The international currency stability of a gold-standard, without the impediment to economic growth of a gold-standard. That is how I read the proposal of two authors of this WSJ editorial.
Neither tax, nor regulatory, nor budget reforms, however desirable, will eliminate currency wars. To restore America's competitive position in production, manufacturing and world trade, stable exchange rates are the only solution tested in the laboratory of U.S. history - from President Washington in 1789 until 1971. Stable exchange rates have proven throughout history to establish the most reliable level playing field for free and fair world trade.
There are no perfect solutions in human affairs. But the history of the past three centuries suggests that stable exchange rates, resulting from adoption of currencies mutually convertible to gold at statutory fixed parities, are the least imperfect solution to avoid currency and trade wars.
Not Donald Trump's protectionist tariffs, nor Ted Cruz' "tax on imports but not exports" (read: tariff) but an agreement with other nations to exchange their national currencies at fixed rates. Could it work?
I teased my Facebook friends that "nobody blames the eeevil speculators when oil prices go down!" (Don't worry, none of them got it.)
But I might let a salvo loose here. A corollary is "nobody bitches about energy's non-inclusion in the core CPI when oil prices go down!" Am I wrong? When gas is $4, I am assured it's incontrovertible evidence of inflation. At $1.859, nobody's asking Janet Yellen to cry havoc and let slip the dogs of liquidity.
U.S. consumers are seeing prices rise at the slowest annual pace in more than five years, largely thanks to a global plunge in oil prices, presenting a potential complication for the Federal Reserve as it looks to raise interest rates this year.
The consumer-price index, which measures what Americans pay for everything from coffee to airline tickets, rose 0.8% in December from the same month a year earlier, the Labor Department said Friday. December’s 0.8% annual rise was the smallest since October 2009, when prices fell 0.2% on the year.
(Yes, that is $1.859 and yes that is a 10 gallon tank.)
Monetary Policy and ISIS. Gotta love the WSJ Ed Page.
ISIS is swimming in capital--more than $1 billion in cash and reserves, by conservative estimates--and has established sprawling taxation in Iraq and Syria. In practice, however, the ISIS economy is notable only for generating large flows of refugees. That probably doesn't bother its leaders too much. But armies won't march on propaganda alone, and operational overhead adds up.
Forget weapons and ammo: ISIS's 20,000-plus fighters also require square meals, secure transport, lodging and first-aid. Oil production in Syria has fallen by 70% since the start of the U.S.-led bombing campaign, and the United Arab Emirates on Saturday formally designated ISIS a terror group.
The ISIS treasury--Bayt al-mal, or house of money--had the foresight not to respond to its liquidity woes by issuing paper currency. If the group had forged better relations with Muslims worldwide, it might be laundering cash through hawala--a global money-transfer system that relies on Islamic honor-codes instead of promissory notes. To put it mildly, though, most Muslims wouldn't wipe their feet with ISIS's "honor." Hence the terror group's decision, "by the grace of Allah, to mint a currency based on the inherent value of the metals gold and silver."
Trouble is, the market value of gold and silver is not "inherent" but dictated by supply and demand. Citizens in ISIS territory can now be expected to hoard gold and silver to trade for whatever foreign goods and currency they can find. Friedrich Hayek in 1977 aptly described "the gold standard" as "the only method we have yet found to place a discipline on government." What ISIS has failed to understand is that metal-backed currency helps protect ordinary people from money-minting despots--not the other way around.
Say what you will about FOMC Chief Janet Yellen -- she does not generally open the Jackson Hole meetings with a beheading.
Professor John Cochrane ("If the exchange rate tanks, you cannot acquit the central banks!") from the University of Chicago asks "Who's Afraid of a Little Deflation?"
With European inflation declining to 0.3%, and U.S. inflation slowing, a specter now haunts the Western world. Deflation, the Economist recently proclaimed, is a "pernicious threat" and "the world’s biggest economic problem." Christine Lagarde, managing director of the International Monetary Fund, called deflation an "ogre" that could "prove disastrous for the recovery."
True, a sudden, large and sharp collapse in prices, such as occurred in the early 1920s and 1930s, would be a problem: Debtors might fail, some prices and wages might not adjust quickly enough. But these deflations resulted directly from financial panics, when central banks couldn't or didn't accommodate a sudden demand for money.
I salute Cochrane for the direct question. I greatly appreciate the Austrian school for their contributions to liberty theory, and am even graced by some Österreicher ancestors with Austrian features. But I cannot call myself of the Austrian School, because I retain a fear of deflation.
