The Federal Reserve: Our Policy Is To Steal From You

Inflation is theft in more ways than one: it also steals our liberty.

We know two things: 1) the official policy of the Federal Reserve is to engineer and maintain inflation and 2) inflation is theft. As I have recounted here many times, in nominal terms, it looks like average wages (earned income) in the U.S. have been rising smartly for decades. But measured in purchasing power, i.e. adjusted for inflation, earned income has declined for most workers, especially in the past three years.

Measured in purchasing power, i.e. the number of gallons of gasoline or loaves of bread an average worker could buy with one hour of labor, American workers have experienced a steady decline in the value of their labor for the past 40 years.

Whenever a pundit scoffs at the idea that the dollar might lose 95% of its value, readers remind me it already has lost 95% of its value in the past century.

The dollar has lost most of its value just in the past 45 years; according to the BLS inflation calculator (which very likely understates real inflation), it takes $7 2011 dollars to buy what $1 bought in 1966, at the top of the post-war Bull market.

Can we buy 7 times more goods and services now? Or can we actually only buy 6 times more goods? If so, then our earnings have actually declined by 15%. Put another way: 15% of our earnings have been effectively stolen via inflation.

The Federal Reserve robs savers every day of millions of dollars, which it then transfers to the "too big to fail" banks by paying interest on those banks' reserves.Savers earn .01% on their cash while banks are paid 2% interest. The difference is what is stolen from savers and funneled to the banks.

Inflation is theft not just of cash but of liberty. Longtime contributor Chad D. explains why:

I've never seen this topic covered (not to say that it hasn't) which is of great interest to me: the nexus of the criminal justice system and the financial system, specifically the inflationary nature of our system. The criminal law books have statutes (and their associated regulations) with provisions regarding the value of property and the relative level of crime with which a person would be charged, if one violated that law. In addition, these statutes spell out the amount of fines and penalties for convictions for those crimes.

The trouble is that these statutes are not indexed for inflation, so what happens is people are charged with a higher level of crime than they otherwise would have in the past, for no other reason than inflation.

As an example, if a person in NY decides to intentionally damage the property of another with a value of $250 or more, he is guilty of a felony. Intentionally damaging the property of another which has a value under $250 is a misdemeanor. Well, that statute was passed over thirty years ago, when $250 was a decent chunk of money. $250 in 1980 is equivalent to $653 today, according to an inflation calculator on the web that I used. Conversely, a product that costs $250 today only cost $86 in 1980.

So if the law were to remain equal over time, the triggering level for the felony level of the statute should have been revised upward to around $650 to reflect the inflationary nature of our system. What we have now is a number of people being charged with felonies when they should only be charged with a misdemeanor if the statutes were indexed for inflation.

Let's run through a scenario. In 1980, I decide that I'm going to intentionally damage my friend's stereo that's worth $200 and I get arrested for doing so. I would be charged with a misdemeanor. Fast forward to 2010, I damage the same stereo, but now, because of inflation, that stereo is now worth $522. Now I get charged with a felony.

My actions have not changed and for the sake of this example, the stereo has not changed, either. Now, we have a lot of people getting felony records and we are having to spend more on prosecuting these offenses (felonies generally cost more than misdemeanor to prosecute for various reasons). One can argue that the stereo has gotten better, so my example is imperfect, but that misses the point. The point is that the statute was promulgated upon the assumptions that a dollar represents an adequate measure to value property and also to set a minimal value upon which a felony prosecution would take place.

If the relative value of the dollar goes down over time due to government mismanagement, how is that statute a fair one? There was no debate in our legislature or discussion in our society to see if we want additional numbers of people prosecuted for felonies, rather than misdemeanors.

We could look at reporting requirements the same way. For example, one has to file reports with the feds, if one has cash transactions of 10K or higher. Again, back when the statute was passed, 10K was a good chunk of money, but now it doesn't buy nearly as much.

Consequently, the number of these reports has skyrocketed, at least in part, due to inflation. How efficient is that? Are we catching more criminals because of it or are we making more criminals out of otherwise decent people? The same goes for fines. Are fines that are promulgated 30 years ago still an effective deterrent? I don't think so, in general. Though, I have noticed that the government is much better at raising fines than raising the levels for felony prosecution.

After writing the above, I decided to do some more research and I found that some NY statutes have been revised upwards (e.g. grand larceny) due to inflation, but not the statute about which I was talking (criminal mischief 3rd). The legislature did raise the minimum felony threshold for grand larceny to $1,000 several year ago, but not criminal mischief, which just highlights the problem in my mind. (Note: Raising the level for felony criminal mischief is currently being considered by the legislature).

Even though some in government are aware of inflation and its nexus with the criminal justice system, nothing (semi-)automatic is put in place to assure a consistent, fair application of the law. In this case, the legislature changed one law, but not another.

