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Tuesday, June 9, 2009

Fnords Setting up the Next Recession

On the Communism Channel recently, I noticed a huge shift in the fnords.

In late 2008 and early 2009, everyone in the mainstream media was saying "OMFG!! Bailout!! Simulus!! Deficit spending to stimulate the economy!" Now, everyone is saying "OMFG!! Inflation is a serious problem!"

When you print lots of new money to "stimulate the economy", the result is inflation. That's obvious to me, but apparently nobody in the mainstream media was complaining a few months ago. It's a huge amount of cognitive dissonance. It makes absolutely no sense that, in only a few months, the state of the economy went from "OMFG!! Bailouts and deficit spending!" to "OMFG!! Inflation!!"

In addition to the bailout money explicitly allocated by the Federal government, the Federal Reserve has kept the Fed Funds Rate in the 0%-0.25% range. When the Federal Reserve "monetizes the debt", it prints brand new money to purchase Treasury Notes and keep interest rates low. The Federal Reserve has an unlimited budget, so they may print as much new money as desired to keep interest rates at whatever level they choose.

The Federal Reserve directly sets the overnight Fed Funds Rate. The Federal Reserve indirectly sets long-term rates. If the average Fed Funds Rate over the next 10 years is expected to be 4%, then the yield on a 10 year Treasury Bond should be approximately 4%. Otherwise, there would be an arbitrage opportunity for the banksters. They could short sell Treasury Bonds and lend the proceeds at the Fed Funds Rate, or borrow at the Fed Funds Rate and buy Treasury Bonds. In this manner, the Federal Reserve indirectly sets long-term interest rates, in addition to explicitly setting short-term rates.

The Federal government has printed several trillion dollars in TARP and other programs to bail out financial industry insiders. Even bailout money allocated to non-banks subsidizes bank profits. For example, the creditors of GM were mostly hedge funds, and so GM bailout money really went to the banksters.

In addition to Federal government bailout money, the Federal Reserve has printed an undisclosed amount of new money. M2 is increasing at a rate of 8.5%-9% per year, about $0.7T. M3 is growing at an even faster rate. M3 was nearly twice as big as M2 when the Federal Reserve stopped publishing it, and some people estimate that M3 is growing at a rate of 15%-20% per year. Most of the new money created by the Federal Reserve is included in M3 but not in M2, although such newly created money should find its way to M2 eventually.

In the past year, the Federal Reserve probably has created a couple of trillion dollars in new money to further bail out financial industry insiders, but it's impossible to get good statistics on exactly what the Federal Reserve insiders are doing.

By keeping the Fed Funds Rate near 0%, the Federal Reserve is causing an inflationary boom. Massive inflation is the primary reason for most stock market gains. The stock market actually underperforms true inflation.

Consumer prices seem to be rising at a rate of 20%-30% per year, comparing things I buy. (I really should explicitly keep track and make the "FSK price index". It's easier to just look at the price of gold.) The CPI is a biased measure of inflation, and severely understates true inflation. When a pro-State troll communist/comedian talks about inflation, he's usually referring to CPI-inflation and not true inflation.

The flip from "OMFG! Bailout!" to "OMFG! Inflation!" is part of the State-created business cycles. It's all about the Compound Interest Paradox. You don't understand why periodic recessions and booms occur until you understand the Compound Interest Paradox. The Federal Reserve is forced to cut the Fed Funds Rate during a recession/depression to prevent hyperdeflation. The most recent recession/depression was so severe that an explicit bailout by the Federal government was also needed.

Cheap credit causes an inflationary boom. Negative real interest rates send a false price signal that investing is profitable. This causes an inflationary boom. Eventually, the Federal Reserve is forced to raise interest rates to prevent hyperinflation. This sets up the next recession/depression and next bailout.

The Federal Reserve bails out the banksters in every recession via a Fed Funds Rate cut. The most recent recession was more severe than usual, requiring an explicit additional bailout. Boom/bust cycles benefit insiders at the expense of everyone else. During a boom, insiders get first dibs on spending newly printed money. During a bust, insiders are "too big to fail" and get a bailout. As an individual small business owner, boom/bust cycles ruin your ability to plan for the future.

If, as an individual, you load up on debt, then you will be bankrupted during the next recession/depression. Only "too big to fail" businesses can safely load up on as much debt as they can. Even if a large business like GM or AIG goes bankrupt, executives typically get to keep their cushy jobs, even in bankrupty. Even if laid off, insiders almost always find another cushy job at another corporation. They have "valuable management experience", even though they have no skills that would be useful in a true free market.

If, as an individual, you stay debt-free and keep cash savings, then your savings will be stolen via inflation during the boom. Via inflation, you are subsidizing your larger corporate competitors. Further, part of the proceeds from income taxes you pay are used to subisidize your larger corporate competitors.

