The Global Curse of the Federal Reserve : How Investors Can Survive and Profit From Monetary Chaos

This revised edition offers the most up-to-date advice for investors who wish to defend themselves, or even make a profit from, the blighted policies of the Federal Reserve. Dr. Brown demonstrates how disordered US monetary policy causes waves of economic destruction around the globe. Foreword by Alex J. Pollock, resident fellow at the American Enterprise Institute, Washington DC, USA. He was President and CEO of the Federal Home Loan Bank of Chicago from 1991 to 2004 and is the author of Boom and Bust (2011). A must read for anyone seeking protection against the forces of economic destruction unleashed by the Federal Reserve. "The Global Curse of the Federal Reserve is a detailed and highly informative history of US monetary policy. It spares few reputations but not in the name of sensationalism - Mr. Brown simply is repeating the warnings of Austrian-school titans such as Friedrich Hayek against putting too much discretionary power over highly complex economic processes into the hands of fallible humans. Fed chairman Paul Volcker in the 1980s confessed that he couldn't outsmart the markets. But Fed chairmen over the years nonetheless have tried repeatedly to do that, usually at the behest of politicians who are, contrary to the myth of Fed 'independence', their political masters. No one has tried more dangerously to be a mastermind of this than Ben Bernanke. Mr. Brown proposes as a remedy a rule-based system for controlling the monetary base, a replication of how the gold standard once worked so successfully, but without the gold. In this era of deep and legitimate doubts about the conduct of monetary policy, his book is an important and highly readable contribution to the discussion." - George Melloan, former editorial page deputy editor and columnist at The Wall Street Journal and author of The Great Money Binge, Spending Our Way to Socialism Cover 1 Half-Title 2 Title 4 Copyright 5 Contents 8 Acknowledgements 12 1 How Monetary Chaos Powers Irrational Exuberance 13 What is the global curse of the Federal Reserve? 13 Two forms of economic destruction 13 How a monetary virus can attack software controlling the invisible hands 15 How does monetary disorder fuel a rise in speculative temperature? 18 2 A 100-Year-Old Monetary Disorder 25 The golden start which never took place 26 Crisis as the Great War erupts 29 Conflict within the Fed during the period of US neutrality 31 First monetary failure – the great inflation of 1915–16 33 From goods inflation to the great asset inflation of the 1920s 35 US dollar and US rates too low, monetary base growth too high 38 Austrian views of 1920s disequilibrium 40 Benjamin Strong fuels credit bubble in the Weimar Republic 41 A revisionist tale of Federal Reserve blunders in the Great Depression 44 Towards the asset price inflation of 1936–7 and the inevitable Roosevelt recession 47 A new global dollar standard (1953–71) and still no US monetary stability 48 The Martin-Burns Federal Reserve destroys the global dollar standard 51 From the Great Asset Price Inflation of 1957–68 to the crashes of 1969 and 1973–4 54 Towards the Volcker credit and asset bubble 55 Greenspan heresy fuels bubble and bust in Mexico, Asia –and the USA 57 How the Fed failed to spot the symptoms of monetary disequilibrium (2003–6) 59 East Asia did not cause the global credit bubble! 60 3 Phobia of Deflation 63 Deflation mythology of the Great Depression 64 Definitions of deflation – popular, Austrian school and monetarist 65 Bad deflation stems from bad monetary systems 69 The origins of deflation phobia 70 Virulent Bernanke-ite strain of deflation phobia 73 Deflation and social justice 74 The good deflations which did not occur – in the United States, Japan and Switzerland 75 Fantasies of the money helicopter 81 Negative interest rate regimes as second best to good deflations 83 Public spending is a poor alternative to good deflation or negative rates 87 Counterfactual history of 2008–9 with emergency negative rates and no QE 89 4 Manifesto for a Second Monetarist Revolution 92 How a Keynesian virus infects congressional control of the Fed 93 First monetarist revolution and its flaws 95 Counter-revolution of the monetary authoritarians 97 Towards a second monetarist revolution 98 Austrian school revolutionaries must stir popular anger! 99 All monetarist revolutionaries agree on rules and reject discretionary control 101 Second monetarist revolution distils some lessons from gold and Chicago 102 Defining monetary stability and its inherent trade-offs 103 Lesson from 1907 and tulip bulbs 104 Monetary base control under the gold standard 105 How to revive monetary base control? 106 Rebutting the criticisms of MBC 110 MBC was tried before and failed 110 Short-term interest rates fluctuate violently 111 It is not practical for one country to practice MBC on its own 112 In deep recessions, MBC cannot prevent massive monetary disequilibrium 114 The need for discretionary changes in the rules 116 A tax on bank intermediation 118 Price level instability 118 A return to monetary base control has never been easier! 119 5 US Currency War Machine 121 Currency wars in the 1920s and 1930s 122 What do we mean by currency war? 122 Richard Nixon’s avoidable currency war 124 Currency war guilt of the Arthur Burns Fed 126 The Volcker Fed wages war on its own hard dollar 128 Greenspan’s non-defence of the dollar 133 Bernanke legitimizes currency warfare 137 Keynesian warriors fight global imbalances 141 Fed myth – Asian savings surplus fuelled the global credit bubble! 145 Should monetarist revolutionaries worry about global imbalances? 147 6 Bernanke-ism Equals Monetary Lawlessness 151 The ten elements of Bernanke-ism 151 Plan for a revolt against Bernanke-ism 155 Bernanke-ism’s claim to Friedman ancestry 156 New Keynesian spectre of credit channel blockage 161 From destruction of monetary pivot to Taylor rule corruption 162 Bernanke-ite embrace of fiscal fine-tuning and the Keynesian ‘savings paradox’ 164 Bernanke opens up Friedman’s black box 166 QE time bombing 167 Long-term interest rate manipulation 169 Massive credit operations 170 Bernanke-ite phobia of deflation 171 Bernanke’s ten principles of monetary policymaking 172 Style, form and politics 175 The Bernanke-ite appointment process 176 Infallibility of the central bank president 181 Bernanke-ism and the French connection 183 Thin-deep transparency and continued maestroism 186 Luck runs out for Bernanke’s maestro performances 188 Global reach of Bernanke-ism 190 Why exorcism must end the Fed’s monetary powers 192 7 The Fed Believes Japan’s Great Deflation Myth 196 The myth of Japanese deflation 196 Misdiagnosis: Failure to spot and treat a sick appetite for equity risk 198 Zero-rate boundary problem is a non-problem 200 Financial repression in Japan 201 Non-conventional monetary policy experiments failed in Japan 203 Failure to analyse the monetary disorder which fuelled the bubble 204 Interest rate manipulation enabled the Keynesian ‘revolution’ 206 The deleveraging myth 208 8 How to Survive and Profit from the Fed’s Curse 210 Passive investors trust to past good luck continuing 211 The active investor questions market prices 212 How should the investor respond to suspected irrational exuberance? 214 Two nightmare scenarios – ‘1929’ and ‘1937’ 215 How to invest in markets infected with Bernanke-ite monetary virus? 217 High-end residential real estate markets – symptoms of temperature rise 218 Strategies in bond markets under Bernanke-ism 222 The role for gold in portfolio construction 224 The death of equity risk bearing would be the death of capitalism! 227 Bibliography 231 Index 235

