Central Banking

Ron Paul: Wells Fargo or the Federal Reserve – Who’s the Bigger Fraud?

The Wells Fargo bank account scandal took center stage in the news last week and in all likelihood will continue to make headlines for many weeks to come. What Wells Fargo employees did in opening bank accounts without customers’ authorization was obviously wrong, but in true Washington fashion the scandal is being used to deflect attention away from larger, more enduring, and more important scandals.

What Wells Fargo employees who opened these accounts engaged in was nothing more than fraud and theft, and they should be punished accordingly. But how much larger is the fraud perpetrated by the Federal Reserve System and why does the Fed continue to go unpunished? For over 100 years the Federal Reserve System has been devaluing the dollar, siphoning money from the wallets of savers into the pockets of debtors. Where is the outrage? Where are the hearings? Why isn’t Congress up in arms about the Fed’s malfeasance? It reminds me of the story of the pirate confronting Alexander the Great. When accused by Alexander of piracy, he replies “Because I do it with a small boat, I am called a pirate and a thief. You, with a great navy, molest the world and are called an emperor.”

Over two thousand years later, not much has changed. Wells Fargo will face more scrutiny and perhaps more punishment. There will undoubtedly be more calls for stricter regulation, notwithstanding the fact that regulators failed to detect this fraud, just as they have failed to detect every fraud and financial crisis in history. And who will suffer? Why, the average account-holder of course.

Die deutsche Antwort auf Negativzinsen: Bankschließfächer

Für unsere deutschen Leser stellen wir unseren ersten Artikel auf deutsch vor. Übersetzt und ergänzt von einem früheren veröffentlichten Artikel.

Die japanische Antwort auf Negativzinsen: Anschaffung von häuslichen Geldschränken. Andererseits die deutsche Haltung: Abhebung von Bankkonten und Verstauung in Bankschließfächern. Beide Methoden sind als Reaktion gegen eine Zinzahlung für Bankkonten verständlich. Der deutsche Fall ist besonders merkwürdig, weil die Bundesbank vor ein paar Jahren erklärte, die durchschnittliche Effektivrendite sei seit 40 Jahren negativ gelaufen. Das führt zur Frage, warum sind diese Kontoabhebungen nicht früher passiert? Nur jetzt, da nominale Zinsraten auch negativ sind, ist die Fassade von Bankkonten als sicherer Geldversteck endlich für Otto Normalbürger weggerissen.

No Fed Hike Anytime Soon

After May’s dismal jobs report, the odds of the Federal Reserve raising the target federal funds rate anytime soon are just about nil. Remember that the Fed has declared itself for the past several years to be “data dependent”, meaning that they are looking for good economic news and data that indicates that the economy has gotten back to normal. And what do they mean by “good news” or “back to normal”? Why, the overheated boom-period growth rates we last saw at the height of the last housing bubble. That is why the Fed will not be raising rates for a long time.

Possible Immediate Effects of the €500 Note’s Abolition

The ECB officially decided to end production of the €500 note yesterday, with production winding down at the end of 2018. Ostensibly this was done to prohibit the use of the €500 note by criminals and terrorists. While this is just one step in the long-term War on Cash, what might some of the more immediate effects be?

1. Increased Demand – Knowing that the €500 note is going to be phased out, expect those holding cash and those wanting to hold cash in the future to increase their demand for €500 notes. Whether the ECB will cater to this demand by allowing higher amounts of €500 notes to be printed before the ultimate phaseout date remains to be seen.

2. Premia on Notes in Good Condition – Given a finite number of notes in existence post-2018, it is not unreasonable to expect that €500 notes may trade at a premium to their face value in the future. Since they will remain legal tender and will be able to be redeemed at face value at banks for an unlimited period of time, they will be worth at least €500. But because they allow a much more compact transportation of money than €100 and €200 notes and because supply will now be fixed, they may begin trading at a premium to their face value. €500 notes in mint condition might eventually trade on black markets at €550, €600, or more. Bills in worse condition would trade at lower premia, until bills that were completely worn out would be traded in at banks for brand new lower-denomination notes.

3. More Counterfeit €500 Notes – Because the €500 note is being phased out, it will not receive any anti-counterfeiting updates that other notes will inevitably receive in the future. As counterfeiters become more adept at creating fake euro notes, they will target the €500 note since it will remain redeemable at banks and will undoubtedly be demanded even more on the black market. If counterfeiting of the €500 note occurs on a large enough scale, the ECB may eventually rescind the bill’s legal tender status and set an end date by which time all €500 notes must be redeemed.