For example, Microsoft pays a huge inflation tax on its cash savings. However, Microsoft receives massive direct and indirect State subidies, like all large corporations. Microsoft pays a huge inflation tax on its cash reserves, but simultaneously receives a massive State subsidy; the value of the State subsidy is larger than the inflation tax that Microsoft pays. As corporations go, Microsoft is relatively benign, even though software engineers usually bash Microsoft at every opportunity. I can boycott Microsoft and use Linux if I choose; currently, the most important information on my PC is actually stored by Google (my blog and gmail). There are legitimate economies of scale in software. Even in a free market, key software that almost everyone uses would probably still be written by a small handful of people.

If, as an individual, you stay debt-free and hold no cash, then you risk being bankrupted during the next recession. You will have no debts, but your customers will be unable to buy your product or pay their bills. During the boom, you'll need to expand your business or lose ground to competitors who do borrow. During the bust, you'll be forced to downsize, because your customers won't have any money.

Boom/bust cycles wreck the ability for individuals to plan for the future. Executives at a "too big to fail" business do not have this problem. They always qualify for a bailout. Even in bankruptcy, they usually will keep their jobs. Even if laid off, nepotism capitalism means that the insiders almost always can get another cushy job elsewehere. Bankruptcy and limited liability incorporation give executives at a large corporation a free put option to cheat creditors. As a small business owner, all your net worth is usually tied up in your business; you may even take out personal loans or a mortgage on your house to finance your business. An executive who fails merely finds another job. A small business owner who fails usually loses everything.

With fiat debt-based money, the Federal Reserve must continually adjust interest rates. The economy oscillates between hyperdeflation/recession/depression and hyperinflation/boom. During a boom, negative real interest rates cause too much money to be created and malinvested. During a bust, the Compound Interest Paradox causes money to drain out of the economy as more loans are repaid than issued. As the final collapse draws near, the oscillations will get more severe.

Pretty soon, interest rates must be raised. This will start the next deflationary depression/recession. This will also prevent a hyperinflationary collapse of the dollar. The State propaganda engine must switch its message ahead of the change. However, you can't rely on the State propaganda engine when planning your business or investing, because unexpected surprises always occur. These surprises always benefit insiders at the expense of everyone else.

It's amusing to notice the rapid propaganda change from "OMFG! Bailout!" to "OMFG! Inflation!" It's like someone flipped a switch and now all the propaganda is sending the opposite message. I'm surprised that nobody is pointing out the obvious contradiction. One day, someone was pressing the "Hype bailout!" button. All of a sudden, they started pressing the "Hype inflation!" button, and everyone switched their story.

Are there a handful of people pulling the strings? Is the Supreme Leader of Humanity intentionally creating such obvious fnords, to accelerate the collapse? Has my fnord awareness increased? As a practical matter, it's irrelevant if it's a deliberate conspiracy or merely a massive coincidence. Either way, the State is evil and must be eliminated.

The "conspiracy" aspect is easily explained in this case. Most mainstream media sources merely parrot the press releases issued by the Federal Reserve and Treasury department. If the Federal Reserve issues a press release saying "OMFG! Bailout!", then every mainstream media outlet says "OMFG! Bailout!" If the Federal Reserve issues a press release saying "OMFG! Inflation!", then every mainstream media outlet says "OMFG! Inflation!" If you're an independent thinker, then you don't get a job working in a mainstream media outlet. It's much easier to parrot authority figures rather than think for yourself.

Besides, if you just parrot what State enforcers say, then you can't be fired for contradicting the official State propaganda. The mechanism for firing people who tell the truth is so efficient that only rarely must someone be explicitly be fired. It's similar to "Almost everyone voluntarily pays taxes. Therefore, State police rarely directly violently force someone to pay. Therefore, taxation is not theft, because almost everyone pays 'voluntarily'." You don't get to be a mainstream media personality unless you're already thoroughly brainwashed as a pro-State troll. Almost nobody considers contradicting official propaganda, and nobody in the mainstream media notices the scam.

Suppose a worker/writer at a mainstream media outlet said "Hey! Why are we switching from saying 'OMFG! Bailout' to 'OMFG! Inflation!' in just a few months? This makes no sense!" That person's cowokers would say "Shut up, idiot!", and that person would learn to conform. He might receive a stern lecture about "Be a team player if you want a successful career!" A single honest person surrounded by pro-State trolls cannot be effective at promoting truth.

It's very amusing to notice the rapid switch from "OMFG! Bailout!" to "OMFG! Inflation!" in the mainstream media. I am no longer offended or angry at propaganda. My reaction now is "Oh, that again! Does that really fool people?" Of course, the vast majority are still fooled.


Anonymous said...

It is very disturbing to see just how similar news channels are on big matters like Iraq, and especially the economy.

m said...

Maybe I'm wrong, but I think it's possible to write a book about whatever and get on CNN.
Just follow Tim Frerriss's 4 hour work week (google 4 hour work week filetype:pdf)
Then again, if you started getting on CNN and they were expecting you to tell one story and you started giving another, they would get angry and attack you most likely...
but the news is always in need of new materials to mix in so the propaganda doesn't look too obvious. If enough of us learned to use the right resources and get on the news, we could start FNORDing the opposite message.

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