The View From 1776
I have frequently alluded to strangling regulation as a major reason for the glacially slow recovery from the Great Recession of 2001-08, noting that it is a recapitulation of Franklin Roosevelt’s socialistic New Deal tactics. During the dreary days of the 1930s Depression, everybody was continually being hammered with huge tax increases, and businesses were continually threatened with punitive regulations, along with governmental support for Spanish-style syndicalist, industrial labor unions and nationalization of agriculture.
Obama has bullheadedly rampaged along that same path, with the same result: businesses have feared to invest in new or expanded production, not knowing what future costs and restrictions may be.
Congratulations on having your response featured by Thomas! Your analysis is extensive and well researched. But let me ask a question:
- Mr. Jay, I can't speak for Mr. Stapler, but even investment professionals who remain faithful to the belief that the stock market still has strong upside potential, acknowledge that the massive price inflation in the stock and bond markets is largely a consequence of the Fed's pumping trillions of dollars of fiat money into the financial system. Hedge funds, speculators, margin buyers, and IPO issuers all are floating on an ocean of money at interest rates a tiny fraction of what they would be in a non-manipulated, free marketplace.
Opinion is divided, but moving on balance toward the view that the stock and bond markets have been running out of steam since the Fed finally embarked upon its tapering program.
I believe you overstate your case. I find it difficult to believe that you think the entire run-up of the market since the Bush crash is due only to injections of money by the FED. The rate of growth in the economy is certainly pallid and below what it could have been had the Republicans in Congress been supportive of initiatives, but you will be hard pressed to point to an economy in the world that is doing better than the USA right now.
- J. Jay,
Clearly, the real object of your question was not whether the last five years represents a market revival but, rather, that it should be conceded Obama is to be credited with reviving the economy. Therefore, I throw it right back at you, what specifically do you think Obama did to restore the market and/or economic confidence? Frankly, I don’t see enough of either to get excited about and market confidence has been all over the map. One week it is high as a kite, and the next it goes all nervous; which makes me think ‘manic-compulsive personality (aka, bi-polar) disorder’. I still hear and read an awful lot of predictions (not even counting Tom’s) of bubbles and impending collapse, and there is good reason to believe those have substance. Other than the market gains you think so significant, we have runaway debt, debt devaluation (by government to avoid paying much of what it owes), high unemployment (including a large component of unemployment that is being studiously ignored) and job stagnation, wages lagging cost-of-living increases, inflation-hiding, the health plan rug being yanked from under us, the same destabilizing lending policies which caused the last market collapse, a self-inflicted grain problem, increased political and treaty obligations which will soon come home to roost as additional financial burdens, and monetary shenanigans that investors loved on the way up but will, now, hate on the way back down. So your only good news is that, for now, the speculative market is trending up. I am supposed to be encouraged by that?
Technically, you can only count four years of market gains, as the resumption only started in mid-2010. From mid-2009 through mid-2010, the market was gloomy and, as we pointed out back then, it took longer recovering than historical cycle averages led us to expect.
The main reason the market is up and trended up for so long, is because Obama chose Fed Chairmen who reflect his own belief in gimmicks. The gimmick in this case has been to keep feeding the market a steady supply of low interest rate loans (aka, quantitative easing). QE does influence speculative investors to buy shares only because it gives them a marginal buying advantage. The problem with this strategy is that the investing is purely speculative and does not have a strong capital (aka, infrastructure) component to it. And, that is because investors are being fed a false signal, and they know it. As soon as this prop to buying is cut away, those same investors will dump shares faster than a bunny can race home. Meanwhile, industrial companies which ought to have been taking advantage of this long period of low rates to make capital investments haven’t. They also recognized QE as a false signal, but unlike speculative investors, industries can’t bail and run when the props are cut; and, eventually, they must be cut else we suffer other defects of QE. There is one other reason the market trended up the last four years, and that is cheap natural gas, which Obama and the rest of you on the left strenuously opposed. Fracking has very likely made the difference between a weak QE inflated market and a strong QE inflated one.
