Bovard in The Hill: Will FISA secrecy doom democracy?
Bovard in The Hill: Will FISA secrecy doom democracy?
“Democracy Dies in the Darkness” is the proud motto of the Washington Post. But, considering the past week’s frenzy, the new motto for much of the media and many Democrats is, “Disclosure is the Death of Democracy.” Unfortunately, the uproar around the release of the Nunes memo totally missed the deadly political peril posed by pervasive federal secrecy.
Shortly before the memo became public, President Trump tweeted that “the top Leadership and Investigators of the FBI and the Justice Department have politicized the sacred investigative process.” But any “sacred investigative process” exists only in the imaginations of pro-government pundits and high school civics textbooks. The FBI and Justice Department have a century-long history of skewering targets to gratify their political masters, while the FISA court routinely heaves buckets of judicial hogwash to countenance the wholesale destruction of Americans’ constitutional rights.
Former FBI agent Asha Rangappa, writing in the New York Times, labeled the Nunes memo a “shame” and urged Americans to presume that “most government servants are ultimately acting in good faith and within the constraints of the law.” But blindly relying on positive thinking is a recipe for political servitude. The FISA court has been a fount of outrages because it is an American Star Chamber: the court meets in secret, only hears the government’s side, and approves 99 percent+ of all the search warrants requested.
Much of the backlash against the memo’s release portrayed the FBI as a FISA Vestal Virgin. The FBI issued with a grim statement: “We are committed to working with the appropriate oversight entities to ensure the continuing integrity of the FISA process." Former FBI chief James Comey tweeted that the Nunes memo “wrecked the House intel committee, destroyed trust with Intelligence Community, damaged relationship with FISA court.”
But for more than a decade, the FISA court has repeatedly complained about deceptive FBI agents seeking turbo-charged secret FISA warrants. In 2002, the court revealed that FBI agents had false or misleading claims in 75 cases. In 2005, FISA chief judge Colleen Kollar-Kotelly proposed requiring FBI agents to swear to the accuracy of the information they presented; that never happened because it could have “slowed such investigations drastically,” the Washington Post reported. So FBI agents continued to have a license to exploit FISA secrecy to lie to the judges.
Last year, a FISA court decision included a 10-page litany of FBI violations, which “ranged from illegally sharing raw intelligence with unauthorized third parties to accessing intercepted attorney-client privileged communications without proper oversight.” How many times did FBI agents make false claims to FISA judges while Comey was boss? It’s a secret. The FISA court also complained that the National Security Agency was guilty of “an institutional lack of candor” connected to “a very serious Fourth Amendment issue” — i.e, ravaging Americans’ constitutional right to privacy.
Syracuse University law school professor William Banks asserted, “I can't recall any instance in 40 years when there's been a partisan leaning of a FISA court judge when their opinions have been released." But this is only because, inside the Beltway, being pro-Leviathan is pragmatic, not partisan. The FISA court has repeatedly presumed that if the feds violate everyone’s privacy, they violate no one’s privacy -— so there is no constitutional problem.
In 2006, the FISA court signed off on effectively treating all Americans as terrorist suspects. The court swallowed the Bush administration’s lawyers’ bizarre interpretation of the Patriot Act, claiming that the telephone records of all Americans were “relevant” to a terrorist investigation.
In 2009, the FISA court upheld surveillance based on a 2007 law that effectively decreed that any American who exchanged emails or phone calls with foreigners forfeited their right to privacy. A FISA Appeals Court decision dismissed concerns because the government had “instituted several layers of serviceable safeguards to protect individuals against unwarranted harms” — so anyone whose privacy was zapped had no right to complain.
Read the rest at The Hill
How to Read the Fed’s Statement of Operations
It’s true what they say about following the money. With the release of the Federal Reserve’s 2022 Financial Statements, we can take a closer look at their income and expenses to find that the central bank functions like a federal embezzler as much as it does a federal counterfeiter.
It begins on page 7: Revenue of $170 billion.
The interest earned on US Treasuries and Mortgage-Backed Securities accounts for nearly 100% of the Fed’s revenue. Keep this question in mind until the end: Who paid this interest?
The above should be considered a national scandal, but it gets better once the expenses are understood. It starts with $102 billion paid to banks which park and lend their money to the Fed.
Almost two decades ago the Fed started paying interest on bank reserves. The Federal Reserve Bank of Richmond tells us Milton Friedman (not an Austrian) advocated for this over 40 years ago. It continues to be a costly endeavor.
From the above, we find that 60% of the Fed’s income has been absorbed by interest payments to foreign and domestic banks, central banks, and countless institutions whom we’ve never heard of.