What other laws are missing, I wonder? Should the grand larceny level be raised again right now? Why should numerous people be subjected to felony charges, because of legislative/bureacratic inertia? Are other states or the federal government better at taking care of this? What happens when the inflation rate starts to get exceedingly high in the coming years, as we get QE 3,4, 5, etc.? So, it appears some people are looking at this, but not enough, in my opinion. I doubt many law makers and law enforcers really understand how pernicious inflation actually is.

One last example: consider the absurdity of the disparity between the current criminal mischief and larceny laws here in NY. For instance, if I intentionally damage a stereo that is worth $750, I would be charged with a felony. If I steal that same stereo, I would be charged with a misdemeanor. Crazy, right?

Correspondent Chris noted the pernicious way that long-term capital gains enable theft of purchasing power via unrecognized inflation:

The problem with long term capital gains is that it taxes inflated gains, not real value.

Say I invest $100 in stocks and then sell them 15 years later for $200. I made a profit of $100 right? Wrong! During that time inflation (caused by government policies) reduced the value of my money so that the purchasing power of my $200 is about the same as the $100 I invested, meaning I really made no money at all.

If capital gains laws allowed us to inflation adjust the basis then I would have no problem with taxing the gains at the normal rate of the rest of your income.

Thank you, Chad and Chris, for highlighting two of the many perversions created by the Federal Reserve's explicit policy of stealing from the American public via inflation. Too bad theft via inflation isn't a felony.


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Has Housing Bottomed? Here's How to Tell

Housing has been propped up by Central State intervention. As that ends, Phase II of the retrace to pre-bubble valuations is at hand.

Has housing bottomed? Here is the sure-fire way to tell:

Stories titled "Has housing bottomed? Here's how to tell" have vanished for lack of interest.

The absence of stories about the bottom in housing will mark the final nadir, because the real bottom can only be reached when everyone has abandoned housing as a pathway to easy money. Only when the public and investor class alike have completely lost interest in real estate as a "sure-fire" investment can the real trough be reached.

This destruction of long-held habits and beliefs takes a long time. The closest analogy might be the stock market in the last secular Bear market. Stocks topped out in 1966, though the economy lumbered on until 1969 before faltering. Stocks then meandered for 13 years of stagflation, losing 66% of their inflation adjusted value in 1966 by 1982.

People gave up on stocks. I call this loss of faith "when belief in the system fades:" note how household participation in stocks topped out in 1969, three years after the peak in the market. Participants clung to their belief in stocks for about four years after 1969, at which point participation cratered as they finally abandoned their faith in a "permanent Bull market."

Household participation fell by two-thirds and remained low for years.

In August 2006, near the top of the housing bubble, I suggested a three-part scenario for the housing bust: it would take eight more years to play out, and the declines would occur in sharp downlegs following a phase-shift model.

Phase Transitions, Symmetry and Post-Bubble Declines (August 2, 2006)

Here is the chart I presented at that time as a possible time model:

Here we see the first phase shift decline and the Central State engineered "recovery," which has now rolled over.

Here is CoreLogic's snapshot of housing (via Calculated Risk). There is still a long way to go down before the market retraces the entire bubble.

The Federal Reserve has bet that housing valuations can be propped up by lowering the interest rate on mortgages. To the degree that a few fence-sitters might be tempted to take the plunge, lower rates have a modest follow-through--but the real determinant of housing is employment, which as we all know, has tanked.

Here's the civilian employment ratio, which reflects the percentage of the labor force that has a job:

Perhaps even more telling is the per capita rate of employment:

By this broad measure, employment has declined to levels last seen thirty years ago. We can also look for clues to housing's future by looking at wages, which have dropped steeply:

These charts pose a simple yet profound question: how can people buy a still-expensive house if they don't have a job, or their income is plummeting?

The proximate triggers for the next phase-shift down include a decline in Central State intervention in the housing market and a return to official "recession" as the "soft patch" turns into a quagmire.

In an era where "market sentiment" swings wildly from day to day and the nation awaits every quarterly report from Apple as the "definitive" bellwether not just on stocks but the entire Galactic Mood, then the notion that trends can take years to play out doesn't sit well with our impatient demands for a "bottom." But long-term trends take years to play out, whether we like it or not.


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You Want to Fix the U.S. Economy? Here's a Start

A simple 8-point plan would restore both the banking and the real estate sectors, and end the political dominance of the parasitic "too big to fail" banks.

Craven politicos and clueless Federal Reserve economists are always bleating about how they want to fix the U.S. economy and restore "aggregate demand." OK, here's how to start:

1. Force all banks to mark all their assets to market at the end of each trading day, including all derivatives of all types, including over-the-counter instruments.