And now, I am being tempted to join by someone -- literally -- from the Chicago School; it's almost too meta to bear.
The case is compelling. But there is a maddening strawman argument of Paulites, Austrians, and gold bugs that says if you fear deflation, you must want an activist central bank with top-down management of the economy. Cochrane does not disappoint:
The weight you put on this argument depends on how much good rather than mischief you think the Fed has achieved by raising and lowering interest rates, and to what extent other measures like quantitative easing can substitute when rates are stuck at zero. In any case, establishing some headroom for stimulation in the next recession is not a big problem today.
I suspect Professor Cochrane could find a Milton Friedman book in the University of Chicago library. I'm not claiming to be more knowledgeable, but I would like to hear him contradict a rules-based currency regime. We can agree on dangers of "fiat money," but I hold a target based on nominal GDP or price -- Friedman's Central Bank Computer -- addresses deflation feras without handing oversized authority to central bankers.
Scott S. Powell, senior fellow at Discovery Institute in Seattle and managing partner at RemingtonRand LLC, has an IBD editorial today to explain How Washington Widens Gap Between The Rich And Poor. He cites the same study that Rich Karlgaard told us about in JK's post yesterday, and then extends the unintended - or not - effects.
Three basics about regulation, politics and the economy must be understood.
First, politicians perceive crises as opportunities to grandstand with supposed legislative fixes. But since new laws rarely fix the purported problems, politicians shift responsibility of their laws' rulemaking to unelected, unaccountable agency bureaucrats.
Second, regulatory costs are more burdensome for small firms than large enterprises.
Third, small companies create most new jobs.
Segue now to monetary policy, and its misguided application to paper over the recession caused by government:
Fed-engineered money creation and low interest rates have helped create a stock market casino, prompting more and more companies to go all in with enlarged stock buyback programs to goose per-share earnings and elevate stock prices -- wealth through financial engineering rather than increased productivity.
Artificially low interest rates have been equally beneficial for real estate investors, providing leverage to propel prices and transactions in an upward trajectory.
While the Fed says its policies have kept consumer prices in check for the working class, the real benefit has been inflating asset prices in the portfolios of the rich. Call them the 1% or the 2%, the rich are getting richer, courtesy of the ruling class in Washington, elected in large part by voters who have been fooled and left behind.
And who absorbs one hundred percent of the blame for both the recession, with its attendant job slump, and the rise of the rich at expense of the poor? You guessed it - Wall Street.
The "Inequality Sucks" crowd harps on the low wages paid to unskilled workers almost as much as they envy the wealth of the 1%ers (the only group to see it's overall wealth rise under President Obama). I've been defending the property rights of the evil rich bastards by claiming that less government overhead holding back private industry will, all things being equal, create new jobs (i.e. labor demand) and move labor wages up the demand-supply curve. It's basic economics - everything except the "all things being equal" part.
The trader's tool site Econoday is explaining the relationship between unemployment rate and annual earnings growth thusly:
When the economy is operating at full throttle, a falling unemployment rate worries policymakers as they anticipate that rapidly rising wages will turn into runaway inflation. In fact, wage growth did accelerate in 2005 and over most of 2006 as the jobless rate headed lower. But the reverse has been true during the past recession and early recovery. A rising jobless rate often alleviates wage pressures but is typically associated with economic recession. Federal Reserve policymakers aim for balanced growth with very low inflation.
(Note that under Bush, wage growth was generally above 2.5% yearly, while under Obama it has generally been less than 2.5%.)
I had believed that economic growth was accidentally retarded by confiscatory taxation and abusive industrial regulation but it appears there is more to it than that - economic growth is "balanced" because the fiat bankers at the FED want it that way, as a check on inflation. Somebody smart is gonna have to explain to me why this is good. I'm not about to defend it.
I've been deferential to the Fed -- incredibly so for a libertarian -- and have quietly acquiesced to loose money policies. I've had underlying concern but the lack of monetary inflation has kept me off the "OMG we're all gonna die" bandwagon.
But this is disturbing. George Melloan asks "How Would the Fed Raise Rates?"
A question mostly unasked at Jackson Hole is a crucial part of today's when-will-it-happen guessing game: Exactly how would the Fed go about draining liquidity if a burst of inflation urgently presented that necessity. The traditional mechanism used by the Fed no longer looks to be serviceable.
Before the "zirp" binge began in 2008, the Fed's primary monetary policy tool was the federal-funds market, overnight lending among banks to balance their reserves in compliance with the Fed's required minimums. The Fed withdrew liquidity by selling Treasurys to the banks and increased it by buying Treasurys. Fed-funds rates moved accordingly, becoming the benchmark for short-term lending rates throughout the economy.
