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Sunday, May 31, 2009
Why The Fed Will Not Be Able To Prevent Higher Inflation
As former Fed chairman Alan Greenspan admitted in post-meltdown testimony to Congress, no group of bureaucrats, no matter how intelligent or how well informed, can accurately predict the timing of economic turns or determine the correct theoretical equilibrium rate of interest.
With an economy as huge as ours, one with tremendous internal momentum, the Fed is in the position of a one-man row boat attempting to dock an ocean liner being pushed by heavy winds and strong tide. Even if the Fed honestly seeks to forestall inflation, its loose money policies have already built up well nigh irresistible inflationary momentum.
In Bond Investment Guru Predicts Dollar to Lose International Reserve Status I wrote:
Interest rates have begun to rise, and there is little the Fed can do about it without triggering further rapid decline in the exchange value of the dollar.
Declining purchasing power of the dollar (a declining exchange rate vs. other currencies) , at home and abroad, is the manifestation of inflation. The Fed has flooded the economy with far too much money over the last decade, and is now pumping trillions of dollars more into the economy to fund the stimulus plan and prospectively yet more trillions to fund the President’s budget imposing massive socialization of the economy.
The odds are slim to none that it will be able to suck enough phony money out of the economy in a timely way to forestall inflation without throwing us into another severe recession. History is altogether against Fed Chairman Bernanke’s confidence that he can pull it off.
The only time since the creation of the Federal Reserve system in 1913 that the Fed has acted to drain the economy of excess liquidity and shut off inflation was in the Reagan administration under Paul Volcker in 1980. Hammering inflation out of the economy was a very painful process that entailed about three years of recessionary conditions.
In that vein, read Fed Cannot Withdraw the Money, by Robert Blumen on the Mises.org website.
Governments, since the golden age of Athens and other Greek city states, as well as later in the Roman Empire, have repeatedly attempted to deal with excessive public debt by inflating their currencies. This is precisely what President Franklin Roosevelt, for the first time since ratification of the Constitution, set out deliberately to do in 1933 (see How FDR Destroyed the Dollar).
Why did Roosevelt encourage inflation, particularly on the heels of Germany’s 1920s hyperinflation that wrecked its economy, wiped out the middle class, and set the stage for the political triumph of Hitler’s National Socialist German Workers Party (the Nazis)?
The short answer is that Roosevelt, and now Obama, wanted to expand Federal spending far beyond prior levels and far beyond the scope of potential tax revenues. Inflationary expansion of the money supply was a fast, though illusionary way to do so. Inflation amounts to a hidden tax on people who work and save, because, in effect, it transfers the future purchasing power of workers’ savings to the Federal government.
President Roosevelt was, as President Obama appears to be, a relative ignoramus regarding economics. Both presidents were enthralled with ivory tower theories about magic solutions to political and economic problems. In FDR’s case, he followed the policies propounded by his crew of Harvard and Columbia University socialist economists, chief among them Rex Tugwell. In President Obama’s case, he follows the historically discredited doctrine of John Maynard Keynes, which has been since the mid-1930s the economic orthodoxy of the Democrat/Socialist Party.
Turning both Roosevelt and Obama to expansion of the money supply while disregarding its destructive inflationary impetus, is the belief that more Federal spending always guarantees higher employment. To spend more - in Obama’s case, a great deal more - in the middle of a recession, with tax revenues sharply reduced, requires that the Fed manufacture money, a great deal more money, out of thin air, via bookkeeping entries.
Unfortunately, stimulus spending artificially channels money into employment in government-selected economic and geographic segments. In those areas, employment increases only so long as the government keeps spending its stimulus money. When that spending stops, the economy drops back into much the same status of misaligned investment and employment that produced the recession in the first place. Note, for example, that government stimulus spending supports the very economic sectors which wildly over-expanded on cheap money (Fannie Mae and Freddie Mac, along with mortgages to sustain the over expansion of the housing bubble). This amounts to increased dependence on debt as a supposed counter to excessive reliance on debt that caused our recession.
If that inflationary process continues, the exchange rate of the dollar will be further devalued and foreign suppliers and foreign holders of dollar-denominated investments will demand progressively higher prices for their merchandise and higher interest rates for their dollar-based investments. The largest of these investors today are the central banks of major exporting nations, such as China, Japan, and Germany. In addition to subverting our economy, placing such economic power in the hands of those nations will severely hamper our foreign policy efforts in the Middle East with jihadists and with a nuclear Iran, as well as in the Far East with North Korea.
Thus, at the very time the Fed seeks to keep interest rates low to facilitate domestic business activity and consumer purchasing, the force of rising inflation will push interest rates higher and choke nascent business revival. This will leave the Fed two choices: continue inflationary flooding of the market with fiat money to fund Federal welfare spending, or squeeze the money supply. Both policies will push interest rates skyward and torpedo the Fed’s prior efforts to resuscitate the economy.
The better choice when a recession hits is to allow the free market place to clean out excess inventory and reduce employment in industries that have expanded too much with the artificial impetus of the Fed’s loose-money and low-interest-rate policies.
The free-market process is painful, but it is much quicker and much fairer than the muddle produced by government intervention and favoritism to special interest groups such as labor unions. Moreover, it returns the economy to a more balanced state in which real, new jobs can be created.
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Friday, May 29, 2009
Pravda Welcomes the United States Into the Marxian Socialist International
Read, in the English edition of the journal that was the Soviet Union’s official news organ, American capitalism gone with a whimper.
Bond Investment Guru Predicts Dollar to Lose International Reserve Status
Interest rates have begun to rise, and there is little the Fed can do about it without triggering further rapid decline in the exchange value of the dollar.
