Category Archives: Monetary Issues

The Signs of Inflation

Since Barack Obama has decided to continue down the path George Bush started down,  the path of Robert Mugabe and Friedrich Ebert, the United States economy will soon be facing all the problems associated with inflation.

Unfortunately, the effects of inflation are poorly popularized, meaning that most people have a very limited understanding of inflation.  As a result when confronted with symptoms of inflation people all to often pin the blame on other “causes” such as Jews or greedy white landowners.  These false accusations are heavily promoted by the ruling classes;  after all it’s better that the mob chase some Jews or hedge fund managers with pitch-forks than coming after the rulers who inflated the currency.

What Inflation Isn’t

The primary misconception of inflation is that it merely is the rise in prices.  The news media encourages people to believe this, reporting the inflation rate in the same way it reports on changes in the weather, as if it is some natural phenomenon over which people have no control.

Price increases are a result of inflation, yes.  However, inflation has the same relationship with price increases that war has with the number of burials per month at Arlington Cemetery.

The Mechanics of Inflation

Inflation is the phenomenon where additional money is created.  In the case of the Unites States, the Federal Reserve purchases some asset, such as a United States Treasury Bond, paying by check.  The seller deposits the check in a bank, which then records the additional money as part of its demand deposits.  This is the moment where the inflation occurs.  The bank then loans out 80% of those deposits to borrowers. Those borrowers spend the loaned money. This spent money is deposited back into the banking system. The banks loan out another 80% of this latest round of deposits. This cycle of loaning out money which then spent and then deposited back into the banking systems continues until eventually an equilibrium is established where banks list $4.00 in outstanding loans for every dollar created when the Federal Reserve Bank wrote that first check.

The Math:

A mathematical calculation of the growth of the money supply when central banks create money out of thin air.

A mathematical analysis of the growth of the money supply when central banks create money out of thin air.

The people spending this newly created money bid up prices;  people selling stuff tend to sell stuff to the highest bidder, and the people holding the newly printed money are competing with other buyers to purchase the stuff they want.

The result is that this new money slowly disperses out through the economy, leaving higher prices in its wake.  The people who spend it first get the benefit of being able to buy stuff at pre-inflation prices, the people who spend it last do not.  The people who have access to the newly printed money are left better off, the people who don’t are left poorer.  Inflation invisibly and without much fuss transfers purchasing power from those who are not closely connected economically with the central bank to those who are.

Follow the Money

The price increases generally show themselves in the sectors of the economy where the new money is spent.  For example,  let’s say that President Obama directs the Secretary of the Treasury to sell a bond to generate the money needed to build yet another bridge over some stream in West Virginia named after Robert Byrd. The bond is purchased by the Federal Reserve Bank with newly printed money.  The money is spent by the Federal Government on tools and materials needed to build the bridge.  The price for cranes, hourly employment of road-crews, concrete and steel increases.

The Rise of the Ersatz Product

The other users of these raw materials find themselves struggling to buy the  supplies they need.  For example, a manufacturer of prefabricated steel sheds might find that he has to pay more to get the metal he needs.  He is caught in a squeeze; the price his customers are willing to pay has remained unchanged while his production costs have increased. The manufacturer can’t raise his prices, so naturally he decides to cut costs by attempting to reduce the amount of steel he uses by substitution or adulteration.  The end result, the steel shed might cost the same, but the quality of the steel, the strength of the steel, or its toughness will be inferior, resulting in a shoddier product.  Candy bars are packaged to look like their sizes are constant, while the volume of candy is reduced.  Houses are built less sturdily.  Automobiles are manufactured with lower quality steel, with engines that wear out more rapidly, etc.

The Rise in Prices

As the money percolates out through the economy, the people coming into possession of it bid up prices.  In fits and starts, at different rates in different sectors of the economy, the price levels go up.  People on a fixed income find themselves becoming poorer and poorer.  The unpredictability of  the price levels causes  accounting to become more uncertain.  Investments and projects that otherwise would be attempted are foregone.  A majority of the population is left poorer as a result of the inflation.