But thanks to the Fed's massive purchases of government and mortgage-backed securities from the banks over six years of "quantitative easing," the banks no longer need to worry about meeting the minimum reserve requirement. They're chock full of excess reserves, to the tune of $2.9 trillion. For all practical purposes, the federal-funds market no longer exists.
The rest of the column speculates about different mechanisms which might be employed; these range from the ineffective to the downright coercive. "Mopping up liquidity" was always a concern, and I accepted that it would be done a little too late -- certainly with Janet Yellen as FOMC Chair. But at first glance, Melloan makes me question not so much how as whether it could be done.
Look at the bright side, we'll have probably nationalized the banks by then.
UPDATE: Fixed Freudian typo "have quietly acquiesced to lose money policies" to "have quietly acquiesced to loose money policies." Even my bad typing cracks me up.
Anyone taking painkillers knows that it is important to ingest the medicine before the pain intensifies. You must be preemptive. If you delay taking that pill until you feel pain, you are in for some real discomfort before you feel relief.
The same is true with deflation. It is necessary to be preemptive. Deflation is self-reinforcing, so if you wait to offset it until prices are actually falling, you risk losing control. The resulting pain can be more substantial than the physical pain that results from delaying ingestion of painkillers, since those will eventually quell discomfort, and deflation's appearance suggests that it will intensify before you can get control of it.
I was argumentative with blog friend sc yesterday on Facebook (continued grousing on my part at Pope-onomics). I don't want to give ThreeSources short shift on my bellicosity and general bad temper.
Insty linked this piece. And I was prepared to magnanimously present it as intelligent commentary bolstering blog brother jg's position.
Inflation is starting to really mean something when it comes to food and energy. The government stats on inflation conveniently omit food and energy when reporting things like the Consumer Price Index (CPI). Let's see what Janet Yellen has to say this week. I bet she isn't worried about inflation in the least.
I agree that she, whom Kudlow calls "Queen of the Doves," is not worried about inflation. But, nor am I.
What about food jk? Not like you're a dainty eater! Well, I quote -- the very same blog post. This is clearly NOT a monetary phenomenon.
The recent farm bill that passed was chock full of subsidies for corporate farmers. A goody bag of money from the government that influences what farmers plant, and how much of each crop gets produced. An economist once told me that every jar of peanut butter we buy is .50 higher than it should be because of farm subsidies.
Grain crop prices ($ZC_F, $ZW_F, $ZS_F) have gone higher in past years because of rising demand, but also because of drought. No rain, no grain. Farmers are planting fencepost to fencepost. Still, a lot of land is idle because of CRP. The cost to farm has gone up with the cost of energy. Successful farmers look at cost/benefit analysis just like a factory. Innovations like Farmlogs help them manage their cropland better.
Meat ($LC_F) has seen a tremendous upsurge in prices. Part of that has been scare. Remember the pink slime scare over a year ago? Because of it, beef prices have to go up because not using pink slime decreases supply. The cost of feed has gone up too (drought) so cattle ranchers thinned their herds. Animal gestation isn't automatic, and the cost to bring a steer to market hasn't gone down, so the nation's cattle herd isn't being rebuilt on higher prices.
Hogs ($HE_F) have seen an exponential price move higher in recent weeks. A virus, PEDv hit the nation's hog herd last May. At first, it was controlled. Since the spread, US pig farmers have seen 5,000,000 pigs die, mostly piglets. The crisis is so severe, the largest hog processing plant in the country, Tarheel in North Carolina, is shutting down a few days during the week because it cannot source enough pork to butcher. Oh, and yes, the price of bacon is going to skyrocket.
Poor government policy, drought, junk science, a virus. None of those are monetary. Bacon in Bitcoin is going to go up when five million pigs die.
Tuesday's report on U.S. inflation is expected to show modest price increases. Economists polled by the Journal expect February data to show an annual increase of just 1.1%. But thanks to drought conditions in various regions, food prices are surging.
The Journal reports that "in California, the biggest U.S. producer of agricultural products, about 95% of the state is suffering from drought conditions, according to data from the U.S. Drought Monitor. This has led to water shortages that are hampering crop and livestock production."
But don't give Mother Nature all the blame. Allysia Finley recently explained in these pages how environmental regulations allegedly intended to protect fish like the tiny smelt are diverting water from California agriculture.
