Bad Day for the WSJ

By Howard Katz  Jul 19 2010 9:36AM

A recurrent theme in my articles has been that our current economic system is intended to steal your wealth and that a vast amount of information being taught as economics is intended to justify this stealing and to trick you into falling for its program.

As with any misinformation, one must make a distinction between a deliberate lie and an honest mistake. As I have studied this, it is clear to me that, at the very top, it is deliberate. For example, John Maynard Keynes was a deliberate fraud. He did not believe Keynesian economics. It was a useful tool toward his goal of attracting the bankers to support him and his followers. Keynes was a confidence man; our current economic system is a confidence game, and the intent is to steal the wealth of all the marks.

As an astute speculator, you cannot afford to let this happen to you. You must see reality as it is. I have been arguing that an updated version of this lie was unleashed on the public in September 2008. It caused the sell-off in commodities of the 2nd half of 2008 and the smaller sell-off of the first half of 2010. This is the idea which we must confront directly, and Wednesday’s Wall Street Journal (once more) brought it forcefully to our attention in a front page article: Speaking of a discussion of Federal Reserve policy Jon Hilsenrath says:

“One topic under debate is the possibility that today’s already-low inflation may turn into a debilitating bout of deflation, a broad drop in prices across the economy.”

“Fed Sees Slower Growth,” by Jon Hilsenrath, Wall Street Journal,
7-14-10, p. A-1.

This concept, that a massive, broad drop in prices across the economy can come out of nowhere, that it cannot be predicted in advance, and that it is a bad thing for most of the people in the country, is very widespread.  You will read it in almost every newspaper and news magazine in the country (and the world). It is taken for granted, and today it is not debated.

And yet it is embarrassingly, incredibly, humiliatingly wrong.

This is an important concept for you to understand.  You seek knowledge of economics. You start by turning to the institutions generally respected in the field. And what you are treated to is a confused mish-mash of gobble-de-gook more to be expected of a medieval witch hunter than a modern, scientific person.

For example, let us consider “broad drop[s] in prices across the [American] economy.”  Over the past two centuries, there have been 3 of them. And there is a 4th case which might be considered such a drop (depending on exactly where in America one lived). None of these cases was difficult to predict. They were all caused by a reduction in the money supply. In 3 of the 4 cases the broad drop in prices was preceded by a broad rise in prices, itself caused by a suspension of the gold/silver standard and the massive printing of paper money. These were the rise in prices associated with WWI, the rise associated with the Civil War and the rise associated with the War of 1812. During the War of 1812 New England was opposed to the war, and the New England banks refused to create money and lend to the Government, but banks in the central and southern states did create money. Consequently, prices rose in the central and southern states but not in New England.  In 1815, Daniel Webster, the Senator from New Hampshire at that time, reported that the money circulating in Washington, D.C. was worth 75¢ (in terms of a one dollar silver coin) while the money circulating in Boston, MA was worth $1.00. That is, prices in Washington, D.C. had risen by 33% from 1811. In other parts of the country, the price level varied directly with the degree to which the banks supported the war and printed money to lend to the Government. The case of the War of 1812 makes it clear that the rise in prices due to the printing of money was in fact a going down of money, not (as was widely debated at the time) a going up of goods. Hence it was called a depreciation of the currency, not an inflation of goods. This terminology was changed after the Civil War so that the bankers could convince people that goods were going up for reasons that had nothing to do with the quantity of money.  This is why I never speak of an inflation (which means a going up of goods) except in quotation marks.

After the war ended, there was a “broad drop in prices” in the central and southern states but not in New England. This is the 4th case above. The other 3 broad drops were as follows:

1866-1879: This was caused by the withdrawal of the paper money (the greenbacks) which had been issued to finance the Civil War. By the way, while the greenbacks were accepted in most of the country, in California (which had a lot of pro-gold sentiment from the ‘49ers) there was massive civil disobedience. People refused to obey the legal tender law, and it could not be enforced.  If you tried to pay in greenbacks, people would boycott you and drive you out of business. So California remained on the gold standard through the Civil War, and of course prices in California did not decline from 1866-1879.

1879-1896: Prices continued their broad decline after 1879 and did not bottom until 1896. This was caused by the demonetization of silver (in 1873). Prior to 1861, the U.S. had a bimetallic system where both gold and silver were money. In 1873, Congress decided to demonetize silver, and from the time that hard money was resumed (1879) to 1933 America was on the gold standard.  The fact that these two “deflations,” which had different causes, came back to back might lead us to group them together and consider them as one giant “deflation” (1866-1896). While this would be incorrect if we think in terms of cause and effect, it is also true that this was the greatest period in the economy of America and in the history of any country in the world, ever. This was the period of great railroad expansion. This was the period when brilliant inventors (Thomas Edison, Nicola Tesla, etc.) created new products which were made cheaply enough for the common man to afford and which enabled him to live far above the level of a medieval king.  For example, a medieval king could never get much above a few horsepower and was never able to travel faster than 40 MPH (the speed of a horse). Today we cross the continent at 600 MPH.  It was the period when millions of people immigrated to America (to get its high wages. There were no anti-immigration laws, and yet Historical Statistics of the United States, Colonial Times to 1954 (published by the U.S. Commerce Department) recorded the unemployment rate for 1906 as 0.8%.

