Posted tagged ‘Tech Bubble’

The Fed Has Proved The Lefts “Trickle Down Straw Man” Doesn’t Work.

October 28, 2014

The left always comes up with words or phrases that ridicule the ideas and/or policies of their opponents with the intent of stopping any intelligent debate about the merits. In the 80’s, the policy of lowering tax rates for the purpose of economic growth, was called “trickle down economics” by the left in an attempt to convince shallow thinking people that this idea couldn’t possibly work. The term “trickle down” has been used by the left since the 80’s to torpedo any economic policy, especially tax cuts.

HILLARY: ECONOMIST EXTRAORDINAIRE

Here is Hillary Clinton using this tactic in a speech yesterday (10/24/14) at a campaign rally for Martha Coakly.  At the start of this short video she says, “…don’t let anybody tell you that, you know, it’s corporations and businesses that create jobs.”, which is similar to the President saying, “..if you got a business, you didn’t build that“, in a campaign speech from the 2012. Mrs. Clinton’s statement reveals either her total ignorance about economics, or her great insight into the economic ignorance of the audience. We could write a post answering this statement, but it’s the next line; “You know that old theory, trickle down economics.  That has been tried. That has failed. That has failed rather spectacularly.”, that this post will be about.

THOMAS SOWELL AND WALTER E. WILLIAMS SPEAK ABOUT “TRICKLE DOWN”

Economist Thomas Sowell has challenged anyone to name an economist from any economic school of thought who had actually advocated a “trickle down theory”. In this article from 2001, Capital Gains And Trickle Down, he states that there is no such thing as “trickle down theory”. The left uses the term to attack tax cuts by saying, their opponents want tax cuts that will help the rich first and the money will supposedly trickle down to the masses. So just to be clear they are saying that letting everybody keep more of what they produce by reducing tax rates is a “trickle down theory”. This theory they created is simply a straw man.

Economist Walter E. Williams talks about the fake war that has been fought against the “Trickle Down” straw man in this article, Trickle Down And Tax Cuts. This is a tactic used by all politicians in which they misrepresent (lie about) an opponents idea or policy, setting up a straw man, in order to argue against this false premise instead of debating their opponent head on. In this case the left sets up the “Trickle Down” straw man to try to win the tax cut argument.

These two articles are really great especially the examples they give. Here are some excerpts from Thomas Sowell’s article.

“But free-market economics is not about “distributing” anything to anybody. It is about letting people earn whatever they can from voluntary transactions with other people.”

“Those who imagine that profits first benefit business owners — and that benefits only belatedly trickle down to workers — have the sequence completely backward. When an investment is made, whether to build a railroad or to open a new restaurant, the first money is spent hiring people to do the work. Without that, nothing happens.”

“Money goes out first to pay expenses and then comes back as profits later — if at all. The high rate of failure of new businesses makes painfully clear that there is nothing inevitable about the money coming back.”

” No one who begins publishing a newspaper expects to break even — much less make a profit — during the first year or two. But reporters and other members of the newspaper staff expect to be paid every payday, even while the paper shows only red ink on the bottom line.”

“In short, the sequence of payments is directly the opposite of what is assumed by those who talk about a “trickle-down” theory.”

Here are some excerpts from Walter E. Williams article.

“Trickle down is a nonexistent theory. Those who use it simply argue against a caricature rather than confront an argument actually made.”

“You can bet that the White House has people reading every bit of the news, including this column and Dr. Sowell’s article. You can bet some people in the news media will read it, as well. Despite the facts that Sowell has marshaled, they will continue to use trickle down theory and “tax cuts for the rich” demagoguery, even though they now have hard evidence to the contrary, because they can count on widespread gullibility and inability to do critical thinking.”

THE FEDS MONETARY POLICY, IS THE TRICKLE DOWN STRAW MAN

Getting money in the hands of the rich with the idea that it will trickle down through the rest of the economy is the straw man the left says won’t work. They are correct. The Feds loose money policy since 2000 is proof that it doesn’t work. Instead of letting individuals keep what they produce by lowering taxes, the Fed electronically prints counterfeit money and gives it to the top 1%. The Fed has printed a total of  $7 trillion since 2000 (click here) with $4 trillion of that being printed since 2008. Click here to see what has happened to the real median household income since this counterfeiting started before 2000. It has gone down.

