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Wednesday, January 25, 2012
Fed Feeds Distortion
Bernanke’s press conference announcement again booted the stock and bond markets, but did nothing to boost employment.
At his January 25, 2012, press conference, Federal Reserve Bank chairman Ben Bernanke stated that he expects the Fed to continue imposing near-zero interest rates well into 2014 on short-term Treasury securities. In response, the stock market surged, despite expectations of generally lower corporate earnings and reduced consumer spending. Loose credit and low interest rates usually facilitate stock market speculation.
However gratifying this may to individual investors and pension fund managers, it does little if anything to restore production of goods and services or to raise employment. It also continues to penalize increased savings, which alone provides a stable, long-term platform for economic growth. People living on fixed incomes have had their rates of income on saving chopped around 75% since the Fed first cut interest rates.
As Austrian school economists long have observed, central bank manipulation of interest rates and government deficit spending has an uneven impact on sectors of the economy. When unemployment is high and people are yet freighted with excessive personal debt, consumer spending will be among the last sectors to increase. Instead, deficit spending and loose money lead businessmen to over-invest in long term capital goods, because low interest cost for borrowed money makes even marginal investment projects appear profitable. When business finally revives and costs, including interest rates, increase, those marginal projects collapse and push the economy into recession.
Such was the genesis and progress of the housing bubble and subprime mortgage securities.
Contrary to the aggregate computer models of Keynesian economics, the economy as a whole never has been controllable via government stimulus spending. In fact, as reported recently, the 31% increase in business long-term investment over recent months has been largely concentrated in labor-saving equipment, which ironically adds to unemployment or postpones new hiring.
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Sunday, January 22, 2012
Kodak vs. Solyndra
Liberal-progressive-socialist state planners are not as successful as private investors in satisfying consumers’ wants.
The collapse of Solyndra and Kodak’s bankruptcy filing illustrate the difference between a socialistic planned economy and capitalistic free enterprise. Under state planning, uneconomic companies can be created and failing ones propped up by the state. Under free enterprise, only companies that have a good chance of prospering will be bankrolled by investors, and those that don’t prosper will be left to fail.
Kodak for generations was an international icon of private technological success. Solyndra never even got off the ground.
In the first decades of the 19th century, when the doctrines of socialism were being codified, the concept of social engineering emerged. Belief in the possibility and effectiveness of a planned economy is the central economic doctrine of liberal-progressive-socialism.
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Saturday, January 21, 2012
Ramifications of MF Global
I’m indebted to Barton Bennett for the link to this, albeit extreme, assessment of what happened when a far-left leader of the Democrat-Socialist Party was allowed access to other people’s money.
Transcript for Ann Barnhardt Interview
Quote:
We are now living in a lawless, Marxist, Communist, usurped, what used to be a representative republic but is no more. This is no longer a nation of laws. This has now transformed into a nation of men. It doesn
The Roots of Environmentalism
Luddite environmentalism springs both from baby-boomer pagan mythology, and from blind selfishness.
Environmentalism and the Leisure Class
Quote:
In turning down Keystone, however, the President has uncovered an ugly little secret that has always lurked beneath the surface of environmentalism. Its basic appeal is to the affluent. Despite all the professions of being “liberal” and “against big business,” environmentalism’s main appeal is that it promises to slow the progress of industrial progress. People who are already comfortable with the present state of affairs—who are established in the environment, so to speak—are happy to go along with this. It is not that they have any greater insight into the mysteries and workings of nature. They are happier with the way things are. In fact, environmentalism works to their advantage. The main danger to the affluent is not that they will be denied from improving their estate but that too many other people will achieve what they already have. As the Forest Service used to say, the person who built his mountain cabin last year is an environmentalist. The person who wants to build one this year is a developer.
Thursday, January 19, 2012
The So-called Stimulus Is Over, But The Crushing Debt Burden Remains
The fabled Keynesian “multiplier” boost to the economy from government deficit spending once again, as it always has since the 1930s, failed to produce promised results. Now even more wealth, via taxes and currency inflation, will have to be sucked from working citizens to pay off the trillions of dollars of debt Obama fecklessly dumped on workers.
An article on the Barron’s website tells the story.
On Borrowed Time
Heavy debt loads slow the U.S. economy now and pose threat to the future.
By RANDALL W. FORSYTH
Can a stimulant become a depressant? As with alcohol, government borrowing and spending initially can give a boost, but later becomes a drag. America has hit the downside of that progression.
So says Lacy H. Hunt, chief economist of Hoisington Investment Management (whose eponymous head, Van R. Hoisington, recently was interviewed in the print edition of Barron’s.) The deficits that had aimed to stave off a rerun of the Great Depression after the 2008 financial crisis now are having a depressing effect on the U.S. economy, Hunt contends.
Catching up with Hunt on the road after meetings with Hoisington clients, he expounded on his latest quarterly review, “High Debt Leads to Recession,” a conclusion that runs counter to economics as it is taught in most institutions of higher learning. For most of us who studied the conventional Keynesian economics as taught in the textbooks of Paul Samuelson and his successors, government spending “primes the pump,” to get money back into the economy after the flow of spending had been turned off by a private sector, which was intent on saving “too much.” As a result, resources sat idle, especially the unemployed. Borrowing and spending by government would expand national income by a multiple of its expenditures.
Actually, the opposite is happening. The multiplier from government spending is no better than zero, Hunt says on the basis of econometric evidence. If the economy is “shocked” with a deficit, gross domestic product will get a lift for three-to-five quarters. After 12 quarters, however, the original stimulus is spent, literally and figuratively. But the debt that was incurred to finance the spending remains, and has to be repaid, with interest. That requires a shift of assets from the private sector to the public sector.