There is another expense line item called: Other Items of Income (Loss), but this is only $220 million, therefore negligible. From an auditor’s perspective, a quarter of a billion dollars is likely below materiality when dealing with dollar-value magnitudes of this order.
Rounding out the expenses are the administrative costs of running a central bank. In 2021 there were over 23,000 people employed by the Federal Reserve System. Last year nearly $4 billion went to salaries and benefits and another $1 billion into the pension plan.
Every year we must also be reminded that the Board of Governors operating expenses and currency costs continue to be concealed and receive absolutely no note disclosure in the statements. The costs were $2 billion this year. The public therefore receives no details as to how the Board of Governors spent this $2 billion.
Elizabeth Warren’s Bureau of Consumer Financial Protection had another stellar year, bringing in $722 million from the Fed; impressive it gets its own line item!
Nonetheless, Total operating expenses amounted to $9 billion, meaning that administration consumed around 5% of the Fed’s revenue.
This brings us to the $59 billion in earnings for the year, give or take a few billion for rounding, but it’s more complicated than that.
As explained in the Note 3q:
The Reserve Banks remit excess earnings to the Treasury after providing for the cost of operations, payment of dividends, and reservation of an amount necessary to maintain surplus at the aggregate surplus limitation.
As instructed by legislation, after paying out 65% of its earnings for interest payments and administrative fees, it then paid out $1.209 billion as dividends to the banks who own capital stock at the Fed. Yes, these are the very same banks the Fed regulates and bails out on occasion.
However, near the end of the report on Note 12, it’s explained that after expenses and the dividend to banks (which was only $583 million last year), the Fed managed to remit $76 billion to the Treasury. Since the Fed does not recognize losses, the loss of $16 billion (earned $59 billion but remitted $76 billion) was capitalized as a deferred asset. See below:
Going back to the initial remark of embezzlement of public funds. In 2022 the US government paid the Fed $116 billion, and mortgage holders paid $54 billion, meaning $170 billion total revenue came from the public. In return, the Fed paid $102 billion to banks, $9 billion for administration, $1 billion in dividends, and then gave back $76 billion to the Treasury, making up for the shortfall in a way that no one else could do.
It’s generally portrayed as a win for the people when the Fed remits billions to Treasury, but this is nothing more than the return of the public’s money, less over hundred billion dollars in expenses and a healthy dividend along the way… and if this is confusing, don’t be alarmed, it’s supposed to be.
Mississippi Becomes the 43rd State to End Sales Taxes on Gold and Silver
With the stroke of Gov. Tate Reeves’s pen on Wednesday, Mississippi has become the 43rd state in the country to end sales taxes on the purchase of physical gold, silver, platinum, and palladium coins and bullion.
Senate Bill 2862, sponsored by Sen. Juan Barnett (D-34), had passed out of the full senate by a vote of 52-0 and sailed through the House of Representatives by a vote of 115-0. The effective date is July 1, 2023.
Backed by the Sound Money Defense League, Money Metals Exchange, and in-state Mississippi dealers and investors, this year’s legislative effort built upon a multi-year grassroots campaign waged by sound money activists. Other key supporters in the Mississippi legislature included Rep. Jody Steverson (R-4), Rep. Jill Ford (R-73), and Sen. Chad McMahan (R-6).
Taxing all precious metals purchases has become an outmoded and even controversial practice in the United States. Only seven states still engage in it.
Every one of Mississippi’s neighbors (Alabama, Louisiana, Kentucky, and Tennessee) had already stopped taxing the monetary metals. Most recently, Tennessee ended this tax in 2022, and Arkansas and Ohio eliminated this tax in 2021. And additional states may pass their own exemptions this year.
Senate Bill 2862 goes into effect on July 1, 2023.
The Mississippi sales tax on gold and silver had been discouraged citizens from protecting their savings against the devaluation of the dollar – or driving them to look for out-of-state options.
Eliminating sales taxes on gold, silver, and other precious metals is good public policy for several reasons:
- Levying sales taxes on gold and silver is inappropriate. Sales taxes are typically levied on final consumer goods. Computers, shirts, and shoes carry sales taxes because the consumer is "consuming" the good. Precious metals are inherently held for resale, not "consumption," making the application of sales taxes on precious metals inappropriate.
- Studies have shown that taxing precious metals is an inefficient form of revenue collection. The results of one study involving Michigan show that any sales tax proceeds a state collects on precious metals are likely surpassed by the state revenue lost from conventions, businesses, and economic activity that are driven out of the state.
