Financial Crisis Deja-Vu: We’ve Been Here Before (Will This Time Be Different?)

In the current era of deepening social divisions, economic distress, distrust of government and financial chaos, there’s one thing that most Americans can still agree on: these are unprecedented times!

Right?

Actually, wrong! It’s fascinating (and liberating) to realize that despite the orgy of graft, corruption, wealth inequality, unprecedented government deficits, Wall Street malfesance, social unrest, welfare state and the potential for widespread economic collapse plaguing our society today, America has actually been here before. And lived through it. For those under about the age of 100 and who are concerned about the future, especially about America’s economic outlook and the potential state of their personal finances and retirement accounts, an examination of the history of American banking will help put things in perspective. If we feel that making an educated guess about the direction that society and the economy are headed and planning accordingly is a better way to manage our finances than leaving them to random luck or the advice of an advisor working off a “one size fits all” financial model developed decades ago, then understanding the nature of American banking and how it’s evolved since the 1920’s can be very helpful. 

Things are never quite the same as they were in the past, of course, but if we can see what has happened before, learn how the banking system responded to it, look for any predictable patterns in those responses, see what changes society has undergone between then and now, and apply some logic to uncover how those pieces of information influence each other, then we may have a more sound basis for rationally choosing the better among competing options of what to do with our money in the forseeable future.

Ready for a short guided tour of history, and a peek into the future? Then let’s start at the beginning, and take a look at what banks are, and what they do.

Banks: Financial “Black Holes”

For most of us, banks are kind of like black holes: mysterious, exotic entities that exist at the centers of the financial universe and pull in our life’s energy (as represented by the wealth we’ve worked to obtain), but give out very little energy or information about themselves in return. Although we can’t avoid banks and we interact with them either directly or indirectly every day, most of us actually know very little about them, or what they do, or even where they came from. How do banks function? And why, really, are they so important to the modern economy? Are banks our friends? Our enemies? Or perhaps a bit of both? Do banks control the economy, or are banks controlled by the economy? Should we trust the banking system to keep us safe during a time of unprecedented economic and social change, or are the banks actually co-creating many of today’s economic problems and using them to rip us off? There are many questions that need to be addressed, and plenty of simple opinions for answers. The realities, of course, are more complex. However, they’re not so complex that we shouldn’t be able to gain a much better understanding without too much brain drain. Given that banks will play an increasingly heavy handed, though often very veiled, role in our lives in the coming months and years, it’s probably wise to get to know more about them. If you’re a taxpayer, a retirement saver, a retiree living on a fixed income or an individual with any significant amount of wealth to protect, a basic understanding of how the banking system works and what the current developments in the banking industry may mean for the value of the dollar and the global economy will help you consider how to plan for a very uncertain future. Let’s start with a really basic, but fundamentally important, question.

What, Really, Do Banks Do?

Banks are, of course, businesses, and their products are financial services. Since the passage of the Glass-Steagal Banking Act in 1933, banks, or, more accurately, banking (the need for distinction between banks and banking will become clear shortly) have been divided into two types: commercial, and investment. Commercial is what most of us are familiar with. It includes holding deposits, managing checking accounts, and making loans. But banks also underwrite government bonds, participate in the stock market by buying and selling securities, operate hedge funds, facilitate corporate mergers and acquisitions, and organize the sales of initial stocks created by new companies (the process known as an Initial Public Offering, or IPO). Investment banks, or the investment branches of commercial banks, are the ones involved in these and other mostly exotic (to us), financial practices.

Within many large commercial and investment banks there is also a small but extremely important subdivision called bullion banks. (Bullion banks may also exist as their own banks, rather than as divisions within larger commercial banks.) Bullion banks are the most important banking creatures that you’ve probably never really heard of. They’re usually subdivisions of the commodities, foreign exchange or corporate finance divisions within the investment banks. Bullion banks trade, hold (vault), and distribute precious metals (PM’s) to buyers and sellers. They also finance precious metals mines and fabricators, conduct research on PM’s, serve as intermediaries between PM lenders and borrowers, and engage in other activities necessary (and profitable) to sustain a market for PM’s. Bullion banks play a crucial role in managing the modern economy, although much of their activity is clouded by secrecy and obfuscation. As we explore the role of banks in creating the economic landscape from the beginning of the industrial revolution until the current day, we’ll take a cursory look at the deeply crucial, but largely hidden, roles that bullion banks have been playing in supporting the U.S. dollar and shaping the contemporary domestic and global economies.

Why the Need For Three Types of Banking?

Why have commercial, investment and bullion banks, instead of, well, just one type of bank that can do everything?  Wouldn’t that be more efficient? Sure, from the point of view of the banks, it probably would be. But from the point of view of bank depositors and society at large, history shows that allowing banks to engage in both commercial and investment activities together is too financially and economically dangerous.

Community Assets, or Threats? How Banks Evolved From Being From One To Both

Most social entities, including businesses, have a limited shelf life. When entities stop serving their intended purpose, or no longer function properly, or find ways to game the system in which they operate, they’re often broken up into smaller, more manageable and – it’s hoped – less troublesome, units.  Such was the case with the banks when they grew so powerful and gamed the system so severely during the early 20th century that they eventually caused the Great Crash of 1929. And, when later, they escaped the bonds placed upon them as a result of that crash and caused our contemporary crashes of 2001, 2008, and, probably, 2021.1

Banks were not always the huge, powerful creatures we’re currently accustomed to. Prior to the 1880’s, banks were mostly small, local entities that engaged in simple transactions and helped facilitate the growth and maintenance of their local communities. They were important institutions, to be sure, but of relatively limited and local influence. Then the industrial revolution came along and changed everything. With the “great leap forward” in technology came a simultaneous leap forward in the size, complexity, power and, ultimately, danger of banks. The relatively simple, local affairs that had served humanity since the invention of money couldn’t suffice to service the new and unprecedented financial needs of big technology. Nor could they effectively handle the increasingly complex financial needs of the increasingly complex society that industrial technology created. While new mechanical thinking was taking advantage of abundantly available raw resources to create an avalanche of novel material goods, new financial thinking was taking advantage of the increasingly abundant economic opportunities to create an avalanche of novel, and potentially dangerous, financial products. The result? Banks developed more ways than every before to multiply both profits for themselves, and risks to depositors and society. As banks grew hand in hand with industrialism, they set into motion a series of transformations that became the roots of the systems and problems we’re grappling with today.

The Early Years

Preindustrial banking regulations focused primarily on protecting depositors as opposed to promoting bank size and profitability. Controlling the avarice of banks was viewed by both the public and the legislators as a fundamental social good. This isn’t surprising as the limited mobility of the population in the pre-industrial era made the cultivation of upright and ethical character a prime social directive. Since honesty, fair dealing and responsibility were the elements of the social glue that held communities together, the complexion of financial laws naturally reflected those social ideals. Banks were supposed to be leaders in maintaining the social glue that kept their communities functioning. If they needed occasional help in sticking to their role, well, that’s what legislation was for.

Federal laws in the pre-industrial era restricted banks from lending large sums of money to individuals or businesses because enterprises that required big loans were inherently risky. Risk wasn’t the depositor’s friend. The freedom to make big loans also provided too much temptation to those bank managers who harbored a gambling mentality. If the bank lent and lost a huge sum, its deposits were raided to cover the debt. After all, somebody had to make the creditor whole. In the process, innocent depositors were often wiped out. Depositor-centric laws strove to protect depositors from this unfairness by effectively limiting the amount of trouble the banks could get into.

This arrangement worked reasonably well for both sides until the era of big industry got underway in earnest. Small banks could handle the small needs of local enterprises, but large businesses began requiring massive loans to fund their growth. Where would this cash come from? The banks couldn’t simply hand over sizeable chunks of wealth entrusted to them by depositors because of the depositor protection laws. The old depositor protection rules also prevented the banks from realizing the huge new profits to be had “if only” they could make the increasingly huge business loans that were in demand. This was unacceptable to the sensitivities of the banks. Unprecedented wealth and power were waiting to be claimed on the other side of the old rules, so of course the banks figured out how to get around them. Would it be surprising to anyone that the “solution” they seized upon may have gotten a bit out of hand? Indeed, the clever work-around the banks figured out to evade the letter of the old depositor protection laws created some of the worst unintended consequences in American history. Ultimately, they contributed to the Great Crash of October, 1929, and helped kick off the Great Depression and all of its sequelae.

Now, let’s be more specific so we can begin to see how the desire of banks to evade well-meaning restrictions during a time of great change, altered the course of financial history and set the stage for our current economic crisis and beyond.

