a political agenda or philosophy, although it could be argued that once any kind of collectivist thinking becomes entrenched at the government level it all works out to the same difference. But it's important to recognize that the collectivism I'm talking about is a byproduct of an extreme reliance on statistical analysis when examining situations that involve large numbers of people. Sort of an occupational hazard, if you will.

The hazard is as old as people thinking in organized fashion about situations that manifest in groups, so it's not limited to economics. However, this era's sophisticated data collection methods and high speed computers, which allow for the application of mathematical modeling to massive collections of data on megapopulations, have increased the tendency for fiscal and monetary policymakers to think in collectivist terms.

It's this collectivist mindset that prompted a CBS News reporter to stand up at Federal Reserve Chairman Ben Bernanke's press conference in May, after Bernanke's testimony before Congress about the state of the economy, and ask without irony if he had any idea of the financial problems of actual people in the United States. Bernanke replied that yes he did; he explained that recently he'd visited his home town, which was still suffering from the effects of the recession, and that he had a relative who'd been out of work for many months.

So it's not as if this collectivism prevents economists from thinking in individual terms. It's just that when it comes to setting monetary policy Bernanke and members of the Federal Open Market Committee must of necessity rely on aggregated data. This means they must think in terms of a collective when devising stratagems to steer the nation away from economic calamity and help it recover from sharp economic downturns.

Where, then, does this leave the individual whose actions deviate from accepted principles of economic solutions and what data tells economists about the economy? The policymakers see the deviance as in effect an anomaly -- something that doesn't reflect the collective data. If there are few such anomalies they're excluded from the mathematical models. But when the anomalies start to pile up then the Federal Reserve, which is specifically charged with managing U.S. monetary policy, and the economists who labor along with Treasury, Congress, and the White House on the fiscal side of U.S. government policies, are at a crossroads:

They can act in the manner of real scientists: admit that their mathematical models are obsolete and that they need to revise the economic principles guiding their policies. Or they can abandon science and look at the proliferating anomalies as a kind of insurgency.

Which road do you think the Guardians of the Economy took?

Rise of the Statistical Anomaly Insurgency

Even as early as 2009 things had gotten out of control. Statistical anomalies were popping up in ever greater numbers. Many of these anomalies purchased gold as a hedge against what they presumed were coming financial calamities. In addition they began stockpiling food. Not just a couple dozen cans of creamed corn, mind you. Drive a forklift to Costco.

The survivalists weren't the worst of it, from a monetary policymaker's viewpoint. Many statistical anomalies had stubbornly refused to return to the stock market after getting burned in 2008. They paid down their debt and sat on cash in their savings account. This was skewing Chairman Ben Bernanke's prescription for the economic recovery. So the Federal Reserve began slashing interest rates and pumping more and more money into the banking system in the effort to direct the anomalies into the stock market.

Nope. Didn't work. The anomalies didn't care if the DJIA hit 20,000 and the interest on their savings accounts went down to 0.0001%. They weren't budging from their cash position. This wasn't just middle-income and middling upper-income Americans. Many rich Americans were also clinging to large cash positions.

More quantitative easing, more interest rate lowering. But like Scrooge McDuck (in his original incarnation) the anomalies quacked that a penny saved is a penny earned. Nevermore would they take a flyer in the stock market. Nor would they ever again go hog wild with their credit cards.

This selfish, miserly attitude was wrecking the mathematical models that churn statistical aggregates on the state of the Economy. And wasn't the whole point of Disney introducing the stingy McDuck character to shame Americans into not being miserly -- to get out there, open revolving charge accounts and spend, spend, spend for the sake of the economy? But those were the Dark Ages for government economists and the Fed. 1947. They were still using slide rules to do statistical analysis, for crying out loud.

Worse, in the Fed's view and the view of banks that can't exist without being propped up by Fed policy, many statistical anomalies refused to take it on the chin when banks froze up on lending after the '08 crash. With the help of some meddling anomalies in the United Kingdom and a few renegade American bankers they began setting up lending networks. Functioning, would you believe, as de facto banks, as lenders of last resort for each other, and charging interest for the loans, to boot!

Do you know what it takes to start a real bank in this country? The application forms are not measured in pages. They're measured in pounds. That's only if you don't have other businesses when you apply to open a bank; if you do, the forms are probably measured in tons. One corporation decided to consolidate all the paperwork at a single site and had to rent a flatbed truck to do it. (I am not making this up.)