- Taxing gold and silver harms in-state businesses. It’s a competitive marketplace, so buyers will take their business to neighboring states, such as Alabama or Louisiana (which have eliminated or reduced sales tax on precious metals), thereby undermining Mississippi jobs. Levying sales tax on precious metals harms in-state businesses who will lose business to out-of-state precious metals dealers. Investors can easily avoid paying $136.50 in sales taxes, for example, on a $1,950 purchase of a one-ounce gold bar.
- Taxing precious metals is unfair to certain savers and investors. Gold and silver are held as forms of savings and investment. Mississippi does not tax the purchase of stocks, bonds, ETFs, currencies, and other financial instruments.
- Taxing precious metals is harmful to citizens attempting to protect their assets. Purchasers of precious metals aren't fat-cat investors. Most who buy precious metals do so in small increments as a way of saving money. Precious metals investors are purchasing precious metals as a way to preserve their wealth against the damages of inflation. Inflation harms the poorest among us, including pensioners, Mississippians on fixed incomes, wage earners, savers, and more.
Only seven states (New Mexico, Hawaii, Wisconsin, Kentucky, Maine, New Jersey, and Vermont) still participate in the outmoded practice of taxing purchases of constitutional sound money. Of these seven outliers, legislative allies in five states introduced sales tax exemption bills, with efforts in Wisconsin, New Jersey, and Maine still ongoing.
Related bills to restore sound, constitutional money have also been introduced this year in Alaska, Iowa, West Virginia, South Carolina, Missouri, Minnesota, Tennessee, Montana, Idaho, Wyoming, Kansas, and more.
Currently Mississippi is tied for 45th out of 50 in the 2023 Sound Money Index. Passage of this measure will increase the state’s ranking dramatically.
Arkansas Passes Legal Tender Act, Removes Taxes on Gold and Silver
Sound money advocates are rejoicing as House Bill 1718, the Arkansas Legal Tender Act has become the law in the Natural State.
Backed by the Sound Money Defense League, Money Metals Exchange, and sound money advocates and supporters throughout the state, HB 1718 reaffirms gold and silver as legal tender, as well as ends all taxes on purchase, sale, or exchange of specie, including state capital gains taxes.
The Arkansas Legal Tender Act, introduced by Reps. Lundstrum (R - 18) and Sen. Dismang (R - 18), passed overwhelmingly out of the House by a vote of 82-8, passed unanimously out of the Senate with a 32-0 vote, and ultimately received Governor Sarah Huckabee Sanders’ signature on April 11.
Specie is defined as “Coin having gold or silver content; or refined gold or silver bullion that is coined, stamped, or imprinted with its weight and purity; and valued primarily based on its metal content not its form.”
The measure continues, “Specie or legal tender shall not be characterized as personal property for taxation or regulatory purposes.”
To remove any doubt of the legislature’s intent, HB 1718 explicitly states, “the exchange of one type or form of legal tender for another type or form of legal tender shall not give rise to any tax liability,” and, “the purchase, sale, or exchange of any type or form of specie shall not give rise to any tax liability.”
This measure builds on momentum on sound money from previous Arkansas legislative sessions.
With strong support from the Sound Money Defense League and grassroots activists, Arkansas passed SB 336 in 2021, ending state sales taxes on purchases of gold and silver. Now, with the passage of HB 1718, Arkansas becomes the 11th state also to end capital gains taxes as applied to the sale of gold and silver (with some of those states simply having no income taxes in the first place).
Ending income / capital gains taxes on precious metals sales is becoming more popular. Understandably so, considering that if taxpayers own gold or silver to protect themselves against the devaluation of America’s paper currency, thanks to the inflationary practices of the Federal Reserve, they frequently end up with a nominal “gain” when exchanging those metals back into dollars.
However, such gains are not necessarily a real in terms of translating to an actual increase in purchasing power. This “gain” is often a nominal gain because of the slow but steady devaluation of the Federal Reserve note dollar. Yet the government nevertheless assesses a tax.
Under HB 1718, the era of taxing gold and silver in Arkansas has come to an end.
In 2023, bills to restore sound, constitutional money have also been introduced in Alaska, Iowa, West Virginia, South Carolina, Missouri, Minnesota, Tennessee, Montana, Idaho, Wyoming, Kansas, and more. These measures would end taxes on the metals, reaffirm gold and silver as money, establish in-state depositories, enable State Treasurers to invest state funds in the metals, and more.
“States all over the country are waking up to the precarious condition of America’s money. Arkansas is helping lead the way in defending and restoring sound money, as well as removing the disincentives for citizens to protect themselves from the inflation and financial turmoil that flows from the Federal Reserve System,” said Jp Cortez, policy director of the Sound Money Defense League.
Currently Arkansas is ranked 30th out of 50 in the 2023 Sound Money Index. Passage of this measure will increase the state’s ranking dramatically.
