Power & Market

The Most Important Factor in The Economy Is Flashing A Huge Warning Sign

Since money is used in all transactions, including investments in physical goods and financial instruments, the supply of money is extremely important to the economy and financial markets.

Accelerating money supply growth typically leads to stronger economic activity and higher prices, while decelerating money supply growth (or decline) typically leads to weaker economic activity and lower prices.

However, the impact of changes in the money supply are always temporary. For example, if accelerating money supply growth always leads to a “stronger economy”, then why not always accelerate money supply growth? The short answer is because there is no such thing as a free lunch in economics.

As Ludwig von Mises, one of the greatest economists and monetary theorists in history noted about the mythical economic benefits of creating money out of thin air:
“If it were really possible to substitute credit expansion (cheap money) for the accumulation of capital goods by saving, there would not be any poverty in the world.”

And not only does creating money out of thin air not improve living standards, but it actually lowers living standards. This is because it causes the boom and bust business cycle, which wastes scarce resources that were used in failed investment projects undertaken due to artificially low interest rates.

Mises developed this Austrian Business Cycle Theory. As he summarized the problem caused by money creation out of thin air:
“The wavelike movement effecting the economic system, the recurrence of periods of boom which are followed by periods of depression is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion.”

Money Supply Is Now Falling Rapidly

As a result of the huge rise in interest rates over the past year or so, money supply growth is now falling at one of the fastest rates in history.

The best measure of money, called Austrian Money Supply (“AMS”), was down 9.7% year-over-year in March, the largest decline in over 35 years of available data, as shown below.

The next chart shows M2 money supply is down 4.1% year-over-year, the largest decline since the Great Depression, when M2 fell over 10%. Let me repeat that. M2 money supply is falling at the fastest rate since the GREAT DEPRESSION of the 1930s!

Source: thechartstore.com

With short-term interest rates on Treasury bills and money market funds now much higher than on bank deposits, many people have been pulling their money out of banks and investing it in Treasury bills and money market funds. As a result, bank deposits are now falling 5.4% year-over-year, the fastest decline in nearly five decades, as shown below.

In order to protect their balance sheets and limit their risk in the face of declining deposits and a coming recession, banks have cut way back on lending. The result is bank credit is now only growing 2.3%, the slowest pace in nearly 50 years, outside of the Great Recession, as shown below.

Implications Of Falling Money Supply

Money supply growth is the primary driver of the boom-and-bust business cycle and financial markets. With money supply now declining at one of the fastest rates since the Great Depression and the yield curve the most inverted in over 40 years following the steepest pace of Fed tightening since the early 1980s recessions, I believe there is an extremely high risk of a major recession coming this year, if it hasn’t already started. Forewarned is forearmed.

The Biden Administration Keeps Lying about US Government Defaults

05/04/2023Ryan McMaken

If you have an actual life and important things to do, you probably haven't been paying attention to the latest debt-ceiling theater now going on in Congress. Congress is indeed at it again, however, and the leadership from the GOP and the Democrats are fighting over how federal tax dollars will be spent over the next year. Until an agreement is reached, the GOP leadership is refusing to sign off on any increase to the debt ceiling which permits the federal government to add to its 30-trillion-plus debt and keep the federal government humming using its usual debt-financed tricks. 

In an effort to get the debt-ceiling increase sailing through without any opposition, the Biden administration in recent years has repeatedly claimed that the United States government has never ever defaulted. Janet Yellen has made this claim several times. For example, in a 2021 column for the Wall Street Journal, she repeatedly claims the US has never defaulted. “The US has always paid its bills on time,” she insists, and then repeats the claim in the next paragraph: “The US has never defaulted. Not once.”

Biden's handlers are still at it. On Tuesday, the Biden administration tweeted that 

America is not a deadbeat nation. ... We have never, ever failed to pay our debt. But MAGA Republicans are engaged in reckless hostage-taking by threatening to force America into default. It’s dangerous and wrong

This is a lie, whether Yellen says it or Biden says it. Here at mises.org, we've published several articles on this topic. Here are two of them:

These articles outline how the US government in the early years of the new federal government, and then again during the US Civil War, when the government refused to make good on its promises to repay its notes in gold.  Further defaults followed, with the largest being the 1934 default on liberty bonds. The US had explicitly promised to pay back its debts in gold. It then refused to do so.  Fortunately, the word is getting out. Shortly after the Biden administration posted its tweet lying about US defaults, Twitter users used the "community notes" feature to add additional context to the post.

