Former Fed President Admits Central Banking, Paper Money a "Confidence Game"

Fri, Jan 10, 2014 - 4:28pm

The following excerpts are from this week’s line-up of interviews provided in full to FS Insiders. CLICK HERE to become a subscriber.

Is central banking and our modern monetary system one giant confidence game? Former St. Louis Fed President William Poole says yes. Also, is the U.S. really experiencing a housing recovery? Brian Pretti of Contrary Investor offers his thoughts. Lastly, agricultural expert Ned Schmidt says in four or five years beef will probably be considered a luxury item, with the average American no longer able to afford it.

Former St. Louis Fed President William Poole:

Central banking is a confidence game. Fiat money is a confidence game. People have to have confidence that money retains its value and that’s always true now and everywhere across the world—it’s what makes people willing to use and hold paper money...If you don’t have confidence in the institutions of society, then lots of things can fall apart. So, central banking is not unique in that respect. We have to have confidence in our court system that judges are honest, that they will make decisions on the basis of the law and the facts and are not subject to bribes and so forth. The Federal Reserve is not in any way in a different situation. We need to have confidence in our central bank...(click here for more)

Brian Pretti on why the housing recovery isn’t what it appears:

I know that we’re having a “housing recovery” right now but, in one sense, we’re having a housing recovery in price. If we really look at the housing metrics of new home sales, of starts, and even mortgage purchase applications, we’re seeing some of the most subdued activity that we’ve seen in decades. What I don’t hear, sort of as a mainstream comment, is, “Oh, by the way, new housing sales have recovered—to about a five decade low,” which is more consistent with recessions that not. So, personally, I think what we’re really seeing on the housing side is an investment cycle. It’s all the folks who could not get a rate of return in safe assets like CD’s, Treasuries, or corporate bonds…that capital is being transplanted into the real estate market where the rate of return is maybe 5, 6, 7, or 8 percent…(click here for more)

Ag expert Ned Schmidt on beef shortages:

Ned: We’ve still got beef shortages—a beef shortage globally…We will start to rebuild the herd in the United States this year. But we’re not looking at any relief on beef prices ‘til 2015, and beef prices are at record highs at the grocery store right now…if I were to look out four or five years, beef will not be on the dinner table of the average person anymore. They just won’t be able to afford it. Now that makes a company called JBS out of Brazil very interesting—it’s the largest animal protein company in the world. While it’s based in Brazil, 75% of its business is in the U.S.

Jim: So you’re saying that the price of beef five years from now is going to be so expensive it starts getting eliminated from the American diet.

Ned: Yeah. It will be…calves don’t come out of a factory. They come out of a cow after about 9 months. You don’t turn that on a dime. If you listen to the USDA, the cattle breeders and the feed lots aren’t convinced yet—they’re still scared. They’ve been burned so bad that they’re just not going to rush into it. And a lot of the calves come off pasture ground. Texas has not recovered from the drought fully. West Texas is still in a drought. And even if it’s not in a drought, it takes years—a couple of years—to rebuild pasture where it can sustain a growth in the herd...(click here for more)

Greg Ip on how the U.S. appears compared to the rest of the world:

You heard a lot of “declinism” in the years right after the crisis when countries like China and Brazil and India seemed to be riding it out really well...You hear a lot less of that recently. Not only have some of these countries that did so well four or five years ago slowed down a lot, namely Brazil and India, but we have shown an ability to overcome our problems...We still have some serious underlying problems with the economy. There’s far too many people that have dropped out of the workforce in the last few years, the population is growing too slowly, the education system is not up to scratch, unemployment is coming down too slowly—these are all things that we as a country need to deal with but relative to some of the other problems that other countries are dealing with, including in Europe and so forth and in China, I don’t think the United States looks too shabby at all...(click here for more)

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