The Setup for the Stock Market Crash of 1929, and Some Surprising Parallels With Today

During the era when depositor protection laws prevented commercial (savings, loan, and checking) banks from making large, risky loans, there was no deposit insurance. If the management of your bank made a bad investment with your money and they couldn’t cover the loss from other deposits or their own profits, you were on the hook. Fractional lending laws required banks to keep only 10% of your cash or gold in the bank itself, so the bank often didn’t have nearly enough on hand to pay up when big loans went bad. (Remember the family Christmas movie, “It’s a Wonderful Life”?) Because Federal rules prohibited commercial banks from making large loans as a source of income, or from trading in stocks, their income had to come primarily from three sources: fees, the payoffs from bond purchases (as bonds were considered a safe form of investing), and the difference between the interest rate at which they lent out money and the interest rate at which they paid depositors (the interest rate arbitrage rate, or arb).

Interest rate arbitration was usually the best, and largest, steady source of income for commercial banks until the recent era of super low interest rates. The profits to be had through arb on thousands or millions of deposits when interest rates far higher than today, was huge. This is a primary reason why banks were so eager to attract depositors. When the bank could turn around and lend out 9 of every 10 dollars you entrusted them with, and keep the difference between the interest the borrower paid them for those nine dollars and the lesser amount they had to pay you in interest for your ten dollars, the difference added up. And while this interest arb has been very profitable for the banks, the concept of ‘fractional banking’ has it’s drawbacks for society. Let’s look quickly at the most egregious case of harming society through fractional lending, below.

Like Beer, Fractional Lending By the Bullion Banks Is Both The Cause Of, and the Solution To, All of the World’s Problems

As we look at the role of fractional banking in driving bank growth, it’s worth noting that bullion banks are also fractional banks, even though they deal in precious metal instead of paper. Like commercials, bullion banks are required to keep only 10% of the metals deposits they take in, on hand to return to depositors at the depositors’ request. This is deeply important in today’s economy because, unlike commercial banks that can substitute dollars only with….. other dollars, bullion banks are able to substitute paper claims of ownership for physical gold (or silver) when depositors come to claim their metals. Of course, depositors can demand that their actual metals and not paper claims be returned to them at any time of their choosing, and the bullion banks must cough the metal up to them. Usually, however, the owners of the metals don’t really want the bullion itself. They just want a deed of ownership to the metal so that they can trade the metal on one of the metals markets and (hopefully) make a profit. Why lug around gold or silver bars when one can leave them where they are and simply hand over a document of ownership, in order to complete a trade?

Such a practice would be fine, except that there is huge circumstantial evidence that, unlike the other fractional banks, the bullion banks have somehow been allowed (quite probably at the behest of the U. S. Government) to hand out far more certificates of ownership for bullion under their control than they actually have under their control.2 This would be like commercial banks being allowed to loan out more than 100 percent (instead of “only” 90 percent) of the deposits they take in. The result? If the banks have indeed produced far more claims to precious bullion floating around than the banks actually have in bullion, and they’re creating more claims every day, that makes each claim less valuable. After all, who’s going to pay good money for something that’s becoming ever less scarce, ever more common, and being held in ever greater numbers of hands? And since each bullion claim is supposedly the representation of a fixed quantity of physical silver or gold, each new claim created deflates the value of each and every ounce of silver and gold in the world. (Does this sound like what’s happening with paper currency as the Fed “stimulates us to prosperity?) Now why would any government want gold and silver to appear to be losing value? Here’s the dirty little secret: as the price of gold drops, meaning that gold is worth fewer paper dollars, that makes the dollars each seem worth more than they really are and keeps up confidence in the value of the dollar! Can you see how fractional banking can be fraudulently used to keep up the confidence and appearance in the value of the dollar, and how that is necessary for propping up our economy and maintaining our global economic supremacy when we produce so few real goods and services? This, in a nutshell, seems to be why bullion banks are so important, and why their activities are so jealously guarded from public scrutiny. The evidence strongly suggests that bullion banks are today, in many ways, the banking lynchpin that prevents the entire global financial system from collapsing. If the free market were allowed to discover the true, unmanipulated value of gold and silver, the value of the paper dollar (and virtually every other world currency) would crash and the greatest financial crisis in history – which the Fed is trying desperately to stave off, as I’ll be discussing at the end of this paper – would commence immediately.

(For an exhaustively detailed and documented analysis of the attempts to bring the activities of the bullion banks and the American government’s involvement with bullion manipulation to light, please refer to the extensive archives and continuing investigations by the Gold Anti-Trust Action Committee (GATA) at www.gata.org)

Small is Beautiful, and Less Is More, Until More Is More

Going back to the topic of commercial banks, keeping them safe, and therefore small, was an arrangement that served both the banks and the public reasonably well until around the 1880’s. That was when the industrial revolution really began to pick up speed and the needs for capital consequently began to change dramatically. As the industrial revolution progressed, the world witnessed the emergence of social and technological innovation second probably only to the emergence of highly organized societies in ancient Egypt. Among the most fundamental and important innovations were continuous process technologies, (ex. – assembly lines), and modern management techniques that created efficient worker coordination. Products could now be produced quickly, in mass quantities, and with little waste of materials or manpower. As a result, commercial and industrial enterprises could develop on a genuinely huge scale. Such growth, in turn, allowed these enterprises to take increasing advantage of economies of scale and scope, to fuel even further growth. When conventional growth led to too much physical and management “sprawl”, efficiency was regained via vertical integration . This unprecedented, massive commercial growth created a new- to- the- banking- world need to make equally massive business loans. Big new plants, large equipment and raw materials were hugely expensive.  Since commercial banks were restricted by law from servicing the new, massive loan demands, and probably also hampered by size in most cases – as banks at the time were encouraged to be small and local – corporations began financing their growth via reinvesting their earnings, and issuing public stocks and bonds3.

(If this all sounds somewhat familiar, that’s because it’s not too dissimilar from our current tech revolution, especially going from the early years of the internet and all the dot.com startups, to the massive FAANG companies of today. Later, we’ll examine both their similarities and differences, with an eye on the changes in the banking system since 1929, to see if the comparison may suggest where the markets, and the US dollar, will be headed in both the short and longer time frames.)

Meanwhile, at around the turn of the 20th century, commercial banks were understandably unhappy that they were permitted to partake of the industrial boom only by purchasing bonds from growing enterprises. The income they were missing out on from collecting interest on loans, and the profits they could have from trading stocks, were off limits. Industry, too, was somewhat penalized and slowed down from lacking easy access to loans of the sizes required. The banks, not surprisingly, decided that the situation needed to change, and the easiest way to create that change was to skirt the law. They realized that they could capture the huge but elusive profits potentially available to them, and grow their customer base, by simply setting up wholly-owned securities affiliates through which they engaged in all the activities the law forbade them to. Thus while the banks themselves to continued operating within the limits of their restrictions, their affiliates participated (and profited) freely in all aspects of investment banking and even the brokerage business. The plan worked. The affiliates grew in number and popularity, eventually handling such a volume of stocks and bonds that they were able to become underwriters, as well. The banks were now happy, industry was happy, and the more wealthy, educated members of the public who participated in the stock boom, were likewise happy. (ibid.)

Enter the Extras

To make sure everybody had the opportunity to participate in the stock market (and to soak up every possible pool of potential profit), the commercial bank securities affiliates created investment trusts, which allowed people of lesser means and education to buy affordable, diversified portfolios of stocks and thereby spread their risks. These trusts served the same purpose as mutual funds do today. Opening the doors of investment to all proved both successful and unsuccessful for the commercial banks On the one hand, many groups of people who had never before purchased stocks, especially women, became buyers. Indeed, women’s magazines began pitching articles on how to buy stocks, and brokers catered to them with special programs and dedicated rooms where the ladies could gather to watch the ticker tape (ibid.)

On the other hand, the increasing demands of industrial finance, plus the restrictions of regulation, kept diminishing the lending roles of the commercial banks proper. The result was the need for both the affiliates and the corporations themselves to sell ever more stock to the general public to keep the money flowing in. This need, and the evidence that the public was meeting it, suggests that one of the conditions for the formation of a bubble (whether a rational or irrational bubble is not clear), was present. Another factor suggesting, but not proving, that the stock market may have entered a bubble between about 1920 and 1929, was that the number and variety of seismic technological changes occurring over the decade made evaluating the future profitability of many companies, particularly those on the leading edges of the technologies of the day, virtually impossible. Investors lacked the means to easily analyze the future trajectories of dividends and profitability of many companies because novel technologies with unknown potential kept rapidly replacing older technologies. To increase the uncertainty, newer, more innovative companies were constantly coming onto the market, giving investors little concrete data to stand on when assessing how much to pay for the stock. Absence of such knowledge not only increased the odds that optimistic investors would make wildly high guesses on valuation, but also promoted speculation on companies that could have brilliant futures but did not have histories of dividends by which to judge their actual performance. (ibid.)

