Janet Yellen may be the new monetary sheriff in town, but she harbors the same old phobias her predecessors had—a fear of the scary deflation monster.

The new Fed chair told the Economics Club of New York, “The FOMC strives to avoid inflation slipping too far below its 2 percent objective because, at very low inflation rates, adverse economic developments could more easily push the economy into deflation. The limited historical experience with deflation shows that, once it starts, deflation can become entrenched and associated with prolonged periods of very weak economic performance.”

This irrational fear that prices will fall and won’t be able to get up is repeated often by Keynesians, who believe consumers will destroy aggregate demand by waiting indefinitely to buy at lower prices. In turn, lower profits will cause companies to cut expenses by laying off employees. This all leads to a downward spiral impervious to central-bank machinations—think “pushing on a string” from your Econ 101 class.

This mindset is wrongheaded at best and dangerous at worst. Profits are the difference between the price it costs to produce a good and the price that good is sold for. As economics professor Jörg Guido Hülsmann makes clear in his book Deflation and Liberty, “In a deflation, both sets of prices drop, and as a consequence for-profit production can go on.”

Lower prices increase demand; they do not reduce or delay it. That’s why more and more people own flat-screen TVs, cellphones, and laptops: the prices of these goods have fallen, and people with lower incomes can afford them. And there are a lot more low-income people than high-income people. This is not something to avoid at all costs—it’s called prosperity.

Lower prices don’t mean lower profits; nor do they mean employees will be laid off. More demand for a good or service means more employees are needed to produce those goods and services. “There is no reason why inflation should ever reduce rather than increase unemployment,” professor Hülsmann writes.

He goes on to point out that only if workers underestimate the amount of money created by the central bank and therefore reduce their real wage-rate demands will unemployment be reduced. “All plans to reduce unemployment through inflation therefore boil down to fooling the workers—a childish strategy, to say the least.”

“Deflation is one of the great scarecrows of present-day economic policy and monetary policy in particular,” Hülsmann says. It seems a nation will destroy its finances battling a non-threat.

While the monetary mandarins lie awake at night worrying about lower prices, since 1971—when Richard Nixon cut the last tether of the dollar to gold—the effect of creating more money (inflation) has showed up in exponentially higher prices. A gallon of gas was 36 cents in 1971. New-home prices averaged $28,300 that year. A dozen eggs was 53 cents. The Dow Jones Industrial Average vacillated between 790 and 950.

The average home price today is $334,000. Eggs cost $2.06 a dozen. Regular gas goes for $3.75 a gallon, and the DJIA is north of 16,700 as I write.

However, Ms. Yellen is not only not alarmed by these price increases, she wishes them to be greater—to the detriment of the average person.

The Fed’s reckless money creation has distorted the price of everything, especially in financial markets. Which brings us to Robert Prechter’s work provided by Elliott Wave International. A section of the March edition of the Elliott Wave Theorist is offered below to Casey readers.

If the Dow at new highs doesn’t make you feel warm and fuzzy or wealthy, Prechter’s illuminating work will show you why.

It’s a must-read. You’ll want to download the entire issue, which you can do here.


Doug French, Contributing Editor

Has the Fed Produced Any Benefits?

Elliott Wave Theorist

The Fed has benefited the government mightily. Its exchange of new accounting units for the Treasury’s bonds has stealthily transferred value from savers’ accounts to the government. In conjunction with the FDIC, it has also benefited bankers in the short run by allowing them to make profits on reckless loans and avoid accountability. But in doing so, it has sucked value out of savers’ accounts and burdened the American economy.

Figure 1 is a remarkable chart that compares two back-to-back centuries. From 1813 to 1913, a period of 100 years when the Fed did not exist, the value of top US corporations (normalized to the DJIA) rose from 0.18 ounces of gold to 2.86 ounces of gold, a 1,489% gain in 100 years.

From 1913 to 2013, a period of 100 years when the Fed has existed, the value of top US corporations (as measured by the DJIA) rose from 2.86 ounces of gold to its current level of 11.86 ounces of gold, a 314% gain in 100 years. On this basis, we can calculate the burden of the Fed as being about 80% of the otherwise gain in the US economy.

But this is the most positive spin one can put on the matter. It took some time for the Fed to get its operations going. If we extend the non-Fed era to 1929, erring slightly in the other direction, we find that the value of top US corporations rose from 0.18 ounces of gold to 18.5 ounces, a difference of more than +10,000% in 115 years. In the 85 years since then, the value of top US corporations has fallen from 18.5 ounces of gold to 11.86 ounces, a difference of -35.8%. On this basis, we can calculate the burden of the Fed as having extracted so much value out of the US economy that it has gone into retreat.

The Era of Money vs. the Era of Unbacked Accounting Units

As they say in the commercials, “But wait!” The change wrought by fake money is far, far worse than you think. Let’s look not at the timing of the Fed’s existence but the timing of the government’s abandonment of money.

For 173 years, as detailed above, the United States was on a money standard. Congress shifted the basis of the money standard between silver and gold twice during that period. In the fateful year of 1965, shortly after authorizing the Federal Reserve to issue notes as currency, Congress abandoned money altogether and authorized the Fed to provide the nation’s currency and the Treasury to issue tokens in place of money, all without any standard at all. Dollars became accounting units anchored to nothing. Officials still call the new unit of account a “dollar” and “money,” but they are lying on both counts. Or, one might say, they merely “re-defined” these terms; but they did so without telling anybody plainly what the change meant.