In the 1970s stagflation, it was bond investors who called the changes on the financial markets. The stock market was flat or down for roughly a decade. But interest rates soared, in tandem with inflation. Bond investors were in the driver’s seat, and they demanded ever higher interest rates to compensate for the inflation that continuously reduced the purchasing power of the dollar.
Extremely high interest rates coupled with inflation made for falling value of the dollar, low profits, stagnant business, and high unemployment. All of it came as a consequence of the regnant Democrat/Socialist belief in Keynesian economics: the view that unemployment can be combatted only with higher wages (read, labor union pressure) and more government deficit spending.
Those are conditions already in evidence today, or conditions that will become dominant within the next couple of years, if President Obama’s budget plans become reality.
PIMCO’s Bill Gross is a titan of the bond investing world. PIMCO’s Total Return Fund is the world’s largest bond fund. His economic perspective is thus worthy of consideration.
Read about his latest assessment of the economic future for the United States.
“Growth will be stunted,” he said. “It will be a different type of world and we have to get used to that.”
The U.S. economy will grow at between 1% and 2% a year rather than 2% to 3% a year for the next three to five years at least, Gross said. “That will make a significant difference for corporate profit growth,” he said.
Moreover, unemployment will hover around 7% to 8% rather than the recently typical 4% to 5%, he added, and the higher rate would be around “for a long time to come.”
Gross added that inflation would also start to accelerate in about three to five years’ time…
Gross also said, with certainty, that the dollar will lose its reserve status. “We simply have too much debt,” he said.
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Little Green Men
Transforming the economy with creation of so-called green jobs, much lauded by Al Gore and his acolytes, is a figment of imagination in liberal-progressive-socialist brains. The enormous costs to the economy and to our original Constitutional liberties are all too real.
I wrote in Are We Next?
So-called green jobs (carbon cap-and-trade regulation, for example) that the Obama administration and Al Gore place so much weight upon are poor substitutes in today
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Wednesday, May 27, 2009
Impartial Justice Under the Law?
Read Read Identity Politics And Sotomayor: The Judge’s Thinking Is Representative Of The Democratic Party’s Powerful Identity-Politics Wing, by National Journal’s Stuart Taylor.
My Sentiments Exactly
Dennis Bucholtz is a retired dye-making trade worker who labored in the auto industry, but not as a member of the socialist, syndicalist UAW. Much of his retirement income depends upon his investment over the years in GM bonds.
Mr. Bucholtz hits the nail squarely on the head:
The government’s proposed restructuring plans benefit one class of retirees at the expense of another. I understand that we each have equal claims in bankruptcy. However, under the current plan GM’s union retirees will receive 39% of the restructured company and $10 billion in cash in exchange for $20 billion in claims. Bondholders, however, receive a mere 10% for $27 billion in claims in the form of stock (and no cash).
This egregious example of favoritism for insiders is crony politics of the most corrupt kind. It is understandable only as a protection racket payoff to organized labor, one of the Democrat/Socialist Party’s two main sources of campaign contributions.
Read the entire article.
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Tuesday, May 26, 2009
Where’s David Axelrod?
If real substance is to emerge from the vacuity of the President’s policies, it presumably will come from Mr. Axelrod, his behind-the-scenes campaign manager and PR crafter.
It was widely noted early in the presidential primaries last year, that Mr. Axelrod was the creator of the Obama public persona. To many it appeared that Mr. Axelrod was a puppeteer who pulled Mr. Obama’s strings.
The President, on his own since his college days, has excelled primarily at rhetorically straddling fences, appearing to both sides of contentious issues that he supports their position. His legislative career, in the Illinois State House and in the United States Senate, was notable for his frequent absences from crucial votes and for his failure to take stands against Chicago’s ward-heeler corruption.
Perhaps that’s why the President allowed Congress to run with the ball on the grotesquely swollen pile of pork called a stimulus bill. Perhaps that’s why he backed away from approving Wall Street bonuses and allowed Congress to tar and feather recipients. Perhaps that’s why he is giving socialist labor unions huge unmerited equity positions in Chrysler and GM, at the expense of bondholders, ignoring centuries of contractual law protecting bondholders. Perhaps that’s why he relies on sweet talk and empty UN resolutions to deal with nuclear arms threats from Iran and North Korea.
That is not the same thing as personal leadership.
Characteristic of President Obama’s policies is sweeping pronouncement of vast goals with no realistic means to attain them. Read Bret Stephens’s assessment in the editorial pages of the Wall Street Journal.
When will Mr. Axelrod get around to filling in the crucial blanks in the vacuous platitudes that constitute so many of the the President’s policies, from foreign affairs, to energy, to the economy and health care? Mr. Axelrod is needed at the teleprompter scriptwriters’ meeting.
If, however, Mr. Axelrod still is on duty and telling the President what to say, he is unfortunately much better at getting Mr. Obama elected than at guiding him to effective governance.
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Saturday, May 23, 2009
Presidential Power and Torture
My early 1950s LSU Constitutional law professor, Walter Berns, gives us historical perspective lacking so far in the “hate Bush” political vendetta.
Friday, May 22, 2009
Gitmo Solution
Treat terrorist detainees as fetuses, which gives us the option to kill all of them and gain the world’s admiration for supporting “choice.” Read the full story by ScrappleFace (aka Scott Ott).
Inflation Risk is Imminent
President of the Philadelphia Federal Reserve Bank disagrees with Chairman Bernanke and the Reserve Board majority.
Read the full story.
