A Weekly Outlook and Analysis of the
Global Investment Climate
November 29, 2001
A new book is out, or at least I've just
discovered it. It's called "Crashmaker,
A Federal Affaire." Victor Sperandeo, a Wall Street author,
and Alvaro Almeida, an attorney write it. According to the short summary
at Crashmaker's website, it is a fictional story about a Wall Street trader
who plans to crash the Federal Reserve, profit from it, and set out to
roll the profit into a new constitutional order - absent the Fed. Brilliant.
I like it, though I'm a little apprehensive because of the few inaccuracies
I've spotted so far. Consider in the following description of the story
whether you see one:
With (the) creation of the Federal Reserve
System in 1913, and destruction of the constitutional monetary system
based on silver and gold in the 1930s, Congress surrendered tremendous
discretionary power over America's economy to a few men and women in
the highest echelons of the nation's central bank.
The constitutional monetary system was
based on silver and gold, but by the 1930's it was only gold. Silver had
already been outlawed by the Silver Coinage act of 1873 better known as
of 1873. This might sound nitpicky to you, in which case the book
would probably be a really good read but for me it sort of wrecks it because
it was the eradication of silver coinage, which in my view allowed the
creation of the Federal Reserve System in 1913 - three months after writing
this criticism, Alvaro Almeida had contacted us to make the following
The Coinage Act of 1873 did not "outlaw"
silver coinage. It purported to create a "gold standard" and terminated
the coinage of standard silver coins; but a "savings clause" retained
the status as money of earlier silver coinage. The 1873 Act also
created a new silver "trade dollar". In any event, the standard
(constitutional) silver dollar was reinstituted by the Act of 1878.
See also the Silver Purchase Act of
1890. In 1893, Congress passed a policy declaration, saying that
it was "the policy of the Unite States" to "continue the use of
both gold and silver as standard money, and to coin both gold and
silver into money of equal instrinsic and exchangeable value". Even
the so-called "Gold Standard Act" of 1900 also contained a section
reiterating this policy in terms of international bimetallism.
In the 1930s, Congress gave FDR authority
to change the values of both the gold and the silver dollars (which
shows everyone's recognition that silver was part of the system
even then.) Also, pursuant to the Silver Purchase Act of 1934, FDR
put out several Proclamations relating to the coinage of silver.
In fact, silver was not removed from the system as a primary "backing"
for paper currency until 1967/1968. (I leave aside that we now have
the silver "Liberty Dollars" being coined, along with numerous silver
"commemorative" coins.) The short of it is that CRA$HMAKER is correct
regarding the role of silver in the monetary system (until 1968)
- Alvaro Almeida
Anyhow, I stumbled into the following quote
from a chapter called A Hidden Agenda where Dominic Ancona, the
lead character in the story opposing the Federal Reserve System, does
a good job on a speech to an audience at a University:
"A Hidden Agenda"
"...The Fed's real purpose- its hidden agenda- is to facilitate government
spending through inflation. To avoid imposing politically intolerable
levels of taxation to pay for the spending that returns them to office
election after election, politicians rely on the Fed to confiscate wealth
from the public through inflation. Inflation's a hidden tax, and lessens
the cost of borrowing by enabling the government to pay its debts in
After a sip of water, Dominic continued.
"For the system to work, however, implementation of its inflationary
policy must be unpredictable- and therefore surreptitious and deceitful.
Thus, the Fed's an economic stealth bomber." The audience laughed. "That
may appear to be an extreme metaphor," Dominic responded to the reaction.
"Nevertheless, it's accepted wisdom on Wall Street. Why? Let me introduce
two key terms: forecasting and discounting."
"If the market can forecast what the Federal
Reserve intends to do, then it can discount- in layman's terms, preempt,
frustrate, or even nullify- the Fed's actions. For example, if the market
knows the Fed will increase the supply of money a month from today,
producers will start today to raise prices of goods and services in
anticipation of the increases in their suppliers' prices, and in consumers'
incomes, that they expect will follow growth of the money supply. The
Fed, on the other hand, would like any price increases to come well
after the spurt in the supply of money, because the ability of its inflationary
policy to stimulate the economy depends on a lag. So, when the market
forecasts and discounts the Fed's actions, they lose their effectiveness.
Conversely, when the Fed deceives the market, the more likely the Fed
will achieve its desires. This explains why the Fed asserts political
independence from Congress and the Treasury, why it refuses to operate
according to fixed rules, and why it makes its decisions in secret-
because the Federal Reserve's ability to deceive depends on its power;
and its power depends on its ability to deceive."
Enough said on the question of manipulation
then. There must be enough truth in the above statement to expose any
central bank's motivation or incentive to do what it does.
It's intriguing to me too, being an analyst
of sorts, that it is so hard to get away from speculating on what "they"
are going to do tomorrow or the next day, or even just trying to understand
what they did last week and why.
Today we're going to try and figure out
why the darn stock and bond markets don't travel together, anymore, whether
they ever did, and what it all might mean. Then we'll apply what we've
learned to today!
|1930 - 2001
|DJ Bond Average Prices (20 Bonds)
|Barron's - Best Grade Bond Yield
we're going to try and figure out why the darn stock and bond markets
don't travel together, anymore, whether they ever did, and what it all
might mean. When they travel together, Wall Street refers to the process
as coupled, when they travel apart, it is decoupled... since 1998, stocks
and bonds have decoupled, and over the past two weeks...
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