Banking Crisis (Not the Fed) To Cause Recession?
One of the most dishonest headlines of the week goes to CNBC:
Fed expects banking crisis to cause a recession this year, minutes show
CNBC absolves themselves by citing that this was said in the Fed minutes, yet it does raise some interesting considerations, the idea that the upcoming recession will be due to a banking crisis.
Market contacts observed that the recent developments in the banking system will likely result in a pullback in bank lending, which would not be reflected in most common financial conditions indexes.
How much a bank “should” lend is anyone’s guess, but with rates on the rise and the Fed’s Quantitative Tightening of last year, it’s understandable lending activity would decrease. Anecdotally, other than mortgage loans, small business owners can attest that banks haven’t been lending to main street for a long time, save for government backed programs.
The Fed continues to place fault on the banking sector, as explained:
Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years.
An irreconcilable turn follows, with the prediction that:
In 2024 and 2025, both total and core PCE price inflation were expected to be near 2 percent.
On one hand the Fed thinks a recession will happen this year, with a recovery to happen in 2024 and 2025, but on the other hand, inflation will remain at 2% during this time.
Unfortunately, last month gave the world a glimpse of what is to come in the next recovery. It happened fairly quickly, but over the course of one week in March, the Fed expanded its balance sheet by $300 billion, and then $100 billion the following week.
If the Fed created a few hundred billion dollars to save a few troubled banks, imagine the response they’ll give once larger banks fall on hard times. Even worse, should the banking crisis be only a small part of the problem, the Fed’s desire to intervene will be even greater. And never forget that $5 trillion was required to fix the last crisis; they’ve given us nothing to believe that next time will be different.
No one knows how bad it will get, and how large the Fed response will be, but don’t expect a mild response any more than a soft landing. The March monetary inflation event reaffirmed this. Nonetheless, the meeting closes.
Members concurred that the U.S. banking system is sound and resilient.
And so, members of the Fed’s inner circle deem the banking system both sound and resilient but warn that a banking failure is ahead. They expect a recession this year and 2% inflation during the period of recovery. While they’re not wrong about the upcoming recession, they might be overly optimistic about their response to the recession. All they have is the ability to print more money and lower rates, so it’s difficult to imagine "low" inflation during any alleged recovery. Lucky for the Fed, they’ll suffer no adverse consequences for their actions because according to them, the crisis won’t be their fault.
Joseph T. Salerno on Murray Rothbard, Demagogic Politics, and the Austrian Economists with ISI
Dr. Joseph Salerno recently joined Tom Sarrouf on the podcast Conservative Conversations with ISI, a product of the Intercollegiate Studies Institute.
In this episode, they discuss Murray Rothbard’s political and economic thought, why a demagogue is necessary for the masses to re-establish control over their government in the age of social democracy, and a primer on the economic theory of the Austrian economists, as well as their underlying anthropology and praxeology.
Federal Deposit Insurance Isn’t Insurance
The recent spate of bank failures and the Biden Administration's response has some talking about raising or eliminating the federal deposit insurance limit of $250,000. It's important to remember, however, that what we call deposit “insurance” in no way resembles actual insurance. Federal deposit insurance, and every other form of insurance touched by government, is better described, in the words of Murray Rothbard, as a "fraudulent racket."
Insurance is, in many ways, the market process at its most beautiful. We exist in a constant state of uncertainty—a fact that is "implied in the very notion of action," according to Mises. You cannot know whether, in the next year, your business's sales will improve, your house will burn down, or the price of gasoline will skyrocket. All you can do is use your judgment and the knowledge available to make the best-informed decision and act.
However, some uncertainties—such as whether your house burns down—possess unique characteristics. Mises used the term class probability. And Rothbard followed Frank Knight in using the word risk, which they distinguished from uncertainty. Mises summarizes the difference:
Class probability means: We know or assume to know, with regard to the problem concerned, everything about the behavior of a whole class of events or phenomena; but about the actual singular events or phenomena we know nothing but that they are elements of this class.
In my words, these risks are nearly impossible to predict on a case-by-case basis. But when they are grouped into specific homogeneous classes of events, we can be reasonably certain about how frequently they will occur. With that near-certainty, insurance providers can offer coverage tailored to the class probability of these risks.
That's what I meant by beautiful. When left alone, the market process allows people to trade their exposure to risk in a world full of uncertainty and varying levels of risk aversion. On top of that, insurance works as a way to funnel cash from the healthy and able to the old, sick, and downtrodden who need it, relying not on the expropriation of wealth but on voluntary, win-win transactions.