Are you hearing shades of 2000, 2008 and today, perhaps?

The Bubble Finds Its Pin? Or A Soufflé Simply Collapses? Either Way, the Deflation Fuels the Long March Towards Socialism

The common explanation for the crash of 1929 is that the market was in a massive bubble that suddenly burst. Actually, despite a reasonable amount of circumstantial evidence that yes, there really may have been a bubble in the 1929 stock market, hard evidence isn’t entirely definitive on that point. Many analysts disagree about it, but possibly the most thorough and objective analysis comes from Eugene N. White’s study  entitled The Stock Market Boom and Crash or 1929 Revisited .( J. Econ Perspectives 4(2), Spring 1990)3. In his paper, Mr. White  examines all the available theories of why the market crashed and carefully correlates them with the available evidence. His conclusion? That the rise in the stock market during the 1920’s was probably ‘legitimate’ in the sense that the era ushered in a wave of goods, services and general prosperity probably never before seen in human history. Companies rose strongly in value, but they probably had a right to. (Whether or not we can realistically say the same for many companies today, especially many tech companies, is a debatable point and a possible difference between then and now.) Combined with a very low unemployment rate and an annual growth in GNP of about 4.7 percent (compare that with barely 2% for the last eight years or so), and, even in the face of tight monetary policy instituted by the Fed, there was probably enough real, labor-created – as opposed to Fed printed – money in the public’s pockets to fuel the economic growth of investment in industry. In a sort of feedback loop, as the stock market rose, companies found it attractive to issue even more stock, which the public purchased. Was is possible that this feedback loop got a bit out of control, and the issuance of new stock overwhelmed the existing supply to cause the crash in 1929? The evidence suggests not. The amount of new stock issued was large, but, in context, seems to have been not nearly large enough to crash the market.

Likewise, the evidence that the much discussed Smoot-Hawley Tariff killed the market doesn’t stand up to examination. If the tariff were having an effect on the market, if would have selectively hurt America’s export industry. In reality, the stocks of America’s export, import and non-tradeable industries all suffered similar declines together when Smoot-Hawley was passed. (ibid.)

(Consider the similarity to today, when we have a steeply rising stock market and a president who has imposed tariffs on Chinese goods. While not taking sides on the issue, I submit that the data suggests that while the tariff may do a bit of damage across the board, it’s not likely to be a big pin in the today’s stock bubble.)

The actual force that halted the market’s ascendancy may have come not in any particular pernicious guise, but in the form of an ordinary, periodic recession of the type that occurs regularly in the business cycle. According to Eugene White, the Federal Reserve’s index of industrial production first dropped in July, 1929. Then some of the Fed’s other indices began to fall. (Sound similar to our current crash in industrial output?) The mixed economic picture, combined with a rise in real interest rates both in America and abroad, suggested that a recession was coming on. Just like today (absent deliberate backstopping of the market by the Fed), news of an incipient recession was enough to cause stockholders to change their minds about the prospects for the future and turn from buyers to sellers.

What started out as a walk out the door by investors in early October, 1929, turned into a mad dash for the exits as everyone wanted to get their money out before it was gone. When brokerage firms became overwhelmed, the stock ticker began to lag. When investors could no longer find out the current prices of their stocks, they began panic selling. Vertical price drops prompted sudden margin calls, and many investors responded to the panic by simply liquidated their entire holdings. To make the chaos even worse, out-of-town banks and other lenders suddenly withdrew their loans to brokers – loans which were now seen as too risky. In a move echoed in 1987, 2000 and 2008, the New York banks stepped in and covered the losses. The Federal Reserve Bank of New York made open market purchases and let it be known that its members could borrow freely from its discount window without the usual stigma attached. To its credit, the New York Fed’s quick response insured that there were no panic-driven rises in money market rates and no threats to the banks from defaults on loans for securities (ibid.)  Thus, they confined the stock market collapse to the stock market itself, and spared its spread to the wider economy, a move praised by then President Herbert Hoover himself.  Again, sound familiar? Later we’ll discuss how that compares to the responses to the crashed of 2000 and 2008, and what the similarities and differences in bank and Fed actions today might suggest about what will happen when the current bubble finally finds its pin.

When the stock market crashed in 1929, panicked depositors across the nation suddenly withdrew $1.78 billion from their bank savings accounts in just four weeks. As a result, over 4,000 banks failed and any claims on deposits over and above the 10% reserves the banks were required to hold, were simply wiped out. Banks and depositors both suffered.

The Great Depression Kills Sound Money

A poorly understood consequence of the panic of 1929, and one that ushered nearly a century of America’s false prosperity and laid the groundwork for the chaos we’re seeing now, is that, because so many deposit holders demanded their money back in the form of gold (the U.S. was still on a gold monetary standard at the time), America’s central bank, the Federal Reserve, ran low on its gold supply. For four years, until Congress passed the Emergency Banking Act (discussed below), citizens understandably shunned the unstable banks in favor of hiding their cash under their mattresses.

Throughout the early part of the Depression, President Herbert Hoover, as well as most economists and business leaders, believed the downturn would be of a temporary nature. Hoover supported mainly voluntary efforts led at the state level to raise the capital needed to invest in industry and jobs (see, for example, Hoover’s letter to Illinois Governor Louis L. Emerson dated July 10, 1931 https://www.gilderlehrman.org/history-resources/spotlight-primary-source/herbert-hoover-great-depression-and-new-deal-1931%E2%80%931933.) Three years on, however, he realized that citizen and state initiatives weren’t enough to resurrect the economy, and gave in to cries that “the government should do more!”. (Have we been hearing that socialist refrain ourselves, lately?) In 1932, Hoover began reluctantly to get the Federal government involved in managing the American economy.

Hoover’s interventions included creating new banking institutions and new lending practices. One of Hoover’s early, and very significant, acts was to push legislation through congress for the creation of Federal Home Loan Banks. These banks were funded for the purpose of providing loans to local banks based upon those banks’ mortgage portfolios – something the Federal Reserve Act forbade the Fed from doing. The American ethic of the day encouraged banks to be small and local, and therefore they often lacked substantial reserves. Many were saved from going under by the liquidity provided by the FHL banks. (Later we’ll be comparing that to the effects of the bailouts of Freddy Mac and Fannie Mae.)  

Hoover’s administration also allotted $500 billion – a whopping one quarter of the Federal government’s total revenues in 1932 – to form a quasi-governmental entity called the Reconstruction Finance Administration (RCA). The RCA was a government-sponsored financial institution designed to shore up and ultimately restore proper functioning and public confidence in the banking system.

Among other mandates, the RCA allowed member banks to borrow cash in exchange for collateral not considered acceptable by the Fed. (Does this sound something like the banks of today borrowing against items like commercial or residential-backed mortgage securities and the like?) The lending focused on institutions that still had assets that could be used to repay creditors on the long run, but that were difficult to liquidate quickly enough to pay off current obligations. In other words, the RCA kept banking institutions alive long enough to unwind their illiquid assets to pay off their creditors. (Remember this when I discuss the failure of Lehman Brothers in 2008, below.) The RCA also issued tax-exempt bonds to raise the capital to loan funds to Federal Land Banks, which financed farm mortgages, and Federal Intermediate Banks, which financed farm crops in production, insurance companies, and railroads4,5.  

OK, but what does all this have to do with me?

If you’re wondering why this history is important, remember that, in the 1920’s and 30’s, most Americans still lived on farms, and railroads were the primary mode of transport of goods and people across the country. Farms formed the bulk of the housing market and railroads were the backbone of transportation, so supporting them to keep the economy going was as important then as keeping the residential housing market and the airlines going today. In other words, the RCA was the first major, organized government bailout of “too big to fail” industries (farming/housing and railroads)!

In an echo of criticism that could be raised today, Rep. Louis McFadden (R, Pa.), who was himself a bank president, called the RFC “a scheme for taking $500,000,000 of the people’s money produced by labor at a cost of toil and suffering and giving it to a supercorporation for the sinister purpose of helping a gang of financial looters to cover up their tracks.”6  In addition, Congress raised taxes on high income earners, and imposed new taxes on such things as movie tickets and telephone calls (considered somewhat of luxury items in their day). (ibid.) Sound familiar?

