The View From 1776

During the Carter administration, the New York Times expressed editorial approval of pulling back from projection of American military power around the globe.  President Reagan’s forthright denunciation of the Soviet Union as an evil power, coupled with extensive rebuilding of our military capabilities, brought the USSR to its knees and ended the Cold War.  President Clinton happily rode the liberal-progressive train supposedly laden with a big “peace dividend” to expand the socialistic welfare state.

Now Obama has gone further, bowing and scraping to Muslim dictators around the world, freighting the nation with unsupportable debt, strangling the economy with regulatory red tape, and debasing the dollar in order to fund an expansion of federal power comparable to FDR’s New Deal and LBJ’s Great Society.

Knowing something of the socialistic and materialistic academic ethos in which Obama’s world view was shaped, it’s difficult not to believe that he consciously wants to punish the United States for the crimes against humanity attributed to it by liberal-progressive academics.

Columnist Charles Krauthammer looks at Obama’s amorphous foreign policy as a poisonous fruit of that mindset.

‘Leading From Behind’ Is Not A Real Doctrine

An April 29, 2009, Wall Street Journal report describes continuing damage to the economy.

Dollar Hits Weakest Level Since July 2008

By JAVIER E. DAVID

NEW YORK—Suffering its worst monthly performance since September 2010, the dollar weakened to a new 2½-year low as investors turned increasingly pessimistic about the U.S. economy and the policy prescriptions designed to improve it.

Longstanding worries among market participants about the Federal Reserve’s ultra-loose monetary policy have converged with growing concerns about the widening U.S. fiscal imbalance. Both are considered legacies of crisis-era stimulus policy that has kept U.S. interest rates at rock bottom, but sent the federal debt soaring to unsustainable levels.

As a result, the dollar is hunkered at multiyear lows against most of its major counterparts, many of which offer higher returns that make the greenback pale in comparison. In addition to the dollar’s lack of yield advantage, data this week have fanned concerns that the U.S. economy could be losing momentum at the very moment the Fed is poised to wrap up its controversial $600 billion bond-buying program, scheduled to end in June.

“A weaker dollar is a consequence of what [policy makers] are doing,” said Peter Schiff, president of Euro Pacific Capital and a critic of the Fed. He expects the euro to retest its record high against the dollar above $1.60 within the coming months, if not weeks.

The Fed’s loose monetary policy “is better than the alternative. They could raise interest rates to protect the dollar, but it would crash the housing market all over again and send the economy back into a recession,” Mr. Schiff said. As a result, policy makers have little alternative but to behave indifferently to the dollar’s slide.

Late Friday, the euro was at $1.4808 from $1.4821 late Thursday. The dollar traded at ¥81.10 from ¥81.54, while the euro was at ¥120.09 from ¥120.85. The U.K. pound was at $1.6696 from $1.6636. The dollar bought 0.8656 Swiss franc from 0.8733 franc.

The ICE Dollar Index, which tracks the U.S. dollar against a trade-weighted basket of currencies, was at 73.03 from 73.121.

Friday’s closing level put the dollar at its lowest point since July 2008, and its near 5% fall makes it the currency’s worst monthly decline since September 2010.

Data from the Commerce Department showed American incomes grew in March but their spending slowed, as rising prices for food and energy squeezed consumers and restrained the economy.

Meanwhile, Friday’s figures followed a government report this week that showed the economy slowed sharply in the first three months of 2011.

“Growing risk appeal outside of the United States has turned to a mild concern that the world’s number one economy is possibly losing its head of steam at a time when the Federal Reserve no longer has use of relief” in the form of quantitative easing, said Andrew Wilkinson, senior market analyst at Interactive Brokers, in a Friday research note to clients. “The recovery in global growth has marked a similar rebound in inflation-bothersome commodity prices.”

Because the Fed is seen not tightening monetary policy well into next year, market observers are increasingly convinced that the dollar is likely to remain pressured across the board.

The System of Liberty
By Robert Curry

The aspects of things that are most important for us are hidden because of their simplicity and familiarity…And this means: we fail to be struck by what, once seen, is most striking and most powerful.
Wittgenstein, Philosophical Investigations

I am hoping that you are, at this moment, open to being struck by a realization of this kind.  With Wittgenstein’s admonition in mind, consider these thoughts from F. A. Hayek:

The more men know, the smaller the share of all that knowledge… any one mind can absorb.  The more civilized we become, the more relatively ignorant must each individual be of the facts on which the working of his civilization depends…It is because every individual knows so little…that we trust the independent and competitive efforts of many.

What Hayek is pointing to is easily overlooked because of its simplicity and familiarity.  Yet his observation explains so much!  This is why the division of labor results in increased productivity and prosperity.  This is why market economies work better than command economies.  This is why open societies, societies with a functioning marketplace of ideas, work better than closed societies.

And this is why the West, and the U.S. especially, has led the way in advancing knowledge, freedom and prosperity.  Because in the West we slowly came to allow and then even encourage innovation and eventually entrepreneurship, new possibilities for humanity began to emerge.  Adam Smith referred to this modern way as “the obvious and simple system of natural liberty.” Relatively recently in historical terms this system took off and expanded exponentially, and every day you and I enjoy the fruits of it in our freedom and prosperity.