Now the federal government expects U.S. retail food prices to rise up to 3.5% this year. This would be the largest annual increase in three years, and would continue a decade-long trend of food prices rising faster than general inflation. Sounds like a war on the middle class.
Drill, baby drill -- and (potentially) irrigate, baby, irrigate. And soi-disant inflation suddenly disappears.
Yesterday I offered my explanation for the market spike on the Taper announcement. Today the IBD Ed page offers theirs:
Yet stock and bond markets rallied sharply Wednesday after the taper was announced. Why? Here's one possibility: Along with gridlock in Congress, maybe the Fed's taper suggests that Washington's grip is finally being pried from the economy's throat.
If so, we hope Obama, Congress and the Fed all get the markets' message: The grand Keynesian experiment in economic meddling is over. Give the American people their economy back, and get out of the way.
When it is the amount of new money the Federal Reserve decides to stop printing every month, effective at some future date.
The news report I heard said that markets rallied over 100 points on the news that QE would "taper" beginning in January. Hmmm. Why the positive response to less liquidity? Because they'll still be printing $75Bn per month ad infinitem. Oh, and
"strengthened its commitment to record-low short-term rates." "It said it plans to hold its key short-term rate near zero 'well past' the time when unemployment falls below 6.5 per cent."
The part of jg will be played by former Federal Reserve trader Andrew Huszar, jk will be represented by Jeapordy! champion and AEI Scholar, James Pethokoukis.
I found it enjoyable and was glad to find video online. As far as our local discussion, I am squishier than JimiP. Q-E-One-and-done is somewhat compelling, yet so is Pethokoukis's reference to the contractionary policies of an overly-tight ECB.
You'd think the Fed would have finally stopped to question the wisdom of QE. Think again. Only a few months later—after a 14% drop in the U.S. stock market and renewed weakening in the banking sector—the Fed announced a new round of bond buying: QE2. Germany's finance minister, Wolfgang Schäuble, immediately called the decision "clueless."
That was when I realized the Fed had lost any remaining ability to think independently from Wall Street. Demoralized, I returned to the private sector.
Where are we today? The Fed keeps buying roughly $85 billion in bonds a month, chronically delaying so much as a minor QE taper. Over five years, its bond purchases have come to more than $4 trillion. Amazingly, in a supposedly free-market nation, QE has become the largest financial-markets intervention by any government in world history.
There's more criticism from this first-hand witness to said largest intervention in world history if you can bear to click through. I'll leave you with this line though, referring to QE1:
We were working feverishly to preserve the impression that the Fed knew what it was doing.
Under President Obama, "Income Gap" gets ... Wider
Investors Editorial Page:
Research by University of California economist Emmanuel Saez shows that since the Obama recovery started in June 2009, the average income of the top 1% grew 11.2% in real terms through 2011.
The bottom 99%, in contrast, saw their incomes shrink by 0.4%.
As a result, 121% of the gains in real income during Obama's recovery have gone to the top 1%. By comparison, the top 1% captured 65% of income gains during the Bush expansion of 2002-07, and 45% of the gains under Clinton's expansion in the 1990s.
The Census Bureau's official measure of income inequality — called the Gini index — shows similar results. During the Bush years, the index was flat overall — finishing in 2008 exactly where it started in 2001.
It's gone up each year since Obama has been president and now stands at all-time highs.
Read More At Investor's Business Daily: http://news.investors.com/ibd-editorials/073013-665705-income-gap-grew-sharply-under-obama.htm#ixzz2aeUovkfz
Follow us: @IBDinvestors on Twitter | InvestorsBusinessDaily on Facebook
The editorial blames "Obama's historically weak economic recovery, which has left the rest of the country falling behind while the wealthy have managed to make gains." That is surely a factor, but the bigger reason is, I think, Stealthflation. Hear me out - I left the following comment on the IBD article:
The non-recovery recovery is one explanation for the growing gap between rich and poor under President "spread the wealth around." The other, perhaps more powerful effect, is the roughly 10 percent per year that working people's purchasing power declines each year as a result of monetary inflation - inflation that is carefully excluded from government CPI data but that exists nontheless as illustrated by the Chapwood Index (dot com) of real consumer commodity costs. Inflation hurts most those with less disposable income, but barely affects the so-called "one-percent" since so much of their income comes from stock market investments, which actually increase with higher inflation. I like to call this intentionally hidden yet fully real inflation "stealthflation." But I wasn't the first.