FDR also enjoyed seemingly sustained rallies, and it is instructive to study why they happened despite his equally flawed policies and why his policies did not address the underlying structural issues of his term; or, rather, exacerbated and prolonged them. Ordinary folks back then also assumed he’d pulled off a miracle and then held their breath waiting for the miracle to restore them to full health. When that failed to materialize despite a market apparently on the rebound, some few of them began questioning what really happened and might the mighty FDR magic be no more than political theater.
FDR sometimes did the right things, but more often he did the wrong ones. If all you focus on is one economic measure, while ignoring other equally important measures, it is perfectly possible to manipulate one such metric so that it appears you have wrought some kind of improvement upon the whole. That is, in a nutshell all FDR ever did, but with this difference. It was not always the same metric that he played around with. Sometimes he concentrated on bank regulation, sometimes on stimuli, sometimes monetary policy and gold fixing, sometimes employment or price fixing, &c. However, neither he nor his chief advisors showed much in the way of concentration, and failed to remain focused on any of these ‘solutions’ very long; whereas and in order to pull off such a miracle in a way that is creditable, they’d have had to have remained focus on every facet of the economy for however long it took – and even that is no guarantee. In part, that is to be expected because no elite, no matter how capable or gifted has that much capacity and focus to devote to this kind of problem. Therefore, and assuming they are wise, they will keep such interventions to a bare minimum (or none). The FDR style of intervention assumes either a) the other metrics will be relatively immune to your chosen manipulation or b) you don’t care what effect it has on them until they become so awful you are forced to do something about them too. Thus his was primarily a political calculation, and only incidentally an economic one. Looked at objectively, Roosevelt spent very little time actually addressing the economic malaise, and spent far more of it attempting the impossibility of restructuring how an economy works.
The economic repetitions of Obama are so parallel as to be chilling. It is almost as though Roosevelt were being channeled through him. Where FDR began his reign by coming to the rescue of banks, Obama rescued an array of financial houses and ‘Too Big to Fail’ industries. Where FDR sought to hobble and humble businesses he deemed greedy or tried to force profit sharing with employees onto them, Obama has regulated and prosecuted companies with much the same objects and ill effects. In the name of emergency, Roosevelt usurped power in ways most Americans regard un-Constitutional, so does Obama. FDR routinely confused effects with causes, so does Obama. FDR, based on advice from crackpots, sometimes abandoned the tried & true (e.g., the gold-standard) in the conviction of unlikely gains, so does Obama. FDR provoked economic retaliation from international trading partners, so has Obama. FDR rashly pushed through policies and measures significantly and negatively affecting food staples soon upon assuming power, so did Obama. FDR, more than once, attempted nationalizing key industries, and (for a time) he succeeded. Through codes, regulation and TARP Obama has been trying his level best to duplicate that feat. Roosevelt threw his presidential weight squarely behind labor, so does Obama. FDR’s employed department heads, directors, and ‘organizers’ many whom were ham-fisted ideologues or plain thugs, so does Obama. Many of FDR’s dysfunctional ideas, imposed as ‘temporary measures’, have proved highly resistant to removal. I expect we’ll be stuck with Obama’s dysfunctional measures a long time also.
Let us suppose for a moment, you knew a certain proposal would improve short-term economic conditions, but the recovery would be temporary, would result in less (if less unequal) prosperity overall and for all time (or until rescinded), would result in a significant and permanent loss of freedom, and it would prove impossible to dislodge once it has taken root in the social fabric, would you still be so keen on adopting it? Would you still adopt it knowing it had all the same attributes except that the recovery would be permanent, but that freedom would suffer just the same and that, with a little patience, you would have achieved the same recovery anyway? Those are the only two alternatives the FDR’s and Obama’s of the world allow us, because that is all of which they are really capable.
- Mr. Jay, I can understand why you “…find it difficult to believe that you think the entire run-up of the market since the Bush crash is due only to injections of money by the FED.” That is not what I believe, nor is it what I wrote
In my comment I wrote, “…acknowledge that the massive price inflation in the stock and bond markets is LARGELY a consequence of the Fed's pumping trillions of dollars of fiat money into the financial system.”
