Central Planning – The Artificially Limited Debate

The monetary debate seems artificially limited. On one side is Federal Reserve policy based on discretion. On the other is policy based on rules. It’s Keynes vs. Friedman. It’s central planning of our economy based on the reactive whims of wise monetary planners vs. central planning of our economy based on the proactive rules written by… wise monetary planners.

 

keynesfriedKeynes and Friedman – their schools have a number of similarities, one of which is that both advocate central planning of money by an agency of the State, i.e., a central bank. Naturally, both sides believe to be in possession of the “better plan”, but there really is no such thing.

 

On the rules side, there is a sub-debate. Should we have central planning based on unemployment and the Consumer Price Index (as now) or switch to central planning based on another metric such as GDP?

Whether one is on team Keynes or team Friedman, whether one is on sub-team Friedman CPI or Friedman GDP, everyone seems to take something for granted. That is, the quantity theory of money. If the quantity rises, then prices follow.

However, since prices (especially commodity prices) are not really rising, this would seem to give more leeway to the monetary planners, to inflict more monetary policy on us.

 

Pushing Down Interest for Decades

There is something about this which few acknowledge. To increase the quantity of dollars — which is not money, but that’s a whole ‘nother discussion — the Federal Reserve buys bonds.

Whatever effect this may have on the price of a new Chevy, it obviously affects the price of the Treasury bond. It pushes the bond price up. Since the interest rate is a strict mathematical inverse of the bond price, we have an obvious conclusion. The Fed is pushing down the rate of interest.

 

30-yr-long-termA 35 year downtrend in interest rates. Outstanding debt and the true money supply have exploded into the blue yonder concurrently – click to enlarge.

 

We can say that the interest rate is the collateral damage. The Keynesians and Friedmanites, in their zeal to increase the quantity of dollars, support or at least ignore the falling interest rate. OK, but who cares about the interest rate? You should care. Everyone is impacted by the 35-year global trend of falling interest rates.

The falling rate ushers in a kind of hyperinflation. You won’t see it by looking at prices, or purchasing power. If you look at the value of your portfolio and divide by the cost of living, you may be lulled into a false sense of security.

You will see the hyperinflation, if you look at it another way. Instead of the liquidation price of assets, consider the yield on assets. Instead of selling off the family farm to buy groceries, think of operating that farm to grow food.

Can you live on the crops you produce? Or must you liquidate piece of it, just to survive? The same question applies to any capital asset including a bank balance. Is it possible to live on the interest?

In the cold harsh light of yield purchasing power, we can see the erosion of our capital base. Since civilization itself depends on capital accumulation, this erosion is a retrogressive force dragging us back to another dark age.

I gave a 45-minute presentation on Yield Purchasing Power at American Institute for Economic Research in Great Barrington, MA on October 14, 2016. I am grateful to the Institute for recording video of my presentation plus extended Q&A. Watch the video below:

 

Keith Weiner – presentation to the American Institute for Economic Research on yield purchasing power

 

Chart by: StockCharts

 

Chart and image captions by PT

 

Dr. Keith Weiner is the president of the Gold Standard Institute USA, and CEO of Monetary Metals. Keith is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. Keith is a sought after speaker and regularly writes on economics. He is an Objectivist, and has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona.

 

 

 

 

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