Wealth Confiscation

Below is an article from Noureddine Krichene, posted in the Asia Times: Usury in the USA.  First, some edification and background:

It is a glaring reminder that wealth confiscation in the United States is publicly yet surreptitiously being conducted all around us.  Neo-Keynesianism is such an easy and politically convenient philosophy because it requires neither intelligent thought nor careful planning to be undertaken.  It is designed for populism, with little relation to its original form as posited by John Maynard Keynes.  The neo-Keynesians are lazy proponents of the idea that profligate spending today at the expense of the future will solve today’s problems.

I have yet to meet an economist who when pressed did not acknowledge the fundamental challenges faced in the future by feckless monetary and fiscal policies in the present; outcomes such as inflation, asset value destruction, distorted investments and risk taking, destruction of savings, dramatic tax increases, collapsed labor markets and extensive unemployment, crowd-out of private investments, and sovereign default.  We are, literally, selling our country to financial institutions, foreign and domestic, piece by piece.  Each treasury sold by the US government represents a claim against future productivity – returned to the treasury’s purchaser through extensive taxation on production.  The only way to get out of it is to inflate the currency and erode the underlying asset’s value, a process that ends in hyperinflation and poverty.  If you don’t believe it, see Argentina, Nicaragua, Peru, Russia, Ukraine, Yugoslavia, Congo, and Zimbabwe, all of which experienced at least one hyperinflation event (inflation exceeding 100 percent per month) since the 1990’s.

Here is what Zimbabwe’s monetary base looked like through its period of hyperinflation (green line):

And here is US dollar Monetary Base expansion under Bernanke:

FRED Graph

It looks just as dramatic – although note that the Zimbabwe scale (left hand vertical axis) is significantly larger – none the less, the comparison is still scary.

Some commentators aver that the US and Zimbabwe are different: that hyperinflation in Zimbabwe was due to the government directly printing money (through its central bank) to put in its bank accounts and pay its bills – as opposed to the “monetary expansion” being undertaken in the US.  Do not be fooled, they are different only in their scale, but that does nothing to imply the US is not on its way down the slippery slope.  Creating money to filter through banks and provide to the US government is no different from printing money for delivery to the government – it is literal creation of money (expansion of the monetary base).  In the US it is to keep government borrowing rates low at the expense of citizens and savers.  The Fed’s method only provides the money to the government through a profit skimming (rent seeking?) institution.  If the Fed purchased billions of dollars of treasuries from you, which you had purchased from the US government, you would collect enormous transaction fee revenue and benefit through the presence of a guaranteed buyer of last resort, an implicit guarantee of the nominal solvency of the underlying asset.

Former US Federal Reserve chairman Ben Bernanke locked the US into a regime of near-zero interest rates. Saving accounts are practically denied any interest income, losing about 30% a year in value compared to stocks and 15% a year compared to housing. To keep interest rates so low, Bernanke had to print billions of dollars every month, pushing the balance sheet at the Fed to US$4.2 trillion. And the Fed will keep increasing the money base ad infinitum, from $4.2 trillion to $10 trillion to $100 trillion, and eventually even further. 

The damage inflicted by Bernanke is beyond imagination and difficult to reverse. The US went through a terrible financial crisis in 2008, and has been suffering mass unemployment, impoverishment and financial chaos. Like someone hooked on heroin, the process of capital destruction has become politically irreversible. The addict cannot quit until he takes his life. 

Usury laws once existed in many European countries. For instance, in the United Kingdom, usury laws once capped interest rates at 12% per year, then at 5% per year. But these laws were repealed completely in the mid-19th century to allow the market mechanism to allocate resources efficiently. Now the Fed has forced new usury laws on the United States by keeping interest rates so low. 

The amount of money printed by the Fed has been a pure confiscation of wealth, undertaken to finance record fiscal deficits, stimulate the economy, reduce poverty, restore full prosperity, and re-establish full-employment. These are laudable objectives, and explain why the Fed has arbitrary power to sequester wealth. But this power has a dark side. 

We should heed the words of Thomas Jefferson, the third US president and a strong opponent of central banking: “I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.” 