2. Allow citizens to discharge all mortgage and student loan debt in bankruptcy court, just like any other debt.

3. Banks must mark all their real estate to market weekly as defined by "last sales of nearby properties" adjusted for square footage and other quantifiable measures (i.e. like Zillow.com).

4. Require mortgage servicers and all owners of mortgage-backed securities to mark every asset within each pool to market weekly.

5. Any mortgage, loan or note which was fraudulently originated, packaged and sold, including the misrepresentation of risk, the manipulation of risk ratings, fraudulent documentation by any party, etc., will be discharged as uncollectable and the full value wiped off the books and title records without recourse by any of the parties.

If a bank fraudulently originated a mortgage and the buyer misprepresented material facts on the mortgage documents, then both parties lose all claim to the note and the underlying asset, the house, which reverts to the FDIC for liquidation, with the proceeds going towards creditors' claims against the bank.

6. Any bank which misrepresents marked-to-market asset values will be fined $10 million per incident.

7. Any bank which is insolvent at the end of a trading day will be closed and taken over by the FDIC the following day, and liquidated in an orderly manner via open-market auctions of all assets, including REO (real estate owned).

8. All derivative positions held by the insolvent bank will be unwound immediately, and counterparties who fail to make good on their claims will also be closed, given to the FDIC and liquidated.

You know what this is, of course: a return to trustworthy, transparent accounting. And you know what the consequences would be, too: all five "too big to fail" banks would instantly be declared insolvent, and most of the other top-25 big banks would also be closed and liquidated.

At least $3 trillion in impaired residential mortgage debt would be written off, maybe more, and $1 trillion in impaired commercial real estate would also be written down. Derivative losses are unknown, but let's estimate it's at least $1 trillion and maybe much more.

If $5.8 trillion of fantasy "value" is wiped off the nation's books, that's only a 10% reduction in net household and non-profit assets, which total $58 trillion. Even an $11 trillion hit would only knock off 20%. If that's reality, if that's what the assets are really worth in the real world, then let's get it over with. Once we've restored truthful accounting and stopped living a grand series of debilitating lies, then the path will finally be clear for renewed growth.

The net result would be the destruction of the political power of the "too big to fail" banks, the clearing of the nation's bloated, diseased real estate market, and the restoration of trust in institutions which have been completely discredited.

Bank credit would flow again, and we could insist on a healthy competitive system of 250 small banks instead of a corrupting system of 5 insolvent parasitic monsters and 20 other bloated but equally insolvent financial parasites.

Those who lied would finally get fried. At long last, those who misprepresented income, risk, etc. would actually pay some price for their malfeasance. Criminal proceedings would be a nice icing on the cake, but simply ending the pretence of solvency would go a long way to restoring banking and real estate and ending regulatory capture by TBTF banks.

What's the downside to such a simple action plan? Oh boo-hoo, the craven politicos would lose their key campaign contributors. On the plus side, the politicos could finally wipe that brown stuff off their noses.


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Four Charts: Shanghai, S&P 500, U.S. Dollar and the Dow

Four charts cast a skeptical light on the Status Quo "stories" of endlessly rising equities and the doomed dollar.

Here are the Status Quo's most important investment "stories:"
1) China will continue booming for decades
2) U.S. equities will continue soaring as profits continue rising
3) The U.S. dollar will continue heading down because Bernanke wills it to do so

I would love to believe these magical tales, but the charts cast a skeptical pall on the happy stories. Beauty and uptrends alike are in the eye of the beholder, so maybe you see uptrends in equities here; I don't.

The chart of the SSEC Shanghai Index is downright ugly. The uptrend line has been decisively broken, and a giant pennant/flag pattern looks busted, too.

The SPX (S&P 500) has also busted its uptrend, and the fan pattern indicates a weakening trend off the March 2009 lows. Notice how the trendline that was support is now resistance--a classic technical sign of reversal.

The dollar's slight uptrend was broken in Bernanke's last-ditch effort to goose the equities market to a new high in April. Since then, the DXY has clawed its way higher while the indicators are showing positive divergence to the buck's weak ascent.

There is great resistance just overhead above 76, as the trendline now offers resistance, as does the 50-week moving average. Those two are roughly aligning with the upper Bollinger band. On a slightly positive note, the lower Bollinger has turned up and the DXY has managed to hover at or above its 20-week moving average.

If the dollar closes decisively above 76.30, then Bernanke has lost control and equities are headed down: a dollar breakout will be in play.

Here is an analog chart of the Dow Jones Industrial Average from 1907 and the present, courtesy of Ron Griess and The Chart Store. Note the uncanny correlation of the two. Correlation isn't causation,of course, so maybe the Dow will sprint to 15,000 from here. But this chart introduces the notion that if history and pattern-matching have any predictive value, the next move will be down.