The Fed injects electronically printed counterfeited money into the economy by purchasing mortgage-backed securities, from banks, and treasury bonds, from the Federal Government. The banks and the Federal Government have first access to the counterfeit money. Everyone in the immediate orbit of the banks and the Federal Government benefit secondarily from this printed money, you and I don’t benefit. Look at the charts in this article, Abolish The Engine Of Inequality: The Federal Reserve, by Charles Hugh Smith. They show that the  income and wealth of the people with access to the Feds counterfeit money has grown. And the wealth of the rest of us is stagnant or shrinking. The more the Fed prints the bigger the gap.

CONCLUSION

The Feds experiment of giving their counterfeit money to the people at the top and hoping it will trickle down has been going on since before the tech bubble popped in 2000. The tech bubble lead to the housing bubble that popped in 2008, which lead to the current financial bubble that will eventually liquidate itself at some point. The counterfeiting by the Fed created these bubbles in the first place. In the words of economist extraordinaire Hillary Clinton, “It has failed rather spectacularly“. She is correct. Trickle down economic theory defined by the left, as giving money to the wealthy in the hopes that it will trickle down, doesn’t work. Unless the goal was to make the first receivers of the money wealthier at the expense of the rest of us. But who could possibly be cynical enough to think that?

 

Related ArticleReal Savings vs. Counterfeit Savings, by austrianaddict.com.

Related ArticleA Tornado vs. The Fed, Which Is More Destructive, by austrianaddict.com.

 

 

 

 

“The Fed Has Failed”, Analysis by Charles Hugh Smith

March 18, 2014

Here is a great article by Charles Hugh Smith, at oftwominds, titled, The Fed Has Failed, (And Will Continue To Fail), Part I. His analysis of what is the result when the Federal Reserve electronically prints counterfeit money through their policies of quantitative easing (QE’s) and  artificially low-interest rates is spot on. He sums it up in this statement;

“The Fed….. is handing guaranteed returns to the banks and financiers while strip mining what’s left of the middle and working classes’ non-labor income, i.e. interest and savings.”

The charts he uses show that the Feds policies have worked to bolster the financial sector {wall street and banking}, while stealing from the bottom 80% of the people who hold financial assets, decreasing the total number of people actively working by 4%,  and shrinking real wages and purchasing power of the people who remain in the labor force.

Before you read the article lets first give a brief explanation of how the Fed first creates and then injects counterfeit money into the economy, and then look at the result of the Feds counterfeiting.

COUNTERFEITING: 1) THE FED SETS THE DISCOUNT RATE IT CHARGES BANKS

The Fed sets the discount rate which is the interest rate it charges banks for loans. The zero interest rate policy {ZIRP}, that has been in effect for some time now, allows a member bank to borrow electronically printed counterfeit money from the Fed at zero or near zero percent interest. They can take the money and invest it in a bond, stock or other financial instrument that yields a higher interest rate than the rate charged by the Fed. It’s not hard to find a security that yields a rate higher than zero. Banks can also loan this money to individuals, at a low-interest rate, for mortgages on home purchases. So banks either purchases interest baring securities {bonds, stocks, etc} or create their own interest baring securities {mortgages} with the counterfeit money from the Fed.

COUNTERFEITING: 2) FRACTIONAL RESERVE BANKING

The banks can loan out more money than they get from the Fed because we have a 10% fractional reserve banking system. What this means is the bank can loan out 10 dollars for every 1 dollar they hold in reserve. So if the bank holds 1 million dollars in reserve it can loan out 10 million dollars. It can actually counterfeit another 10 million dollars in loans on top of the 1 million the Fed counterfeited and loaned to the bank. The bank is receiving monthly payments of interest and principle on the 10 million it counterfeited and loaned out. These payments can now be held on reserve which allows the bank to create more counterfeit loanable funds.

COUNTERFEITING: 3) PURCHASING SECURITIES THROUGH QE

Quantitative Easing is a fancy name for the Fed creating more counterfeit money and purchasing government bonds and mortgage-backed securities from banks on the open market. The Fed will buy the government bonds the bank originally purchased, and it will also buy the mortgages the bank originally created. The bank can now use the new counterfeit money the Fed created to purchase these securities, hold it in reserve and create 10 times that amount in counterfeit dollars.