As you can see, the added context contains a link to Chamberlain's article:  This has produced tens of thousands of visitors to the article. 

Moreover, another one of the articles posted is written by our own Senior Fellow Alex Pollock, and published in The Hill. Pollock adds two additional defaults: the time the US refused to make good on its silver certificates in 1968, and when Nixon closed the gold window in 1971, refusing to make good on its gold obligations under the Bretton Woods agreement. 

These are all excellent examples of how the US cheats its creditors, and it's time for agents of the regime to stop pretending that the US government is not a "deadbeat" government. 

The Fed's Difficult Position Is Its Own Fault

05/03/2023Connor O'Keeffe

Fed officials are meeting today to discuss the central bank’s next course of action amidst bank failures and persistent inflation. The financial press is busy pumping out articles lamenting the tough position Fed officials find themselves in as they debate another rate hike. That’s true, it is a tough position. But the blame for that lies squarely on the Fed’s own shoulders.

This often goes unsaid because the way people think about central banking is wrong. Most seem to imagine the national economy as a hot air balloon trying to get from point A to point B. The Fed is like the pilot whose job is to keep the balloon stable and at a safe altitude. When conditions demand it, the pilot can either blow hot air into the balloon (monetary expansion) or vent the hot air out (monetary contraction) to increase or decrease buoyancy. If the Fed does its job well, the economy would be guided gently along with occasional monetary interventions to account for economic fluctuations—just as the balloon pilot gently corrects for changing atmospheric conditions.

The quest for a “soft landing” makes sense in this view. The “balloon” climbed too high (inflation), and venting hot air (rate hikes) has yet to bring the balloon back down to the target altitude (2% inflation). But continuing to vent air risks sending the balloon into an unrecoverable descent to the ground (recession). The analogy seems to work well because we’re inundated with central bank discourse that uses this framing. But the framing is wrong. The Fed is not a gentle guide keeping the economy stable; it’s the culprit behind the inflation and imminent recession we’re now forced to deal with.

Recessions don’t come out of the blue. They have a cause—malinvestment encouraged by central bank credit expansion. Artificially low interest rates send a false signal to investors and producers to start, or continue, producing things that either customers don’t actually want—at least not in the quantity now being produced—and/or are unable to be completed with available resources. At some point, often when rates come back up, the precarious nature of these production lines becomes impossible to ignore, and a painful period of correction takes place. That’s a recession. 

So we can see the problem with the typical framing of the Fed’s situation. Besides falsely identifying the Fed as an essential part of the economy, it presents a recession as possible to avoid. Not only is it impossible to avoid, it was the Fed who caused it. They may still have room to delay the correction, but the malinvestment that needs correcting is already here. 

A better analogy than the hot air balloon would be a false shortcut. Imagine you’re running on a trail in the woods. Say it’s the second half of a trail marathon. You’re exhausted and desperate to get to the finish line when you round a corner and see a steep hill up ahead that seems to go up forever. You stop, devastated. You don’t feel like you have the energy to get to the top, much less all the way to the finish. Then out pops a Race Official. He says he can tell you’re exhausted and points excitedly to a small trail to the left of the hill. He explains that it’s a shortcut that avoids the hill. You don’t believe him. A shortcut? In a race? That can’t be allowed. But he insists. He is an official, after all. This shortcut isn’t just allowed, he says, it’s encouraged. 

He’s persistent, and eventually, you’re convinced. You start down the trail and immediately feel much better. It’s shady and has a slight downhill. Your pace increases, you stand taller, and you feel more energized. But above all, you feel grateful that the Race Official happened to find you at the base of that hill. However, what you don’t know yet but will eventually figure out is that you were fooled. There is no shortcut. You’re running off course. Every step you take brings you further and further from your goal. At some point, you will need to recognize this, turn around, and run all the way back up to the base of the first big hill you were misled into thinking you could skip. And because you’re now running downhill and every mile you run not only doesn’t count towards your race but will need to be re-run just to get back to where you initially went off course, correcting your mistake will be extremely painful. But it’s necessary. And the longer you refuse to face that, the worse the eventual correction will be.  

