The Fed is Filching

The main problem for the novice investor to solve is how to gauge market rallies. The trick to this, for the Austrian, is to build a strong foundation in theory. The rest is wagering.

When understanding the concepts of manias in prices, that is, the upthrusting of prices on the market, one must strongly consider the rise in the money stock.

The basic Austrian theory is that when the rate of interest is lowered, debt is issued which allows for more money to flow into these lower priced instruments. This is where one arrives at what is called a false boom.

Mainstream economists call this process "Boosting Aggregate Demand." The theory first assumes that every individual demands at the same rate, and at the same time, creating one large abstract demand curve. An assumed desire of investing and saving on a large scale. Completely fallacious.

Aggregate Demand has the theory of diminishing marginal utility applied to it. Par example, every following bite of ice cream I consume is desired less. A completely subjective concept.

On the other hand, the agglomerated supply shaped upward sloping. As Aggregated demand assumes satiation, the agglomerated supply assumes a constant increase.

In mainstream economics, due to the desired application of numerical symbols to constant unpredictable human occurrences, a theoretical paradigm was created. It is as follows:

As one can see, this is a very abstract creation. IS (Investment-Savings) is rooted in the subjective time preference of individuals, which derives from their subjective value scales.

The LM (Liquidity Money or Quantity of Money) curve assumes the government can gauge the inflows and outflows of money into the stock of money in an economy. The mainstream economist hypothesizes that the quantity of money derives from the producer's loan market, since ultimately the number of loans produced influences the money supply.

Therefore, they assume, the central bank is necessary to influence the supply of money, to then indirectly influence the consumption of individuals and do as was aforesaid, "Boost Aggregate Demand." Doltish abstraction.

What is most insightful is that applying this abstract concept down to the individual, one finds that it is merely relative or cerebral, and not at all realistic.

Take for instance the previous idea of the rate of return and individual investment-consumption ratios derived from our subjective value scales I described before. As a vast amount of money is injected into the economy abruptly, all prices are bid up quickly which then causes the individual to consume at higher quantities.

Everyone is hypothetically doing this in tandem. We coin this capital consumption, as purchasing power dwindles at the rate of inflation, which is ultimately subjective.

For the mainstream economist, their objective is to ignite this consumption because, to them, inflation is benign. Their false belief is that they can actually calculate the natural rate of interest, and infuse the markets with new money. They desire higher rates of inflation, all the while misunderstanding the ramifications of a deteriorating monetary unit.

By monopolizing the rate of interest, the benchmark (what the Federal Reserve Board terms the Federal Funds Rate), the central bank believes it can influence the quantity of money. A lowering of the rate of interest, makes them feel they can induce this economic boom which will lead to both higher GDP and therefore the rate of interest need only be adjusted upward to the new equilibrium.

In the abstract, this process of reification seems quite simple and easy to manage. Yet taking into account the more complex aspects of an economy, one realizes that calculating the proper moment in time at which the rate should be raised is practically impossible. Sadly, by monopolizing all agios (creating the monopolized benchmark), the central bank distorts the natural market adjustments that should be constantly occurring.

An expansion of credit, by lowering the monopolized benchmark, will then filter the new funds through the fractional reserve banking system, simultaneously creating more loans and deposits.

Banks attempt managing this process, but are woefully undergirded by the central bank--this is, simply put, further inflation. This pyramiding never ends until individuals readjust their investment-consumption ratios.

The Debt Will Never Disappear

The debt will never disappear. Unless of course we come to the realization that the market must properly adjust, forcing a complete repudiation of the national debt itself.

During a readjustment process, as was discussed in a previous post, market prices fall to their proper free market level. In order for this readjustment process to be effectuated with ease, the free market must be free of any precluding laws that uprear market prices.

These underpins that are in place are unnecessary hindrances of the clearing out of bad practices. Some may refer to this period as the liquidation of bad assets on business balance sheets.

In order for a market to function properly, especially during these moments of falling prices (deflationary period), the government mandated impediments must be eliminated. A gracious clearing can occur when the market represents a glade in absence of government laws.

As we speak, the debt stands at around $19 trillion. This is an astronomical leviathan of false prosperity. When the monopolized benchmark is slowly adjusted anew upward, Treasury prices within this realm of affected yields, will fall.

Therefore, a raising of rates simply makes current market prices of outstanding debt instruments fall. Unless the IOU matures, the instrument has a remaining time of existence. A fall in Treasury prices does not shrink the debt.

The only debt instruments that disappear are those from failing companies in the private sector, yet even then many private equity companies and investment banks revive some of these feeble IOUs of trifling value and attempt to recreate a profit seeking venture. Capitalism has a unique way of rewarding those capitalist-entrepreneurs who gauge market prices correctly.

The reason for such a vast amount of failures during a rate hike is due to the common business strategy of managing cash flows with debt issuance. Rate hikes make new debt issuance more expensive. Hence higher amounts of cash flows must be paid out.