To sum it up, the Fed counterfeits money and loans it to banks at zero percent interest. The banks can counterfeit 10 times as much money as they hold in reserve because of our 10% fractional reserve banking rules. The Bank purchases Government bonds, and creates mortgages with these counterfeit funds. The Federal reserve purchases these Government bonds and mortgage backed securities from the banks with more counterfeit money, and this money can be increased by a factor of ten, and the whole process starts over again. Where can you sign me up for this sweet deal.

FED COUNTERFEITING MISALLOCATES SCARCE RESOURCES

The counterfeit money injected into the economy allows first receivers to purchase something without any corresponding production. It is an exchange of nothing for something. It sends false signals through the economy propping up economic activities that would never be supported in an unhampered free market. The tech bubble of 2000, the housing bubble of 08, and the current level of the stock market are all examples of bubble activities that would never have happened if the Fed had not printed counterfeit dollars. The Tech bubble of 00, and the housing bubble of 08 were created by the Feds printing and artificially low interest rates. The counterfeit money injected since 08 has stopped the fall in housing prices, and has also created the stock markets five year bull run. All economic activities that have been created and/or maintained by this counterfeit money will eventually have to be liquidated sooner, if they stop counterfeiting, or later if they continue. One way or another the economic forces trying to correct the Feds  interventions will win out.

Click on the article above and read Charles Hugh Smiths analysis of the Feds failure. The charts are very good. Here are a few excerpts.

“The Fed’s policies have been an unqualified success for financiers and an abject failure for the bottom 99.5% who have to work for a living.”

“Keeping interest rates near-zero for five years and pumping $4 trillion into the system are both completely off the scale of central bank policy in the U.S.”

“The most charitable assessment we can make of Fed policy is that the “prosperity” it created is at best, ahem, grossly concentrated in the most parasitic and politically powerful sector: finance. Why should we be surprised that the Fed, itself a servant of the banking sector, should devise policies that enrich the bankers and financiers”.

Also read, “How The Fed Has Failed America”, Part II, by Charles Hugh Smith. Here is an excerpt from this article,

“The only way to eliminate the financial parasites is to stop subsidizing their skimming and scamming, and the only way to stop subsidizing the financial parasites is to shut down the Fed.”

Related ArticleCounterfeiting by the Federal Reserve, Although Legal, Still Results In Theft, by austrianaddict.com.

Related ArticleLet The Counterfeiting Continue! The Fed Is Stuck In Its Feedback Loop, by austrianaddict.com.

Related ArticleA Tornado vs. The Fed, Which Is More Destructive? by austrianaddict.com.

Related ArticleCapital Consumption, aka, Eating Our Seed Corn, by austrianaddict.com.

Related ArticleThomas Woods Explains The Austrian Business Cycle Theory, at austrianaddict.com.

Real Savings vs. Counterfeit Savings

July 19, 2013
Savings

Savings (Photo credit: 401(K) 2013)

RESULTS OF COUNTERFEITING

In a previous post titled, Financial Markets Move When The Puppet Master Speaks, we talked about some of the consequences the Fed creates, when it electronically counterfeits money and injects it into the economy. Some of these are 1) the misallocation of scarce resources into activities that can’t be sustained when the counterfeit money injections are halted, and 2) people’s real production is being redistributed to the first receivers of the counterfeit money (which is known in my world as theft). What’s the difference when real savings enter the market as opposed to counterfeit savings? Lets see what happens, but first let’s talk about money.

WHAT IS MONEY? (more…)

Financial Markets Move When The Puppet Master Speaks.

July 15, 2013
♫Puppet on a String♫

♫Puppet on a String♫ (Photo credit: trawets1)

FINANCIAL MARKET MINIPULATION

The stock and bond markets were sent soaring last week when Fed chairman Ben Bernanke said more Fed stimulus was needed (read here). Three weeks ago Mr. Bernanke hinted that the Fed might start to taper its money injections and the stock and bond markets had a sell off. In an article I wrote on July 1, titled Incremental Steps To The New Normal, I said, “The sell off in the stock and bond market, the week of June 20th, at a hint by Ben Bernanke that he might ease out of Quantitative Easing in the not too distant or distant future, is evidence that the financial markets are a bubble activity blown up by the Fed’s double edge sword of printing counterfeit money and artificially lowering interest rates. We witnessed more evidence the following week when first Quarter GDP numbers were revised down. This started a rally in the stock market because investors know that if there are bad aggregate numbers, the Fed will keep electronically printing money…” . It’s not difficult to predict how investors will react to economic data, because they understand what the Fed will do in response to this data. (more…)