Despite responding to public and congressional pressure favoring expansion of Federal intervention in the economy, Hoover starkly understood the dangerous long-term changes his policies posed to the American economy and national character. After being soundly defeated by Franklin Roosevelt who promised Americans a “New Deal” for prosperity (which was actually Hoover’s deal plus massive additional deficit spending, Hoover assessed, correctly, that deficit spending would ruin the moral character of America and our economy. I a letter written to Bruce Barton several months after Hoover left office, Hoover predicted that once the middle class perceived its economic doom, the vast bulk of the population would swing so far left that America would support the rise of its own unique version of Hitler or Moussolini. This was a very prescient observation. For anyone who is a fan of historic film reels, I would encourage you to watch a couple of news broadcasts featuring Benito Moussolini, and then watch a stump speech made by Donald Trump. I, myself, am a FreeThinker so I’m not claiming any political side, but I’ll leave it up to the watcher to be the judge as to whether or not there may be some resemblance between the two.

Banking Corruption and Congressional Response – Then and Now

Between the crash in 1929 and 1932, Congress held hearings and investigations into the Wall Street banks, to determine if market rigging and self-dealing by the Wall Street banks had contributed to the crash. The public, understandably, was outraged by the possibility and pressured congress to act. Congress did, and in 1934 passed the Securities Exchange Act. The Act created a new Federal Agency, the Securities Exchange Commission, set up specifically to register, regulate and oversee the purveyors of securities. The Act covered brokerages, clearing agencies and stock exchanges.

The Act recognized that securities prices were susceptible to manipulation and control. The ability to manipulate prices could give way to speculation, which in turn would cause a host of ills including the rapid and unreasonable expansion and contraction of securities prices (unfair to investors), unreasonable expansion and contraction in the amount of credit available for business growth (harmful to the economy), and make it difficult to calculate the correct amount of taxes owed to the government based upon fair valuation of the underlying securities (oh, boy! Now THAT would be a problem from the government’s point of view.) An additional concern was that securities price manipulation could prevent the fair evaluation of collateral for bank loans and thereby obstruct the smooth functioning of the national banking and Federal Reserve systems. We saw on the night of Sept. 16, 2019, what happens when the interbank lending system breaks down, and the result was the launching QE4 and explosion of the Fed’s balance sheet, which the taxpayers will have to repay at some point. Last but not least, the Act recognized that manipulation of securities prices and subsequent speculation could prolong and intensify national emergencies that create widespread unemployment, dislocate commerce and industry, and affect the general welfare.  Does this sound like something we should be concerned about today? Interestingly, in an example of how badly good legislation can be perverted by those it was meant to control, on May 5, 2020, the Securities and Exchange Commission granted several mega-banks, hedge funds and even a high frequency trading firm the right to jointly open their own stock exchange (ticker symbol MEMX)7. It went fully live on Sept. 29, 2020. Founders of MEMX include JP Morgan Bank, Goldman Sachs and UBS, as well as hedge funds Citadel Securities and Black Rock, which now handles all investments for the Fed. What’s so sadly remarkable is that each of the banks involved have been repeatedly investigated, charged and sometimes convicted of felony financial wrongdoing by the U.S. Department of Justice (ibid.) If you recall, I wrote earlier about how the banks created stock and bond programs to get around regulations preventing them from making big, and potentially risky, loans to growing industrial enterprises at the beginning of the industrial revolution. The result was the Great Depression. Are we seeing déjà vu all over again?

Franklin D. Roosevelt Sets Out To “Progressively” Improve the World – And We’re Still Living With the Fallout

In 1933, while congress was still debating the Securities and Exchange Act, newly elected President Franklin Roosevelt set out to improve on the emergency measures enacted by Herbert Hoover in 1932 and restore full confidence in the banks. Soon, cash began flowing into the banking system again. Roosevelt shut the banks, including the Federal Reserve, for four days (the infamous “banking holiday”) while calling a special session of congress to deal with the ongoing crisis. One of the little known, but deeply important, parts of the Emergency Banking Act legislation they passed was Section IV, which gave the Fed the flexibility to issue emergency currency, known as Federal Reserve Bank Notes (what we know today as dollar bills, or cash), to be backed by any assets of a commercial bank. In this one move, Congress effectively took America off the gold standard, and gave the Greenback all the security of, well, whatever collateral the banks happened to have on hand. It’s quite a sobering thought to realize that the United States is still operating on ‘emergency money’, and, by extension, so is the rest of the world when we consider the pre-eminence of the dollar in global trade and finance.

Interestingly, a debate within the Federal Reserve in 1932 over how to deal with the deepening depression, foreshadowed the circumstances of today. The leaders of two Federal Reserve member banks, as well as several Federal Reserve Board members and many in Congress and the public, wanted to Fed to vigorously fight the Depression by extending more credit to member banks, expanding the monetary base, and providing liquidity to all financial markets. Sound familiar? Many business leaders, financial executives, academic economists and policy makers at the time, however, warned that such a response would either prolong the contraction or create inflation that would lead to future cycles of great booms and busts. Can you start to see how the foundations were laid for the problems our economy has been experiencing since the late 1990’s?

The Rise of Red and Black Crises

As we’ll see shortly, the prediction that the economy would devolve into an unending series of massive booms and busts if the Fed tried to “stabilize” it by unleashing huge quantities of credit and liquidity, ostensibly to stimulate growth, turned out to be a prescient observation. There were two details, however, about the social and economic effects of loose liquidity that couldn’t be forseen when the original policies were being crafted. The first, was how “accommodative” policy would affect a nation that would eventually become dramatically different in terms of demographics, technological innovation, job types, and culture.  Second, was how the Fed itself would increase the complexity, sophistication and simple blunt force of its responses to the problems created by its own loose policy.  Such complexity, which evolved largely in response to the desperate desires of the Fed, the banks and the political class to keep banks and markets afloat in increasingly challenging scenarios – regardless of the social or economic fallout – has led to what one financial analyst has construed as a series of up and down waves of potential financial crises and opportunities created by the Fed’s attempts to eliminate economic downturns. The phases of the cycle in which the Fed attempts to contain or mitigate oncoming “hot Red” crashes, are called “black containment crises” by the developer of the theory, Daniel R. Amerman, CFA. “Black crises” owe their existence to the Fed using whatever policy tools and levers they have (and maybe ones they don’t really have, but managed to appropriate when congress was busy not looking), to stave off the normal periodic slide into full-on, “red” crises (crashes). If the black containment attempt fails, then the financial system slides into a traditional, full on, hot “red” crisis/crash. The cyclical drift between cold, “black” attempts to contain financial crisis and the “hot red” failure of such attempts, gives rise to a predictable series of risks and opportunities which savvy investors can play to increase their wealth. Understanding the history of financial depressions and the Fed’s responses to them, allows individuals to effectively use the Fed’s containment and crisis mitigation strategies to create personal wealth. For more information and deeper insight into Mr. Amerman’s Red and Black “Crisis and Containment of Crisis” Matrix and how to use it to build security in times of financial turmoil, please visit his web site at www.danielamerman.com.

Just When You Thought It Couldn’t Get More Screwed Up, The Fed Goes Even Further!

If loosening the money spigots to fight the onset of a full-blown, hot “red” financial crisis hasn’t proven to be deadly enough to the economy overall, today the Fed has increased the sophistication and range of its interventions beyond the dreams of avarice to re-animate our increasingly moribund economy. Interventions now include such things as removing the stigma of using its “discount window” (which is sort of like a Catholic confessional, only where banks that have gotten into trouble can ask the Fed for forgiveness – and loans to alleviate their sins when nobody else will talk to them). The Fed is also propping up failing businesses by  purchasing toxic assets, including corporate junk bonds. Well, maybe it purchased only a relative few junk bonds, but purchasing even one goes well beyond the Fed’s legal purview and demonstrates just how far out on a limb it’s now going to shore up a clearly sinking economic ship. Interestingly, some of the exercises the Fed is currently engaging in may be more about giving the markets a series of ‘head fakes’ to get the desired market response without committing the Fed to actually doing much. (The practice of getting the markets to move just by saying that the Fed will or won’t be doing something is called “jawboning”, and it’s a policy tool that the Fed has come to rely upon more and more over the past several years.)

So, What’s the Alternative?

OK, so far, I’ve talked about all the bad things that fractional banking and Fed crisis intervention have caused (or could cause) to happen to our economy. It would be entirely fair to ask at this point, “sure, but what would happen, or will happen, if the banks and the Fed start doing things differently?” The question might be rephrased as, “If all the banks (especially the bullion banks) were no longer allowed to practice fractional reserve banking and the Fed was no longer attempting to prevent the economy from sliding into a full financial depression, would we actually have a “Red” crisis/crash? And, if so, how long and how deep would it be under current circumstances? How long a recovery would take, absent Fed intervention?” This leads to a natural corollary question: “Which would be worse at this point: to voluntarily let the whole system experience the necessary cleansing process now, or to keep prolonging fake prosperity by increasing the size and variety of “black” interventions until the “red” crash simply cannot be postponed by any type of interference any more?”