Although a few nuances attend US monetary history, broadly speaking we may delineate the key periods as follows:

  • 1792-1873: silver money standard
  • 1873-1934: gold money standard
  • 1934-1965: silver money standard
  • 1965-present: Federal Reserve Accounting Units (no standard).

The year 1965 is not just any old year. It is the year that we have long recognized as the orthodox end of the great bull market in the Dow/gold ratio in Elliott Wave terms. Figure 2 shows this wave labeling, which we first posted in Appendix C of the Year-2000 edition of At the Crest of the Tidal Wave; Figure 3 brings the wave pattern up to date.

Thus, the true bull market provided conditions under which the country would prosper, with the most important of those conditions being a money standard. When the bear market started after 1965, conditions shifted to reflect the negative psychology of a bear market, the most important of those conditions being the absence of a money standard.

Figure 4 is a chart you have never seen elsewhere. It shows the breathtaking rise in US corporate values during the bull market period and exposes the stunning net destruction of US corporate values since the bear market started. The year of the bull market top is when the government shifted the foundation of value for the nation’s accounting unit from money to the whims of politicians and central bankers.

The difference in result is stunning: From 1792, when a money standard was first made official, to 1965, when Congress abandoned the money standard, the US stock market rose from being worth .09 ounces of gold to being worth 27.59 ounces, a difference of +30,556%. Since 1965, when the government abandoned the money standard, the US stock market has fallen in value from 27.59 ounces of gold to 11.86 ounces, a difference of -57%.

Had the old trend continued at its preceding average pace, the Dow at the end of 2013 would be up 390% since 1965 instead of down by more than half; and since 1792 it would be up 150,009% instead of only 13,078%. Of course, social mood is in charge of these values, so we do not believe that the Dow would be worth that much; it would be worth just what it is today in gold-money terms. But the difference does reveal the power of a bear market to prompt destructive decisions among the political class.

The only reason people do not know the country’s true stock market history and its current real value is that the massive inflating of accounting-unit dollars has caused an attendant reduction in the value of the accounting unit, which in turn has masked the devastation of US stock values.

But Figure 4 tells the truth: The bull market ended in 1965; the bear market has been raging ever since; and the accounting-unit monopoly engineered by the government and the Fed has been an intimate factor in the trend toward the financial and economic destruction of what was formerly the most prosperous country on earth.

Despite our delineation of the money era from the Fed-note era, the Fed deserves only part of the institutional blame for the monetary and economic effects of the bear market. Congress is primarily responsible for bloating credit and for ruining the economy, by means of its debt engines (FHLBs, FNM, FMAC, GNMA, student loans), speculation guarantees (FDIC, FSLIC, bank and corporate bailouts), regulations (OSHA, EPA, EEOC, etc.), taxes (income tax, social security tax, inheritance tax, gift tax, capital gains tax, excise tax, gas tax, medical tax, etc.), and criminalization of enterprise (via thousands of state and local laws prohibiting free enterprise). But the Fed has helped finance it all.

Has the Fed produced any benefits? No.

Has the Fed contributed to prosperity? No.

On the contrary, the Fed, by providing an inflatable accounting unit, has made it easier for the government and its friends to extract purchasing power from dollar-holders with very few being the wiser. You can see the results in the dramatic shift of trend in 1965, from 173 years of mostly persistent prosperity to 49 years of net stagnation and decline.

True Stock Values

So, why does everyone seem to think that the country is prosperous? The Dow is at 16,500! The S&P is at 1,880! But, of course, they’re not. In less than a century, government through its debt-creating engines and the Fed through its monetary policies managed to reduce the value of the original dollar by almost exactly 99%. From the dollar’s original value of 1/19.39 of an ounce of gold in 1792-1834, it slid all the way to 1/1,921.5 of an ounce in 2011. With the dollar’s recent gain against gold (i.e., fall in dollar price), the reduction from original value to date is about 98.5%. So everything today is dollar-priced about 67 times where it would be had the dollar remained worth approximately 1/20 of an ounce of gold.

As you can see in Figure 4, the true price of the Dow at year-end 2013 was not 16,500 but 245. This is not a made-up figure. This is the Dow’s true price. That’s the price you would be reading in the paper had the dollar maintained its purchasing power in terms of gold. The Dow at year-end 2013 is worth less than it was at year-end 1928, 85 years ago. The government and the Fed have succeeded in one thing: hiding true values and keeping people complacent, even giddy, over their “gains” while they are secretly being robbed.

The Dow’s Seemingly Low Real Price Does Not Portend More Gains Ahead

One might look at Figure 4 and think that the Dow is now so cheap in real terms that it has nowhere to go but up. But thinking so would be to underestimate mightily the destruction that the government has wreaked on the US economy.

Incredibly, the year-end-2013 price of the Dow—11.86 ounces of gold, or 245 original dollars (normalized to 1837-1933’s 1/20.67 oz.)—is ridiculously expensive for what you get: a lousy 2.1% annualized dividend yield, even lower than it was at top tick in 1929; a P/E ratio in the high end of the range for the past century and three times what it was at major bear market bottoms of the 20th century; and a 4.7 price-to-book-value ratio (adjusted to the pre-2004 data series) on the S&P, which is two to four times its range from year-ends 1929 through 1987.

In other words, the Dow is not cheap; it’s absurdly overpriced. At the same time, stock-market optimism is as extreme as it was at the Dow’s all-time record overvaluation in 2000. The miserable value shown at December 2013 in Figure 4 comes from a snapshot of the Dow at its second-greatest overvaluation in history. This condition virtually ensures that the worst of the devastation of US corporate values still lies ahead.