The State Causes The Poverty It Later Claims To Solveby The Ludwig von Mises Institute December 10, 2013

If one looks at the current paper moneysystem and its negative social and social-political effects, the question must arise:where are the protests by the supportersand protectors of social justice? Whydon’t we hear calls to protest frompoliticians and social commentators, fromthe heads of social welfare agencies andleading religious leaders, who all promotethe general welfare as their mission?

Presumably, the answer is that many haveonly a weak understanding of the role ofmoney in an economy with a division oflabor, and for that reason, the consequencesof today’s paper money system are beingwidely overlooked.

The current system of fractional reservebanking and central banking stands in stark opposition to a market economy monetary regime in which the market participants could decide themselves, without state pressure or coercion, what money they want to use, and in which it would not be possible for anyone to expand the money supply because theysimply choose to do so.

The expansion of the money supply, made possible through central banks and fractional reserve banking, is in reality what allows inflation, and thus, declining income in real terms. In The Theory of Money and Credit Ludwig von Mises wrote:

The most important of the causes of a diminution in the value of money of which we have to take account is an increase in the stock of money while the demand for it remains the same, or falls off, or, if it increases, at least increases less than the stock. … A lower subjective valuation of money is then passed on from person to person because those who come into possession of an additional quantity of money are inclined to consent to pay higher prices than before.[1]

When there are price increases caused by an expansion of the money supply, the prices of various goods and services do not rise to the same degree, and do not rise at the same time. Mises explains the effects:

While the process is under way, some people enjoy the benefit of higher prices for the goods or services they sell, while the prices of the things they buy have not yet risen or have not risen to the same extent. On the other hand, there are people who are in the unhappy situation of selling commodities and services whose prices have not yet risen or

not in the same degree as the prices of the goods they must buy for their daily consumption.[2]

Indeed, in the case of the price of a worker’s labor (i.e., his or her wages) increasing at a slower rate than the price of bread or rent, we see how this shift in the relationship between income and assets can impoverish many workers and consumers.

An inflationary money supply can cause impoverishment and income inequality in a variety of ways:

1. The Cantillon EffectThe uneven distribution of price inflation is known as the Cantillon effect. Those who receive the newly created money first (primarily the state and the banks, but also some large companies) are the beneficiaries of easy money. They can make purchases with the new money at goods prices that are stillunchanged. Those who obtain the newly created money only later, or do not receive any of it, are harmed (wage-earners and salaried employees, retirees). They can only buy goods at prices which have,in the meantime, risen.[3]

2. Asset Price InflationInvestors with greater assets can better spread their investments and assets and are thus in a position to invest in tangible assets such as stocks, real estate, and precious metals. When the prices of those assetsrise due to an expansion of the money supply, the holders of those assets may benefit as their assets gain in value. Those holding assets become more wealthy while people with fewer assets or no assets either profit little or cannot profit at all from the price increases.

3. The Credit Market Amplifies the EffectsThe effects of asset price inflation can be amplified by the credit market. Those who have a higher income can carry higher credit in contrast to those with lower income, by acquiring real estate, for example, or other assets. If real estate prices rise due to an expansion of the money supply, they may profit from those price increases and the gap between rich and poor grows even faster.[4]

4. Boom and Bust Cycles Create UnemploymentThe direct cause of unemployment is the inflexibility of the labor market, caused by state interference and labor union pressures. An indirect cause of unemployment is the expansion of the paper money supply, which can lead to illusory economic booms that in turn lead to malinvestment. Especially in inflexible labor markets, when these malinvestments become evident in a down economy, it ultimately leads to higher and more lasting unemployment that is often most severely felt among the lowest-income households.[5]

The State Continues to ExpandOnce the gap in income distribution and asset distribution has been opened, the supporters and protectors of social justice will more and more speak out, not knowing (or not saying) that it is the stateitself with its monopolistic monetary system that is responsible for the conditions described.