Japan provides an example of this process. That nation’s government debt has expanded during its “lost decades” to 200% of GDP from 50%. Meanwhile, nominal GDP in yen terms is basically unchanged. In other words, Japan’s debt has quadrupled but has nothing to show for it—except higher interest costs, which has to come out of the private sector.
Hunt cites the now-familiar conclusion that debt-to-GDP ratios over 90% retard growth from economists Kenneth Rogoff and Carmen Reinhart, authors of the popular This Time is Different: Eight Centuries of Financial Folly, who also presented that conclusion in a 2010 National Bureau of Economic Research working paper, Growth in the Time of Debt.
Hunt also points to an even more exhaustive study on the effects of debt from Stephen G. Cecchetti, M. S Mohanty and Fabrizio Zampolli from the Bank for International Settlements, presented at the Federal Reserve’s Jackson Hole confab last year, The Real Effects of Debt , which takes into account the retarding effect of not only government but also corporate and household debt. Those imply “that the debt problems facing advanced economies are even worse than we thought,” especially when unfunded future liabilities in the form of promises given by governments in retirement and medical benefits are counted.
So, I asked Hunt, is there any way out of this apparent debt trap? Nothing that’s politically popular, he says. Without tackling the unfunded liabilities of Social Security and Medicare—which total some $59 trillion, dwarfing the U.S. bond debt of $15 trillion—there’s little if any anything that can be done. Federal outlays—which total 25% of GDP, unprecedented except in World War II—are headed to 40%, according to economist Barry Eichengreen of the University of California at Berkeley. Absent the political reforms needed to rein that percentage in, he writes, “The United States will suffer the kind of crisis that Europe experienced in 2010, but magnified,” Eichengreen writes.
The solution to the U.S. debt problem requires robust economic growth, not the downward spiral that Europe’s most indebted economies, such as Greece, now are experiencing. Government spending has negligible or negative long-term impact on growth, Hunt says, based on econometric evidence. So-called tax expenditures, the most prominent being the mortgage-interest deduction, do little if anything to spur growth. But changes in marginal tax rates have significant multiplier effects.
What’s needed then, says Hunt, a comprehensive package of shared sacrifice along the lines of the Bowles-Simpson plan, which was unveiled a year ago and shelved. Since then, the U.S. has had a contrived crisis over the debt ceiling and a less-than-super committee that couldn’t make basic choices about spending. Hunt says his package would consist of cutbacks on government spending and tax expenditures, which slow growth, with stable or lower marginal tax rates. At minimum, stabilize policies so businesses can plan and invest and hire.
This dire long-term view of U.S. finances seems at odds with Hoisington’s continued position in the longest-term Treasury bonds. And those long Treasuries produced 30% total return in 2011. For the deflation pressures from various sources, including heavy U.S. total debt, Hunt looks for Treasury bond yields to fall still further, from just 3% currently. But, he adds, his firm is ready to switch tacks if and when debt problems push yields higher.
When the facts change, Hunt says Hoisington Investment Management’s portfolios will change, alluding to Keynes’s famous dictum. That may be the only thing on which Hunts agrees with Keynes.
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Thursday, January 12, 2012
Managing The Economy
The Federal Reserve, among other things, is charged with managing the economy to prevent unemployment. Recently released transcripts of Fed meetings in 2006 demonstrate that even a well-informed elite group of regulators cannot do the job.
The Fed failed completely to foresee the 2007-2008 housing meltdown and the collapse of the financial system. The Fed failed completely to foresee the dot.com boom-and-burst that threw the economy into recession at the end of President Clinton’s tenure. The Fed failed completely to foresee the stagflation of the 1970s (it was, in fact, proclaiming its success at fine-tuning the economy using Keynesian economic tactics). The Fed pumped up the money supply sharply during the 1920s, failing completely to foresee the 1929 stock market crash and the Great Depression.
The following excerpts from an article in today’s Wall Street Journal bring us up to date on the dangerous folly of allowing the Fed to attempt management of the economy, particularly when it espouses the Keynesian belief that financing the government’s deficit spending will automatically end a recession without inflationary distortions to people’s standards of living.
Fed 2006 Transcript Highlights: Riding Housing Roller Coaster With Eyes Shut
Federal Reserve Chairman Ben Bernanke and most of his colleagues showed little concern when house prices started to decline in 2006, predicting
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The Environmental Gestapo
Sunday, January 08, 2012
Poetic Justice
Two liberal-progressive causes motivated by hatred of private enterprise collide head-on in California. Another example of the inherent limitations of state-planners’ minds.
Read Revival Of Iconic California Condor Threatens State’s Wind Farm Boom on the Forbes website.
Saturday, January 07, 2012
Historical Obfuscation
In the United States, a large part of historical truth has systematically been smothered or ignored by academics.
From the closing decades of the 19th century through mid-20th century, academics (who were heavily influenced by the socialistic materialism espoused in the great German universities, then regarded as the ultimate source of PhD degrees) taught a distorted version of American history. That version centered around the false idea that the Declaration of Independence represented the egalitarian spirit of the French socialist revolution and that the Constitution was a reactionary effort to kill egalitarianism. Notable among those academics were Vernon L. Parrington (Main Currents in American Thought) and Charles A. Beard (An Economic Interpretation of the Constitution of the United States).
Because academics of that era, just as is true today, favored the collectivism of the socialistic welfare state, they identified the 17th and 18th century Enlightenments exclusively with the socialistic French Revolution.
Robert Curry sets about dismantling that academic fraud.
Sorting out the Enlightenments
By Robert Curry
A Review of Gertrude Himmelfarb
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More On The Nature Of Inflation
It’s more complex than most citizens assume.