Now imagine you realize your mistake. You turn around and start your painful climb back up to the trail when, again, out jumps the Race Official. He reassures you that you’re on the right path and should continue down this trail. The climb is painful, so you’re inclined to believe him. You keep on down the trail, occasionally turning around when your doubts return, only to have the Race Official again usher you back down his false shortcut. 

By now, I hope it’s obvious what this analogy represents. The hill is the economic pain made inevitable by the lockdowns in 2020 and 2021. The Race Official is the Fed, and the false shortcut is the artificial boom and malinvestment caused by the $7 trillion created out of thin air and injected into the credit markets. I hope it’s also clear that the worst thing you, as the runner, could do would be to continue seeing the Race Official as a helpful guide. Correcting for malinvestment is always painful. But ignoring or aggravating it is worse. 

We’re running off course. Don’t have pity for the people who got us here. And certainly don’t look to them to get us out.

New Must-Read Book Honoring Jesús Huerta de Soto

05/01/2023David Howden

Attention Austrian school economists and enthusiasts: Philipp Bagus and I are pleased to announce the release of our new two-volume book in honor of Jesús Huerta de Soto! "The Emergence of a Tradition: Essays in Honor of Jesús Huerta de Soto" is a celebration of the life and work of one of the most prominent members of the Austrian school of economics.

The two-volume book offers a collection of essays from notable economists and scholars.

The first volume, "Money and the Market Process," includes chapters from well-known economists such as Philipp Bagus, Jörg Guido Hülsmann, Mark Skousen, Thorsen Polleit, Joe Salerno, Shawn Ritenour, David Howden, and others. The articles cover a broad range of topics, including monetary theory, banking, and the market process.

The second volume, "Philosophy and Political Economy," features contributions from Hans-Hermann Hoppe, David Gordon, Walter Block, Javier Milei, Daniel Lacalle, Axel Kaiser, Cardinal Antonio María Rouco Varela, and others. These chapters delve into the philosophical foundations of Austrian economics and its relationship to political economy.

This book represents a significant contribution to the field of Austrian economics. The fifty-two chapters include many new theoretical contributions to our understanding of the market economy and free-enterprise system. The essays provide a comprehensive and in-depth exploration of the world of Austrian economics, making it a must-read for anyone interested in this fascinating field.

"The Emergence of a Tradition: Essays in Honor of Jesús Huerta de Soto" is an essential addition to any Austrian economist's collection. The quality of contributions makes it the most significant book on Austrian economics in many years.

First Republic Count Down

05/01/2023Doug French

Citizens Financial Group Inc (CFG.N), PNC Financial Services Group (PNC.N), JPMorgan Chase & Co (JPM.N) and US Bancorp in NFL Draft parlance are “on the clock.” These banking white knights are thought to be among the bidders vying for the remaining carcass of First Republic Bank in an auction process being run by the Federal Deposit Insurance Corp, reports Reuters.

Reuters says, “A deal is expected to be announced on Sunday night before Asian markets open, with the regulator likely to say at the same time that it had seized the lender, three of the sources said. Bids are due by Sunday noon, one of the sources said.” 

“Unclear to some involved in the process is whether regulators might use a bid for a so-called open-market solution that avoids formally declaring First Republic a failure and seizing it,” Bloomberg reports. 

Bank analyst Chris Whalen tweets the hard facts. “Hello. Bid is zero with a loss share agreement @FDICgov Haircut loan book 15%. Equity number is negative…”

Yes, the taxpayers will be the unwitting holders of First Republic’s bad assets, while one of the FDIC’s favored bidders gets the good stuff at a discount. Jamie Dimon’s J.P. Morgan already has ten percent of the nation’s deposits making that bank ineligible to pick up First Republic but don’t be surprised if Jamie receives a “special government waiver” if he submits the winning bid. 

Mr. Dimon has been viewed as the fair haired banker for decades. Ex-FDIC Chair Sheila Bair, in her book Bull By The Horns, called Dimon “deeply experienced” and related a story when she served on a panel with Bill Clinton and Dimon with the JP Morgan CEO calling the FDIC “creditworthy” and “would be happy to lend [the FDIC] money anytime.” Writing about the WaMu failure Bair said, “If Chase had not acted, the FDIC would have suffered tens of billions of dollars in losses.” The FDIC remembers. 

James "Jim" Herbert founded First Republic in 1985. Merrill Lynch acquired the bank in 2007, but after Merrill was purchased by Bank of America in the throes of the great financial crisis, BoA sold First Republic and the bank blossomed by luring high-net-worth customers with preferential rates on mortgages and loans. What came with those low loan rate products was uninsured deposits amounting to 68% of the bank’s total deposits.