The answer is: nobody knows. However, what can be said with certainty is that the more the Fed fights the onset of a full on “Red” crisis by pouring on more “Black” interventions (such as flooding the economy with paper, propping up non-performing businesses and loans, and even joining with congress on ill-conceived fiscal policy like Universal Basic Income), and the more the bullion banks join the effort by suppressing the free market prices of precious metals, the longer and deeper the eventual crash will be. Also, the weaker and more prolonged the recovery will be, especially in an age when much of our social, intellectual and industrial capital has decayed even before the crash has arrived. We are no longer a nation of young, hearty, ambitious citizens blessed with an almost limitless supply of belief in ourselves and raw materials with which to turn our visions into concrete reality. We are now a much more aged society afflicted with dep social and political divisions and diminishing natural resources. Our creative and intellectual capital has also been depleted by decades of “progressive” education. Out of what will we rebuild, after a devastating financial crisis that will actually be global in scope? The answer is anyone’s guess. Yes, we’ve been here before, and pulled through, but the changes from then until now must be taken into account when analyzing how similar circumstances will be handled this time. From what I’ve seen, the technology-based “solutions” being offered by the global financial elite (example – digital government currencies to replace paper currencies) are far from reassuring or just. But that will have to be the subject of another paper.

Back to the Future

With so many young people demanding that America transform into a socialist economy, it might be good to remember that the bow to socialism actually began with our grandparents demanding that President Hoover and the Fed artificially end the hardship of the Depression by printing money and starting “make work” programs by which to distribute it.  In this way, Hoover’s programs, which were aggressively expanded by Franklin D. Roosevelt under his “New Deal”, ushered in the current era of big government and the entitlement culture, a consequence of government management of the economy that Hoover himself was deeply afraid of6. The progressive era that our grandparents, and then parents, largely supported by electing Franklin D. Roosevelt to office an astonishing four times (proving that humans often don’t learn very well), paved the way for many of the excesses and resulting problems we’re grappling with today. So, perhaps we shouldn’t lay all of our fears and frustrations about economic and civil decline upon today’s generation. There is plenty of blame to go around. In a future paper I’ll be examining how Congress and Presidents during the Bush, Clinton and Obama eras colluded, in concert with progressive social leaders, to twist the concept of the American Dream into a nightmare that catalyzed the 2001 financial crisis, blocked the prospect of true recovery, and has kept the economy increasingly in need of life support and in the continual grip of ‘black crisis management’ to our collective long-term detriment. Stay tuned. In the meantime, I hope you’ve enjoyed and benefitted from my small attempt to place our current economic crisis in some historical perspective.

References:

  1. https://www.ccn.com/us-dollar-will-crash-2021-senior-yale-economist-warns/
  2. https://www.bullionstar.com/gold-university/bullion-banking-mechanics
  3. White, Eugene, J. Economic Perspectives, 4(2), Spring, 1990
  4. https://bankingjournal.aba.com/2020/07/a-short-history-of-economic-rescues/
  5. (https://www.federalreservehistory.org/essays/banking_acts_of_1932https://www.federalreservehistory.org/essays/banking_acts_of_1932
  6. https://fee.org/articles/the-first-government-bailouts-the-story-of-the-rfc/
  7. Martens, Pam and Russ, “Wall Street’s Felons Go Live With Their Own Stock Exchange This Month” Wall Street on Parade, 9/2/20
  8. https://www.gilderlehrman.org/history-resources/spotlight-primary-source/herbert-hoover-great-depression-and-new-deal-1931%E2%80%931933

As infinite money chases collapsing production, gold is on call

Authored by Chris Powell of GATA

A few observations on the turmoil in the financial system.

1) Because of the virus epidemic, economic production is being sharply curtailed around the world and likely will remain sharply curtailed for some time.

2) Accordingly, personal incomes are being sharply curtailed too, so there is talk of “helicopter money” to replace incomes. But “helicopter money” won’t restore production, just support demand and reduce personal debt defaults.

3) Every hour billions or trillions in dollars and other currencies are being created and thrown at problems here, there, and everywhere, even as production declines. This may evoke Kipling’s observation from “The Gods of the Copybook Headings”:

But though we had plenty of money,
There was nothing our money could buy.

His poem, written a century ago, is an even better reprimand of the current age:

http://www.kiplingsociety.co.uk/poems_copybook.htm

4) Corporate debts are becoming unservicable as business has been suspended or cut way back. The Federal Reserve today undertook to assume many of these debts.

5) Negative interest rates, common elsewhere, now are coming to the United States too, so the cost of holding dollars may exceed the cost of holding monetary metals. The disparagement of gold long has been that it doesn’t pay interest. Of course gold does pay interest for financial institutions in a position to lend it, just as government money has paid interest, so this disparagement has always been false. But now government currencies not only fail to pay interest but are openly devalued when banked.

6) All this would seem to foretell inflation, debt defaults, bankruptcies, currency devaluation — and gold and silver revaluation, either by government devaluation policy or by the markets themselves when the paper market for the metals is overtaken by the physical market. The recent sudden disparity between metal futures prices and physical coin and bullion prices again indicates that there has been massive government intervention in the futures markets and that futures prices are illusions.

7) The success of a system of infinite money requires infinite commodity price suppression to defend government currencies. Gold price suppression has been central bank policy since the London Gold Pool of the 1960s. But not only are government currencies becoming harder to defend amid the dislocations caused by the virus epidemic, governments no longer may want to defend their currencies so much. They want to reflate asset valuations. But even before the virus epidemic, equities and bonds already were highly overvalued by traditional measures, and how can they be worth as much as they were now that world production is declining? Only devaluation of currencies can accomplish reflation.

8) As has been noted by economists many times, rising monetary metals prices can help governments devalue their currencies and the economy’s debts. See the Scottish economist Peter Millar’s 2006 analysis of this issue:

http://gata.org/node/4843

9) But governments will pay a big cost for obtaining help from the monetary metals — the cost of long-term competition for their currencies and maybe even the cost of the return of market economies and limited government.

Whatever happens, may it be done in the open, for all to see and understand, and after decades of official lies, rigging, and corruption, fiat justitia ruat caelum

Reprinted by permission of the author

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
CPowell@GATA.org

12:02p ET Tuesday, March 17, 2020

Grievance and Political Correctness: A Movement, Or A Business?

Social movements: whether you love ‘em or hate ‘em, the reality is we’re all going to live through several in our lifetimes. Maybe we’ve even participated in one or two when we were younger (I’m looking in the mirror right now). While some social movements enjoy their moment in the sun then fade into the annals of history -think of the Temperance Movement or Impressionism- others seem to have great staying power. There are many going on right now, in fact, that have been around for decades and show no sign of losing steam. Think of the War on Cancer, the Sexual Revolution or the Civil Rights movements, for example. Despite the many social changes they’ve already created, the millions of dollars they’ve collected and spent, and the evolution in tactics and leadership they’ve undergone over time, they carry on and on. They seem to be like vast trains always consuming money and resources and chugging along a track, but never seeming to reach a final destination.

Why is it that some movements never seem to be able to declare “mission accomplished”, stop taking up resources, and go home?

Social Movements And The Economy

This is an important question to consider because social movements are expensive. They affect our economy more deeply and in more ways than most people realize. Indeed, they can also be a hidden drag on our national resources, as I’ll discuss below. While many Americans struggle to save for retirement, public schools lack books and roads and bridges across the nation crumble from neglect, social movements suck down millions of dollars of private and government support every year to advance their agendas. Do they deliver commensurate value? That depends on who you ask, and how they define “value”. There’s no objective way to answer that question. However, analyzing a large social movement as if it might be a type of business could help us understand what gives some of them staying power and such a command over public hearts, minds and resources.

If you asked most economists, or spoke with most social scientists, business people or social activists themselves, they would agree that social movements are quite different from businesses. For one thing, social movements depend primarily on volunteer labor that can’t be commanded or well controlled. Businesses, on the other hand, operate on the tightly controlled efforts of paid employees. Social movements also don’t keep books. (While the various organizations that help fund the movement or work on its behalf must account for their funding, the movement itself is an abstract entity, so of course it can’t track its inputs and outputs or pay taxes.)  Businesses, in contrast, must account for their spending habits.  Another big difference is that social movements don’t exist to create a financial profit. A final key contrast between social movements and businesses is that the purpose of social movements – at least in theory – is to put themselves out of business. After all, they exist to stop the conditions that caused them to come into existence in the first place.

Don’t they?