But here were these -- do it yourself monetarists (by this time the Guardians were getting imprecise in their Scientifical language) making up their own policies as they went along, circumventing scores of regulatory agencies, making party favors out of red tape meant to protect the American depositor and the banking system.

To add insult to injury in the wake of the 2008 market crash the Internet had generated an entire subculture of Do It Yourselfers, who followed the advice of any self-appointed monetary expert and renegade economist who started a website.

Then these crypto-anarchists (by then the Guardians had completely abandoned Scientifical language), upped and created their own currency. Bitcoin. Virtual currency, they called it. Do you have any idea how expensive it is for a government to make currency? And here were these -- these bitbrains doing it with a few strokes on a computer keyboard. Worse, their trading in Bitcoins was screwing with monetary policy. Only the Federal Reserve has the authority to do that.

Then the criminal class got into the act, turning Tide liquid detergent into a booming black market currency. (I am not making this up.)

Now none of these anomalies considered themselves to be running monetary policy but that was just the problem: in completely disorganized fashion many Americans were creating an alternative to official monetary policy and by doing so challenging the authority of the Guardians. Worse, the very existence of so many anomalies threatened to destroy the Economic collective.

The Final Straw

Next these these cretins, these financial illiterates, these -- these hoarders of creamed corn, began demanding physical delivery of the gold they'd bought.

And it wasn't just the little guy; by 2012 wealthy Americans who'd stored gold offshore for decades began asking banks in Switzerland and Eurozone countries for their gold.

By then gold was no longer merely a hedge against inflation or calamity; it had become a hedge against the Fed's prescription for economic recovery. The third round of quantitative easing, which put no cap on the Fed's massive bond-buying program, had sent the U.S. stock market soaring but with little effect on the recession outside New York and a couple other big cities.

The runup in gold prices was fueled by speculators betting against the Federal Reserve's quantitative easing policy; they thought it was going to fail to meet its objectives. This would mean a severe 'double dip' recession possibly leading to an all-out depression. So several investment advisors were routinely telling CNBC, the premier American financial TV station, that gold could go to $2,000 an ounce and from there the sky would be the limit.

But once gold hit $2K/oz it would become completely monetized and as such rival the U.S. dollar as a major reserve currency for central banks.

Trouble was, nobody was sure how much gold was actually available for delivery. The uncertainty touched off demands among very knowledgeable gold purchasers for physical delivery of the stuff.

Then the Bundesbank got cute

As early as the fall of 2012 rumors were flying in financial circles that Germany's central bank had gone from being upset to very upset with the Federal Reserve's quantitative easing policy. We don't want to be caught in a currency war, one Deutsche Bundesbank official said, as central banks around the world slashed interest rates in a desperate attempt to keep up with the Fed's QE to Infinity approach, after QE1 and QE2 had failed to meet the Fed's target objectives.

By January of this year the word was out: the Bundesbank had asked for delivery of a big chunk of the gold bullion it kept stored in the Federal Reserve, originally as a hedge against Soviet aggression. (It also sent notice to the French central bank that it was repatriating a smaller amount of German gold stored there.)

Technically one thing didn't have to do with the other. The Bundesbank had come under a court ruling to precisely count and assay all its gold holdings. This was after the German people started getting nervous about the state of their central bank's gold reserve -- not without reason, I might add.

There was an unfortunate mistake many years ago when the Bundesbank asked for delivery of some its gold from the Federal Reserve and the Bank of England (the U.K. central bank.) When the Bundesbank assayed the gold (did they think the Germans wouldn't check?) they discovered it wasn't the "pure" bullion it had originally shipped the central banks for safekeeping. The mistake was quickly corrected but you can see how people could get nervous about such things when the price of gold heads north of a thousand bucks an ounce.

To cut a story: human nature being what it is, people hooked up the gold repatriation request with the Bundesbank's concerns about QE3 -- concerns that extended to Germany's finance ministry. So what had started out as the odd request here and there for physical delivery of gold turned into a stampede after the Bundesbank's repatriation request became news. This threatened to skyrocket the price of gold.

Look at things from a Guardian's point of view. Something had to be done to restore central authority for monetary policy, or next the whole quacking lot of insurgents would be pretending to take a vacation so they could try to open a bank account in the Grand Caymans or Luxembourg with their chump change. Precautions, they'd call it. Precautions against the coming social unrest in the USA. They were more likely to be killed by a super-sized can of Dinty Moore beef stew falling off a forklift than by a rioter.

Something was indeed done. Actually a number of things were done. That's where I'll pick up in the next post.


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