As was the case with Silicon Valley Bank, First Republic saw more than $100 billion in deposits fleeing in the first quarter, leaving it scrambling to raise money.

Mr. Dimon’s bank, PNC and 9 other big banks made a 120-day deposit at FRC totaling $30 billion in March. It’s unclear if that deposit is insured (why should they be insured? Asks ZeroHedge), uninsured or could be converted into equity as a part of a bailout. This writer can’t believe Mr. Dimon would put up that kind of money uninsured. 

Former Treasury Secretary Lawrence Summers told Bloomberg Friday that he was “surprised and disappointed that this situation has continued to linger as long as it has.”

Sounding almost Rothbardian, Summers said “These are things like forest fires, it is much easier to prevent them than it is to contain them after they start to spread.”

Now First Republic is a political football: cover all the deposits or not. Jim Bianco tweets, 

Don't bailout the uninsured depositors (who are also uninsured creditors) and most likely they take a loss. Yes, the 11 banks will lose, but so will any other uninsured depositor.

If so, sit back and watch 41% of the US deposit base that is not insured (mainly businesses with deposits greater than $250k) try and get their deposits out of their “not-too-big-to-fail” bank and into one that is too-big-to-fail. Chaos in banking because Yellen reneged about protecting uninsured depositors 5 weeks after her promise to protect them.”

"If no business firm can be insured," Murray Rothbard wrote,

then an industry consisting of hundreds of insolvent firms is surely the last institution about which anyone can mention "insurance" with a straight face. "Deposit insurance" is simply a fraudulent racket, and a cruel one at that, since it may plunder the life savings and the money stock of the entire public.

If Jamie Dimon wants the First Republic, he’ll get it, on his terms. And the fraudulent racket will continue. 

23,000+ People Work at the Fed

04/28/2023Robert Aro

There are about 23,000 people too many, working in the Federal Reserve System. According to the 2021 budget, the actual amount was 23,517.

Various calculations can be done to put more context around this and provide additional food for thought. In 2022 the Fed paid about $4 billion in salaries in addition to the$1 billion it paid in pension costs. If we take this $5 billion and divide it by the Fed’s 23,000 employees, we arrive at a cost of approximately $217,000 per employee. Keep in mind that this is just an average and rough estimate. The reality is likely that closer to 80% of the employees only make around $100,000 while the remaining 20% make a lot more.

But there’s more to it than that. The financial statements reveal that the Board of Governors expenses and currency costs were $2 billion. If this constitutes salaries, then total salaries and pension costs at the Fed become closer to $7 billion. Dividing this figure by 23,000 people equals around $304,000 per employee.

The salary structure can be viewed below:

The 23,000+ people who work at the Fed are probably doing well financially. Steady income, great benefits, probably not too much stress, and likely have little risk of being fired over things such as failure to meet profitability targets.

Additionally, any risk of a severe downturn leading to mass layoffs likely doesn’t apply to them. Quite the opposite in fact, as any severe market downturn typically forces the Fed to act more, with more bailouts, more money printing, and the creation of more lending programs. As we’ve seen, in times of financial crisis it’s not unheard of for Fed officials to work weekends!

It seems all so welcoming, reinforced by Chair Jerome Powell’s inspirational 2-minute-long video on the importance of diversity. According to the transcript:

Diversity makes the Board stronger by providing different talents and perspectives that help make us more effective. We also do a better job serving the public when we reflect the rich diversity of our nation.

Various resource groups exist to help manage this much diversity, including:

Sadly, the Fed continues to discriminate against Austrians…

The benefits beyond the standard salary and pension are numerous. It offers other insurance plans, a thrift plan, alternative work arrangements, transportation subsidy, academic assistance, leave (which appears to be granted when you work too many hours), paid parental leave, and career development.

Should one choose to work from the office, on-site perks include:

  • credit union offices for your banking needs,
  • fitness centers that encourage a healthy lifestyle through exercise and indoor and outdoor sports,
  • lifestyle seminars on finance, health, and life transitions that assist employees with major life decisions,
  • and a Fine Arts program for appreciation of the cultural arts.