Let's pause the battle for the soul of the Republican Party long enough to examine more proof of the existence of Stealtflation (R). This Fox Business article dates to last summer, but except for the Bing or Google page caches it may be the closest you can get to the chapwood index site, which is either swamped after their FNC mention this morning or blocked by the Secret Service.
Wait, what's that sound? whup whup whup whup...
UPDATE:This guy stole my term, Stealthflation, before I even coined it! (And we need to work on our SEO 'cause the first Threesources hit for the term didn't come until the third page.)
We have a family joke that originated with former Oakland Raiders quarterback Rich Gannon, explaining why his team had lost a particular game, saying, "I can't run the ball, I can't catch the ball, I can only throw the ball. I can't do everything." So now, to "Richie can't DO everything" we can add, "Cheap money can't DO everything."
Robert Samuelson, a man I don't recall agreeing with ever before, explains on the IBD Ed page:
Cheap credit addresses none of these problems directly and, indirectly, does so only weakly. It can't erase the memories of the financial crisis. It can't create new technologies. It can't make older people younger.
At best, cheap money aided the housing recovery; at worst, it became a stock-market narcotic that can't be withdrawn painlessly.
Many countries face obstacles to growth that cheap money won't magically remove.
This raises a larger issue. Economists have been taught in graduate school that advances in their discipline make it possible to stabilize and, within broad boundaries, control economic activity. But what if that's not so? The ferocious debates among economists indicate that the consensus has broken down.
Who says there ever was a consensus? Ah yes, "The economics is settled."
"There is nothing [Stockman says] that others haven't," says Peter Schiff, chief executive of the broker Euro Pacific Capital, with a similar outlook. "But when someone from the establishment criticises the establishment then everyone has to jump on him and discredit him."
Aw hell, I'm gonna blockquote it anyway, because the widely quoted passages are the wrong ones. The right ones are here:
These policies have brought America to an end-stage metastasis. The way out would be so radical it can’t happen. It would necessitate a sweeping divorce of the state and the market economy. It would require a renunciation of crony capitalism and its first cousin: Keynesian economics in all its forms. The state would need to get out of the business of imperial hubris, economic uplift and social insurance and shift its focus to managing and financing an effective, affordable, means-tested safety net.
It would require, finally, benching the Fed’s central planners, and restoring the central bank’s original mission: to provide liquidity in times of crisis but never to buy government debt or try to micromanage the economy. Getting the Fed out of the financial markets is the only way to put free markets and genuine wealth creation back into capitalism.
That, of course, will never happen because there are trillions of dollars of assets, from Shanghai skyscrapers to Fortune 1000 stocks to the latest housing market “recovery,” artificially propped up by the Fed’s interest-rate repression. The United States is broke - fiscally, morally, intellectually - and the Fed has incited a global currency war (Japan just signed up, the Brazilians and Chinese are angry, and the German-dominated euro zone is crumbling) that will soon overwhelm it. When the latest bubble pops, there will be nothing to stop the collapse. If this sounds like advice to get out of the markets and hide out in cash, it is.
I have been dismissive of inflation projections from some of my blog brothers. Yet I must report today's potential "wake up call."
I have been playing finger style guitar for the last ten years or so. Before that time, I had a large supply of picks. I figure it has been 14 years since I bought them. Some new material I am working on requires them, and I took a nice convertible ride on a lovely day to stock up and try some new styles.
Where I recall their being about a quarter before, they are a dollar now. Using the rule of 70, I compute the GPI (Guitar Pick Index) deflator to be 70/(14/2). That's a seven percent annual increase in the price of picks! That Bernanke fellow has quite a bit to answer for.
Politicians generally make noise or law, but rarely both at once. That's why I'm not too concerned about the gun-grabbing hysteria in the news these days. The noise achieves multiple goals: It makes the loudest politicians look like they care the most and are "doing" the most; It also distracts from real issues like debt, spending, Benghazi, and the "Global 'Currency War.'"
The massive Fed balance sheet expansion has resulted in the U.S. dollar declining about 11 percent against a basket of world currencies since QE began in 2009. In the meantime, stock prices have doubled since their March 2009 lows and the Morgan Stanley Commodity Related Index has gained about 80 percent.
With the U.S. as its guide, competitive devaluation is expected to accelerate.
Strategas investment strategist Jason Trennert included the "race to the bottom" as one of his five principle investment themes of the year.
And yet, fuel prices continue to fall as domestic production soars (and world demand shrinks.) Think how inexpensive energy would be if you could buy it with a sound dollar.
* You thought "race to the bottom" was my characterization, didn't you? Actually it was, even before reading the article in full.
