“A huge threat to just about everything.."
“Everyone loves an early inflation..”
“Everyone loves an early inflation. The effects at the beginning of inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the latter effects, but the latter effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of all traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation.”
It is probably no coincidence that the 20th Century – the century of central banking – was also the century of two world wars and multiple genocides. Yet the ‘origin story’ of the US Federal Reserve, still the most important of the world’s central banks, is one with which many longstanding financial practitioners may still be unfamiliar. Edward Griffin, in his book ‘The Creature from Jekyll Island’, explains how the US Federal Reserve was conceived.
“On a cold November night in 1910, a handful of financiers boarded a private railway car in conditions of extreme secrecy in New Jersey. The passengers included the Republican whip in the Senate and a business associate of the banker J.P. Morgan; the Assistant Secretary of the US Treasury; the president of the National City Bank of New York, the most powerful bank of the time; a senior partner of the J.P. Morgan Company; the head of J.P. Morgan’s Bankers Trust Company; and a representative of the Rothschild banking dynasty in England and France. In other words, of the six passengers, five of them were representatives of private banks.
“Those financiers would go on to meet in secret at a hideaway owned by J.P. Morgan and several of his business associates, where visitors would gather in the winter to hunt ducks. The name of this remote retreat: Jekyll Island.
“This group met in order to tackle five pressing issues:
“Perhaps most cynically of all, to address this fifth problem, the group decided to adopt the structure of a central bank and, furthermore, ditch the use of the word bank altogether, in favour of a coinage that would evoke the image of the federal government instead. Three years later, after the passing of the resultant bill in Congress on 23 December 1913, the US Federal Reserve was born.”
“The Federal Reserve System,” it today proudly tells us, “is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.”
Few could deny the latter point. Rather than maintain a narrow focus on managing the money supply, the Fed is now figuratively all over the shop, its fingerprints evident everywhere across the economy. Jim Grant, interviewed on CNBC in February 2014:
“The Fed insists on saving us from ‘everyday low prices’ – they call it deflation. I submit that in a world of technological wonder, prices ought to be weakening: it costs less to buy things because it costs less to make them. This benign tendency the Fed resists at every turn. It wants the price level (as it defines it) to rise by two percent a year, plus or minus. In so doing, it creates redundant credit that finds its way into other things. These excess dollars do mischief. On Wall Street we call this mischief a bull market and we’re generally all in favour of it.
“The Fed, in substance if not in name, is [still] engaged in a massive experiment in price control. (They don’t call it that.) But they fix the Fed Funds rate, they manipulate the yield curve… they talk up the stock market. They have their fingers and their thumbs on the scale of finance. To change the metaphor, we all live to a degree in a valuation ‘hall of mirrors’. Who knows what value is when the Fed fixes the determining interest rate at zero? So I said ‘experiment in price control’ but there is no real suspense about how price control turns out. It turns out, invariably, badly.”
The Fed is not alone in having a shady composition of which many market professionals are unaware. Iain Davis for UK Column makes the following observations of the Bank of England:
“Contrary to the stories we are told about the Bank of England (BoE), it is not “owned” by the Government. The BoE is a private corporation managed by its Court of Directors by virtue of the authority invested in the Court by Royal Charter.
“The Government has no power to interfere in the BoE’s “business”. This can only be done through amendments to its Charter, and the BoE must consent to make the Charter “anew”. BoE-related government legislation, such as the 1946 and 1998 Bank of England Acts, are legal constructs which the BoE permits.
“The BoE allows the Government to create legislation that enhances its status as a private corporation, one with the “public” authority to make monetary policy—thus affording the BoE immense financial and economic power.
Of the Bank’s alleged purpose:
“The BoE declares:
“Our mission is to maintain monetary and financial stability for the good of the people of the United Kingdom. To do this, we provide safe, confidential and reliable banking and custodial services that underpin our responsibilities as banker to the UK Government.
“The BoE provides services to the Government. It “acts” as the Debt Management Office’s “agent” for settlement of its debt securities (government bonds). The BoE also “acts” as the UK Treasury’s “agent”, holding its gold and other assets.
“The current governor of the Bank of England (BoE), Andrew Bailey, has blamed British inflation on many and varied people. He blamed workers and their unions for calling for wage increases. More recently, he blamed businesses for increasing prices, as they try to absorb the rising costs that result from inflation.
