Thursday, September 29, 2011

Ben Bernanke is the Anti-Robin Hood

In the words of Kanye West, "No one man should have all that power."

Federal Reserve Chairman, Ben Bernanke, looks so innocent.
I've watched him in a fair number of videos online, and in all of them, I can't help but think that he has no clue what he's doing, that's he's in over his head. (Here's an example.)
But some days, his distortions of the truth shine through. For example, he said that the Federal Reserve returns a profit for the US government. The truth is that the Federal Reserve prints money, and some of this money goes to the US government and some of it goes to the owners of the Federal Reserve, i.e. Bank of America, Wells Fargo, JP Morgan, etc... This is not really profit because the money came from us in the form of a tax: inflation tax.

Here's the problem: the Federal Reserve has been printing money even when prices are increasing. QE2 was an example of when the Federal Reserve was printing money while prices were increasing. In late 2010 and early 2011, gasoline prices (as well as all of the major price indexes) were increasing, and hence the purchasing power of the dollar that you earned decreased. The Federal Reserve printed money, and gave some of the money to the banks (in the form of interest for having done no work) and some of the money to the US government (in both the form of purchasing US Treasuries and direct profits given to the Treasury department.) The question is: where did they get the money to do this? Answer: they printed the money out of thin air, i.e. they taxed all of us by devaluing our currency. More currency, and the same number of goods means less goods for those who earned the money the real way, and more goods for those who earned the money by printing it out of thin air.

If on the other hand our purchasing power had been increasing (due to dropping prices of gasoline and electricity), I could understand printing money to avoid deflation, but twice in Ben Bernanke's short term as Federal Reserve Chairman, he's printed money while prices were rapidly increasing. The second time was 2010/2011. The first time was in 2007 / 2008. The price of gasoline was going through the roof. Instead of removing money from circulation (in order to maintain constant purchasing power of your hard earned dollars), Ben Bernanke printed money (i.e. printed money in order to lower the Federal Reserve's interest rates.) This was a tax on every man, woman and child who owns dollar bills. (Mostly the middle class, but this also hits the poor hard as well because food, gasoline and electricity are a main portion of their budgets.) How the hell did Bernanke convince himself that printing money while prices were increasing would be a good thing? Where in any economics textbook did he learn that printing money while prices are increasing would lead to the betterment of society?

This is why I state firmly that Ben Bernanke is the Anti-Robin Hood.

He stole from the poor and especially the middle class, and he gave the printed money to banks and the US government. This is the reverse of stealing from rich to give to the poor. He has instead being stealing from the poor and giving to the rich. And it's all been legal because Congress has given the major banks (i.e. the Federal Reserve) the legal right to print money  (it's called the federal reserve open market operations. What a name for printing money!)

The days of a privately owned Federal Reserve must end now!  The Federal Reserve (throughout its history) has printed money, even when prices are increasing. We can't trust today's Federal Reserve system any longer. The current system needs to end.

We need a system that will actually protect people's hard earned income. We need to remove the power of the Federal Reserve to print money and give that money to themselves (i.e. bankers.) We need a system that enforces a zero inflation currency by removing currency from circulation when prices are increasing and printing money when prices are decreasing. That money should go to the US government to pay off the debt or to lower taxes. It should not go to bankers, and the rule for when to print or when to remove currency should be completely known to all, i.e. we should print or remove money to maintain zero inflation. There'll be nobody in charge to make the decision. "No one person will have all that power." In fact, nobody will have any power over when to print or remove currency from circulation. We could have a machine do it. There'd be a simple equation to follow, and the market would know in advance because the equation would be distributed publicly.

And now, I'd like to focus on the problems with inflation. Inflation is a tax.
When people say that the poor aren't being taxed, they are fooling themselves because they aren't counting inflation tax. Since inflation over the last year has been on the order of 3-9% per year (depending on what index you use), we should count this as a tax of 3-9% on everybody who owns dollar bills, i.e. anybody with cash, checking accounts, and savings accounts. (That's most of us.) People who own capital typically do not feel the effects of inflation because capital goods (like working power plants) have real value based on expected future income. Inflation typically hits both fuel prices and electricity prices equally, so inflation doesn't hurt those people who own capital goods. So, inflation is not a tax on those people who own working power plants.

