The Mess That Greenspan Made - Part 40

Jim Grant of Grant’s Interest Rate Observer shares a few thoughts about Federal Reserve Chairman Janet Yellen’s appearance yesterday before the Joint Economic Committee.

Grant explains how Yellen could make herself more clear during such visits:

If she said, for example, we believe in price control, we believe in market manipulation, and we believe in the Phillips curve, the Phillips curve being the trade-off between employment and inflation. Each of these ideas is widely discredited.

Each is dearly embraced by the federal reserve and you can in fact tease out from her remarks that she is a believer in all three of these heresies. It’s not chairman Yellen, but the entire fed is built around these doctrines.

Note that the oddity discussed in the opening seconds is occurring yet again today as bond prices are rising (somewhat disturbingly, along with stock prices) despite the certainty of the central bank buying fewer bonds next month than they did last month. It appears the bond market knows something that neither the Fed or the stock market know.

There’s a fascinating romp through the history of U.S. coinage in Coins that Go Clunk at The American that held even a few surprises for someone like me, who is pretty familiar with the whole American progression from sound money to a pure fiat currency.

Author Alex Pollock gets to the first surprise in his first sentence in the little known (and ironic) Golden anniversary of the move away from silver coins that has led to the one dollar silver coin below being worth about twenty times that amount at coin shops (it’s still only worth a dollar at a bank where, as I understand it, they must accept it as legal tender).

The year 2014 is a little noticed 50th anniversary: the anniversary of the disappearance of U.S. silver coins from circulation in 1964. In that year, the American people decided that silver was probably going to be a better store of value than paper dollars, regardless of the pronouncements of the central bankers and politicians of the time. The people were right. At silver’s year-end 1960 price of 91 cents an ounce, the 0.77 ounces of silver in a silver dollar had been worth about 70 cents. But by late 1963, it was worth a dollar. Today, with silver at approximately $20 an ounce, the silver in a silver dollar is worth more than $15. (Silver has been as high as $49 an ounce.)

Up to the 1960s, American dimes and quarters (as well as half-dollars and silver dollars in those days) rang when you dropped them on a table. Now they go clunk. This change from coins made of silver, it might be said, is of little practical importance. Yet it symbolizes a profound shift in the behavior of the U.S. government with respect to money, a precursor to the immensely destructive Great Inflation of the 1970s.

Long before the 1960s, all the gold coins and bullion of American citizens had been confiscated by their government under its diktat of 1933. At the same time, the same government defaulted on the bonds it had promised to pay in gold. It took the extreme, indeed despotic, step of making any possession of gold coins or bullion by American citizens illegal and a punishable, criminal offense! It became harder for Americans to protect themselves against money printing. This law, which today is hard to believe was real, lasted four decades, until 1974.

Silver certificates, the collapse of Bretton Woods, and a host of other topics are covered in a report that is well worth reading in its entirety, even if you think you know the whole story.

Another thing I didn’t know was that the 1965 coinage act was the first fundamental change in U.S. coinage since 1792 – during George Washington’s first term as the first president.

The tumbling trade-weighted dollar is one of the surprise stories of the year so far as many analysts thought the greenback would fare better than its freely traded rivals due to an improving U.S. economy and a central bank that was reining in its money printing effort while prepping financial markets for higher interest rates.

But that’s not what has happened as detailed in this story at CNBC.

After years of tough love from policy makers and central bank officials, the eurozone may finally be on the road to recovery despite perpetual warnings of deflation (either that, or bond bubbles in places like Spain and Greece are contagious). The euro is now near $1.40 for the first time since it looked like the U.S. government was going to implode in 2011.

Also (and this took me by surprise when I looked it up), thanks in large part to a blossoming housing bubble, the British pound is threatening $1.70 for the first time since 2008!

It’s not clear what any of this means, but it sure has taken a lot of people by surprise.

Thursday Morning Links

MUST READS
China’s exports and imports rebound – BBC
Putin to rebels: postpone secession vote – Reuters
Pro-Russians to hold referendum in east Ukraine – AP
China, Vietnam, Philippines in escalating South China Sea tensions – CNN
Carney Keeps Rates on Hold as BOE Seeks House-Price Tools – Bloomberg
New Draghi Era Seen on Hold at ECB as Euro Area Recovers – Bloomberg
6 dubious Yellenisms from the Fed chair’s testimony – MarketWatch
One Day, Two Views From Yellen on Reach For Yield – WSJ
Most People Have No Idea How to Manage Their Money – The Atlantic
The Shocking Increase Of College Tuition By State – Zero Hedge
JPMorgan is poaching talent from Silicon Valley – Quartz
The Piketty Bubble? – Marginal Revolution
About that inequality… – Gresham’s Law

MARKETS/INVESTING
Global stocks lifted by China trade, Yellen stance – AP
The toxic stocks sickening the Nasdaq – USA Today
The declining dollar: Why everyone got it wrong – CNBC
Stock market bubble talk may be inflated – Fortune
10 peaking megabubbles signal impending stock crash – MarketWatch
Russell Breaks Down, Negative Divergence in NYSE New Highs – Reformed Broker
U.S. 30-Year Yield Near 11-Month Low on Yellen Inflation Outlook – Bloomberg
Gold steadies after 1 pct drop ahead of ECB meeting – Reuters
The Sharpest Gold Analysis You Will Ever Read – GoldSilverWorlds
Don’t put too much stock in Putin’s so-called soft talk – Mineweb
Putin punishes platinum, palladium prices – Mining.com

ECONOMY/WORLD/HOUSING/BANKING
Unemployment dynamics – Econbrowser
Why Seattle’s $15 minimum wage is so exciting – Vox
Fast food worker strikes planned in 150 cities – CNN/Money
End of oil boom threatens Norway’s welfare model – Reuters
Urgent Moves Needed to Address Slowing China Economy – Caixin Online
Whodunit: Yes, China’s Central Bank Was Behind the Yuan Depreciation – WSJ
Why a savings glut does not increase savings – China Financial Markets
ECB is delighted by the splendid prospect of deflation – Telegraph
Nearly half of all home sales all-cash deals – CNN/Money
Housing’s sagging rebound worries economists – USA Today
Scorched-Earth Monetary Policy in the US – Testosterone Pit
Barclays axes 19,000 jobs, reins in Wall Street ambitions – Reuters
Modern Bubble Doctrine Needs Not Logic – Alhambra Partners

 
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