[Editor’s Note: The following post is by TDV Senior Analyst, Ed Bugos]
I missed this when it first came out because, to be honest, I am not all that interested in Janet Yellen, or whoever takes lead of the Federal Reserve Board. I am already convinced it is going to be someone like Bernanke, or worse, because these nominations are political, and we all know which way the political winds are blowing these days. Certainly not in favor of any form of actual austerity. As a result, I ignored the Yellen criticisms from other gold bulls.
Nor do I ever read the papers quoted at the beginning of Peter Schiff's clip, as perpetuating the unholy myth that Janet Yellen was one of the few who recognized the asset bubbles and forewarned of the impending crisis. As you might imagine, it was a bit of a surprise for me to hear that mainstream or anyone would think this about her!
If you do, or know anyone who does, Schiff's analysis is excellent medicine.
What seems apparent is that Yellen likes to hedge, like any bureaucrat, and prefers not to make waves. She likely suits a rule-based framework. She is certainly not the person for the job that’s truly required: to end all interventions, and commit to a zero inflation/deflation policy. I don¹t think it makes sense to adopt a policy of draining excess reserves, as that might be a de facto deflation policy, which I wouldn¹t advocate.
But some intervention may be necessary at first to keep money neutral. And note that I don¹t mean to keep prices stable. This is not a Friedmanite argument in favor of intervention. It is just a critical step away from interventionism.
The cause of modern day recessions, rising prices, unequal (uncontrollable) redistributions of wealth, growing public debt and government itself, all starts when the central bank either directly expands the money supply to lower the rate of interest or induces the fractional reserve banking cartel to expand credit artificially.
If a contraction in the money supply occurs, it is because the forced intervention sustained its expansion too far, which is really just anything more than what would be expected in a freely competitive market economy where gold (or whatever the market decided on) were money and no authority intervened in expanding its supply beyond what new production allowed to be extracted economically. The kind of deflation that would occur by pulling out all the stops in the current environment is not the type that we would expect to be characteristic of a truly free market economy, because in a free market environment, fractional reserve banking cannot be sustained.
It is not an economic enterprise. I don¹t just mean it is fraudulent. I believe that is true fundamentally (not technically) too, but, it is just not sustainable in a freely competitive market. That is the argument for ending inflationism and the business cycle from the Misesian point of view, i.e. by removing the protections and subsidies of the government supported, centralized, and fractional reserve banking system: the Federal Reserve Act, its legal tender privileges, and basically totally deregulating the banks.
These are the things through which government works to foster perpetual credit expansions. This is where the threat of deflation originates!
Hence, at first, as Ludwig von Mises argued in his famous work on Human Action, in order to prevent a deflation of the sort that unfairly benefits creditors or that would not happen if the money supply weren¹t overinflated to begin with, some intervention may be required before outright abolishing the Fed. But clearly we are nowhere near the point where people stop conflating the solution with the cause, and see the true solution as generally moving towards less regulation.
As Mises concludes in Human Action:
"For the most part the banks of good repute are blamed for their conservatism and their reluctance to expand credit. In the eyes of people not deserving of credit such restraint appears as a vice. But it is the first and supreme rule for the conduct of banking operations under free banking.
"It is extremely difficult for our contemporaries to conceive of the conditions of free banking because they take government interference with banking for granted and as necessary. However, one must remember that this government interference was based on the erroneous assumption that credit expansion is a proper means of lowering the rate of interest permanently and without harm to anybody but the callous capitalists. The governments interfered precisely because they knew that free banking keeps credit expansion within narrow limits.
"Economists may be right in asserting that the present state of banking makes government interference with banking problems advisable. But this present state of banking is not the outcome of the operation of the unhampered market economy. It is a product of the various governments' attempts to bring about the conditions required for large-scale credit expansion.
"If the governments had never interfered, the use of banknotes and of deposit currency would be limited to those strata of the population who know very well how to distinguish between solvent and insolvent banks. No large-scale credit expansion would have been possible. The governments alone are responsible for the spread of the superstitious awe with which the common man looks upon every bit of paper upon which the treasury or agencies which it controls have printed the magical words legal tender.
"Government interference with the present state of banking affairs could be justified if its aim were to liquidate the unsatisfactory conditions by preventing or at least seriously restricting any further credit expansion. In fact, the chief objective of present-day government interference is to intensify further credit expansion. This policy is doomed to failure. Sooner or later it must result in a catastrophe.”
[Editor's Endnote: Ed's in-depth analysis and actionable advice on investing in precious metals miners to take advantage of the ongoing dollar collapse can be found in the TDV subscription newsletter. And that's just one of the many benefits of signing up. To learn more about the TDV newsletter and why it is an essential part of your investment life, click here.]
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