And as many libertarian scholars like Rothbard and Hans-Hermann Hoppe have argued, an insurance model would most likely be used to provide things like protection services in the absence of a state monopoly. There is a lot the insurance model can do. But it requires a free market.
To work, the insurance model rests on the provider's freedom to properly classify risk and both parties' ability to walk away from the transaction. Remove either or both of these elements, and what remains is no longer insurance.
Obamacare did both. Providers were prohibited from classifying risk based on preexisting conditions, and individuals were forbidden from choosing to go without health insurance. The Act represented a large step away from the insurance model towards the crony third-party payment scam that defines today's rotten healthcare system. Interventions have also warped car insurance, flood insurance, and more—bringing about higher prices and riskier behavior.
The government also runs its own "insurance" programs like Medicare. But because they're tax-funded and protected from the feedback of consumer choice, these "insurance" schemes are more accurately described as wealth redistribution programs.
Federal deposit insurance falls into this last category. The government-run Federal Deposit Insurance Corporation (FDIC) is not classifying risks, and depositors are not choosing plans based on their risk aversion and financial status. Instead, the FDIC uniformly covers all deposits up to $250,000—a limit some now want to eliminate.
This isn't insurance. As Rothbard wrote, it's "a massive bailout guaranteed in advance" that props up the banking sector and subsidizes the fractional reserve system. In other words, it’s a fraudulent racket that funnels cash from the downtrodden to the pockets of wealthy bankers. That sounds like the opposite of insurance.
Meanwhile at the Fed....
Recently, the Fed raised interest rates by 0.25 percent, after another 0.25 percent hike in February. The interest rate is now at 4.9 percent. The annual consumer price index (CPI) has been decreasing in recent months and it was 6 percent in February. However, according to Shadow Government Statistics, if we measure the CPI by the methodology used in the 1980s (see how the CPI’s methodology was changed here), the CPI has also decreased in recent months, but it is barely below 15 percent.
After the collapse of FTX and the layoffs in the tech sector in November, the US banking sector is the one bleeding right now. The US has been living in an artificially ultra-low interest rate (or negative real rates) environment since 2001. This created a lot of distortions in the allocation of resources in the economy, by incentivizing companies and financial institutions to take huge risks. Plus, bank regulations made by the US government encouraged banks (through favorable accounting) to accumulate Treasurys and mortgage-backed securities (MBSs) since they didn’t take a haircut on those assets (and neither they were required to mark them to market). So, as those assets were losing value, banks could pretend there were no losses.
The US banking system was bailed out by the Fed shortly after the collapse of Silicon Valley Bank and Signature Bank and the Fed's balance sheet increased again (chart 1) and is now at $ 8.7 trillion (the peak was $ 8.9 trillion). The monetary base (M0) likely increased as well, but the data is not up to date.
The decrease in the CPI is mainly due to the fact that the monetary aggregates were contracting. As the Fed was no longer buying Treasurys and MBSs, the monetary base (M0) was not increasing and even underwent a small contraction since April 2022. Bear in mind that the bailout mentioned above is not yet an official quantitative easing (QE). That is, the Fed is not effectively buying banks' assets, but rather making loans to them using these assets as collateral (however, to do so, it increases the monetary base to make these loans and puts these assets in its balance sheet; so, it's the same effect).
Chart 1: Fed Balance Sheet (Green) and M0 (Red), 2020–23
Source: FRED; author’s own elaboration.
M1 and M2, which include money that actually circulates in the economy and which have actual influence on consumer prices, also contracted in recent months, after a significant increase in 2020-21.
Note: Murray Rothbard’s and Joseph Salerno’s true money supply (TMS) is a more precise measure of money circulating in the economy. TMS differs from M2 in that it includes Treasury deposits at the Fed (and excludes short-time deposits and retail money funds).
If M1 and M2 increase significantly (like it did in 2020-21) alongside M0, then the CPI is likely to rise again. The increase in M0, by itself, does not cause consumer price inflation, but it does cause misallocations of resources in the economy (as the central bank buys rotten assets, preventing companies and financial institutions that are wasting resources (they make investments with no return) from going bankrupt and releasing those resources for potential sustainable investments. The expansion of M0 also causes asset price inflation (real estate, bonds and stocks).
This latest interest rate hike raised the IORB (Interest Rate on Reserve Balances), which is the main rate the Fed uses to influence the Federal Funds Rate (FFR), from 4.65 percent to 4.9 percent. In July 2021, the interest rate on reserve balances replaced the interest rate on excess reserves (the interest that banks received from the Fed on excess reserves they held with the Fed and which was the rate that the Fed used, since 2008, to influence the federal funds rate) and the interest rate on required reserves (the interest rate on reserves that banks are required to hold with the Fed). For details on how the Fed began to use the interest rate on excess reserves to influence the federal funds rate in 2008, read pages 61–68 of my article at Procesos de Mercado.
