-- Posted Monday, 2 February 2009 | | Source: GoldSeek.com
by Howard S. Katz
Dear President Obama:
I read in the newspapers that you want to stimulate the American economy. I know more than any of your economic advisors, and I can tell you how to stimulate the economy.
I also read that you are a Democrat and that you favor change. This is a good start. The Democratic Party was founded by Andrew Jackson and Martin van Buren in 1828. They also favored change, and they wanted to stimulate the economy. This they did by abolishing the central bank (the Second Bank of the United States). Andrew Jackson ran for reelection in 1832 on the platform that the people could have:
“a bank and no Jackson or no bank and Jackson”
The people of America chose the latter, and Jackson was reelected by an overwhelming majority. It became received political wisdom in America for the next 80 years that to advocate a central bank was political death, and when a 3rd central bank was brought back to this country, its advocates swore up and down that it was not a central bank.
Abolishing the central bank returned America to a hard (gold/silver) money. This meant that the government and the bankers were unable (less able) to create money. Money was dug out of the ground by human labor Since it was produced by labor, its supply increased at the same rate as other goods produced by labor, and its value in relation to these goods remained the same for 140 years. From 1793 to 1933, the American Wholesale Price Index came out the same.
There must have been something good in these policies because they had great success. Over the course of the 19th century, the United States became the economic powerhouse of the world. It produced the greatest economic growth of any country in the world at any time of history. New inventions were created by the country’s brightest men. These new inventions were then manufactured cheaply for purchase by even the poorest members of society. Jackson and van Buren had never even heard of the telephone; but today most people carry one in their pocket or purse. John D. Rockefeller, contrary to the energy producers of today, continually lowered the price of kerosene. The railroad “barons” of the late 19th century continually lowered the prices they charged for carrying passengers and hauling freight. It was a wonderful time. Diseases were cured. Immigrants flooded to America to partake of the greatest prosperity in the history of the world. The nation grew strong in war, as it was strong in peace. And it saw the achievement of man’s age-old dream to fly.
An important element in this great success was saving. Up until 1787, paying anyone interest on his savings was prohibited in every country in the world. But in 1785-86, Noah Webster (cousin of Daniel, compiler of the first American dictionary) took a trip through the 13 new states. He talked to state legislators and other prominent people and convinced them that these anti-usury laws should be repealed. They were (although it took until Reconstruction in the South), and people began to save. A similar thing occurred in Britain, and during the 19th century these two countries led the world in an explosion of wealth unheard of in history.
I am a believer in the method of science. You start out by first looking at the facts. And one of the most important facts taught by the history of economics is that saving makes you rich, and spending makes you poor.
I mention this because there are some people going around today saying the opposite. These people say that spending makes you rich. The weak point in the economic system, they argue, is spending. The danger is that people’s desire for wealth will fade. It is easy to create the goods, but the danger is that people will not desire them.
Of course, the truth is just the opposite. Every human being, when he is barely delivered from his mother’s womb, sets up a cry: “Give me more.”
“Give me food.” “Give me a toy.” “Give me a bicycle.” “Give me a car.” There seems to be no end to the human demand for more economic goods. Even the richest men in the country do not, in general, retire once they have made their fortune. They keep striving to get more.
So the people who tell you that demand is the hard part of the equation do not understand human nature. The problem has always been, for the last 5,000,000 years, figuring out how to produce the goods to satisfy those demands. That is the hard part, and that is what makes a successful economy.
And the best way to produce goods starts out with saving. After 1786, Americans were permitted to receive interest on their savings. Banks rose in the country. They collected the savings of the people and lent these out to businessmen who in turn built factories containing the most advanced machines of the day. From these factories poured forth a cornucopia of great wealth. The businessmen raised wages to attract workers to their factories. They lowered prices to attract customers to their products. At first (1786-1865), this only happened in the North, and the North opened a large economic gap over the South (which enabled it to win the Civil War). But after the South adopted the same system of saving, banks and factories, it caught up. Saving works.
On the other hand, people all over the world, at all times of history, have been bursting with demand. All you have to do is to look at the average person from Zimbabwe dying from the starvation that is sweeping that country. He is so thin that you can see his bones through his skin. He demands food. But no matter how much food he demands this does not produce the food that he desires. The same is true for North Korea, Bangladesh, Afghanistan and Albania. All these economies are full of demand. But they have given no thought to how to produce the goods to satisfy these demands.
The importance of this lies in the fact that, from the time of President Reagan, Americans have given up saving. The saving rate, which was around 10% of personal income in the early 1980s, is down to 1%-2% today. The reason is simple. Prices have been rising at the same rate at which interest is paid. Take, for example, a situation where prices are rising at 4% per year, and the interest rate is also 4% per year (which pretty much describes things as they were at the end of 2007). A person who buys a bank CD at 4% for $1,000 will have, at the end of a year, $1,040. However, during this year the dollar has fallen in value by 4%, and it requires $1,040 to buy what $1,000 bought when the year started. In real goods, the person has made no gain. It therefore has to be asked, why should he save? And, as the figures above show, he probably will not. But then the great advance of America/Britain over the 19th century was based on the fact that these were the first two countries to aggressively adopt saving as a key to their economic policy.
In the late 1940s, a group of big New York banks adopted a deliberate policy of corrupting the teaching of economics in American colleges. People who supported the bankers’ privilege to create money were deemed economists, and the top universities in the country were bribed to accept them as professors. This has now corrupted the profession of economics in America. (Prior to 1945 these banker-economists were considered crackpots by the economists of the day.) Today an economic title is a very good indication that your head has been filled with nonsense and your prescriptions do not work.