It’s a perfidious “business model” in which the state creates social inequality through its monopolistic monetary system, splits society into poor and rich, and makes people dependent on welfare. It then intervenes in a regulatory and distributive manner, in order to justify its existence. The economist Roland Baader observed:

The political caste must prove its right to exist, by doing something. However, because everything it does, it does much worse, it has to constantly carry out reforms, i.e., it has to do something, because it did something already. It would not have to do something, had it not already done something. If only one knew what one could do to stop it from doing things.[6]

The state even exploits the uncertainty in the population about the true reasons for the growing gap in income and asset distribution. For example, The Fourth Poverty and Wealth Report of the German Federal Government states that since 2002, there has been a clear majority among the German people in favor of carrying out measures to reduce differences in income.

ConclusionThe reigning paper money system is at the center of the growing income inequality and expanding poverty rates we find in many countries today. Nevertheless, states continue to grow in power in the name of taming the market system that has supposedly caused the impoverishment actually caused by the state and its allies.

If those who claim to speak for social justice do nothing to protest this, their silence can only have two possible reasons. They either don’t understand how our monetary system functions, in which case, theyshould do their research and learn about it; or they do understand it and are cynically ignoring a major source of poverty because they may in fact be benefiting from the paper money system themselves.

How Far Will Stocks Fall This Time When The Fed Decides To Slow Down Quantitative Easing?Michael SnyderEconomic CollapseDecember 11, 2013

When QE1 ended there was a substantial stock market correction, and when QE2 ended there was a substantial stock market correction. And if you will remember, the financial markets threw a massive hissy fit a few months ago when Federal Reserve Chairman Ben Bernanke suggested that the Fed may soon start tapering QE3. Clearly Wall Street does not like it when their supply of monetary heroin is interrupted. The Federal Reserve has tricked the American people into supporting quantitative easing by insisting that it is about “stimulating the economy”, but that has turned out to be a massive hoax. In fact, I just wrote an article that contained 37 statistics that prove that things just keep getting even worse for ordinary Americans. But quantitative easing has been exceptionally good for Wall Street. During QE1, the S&P 500 rose byabout 300 points. During QE2, the S&P 500 rose by about 200 points. And during QE3, the S&P 500 has risen by about 400 points. The S&P 500 is now in unprecedented territory, and stock prices have become completely and totally divorced from reality. In essence, we are in the midst of the largest financial bubble this nation has ever seen. So what is going to happen when the Fed starts pulling backthe monetary crack and the bubble bursts?

A lot of people out there are claiming that the Federal Reserve will never end this round of quantitative easing. They are suggesting that the Fed may hint at tapering from time to time, but that when push comes to shove they will just keep printing more money.

There is just one big problem with that theory.

The rest of the world is watching, and they are very troubled by quantitative easing. Therefore the Fed must end it at some point because they desperately need the rest of the world to keep playing our game.

Our current economic prosperity greatly depends upon the rest of the planet using our dollars as the

reserve currency of the world and lending trillions of dollars to us at ultra-low interest rates. If the rest of the world decides to stop going along with the program, the system would come crashing down very rapidly.

That is why it was so alarming when China recently announced that they are going to quit stockpiling more U.S. dollars. For a long time China has been warning us to quit recklessly printing money, and now China is starting to make moves that will make them more independent of us financially.

If the Fed does not bring quantitative easing to an end soon, other nations may start doing the same thing.

So the Fed knows that they are on borrowed time. Faith in the U.S. financial system is declining very fast.

But the Fed also knows that ending QE3 is going to be very tricky for the financial markets. The other times that the Fed has ended quantitative easing, it has turned out to be very painful for Wall Street.

So this time, the Fed seems to be trying to do what it can to use the media to mentally prepare investorsahead of time. For example, the following is what Jon Hilsenrath of the Wall Street Journal wrote just a few days ago…

Markets are positioned more to the Fed’s liking today than they were in September, when it put off reducing, or “tapering,” the monthly bond purchases. Most notably, the Fed’s message is sinking in that a wind down of the program won’t mean it’s in a hurry to raise short-term interest rates. Futures markets place a very low probability on Fed rate increases before 2015, in contrast to September, when fed funds futures markets indicated rate increases were expected by the end of 2014. The Fed has been trying to drive home the ideathat “tapering is not tightening” for months and is likely to feel comforted that investors believe it as a pullback gets serious consideration.

