This week has revealed new indications that, frankly, we may be heading toward a crisis.
On Thursday, the yield on the 10-year Treasury note exceeded 1.55 percent. Shortly after, the Dow Jones Industrial Average, which had just reached an all-time high on Wednesday, plummeted by 559 points. It seems Wall Street is disregarding Federal Reserve Chairman Jerome Powell’s perspectives.
Earlier in the week, Powell, during his testimony before the Senate Banking Committee, affirmed that the central bank plans to maintain the federal funds rate close to zero until maximum employment is achieved. Additionally, the Fed’s recently published semiannual Monetary Policy Report confirmed its commitment to conjuring credit out of thin air to buy $80 billion monthly in Treasuries and $40 billion in mortgage-backed securities (MBS).
The Report further stated that the Fed’s purchases of Treasuries and MBS “…will continue at least at this pace until substantial further progress has been made toward its maximum employment and price stability goals.” The significant terms here are “at least.”
What does this mean for us?
Central banking is essentially a type of centralized planning, and such planning translates into state control. In the U.S., this control doesn’t revolve around generating income but rather focuses on redistributing it.
Through inflation, the state covertly reallocates funds saved and earned by individuals to the centralized authority in Washington, where it is consumed by ever-expanding government programs and gigantic defense budgets. Much of what remains is squandered through an overwhelming network of bureaucracies and agencies.
Powell, without a doubt, adheres to steadfast principles. His core beliefs align with the central authority and the twelve regional Federal Reserve Banks, which, as noted by the Ninth Circuit Court of Appeals, are characterized as “independent, privately owned, and locally controlled corporations.”
As a result, Powell strives to ensure that Federal Reserve Banks and their member institutions are well-capitalized and liquid. He also aims to provide Washington with an unending supply of inexpensive credit.
The crux of the issue is that as interest rates rise, Powell will likely intervene in credit markets, through the purchase of Treasuries and MBS, to keep rates lowered. The objective of achieving maximum employment serves merely as a facade for injecting trillions more into the system through quantitative easing.
Powell seems to appreciate the significance of historical context. He is surely aware that all fiat currencies face eventual failure and knows precisely where the dollar stands in this ongoing narrative.
He likely recognizes that the dollar’s end is approaching. But what options does he truly have? He finds himself grasping a tiger by the tail. There’s no turning back for him; like those before, he must see this through to the very end…
The Grandmaster of Monetary Stimulus
Rudolf von Havenstein led the Reichsbank, Germany’s central bank, from 1908. He possessed an unparalleled understanding of central bank debt issuance and was regarded as a central banker’s central banker.
When history called upon him to work a miracle for the Deutsches Reich following World War I, he knew exactly how to respond: through monetary stimulus. In fact, his endeavor had already begun several years prior.
On August 4, 1914, at the onset of the war to end all wars, the Goldmark transitioned from a gold-backed currency to the unbacked Papermark. With gold no longer in play, the money supply could be expanded to accommodate the insatiable demands of warfare.
To facilitate this, von Havenstein escalated public debt from 5.2 billion marks in 1914 to an astonishing 105.3 billion marks by 1918. Concurrently, he raised the amount of marks in circulation from 5.9 billion to 32.9 billion, causing German wholesale prices to soar by 115 percent.
By war’s conclusion, Germany’s economy lay in ruins. Industrial production in 1920 plummeted to just 61 percent of the 1913 level. Faced with a weakened economy and overwhelming debt, von Havenstein had to drastically ramp up money printing.
In reality, he had little choice. The shift from the Goldmark to the Papermark had already crossed the boundaries of fiscal and monetary prudence. Backtracking would have resulted in immediate economic collapse and social unrest.
Opting for inflation over a post-war depression, von Havenstein perceived inflation as the lesser of two evils, which would lighten Germany’s war debt burden.
Jerome von Havenstein: Inflation Or Bust
Initially, the adverse effects of the Reichsbank’s monetary expansion appeared manageable. Real, inflation-adjusted wages fell, yet unemployment dropped to record lows. However, an undeniable economic crack-up boom was brewing.
As the value of the Papermark waned, wage earners suffered greatly. To counteract this damage, the German government instituted mandatory wage indexing. This intervention, however, caused unemployment to skyrocket from record lows to unprecedented highs in just two years.
Simultaneously, the decline in the purchasing power and outward value of the Papermark accelerated to the point where the currency effectively ceased to function as a viable medium of exchange.
Indeed, printing money can be arduous, but producing excessive amounts can lead to devastating consequences.
By the time von Havenstein passed away in late November 1923 from a myocardial infarction, Germany’s central bank had issued over 500 quintillion marks. What started as moderate inflation spiraled into hyperinflation, with one U.S. dollar equating to 4.2 trillion marks by December of that year.
Furthermore, the collapse of the mark brought societal destruction, paving the way for the rise of national socialism. The political ramifications of this economic calamity soon reverberated across the globe.
Jerome Powell, much like Rudolf von Havenstein, fully understands the implications of his actions. In fact, he has explicitly stated his course: it’s inflation or bust.
Despite the gold market slipping below $1,800 per ounce, many might think he is merely posturing. This assumption is misguided. One thing is abundantly clear: Powell’s commitment to inflation is as serious as a von Havenstein heart attack.
Sincerely,
MN Gordon
for Economic Prism
Return from Jerome von Havenstein: Inflation Or Bust to Economic Prism