Well, let’s not jump to conclusions. The very longevity of some movements rightfully allows us to call into question how serious they are about eliminating the problems they’re trying to fix. And the fact that so many large social movements continually operate in ‘crisis mode’ should also raise eyebrows. Why do many movements never seem to have enough resources to accomplish their missions? Why do their needs always increase, but never decrease? And why does the solution to the problem they’ve been flogging for decades always move off into the distance with every victory declared?  How can this be? It’s a curious phenomenon. And a very expensive one, with significant impacts on your retirement savings, the national debt, and the wealth gap. Yet the tax dollars and voluntary contributions to support the movements simply ignore their obvious paradoxes and just keep rolling in. Why is that?

Incompetence and Corruption – Answers, Or Just Symptoms?

Some people would blame simple incompetence for the lackluster performance of many social movements.  Maybe the leadership simply gets in over its head in too many situations. Certainly incompetence is a problem and there’s some of it in every organization, but can an entire movement be so successful for so long if it runs mainly on the inability to make good decisions? Probably not. An alternative (or, more likely, complementary) explanation is corruption. Many would agree that there’s a strong case to be made for the role of theft and fraud in squandering resources meant to be used to fight a problem, especially if a movement enjoys the support of several large formal organizations. Think of the scandal that happened in 2010, for example, when it was revealed that after the giant Haitian earthquake, several members of Oxfam – a leading organization in the movement to end hunger – spent some of the organization’s hunger relief money to hire prostitutes and promote wild sex parties?1,2 The Haitian government was so outraged that they banned Oxfam from every operating in Haiti again. Interestingly, Oxfam had already had a similar “slip up” when providing relief efforts in Chad a few years earlier, yet the organization was still receiving millions of dollars in both British government support and private donations from around the world.2  How much progress was that money actually providing towards he goal of ending hunger? How much harm was it doing along the way? Sadly, Oxfam’s basic story of corruption isn’t unique. But can we conclude that the overall failure of so many movements to achieve their goals is really due to individual acts of corruption? I don’t think so. In fact, I think corruption is only the symptom of a much deeper, and more subtle, problem. I believe the forces that operate to prevent a movement from reaching its stated goals are a function of the way many mass movements are organized and structured. Could we understand this better if we chose a non-traditional way to look at the movements? What would we see if we looked at large, persistent social movements not as simply a loose mass of people all voluntarily trying to ‘do good’ and solve a common problem, and instead looked at them as forms of businesses aimed at enriching themselves with wealth and social power?  Interestingly, if we start to look at large social movements as types of business ventures, we can start to find some answers to the questions raised above.

Social Movements As Businesses

I’m going to single out one particular movement- the political correctness movement, which rests on the mass generation of grievances – to see if examining it as a business helps make sense of why it’s flourishing despite its obvious inability to achieve its basic goals of promoting racial, gender and income equality and social harmony. Why choose political correctness? Because it’s probably the largest, most visible and most pervasive social movement in modern American society. It has deeply infiltrated our social lives, our personal identities, our educational system, and our entertainment. It shows no signs of abating and grows more powerful all the time. And for all the time and money donated to achieving “equality” and every change made in society made to accommodate the many demands of the movement, as a whole, the movement simply claims that the wrongs it aims to right grow ever worse. Political correctness has now even created a lens through which other social movements are practically required to operate if they hope to survive in a society increasingly controlled by PC dictums.  For example, consider how often we’re now asked to respond to environmental disasters, the scourge of chronic disease, or poverty and hunger, not because they affect us, or even because they affect others, but only because they affect others of specific, politically preferred, classes?  Want an end to water pollution? Caring about dirty water is now a racial issue. It’s important only because (in the minds of environmental leadership) it differentially affects the health or well-being of racially preferred communities. A community’s water needs are now important only in proportion to the extent to which that community can lay claim to being “victims” of a perpetually unjust “system”. Likewise, sharing food simply so your fellow man has bread to eat, no longer makes the cut. The bread must be divided and distributed in proportion to the political appeal of the narratives of injustice put forth by various communities when asking for some free bread. These are two common scenarios, but the examples go on and on.

So let’s ask some basic questions. If political correctness (or any other large movement) is a type of business, then it must have products, customers, and ways to “sell” its product(s) to its customers. It must rely on workers, and have some way to manage, advertise and distribute its products. If it’s a very large movement with many products, it may be organized and function more like an entire industry than as just a single business. Is it possible that the PC movement has found a way to harness grievance, or the power of mass complaint, and turn it into a household commodity that is created, marketed, distributed and sold to various consumer groups by a complex and sophisticated grievance business? Although the profits of the grievance industry have to be measured mainly in terms of social rather than physical capital – in other words, in terms of power, prestige, psychological satisfaction and that all important ability to dominate all social thought –in all other respects, if we consider the modern grievance movement as a business or industry, that does seem to help explain why it’s become as much a part of our culture as Google, Kleenex or microwave ovens. It also helps to explain why grievance is equally likely to never go away.

The Grievance Industry

Grievance, of course, is nothing new. Many mass movements have been sparked by grievances. But when the grievances were satisfied, most of these movements died out. Mission accomplished. Our modern political correctness movement, however, which encompasses many different grievances, is different. It has no natural end point and no means of satisfaction. Every shift society makes to satisfy a grievance is met with scorn and cries of “That wasn’t done right!” or “It’s not enough! You must do more!” If you think about it, that’s not unlike the way many financial investors turn their noses up when a company reports a nice increase in quarterly earnings. It’s not uncommon for investors to react to such good news by downgrading or selling the company’s stock because the increase “wasn’t good enough” (even if it beat expectations!). While we often wag our fingers (and rightfully so) at the levels of financial greed displayed by Wall Street, the levels of greed for control over society’s thoughts and actions displayed by the grievance movement, are easily as extensive and shocking.  

Grievance is, in many ways, the ideal industry because it’s built upon a manufacturing model in which the raw materials –ideas and emotions – are intangible, ubiquitous, endlessly renewable, potentially available for anyone to exploit, and free. At it’s core, grievance is a collusion between rank capitalism and voluntary slavery. Ironically, the movement has been conceived, nurtured and skillfully harnessed by groups of people who claim to reject both capitalism and slavery. At the top are the captains of the grievance industry – the robber barons who exploit various masses for their willingness to exchange control of their lives for various special privileges the industry secures for them. Industry leaders create scripts for the aggrieved to live by – as victims of racism, for example, or an oppressed and excluded minority – and the ‘workers’ (the aggrieved) take liberties that are offered to them in compensation and off limits to the rest of society. Forgiveness or exculpation for transgressing the law; subsidized living expenses, and the right to form exclusive societies within a culture that otherwise forbids exclusion, are examples of the privileges the aggrieved may be granted. There are many more. But the general idea is that, in exchange for helping the elites of the grievance movement to advance a narrative that they can use to police and create a monopoly over social thought and behavior, the aggrieved give up their right and ability to live their own lives. As individuals or communities, they many no longer form their own identities, discover their own values, forge their own futures, or make up their own minds. What a Faustian bargain it is. The aggrieved give up their lives, and the robber barons get an endless source of emotional raw material to mine, process for public consumption, export and exploit to create power, purpose and income for themselves and the “staffs” of mostly unpaid, ernest volunteers who do the day to day work of advancing and managing the movement.

The aggrieved may be looked at as an endlessly renewable natural resource, if managed properly. The industry can use them in three ways: find them more to complain about, encourage them to complain louder, or recruit more of them to complain. Recruitment is the most important component (there’s power in numbers), but how does recruitment occur? If we look to the direct marketing industry, we may find some answers. Direct marketers are the companies that want you to pay a little fee for the privilege of buying their laundry soap or protein bars. They survive by getting you to buy in and keep purchasing their soap and bars every month. They grow when you persuade your friends, family and strangers to think that they, too, want in on the deal. To incentivize recruitment, the company shares a tiny sliver of its profits with you for every paying body you bring in. The grievance industry operates similarly. Instead of soap and protein bars, though, it “sells” ideas, emotional satisfaction, and the power of belonging to the mob. As long as the mob has ever more grist for its mill and keeps getting larger, the grievance industry keeps expanding its market share in the marketplace of ideas. Its ultimate goal? The same as the peddler of soap and protein bars: to achieve a monopoly on selling the product. Only in this case, the product is the right to police and exercise control over all social thought and behavior.

Who Pays for Grievance?