With 12 districts to choose from, the Federal Reserve System offers a little something to everyone:

Other than for the janitorial staff (who may be contracted), there appears to be no physically demanding labor involved. The jobs available primarily consist of office workers, such as economists, researchers, attorneys, analysts, and IT positions.

Those in the system have little to no incentive to question where their salary is coming from, or what the greater economic impacts of their organization are. Speaking of averages, if the average low-level employee read Mises or Rothbard, it would only raise more questions and leave them in an ethical dilemma, which could become quite unnerving. To the average person, the system works for them so there’s no need to ask too many questions.

However, those in the upper echelon of the Fed may require a much more impregnable conscience. One can only hope that those within the Board of Governors know exactly what they’re doing, and simply don’t care about the capital destruction, currency debasement, and boom-bust cycle they create; if not, then the conclusion becomes much more terrifying.

Image source:

The Path to Profitability

04/26/2023Robert Aro

One of the problems we’re forced to confront when considering the role of the Federal Reserve is whether it’s better for the Fed to take losses and capitalize them as deferred assets, or go back to an era of “Fed profitability” whereby the Fed remitted money to the Treasury on a weekly basis.

The path to profitability is an easy one, consider: Last year the central bank earned $170 billion in interest revenue (paid by government and mortgage holders), then expensed $102 billion to banks, literally 60% of the Fed’s revenue.

What would happen if the Fed simply stopped paying interest to banks?

The chart below shows Reserves held at the Fed since 1959:

The reserves balance held at the Fed didn’t fluctuate for decades and then suddenly banks started keeping a lot more money at the Fed. By 2009 over $1 trillion was held there, and in 2021 over $4 trillion.

This October 6, 2008 announcement solves the mystery:

The Federal Reserve Board on Monday announced that it will begin to pay interest on depository institutions' required and excess reserve balances.

Required and excess reserve balances no longer exist, they’ve been combined into reserve balances, and so, as the Fed’s FAQ shares:

The Federal Reserve Banks pay interest on reserve balances.

Currently at a generous 4.9%.

The interest rate on the Fed’s US Treasuries held are not disclosed in its financial statements, but the interest rate on its nearly $3 trillion Mortgage-Backed Securities is:

Nearly $2 trillion earns the Fed 1.5% to 2.5%, whereas the Fed pays 4.9% on the $3 trillion that banks hold on reserve. And so, it’s probably time to consider putting an end to this nearly two-decade long experiment of transferring wealth from the poor and middle class to the rich and powerful.

The correct answer is that the Fed should be abolished, but this will not happen anytime soon. Realistically, they could revert to the pre-2008 policy and pay no interest, or because too many people won’t like that, then at least lower the rate paid to banks to something smaller, like 1, 2, or 2.5%. It’s all arbitrary, but anything less than 4.9% would be an improvement.

One might fear that in doing so, this $3 trillion reserve would leave the Fed and go back to the banks; however, this is fine as the world functioned a lot longer in the former way rather than the latter.

Also consider how ideas like liquidity crisis, lending crisis, or credit crunch, have been mentioned since the banking crisis of 2007-09. Lending programs like the Paycheck Protection Program, and all the other bank assistance schemes, appear more suspect when we remind ourselves that the banks had trillions of dollars earning interest at the Fed this entire time. Given that we’re living at a time when the risk of bank-runs have become a real threat, it’s almost comical to think banks would lend “too much,” or wouldn’t benefit by increasing their own reserve amounts, so claims to the contrary seem unfounded.

In a truly free market, a bank would have the ability to either lend money or keep it on reserve as there would be no central bank to offer a third choice. A Fed that does not pay interest on reserves would bring us a step closer to such a market. 

It doesn’t bode well that stopping interest payment on reserves or at least reducing the 4.9% rate is not being considered as a viable solution. The fact that the Fed has the power to enact this change, literally tomorrow, but continues not to, speaks volumes. Hopefully there’s another way, but if not, the conclusion is clear: If the Fed refuses to cut expenses by reducing interest paid to banks, then the only way for the Fed to make more money is for the Fed to “make more money.”

Image source:

It's a Good Thing for Ordinary Americans If the US Loses Reserve Currency Status

04/25/2023Ryan McMaken

Earlier this month, Larry Kudlow insisted that it is "it's incumbent on the U.S. government, no matter who's in power, to maintain the reserve currency status of the dollar." Kudlow laments that a toppling of the dollar from that perch "seems to be the direction we're going in." 

