Cognitive Economics (how things work)Political Impact on BusinessSmarter BusinessUncategorized

The Fed vs Banks, Gold Grab DejaVu!

It’s the 1930’s gold grab all over again, maybe.  Sure feels like it, looks like it, walks and talks like it.

Today the Fed is suing banks over mortgage drivel.  Drivel because the Fed helped cause it, and drivel because their only remaining point of first bailing them out and then suing them is to force a sea change in currency for the Fed’s own benefit.  And of course congress can “window-dress” and make themselves look good in the media.  That’s all it is.  The Banks did what the Government designed the banking business to do, and in support of the Government’s creations called Freddie and Fannie.  Everyone should care.  They are trying to force banks to release deposits back into the Fed.  Didn’t we read in the news that the banks had paid back the bailout money?

Like the late 1920’s and early 1930’s, there’s been a lot of cash hoarding going on in corporate America, as well as asset realignment.  In the days of the Great Depression there were not enough dollars circulating because of hoarding.  Those who had lots of currency wanted to control more of the government as well as the people they employed.  In the 1930’s the Federal Government of the United States of America virtually outlawed the ownership of Gold and forced the banks to move all gold into the Federal Reserve Deposit in consideration of the Fed’s full faith and credit to guarantee cash.  Nobody seems to have seen the famous Fort Knox gold ever since.  But that’s not the point.

The reason they did that, back in the 1930’s, was to flush cash out of hoarding accounts and back into public distribution.  What good is cash if it isn’t trading hands?  Velocity at which money moves is very important to the economy.   The method the U.S. used is highly questionable, taking everyone’s gold and giving them dollars instead.  Sounds okay to you?  Well, right after the Fed confiscated the gold, through an act of congress creating a law to do so they reset the price of Gold to double what it was and effectively increased the value of the Federal deposit while cutting the value of the dollar in half.  Snap!  The rest of the depression years were spent trying to overcome the negative effect of doubling the cost of living overnight.

So here we are, this many years later, and maybe this action against the largest banks is very similar.  They can’t force banks to deposit gold again, since they don’t have gold on deposit like they did long ago.  This may not have the full effect and fury of resetting the Gold and Dollar price, but it may be one of several steps to cause much of the same effect over time.  It’s a bit early to tell because we have to see what happens with the dollar.  One thing is obvious, through fines levied on banks, quite a few billions of dollars could end up in the Fed’s account very soon and then some other action to cut the value of the dollar in half could take place.  If this happens it could be very hard on the citizens of the country.

Why would the Fed do this today?  Several reasons come to mind:

1. Increasing the deposits through payments of billions of dollars in fines can allow the government to circulate more currency without printing it.

2. The Fed can then afford to issue more debt which can then be leveraged by banks and other institutions.  Feds get cash, then they sell bonds, the banks leverage the bonds.  That’s like you using a credit card to secure another credit card; chasing debt with debt.

3. If they find a way to reset the value of the dollar, they can effectively lower the cost of  Federal debt.

4.  Causes the value of the dollar to sink low enough that those who hold dollars in large hoarded amounts will want to free them up, thus creating higher circulation.

5.  They can afford more bailouts with cheaper dollars and that means more regulation and therefore more control.

6. Increases the net power of the U.S. Fed in terms of currency control.  Imagine a King who circulates his own money with his image stamped on it.

7. Citizens become even more dependent since they cannot afford the new cost of living.

8. It’s a way to bankrupt the system quietly.  At that point they may also have the option of replacing the currency with a completely new one.

Maybe this is the only way to manage the currency, debt, and productivity crisis when we come to this point in the economic cycle.  Maybe there is no better way.  Reducing hoarding is a positive but maybe there is a better way to cause the dollar to be more valuable in circulation.  When investment in business, employment, and other things can give a higher return than the simple yield/risk model in a bank account, then people will put their money to work.  When fear is high, risk is out of control, there are few options, and it is normal to hold cash.

There is a possibility that over-regulation, over taxation, and the high cost of fees, fines, and employment overhead such as employment tax, insurance, and other benefits, actually add up to cause a reduction in productivity of investment.  Because of this firms and those who hold cash must choose to avoid the risk of new business.

This is how our system of freedom and opportunity depends on less government.  This is how it works.  The more value government takes out of the system of free enterprise, the less opportunity its citizens will feel they can afford.

Now you must ask the question of how to prepare for the dollar to collapse, if it does.