Government debt instruments are managed differently, their method is to issue debt whimsically. This is where the old proverb of "printing money" comes from. Debt issuance leads to new money in the system which is filtered through the fractional reserve banking system. Namely, loan agglomeration.

Debt monetization (coined "money out of thin air") is the more aggressive approach to injecting new money into the system. Both government debt issuance thereof as well as the socialist central banking method of debt monetization create new money which enters the economy spontaneously. The two aforementioned processes are anti-Free-market and lead to another false boom or simply stated, an amplification of the business cycle itself. Inter alia, transient expedients.

Hamilton's utopian perspective was to have a centralized bank manage the cash flows of a government. His Treasury serves this purpose, it is itself a central bank.

Government expenditures cannot be managed with the estimates used in the competitive private sector, as extortion must be enacted in order to pay off the obligations. The monetary unit is debased at every step of the way within this process.

The CBO attempts to manage expenses by suggesting a rate of expropriation suitable to garner the matching amount of revenues that will pay for those expenses. This is unknown until the end of the year. Many times governments decide to spend more than is estimated, requiring further expansion of credit. There is truthfully no optimal tax rate.

A surplus is ultimately paltry to the failed measurements in expenditures by the government. Extra money in one year would mean less credit expansion the following year, whilst, once again, debt is constantly being issued. Treasuries are sold twice a month for Notes, once a month for Bonds, and more frequently for Bills (typically once a week).

In order for the debt to disappear the government must cease expanding credit, that means cutting all expenditures outright. At this point, only the remaining outstanding obligations would need to be paid off, consecutively managing the cash flows then later paying off the full amount at maturity. Radical cuts to this measure are not in the plans any time soon.

Surely one can deliberate a mystical strategy as to how to rid the country of it's Tower-of-Babelesque sized debt, but this socialist planning would only be useful as pretexts for keeping the coercive monopoly in place. Without a doubt, one might see how the theories of mathematics are earnestly nothing but artifice with symbols called numbers.

Instrument of Consumption

The US Treasury instrument is an instrument of consumption. Those investors of the scholarly infusion from your typical university believe that government debt instruments are instruments of investment like those commonly sold on the free market.

Debt instruments are contracts sold for a certain price at present, bought by an investor, with the terms affirming the reception of a quantity of money in the future. This includes a stream of periodic cash flows parceled out over time which will ultimately equal the coupon (a percentage of the face amount).

Coupons are fixed, what fluctuates on the market is the present market price. This price is speculated upon amongst investors all across the world. A trade is reached when both actors act upon the ranking most suitable to them, which is compromised on, and where both gain from the trade. This process is fully subjective.

Corporate bonds are IOUs which will be fulfilled at some time in the future, with each person partaking in the contract receiving snippets of compensation over time until the full face amount is received. At this point, the debt instrument matures.

Corporations manage their expenses by estimating their revenue stream, usually dictated by quantity of sales, as well as the value of the other defined particulars such as shareholder's equity. Accounting is an aggregation of components, and a netting out of money owed. Assets-Liabilities=Owner's Equity. Arithmetic is the more commonly organic term used; basic mathematics.

This process rendered in the private sector creates a competitive mentality that foments a wary foresight amongst the capitalist-entrepreneurs. The agio used universally, will guide the ultimate decisions of these investors.

The monopolized agio, something I have coined the monopolized benchmark, distorts all processes within the free market buying and selling of goods. The US Treasury--including all government debt instruments--is most heavily influenced by this monopolized benchmark. As a matter of fact, all rates of interest are fully distorted by this coercive agio.

Unlike the private sector, governments can issue debt instruments heedlessly. Central Banks serve as their underpin which essentially produce moral hazards. The money stock rises withering away the consumption capabilities of the monetary unit, confecting less effectiveness: lower purchasing power.

Making certain that the appropriate amount of Net Income is generated allows for the corporation to allocate it's capital properly to where costs must be fulfilled. They economize through estimates using market prices, typically nominal. Measuring the inflation rate is another educated guess. What are real profit margins?

This type of business is coined price discovery, it is something that voluntarily arises naturally on the free market.

Governments use their Treasury department to issue debt instruments which are valued according to the monopolized accounting measurements. These measurements are phony mathematical formulas that cajole people into believing governments can manage costs in the similar fashion that the private sector does.

A Government debt instrument is paid by taxing the population, this is mere expropriation. Inflation is the other more formidable occurrence which reduces monetary purchasing power by filch. Both occur when attempting to manage an economy through a coercive monopoly.

The profit and loss mechanism works best in the private sector, prodding capitalist-entrepreneurs toward forbearance. With government, or within their ambit, the profit and loss mechanism is distorted and additionally frugality is replaced by feckless frivolity.

The Government does not own the economy, and the public goods it believes we need (which are coerced upon us) can be provided more efficiently on the free market.

A transient protuberance of the money supply by injecting liquidity will result in an obscured dwindling of one's capital structure, which will ultimately result in what is an abrupt awakening.