And that's good, but inflation is a tax on those people with checking and saving accounts in US dollars. And who gets the printed money?   Bank of America, JP Morgan, Wells Fargo...and the US government. These companies are able to pay their executives with this printed money. And the US government is able to spend shit loads of cash on wasteful projects (like ethanol subsidies, solar cell subsidies, wind turbine subsidies, bridges to nowhere, the War on Drugs, and many more.) Here's the other problem: it's not just that we print money and give it to bank executives and the government; it's the fact that the money is being wasted on those government projects and on luxuries. If you're a Keynsian or a trickle-down economist, you might think that any time of consumer spending is a good thing.

But you'd be absolutely incorrect!
It's really easy to think about it when you think in terms of electricity and fuel consumption.
When you buy a luxury item, such as a ticket to concert, there's a lot of electricity use and fuel consumption associated with attending the concert. The money you spend reflects both the electricity / fuel consumption for the concert itself, as well as the electricity / fuel consumption associated with those people who worked at the concert (including the band members) who now have money to spend in their free time on things that consume electricity and fuel. This chain goes on and on; this is what I mean when I say that economics is self-referential. It's really difficult to solve any but the simplest problems in economics because of its self-referential nature.

But here's the main point. Where did the electricity and fuel come from?  It came from a power plant that achieve a positive rate of return on work (kWh) invested. Or from an oil well with a positive rate of return on work invested.

Consuming luxuries is a form of consuming electricity with no return on investment. The problem is that consuming luxuries doesn't cause a return on work invested, and hence the amount of work available decreases. This causes prices to increase, unless we remove currency from circulation, and hence, purchasing luxuries does not grow our society. It instead leads to its contraction because we've consume available work (electricity and fuels), but we haven't invested it into a project that generates more available work.

It's not that I have anything against luxuries, per se. It's that it's easy to delude ourselves into thinking that consuming crap and consuming luxury items is helping the economy. It's not. Don't go into debt buying crap and consuming luxuries.

The point of a luxury (such as the beautiful feathers on a male peacock or gold jewelry) is that it's supposed to be a sign of an underlying positive rate of return on investment. For example, if you're an owner of a power plant that actually generates a positive rate of return on work (kWh) invested (i.e. a natural gas combined cycle power plant, not for example an solar panel or a wind turbine), then you deserve to be able to purchase luxuries with your hard earned dollars. We need to be able to tell productive members of society from those who are not. Luxury items are useful when they help us tell productive members from unproductive members (or peacocks with good genes from peacocks with bad genes.)

Owners of coal, natural gas, hydroelectric, and nuclear power plants are what's keeping our society going. Doctors, police officers, military officers, teachers, nurse, fire fighters, bankers, chefs, farmers, politicians, mechanics, etc...are required as well, but in a secondary role. And then there are those people who work in the area of luxury items, such as: vacations, fancy cars, fancy homes, jewelry, comedy, music, etc...These people are needed as well, but only if we can afford these things. And we can afford them only if the power plant owners are obtaining positive rates of return on work (kWh) invested. When the power plants are obtaining less rate of return on work invested (such as if the government mandated more use of solar and wind), then we could not afford as many people working in the areas of vacations, fancy cars, fancy homes, jewelry, comedy, music, etc...

So let me repeat why I think that Ben Bernanke is the Anti-Robin Hood:  he allowed banks to print money even when prices of goods were increasing (2007/2008 & 2010 / early 2011.)
He's allowed bank executives to get paid even when they have negative rates of return on investment (excluding the free printed money they get from the Fed). This allows them to pay themselves bonuses, and allows them to purchase luxury items. They get to consume fuel and electricity on luxury items even though they didn't earn them.

This means that luxury items aren't able to serve their useful intended purpose. If people get to buy luxury items even though they didn't earn it, then that means that luxury items are not a good sign of underlying positive rates of return on investment. It's a facade. Luxury items were supposed to be a sign of good genes, and a growing society, but now we have tons of luxuries, but no growth (in real terms) and tons of debt.

There's only one way out of our problems: investing in energy technologies that generate very large rates of return on investment  (such as natural gas combined cycle.) And in the mean time, let's end the power of bankers to print money. Let's end the inflation tax!

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