More Economic Data Leaking to Markets

A new ECB white paper has found evidence that many major market-moving data releases in the US are leaked in advance of their official publication, allowing some investors to profit from trading stocks and Treasury securities when those data are released. Included among the data releases studied are two from the Federal Reserve Board, on industrial production and consumer credit. The researchers analyzed price movements in the S&P 500 futures market and the 10-year Treasury Note futures market in the thirty minutes prior to these data releases, assuming that strong price movements in the direction of the eventual post-release price were indicative of some sort of leak. The industrial production release was one of seven releases that was strongly suspected of being leaked. This isn’t good news for the Fed.

The Fed is already grappling with an ongoing probe into a 2012 leak of confidential interest rate information to a financial newsletter. The Fed also provides news organizations with sensitive data which is embargoed until the Fed publishes it, however those embargoes are occasionally breached. Then there are the accidental leaks from the Fed on FOMC matters and the case of the former New York Fed official who obtained confidential information from his former colleagues after he went to work at Goldman Sachs. There have been enough mistakes and leaks that the idea of sensitive information being systematically leaked to certain market participants isn’t far-fetched. Especially because such leaks rarely come to light and almost never result in anyone’s termination, the risks of being caught don’t outweigh the potential benefits of making friends on Wall Street or making a little extra money. At the very least, this study should result in hard questioning surrounding these data releases and the importance placed on them. In particular, the Federal Reserve’s role as a market mover should face scrutiny. Leaking information to profit special interests is all the more reason to end the existence of government agencies that have so much power to move markets.

Bank Hackers, Electronic Money, and the War on Cash

In the aftermath of the bank heist targeting Bangladesh’s central bank, international financial network operator SWIFT has warned that its networks were compromised. Hackers have apparently accessed the network and used it to send a number of fraudulent payment orders. Why do hackers do this? In the apocryphal words of Willie Sutton: “Because that’s where the money is.” Why bother hacking individual bank accounts when you can instead hack an entire bank or even the backbone of the financial system?

Would You Trust This Man to Run Your Country’s Economy?

Let’s take a look at a selection from a prominent official’s recent speech and tear it apart piece by piece.

Deflation refers to a situation where prices decline persistently. If prices of individual goods and services fall thanks to innovation and improved productivity, this is of course a good thing. A good example is the gradual price decline in PCs and smartphones. However, the deflation I am talking about refers to a situation in which the prices of a broad range of goods and services decline, and consequently, prices as a whole drop. In most countries, including the United States, general prices are measured in terms of consumer price indices, which are the weighted averages of baskets of goods and services purchased by consumers. Put very simply, deflation can be understood as a continuous decline in consumer prices.

What happens to the economy if prices as a whole decline continuously? Looking at the overall economy, suppliers of goods and services will see a decrease in sales and profits, and firms with declining profits typically start to lay off employees or restrain their wages. Employees that have been laid off or whose wages have declined experience a fall in their income and restrain their spending due to uncertainty about their future. Such restraint in spending leads to a further decline in the sale of goods and services, resulting in harsher competition among firms. Firms therefore lower prices in order to compete, leading to a further decline in their sales and profits. This simple outline shows that once deflation starts, it perpetuates itself, so that the economy falls into a bad “equilibrium, in which economic activity is shrinking.”

Who was this prominent official?

No Limit to Kuroda’s Monetary Easing?

Bank of Japan governor Haruhiko Kuroda two weeks ago stated that there is no limit to the Bank of Japan’s monetary easing measures. “There aren’t any such things as a quantitative limit or anything, any numbers we can’t overcome,” he was reported to have said. Kuroda must apparently adhere to the Weimar School of Economics or perhaps its more recent neo-Weimarian offshoot, the Zimbabwean School of Economics. Can Kuroda actually believe that there is no limit to what the Bank of Japan can do?

Central Banks, Fiat Money, and Barter

There have been many monetary cranks over the course of the centuries who have thought that creating more money would benefit society, and have sought to do so by creating money backed by assets. John Law’s Mississippi Bubble and its creation of money backed by land is one prominent example, and despite his failures such movements towards asset-backed money backed by real estate, copyrights, and other tangible or intangible assets still exist today. While the faults with such schemes are readily apparent to Austrians, they stem from a well-meaning desire that money should be backed by something of value.

Gold and silver coins used to be used as the currency of everyday transactions but they were replaced by banknotes, those being easier to handle and exchange. Banknotes were promised to be exchangeable for gold and silver, but banks and later central banks started to create more notes than they had gold or silver backing. Eventually the promise of exchange for gold and silver went by the boards and we were left with what we have today, a system of unbacked paper fiat money that can be printed ad infinitum. The only reason this fiat paper money has any value is because enough people trust that the government will not erode its value too much and because they believe that enough other people will accept it in exchange for goods that they will be able to use it to make purchases with it. If that trust ever erodes, however, all bets are off.