Creating and managing the grievance industry isn’t cheap. “Workers” (the aggrieved) must be paid with subsidies, freebies and special social privileges to secure their output and loyalty.  A worker in the racial grievance division, for example, might require rent, food and health care subsidies. Plus maybe a few freebies thrown in (anybody remember Obama’s free cell phone program?) A worker in the gender grievance division might require a group of supporters to visit their representatives to lobby for a favorable bill. So where does the money to pay all these workers and their required expenses come from? Most of us pretty much know the answer intuitively: it comes from the pay of working taxpayers (you), coerced into parting with some of your earned cash by the police powers of the state. In other words, forced taxation. And why does the state choose to redistribute the incomes of productive laborers to grievance workers? Because, like all industries, the grievance industry has created a strong lobby for itself. The workers, the leaders (mainly academic ideologues and wealthy contributors), the celebrities, and the “administrative staff” (rank and file, mainly volunteer, co-dependents who carry out the professional roles and day-to-day tasks) all assail the state in various ways with reasons why they should be allowed to co-opt public support for their workers/clients. Protests, ad campaigns, and, yes, good old-fashioned mass letter writing and meetings with public officials, are all part of the lobbying effort. (Who hasn’t, for example, seen commercials touting schoolkids who will starve unless somebody else’s parents buys them a school lunch? This is a complaint by parents who feel they can’t provide lunch for their children, and their solution is to have you do it for them.) A more informal, but increasingly invasive, form of lobbying is the day-to-day, informal Maoist-style barrage of public shaming being carried out everywhere by the “social justice warriors” and well-meaning, mob-loving do-gooders. Pressuring you into supporting them by buying your laundry soap from the same company they buy theirs from, secures themselves the approval of the crowd and a place in the emerging  new order. The ultimate object of all this activity is to convince the government to engage in gross legislative overreach and create a permanent industry bailout fund in the name of “saving the vulnerable” (the aggrieved). It’s no accident that the grievance industry operates at a loss. If it returns, in aggregate, less in human growth and productivity than it spends in taxpayer labor and money, it creates an ever deeper hole into which to throw resources. At the same time, it grows the need it’s supposedly trying to eliminate. Operating this business at a loss makes sense because if it did otherwise – if it excelled at turning unproductive people and communities into highly productive people and communities – where would the new recruits to keep the business going, come from? It’s rather like asking, if the Fed throws money at the banking industry only after the industry operates at a loss, why should they strive to be good stewards of your savings? (Are you listening, Wall Street?) What’s ingenious about this model is that it forces taxpayers to become permanent consumers of grievance by becoming mandated paying customers via taxation. There is no consent, and no method to opt out except by revolting outright and facing punishment by the state. Every dollar earned through productive work must be partially commandeered by the state – who takes its job very seriously – to underwrite the paychecks for the grievance industry workers so they can continue to go to work, the industry can flourish, and everyone involved can get what they showed up for: cash, freebies, the opportunity to evade personal responsibility for one’s actions, or the honorable badge of self righteousness and moral authority. How can anybody put a price on that?

Which raises an interesting question: What happens if a grievance worker gets tired of their job, and chooses to go on strike? No industry can survive if that happens very much. So, the consequences for the worker are very similar to workers on any other job: no work means no pay. No more subsidies, or rights to feel OK about oneself. In fact, if a worker tries to strike, the industry leaders and fellow employees are likely to engage in an “asset seizure” of sorts. The miscreant might be stripped of reputation, rights to participate in community, or their tangible pay (cash, subsidies, freebies). And just how would a grievance industry worker “quit”, anyway? There are lots of options. A grievance worker might decide to get an education, to see what alternative “jobs” might be out there. Maybe they learn a skill and become self-supporting. Perhaps they give their child the perspective that their birth situation isn’t very good, and the dream of moving beyond their community when they grow up. Quitting might also take the form of switching to a different religious or political party that emphasizes the ability to do better for themselves. Or could quit simply by choosing to try seeing the point of view of someone who disagrees with the grievance narrative. The latter is generally considered an unforgivable sin by grievance industry members, not much different from, say, peeking at classified intel. Some things are just not meant to be known by the plebes. What happens to workers when they try to think above their pay grade? The industry reacts pretty harshly. Look at the number of ways that the racial grievance industry has, for example, threatened and attempted to politically assassinate black political leaders who have seen value in conservative views. Collusion with the enemy – the “other” who makes the grievance narrative ring true – is treason.

Grievance, Interest Rates and Economic Bubbles

AS I mentioned earlier, the grievance industry is expensive to maintain. This might not always have been a problem, but under our current economic circumstances, it’s a critically heavy burden for the public to bear. We need to make some decisions about how much longer and to what extent the taxpayers will continue to bail out the grievance populations.

When the grievance industry was in its infancy, America was a very different place. Our work force was younger, technology was increasing productivity rather than stealing jobs, and retirement lasted, on average, five years or less. Future boomers were still in their prime working years and the economy was expanding nicely. National debt was relatively low and the interest rate averaged about 7%.  Today, our work force is much older, the boomers are retiring in droves and life after retirement age has lengthened by almost twenty years. The dollar has shrunk significantly in value and the national debt exceeds our annual GDP. It’s actually expanding now by around a trillion dollars a month. The U.S. has spent far beyond its means, in part to support a growing grievance class that consumes copious quantities of economic resources while contributing extremely little to grow the economy.

The downward pressure in interest rates, as a direct effect of our growing debt, is a particular problem for workers hoping to retire some day. Between the mid-1960’s and 2000, when the tech bubble burst, the average interest rate was about 7%. To keep interest payments manageable as the national debt grew, and to help prop up the economy after the bursting of the tech and housing bubbles, the Fed lowered interest rates to their current, historic low. Driving rates down was a necessity undertaken in the belief that it was better to prop the economy up in the short run and worry about bubbles later, than to let the economy founder and reset for the long run. Corrections cause a lot of temporary pain, and creating pain for the taxpayers is never politically popular. Near zero interest rates are now required not only to keep the stock market and debt-soaked banks and corporations from failing,  but also to keep the cost of the interest payments on our egregious national debt somewhat affordable. (Remember that as the debt increases, the interest payments on the debt also increase – exponentially.)  The situation is now so dire that some economists are calling for the U.S. to impose negative interest rates as Japan and Europe do. Alarmingly, there’s not a lot of pushback to that idea coming from either the Fed or the White House. Whether or not the U.S. ever actually crawls down into the rabbit hole of negative interest, from which there is no known escape, interest rates will probably never rise again until buyers of our debt go “on strike’ and the Treasury is forced to raise rates to coax their money out of their wallets. At that point, as interest rates rise, our economy will start to spiral into an unrecoverable black hole.

So how do low, low interest rates necessary to keep our debt payments under control, affect you? If you’re saving for your retirement, your job is now a lot harder. Savers can’t get interest returns on their savings to grow their nest eggs. Millions of hardworking, productive citizens will be condemned to live out their old age in poverty. This is a financial and ethical disaster beginning to unfold right now and will destined to explode when the Social Security Trust Funds run out around 2024 (according to the Congressional Budget Office – and assuming we don’t go into a recession between now and then. Good luck with that!) The anti-poverty grievance movement will quickly gain millions of new members. In the meantime, investors who fund our debt by purchasing Treasury securities are likewise being punished, because they, too, also getting cheated on interest returns (yield). While the astute among them will purchase low-yielding Treasurys today to sell them to greater fools when rates drop tomorrow, that game lasts for only one or two rounds. Who will keep buying ever greater numbers of Treasurys then, and continue to fund our ever growing debt, when they’re just guaranteeing themselves more and more loss in the future?

Soooo, if it’s not worth putting money into a savings account or Treasurys, where will investible income go? Probably to the stock market, which is always ready to swallow up cash that’s looking for work to do. This creates stock bubbles that make stock owners feel wealthy as long as their stock keeps rising as the bubble keep expanding. And when the bubble pops? Will we bail out everyone who invested in the stock market and got hurt? Would that be ethical, or even possible? If we could afford to do that, then why can’t we afford to do away with the markets altogether, simply pay everyone a Universal Basic Income, and not require anyone to go to work any longer?

Of course that’s not possible, or even realistic. But neither is keeping an economy running on zero interest. Mom and Pop will want to chase the rising market, and everyone up the financial food chain above them (their investor, his or her broker, the research team who ferrets out the investing data, and so on) will get their cut of the fees. Risky investments and exotic financial schemes that promise higher returns will proliferate. Aggressive Wall Street speculators will be rewarded and the rich will get richer. As mortgage rates drop on lower interest rates, home prices soar. That’s great for sellers and flippers (for example, Zillow and Redfin both plan to aggressively re-start the flipping sides of their businesses as the virus lockdowns ease), but it’s not so good for low income or first time buyers. Nor is it good for the banks and mortgage companies that have to lend more and more money to less and less credit worthy borrowers to keep the cash rolling in. Eventually, a housing bubble forms. So do stock and exotic credit scheme bubbles. Finally, the Federal Reserve is placed in a quandary: should they let the bubbles pop, the banks fail, and corporations, investors and working people (especially retirees) get badly clobbered? Or should they prop up the markets with money created out of the nothingness?  That money may be “funny’, but it isn’t free. It must get paid back through taxation or inflation, but most people don’t make the connection between a rising debt and rising taxes or falling value of the dollar. Therefore it makes political sense to fleece the people slowly rather than hurting them in ways they see. The effect is that more and more people get pushed into debt in a vicious cycle of driving up the debt to support the grievance industry, then going into poverty to pay off the debt. Is the irony lost on the grievance industry? Or, is it possible that poverty is of concern only if the impoverished agree to become industry workers and create grievance? Will YOUR debt manage to those who are complaining today that you’re not giving them “their fair share”?