The truism in technical analysis is that you can always find a chart or indicator to support your belief system. But if we look at these simple charts and simple lines without predisposed beliefs, then what story are they telling?


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The Critical Difference Between the Top 1% and the Top .1%: Capital Gains

An entrepreneur in the top 1% explains the difference between those in the top 1% of income and those in the top 1/10 of 1%: capital gains enable a much lower tax burden on the thin layer of super-wealthy.

I have failed to make an essential distinction between those in the top 1% of income earners who pay ordinary tax rates and those in the upper reaches of that 1% who escape the heavy tax burden via shifting income to capital gains. The most egregious example of this is hedge fund managers who bought a loophole which enables their $600 million annual income each to be treated as capital gains, a rate of 15% compared to a top rate of 35% for earned income and a self-employment tax on the first $106,000 of 15.3% for self-employed/sole proprietors--a total of 50.3% for top earners of ordinary income.

Correspondent S.R. is an entrepreneur and business owner who identifies himself as a top 1% income earner. He rightly (and politely) takes me to task for accepting what he suggests is rank propaganda, that is, conflating those who are creating value and jobs with those in the very top rungs who escape ordinary tax rates via Panzer divisions of tax attorneys and political influence. Here is his commentary:

I need to bring to your attention one thing you have been promulgating as truth which is, in fact, misleading -- and more than misleading. I am technically in the "top 1%" which has been bad-mouthed and conflated with the "Power Elites" on your site and in the main stream media for several years now. I'm convinced the conflation has been a well orchestrated propaganda campaign and it has obviously been a big success if even you have been substantially taken in.

It is LESS accurate to categorize the bottom 0.9% of the top 1% with the likes of Soros, Paulson, Buffett, etc. than to lump them with those who are barely getting by on $40K. Why? Because most of those who are in the "top 1%" -- probably 90% of them -- are professionals and small business owners who may earn $150k to $2M a year or so but are primarily taxed at "ordinary" income tax rates!

Those in the top 0.1%, on the other hand, have mostly graduated to Wall Street and Washington with its stock options and shares and other tricks for getting paid in forms which fall under capital gains. Nobody is asking WHY capital gains should be taxed LESS than income from personal, productive effort. Isn't that strange?? Obama, notably, pontificates about the "rich" who earn "more than $250k" needing an increase in their (ordinary) income tax rates.

The Republicans say they are against ANY tax increase -- in their own way, skirting the question of WHY *gambling* income is treated better than productive income. I know you know this. In various articles you've tangentially pointed it out. In fact, I think you wrote at least one article which was very close -- only you said the status quo benefited "the top 1%", instead of only the top 0.1%.

Ordinary income tax rates rapidly approach 50% when state ordinary income taxes are included and exceed it when you consider all the other taxes, including matching payroll taxes and property taxes. There are few loopholes for ordinary income earners -- and there are "alternative minimum taxes" to make sure it stays that way!

I have no clout to make a special deal with governments and, in fact, this year they have stepped up their predation so extremely that I am beginning to think of quitting. I hire at least 30 people directly ... and probably another 10 or more indirectly, and I am profitable. I would be thinking of expanding, of hiring more, but I am beginning to think of quitting. I am so sick of being eaten alive by government and this business of being slandered as one of the "1%" -- something I used to be proud of having achieved -- is extraordinarily discouraging.

I enjoy adding value to the world through honest and productive business, I feel loyalty to my customers and my employees, I was proud when I found a way to offer my factory workers health benefits more than a decade ago. But I have ethics and ethics demands I NOT participate in Obamanation. Sometimes I think of the people my taxes help kill in foreign countries and the way it is being used against me and others here at home. I tell myself I will forgo profits, if necessary, to opt out. I will NOT do "anything" for money. I despair. I go on.

Anyway, my request: I would appreciate if you would try harder to be clear that the bigger issue is the preferential treatment of capital gains over ordinary income, of corporations over sole proprietors, and that, in any case, there is a HUGE difference between those who speculate or exercise fascist connections for profit versus those who have achieved financial success through honest efforts and creation of value in the free market.

Thank you, S.R., for taking the time to set me straight on the critical difference between the top 1% and top .1%, and for highlighting the importance of aligning capital gains taxation with regular tax rates. I plead guilty to failing to make these critical distinctions in the past and will make that distinction going forward.

The most rewarding aspect of publishing this blog is learning from smart, experienced readers. Being open-minded to new information and insightful analysis may well be the key skill needed to navigate the next 20 years. Fostering that skill is one of my goals, and I hope it is reflected in the blog's content.


Note about email: Projects (replacing a water heater and a concrete pour) over the past two weekends absorbed all the time and energy I usually devote to catching up with email. I am also working mono-maniacally to complete my book and so my usual state of exhausted near-delirium has worsened. I greatly appreciate your patience and understanding of my limits.


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