The Dow Jones dropped nearly 400 points today, one of its biggest single-day drops for the year. This survey on MSN Money has 38% of surveyors saying this is just summer doldrums for the stock market, but a hefty 28% think the market is going to sell off slowly and steadily, and still another 19% responded “look out below.” Thus, the mild to moderate bears plus the severe bears total 47%.
Since 2003 when we featured Michael Nystrom’s website Depression2tv.com on Kmareka, I have been following along as Nystrom questions whether we will head into another economic depression, and if so, when. It kind of causes me to live every day as if we were about to face economic collapse, which helps me stay focused on what is important in life, and adds to my reasons to try to save money for a rainy day.
Michael Nystrom is a provocative thinker and a compelling blogger. Reading the color-coded links on his webpage helps to remind me of how easily the news media can be manipulated. It also helps me stay on top of global economic conditions, not just US conditions. And Michael has helped me learn about diversifying investments into foreign currencies and gold, although I have yet to do either.
Nystrom recently wrote an interesting essay about the role of central bankers in controlling the economy, and the way these decisions are skewed by the composition of the Federal Reserve Open Market Committee. This essay is available here and I encourage others who are curious about how economic markets are affected by the central banks to read it in full. You will note in the MSN article that central bankers became actively involved in trying to limit the fall-out from hedge fund problems today.
Michael Nystrom is also a loyal supporter of Ron Paul, who is a Republican Congressman from Texas who holds to strong fundamental conservative values. Ron Paul questions the way the American economy is based on debt and on the creation of “fiat currency.” While I do not agree with Ron Paul on a number of traditional Republican positions including his position on abortion (he voted to cut federal funding for abortion and is pro-life) I appreciate his adherence to some principles of economic responsibility, particularly his concern for debt being the basis for economic expansion in the US.
While learning about how the central bankers control so much of the economy is interesting, I’m not sure what — if anything — little people like you and me can do about it. What are the alternatives? I’d be interested in readers’ thoughts.
Kmareka.com 
There are two separate issues here. The first one, on the surface, is that Ron Paul, Nystrom, and Richard Russell attribute way too much power to the FOMC and the Fed. This is what conspiracy theorists do.
The Fed controls MONETARY policy, which is the regulation of the amount of money sloshing around. The two ways they do this is through interest rates and setting the level of reserves banks have to hold. If there is too much money out there, we end up with inflation; too little, and we can get deflation.
Deflation has not been a problem in the US for decades—since the 30s—but Japan is just coming out of a deflationary period that lasted about 15 years.
However, while monetary policy is important, more important is FISCAL policy. This is set by the president and Congress; it’s levels of taxation and the amount of gov’t spending, etc. This has much more direct impact on the economy because it sets the macro-economic tone.
In relation to this, monetary policy is more like the fine tuning.
[Please note: I am grossly oversimplifying. As such, I am distorting certain aspects of the overall picture. I apologize, and make no claim that this is definitive. Rather, it’s the nickel tour put in layperson’s terms.]
However, relatively speaking, this is the surface issue. It is, in my opinion, merely a smokescreen for a much deeper, much more insidious agenda.
To explain this — let’s be clear about why Conservatives hate big gov/t. It’s because Big Government is the only thing that has the clout to stand up to Big Business. Without Big G around, Big B can run the show like they did in the late 1800s.
By dismantling things like the Fed, and the SEC, and all of the other gov’t apparatus put in place in the Progressive Era and under FDR, there is nothing powerful enough to regulate large corporations. They can buy enough congress-critters to create the sort of environment that will maximize profits — at the expense of everyone else.
This is what Big B did in the late 1800s; it’s what they’re trying to do now.
Corporations exist solely to make money. If that means grinding the average person into bone meal, so be it.
Big B did not cease child labor until they were forced to do so by the gov’t; they did not disclose product ingredients until forced to do so; they did not adopt ‘truth in advertising’ standards until forced to do so. Sarbanes-Oxley basically requires that a CEO attest to the veracity of the company’s financial statements, but this is somehow onerous, so they want it watered down to pre-Enron levels.
All of this apparatus was put in place to correct problems; they want to dismantle this. They want to get rid of Social Security so they don’t have to pay the 15% payroll tax.
When the Depression really took hold, Sec of Treasury Mellon shouted against gov’t intervention because the excess of the last business cycle had to be purged from the system. If that meant people starving in the streets, so be it.
Conservatives still hate FDR because he actually allowed the people of this country to have a real voice in how it was run. Up till that time, Big B ran the show. However, Big B was so thoroughly discredited by the Depression that a populist like FDR was able to pry their fingers from the controls of the state.
And this relates to the Gold Standard. Nystrom and his buddies wail about fiat currency. They long for the days of the Gold Standard. Reverting to the Gold Standard would cause a horrific deflation that would make the Depression look like a day at the beach. Reversion to the Gold Standard caused the panic — and subsequent depression — of 1873.
Believe it or not, economists cannot agree on the cause of the Depression, but the fact that we reverted to the Gold Standard seems oddly reminiscent of 1873 — especially since the countries that dropped the Gold Standard the earliest recovered the quickest. The US was not one of these countries.
Fiat currency helps prevent deflation. What’s so bad about falling prices? Nothing, except wages generally fall with them. Under moderate inflation, your mortgage costs LESS over time. Under deflation, the debt gets bigger and bigger. Deflation is a huge boon to bondholders and other creditors.
Plus, with deflation, there is no incentive to buy today, when the product will cost less next week. That causes prices to fall more, and wages to follow, and dries up the amount of money in circulation, which means the system gets tighter and tighter.
The Depression was a deflationary event. My granddad lived through it. His line was: “sure, bread only cost a nickel. But you didn’t have a nickel.�
So, beware the Gold Bugs. Their motives may not be pure, whether they’re aware of it or not.
I’m not an economist, but I read a lot. And this suffers from compression, but the medium prevents fuller treatment. I recommend frequent visits to Economist’s View. I also recommend books by Kevin Phillips, especially “Wealth And Democracy.�
p.s.
This is an excellent, 45 minute video which explains what fiat money is, and why it is so bad:
link to page
I’ve asked Michael Nystrom by email if he had a post that he submitted prior to this “ps” one. I’m hoping it didn’t get lost in transit but I will wait to hear from him.