Note that the federal funds rate has been almost on the same level as the interest rate on excess reserves (and now as the interest rate on reserve balances):
Chart 2: Federal Funds Rate (Red), Interest Rate on Excess Reserves (Green), and Interest Rate on Reserve Balances (Orange), 2019–23
Source: FRED; author’s own elaboration.
The Federal Open Market Committee – FOMC stated:
The Committee anticipates that some additional [monetary] policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation [prices] to 2 percent over time.
However, it also stated:
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals.
This could be seen as an indication that the Fed rate hikes may be near the end. And we can never trust the FOMC’s projections.
And the fact that the Fed is increasing its balance sheet again already undermines its commitment made at the February meeting:
[...] the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.
This same commitment was made in the last meeting.
An increase in interest rates means a decrease in the prices of fixed-income assets (like corporate bonds and government bonds) and a reduction in the present value of future revenues of companies (which makes their stocks go lower). In Q4 2022, banks registered unrealized losses. The total of these unrealized losses (including securities that are available for sale or held to maturity) was about $620 billion. Unrealized losses on securities have meaningfully reduced the reported equity capital of the banking industry.
With the Fed raising rates once again, there could be more turmoil in the banking system and/or other sectors of the financial market as these losses tend to increase. The Fed is loosening monetary policy on the one hand (by expanding the M0) and tightening it on the other hand by raising rates. It makes no sense.
Three Congressmen Introduce Gold Standard Bill to Stabilize the Dollar's Value
As America faces the twin threats of inflation and bank failures, three U.S. congressmen introduced a pivotal sound money bill that would enable the Federal Reserve note “dollar” to regain stable footing for the first time in more than half a century.
Rep. Alex Mooney (R-WV) - joined by Reps. Andy Biggs (R-AZ) and Paul Gosar (R-AZ) - introduced H.R. 2435, the “Gold Standard Restoration Act,” to facilitate the repegging of the volatile Federal Reserve note to a fixed weight of gold bullion.
Upon passage of H.R. 2435, the U.S. Treasury and the Federal Reserve are given 24 months to publicly disclose all gold holdings and gold transactions, after which time the Federal Reserve note “dollar” would be formally repegged to a fixed weight of gold at its then-market price.
Federal Reserve notes would become fully redeemable for and exchangeable with gold at the new price, with the U.S. Treasury and its gold reserves backstopping Federal Reserve Banks as guarantor.
Monetary experts have noted a return to a gold standard would substantially curtail the economic damage caused by inflation, runaway federal debt, and monetary system instability.
“A gold standard would protect against Washington's irresponsible spending habits and the creation of money out of thin air," said Rep. Mooney in a statement.
"Prices would be shaped by economics rather than the instincts of bureaucrats. No longer would American families, businesses, and the economy as a whole be at the mercy of the Federal Reserve and reckless Washington spenders.”
The Gold Standard Restoration Act also makes several findings as to the harm the Federal Reserve System has inflicted on everyday Americans - particularly since President Richard Nixon “temporarily suspended” gold backing of America's monetary system in 1971.
H.R. 2435 points out: “The Federal Reserve note has lost more than 40 percent of its purchasing power since 2000, and 97 percent of its purchasing power since the passage of the Federal Reserve Act in 1913.”
Historians have observed that the elimination of gold redeemability from the monetary system freed central bankers and federal government officials from accountability when they expand the money supply, fund government deficits though trillion-dollar bond purchases, or otherwise manipulate the economy.
“At times, including 2021 and 2022, Federal Reserve actions helped create inflation rates of 8 percent or higher, increasing the cost of living for many Americans to untenable levels…enrich[ing] the owners of financial assets while… endanger[ing] the jobs, wages, and savings of blue-collar workers,” H.R. 2435 states.
Notably, Rep. Mooney's bill would also require full disclosure of all central bank and U.S. government gold holdings and gold-related financial transactions over the last 6 decades - a seemingly taboo subject surrounded by mystery and deception.
“To enable the market and market participants to arrive at the fixed Federal Reserve note dollar-gold parity in an orderly fashion... the Secretary and the Federal Reserve shall each make publicly available… all holdings of gold, with a report of any purchases, sales, swaps, leases, and any other financial transactions involving gold, since the temporary suspension in August 15th, 1971, of gold redeemability obligations under the Bretton Woods Agreement of 1944.”
In the years leading up to Nixon's panicked “temporary suspension” of gold redeemability, abusive U.S. deficit spending and currency debasement had prompted many foreign central banks to turn in their Federal Reserve notes for gold.