Given the coin's purpose, it would be far wiser to fashion it out of the same junk now used to make pennies, or for that matter out of plastic, or out of cardboard made from recycled copies of the Congressional Record.
Indeed, if the thing is never to leave the Federal Reserve's vault, it might as well consist of nothing more than a cover from one of those little ice-cream tubs--you know, the ones with the wooden spoon underneath--on which Congressman Walden has scribbled the words "$1 Trillion" along with some appropriate legend. In case the good Congressman is reading this, perhaps he will consider my proposal for such. It is: "In Idiots We Trust." -- George Selgin: My Own Two Cents Concerning Trillion Dollar Coins
I think the Austrians and the Chicago school can agree on the perfect, post storm currency:
"Buy a lot of it," says Trey Click, a magazine publisher who rode out last year's Hurricane Ike in Galveston, Texas. "It's one of the only things you can use for money in the aftermath." Need your neighbor to help you clear trees out of your yard? A case of Bud is a better motivator than a $20 bill when all the stores are boarded up.
All the best to our Keystone & Empire State ThreeSourcers -- stay safe and dry, y'all!
Correct me if I am wrong, but the running meme of contentious monetary policy debates around here is something of a myth. It's not that we all agree, but I don't know that we have any William Jennings Bryans around here who are devoted, passionate, and radically different than others. I consider myself a neo-Austrian Chicago guy of sorts. But the great ThreeSources rows I recall have been about immigration, drugs, or my voting for a Democratic Governor.
But Brother Bryan shares a contentious monetary policy debate. Joe Salerno wades into a Paul Krugman/Brad DeLong/George Selgin contretemps:
[...] but this was the gist of George [Selgin]'s bizarre and irrelevant comment on Krugman's column asking Austrians what their position is on money market mutual funds. In his haste to establish his mainstream bona fides to Krugman, however, George was blind to the fact that Krugman has been forced to recognize and address Austrian arguments precisely by those who George denigrates in his comment as "the anti-fractional reserve crowd among self-styled Austrians, taking its lead from Murray Rothbard."
Yes, we hate the Romans -- but it's The People's Front of Judea that really gets our goat!
In the face of Krugmanites who would inflate the currency without bounds to fund activist government, the pragmatist in me considers Austrian / Chicago debates internecine. I'm all for a robust difference of opinion and debate, but I wonder if there aren't times to circle the wagons against the Brad DeLongs and Paul Krugmans of the world. "Irrelevant and bizarre?" Here's the Selgin comment:
Rothbard, ...would ban 'acts of fractional-reserve banking among consenting adults,' and so, apparently, would Congressman Paul. Whatever such a ban might accomplish, it certainly can't be squared with monetary laissez faire, or for that matter with plain old personal freedom.
Or, "What if they threw a big economic recovery and nobody came?"
Lawrence Kudlow points out in an IBD editorial that Bernanke's "desperate money-pumping plan" is a complete reversal of the "supply side" policy that his predecessor Paul Volker used to great effect in the 80's, with an unsurprising result.
A falling dollar (1970s) generates higher inflation, a rising dollar (1980s and beyond) generates lower inflation.
This is the supply-side model as advanced by Nobelist Robert Mundell and his colleague Arthur Laffer. In summary, easier taxes and tighter money are the optimal growth solution. But what we have now are higher taxes and easier money. A bad combination.
The Fed has created all this money in the last couple of years. But it hasn't worked: $1.6 trillion of excess bank reserves are still sitting idle at the Fed. No use. No risk. Virtually no loans. And the Fed is enabling massive deficit spending by the White House and Treasury.
The obvious implication being that if it worked then and its opposite is failing now, let's try it again. *Homer Simpson voice*"Hey, why didn't I think of that?"*/Homer Simpson voice* Kudlow explains that when policies don't encourage higher after-tax income for producers or greater return on investment for lenders, well, we'll see less of both.
On page 2 Kudlow explains how QE3, like QE2 before it, is murder on the middle-class that the president loudly and repeatedly boasts he cares most about. As my three year-old likes to say these days, "Nonsense."
I did not forget nor ignore the question of QE3. I first hoped that Kudlow would post the video of his discussion with Don Luskin, but that is not on the CNBC site today. I also hoped to find the great graphic he uses -- it looks like a Spanky-and-our-gang vintage film of a baby tossing a pile of cash out the window.
Missing both of those, the WSJ weighs in with three concerns about "the brave new world of unlimited monetary easing:"
Then there are the real and potential costs of endless easing, three of which Mr. Bernanke addressed at his Thursday press conference. He said Americans shouldn't complain about getting a pittance of interest on their savings because they'll benefit in the long term from a better economy spurred by low rates. Retirees might retort that they know what Lord Keynes said about the long term.