Note that, in addition to the inflation of assets values (stocks and bonds among other things), a directly announced policy aim of the Fed, the very significant devaluation of the dollar (resulting from inflating the amount of fiat currency in the system) mean that U.S. corporations converting overseas earnings into dollars got an artificial boost, making increases in reported dollar earnings a bookkeeping maneuver, not real increases in earnings.
Yes, some corporate EPS gains were legitimate increases in real cash flow, most of it being the result of cost cutting, not increases in sales. But two other significant element in the mix have been share buy-backs and acquisitions of other companies, both of which were the result of superabundant, dirt cheap fiat dollars created by the Fed.
Underneath everything has been the continual assurance by the Fed that the Greenspan-Bernanke put will remain in place, that whatever happens to disturb the stock and bond markets the Fed will make pumping the market up its primary focus, and the real economy be damned.
- J. Jay,
Sad, so sad, that I must take pity on you as incapable of constructing a rational and factual argument. Therefore, I will cut you some slack and explain this yet again with a minimum of rancor. I really thought you could do better than that persistent 'there is no inflation, there is no inflation!' whine, especially as I have amply demonstrated to you on multiple occasions there is, in every economy, always some inflation, and that inflation can take several forms (core, wage, asset, currency, speculative growth, taxation, money infusions, &c). As also previously demonstrated, it is not all that hard for governments to hide core inflation for quite some time from us (just not indefinitely) as it controls means of inflation reportage, and the media obliges them (at least whenever the Administration has a D in it) by not ratting them out. CPI (which is the only measure of inflation you seem to recognize) was reconfigured in the 1980s to help hide inflationary spikes as caused the occasional panic and revolts. Unfortunately, as it turns out, the reconfigured CPI now also masks a good deal of real and persistent inflation, and no administration has seen fit to correct this problem with CPI. Ever since then, it has consistently and increasingly underreported core inflation. Moreover, when inflation is used to estimate inflation-adjusted growth, it creates a semblance of recovery more fake than real (in reported GDP; see http://www.shadowstats.com/alternate_data/inflation-charts ). This is, in effect, an inflationary bubble, but is one everyone cheers on believing things are getting better.
In 2011, there was a significant increase in the cost of consumer foods (cereals jumped over 40%) as a result of the push to convert more corn to ethanol. Many of those food price increases are still with us. You may have noticed your cereal box got a little smaller. That was a marketing ploy by cereal makers calm things down without us switching to some cheaper brand or breakfast type. Gasoline and oil also spiked (you do recall $4 gasoline, right?). Corn fed beef and other corn-based products also spiked. In part, that was a response to the sudden redirection of corn to ethanol production (market disruption) affecting corn demand globally. Magically, none of that showed up in CPI, despite it fits perfectly within our definition of inflation. Why do you think that is? It just so happens BLS does not include food and fuel in its definition or its estimates CPI, despite those are two things people can’t do without. BLS excludes them precisely because they know it also. They know that, come inflation time, we will juggle the family budget so as reduce consumption of non-essentials first, thereby hiding quite a bit of real inflation, and that is what every administration since Carter wants you to believe – that inflation has been tamed. There are other ways government masks inflation, but this is the best known and most widely commented.
I also previously pointed out the inflationary effect of joblessness (losing your job is the functional equivalent of hyperinflation), so will not regurgitate that one here.
The effect of stimuli (big infusions of fiat money) is to devaluate every dollar in your bank account and 401K in direct proportion to the amount of new currency in circulation. Nothing real is created (i.e., no change in the supply curve) by handing out new money, so how does the market respond to cash infusions. It responds by shifting the demand curve to the right, which is the amount in dollars we are willing to spend on existing supplies. That means prices of goods must rise. Since only some of the stimulus money went into immediate circulation (much of it was horded by recipients to pad portfolios and lending limits), the amount of this inflation (spike) was less than what it might have been. However, that also means that we have had continual or periodic infusions of the remaining stimulus as financial houses and banks gradually spent and lent it. As the 2009 and 2010 stimuli were pretty hefty (hundreds of billions), it is inconceivable there was no inflationary result of that.
