Why the Fed Can't Stop a Currency Crisis
Any first year economics student will be able to slowly and cogently explain the theory of maximum employment, or even give you a run-down on modern monetary theory.
Certainly, most hobbyist economists will be able to fumble their way through an explanation of Keynesian stimulus theory.
But where their book learning and theories and financial models break apart is during a crisis.
Why?
Because: you can’t model a currency crisis. You can’t say when one will occur. You can’t say how bad it will be once it starts.
A currency crisis occurs outside the realm of even the best mathematically correct theories. Such a crisis results from a massive, widespread loss of faith in a given currency. It doesn’t happen in textbooks or in charts, models or in Paul Krugman’s daily hack-job column.
It happens in the minds of men.
It’s largely emotional. If you believe that the object of your life’s hard work will soon be worthless, then you may be allowed some small degree of emotional response.
The response might seem irrational – and even completely unnecessary to the casual observer.
But the response of everyone “irrationally” fleeing the dollar, need not fit into Nobel Laureate’s understanding of what should happen.
Sooner rather than later, when governments and central bankers treat their currencies like waste-paper, regular people will begin to connect the dots, and all it will take is one large institution or country to set off the crisis.
People like John Williams, the San Francisco President of the Federal Reserve, believe that they can chart out the actions of the dollar as if the entire economy of the world and every individual holder of the dollar was a simple 3-step Rube Goldberg setup.
After printing trillions of dollars over the past few years, and cramming billions more into existence, Mr. Williams thinks he knows exactly where all of those dollars will end up, and how they’ll behave.
Here’s what he said yesterday when discussing the Fed’s ongoing bond purchases, aka Quantitative Easing:
“I estimate that these longer-term securities purchase programs will raise the level of GDP by about 3% and add about three million jobs by the second half of 2012.”
He actually believes he can accurately predict GDP and job growth by simply pulling levers at the Fed’s computer.
According to bankers like Mr. Williams, inflation is of no concern. Why isn’t it of concern?
He says that money supply, “has grown at a 5 1/2% annual rate on average, that's only slightly above the 5% growth rate of the preceding 20 years."
Remember his lack of concern as prices of nearly everything continue to spiral upwards.
After doing little else besides print massive amounts of money for the past 20 years, inflation is of little concern!
Amazing.
What Mr. Williams is too incompetent or dishonest to be aware of, is that regular people are feeling less than confident in the dollar. The Chinese share that lack of confidence, and they’re dumping Treasuries. Other countries are beginning to settle trade in currencies besides the dollar.
It’s getting late in the evening for the dollar’s hegemony.
Either John Williams, and his buddies Tim Geithner and Ben Bernanke know it, and they’re on damage control, or they don’t know it, and they’re some of the most shortsighted figures in world history.
Either way, look out below.
Good investing,
Kevin McElroy
Editor
Resource Prospector