In case you missed the subtle messages contained in that paragraph, here is a rough translation…

“Don’t worry. The Federal Reserve is your friend and they say that everything is going to be okay. Investors believe what the Fed says and you should too. Pay no attention to the man behind the curtain. Tapering is not tightening, and when the Federal Reserve does decide to taper the financial markets are going to take it very calmly.”

The Fed (and their messengers) very much want to avoid a repeat of what has happened before. As youcan see from the chart posted below, every round of quantitative easing has driven the S&P 500 much higher. And when each round has ended, there has been a substantial stock market correction. The following chart was originally produced by DayOnBay.org…

And of course the chart above is incomplete. As you can see below, the S&P 500 is now sitting at about 1,800…

So let’s recap.

From the time that QE1 was announced to the time that it ended, the S&P 500 rose from about 900 to about 1,200.

When QE1 ended, the S&P 500 fell back below 1,100.

In a panic, the Federal Reserve first hinted at QE2 and then finally formally announced it. That round of QE drove the S&P 500 up to a bit above the 1,300 mark. Once QE2 ended, there was another marketcorrection. The S&P 500 fell all the way down to 1,123 at one point.

In another panic, the Federal Reserve first announced “Operation Twist” and then later added QE3. Since that time, the S&P 500 has been on an unprecedented tear. At this point, the S&P is sitting at about 1,800.And of course those massively inflated stock prices have absolutely no relation to what is going on in the U.S. economy as a whole. In fact, the truth is that economic conditions for most of the country are steadily getting worse. Just today we found out that for the week ending November 30th, U.S. rail traffic was down 16.3 percent from the same week one year earlier. That is a hugely negative sign. It means that the flow of goods is slowing down substantially.

So the Federal Reserve has created this massive financial bubble that is totally disconnected from reality. The only way that the Federal Reserve can keep this bubble going is to keep printing lots more money, but they also know that they cannot do that indefinitely because the rest of the world is watching.

In essence, the Federal Reserve is caught between a rock and a hard place.

When the Fed does ultimately decide to taper (whether it be December, January, February, etc.), the consequences are likely to be quite dramatic for the financial markets. The following is a brief excerpt from a recent article by Howard Kunstler…

But even in a world of seemingly no consequence, things happen. One pretty sure thing is rising interest rates, especially when, at the same time as a head-fake taper, foreigners send a torrent of US Treasury paper back to the redemption window. This paper is what other nations, especially in Asia, have been trading to hose up hard assets, including gold and realestate, around the world, and the traders of last resort — the chumps who took US T bonds for boatloads of copper ore or cocoa pods — now have nowhere else to go. China alone announced very loudly last month that US Treasury debt paper was giving them a migraine and they were done buying anymore of it. Japan is in a financial psychotic delirium scarfingup its own debt paper to infinity. Who’s left out there? Burkina Faso and the Kyrgystan Cobblers’ Union Pension Fund?

The interest rate on the US 10-year bond is close to bumping up on the ominous 3.0 percent level again. Apart from the effect on car and house loans, readers have pointed out to dim-little-me thatthe real action will be around the interest rate swaps. Last time this happened, in late summer, thetoo-big-to-fail banks wobbled from their losses on these bets, providing a glimpse into the aperture of a black hole compressive deflation where cascading chains of unmet promises blow financial systems past the event horizon of universal default and paralysis where money stops moving anywhere and people must seriously reevaluate what money actually is.

What Kunstler is talking about is something that I have written about previously many times. When QE3 slows down (or ends), that is likely going to cause the yield on 10 year U.S. Treasuries to rise substantially, and that would have a whole host of negative consequences for the U.S. economy.

Most notably, it would threaten to blow up the quadrillion dollar derivatives casino that Wall Street usually manages to keep so delicately balanced.

The truth is that we are going to have massive problems no matter what the Federal Reserve does now.

If the Federal Reserve keeps wildly printing money, our financial system will become a massive joke tothe rest of the planet and other nations will stop using our dollars and will stop lending us money.

That would be absolutely disastrous.

If the Federal Reserve stops wildly printing money, the massive financial bubble that Wall Street is enjoying right now will burst and we could have a financial crisis even greater than what we experienced back in 2008.

That would also be absolutely disastrous.