As the Fed continues to destroy the currency, personal assets like bonds will be worthless and millions of Americans will be reduced to poverty and homelessness. Democracy does not secure against totalitarian power. 

All the Fed has really been doing is destroying capital. It is like someone who has an orchard and keeps cutting down trees, thinking his produce will be somehow greater than before. Finally, he will end up with no capital (trees) and no produce. 

Fed maestros like Bernanke and his successor Janet Yellen are firm believers in Keynesianism and Marxism. Both ideologies have strong world-wide support. Top US universities as well as Nobel Prize laureates are among their advocates. Both ideologies are very attractive on paper, but in practice they have turned out disastrously. Countless lives were lost in Marxist revolutions around the world, and total economic disaster followed in Russia, Ukraine, China, and Indonesia. 

Likewise, Keynesian economics appear to be very attractive. To get prosperity and full employment, all that the government needs to do is dig holes. Faithful to this doctrine, US President Barack Obama has spent trillions of dollars digging holes, hiking the US debt to incredible levels, without any impact on real investment and growth. Like a smoker who spends his money on cigarettes, all that is left are ashes. If these trillions of dollars were invested by the private sector, growth in the US and the rest of the world would have been formidable and full employment would have been achieved. Yet Obama remains adamantly committed to digging holes, confiscating private savings and turning real capital into ashes. 

Pragmatic people are not interested in ideologies such as income equality. They are interested in immediate results, and efficient and workable methods. Engineers and doctors do not get locked into one type of method, irrespective of cost. If Thomas Edison, the inventor of light bulbs, had used only one type of experiment, we would still be using candles. And if someone gets lost, he will not remain stubbornly on the same road forever. He stops, asks people for directions, and changes course. Such is not the case with the Fed or Obama. 

The US Fed has a full-employment mandate, which was introduced by a congressman in 1946 and has been cherished ever since. Perhaps one day a congressman will give the Fed a mandate to secure generous rainfall everywhere in the US. Entrusting the Fed with full employment caused the Great Depression and 25% unemployment for many years. It is utter nonsense. If we tell a carpenter to do heart surgery, it is easy to predict the outcome. 

If the Bernanke-Yellen interest-rate confiscation of wealth is not the solution to full employment, then what is? The answer is the “invisible hand” of the market, which means the government has to abolish minimum-wage laws and unemployment benefits, and withdraw any support for unions. Once the labor market is fully liberated, only voluntary unemployment prevails. But as long as the sacred labor laws are in force, the zero-interest-rate regime will only worsen unemployment and spread financial chaos and plundering. 

There is no government in the world that has been able to service a debt at 140% of gross domestic product; a sustainable debt should not exceed 30% of GDP. Saddled with high debts, governments either inflate them away or default on them outright. No government has ever indulged in the present style of US fiscal and monetary profligacy without running into hyperinflation and chaos. Fortunately for the US Fed, it dismisses any measure of inflation except “core inflation”, which excludes many products. Hence, pushing Fed credit from $0.8 trillion to $4.2 trillion has had no effect on core inflation, which remains at one to 2%. But very high inflation is already raging in the stock markets and housing sector, and food prices have tripled over recent years. 

The US is on an irreversible path of fiscal and monetary chaos and capital destruction. To prevent a collapse of over-inflated stocks, and to deal with a huge public and private debt, the US Fed has no choice except to destroy capital, currency, and savers. Politically, the process cannot be arrested for three reasons. First, politicians believe in the prevailing ideologies and can never cast any doubt on their truthfulness. Second, pressure groups such as Wall Street speculators, welfare recipients, and debtors will forcefully defend the subsidies they receive from the state. 

Third, the dollar remains a key reserve currency. Therefore, the real burden of fiscal deficits and wealth confiscation is borne by the poor in the rest of world. People in Burundi, Rwanda and elsewhere have to squeeze their food intake so that millions of welfare recipients and borrowers can enjoy free wealth. According to the Food and Agriculture Organization, malnutrition is deepening in many vulnerable countries. This is also leading to social unrest in many nations. 

Noureddine Krichene has a PhD in economics from UCLA.
(Copyright 2014 Noureddine Krichene)