Not coincidently, this modern system of continual innovation in a context of liberty of human action and limited government achieved lift-off at about the time America, its principal avatar, came into its own; economists like to point to “around 1800.” At first, the new system seemed destined to sweep everything before it.  In the words of Ludwig von Mises:

In the first part of the nineteenth century the victorious advance of the principle of freedom seemed to be irresistible. The most eminent philosophers and historians got the conviction that historical evolution tends toward the establishment of institutions warranting freedom…

But the drive to take control of the economy politically, to shut off debate and to re-impose political subjugation soon made a powerful return.  The 20th century was marked by enormous and enormously costly efforts to do just that.  That is what the Nazis tried to do, and the communists in Russia and China and Cambodia and Cuba.  And that is, of course, what the Islamists are trying to impose today with their goal of a world-wide caliphate.  In each instance, this attempt has meant repression, torture and political murder on a vast scale.

Attempts to counter the modern, open-ended system with an order imposed by a political center have not always succeeded.  However, the history of the 20th century makes it quite clear that it was a close call.  Who can doubt that except for American power and determination during WWII and the Cold War, victory would have gone to the opponents of liberty?

And who can doubt what the fate of the simple system of natural liberty will be if America abandons it and chooses instead the path of political control of the economy and of the marketplace of ideas?

It’s now clear that government stimulus spending, under George W. Bush and Barack Obama, and unending expansion of the money supply by the Fed, have prolonged our agonizingly slow economic revival.  That is hardly surprising, since no previous resort to Keynesian macroeconomics has worked as advertised.  At most they have promoted stock market bubbles, and all such essays, beginning in the 1930s Depression, have led to continual and ruinous inflation.

The New York Times, the nation’s premier voice of socialist propaganda, admits in a front page, lead article that Stimulus by Fed Is Disappointing, Economists Say.

Quote:

The Federal Reserve’s experimental effort to spur a recovery by purchasing vast quantities of federal debt has pumped up the stock market, reduced the cost of American exports and allowed companies to borrow money at lower interest rates.

But most Americans are not feeling the difference, in part because those benefits have been surprisingly small. The latest estimates from economists, in fact, suggest that the pace of recovery from the global financial crisis has flagged since November, when the Fed started buying $600 billion in Treasury securities to push private dollars into investments that create jobs.

The Times may be correct that “most Americans are not feeling the difference,” but we will suffer the consequences increasingly over the next year or so.  The price of gasoline is a prominent harbinger.

As noted in The Price We Must Pay and The Weak Dollar Problem, the biggest factor in the oil price jump to around $110 per barrel is the Fed-induced devaluation of the dollar.  That, by any other name, is inflation.

A subtext to deliberate inflation, which President Obama obviously doesn’t wish to publicize, is that it destroys incentives to save.  In Keynesian dogma, saving is a social sin, on the false assumption that saving for future needs and future growth subtracts from consumer spending.  Keynesians, of course, neglect to note that savings are placed in financial institutions that then lend and invest those funds to power economic growth.

The real aim of deliberate inflation is debilitating private business and individual consumers to such an extent that they are forced into becoming wards of the collectivized, socialist political state.  New Deal economists, led by Harvard’s Alvin Hansen, propounded the Keynesian doctrine that capitalism had failed, and government would henceforth be required to take over employment and economic investment.

President Obama, former House Speaker Nancy Pelosi, and Senate Majority Leader Harry Reid made it abundantly clear that they aimed to create a New New Deal to finish FDR’s start at destruction of private enterprise and individual initiative.  Fed chairman Ben Bernanke, a worshipper of the secular religion of socialism and its Keynesian economic dogma, has happily supported their efforts.

This website is not in the business of giving investment advice and does not necessarily endorse the investment recommendations in Richard Lehmann’s column, appearing in Forbes Magazine dated April 25, 2011.

With respect to inflation, however, what Mr. Lehmann has to say is of considerable interest.

Quote:

The Federal Reserve says that inflation is well under control, telling us not to believe our lying eyes, which show us prices heading skyward. This downplaying of the increase in the cost of living is necessary to justify keeping short-term interest rates artificially low at the cost of savers. Don’t forget that the CPI is used in all government indexed expenses like Social Security, government wages and inflation-indexed securities.

The CPI includes a wide variety of components, 42% of them housing-related. When you take out food and energy, the housing component becomes 51% of the core CPI total. Since housing has been in decline for years and appears to be caught in a funk, it will continue to offset cost increases in all other components to produce a lower CPI. This would be fair, except I doubt many people spend 51% of their income on housing.

Adding to the understatement of inflation are so-called hedonic adjustments made to reflect the higher quality and functionality of goods today. New York Fed President William Dudley invoked the hedonic adjustment last month, offering up Apple ( AAPL - news - people )’s iPad 2 as an example. It costs the same as the original iPad, but it does more, he told a working-class crowd in Queens, N.Y. Someone’s retort: “I can’t eat an iPad!”

Manipulating the CPI is a game government plays to help solve its fiscal problems through increased inflation. It is a tax on wealth and can be imposed without public debate or a legislative vote. While inflation is beneficial to government in the short term, its long-term effects are always negative. Hence, it must be done in secret--call it stealthflation. What this means for fixed-income investors is that long-term interest rates are going higher, as they have since last August.