[BRIGADE] PJB: The Weimar Solution
Published: Tue, 03/24/09
By Patrick J. Buchanan
March 24, 2009
"The best way to destroy the capitalist system is to debauch the
currency," said Lord Keynes.
Ben Bernanke disagrees. A student of the Depression, the Fed chair
appears far more fearful of deflation -- a vicious cycle of falling
prices, debt defaults, home foreclosures and rising unemployment.
Deflation is what America underwent in the 1930s. A Fed-created
bubble burst, causing margin calls to go out to stockholders, who
ran to their banks that, besieged, collapsed, wiping out a third of
our money. As Milton Friedman, who won a Nobel for his thesis that
the Federal Reserve caused the Great Depression, told PBS in 2000:
"For every $100 in paper money, in deposits, in cash, in currency,
in existence in 1929, by the time you got to 1933 there was only
about $65, $66 left. And that extraordinary collapse in the banking
system, with about a third of the banks failing ... with millions
of people having their savings essentially washed out, that decline
was utterly unnecessary.
"(T)he Federal Reserve had the power and the knowledge to have
stopped that. And there were people at the time who were ... urging
them to do that. So it was ... clearly a mistake of policy that led
to the Great Depression."
Is Bernanke fighting the war of 1929 in 2009? Surely, today, with
the explosion in M1, the basic money supply, there is no shortage
of dollars out there, even if they are not circulating fast enough.
To end our recession, Bernanke may be running an even greater risk:
hyper-inflation. This has destroyed more nations than deflation or
even depression.
Recall: It was French military intervention in the Ruhr in 1923, to
force payment of war reparations, and Weimar's decision to let the
currency fall and pay the French in cheap marks that led to the
wipeout of the German middle class, the discrediting of that
democratic republic and the Munich beer-hall putsch of Adolf Hitler.
"The first panacea for a mismanaged nation," said Ernest Hemingway,
"is inflation of the currency; the second is war. Both bring a
temporary prosperity; both bring a permanent ruin. But both are the
refuge of political and economic opportunists."
Which brings us to last week's shocker.
The Fed will buy up $300 billion in long-term Treasury bonds and
spend $750 billion more buying sub-prime mortgages to remove them
from the balance sheets of ailing big banks, to get the banks
lending again.
Bernanke is printing money to buy U.S. bonds.
This new gusher from the Fed, after the $700 billion TARP bailout,
comes on top of a Congressional Budget Office estimate that this
year's deficit will be $1.85 trillion, 13.1 percent of gross
domestic product, more than twice the share of the U.S. economy of
the largest previous postwar deficit.
Concluding the dollar is being abandoned in a frantic Fed effort to
stop the recession, markets reacted instantly. The dollar plunge
was the steepest since the Plaza Agreement of 1985. Gold shot up to
$950 an ounce. Silver had a 12 percent run-up, the sharpest ever.
Oil prices surged above $50 a barrel. Commodity markets advanced.
The Fed seems to have confirmed the fears of Premier Wen Jiabao,
who said that China is "definitely a little worried" about the
value of the U.S. bonds Beijing has purchased with the dollars
piled up from her trade surpluses with the United States.
Can one blame the Chinese? They have already been burned on their
U.S. investments. And if the defense of the dollar against its
ancient enemy inflation is being abandoned, and protecting the
dollar is to take a back seat to the Fed's fight to avoid
deflation, than it is indeed time to get out of the dollar and
dollar-denominated assets.
For inflation is theft. It make liars and cheats of governments. By
eroding the value of a currency, inflation punishes savers and
creditors and rewards debtors. And what nation is the biggest
debtor of them all? The United States of America.
Insidiously, inflation consumes the value of cash, savings,
municipal bonds, corporate bonds, Treasury bonds and T-bills.
Friends who lent America money, who bought our debt in good faith,
are robbed and made fools of, while speculators who bet against
America by shorting the dollar in the currency markets are vastly
rewarded.
Given the $3.6 trillion budget Obama plans, the $1.8 trillion in
red ink he will run by Oct. 1 and the trillions the Fed is pumping
into the economy, gross domestic product should spike, as it did
after the far smaller stimulus package of 2008
We will feel a healthy glow, and folks will begin to sing, "Happy
Days Are Here Again."
Yet, one senses that we are doing again exactly what we have done
before in this generation. Rather than endure the pain and accept
the sacrifices to cure us of our addiction, we are going back to
the heroin. And this time, with Dr. Bernanke handling the needle,
we may just overdose.
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SOURCE: http://buchanan.org/blog/pjb-the-weimar-solution-1480