So does anyone out there see an easy way out of this under the current system? If you think that you have such a plan, please feel free to share it below…

More Misleading Official Employment StatisticsPaul Craig RobertsInfowars.comDecember 11, 2013

The payroll jobs report for November from the Bureau of Labor Statistics says that the US economy created 203,000 jobs in November. As it takes about 130,000 new jobs each month to keep up with

population growth, if the payroll report iscorrect, then most of the new jobs would havebeen used up keeping the unemployment rateconstant for the growth in the population ofworking age persons, and about 70,000 of thejobs would have slightly reduced the rate ofunemployment. Yet, the unemployment rate(U3) fell from 7.3 to 7.0, which is too much forthe job gain. It seems that the numbers and thenews reports are not conveying correctinformation.

As the payroll jobs and unemployment ratereports are released together and are usuallycovered in the same press report, it is natural toassume that the reports come from the samedata. However, the unemployment rate iscalculated from the household survey, not frompayroll jobs, so there is no statistical relationshipbetween the number of new payroll jobs and the change in the rate of unemployment.

It is doubtful that the differences in the two data sets can be meaningfully resolved. Consider only the definitional differences. The payroll survey counts a person holding two jobs as if it were two employed persons, while the household survey counts a person holding two jobs as one job. Also the two surveys treated furloughed government workers during the shutdown differently. They were unemployed according to the household survey and employed according to the payroll survey.

To delve into the meaning of the numbers produced by the two surveys, keep in mind that payroll jobs can increase simply because the birth-death model used to estimate the numbers of unreported businessshutdowns and startups can underestimate the former and overestimate the latter.

The unemployment rate can decline simply because the definition of the work force excludes discouraged workers. Thus, an increase in the number of discouraged workers can lower the measured rate of unemployment.

Before reviewing this, let’s first assume that the story of 203,000 new payroll jobs in November is correct. Where does the BLS say these jobs are? Are these the long-missing New Economy jobs that wewere promised in exchange for giving China our well-paid manufacturing jobs and giving India our well-paid professional service jobs?

Unfortunately, no.

According to BLS, the jobs are mainly the same lowly-paid, part-time, nontradable domestic service jobs that I have been reporting for a decade or longer.

BLS reports that 17,000 jobs are in construction. On the surface this looks like some slight pickup in housing, but less than 5,000 of the jobs are in residential and nonresidential construction. The bulk of the claimed jobs are in “specialty trade contractors.” Specialty trade contractors are involved in repairs,alterations, and maintenance, but some of the work pertains to site preparation for new construction.

The BLS also claims 27,000 jobs in manufacturing. What precisely is being manufactured? Apparently,very little. The manufacturing jobs are spread over about 23 categories.

The manufacture of wood products gained 600 jobs. (Keep in mind that we are talking about a

population over 300,000,000, and a participating work force of approximately 155,000,000.) Nonmetallic mineral products experienced, according to the BLS, 2,000 new jobs. Machinery gained 300 new jobs. Computer and electronic products gained 500 new jobs. Electrical equipment and appliances gained 600 jobs. Transportation equipment gained 4,900 jobs. Furniture manufacture gained2,100 jobs (apparently to fill the foreclosed unoccupied houses). Food manufacturing gained 7,800 jobs. Petroleum and coal products gained 1,600 jobs, chemicals gained 2,200 jobs, and plastics and rubber products gained 1,300 jobs.You can review the remaining categories on the BLS site.

Most the rest of the 203,000 jobs–152,000–were in lowly paid domestic nontradable services (nontradable means that the jobs do not produce a service that can be exported), such as retail trade with 22,300 jobs, transportation and warehousing with 30,500 jobs, temporary help services with 16,400 jobs, ambulatory health care services with 26,300 jobs, home health care services with 11,800 jobs, and the old reliable waitresses and bartenders with 17,900 jobs.

This is the jobs profile of the American super economy. It is the profile of India 30 or 40 years ago.

Are even these lowly paid part-time domestic jobs really there? Perhaps not. According to statistician John Williams (shadowstats.com), the government shutdown and reopening, the birth-death model, andconcurrent-seasonal-adjustment problems can result in misstated jobs.

