Editor’s Note: Although timing the market accurately is extremely difficult, a good foundation in Austrian economics (free market economics) can help you build a better portfolio and have better success at speculating.
Politics and monetary policy have a huge effect on our investments, so we must understand this if we want to make good investment choices.
There are few folks better at this than our newest contributor, Geoffrey Pike.
Take it away, Geoff…
Janet Yellen has officially been nominated as the next chairperson of the Federal Reserve.
It is widely expected she will easily be confirmed in the Senate.
While much of the media view her nomination as groundbreaking, due to the fact that she will be the first woman to head up the central bank, her nomination means we should expect more of the same…
You see, it’s not surprising that Obama would nominate somebody like Yellen. Her philosophy is in line with Obama and other advocates of big government, like Paul Krugman. She will almost always take a position that the Fed should create more money out of thin air.
Yellen and Obama believe people should not be free to make their own decisions. They believe in central planning — and that they should have a hand in that planning.
They do not believe resources should be allocated based on consumer demand in a free market; rather, they believe resources should be allocated by the state.
While many in the liberty movement are fearful of Janet Yellen (and rightfully so), it is hard to imagine she could be much worse than Ben Bernanke has been…
Of course, as with presidents and other politicians, sometimes it is hard to imagine getting anybody worse in office — until they’re actually in the position, acting with authority.
A Lower Standard of Living
In 2008, Ben Bernanke played a vital role in bailing out numerous companies, including the major financial institutions.
In the last five years, he has overseen a monetary policy that has more than quadrupled the adjusted monetary base. Most of this new money has been used by commercial banks to increase their excess reserves. This has prevented a multiplying effect and has helped keep consumer price inflation down.
Unfortunately, all of this new money causes bubbles and misallocates resources on a grand scale…
What’s more, it results in average Americans having a lower standard of living than they would otherwise.
We have yet to see the worst of the unintended consequences from this policy.
At this point, Bernanke’s Fed is still creating monetary inflation at the pace of $85 billion per month, which is about $1 trillion per year — a rate that is unprecedented and can only lead to further disaster in the future.
How Can Yellen Be Any Worse than Bernanke?
Truthfully, I am afraid to find out the answer to that question.
The good news is that the Fed chair isn’t the last word. That position is much like the presidency: It is mostly a figurehead position. They are told what to do. They may offer some suggestions and put things into their own words, but they will never stray too far from the establishment.
When the Federal Open Market Committee (FOMC) puts out its press releases every six weeks, it is almost always a unanimous vote.
In the last several meetings, there has only been one dissenting vote, citing concerns for possible inflation in the future. But overall, most of the members of the FOMC agree each time as to its policy going forward.
Is the Fed chair telling the other members how to vote, or are the other members telling the Fed chair how to vote?
Or are they being guided on what to do by general establishment opinion?
What Jimmy Carter Did
Back in the late 1970s, during a period of double-digit price inflation, Jimmy Carter brought Paul Volcker in to head up the Fed.
Volcker slammed on the monetary brakes. He refused to inflate.
His decision caused interest rates to go even higher, and it brought on recessionary conditions in the economy.
This probably contributed to Jimmy Carter’s loss of the 1980 election.
However, aside from actually shutting down the Fed, Volcker probably did the best thing possible…
He stopped the monetary inflation.
This exposed all of the misallocated resources, and the recessions that occurred basically cleansed the system of most of the bad investments.
In the process, it set the stage for some actual real growth and wealth creation.
While Volcker is viewed as a smart guy, did he really take a stand against the establishment and do his own thing out of principle?
And why would Jimmy Carter have nominated him in the first place?
My best guess is that there was major pressure put on Carter and Volcker and other people in high government positions.
If the high monetary inflation had been allowed to continue, it would have put the U.S. dollar at great risk.
The dollar likely would have lost its status as the world’s reserve currency. It would not be surprising if foreign governments and foreign central banks had sent a private message to the establishment in the U.S., warning them to stop inflating — or else they would start dumping U.S. Treasuries and cease use of the dollar for trade.
With the nomination of Yellen, there obviously isn’t too great of a fear at this point that the U.S. dollar will be lost.
If Obama were being warned to stop the monetary madness, he likely would not have picked someone like Yellen, straight out of the Keynesian handbook…
He would have picked someone more like Paul Volcker — or at the very least, someone who did not already have a reputation of being a money printer as the means by which to solve our country’s economic woes.
I don’t think the Fed will go to hyperinflation (at least, not purposely), as they would be destroying their own power and essentially ruining themselves. They don’t want the U.S. dollar to lose its status as the world’s reserve currency.
With that said, there does not seem to be much concern about the dollar losing some value (at least, not from Obama or the Fed).
The Fed really doesn’t know what it is doing at this point, and it doesn’t know what the consequences of its policies will be.
For the last several years, Bernanke has talked about an “exit strategy” from all of his so-called quantitative easing. Well, Bernanke will be implementing his exit strategy on January 31, 2014, when he leaves the Federal Reserve.
He’ll pass on a major mess to Janet Yellen, whether she knows it or not.
I expect in the next few years that we will either see a worsening economy or an increase in consumer price inflation, or both.
The good news is that when this does happen, we will have a proponent of big government and Keynesian economics heading up the Fed.
The philosophy of Yellen and Obama can take the blame, just as it should.
Until next time,
Geoffrey Pike for Wealth Daily