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What do we do about the Fed showering the US with an ocean of currency?

*Dow Theory Letters, by Richard Russell, February 27, 2008

“I want to be honest about this. I have always objected to the very existence of the Federal Reserve. The Fed was sneaked into the system during 1913. The Fed was organized by a secretive group of bankers, and it was steered through Congress under very suspicious circumstances. The Fed, in effect, is a private banking monopoly. The original idea of the Federal Reserve, following close on the Panic of 1907, was to allow for an elastic monetary system. The Federal Reserve act turned over to certain banks control of the monetary system of the United States. Its legality was never placed before the Supreme Court. Nor was the Federal Reserve even presented to the American people as a Constitutional amendment.

Under the Federal Reserve system, monetary discipline is exercised via a group of bankers and advisors. Before the advent of the Fed, monetary discipline was brought about by gold. In 1971 Richard Nixon took the US off the gold standard. Now “we’re all Keynesians,” he said. Once having removed the discipline of gold, inflation in the US accelerated and the dollar lost purchasing power year after year.

Let me be blunt — if it was up to me, I’d get rid of the Fed and have the US Treasury issue its own money. Had we stuck to this process in 1913 and thereafter, we’d have much less inflation, we might have had the same number of recessions, the nation would be on a much more stable basis, and there’d be little need for an income tax. Finally, the US would not be pressured by a national debt that has now reached the absurd total of over $9 trillion.

But the reality is that we do have a central bank that we call the Federal Reserve. And the Fed is charged with two duties — guarding the purchasing power of the dollar. And insuring that the nation is prosperous. The Fed is entrusted with those two tasks.

Ben S. Bernanke, the latest Fed Chief, has moved into the Fed Chairmanship at a difficult time. The previous Fed Chairman, Alan Greenspan, left the nation in a precarious state. Greenspan left his job with housing and the big banks in arguably their worst condition in US history.

Bernanke, a former Princeton professor, is an expert on the Great Depression of the 1930s. He is also an expert on the long Japanese recession of the 1990s. Bernanke is well aware of the danger of deflation. Bernanke knows that once deflation holds the economy in its grip, it is difficult and close to impossible to turn the situation around. The Fed can create inflation, the Fed can dampen inflation, but it is far from certain that the Fed can turn deflation around, once deflation is well-established in the economy.

The fact is that Bernanke does not want to find out whether the Fed can turn deflation around. So what’s the best defense against deflation. In a word — it’s inflation. You inflate in order to forestall deflation.

I posted a message from Fed vice Chairman Don Kohn at the beginning of this site. Kohn is a veteran Fedsman. He’s been around a long time, and his words carry a lot of weight. Kohn is saying that the Fed is far more worried about the US economy than it is about potential inflation. Translation — the Fed will ACT to stimulate the economy but when it comes to fighting inflation — the Fed will resort to TALK.

Put yourself in Bernanke’s place. What else can he do? Really nothing. He will do as much as possible to reliquefy the banks. He will do what he can to save as many homes as he can. He can hope that a rising stock market will work its magic on the psyches of America’s consumers. And he will shower the US with money in the hopes that this added ocean of currency will somehow float the US out of trouble.

Question — Is Ben S. Bernanke doing the right thing?

Russell answer — Under the current system, which is the only system we have, yes, Bernanke is doing what he’s being paid for. He’s charged with keeping the nation prosperous, and he’s trying to do that. He’s also charged with guarding the purchasing power of the dollar — well, right now it’s not possible to do that — so he’ll have the various Fed governors telling anyone who will listen that “inflation isn’t that bad.”

OK, fine — but what should you and I do? We will deal with reality and try to protect ourselves from the loss of purchasing power due to inflation. To protect ourselves we buy gold and we buy silver.”

*This information is solely a highlight of the opinion of a third-party publication and is incomplete.  Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

Monex Bullion Investor