Mr. Bernanke was also as slippery as a politician in claiming that his policies don't promote deficit spending because the Fed earns interest on the bonds it buys and hands that as revenue to the Treasury. Yes, but its near-zero policy also disguises the real interest-payment burden of running serial $1.2 trillion deficits, while creating a debt-repayment cliff when interest rates inevitably rise. Does he really think Congress would spend as much if he weren't making the cost of government borrowing essentially free?
The third cost is the risk of future inflation, which Mr. Bernanke accurately said hasn't strayed too far above the Fed's 2% "core inflation" target. That conveniently ignores the run-up in food and energy prices, which consumers pay even if the Fed discounts them in its own "core" calculations.
The deeper into exotic monetary easing the Fed goes, the harder it will also be to unwind in a timely fashion. Mr. Bernanke says not to worry, he has the tools and the will to pull the trigger before inflation builds.
Kudlow showed the Fed's balance sheet going from $800 Billion to $3T in a few years, with QE3 suggesting almost a full $1T being added every year. Governor Romney said that he does not plan to renominate Chainman Bernanke to another term. Let us hope he wins and The Chainman is sent back home to play with toy helicopters.
Dagny's plea to the blog economists for someone to "explain to me, in small words, what the FED has just done" having heretofore gone unanswered, I'll link to a capitalist hack who gives a fairly concise summary of the "absolute final gasp of the central bank cartel" in Bernanke's Last Bullet.
Bill begins by explaining what the Fed did yesterday:
On Sept. 13, the Federal Reserve announced a program to purchase $40 billion of mortgage-backed securities a month — at a pace of $480 billion a year. Unlike previous incarnations of quantitative easing (QE), this one is open-ended with no sunset stated or envisioned.
“If the outlook for the labor market does not improve substantially, the committee will continue its purchase of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability,” the Fed wrote in its statement.
And then he explained what it means:
When coupled with the European Central Bank’s (ECB) Sept. 6 announcement of open-ended government bond purchases, this is the absolute final gasp of the central bank cartel. They are desperate. These coordinated actions indicate only one thing: the global economy is going over a cliff. Name one region or industry that is prospering. Not China as its exports dry up. Not Australia who is just now entering its own housing meltdown. Certainly not Europe where even Germany is starting to show signs of recession. And the emerging economy nations? They depend on others to buy their commodities and goods. They are just months away from their own problems.
Bernanke has now fired his last bullet. When this reckless move fails, nobody will believe just shoveling more money into a broken economic engine will do anything meaningful.
Many people, even those who are not New York State residents, have probably heard the lottery slogan, "All it takes is a dollar and a dream." Now comes an actor, comedian and writer, seeking to make his way across the country in the next two weeks with only a dream and, oh, yes, instead of a dollar, a trailer filled with 3,000 pounds of a new bacon.
That would be Oscar Mayer's new Butcher Thick Cut bacon. Actor Josh Sankey leaves New York without cash or credit cards, to parley a trailer full of bacon into food, lodging, and transportation.
If you hanker for some tasty pork products, you can swap on baconbarter.com. Wonder if he needs a tape library?
Hat-tip: Insty (of course -- the Professor has the bacon beat covered).
Congress created the Federal Reserve System in 1913 to tame the business cycle once and for all. Optimists believed central banking would moderate booms, soften busts, and place the economy on a steady trajectory of economic growth. A century later, in the wake of the worst recession in fifty years, Editor David Beckworth and his line-up of noted economists chronicle the critical role the Federal Reserve played in creating a vast speculative bubble in housing during the 2000s and plunging the world economy into a Great Recession.
I have not been able to generate any enthusiasm for Rep. Ron Paul's quixotic campaign to "Audit the Fed!" One can criticize fiat money, wish Alexander Hamilton had read George Selgin or that Roger Taney had slayed Nicholas Biddle in a duel -- I get that.
But the equation "X is bad, therefore add Congress" has few if any real values for 'X.'
Daniel Hansen asks "Do we really want Congress controlling the Fed?" It being the AEI blog, he has to present a serious argument and take time to enumerate things that our 535 economists-in-chief have -- if I may use a technical term -- boogered up.
Ron Paul's recent Audit-the-Fed bill that passed through the House (with no hope of passing through the Senate or being signed by Obama) marks an interesting victory for supporters of Ron Paul. Should the bill magically enter into force, all aspects of the Fed's operations -- like monetary policy moves, discount window operations, agreements with foreign central banks, and so on -- could be subject to intense public scrutiny and Congressional oversight.