Imagine we live in a kingdom with a money supply of $1,000 and a supply of goods with a cash worth of $1,000. The king has some debts he needs to pay off but an empty purse. Moreover, his debt is nearly as great as all the money currently in circulation. He could tax us for it, but he’s pretty much taxed us to death and fears a revolt if he tries that. So he decides to debase our coinage instead. He calls in all the gold and silver coins in the kingdom with a promise he will replace every coin with a new and ‘improved’ one with his likeness on it. No one can refuse, of course. When he gets hold of our coins, he melts them down and adds an equal amount of base metal (say tin and lead) to the gold and silver, effectively doubling the supply of coinage metal. He casts the new coins, gives half back to his subjects and half to his creditors with maybe a little left over for himself. None of us is any the wiser as to what he did or how he did it. In this way he paid off his debts by doubling the money supply. But, what became of our money. We have the same number of dollars, lira or pounds, but there are also now $2,000 worth of debased coins in circulation competing with our coins for the same food, clothing, shelter, books, horses, carriages, &c. The market soon responds by demanding, for every item and quantity of goods, twice the previous price because that is what they can fetch. We have as many dollars but can buy only half as much. That, by definition, is inflation by monetary devaluation, and is the same whether it is from debasing the coinage, unsecured promissory notes, or modern government fiat money (aka, stimuli). So call it what you want, there has been inflation, and quite a lot of it.
Taxation is normally deflationary (removes money from economy), but can also be inflationary when enough of it is redistributed and subsequently spent. Moreover, this redistribution has a secondary inflation component as it discourages productivity, meaning less will be produced. Less produced means supply has shrunk relative to demand and, so, prices must rise.
Do you really still not get any of this?
- Mr. Jay, you are correct that I expected a bigger run up in the CPI than the 2% to 3% PA experienced so far. But note that the CPI is not the only measure of inflation. Also, before rendering final judgment, let's hope that we don't encounter a bigger CPI run up if employment ever fully revives.
Until recent decades, inflation was always defined as an excessive creation of fiat money (usually as a concealed tax to pay the sovereign's expenses) that devalued the purchasing power of the monetary unit. Measured against other currencies we have experienced that at the aggregate toll of around 50% since Bernanke took over the Fed.
The Fed's quantitative easing policy was expressly designed to do two things: (1) create a "wealth effect" by inflating the stock and bond markets in order to deceive the public into believing that they were recovering from the crash, and (2) to lower long-term interest rates in order to coax businesses into expanding production and employment.
The Fed certainly got what it aimed for in (1) above. The stock and bond markets have been vastly inflated over the past few years. Nothing in economic conditions alone could possibly justify the rock-bottom interest rates that have levitated bond market prices.
(2) above has been a nearly complete failure. Companies indeed have borrowed massive amounts in the bond market, but not for the purpose of expanding production and creating jobs. Most of the funds have been applied to refinancing existing debt at lower rates and longer maturities, as well as for stock buy-backs to inflate EPS artificially, and to make acquisitions.
Ironically, what money has gone into long-term plant and equipment has dismayingly often been used to substitute machinery for jobs, either via robotization or making processes more labor-efficient. A major impetus has been Obama's continual push for higher taxes and higher minimum wages, Holder's continual prosecutions on discrimination charges, and ObamaCare's procrustean penalties.
- Mr. Jay, I should add that the freakishly low interest rates imposed by the Fed have led directly to job losses in an additional way. Almost always, when a corporate acquisition is effected, the acquiring company will partly pay for the "goodwill" premium acquisition price by eliminating jobs in the acquired company to increase EPS and cash flow.
- Mr. Brewton,
We will probably have to agree to disagree on whether QE has negative or salutary effects.
Mr. Stapler constructs a straw man in claiming that I said "no inflation" has occurred. As you point out, inflation has been running in the 2-3% range, which is about as close as you want to get to the deflation line.
At long last, Japan has recently begun to seriously revise its monetary policy to escape its 20 year battle with deflation. Unfortunately, our friends in Europe appear not to have gotten the message and seem to be driving their economies into the ditch in the name of "prudence."