However, this disgorgement of America's gold holdings was largely conducted in secret.
That's why H.R. 2435 also requires the Fed and the Treasury to disclose “all records pertaining to redemptions and transfers of United States gold in the 10 years preceding the temporary suspension in August 15, 1971, of gold redeemability obligations.”
U.S. sound money groups and industry leaders are cheering Mooney's actions.
"Government cannot continue to spend and print on a massive scale without producing existential threats to the currency and our economy," said Lawrence W. Reed, president emeritus of the Foundation for Economic Education.
"The gold standard never failed America, bad ideas and bad politicians did. If we do nothing, disaster awaits us just as it drowned earlier civilizations that spent and inflated their way to ruin," Reed continued.
“Today's debt-based fiat-money system serves primarily to support big government and wealthy financial insiders - while the Federal Reserve's serial policy of currency debasement punishes savers and wage earners,” explained Stefan Gleason, President of the Sound Money Defense League and Money Metals Exchange.
“A return to gold redeemability would arrest the problem of inflation, restrain the growth of wasteful and inefficient government, and kick off an exciting new era of American prosperity,” Gleason concluded.
The full text of Rep. Mooney's gold standard bill can be found here. It was introduced on March 30, 2023, and referred to the House Committee on Financial Services.
The Federal Rorschach
Look at this chart. What do you see?
Now this chart?
And this chart, what type of thoughts come to mind?
The above images show the same thing, the Fed’s balance sheet, the only difference is the time frame (from 2007, 2018, and 2022 until today). Looking at the charts, I see inflation in its historical definition, being the expansion in the supply of money and credit; I also see one of the world’s largest accounts receivable balances, which is unlikely to ever get fully paid off; I see money creation, counterfeiting, and currency debasement.
The balance sheet fully displays the record of the Fed’s monetary injections. For those who can recall, this is typically followed by financial ruin. It is through understanding the nature of central banking and the ebbs and flows of the balance sheet, where one can make a fair prediction as to what the future has in store.
Even if central bankers were moved by altruistic views, the mere fact they possess the ability to determine the national interest rate and manage the money supply makes them superfluous. Therefore, by taking market intervention where none is required, they only make matters worse.
What cannot be easily quantified, but should be considered, is the amount of effort the world spends trying to anticipate the Fed’s actions. If investors and entrepreneurs were able to focus on what the market will do next, instead of what the Fed will do next, the world would be a much better place to live, and resources would be allocated far more efficiently.
In 2010 Dr. Bob Murphy wrote about this problem:
Knowing that the bank had the ability to inject massive doses of new money into the market, investors and businesspeople would have less faith in the long-run purchasing power of the money unit. They would spend time and devote resources to hedging themselves against erratic central banking decisions, rather than focusing exclusively on the "fundamentals."
This is exactly where many have been their entire lives. Way too much time and effort is dedicated to interpreting the latest policy stance, while mainstream economists largely seem incapable of envisioning a world without central banking. As for the masses, they appear to be unaware of the nefarious scheme we call monetary policy.
Despite no one being able to guarantee the size of the balance sheet a year from now, let alone by this Thursday’s data release, each new day brings the potential for a new crisis, and with that the opportunity for a new market intervention. Until the Fed is properly disbanded or at least incapacitated, we must continue to read their tea leaves, interpreting this Federal Rorschach of balance sheet expansion, Fedspeak, and historical failure.
To flourish during a period of dollar depreciation and economic catastrophe, it behooves everyone to at least try to predict the movements of our erratic and certainly compromised central bank. When looking at the balance sheet, everyone might see something different, but if there’s anything it helps reaffirm, it's that in the long run, the balance sheet, money supply, and most prices will only go up. This is all part of some grand design by the Federal Reserve in a financial system where those at the bottom pay dearly for those at the top.
Bracket Creep: Delaware’s Hidden Income Tax
The recent acceleration of inflation in the U.S. has undoubtedly caused most Delawareans to see the difference between nominal or money income and real income or what their income actually buys. The loss in purchasing power of Delaware households because of inflation is compounded by the fact that Delaware, like several other states, has a progressive income tax and doesn’t adjust its income tax brackets for inflation.
Delaware’s income tax brackets have remained the same since 1999. So, when nominal household incomes rise, those incomes are taxed at higher rates. This in turn results in lower disposable household incomes. This phenomenon is referred to as “bracket creep.” The loss in real income or purchasing power because of bracket creep is in addition to any loss in real income that results if the rate of inflation exceeds the increase in nominal income.