If this is all remotely plausible, is there an actual industry to which grievance might be compared?

Grievance and the Art Industry

Yes, I believe there is an industry to which grievance can be compared, to see if my argument holds water: the art industry. They’re actually a lot alike. Like the grievance industry, the art industry is diffuse in terms of objectives, participation and leadership. However, both can be considered cohesive economic entities. Art is considered a perfectly legitimate product whether it produces something tangible, like a statue or musical score, or only something intangible, like the emotions generated as a result of a shocking display. (Does anybody remember Andres Serrano’s “Piss Christ”, a photograph of a crucifix immersed in a tank of the artist’s urine? It won both a visual arts award from the National Endowment of the Arts and waves of angry protest from Christians in the U.S. and abroad.)  Similarly, in the grievance world, both tangible and intangible items are considered legitimate ‘products’. Examples might include a written speech, a newly discovered sense of anger, or a riot orchestrated to express frustration at a policy. Graffiti created by one person without permission on property owned by another, as a way of expressing the idea that one community does not respect the boundaries laid out by the other, is a good example of a grievance product that is both tangible (the graffiti) and intangible (the message sent). Grievance and art, in fact, are frequently inextricably intertwined.

The economic outputs and impacts of both the art and grievance industries are significant, but difficult to ‘value’ and quantify, What, after all, is “Piss Christ” worth? The ink and paper photo is intrinsically valueless, but the reaction generated was priceless – at least to the artist. Where these industries differ is primarily that the impacts of the art industry can be generally added to the economy, whereas the impacts of the grievance industry must be mainly subtracted from the economy. Most art adds to the GDP, whereas grievance expands the national debt, promotes reduction in interest rates, destroys the value of retirement savings, and increases the divide between rich and poor. Because the grievance industry creates more poverty than wealth for those outside the financial class, it internally generates its own ever growing income, customer base, and need for itself in a permanent vicious cycle. It could be argued that peer-to-peer direct marketing comprises its core business model and can explain much of its staying power. Analyzing grievance through the lens of economics gives us the potential to explain why the grievance movement persists in spite of failing to ever secure its objectives. Whether we want to join it or fight it, one thing is clear: we’re likely to be more successful if we understand it. Putting it under the lens of economics for examination may be a very productive way to do that.

Precious Metals: More Monetary Conspiracy Than Theory

By Stuart Englert

Demands for free markets and sound money are futile as long as precious metal prices are suppressed to defend the U.S. dollar. The U.S. government and its banking accomplices for decades have intervened in gold and silver markets to protect the world’s reserve currency from its primary nemesis: precious metals. Since the 1960s, the U.S. Treasury, bullion banks, Federal Reserve and other Western central banks have sold, swapped and leased gold to contain its price. In 1974, gold futures trading began on the COMEX in New York, allowing manipulators to create an endless supply “paper gold” to control the price of physical metal. Formed in 1999, the Gold Anti-Trust Action Committee (GATA) has documented the ongoing manipulation of the monetary metals while politicians and mainstream media organizations remain largely silent on the largest financial fraud in history. “There are no markets anymore, just interventions,” declared Chris Powell, GATA’s secretary/treasurer, in 2008. The evidence gathered by GATA is indisputable. Some is part of the public record, such as Alan Greenspan’s 1998 congressional testimony in which the former Federal Reserve chairman asserted “. . . central banks stand ready to lease gold in increasing quantities should the price rise.” Or the admission by Jeffrey Christian, managing director of the CPM Group, who during a 2010 Commodity Futures Trading Commission (CFTC) hearing on silver price manipulation stated precious metals “trade in the multiples of a hundred times the underlying physical [metal] . . .” Despite the extensive and growing body of proof, some continue to deny or disregard efforts to maintain the corrupt scheme. Ignoring the evidence, however, has become increasingly difficult as the spot, futures and retail price of gold and silver diverged in recent weeks. Sound money and free market advocates would do well to examine and disseminate the evidence in GATA’s archives. http://www.gata.org/taxonomy/term/21 They’ll discover rigging and suppression of constitutional money is more conspiracy than theory.

Printed with the permission of the author.

About the author

A veteran journalist and longtime libertarian, Stuart Englert is the author of “Rigged: Exposing the Largest Financial Fraud in History,” which was released in January. Englert’s book is available at: https://www.amazon.com/Rigged-Exposing-Largest-Financial-History/dp/1651405204/ref=tmm_pap_swatch_0?_encoding=UTF8&qid=1586863366&sr=8-1

A Brief Word Of Congratulations to Donald Trump

In response to rapidly changing current political and economic events, I’ve decided to publish a very short and light piece on the unprecedented changes taking place. Expect more detailed analyses in the coming weeks.

For now, I just congratulate President Trump. He did it! But I’m not congratulating him for what most people are thinking of. I congratulate him for yet again exhibiting a rare combination of luck and cleverness to be in the right place at the right time to capitalize on somebody else’s problem and make off like a bandit at his benefactors’ expense.

The man who helped troubled Deutsche Bank establish a presence in the American banking industry when American banks found him too toxic to touch, then repaid DB by cheating them out of some of the cash they loaned him, has now created the ultimate rip-off of the American people. Instead of protecting the economy and our Constitution by abolishing the Fed; instead of braving the wrath of investors and Wall Street via publicly ordering an orderly unwinding of the bubbles blown by Street players (bubbles blown with the help of a largely unwitting, but all too happy, public), Trump has allowed the Fed to de facto nationalize our economy to “solve” the current bubble crisis. This means the American people will now eat the trillions of bad debts created by the banking, education and business sectors of the economy. It also means that Trump allowed the Fed to make an end run around its own governing laws as well as our Constitution without so much as Tweeting to alert the public. In fact, Trump congratulated Fed Chair Jay Powell for helping our government literally take an axe to our legal system, usurp legal and constitutional authority, and pave the way for breathtaking new powers to the Fed itself and the office of the President. And all done in ways that the public hardly sees, let alone understands.

Sadly this was not situation that couldn’t have been forseen. Nor is it entirely the fault of Wall Street. War hawks and progressives together had a massive hand in this mess we now find ourselves in, by larding up public expenditures and bloating our national debt to the point of pushing interest rates to historic lows. This forced everybody (from banks to retirement savers) to load up on risk to achieve yield. That process, in turn, slowly but predictably paved the way for the entire global economic system to become unsustainable, while creating the perfect excuses for guilty parties on all sides to demand bailouts when the inevitable finally happened. It isn’t just the banking industry that’s gone bad, it’s our whole warfare/welfare economy that sunk us, though nobody on either side can see it.

If you thought the $4 trillion bailout in 2008 was a lot, wait until you see the size of the bailout that coming. Taxpayers and Main Street will rapidly be deep sixed to pay the tab, which is already near or above our annual GDP. This new debt will sit atop the nearly $4 trillion that the Fed couldn’t pay down from the 2008 debacle, and will meet the $4-5 trillion in unfunded Social Security obligations coming due around 2024 and currently staring at an empty Social Security Trust Fund. As a result of the measures being taken to keep the economy falsely propped up for a few more years, however, The Trump family, unlike most of the rest of us, will walk away in better shape than ever. In exchange for encouraging economic policy to head towards unprecedented low interest rates and high inflation (both of which decimate workers), they’re now getting the fiscal environment perfect for big real estate developers to make vast sums of money in. The Trumps will walk away with more economic opportunity than they know what to do with, while more Americans than ever will become homeless of barely get by.

So to all the war hawks, progressives and Trump supporters out there, I say enjoy the new socialist government and economy on your paltry $1,000 a month helicopter checks. Its going to be a veeeerrryyy expensive new form of society, and you helped buy it! A bag of burgers and fries will soon be costing more than your current weekly meal budgets while college, health care, and big homes with granite countertops will become a dream of the past for average families. Spring may be on the horizon for Wall Street and crony businesses once again, but the longest, deepest economic winter in American history will soon be arriving for Main Street. But I’m sure the Trumps will still welcome your support.

“Don’t Cry for Us, America”.