These banker-economists have redefined economic growth in a manner completely opposed to common sense. For example, during WWII Americans were relatively poor. It was impossible buy a new house or a new car. Gasoline was limited to 3 gallons per week. Butter, meat and other food items were rationed. Yet these pseudo-economists have been telling the country for the past half century that WWII was a period of economic growth. This is certainly a strange kind of growth: no new houses, no new cars, 3 gallons of gas a week, etc. These banker-economists have redefined economic growth to mean more income for the bankers (and their associated vested interests, the paper aristocracy). Thus the period of the past generation, when the stock market made explosive gains and the average working man saw a decline in his real wages, is called economic growth by these banker-economists..
Take Ben Bernanke, for example. He is obsessed with what is called the Great Depression. One would think that he had lived through it. He sees it coming around every corner (just as the inhabitants of Salem in 1693 saw witches around every corner). He does not know that pretty much everything he has learned about the “great depression” is a lie.
You see, during WWI the Democrats caused a doubling of the money supply, and this led to a doubling in average prices. At the start of the war, prices had been stable in America for 121 years. So the Republicans saw their first obligation to rescind the doubling of prices. Thus their 1920 campaign was based on restoring the 1914 price level. Since the price of cigars had gone from 5¢ to 10¢ during the war, they expressed this by saying, “What this country needs is a good 5¢ cigar.”
This was indeed the policy which had been followed after the Civil War. Reduce the volume of money and restore the pre-war price level. This policy was dramatically successful. It was during this time that American moved from the rural-type Civil War standard of living to the 20th century standard (telephone, automobile, electric light, etc.). And it was during this time that America became the wealthiest country in the world.
Thus, the Republicans had every confidence that their policy of reducing money would work. It had been tried before, and it had worked beautifully.
But modern Americans are taught that the period of the early 1930s, when money was reduced, was a depression. A depression, of course, is a period when the entire country gets poorer. What would the old Republicans of that era have said about the early 1930s?
They would have said, “The prime purpose of our policy was to help the saver. Americans were almost all savers, and they had seen the real value of their savings fall in half. The value of their savings had to be restored by restoring the value of the money. It is true that this was painful for the unemployed. The exact same thing had happened in the 1870s. But the point was that a) there were a lot more savers (upwards of 95% of the country) than unemployed (at worst 25% of the country), and b) it was known that the harm to the unemployed was temporary. The proof that this policy worked can be seen from the economic statistics of 1930-1934. Meat consumption in America rose from 129 lbs to 144 lbs. per capita. People switched from margarine to butter. And they gave more to charity. So the “great depression” was not a depression. The country as a whole was not poorer; it was richer.
During the 1930s a set of lies was made up. The 1930s were indeed a depression for the bankers and for Wall Street. But they were not a depression for the country. The period was described as a depression because the bankers and Wall Streeters could not win sympathy for themselves. They could not appeal to the average voter by saying, “Help me, I’ve gone down from $10 million to $1 million.” Such a plea would have fallen in deaf ears. So they made up a set of lies, and these lies were then taught, by the banker economists, in economics classes all over the country.
One of these lies was the Keynesian theory of the liquidity trap. It holds that all of a sudden, for no discernable reason, people stop spending money. Well, people did stop spending money in the early 1930s, but the reason was plainly discernable. The money supply dropped by 30% in 3 years. This caused a similar drop in prices, very much to the benefit of all consumers. During this drop prices fell rapidly, but wages lagged behind. Thus although nominal wages fell, real wages rose, and this is what caused the rise in unemployment.
The unemployed of that day did not realize that lower nominal wages were just as high in real terms, and they refused jobs which paid wages they considered beneath their dignity. An employer of the day solved this problem by posting a job for $50/week ($850/week in modern money) but requiring that the workers kick back $10 to get the job. Their real wages were $40/week ($680/week in modern money). But this was acceptable to them because they could now convince themselves that they were $50 dollar men.
These same lies are going on today. In the 1930s, we had a real fall in money and a real decline in prices. Here in 2009 we have conjured up an imaginary fall in money and an imaginary decline in prices. Commodity prices have been on the rise since 2001. They had a 9 month decline from March to December 2008. Such declines are quite normal in long bull markets. They are caused by speculators getting cold feet and running for the exits. Such declines are buying opportunities not evidence for a major crash. They are like the commodity declines of the 1970s, not the declines of 1930-31.
These speculative declines are very short, from the point of view of an economist, and it is likely that they are mostly over. Gold bottomed on Oct. 24 and is now within hailing distance of its March 2008 high. The grains and the CRB index bottomed on Dec. 5. Energy may have bottomed in late December. We will look back upon these events of 2008-09 from the future much as we now look back on the decline in gold in 1975-76 to $108. Less than 4 years later it was above $800. This is because Ben Bernanke (mesmerized by his vision of the 1930s) is engaged in a massive increase in the money supply. The monetary base has already doubled in the past 4 months. He is fighting the wrong war at the wrong time with the wrong weapon.
I have told my subscribers to prepare for a massive fake-out (a short move down now complete) followed by a giant move to the upside. I write a fortnightly newsletter, the One-handed Economist ($300/yr.) making hard predictions on the markets. My weekly blog, www.thegoldbug.net, is free. This week’s blog is about the bank bailout bill.
So remember the advice of Bill Clinton: “We are Eisenhower Republicans, and we are going to balance the budget.” He did, and that is the only way to stimulate the economy.
Howard S. Katz
-- Posted Monday, 2 February 2009 | Digg This Article
| Source: GoldSeek.com