In this essay, I examine the extent of bracket creep in Delaware between 1999 and 2019 and then review the implications of this bracket creep. Figure 1 shows the change in the price level as measured by the U.S. Consumer Price Index (CPI), the mean Delaware Adjusted Gross Income (MEAN AGI), and the revenue generated by the Delaware income tax (Tax Revenue) for the period 1999-2019. All variables are index values expressed as percentages of their respective 1999 values.
The data in Figure 1 indicate that the mean adjusted gross income over the period 1999-2019 increased at an annual rate of 1.79 percent or by 45 percent over the entire period. This was less than the rise in the consumer price index which increased at an annual rate of 2.06 percent or by 53 percent over the entire period. Hence, the mean adjusted gross income failed to keep up with inflation, resulting in a loss in the purchasing power of Delaware taxpayers.
This loss in purchasing power was further diminished by the increase in personal income tax rates as households were pushed into higher tax brackets by inflation. While the real average adjusted gross income of Delaware households declined over the period, the tax revenue generated by the personal income tax increased by an average annual rate of 3.31 percent and nearly doubled over the period 1999-2019. In other words, the state of Delaware was able to nearly double its revenue from the income tax without legislating any tax increases.
Sources: Data for the mean adjusted income (Mean AGI) are from the Federal Reserve Bank of St. Louis. Data for the Consumer Price Index are annual data for all urban consumers and are from the Bureau of Labor Statistics and data for the tax revenue are from the Delaware Division of Revenue.
Table 1 shows the impact that adjusting the tax brackets annually for inflation would have had on the tax liability of households with varying levels of taxable income for the year 2019. Column 4 of the table denotes the percentage by which the tax liability for households with varying levels of taxable income would have declined in 2019 if the tax brackets had been adjusted for inflation.
Table 1. Comparison of 2019 Tax Liabilities Under Current and Adjusted Tax Brackets
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Taxable Income | Current Tax Bracket | Adjusted Tax Bracket | Percent Change |
$10,000 | $262 | $190 | -27 percent |
20,000 | 742 | 407 | -45 percent |
30,000 | 1,280 | 623 | -51 percent |
40,000 | 1,835 | 1,623 | -12 percent |
50,000 | 2,390 | 2,178 | -9 percent |
60,000 | 2,944 | 2,733 | -7 percent |
70,000 | 3,603 | 3,288 | -9 percent |
80,000 | 4,263 | 3,843 | -10 percent |
90,000 | 4,923 | 4,398 | -11 percent |
100,000 | 5,583 | 4,762 | -15 percent |
150,000 | 8,883 | 8,326 | -6 percent |
The data in table 1 clearly indicate that the failure to adjust tax brackets for inflation results in lower after-tax incomes for households at all levels of income. However, the most adverse effects are felt by households which had incomes of $30,000 or less in 2019.
Bracket creep creates a number of problems. First, it results in a loss in the purchasing power of taxpayers which reduces the amount of income available for savings and capital investment in the private sector. As the Austrian economist Ludwig von Mises noted "progressive taxation of income and profits means that precisely those parts of the income which people would have saved and invested are taxed away." This in turn leads to a decline in the rate of economic growth and a lower standard of living for future generations.
In addition, bracket creep requires taxpayers to pay a higher percentage of their incomes in taxes without requiring any action by the state. Instead of forthrightly increasing taxes, the state relies on inflation to push households into higher tax brackets in order to increase tax revenue and the size of government. As Thorndike noted bracket creep is “a convenient way to raise more revenue—painful for the hapless taxpayers but painless for the gutless lawmakers.”
Higher income tax rates also incentivize higher income individuals and households to migrate to lower tax states. In fact, an increasing number of states are lowering or eliminating their income taxes to stem out-migration and spur in-migration and economic growth.
Finally, since higher income households are already in the highest tax bracket, bracket creep tends to make the after-tax income distribution more unequal as lower income households are pushed into higher tax brackets over time. It also discourages less skilled lower income workers from entering the workforce, resulting in lower labor force participation rates. This negative effect is particularly important for a state like Delaware because of its relatively low labor force participation rate. Delaware’s labor force participation rate of 60.2 percent in December of 2022 was in the lowest quartile of U.S. states. Given this, It behooves Delaware to look for ways to incentivize, not disincentivize, higher labor force participation rates.
It's time for Delaware to adjust its income tax brackets for inflation each year to prevent the negative consequences of bracket creep. If the executive and legislative branches of Delaware’s government want to take more of the taxpayers’ money, they should be required to do so by transparently raising tax rates. This is not such a novel concept. Even the U.S. Congress recognized how deceitful the use of bracket creep was as a means of raising revenue. As a result, in 1981, it voted to pass President Reagan’s Economic Recovery Tax Act which included a provision to adjust tax brackets for inflation.