Kudlow's remarks came a day after Donald Trump declared that China is trying to displace the U.S. Dollar [sic] as the NUMBER ONE CURRENCY" and that if this occurs, it would be the biggest defeat for our Country [sic] in its history." 

Neither Trump nor Kudlow actually explain why maintaining reserve currency status is so important. After all, it's clear that it is not necessary for a country's currency to be a reserve currency in order for that country to have a high standard of living and a high degree of economic freedom. We could simply look to Norway and Switzerland to see that. 

What's Good for the Government Isn't Necessarily What's Good for the People

Trump and Kudlow seemingly can't tell the difference between what is good for the US government, and what is good for the people.  The idea that global reserve currency status for the dollar is essential to "America" relies on the false notion that the interests of the US regime and the interests of ordinary taxpaying Americans are one and the same. These interests rarely coincide, however, and they certainly don't when it comes to reserve currency status. This is especially the case when the dollar is unbacked by any commodity like gold, and is simply a floating fiat currency that can be inflated at the will of the regime at any time.

That global reserve currency status benefits the regime itself is obvious. This status for the dollar does indeed allow the regime to more recklessly inflate the dollar and increase deficits. This enhances the US regime's ability to bribe voters with enormous welfare programs and involve the US regime in a dazzling array of wars that have nothing to do with defending US territory. None of this, however, improves the standard of living of Americans who pay the bills. Even worse, when the dollar ceases to be the dominant reserve currency—an event that is inevitable—holders of dollars will see their purchasing power plummet. Yet, it not the end of reserve currency status that is to blame for the inflationist pain. Rather, the fault will lie with the decades of monetary and fiscal mismanagement made possible by the dollar's status as global reserve currency. 

To demand the regime continue to cling to global reserve currency status is to demand a continuation of the policies that have hollowed out the financial well-being of Americans for decades.

Trump and Kudlow, however, are not troubled by this. For them, it appears that the supposed importance of reserve currency status is not about economic concerns, but is really a political project. This shouldn't surprise us given many of the narratives surrounding the dollar's status—which focus on China and Chinese geopolitical power as the main reason to fear a decline of the dollar. This isn't about protecting your wealth or reining in government power. It's about increasing US government power in the name of fighting the latest foreign "axis of evil." 

In fact, China's currency, the yuan, doesn't even pose a threat to the dollar. The yuan is a fifth-place also-ran in the currency race. So, for now, the dollar still reigns supreme, and being the regime whose currency enjoys global reserve status comes with many advantages.

Why Reserve Currency Status Enhances State Power at the Expense of the Taxpayers

The first advantage is reserve currency status brings a greater global demand for dollars. This means more of a global willingness to absorb dollars into foreign central banks and foreign bank accounts even as the dollar inflates and loses purchasing power. Ultimately, this means the US regime can hoodwink the voters into accepting more monetary inflation, more financial repression, and more debt for many years before domestic price inflation becomes a political problem for the regime. After all, even if the US central bank (the Federal Reserve) creates $8 trillion in new dollars in order to prop up US asset prices, much of the world will take those dollars out of US domestic markets, and this will reduce price inflation in the US—at least in the short term. 

[Read More: "Why the Dollar Still Beats the Euro and the Yuan" by Ryan McMaken.]

A second advantage: the fact the dollar dominates in global trade transactions means more global demand for US debt. Or, as Reuters put it in 2019, the dollar is used “for at least half of international trade invoices—five times more than the United States’ share of world goods imports—fuelling demand for U.S. assets.” Those assets include US government debt. In fact, as Robert Murphy notes, this inflation-fueled demand for US assets will be "heavily tilted toward debt (rather than equity in growing companies)." This rush for US debt pushes down the interest rate at which the US government must pay on its enormous $30 trillion debt. 

All in all, reserve status for the dollar means a lot more US government spending. This produces no net benefit since government spending in itself distorts the economy, drives up prices, and otherwise redistributes wealth according to political considerations, rather than according to the needs of consumers and entrepreneurs.

None of this is good for the productive people in the US. For one, deficit spending—whether for elective wars or welfare programs—must always be paid for, either in the form of price inflation (i.e., the inflation tax), or in terms of future ordinary taxation. Moreover, reserve currency status creates political cover for the regime's easy-money policies in the short term. That is, global demand for the dollar helps create the temporary impression that monetary inflation comes with few downsides. This, however, can only continue until the dollar's reserve status ends or even significantly weakens. In the meantime, the world will have been flooded with dollars. 

