For someone who doesn’t even believe in basic Supply and Demand, Bernie Sanders seems pretty confident that he has the panacea to the world’s economic woes.
In a December 23rd New York Times editorial, Bernie laid out his plan for tackling the problems with the economy: prohibit Wall Street executives from serving at the FED, tax the shit out of speculative investing, and set interest rates at 0% by fiat to make sure small businesses are able to get loans. Sounds pretty good, right? In his words:
“The recent decision by the Fed to raise interest rates is the latest example of the rigged economic system. Congress have been telling us for years that runaway inflation is just around the corner. They have been dead wrong each time.”
That’s… an interesting statement. By “Congress”, does he mean the now-retired Ron Paul?
On one hand, Sanders alleges that raising interest rates constitutes a rigging of the system, which is technically true. On the other, he simultaneously implies that the antithesis of rigging the system is using the Federal Reserve to keep rates artificially low. Strangely, or perhaps not so strangely, he glosses right over the fact that the monopolistic, artificial suppression of natural interest rates precipitated the malinvestment which caused the 2007 financial crisis in the first place. Instead, he launches into what seems like a non sequitur and criticizes anyone who warns of runaway inflation. Keep that in mind for later. He goes on to lambaste Wall Street executives for (somehow) infiltrating the FED and causing this collapse:
“What went wrong at the Fed? The chief executives of some of the largest banks in America are allowed to serve on its boards. During the Wall Street crisis of 2007, Jamie Dimon, the chief executive and chairman of JPMorgan Chase, served on the New York Fed’s board of directors while his bank received more than $390 billion in financial assistance from the Fed. Next year, four of the 12 presidents at the regional Federal Reserve Banks will be former executives from one firm: Goldman Sachs.”
Well fuck Goldman Sachs, Jamie Dimon and and JPMorgan, but again, Sanders glazes over the failures of monopolistic controls of the money supply and instead blames the problem on something almost completely extraneous. In effect, he is claiming that artificially low interest rates wouldn’t have caused a crisis if different people had been at the FED (which puts the comment about inflation into perspective). Does he bother making the case for why Jamie Dimon’s presence at the FED caused the crisis? Nope; he just asserts that a conflict of interest explains everything. Is he correct that it’s a conflict of interest for private bankers to hold a public office which may give their bank a competitive advantage? Absolutely. Does that have anything to do with why the crisis in 2007 happened?
Only if you ask someone who doesn’t understand the Austrian school of economics.
Traditionally, interest rates reflect the degree of potential risk for lenders and borrowers. When a borrower has a history of default, that makes potential lenders nervous. As a result, these potential lenders will have a higher time preference for receiving repayment from this borrower than if they were lending to someone whose credit history wasn’t bruised. This would typically be reflected in higher rates of interest. If the borrower accepts the higher rates of interest, he is indicating that he has a high time preference for having a lump some of money now, and that he is confident he will be able to repay it later. If interest rates are too high, the borrower is deterred from taking a loan he knows he likely won’t be able to repay. If interest rates are artificially low because of government intervention, the borrower may be enticed to accept a loan he won’t be able to pay back. Therefore, as Bernie claims, the net effect of artificially low interest rates across the board IS more loans; he’s just not disclosing the fact these loans would be extremely risky and likely to result in default.
To reiterate: natural interest rates safeguard against risky lending practices; artificially low interest rates encourage risky lending practices.
In a fractional reserve system, loans are not issued from the savings of depositors. Instead, the savings of depositors are used as collateral upon which new currency is created (or counterfeited) from nothing and circulated as a loan. When a fractional reserve bank issues a loan, it is therefore expanding the total supply of “money” (or monetized debt, as the case may be) in circulation. This is called monetary inflation.
So let’s put it all together. When people borrow money, the money supply expands. When interest rates are higher, inflation happens at a slower rate. When interest rates are lower, inflation happens at a faster rate.
You may be asking yourself why this is important.
It is important because Bernie Sanders is blaming the misspending and bad investments which precipitated the 2007 financial crisis on speculative investment. There definitely was some shady activity in that arena, but speculative investment is still a necessary part of the economy upon which entrepreneurs depend to satisfactorily supply the demands of consumers. Furthermore, speculators assume the lion’s share of market risks (absent the government bailouts for which Bernie’s union supporters lobbied), they help the market adjust to change more expediently, and they provide funds to entrepreneurs who in turn use the money to start businesses and create jobs. Taxing speculation will therefore have a ripple effect throughout the entire economy which will most likely result in a net reduction of employment, goods and services.
Bernie Sanders, who admittedly takes his economic cues from Paul “Broken Window” Krugman, is claiming that conservative economists are wrong about inflation. This would absolutely have to be true for him to be able to defend his point that speculative investment was responsible for the financial crisis. Otherwise, he would have to admit that the crisis was caused by the artificial manipulation of interest rates – the very policy he’s campaigning on.
In reality, there are two types of inflation: monetary inflation (expansion of the money supply) and price inflation (prices going up relative to the supply of money). Traditionally, monetary inflation leads to price inflation. However, in America, the situation is unique in that the Federal Reserve note is pegged to oil, which means that every other country in the world has to import Federal Reserve notes before purchasing oil.
This means that every country in the world is stockpiling Federal Reserve notes. Maybe that’s why Bernie Sanders gutted the provision in the original FED audit bill for reviewing loans to foreign banks?
If he hadn’t done that, would he still be able to claim that “Congress have been wrong” (sic) about inflation? Would he still be able to champion Krugman’s completely erroneous assertions as self-evident gospel? If every country in the world knew how many dollars were really out there, would the dollar peg on oil even hold up? Would global American military presence be enough to continue intimidating the world into respecting the dollar peg?
It has so far. Especially in places like Iraq. Someday it won’t. Perhaps that’s why the media made such a fuss over China unpegging its currency from the FRN.
When the dollar peg IS dissolved, the Federal Reserve notes sitting in foreign reserves will come crashing down on American shores in a wave of hyperinflation. Will Bernie still blame Wall Street then, or will he acknowledge reality?
- We know that Bernie Sanders is blaming speculative investment for a problem that was caused by artificially low interest rates.
- We know that he is campaigning on keeping interest rates artificially low.
- We know that he knew enough about economics to snuff out an audit of the FED’s loans to foreign banks.
- We know that he will need to maintain a strong global military presence to prevent the FRN from being dumped as the world reserve currency.
- We know that he is a complete “trickle-down” Keynesian who has the support of Paul “War Stimulates the Economy” Krugman and 170 other econometrists.
- We know that he has absolutely no interest in breaking up the Federal Reserve, which is the biggest bank and monopoly in the world.
In other words, a Sanders presidency would be almost completely indistinguishable from any previous presidency of the last hundred years – global wars and all. With that in mind, consider the following quote from his website:
“Breaking up the biggest financial institutions would reduce the level of financial monopolization in America and the corresponding political influence of the largest banks. Too few banks control too much of our money.”
This is starting to seem less like economic illiteracy and more like Keynesian doublespeak.