“The BoE, like the Government, uses the Consumer Prices Index (CPI) to measure inflation. The CPI does not provide a true reflection of the real impact of inflation and only partially records the effect of inflation. Nor does the CPI tell us anything about the cause of inflation.
“Inflation is primarily caused by the monetary policy that is firmly under the control of the BoE. In 1951, the economist Ludwig von Mises said:
“Inflation, as this term was always used everywhere and especially in this country [the United States], means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term “inflation” to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise.
“Bailey is among the many modern “financial experts” who conflate the effect of inflation—rising prices—with its cause, monetary expansion. In his most recent letter to the chancellor of the Exchequer, Andrew Bailey wrote:
“The increase in CPI inflation in the aftermath of the pandemic mainly reflected large increases in global energy prices and other tradable goods prices. [. . .] Russia’s invasion of Ukraine [. . .] greatly exacerbated the rise in energy prices as well as wholesale prices of many agricultural commodities. [. . .] These external factors continue to add significantly to inflationary pressures in the United Kingdom[.]
“According to Bailey, sterling inflation mainly reflects the impact of “external factors”. The BoE’s—and Bailey’s—eagerness to blame anyone and anything for current inflation, except the BoE’s own monetary policy, is utterly at odds with its own stated purpose.
“The BoE’s Monetary Policy Committee (MPC) lays out its alleged responsibility:
“Monetary policy affects how much prices are rising—called the rate of inflation. We set monetary policy to achieve the Government’s target of keeping inflation at 2%. Low and stable inflation is good for the UK’s economy and it is our main monetary policy aim.
“Again, according to the BoE, it controls monetary policy and it is this—not so-called pandemics, wars or wage demands—that “affects how much prices are rising”. Suggesting that it can control inflation, the BoE declares that managing inflation is in fact its “main monetary policy aim”.
“While quick to take credit for on-target, stable inflation, the BoE points the finger at everyone else when the situation deteriorates. It both claims that it can control inflation and that inflation is beyond its control.
“Currently, the BoE is seemingly failing to “maintain monetary and financial stability”. If it can’t perform its primary function, what use is it? On the other hand, if it is capable, then perhaps we should entertain the possibility that it is deliberately trying to destabilise the economy. Either way, it hardly appears trustworthy.”
Iain Davis concludes his exhaustive piece on the BoE as follows:
“The Government neither owns nor directs the BoE. The private Bank of England corporation is, and always has been, entirely and irrevocably beyond government control.”
Years of easy money and an associated build-up of sovereign debt have brought us to what feels perilously close to the Anglo-Saxon bond market endgame. This year’s US debt ceiling debates and political brinksmanship, for example, have been even more than usually fraught. Given recent monetary stimulus, the inevitable inflation, and even more recent interest rate policy, an objective observer could be forgiven for thinking that both the Fed and the BoE were deliberately trying to crash the financial system quite deliberately, in order – presumably – to drive through the compulsory introduction of Central Bank Digital Currency, a nastily fascistic solution (programmable currency) in search of a non-existent problem (in that nobody other than central bankers even wants it). On which note, the financial history Russell Napier, in an interview with fund managers Incrementum AG, makes an interesting observation:
“I must tell you a funny story. There is a CBDC in the Bahamas, and I was recently in the Bahamas, and everybody I met, I asked them if they’re using the sand dollar, which is the CBDC, and I couldn’t find anybody. Believe me, I did ask young people, because obviously old people tend not to; and the reason they weren’t using it is that it wasn’t really adding any functionality. Then I was at dinner one evening, and I asked the gentleman beside me. He said, “Oh yes, I use it all the time”, and that surprised me because he was the first person I encountered that used it, but also he was probably about as old as I am. I said, “That’s really interesting”. He brought out his phone, showed me the app, and told me how he used it. I said, “That’s interesting; what do you do for a living?” He said, “I’m the central bank governor”. Then the lady next to him chipped in, and she showed me how she was using it as well. I said: “Well, let me guess. Are you the wife of the central bank governor?” She said yes. So, as a means of transaction, it doesn’t really add any functionality. However, as a store of value, it could, particularly in a crisis, become a huge threat to just about everything.”
‘A huge threat to just about everything’. Sounds like something consistent with a central bank.