Without a small amount of inflation, people tend not to buy, because they believe the prices will be lower tomorrow. When this mindset becomes embedded, the economy generally goes into a tailspin, which is bad for conservatives and liberals alike!
- J. Jay,
- J. Jay,
- Mr. Jay, not to engage in piling on, the "need" for ca. 2% inflation is still a very much debatable issue. As I have frequently noted, the fantastic growth of the United States, from the 1600s until the 1970s stagflation, was accompanied, except during war times, by very stable prices.
After the Civil War the Populist Party (forerunner of the Socialist and Progressive Parties) agitated for engineered inflation to make repayment of farm loans easier (cf. William Jennings Bryan’s “Cross of Gold” speech). The Populists nonetheless were swamped in 1896, and William McKinley made our reliance on the gold standard even tighter. Thereafter business boomed. Much the same was true after WW I, when Harding cut taxes, greatly reduced government debt, and balanced the budget. The recession of 1920-21 was over in less than two years, despite statistics as dire as those confronting us in 2008.
There is far more to the Japanese economic coma than deflation, which has been an effect, not a cause.
I was actively involved with Japanese and U.S. banks during the seemingly endless surge of Japanese expansion, and it became clear that the Japanese banks were gobbling far more than they could chew, and much of it was poor quality. One example is land loans. In Japan, with land so scarce, any grade school lad could make a land loan and expect it to be repaid. Not fully recognizing the vastly different conditions in the U.S., Japanese banks were ready to finance just about anything that came along the pike. It was they (Daiwa Bank, et al) who provided the first big securitizations of real estate deals. Later in the 70s, when stagflation really hit, they were left with huge portfolios of under-water real estate loans. The same was true in many other industries.
The great sin was that, unlike the U.S. banks at the time, the Japanese banks didn’t write off those bad loans, but, with the active direction of Japan's MITI, they kept them on their balance sheets. So, for more than a decade, with badly impaired balance sheets, the Japanese banks were unable to make regular loans to support their local industries. All along, the zaibatsu worked hand-on-glove with MITI, to fund those industries and projects favored by the government.
These two policies, both adopted here by admiring liberal-progressive bureaucratic planners, are major reasons why we remain mired in the slowest economic recovery since the liberal-progressive Great Depression of the 1930s. Don’t forget that, at the outset of the first Clinton administration, his economic advisors touted Japanese government planning and direction as the only way to foresee and develop the technology and industry of the future, in order to avoid being swept aside by rapidly expanding Japanese technological businesses.
In the 1930s, both Hoover and FDR jaw-boned business leaders, threatening governmental punitive action if wages were cut and workers fired. Now Obama directly or indirectly does the same, with regulations to kill industries that liberal-progressive “greens” don’t like and government profligacy toward uneconomic, unsustainable industries that sound good to environmentalists, but produce hardly any jobs. At the same time, the Fed’s massive and continuing purchases of uncollectible mortgage-collateralized debt keeps banks from writing them off and foreclosing on people whom the government entrapped into assuming mortgage debt that they could never repay.
The Austrian, and most classical schools of economics recognized the recessions are the natural way to purge the economy of uneconomic or over-expanded production. Yes, many people lose jobs and many investors lose their invested money in the purge. But in most cases the economy has rebounded fairly quickly. Today, like the Japanese banks and the Japanese economy, the government is encouraging banks and businesses to keep flat-liners “alive” on feeding tubes supplied by the taxpayers.
I guess it was fortunate for us and Clinton that the Japanese financial system took a dive when it did, or we would have gone down that rabbit hole with them. As I recall, there was Japanese management style or model that was all the rage in the 1980s also, but cannot now recall what it was or what it was called. I can't find any mention of it online either. Do you remember what that was?
Thank you for that good background information.
Prime Minister Shinzo Abe is working with Haruhiko Kuroda to work toward an inflation rate in Japan of 1.5% to 1.7% by using the same technique ("Abenomics") that our FED is using, quantitative easing. The Japanese look on this as a good thing, rather than something to fear.
- Bob, the only thing that I recall is just-in-time inventory control: suppliers were compelled to take all of the inventory carrying risk and were expected to be able to deliver parts almost immediately upon demand.