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Fed Seizes Control of American Economy


Fed takes SEC's powers for itself; art good as gold in inflation era... but what about deflation?; CA tax revolt and much more.

1) Obama Administration Plans to Shift Even More Power to the Federal Reserve

According to Bloomberg, the Obama administration is planning to call for removing some regulatory powers currently held by the Securities and Exchange commission and handing them over to the Federal Reserve.

"The proposal, still being drafted, is likely to give the Federal Reserve more authority to supervise financial firms deemed too big to fail," Bloomberg reported.

Eh, so what? Big deal. Yes, it is. Unlike the SEC, which is an agency of the U.S. government, the Federal Reserve operates without congressional oversight and without any transparency whatsoever.

A bill, the Federal Reserve Transparency Act, HR1207 in the House, and its companion bill S 604 in the Senate, is currently being spearheaded by Texas Congressman Ron Paul.

As Paul wrote on his Website, "Some have begun to push back against this bill, and I am very happy to address their concerns.

The main argument seems to be that Congressional oversight over the Fed is government interference in the free market. This argument shows a misunderstanding of what a free market really is. Fundamentally, you cannot defend the Federal Reserve and the free market at the same time. The Fed negates the very foundation of a free market by artificially manipulating the price and supply of money – the lifeblood of the economy. In a free market, interest rates, like the price of any other consumer good, are decentralized and set by the market. The only legitimate, Constitutional role of government in monetary policy is to protect the integrity of the monetary unit and defend against counterfeiters.

Instead, Congress has abdicated this responsibility to a cabal of elite, quasi-governmental banks who, instead of stabilizing the economy, have destabilized it. It took less than two decades for the Federal Reserve to bring on the Great Depression of the 1930s. It has also inflated away the value of our currency by over 96 percent since its inception. It has invisibly stolen from the poor and given to the rich through this controlled inflation, and now openly stolen through recent bank bailouts. It has predictably exacerbated the very problems it was meant to solve."

2) Flashback

Fed In Massive Power Grab

January 13, 2009
Five Things: Fed In Massive Power Grab

"I'm in control here."
- Secretary of State Alexander Haig to reporters after the attempted assassination of President Ronald Reagan

As is customary, Federal Reserve Chairman Ben Bernanke's speech before the London School of Economics today was long on words, short on meaning. But there was one crucial takeaway from it that bears mention; the massive power grab the Federal Reserve is asserting.

I understand that people who compose sentences like that are automatically viewed as 1) nuts, 2) conspiracy theorists and 3) nuts, but before you deliver the verdict take the chairman at his own words:

"The world today faces both short-term and long-term challenges. In the near term, the highest priority is to promote a global economic recovery. The Federal Reserve retains powerful policy tools and will use them aggressively to help achieve this objective."

There are only two appropriate responses to the assertion that the Federal Reserve is prepared to aggressively use its "powerful policy tools" to promote its highest priority, a global economic recovery: If you are an American, the appropriate response is, "Gosh, thanks... and good luck!" For everyone else, it's to wait and hear how your government intends to respond to the fact the U.S. Federal Reserve has apparently seized control of your country's economy.

Art Good as Gold in Inflation Era... But What About Deflation?

Interesting piece on Bloomberg today discussing art as an inflation hedge on par with gold.

"As long as the value of money falls, the value of real assets will rise," Castlestone Management founder and joint chief executive officer Angus Murray told Bloomberg. "Art to me is exactly the same asset as gold bullion."

And Murray has put his money where his mouth is. According to Bloomberg, Castlestone has picked up $16 million worth of art and plans to spend another $9 million by the end of September. Among the artists in the portfolio are Jean- Michel Basquiat, Willem de Kooning and Alexander Calder.

But the larger issue is how art performs, compared to gold, as a potential deflationary hedge. The art currently owned by Castlestone for the fund has shed a third of its value, Murray. told Bloomberg "I had a house, it went down in value too, but I'm not going to change my view on that."

Meanwhile, prices of contemporary art at auction have fallen 30 percent to 50 percent in the last six months, Bloomberg reports. Gold, on the other hand, is up nearly 6% over that same period.

4) California Kicks Off the Coming Tax Revolt

Look around your state and locality and start preparing now. The tax revolt is coming. Yesterday voters resoundingly defeated a slate of special election measures in California designed to deal with that state's $21.3 billion shortfall.

Governor Arnold... Schwarzenegger... (I'm sorry, it's the first time I've ever typed those words together and... well, it's just ridiculous. This is the same man who starred with Danny DeVito in the movie Twins.) and state lawmakers called the special election to help manage a $42 billion deficit that has been projected through mid-2010.

The vote wasn't even close. Voters rejected all but one of the six propositions on the ballot, approving a measure prohibiting pay raises for lawmakers and other state officials during deficit years.

As social mood continues to darken and turns increasingly negative, you should expect tax revolts across the country to become more aggressive. For a reference point, check out this paper by Mark Thornton and Chetley Weise, "The Success of the Great Depression Tax Revolts".

5) News & Weirdness

Grist for Dollar Bears:
USA Won't Join Gulf monetary Bloc - AP
UAE Central Bank Governor quoted through WAM news agency as saying that country, the second-largest oil exporter behind Saudi Arabia, will keep its currency pegged to the US dollar.

Kazakhstan Bank Defaults May Require IMF Bailout to Avert Crisis - Bloomberg
Economic Handout of IMF for Make Benefit Glorious National Bank of Kazakhstan?

Bill Ford Says Running Company Without Bailout Serves `National Interest' - Bloomberg
Yes, the issue now is how to keep companies that are not taking bailout money from being disadvantaged by the fact their competitors are being bankrolled by the U.S. government. It's an extension of what the average American who did not go deep into debt, who did not take on more house than he or she could afford, who did not spend their entire paycheck each week on consumer goods, is asking themselves every day as well.

Google (
GOOG) Falling Behind Twitter - Guardian (UK)
Google's (GOOG) co-founder, Larry Page, admitted today that the company has been losing out to Twitter in the race to meet web user's demand for real-time information. I am on Twitter. It's my preferred source for breaking news. Twitter is not about posting what you had for breakfast, though many use it in that manner. It allows you to build a selective network of information providers.

Consumers Dealt New Hand in Credit Cards
End of reward programs? Not likely. "If you strip away the reward component of a credit card, it's essentially a commodity," said Rick Ferguson, editorial director at the loyalty marketing company LoyaltyOne.

Big-Box Retailers Become Mini-Retailers as Downturn Persists
Call it "choice deflation." During the bull market, with expanding risk appetites and increased time preferences, consumers couldn't get enough choice. Now, with risk appetites declining and time preferences shifting, consumers feel they are faced with too much choice.

Spike in US Residential Mortgage Delinquencies - FT Alphalville
Note from FT Alphaville building on Reuters columnist John Kemp's observations: "Note that this spike is in spite of all the housing relief measures introduced by the US Treasury - and is happening at a time when official US rates are close to zero."

Boomers Poised to Change Pace of Retirement
- Sacramento Business Journal
You know what, just go fish or play golf or something. Haven't you done enough already?
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