Reserve currency status, by politically fostering more deficit spending, also harms those parts of the private economy that depend on private investment. As deficit spending increases, the economy is flooded with ever larger amounts of government debt backed up by tax dollars. This attracts huge amounts of wealth to government Treasurys that otherwise would have gone into private-sector investments

All this dollar profligacy has been neither necessary nor advisable, yet maintaining global reserve currency status can help regimes get away with this sort of thing for decades. 

The Effects of Losing International Currency Power

Often, discussion about the dollar’s reserve status creates a false dichotomy between total domination of the global monetary system on one hand and complete abandonment of the dollar on the other. A more likely scenario is that the dollar will weaken considerably but will remain among the most often used currencies. After all, even after the pound sterling lost its status as reserve currency in the 1930s, it did not disappear. 

For example, let’s say the US dollar sinks to 40 percent of all foreign reserves and is only used in one-third of all international trade invoices—instead of one-half, as is now the case. This would not necessarily destroy the dollar or the US economy, but it would certainly constrain the US regime's ability to pile on another trillion dollars worth of debt without the true costs of mounting debt becoming abundantly clear.  Perhaps more importantly, a world less awash in dollars will mean a world with less demand for US assets such as US government debt. That means higher interest rates for the US government and less of an ability to finance the welfare-warfare state by inflating the currency.

Naturally, politicians and pundits such as Trump and Kudlow view any threat to this kind of state power as a bad thing. At this point, however, how we feel about it is irrelevant. It's going to happen regardless of our feelings on the matter. The only way it doesn't happen is if the US regime suddenly starts slashing deficits and government spending, embraces a strong dollar policy, and perhaps even anchors the dollar to a commodity like gold. None of those things is going to happen without first experiencing a wakeup call on the level of losing currency reserve status. The good news is such a wakeup call will weaken the US regime, potentially forcing policymakers to embrace a more sane fiscal and monetary policy.  

Ukraine War Offers Glimpse at Modern Conscription

04/24/2023Connor O'Keeffe

January 27th of this year marked fifty years since the draft was officially suspended in the United States. And while young American men are still forced to register with the Selective Service, we have been fortunate to go without a draft for half a century, despite Washington's hyper-aggressive foreign policy.

That amount of time can make things feel distant. And even though the program is all set to fire right back up with a word from the president, there's a sense that the draft is an issue from a different era.

But the war in Ukraine offers a window into what conscription looks like in today's day and age. Both sides have resorted to forcing a part of the population to put their lives on the line to serve the interests of the regimes in Kyiv and Moscow. And the lack of condemnation, or even interest, from our fellow Americans should concern all advocates of self-ownership.

After the fall of the Soviet Union, both Ukraine and Russia continued to require male citizens to serve time in the military, though the term was gradually reduced from two years to one.

In 2013, Ukrainian President Viktor Yanukovych abolished conscription. Less than a year later, the new Western-backed Ukrainian government reinstated the draft and forced men to fight the people of eastern Ukraine who didn't want to live under the new government in Kyiv.

After serving their time as active duty soldiers, Ukrainian conscripts remained in a reserve status, eligible to be recalled until the age of 55.

Within hours of the first Russian airstrikes that signaled the beginning of the February 2022 invasion, Ukrainian President Volodymyr Zelensky declared martial law, called up men in the reserves, conscripted new soldiers, and prohibited men between the ages of 18 and 60 from leaving the country.

Zelensky also authorized the "release" of convicts with combat experience to bolster Kyiv's forces. At the same time, conscription appears to have been implemented as a new form of punishment. Men caught breaking curfew and getting into street fights have received conscription notices after being detained by police.

Russian conscription followed a similar trajectory to Ukraine's after the fall of the USSR. The mandatory term of military service for Russian men was rolled back to one year in 2008. And as recently as 2019, Russian President Vladimir Putin voiced support for abolishing conscription.

But, genuine or not, those sentiments disappeared as the region descended into war. Shortly after the February invasion, Russia held its spring draft and conscripted 134,500 people. 120,000 were conscripted last Fall. The Russian government has claimed conscripted soldiers are only being sent to replace volunteer soldiers in their posts, with the volunteer soldiers then sent to the front in Ukraine, but some have disputed this.