1921 and 1929-33:  The money supply in the U.S. doubled in WWI, and prices doubled as well. The Republicans of 1919 decided upon the same policy as 1866-1879, withdrawing the war-created money from circulation and restoring prices to their pre-war level. Since these Republicans were “cigar-filled-room” types and since cigars had gone from 5¢ to 10¢ during the war, they expressed this by saying “What the country needs is a good 5¢ cigar.”  They won the election of 1920 and were able to bring (Wholesale) prices down in two stages, 1921 and 1930-33. By 1933, prices in the U.S. were back to their level of 1914, which in fact was the same price level that Webster had noted for Boston in 1815 and which had prevailed over the country in 1793 – 140 years of price stability. By the way, the Republican “deflation” of 1930-33 brought the same good effects as that of 1866-79. This is shown by the sharp rise in meat consumption, the change from margarine to butter and the sharp increase in charitable giving. The myth that a depression occurred during this period was a lie, pure and simple, created by the media to seek favors from the bankers. This lie has been very successful in cheating the people of America (and the people of the world) for the past 77 years.

Does this mean that there have been no depressions in American economic history?  No, there have been at least 3.  Remember, a depression is a period when the large majority of the people in a society become poorer. These are the Civil War, WWI and WWII. And there was probably a minor depression in the central and southern states during the War of 1812.  (It is almost certain that there was another depression during the Revolutionary War; however, here I am only considering the period starting with the adoption of the Constitution.)  We have just seen that the vast majority of the people in America were wealthier during the early 1930s.  But fast forward a decade and look at events.  In the early 1940s, no one could buy either a new house or a new car. They were not being made.  Gasoline was rationed to 3 gallons a week.  Butter, eggs and meat were also rationed.  Would anyone in his right mind call this prosperity? Actually the establishment economists called this a boom, but it is not possible that they were in their right minds.

If you simply realize what a war is, a war is destruction. For example, in WWII, a Nazi U-boat torpedoes an American freighter. Then the U.S. Air Force levels a German city.  Back and forth. The result is massive destruction of wealth on both sides. Hawks will claim that the victor can steal enough wealth from the loser to make the war pay off for him, but a close study of history reveals that this is a romantic fantasy. For example, the British Empire, the greatest in world history, was created because Britain recognized that people had rights, and other countries wanted to be under Britain because they wanted rights too. So they put up only token resistance, and this was their way of joining the British. (When Britain gave up her rights and adopted the welfare state between WWI and WWII, she soon lost her empire.)

The same thing happened in WWI and the Civil War.  WWI is a good example because the central powers (Germany and Austria) had more rights than the eastern ally (Russia) but less rights than the western allies (Britain, France and the U.S.). As a result, they won the eastern front and lost the western front.

But what about the central establishment argument, that the 1930s must have been a depression because of the high unemployment? The answer is that the high unemployment was caused by the sharp decline in prices, which caused wages to decline more slowly than prices, thus leading to a rise in real wages. Thus all of the employed working people (the vast majority) were better off.  Furthermore, from 1930-33, there was a 30% rise in the value of the money, and this led to (approximately) a 30% rise in everyone’s savings. Every working man saw a 30% rise in real savings over this period. On balance, the working class was much better off, and Wall Street and the banks were much worse off.  Of course, it was easy to see this from the big drop in the stock market and corporate profits.

And what is the bottom line for the astute speculator from all this economics and history?  Mr. Hilsenrath continues:

“As Mr. Bernanke noted in a now-famous 2002 speech, the Fed has the power to fight deflation – or falling wages and prices – by printing money.”

Ibid., p. A-4.

In words of one syllable, the Wall Street Journal wants “inflation.” That is why it is urging the Fed to print money. Indeed, they did precisely this to introduce the 21st century. At that time, their Op-Ed page was screaming “deflation, deflation, deflation.”  What was the result?  The Fed created a large increase in the money supply, and this led to one of the greatest commodity price increases in history (as well as the early century housing bubble). Indeed, prices have not declined in America since 1955. And right in the middle of all this screaming of “deflation” the business executives of the Journal raised its news stand price from $1.50 to $2.00. Of course, if there really was going to be a “broad drop in prices” this increase would have priced the Journal out of the market and led to heavy losses for the paper.

THE BUSINESS EXECUTIVES OF THE JOURNAL DID NOT BELIEVE WHAT THE PAPER WAS WRITING IN ITS PAGES.

Then, dear reader, why should you believe it? Printing money does not create wealth. If it did, then why not legalize counterfeiting? Is there is single country in world history where this theory has worked? Not a chance.

You want to see reality as it is? That is my job. I publish a fortnightly (every two weeks) newsletter, the One-handed Economist predicting the financial markets with special emphasis (at this time) on gold and gold stocks. At the One-handed Economist, we know the past, and we are pretty good at seeing the future.

In your face, Jon Hilsenrath.  In your face.

Howard S. Katz

****

The One-handed Economist is written and published fortnightly by myself with regular issues every other Friday and special bulletins when necessary. Price is $300/year ($290 for cash customers subscribing via U.S. mail). For e-mail customers, the letter is posted on my website, www.thegoldspeculator.com (password protected) on Sat. or Sun.  Cash customers should send $290 to: The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055.  Thank you for your interest.