There are innumerable reasons to favour sound money over fundamentally unsound fiat. Probably the most compelling dates back to the outbreak of hostilities in July 1914. If the various combatants had been forced to pay their way honestly, the First World War would indeed have been over by Christmas, because the protagonists would all have gone bankrupt. Instead, they chose the politically expedient option to go off the gold standard, ushering in problems over debt and monetary corruption that linger to this day.
Sound money saves lives. Unsound money destroys them.
Alasdair Macleod of Goldmoney:
“This sad outcome is enough to turn frustrated libertarians into anarchists, wishing for a collapse of the whole rotten system — the sooner the better. Fortunately, or unfortunately, the increasing progression of statist control and suppression of free markets has nearly run its course. A financial crisis of humungous proportions is lurking in the wings, which in this analyst’s opinion has a fair chance of wiping out all rapacious states’ income entirely by collapsing their fiat currencies. For with their authoritarianism, they have bred economic and catallactic ignorance, which will certainly lead to their destruction.
“As Ludwig von Mises put it in an essay entitled ‘A Critique of Interventionism’ written in 1930,
“Only the naive inflationists could believe that government could enrich mankind through fiat money. Government cannot create anything; its orders cannot even evict anything from the world of reality, but they can evict from the world of the permissible. Government cannot make man richer, but it can make him poorer. “
“Besides his close attention to valid economic theory, the authority for Mises’ thesis came from his experience in the post-war years, when he witnessed at first-hand the economics and politics of the Austrian hyperinflation, closely followed by that of Germany. In the century since, we have forgotten the lesson. So too, it appears, have the Austrian and German people whose forebears suffered catastrophic destruction of their wealth. Furthermore, it is almost certain that when the currency collapse becomes fact will we be ignorant of the follow-on consequences so vividly described in Hayek’s ‘The Road to Serfdom’. It chronicled the likely political developments that follow a government’s impoverishment of the masses by inflation.
“But we can only consider one thing at a time. Borne out of statist ignorance and intellectual arrogance, today’s disregard by governments for the rights and individual freedoms of their peoples is responsible for the economic and catallactic crisis now before us. Our political leaders, hiding their coordinated attack on everyone’s freedom, are beginning to realise that their tenure is ending in crisis. Like those of a car whose brakes have suddenly failed while dashing downhill, the levers of power no longer function.
“Arranging a reset is increasingly talked about. The current bankrupt system is expected to be replaced with another, allowing the political and bureaucratic classes to retain their power and control. In their new reset, they are even planning to take total control of bank credit away from commercial banks by the introduction of central bank digital currencies. They say a CBDC will be used to control and direct our spending for greater economic effect. Those of us in the authorities’ favour will get more state credit, while those who are not, such as those suspected of tax evasion, will be denied it. Some say we will be chipped like dogs and traced through our actions. If this seems extreme, these plans are echoed by the World Economic Forum, one of which’s acolytes told us we will own nothing and be happy.
“We must dismiss these utopian fantasies of socialising interventionist politicians seeking to jump ship from their current failing system. They lack the ideological pull of Marxism, required to persuade the intelligentsia and the middle classes. They will never overcome nationalism, never get their long-suffering populaces to support them. Instead, they only inspire conspiracy theories.
“The current political system mixes socialist intentions with interventionist policies. But as policies they differ distinctly. Socialism seeks to achieve its ends by seizing command of the factors of production: that’s what Marx intended. But western governments currently do not intend to nationalise swathes of industry. Instead, they wish to regulate them, leaving possession of property in private hands. It is interventionism that has killed off free markets.”
By way of investment strategy, we eschew exposure to the dead hand of the Big State almost completely. We endeavour to minimize or eliminate altogether allocations to unbacked fiat currency, and we choose instead to focus on investments in the productive economy, ideally shares in unindebted but highly cash-generative businesses run by principled, shareholder-friendly entrepreneurs, especially when those shares can be purchased at a meaningful discount to any objective assessment of their inherent worth. We value uncorrelated investments, notably in systematic trend-following funds that have already proven their worth during 2022. And we attach a premium to real assets and to commodities businesses with the same ‘value’ attributes already cited. We avoid politicians’ and central bankers’ promises, in other words, and we seek shelter in the tangible, the valuable, the permanent, and the real.
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you, too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio -with no obligation at all:
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: email@example.com
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and specialist managed funds.
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