The unemployment rate is affected by not counting discouraged workers who cannot find employment. No discouraged unemployed worker and no person forced to work in a part-time job because he cannot find full-time employment is counted in the 7.0 unemployment rate (U3).

To be included in the U3 unemployment rate, an unemployed person has to have looked for a job in thepast four weeks. Those who have looked for a job until they are blue in the face and have given up looking are not counted in the U3 rate. In November any unemployed workers, discouraged by the absence of jobs, who ceased to look for employment were dropped from the labor force that U3 considers to be the base for the measure of unemployment. Thus, if unemployed workers move into thediscouraged category, the rate of unemployment falls even if not a single person finds a job.

The government has a second unemployment rate, U6, about which little is heard. This rate counts workers who have been discouraged for less than one year. This unemployment rate is 13.2 %, almost double the reported rate.

In other words, the U3 measure of unemployment can decline for two different reasons: the economy can create more employment opportunities or people become discouraged and stop looking for jobs. Discouraged workers move into the U6 category where they are counted as unemployed until they havebeen discouraged for more than one year when they are no longer officially considered to be part of the labor force. The U6 unemployment rate can rise as short-term discouraged workers are dropped out of the U3 measure and moved into the U6 measure, and the U6 rate can fall when the workers become long-term discouraged and are officially removed from the labor force.

Think about this for a minute. The BLS admits that the US unemployment rate that includes people who have been discouraged about finding a job for less than one year is 13.2%. The official line is that the US economy has been enjoying a recovery since June 2009. How is there a recovery when 13.2% of the population is unemployed?

This question becomes even more pointed when the long-term–more than one year–discouraged workers who cannot find a job are included in the measure of unemployment. The US government doesnot provide such a measure. However, John Williams (shadowstats.com) does. His estimate produces a 23.2% rate of US unemployment. An increase in the number of long-term discouraged workers is consistent with the drop in the US labor force participation rate from 66% in December 2007 to 63% inNovember 2013.

There is no such thing as a recovery with 23.2% unemployment.

So, if there is no economic recovery, why are stock and bond prices so high, at all-time records? The answer is simple. The Federal Reserve is printing $1,000 billion new dollars annually and the newly created money is going into the bond and stock markets, driving them to high bubble levels.

So here sits the US economy with substantial unemployment, with massive trade and budget deficits that are taxing the US dollar’s credibility, with the labor force participation rate declining because thereare no jobs to be found, and we are enjoying economic recovery with bond and stock prices at historic highs.

If this isn’t enough of a puzzle, consider the official second estimate of third quarter GDP growth. According to this estimate, the US economy expanded at a 3.6% rate in the third quarter; yet official U6 unemployment is 13.2%.

And if you believe the government, there is no inflation either. Yes, I know, your grocery bills go up each month.

Keep in mind that many of the new November payroll jobs could reflect seasonal hiring gearing up for the Christmas sales season. Remember, the payroll survey counts one person with two part-time jobs astwo jobs.

Economic recovery requires a growth in real median family income and/or an increase in consumer debt, and, except for a rise in student loan debt, there is no sign of either.

US real median household income has declined from $56,189 in 2007 to $51,371 in 2012, a decline of $4,818 or 8.6%. http://www.deptofnumbers.com/income/us/

US real per capita income has declined from $29,554 in 2007 to $27,319 in 2012, a drop of $2,235 or 7.5%.

How do consumers take on more debt in order to finance their consumption when their real incomes are falling? The growth in consumer credit outstanding is due to student loan growth.

I have not seen the establishment’s explanation of how recovery can occur without growth in real purchasing power either from rising real incomes or rising consumer indebtedness.

According to the Bureau of Labor Statistics, there are 1,277,000 fewer seasonally adjusted payroll jobs in November 2013 than in December 2007.

How it is possible for the economy to have been in recovery since June 2009 (according to the NationalBureau of Economic Research) and there are 1,277,000 fewer jobs today than existed six years ago prior to the recession?

How has real Gross Domestic Product recovered when jobs and real consumer incomes have not?

These are among the many questions that go unasked and unanswered.

Statistician John Williams says that the economic recovery is a statistical illusion created by deflating nominal GDP with an understated measure of inflation.

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