Today, over a year into the invasion, Ukraine is relying more on conscripts as their losses mount. Until recently, officials could only deliver draft notices to someone's home address. Some found they could avoid the summons by staying away from their official addresses.

New rules allow officials to track down new conscripts wherever they may be. Men are being stopped in the street and questioned about their draft status. With few eligibility exceptions available and a brutal front line, the stricter rules have many Ukrainian men fearing for their safety. The conscripts have so far received worse equipment and inferior training than the volunteer forces before being sent into battle.

Russia has also had an issue tracking down new conscripts. The Kremlin's approach has been to transition to a digital platform. All eligible men are required to register through an online government portal. Draft notices are sent out electronically and are considered “delivered” immediately, meaning the man is instantly on the clock for reporting to his local recruitment office.

In the enduring words of William Norman Grigg, "conscription indisputably rests on the assumption that each individual is the State's property, to be sacrificed when those controlling the State deem it necessary for their protection."

The draft may lie dormant in the U.S., but that assumption remains. The war in Ukraine serves as a reminder that conscription is not extinct. It remains a clear and present threat to liberty. 

Don’t Forget the Notes to the Financial Statements!

04/24/2023Robert Aro

The notes to the Fed’s Financial Statements read like a disclaimer at the end of an Rx drug commercial. However, a financial statement review would not be complete without a look at the fine print. The question is: How bad is it?

Never mind the $16 billion dollar loss that was capitalized, let’s start with the $1.2 trillion dollar loss that never happened, as Page 43 explains:

Under the column: Change in cumulative unrealized gains is the total of $1,208,223 (in millions), or $1.2 trillion, in a loss position.

It’s quite tiny but Footnote 3 above refers to the $1.2 trillion loss, as follows:

Because SOMA securities are recorded at amortized cost, the change in the cumulative unrealized gains (losses) is not reported in the Combined Statements of Operations.

This loss represents the decline in fair market value of the Fed’s US Treasuries and Mortgage-Backed Securities (debt) holdings. As a result of the increasing rates, the value of the Fed’s assets has declined dramatically. Consequently, if the Fed wanted to sell these assets today, no one would pay as much as the Fed initially paid for them, in fact they’d pay about $1.2 trillion less.

Of course, it would be next to impossible for the Fed to actually sell its entire $8 trillion portfolio since the pool of buyers is fairly small, so prospective buyers would demand a much lower price in return. This helps explain their Quantitative Tightening (QT) strategy. The Fed must slowly shrink its balance sheet by around $80 billion or so a month, as we’ve seen it do this year, in order to mitigate losses; and so, the mystery of QT is nothing more than the Fed buying time before a system failure occurs. 

Since the assets are not written down to market, they remain at cost, so no loss appears on the financial statements. To be fair, so long as nothing catastrophic happens, the Fed will probably not realize the $1.2 trillion loss… conversely, it could always get worse!

The other section deserving of consideration is on Page 24, where the deferred asset (capitalized loss) of $16 billion is explained. It reads:

On a weekly basis, if earnings become less than the costs of operations, payment of dividends, and reservation of an amount necessary to maintain the aggregate surplus limitation, the Reserve Banks suspend weekly remittances to the Treasury and record a deferred asset.

The interest, administrative, and dividend costs were discussed in the review of the Statement of Operations a few days ago.

 Page 24 note continues:

A deferred asset represents the shortfall in earnings from the most recent point that remittances to the Treasury were suspended. The deferred asset is the amount of net excess earnings the Reserve Banks will need to realize in the future before remittances to the Treasury resume.

As of Thursday’s release, their deferred asset stood at $50 billion.

With interest rates this high it becomes difficult to imagine when the Fed will start to have positive income and remit money to the Treasury again. It’s almost as if the Fed only makes money when it expands its balance sheet, meaning the only way out of this is to inflate the money supply. Readers will recognize that this is precisely what the Fed has been doing and until they’re stopped, expansion of the balance sheet will continue to be its long run monetary policy.

To answer the initial question: How bad is it?

The notes reveal that all is not well with the Fed, and these heavy losses can be squarely attributed to its own policy. A profitable Fed may be even more dangerous than an unprofitable Fed. Like the money supply, there is no upper limit on how much profit the Fed could make by simply flooding the world with trillions of additional dollars to buy every bond and possibly stock in sight. When the Fed eventually pursues the road to profitability via Quantitative Easing, it will come with devastating consequences.

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