All of which begs the question: Would we be better off if Congress had more control over the Fed?
Compared to the rest of ThreeSourcers, I am Chairman Bernanke's biggest fan, telling his mom that Inflation Targeting remains valid and forcing her to accept Operation Twist's subtle manipulation of the yield curve. But no matter what your feelings of Bearded Ben, can you look me in the eye and say that the guys who gave us Dodd-Frank, ObamaCare, Sarbanes-Oxley, the light bulb ban, ethanol and mohair subsidies, and the Designated Hitter are going to do better?
No. Hell no. Let Barney Frank yell at the Chair a few times a year by all means. But keep him or his replacement away from the monetary policy levers.
UPDATE: Okay, maybe I cannot blame Congress for the DH...
Bloomberg television carried this 20-minute debate live yesterday. Drudge linked it with the headline: Ron Paul staying in race, may not support Romney. But I don't think I would have pitched it that way. I had already seen the story as a hit on my Google Alert for "Liberty Dollar." Andrew Kirell via MEDIAite wrote:
Krugman, grinning through Rep. Paul’s answers, responded that “if you think you can avoid [the government setting monetary policy], you’re living in the world that was 150 years ago.” Predictably, Krugman continued on to defend our monetary policy as a response to “free market economy gone amok,” and explain why he thinks government is necessary in order to prevent future depressions.
When discussing the topic of inflation (something Krugman wants more of), Rep. Paul hit back that “[Krugman] wants to go back 1,000 years” to the Greco-Roman times when inflationary monetary policy was a common practice. Paul explains how the Roman empire eventually destroyed their currency through inflation, implying that Krugman’s desire for the federal government to print more money could lead to similar consequences.
Krugman chuckled and responded: “I am not a defender of the economic policies of the emperor Diocletian. So let’s just make that clear.”
“Well, you are. That’s exactly what you’re defending,” Paul insisted.
Mitt Romney, take notice: When you're opponent says, "I'm not _________" the correct reply is, "That's exactly what you're doing."
When co-host Trish Regan questioned Paul on whether he wants to abolish the Federal Reserve entirely, he explained that he wants to legalize private currencies to compete with the government monopoly on currency. As it stands today, if people use a private currency, they can go to to jail (as we saw several years ago with the federal raid on the Paul-inspired Liberty Dollar).
Since central banking, and more specifically, monetary policy is such a hot topic here at Three Sources, I decided to share this article written by Philipp Bagus for Mises Daily. While a lot of attention has been given to monetary policy, interest rates, and inflation in previous posts on Three Sources, Mr. Bagus brings to the forefront an often overlooked activity undertaken by our central bank: Currency and Credit Swaps.
Our differences regarding price inflation versus monetary inflation aside, it is because of these activities that an Audit of the Federal Reserve is needed. The moral hazards created by these types of activities are numerous and include, but are not limited to, currency debasement and loss of liberty in Europe.
The I-word is about to come out of the shadows, and into the full light of day. Investors:
Minutes from the Federal Reserve's last meeting show the central bank has all but abandoned plans for another round of quantitative easing.
It's now clear the Fed is more worried about inflation than recession.
Other notable nuggets-
Net interest expense will triple to an all-time high of $554 billion from $185 billion, Treasury says, meaning we'll pay more to service our debt than to protect our nation. The defense budget stands at $525 billion.
The reversal in interest rates makes defusing the Obama debt bomb through real budget cuts even more urgent than it already is.
The federal debt so far has not been the political liability that it could be for Obama in his bid for re-election.
But if interest rates rise at an even faster clip as he heads into November, the issue could blow up in his face. As his South Side reverend once famously said, the chickens are coming home to roost.
While I hesitated to post about anything having to do with monetary policy due to that topic's polarizing nature on Three Sources, I found this article very interesting and worth sharing. Regardless of which economic school we adhere to, we probably agree that understanding the role of money in civilized society is crucial to economic analysis and often times taken for granted. This article presents several interesting arguments against central banking and the dangers associated with the decreasing role of cash in today's economic transactions. In an effort to "stir the pot" as it were, I will leave you with this little excerpt:
"But since 1969, the inflationary monetary policy of the Fed has caused the US dollar to depreciate by over 80 percent, so that a $100 note in 2010 possessed a purchasing power of only $16.83 in 1969 dollars. That is less purchasing power than a $20 bill in 1969!"