FOOLS' GOLD, Bernanke's Folly?
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At this moment,Fed Chair Bernanke is inching closer to “quantitative easing” or monetizing part of the national debt by using his agency's money creation powers to buy US Treasury bonds; this amounts to using an outmoded play-book to avert systemic deflation. He has hesitated for good reasons- the measure may or may not help the economy in the short term, but it certainly risks igniting a dangerous inflationary trend.
This all started, you may recall, when the movers and shakers of our financial system made the mistake of relying on monetized real estate assets as if they were the new gold standard.
We then experienced the comprehensive deflation of a single asset class, an overdue adjustment that could have been contained. Instead, policy makers vainly attempted to reverse the decline – postponing the inevitable adjustment – and worse, they took measures that had the effect of spreading the risk to the rest of the economy. This was like the fatal error of the infamous captain of an ocean-going ship who, when a single water-tight compartment is breached, decided to open all the rest to help the “victim compartment” recover.
This is why our ship is at risk of capsizing.
A Cautionary fable for our times
Once upon a time, the kingdoms of the realm were under relentless pressure from their subjects to distribute more and more wealth at lower and lower cost. So the kings and queens all agreed to abandon the gold standard in favor of 'trust currency” issued by their royal banks. At the same time the kings and queens of the realm imposed a suffocating system of taxes, enforced wealth 'sharing', petty regulations and permits on the oppressed commercial and producing classes – these were the only people in the realm who were generating the real wealth. Eventually the system failed because the oppressed commercial and producing classes remained even more oppressed - except for certain under-performing royal favorites. Also, it failed because the realm's 'trust currency' was no longer trusted.
So the kingdoms of the realm secretly conferred: All agreed on a new currency backed by the next 'gold standard'; it was called 'condo-gelt. To be safe, all of the royals agreed to pass edicts in their respective principalities - “The law of supply and demand is hereby repealed”.
A period of tenuous and transient prosperity followed. Then one day, “condo-gelt” was exposed as a dramatically overvalued asset class, worth in the aggregate little more that fools' gold.
Once again the royal currency was no longer trusted and the entire economic system collapsed.
The commercial and productive classes demanded an end to the royal system of punitive taxes, enforced “sharing”, and all of the petty regulations of commerce. Some hotheads even demanded a reversal of the edicts repealing the law of supply and demand. The rebels were disparaged by the royals as “ignorant serfs” and “upstart rabble'.
For the royals in this story you can substitute the Keynesian political elites of the West.
For “condo-gelt”, you can substitute the securitized mortgage assets, the bundled real estate instruments and other financial gimmicks that served to conceal the fact that Western governments and the “royalist” financial institutions under their political control were allowed to overextend the world economy on a debt platform held up by fantasy assets.
For those of us who still think that we in the liberal democracies have fully emerged from the royal system of elite privileges and top-down governance, the current crisis is a wakeup-and-smell-the-smoke moment.
For the idealists among us who still think that real wealth can be generated by fiat, or that the equal redistribution of poverty produces better results than the naturally unequal distribution patterns that attend any real wealth creation (not to mention the necessary risks) the current crisis is a brutal teaching moment.
For a longer discussion of our current predicament, download a copy of my article, “The Escape from Delusional Economics”, posted at http://www.jaygaskill.com/DelusionalEconomics.pdf , or read it on-line at http://www.jaygaskill.com/DelusionalEconomics.htm.
....and, yes, there really are positive solutions.
Stay tuned for “Breakout!”, to be posted here soon.
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