The Global Curse of the Federal Reserve reveals and explores the missing link between the Austrian School of Economics and behavioral finance theory. Monetary instability is the source of the waves of irrational exuberance (sometimes described as asset price inflation), which spread so much economic destruction and geo-political turmoil when they break. The largest and most destructive waves in the past 100 years have all been powered by monetary turmoil created by the Federal Reserve. Dr. Brown argues that flawed monetary practice and principles-most recently in the form of Bernanke-ism-have been responsible for the Fed-made havoc. The author comes to two optimistic conclusions. First, political forces in the US will one day gain sufficient strength to repeal Bernanke-ism. But the new revolutionaries must learn from the mistakes of the first monetarist revolution. Brown argues for the end of the Fed as a policy-making institution. Second, it is possible for investors to build substantial protection for their wealth and even profit from monetary chaos unleashed by the Federal Reserve-but this depends on throwing overboard much of the established wisdom about optimal portfolio management.

Front Matter....Pages i-xi How Monetary Chaos Powers Irrational Exuberance....Pages 1-12 A 100-Year-Old Monetary Disorder....Pages 13-50 Phobia of Deflation....Pages 51-79 Manifesto for a Second Monetarist Revolution....Pages 80-108 US Currency War Machine....Pages 109-138 Bernanke-ism Equals Monetary Lawlessness....Pages 139-183 The Fed Believes Japan’s Great Deflation Myth....Pages 184-197 How to Survive and Profit from the Fed’s Curse....Pages 198-218 Back Matter....Pages 219-228