Increased Political Repression

These people naturally lobby for relief.  However the political classes that benefit from the inflation don’t want to stop,  and the people are too ignorant of economics to recognize the fact that it was the printing presses which caused their problems.  Instead the people attack profiteers or greedy manufacturers or the greedy bankers.  They call for price and wage controls, which if instituted, further wreck the economy.

People also try to abandon the unreliable monetary system for alternatives.  They try to do business in foreign currencies or even use commodities such as cigarettes or gold chains as money.  Governments typically react savagely, criminalizing attempts to do business using alternatives to the rapidly devaluing currency.

Stop Me Before I Inflate Again!

Typically, when a government or central bank engages in inflation, they find it hard to stop – the political incentives are too great to resist. They cannot fund their operations if they stop the printing presses. The more the economy falters, the more the tax-base is disrupted, the lower the productivity of the industrial base, the more dependent the elites are on the printing press to fund their lifestyles and the operations of the state.  In private, the central-bankers will admit that the currency debasement is wrecking the economy.  But the central-bankers’ fear of the negative personal consequences if they should stop inflating the currency overrides any impulse to do the right thing.

America’s Peculiar Institution

Some economists argue that since the Federal Reserve is not part of the U.S. government such a doomsday scenario cannot play out here.  They claim that the Federal Reserve, being independent, is immune to political pressure.  Yet throughout its existence it has acted to support the U.S. government; periodically, the Congress threatens to update or revise the Federal Reserve Act to mandate greater congressional oversight of the Fed’s operations and the ‘independent’ organization suddenly becomes quite accommodating.

Historically, the Federal Reserve has purchased only a small fraction of the bonds issued by the U.S. Treasury;  it didn’t have to – there were always sufficient buyers willing to buy Treasury Bonds to keep the U.S. government operating.  That is changing.  The U.S. government will have to borrow more than a trillion dollars a year to fund its operations.  At the same time the U.S. Government is borrowing at such unprecedented levels, the willingness of voluntary investors to purchase the bonds is collapsing.  If the Federal Reserve were passive, within a year or so we would see U.S. Treasury Bonds routinely going unsold at auctions. The Federal Reserve, inevitably, will begin purchasing those bonds to keep the U.S. government solvent.

Protecting Yourself

In an inflationary economic regime, the formal economy is generally a suckers game.  To avoid being taken to the cleaners, consider doing the following:

  • Start or purchase a business making something in relatively widespread demand that is not likely to have price controls slapped on it.
  • Go into a profession where your skills will be in wide demand.
  • Learn how to fix broken things.
  • Cultivate circle of associates with whom you can engage in gray-market or black-market business deals.
  • Befriend a policeman or a judge! They can get you out of hot water should you get tagged for committing an economic ‘crime’.
  • Get to know local gold-dealers, particularly ones who buy and sell gold chains.
  • Learn how to defend yourself; police take time to respond, and are prone to prosecuting economic crimes when confronted by evidence of contraband.
  • Buy an old “Whip Inflation Now” button. It will be about as helpful as it was in the 1970’s

You don’t have to be helpless as the Democratic and Republican Party Apparatchiks loot the economy.  Prudent steps taken now can pay off in the coming dark years.

I am an anarcho-capitalist living just west of Boston Massachussetts. I am married, have two children, and am trying to start my own computer consulting company.
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Let Us Fail

California’s in a world of hurt, exacerbated by the fact that we didn’t offer to give the state a whole bunch more money during our ballot propositions yesterday. There are a lot of reasons for our pain, but it really comes down to a state that never quite understood TANSTAAFL. They’ve been sold the lie that government can do everything they desire, and all of it “with NO MONEY DOWN!!!” Now the bill is due, and there’s going to be some trouble.

But the question is where we go from here. And I can tell you that there is going to be a cry to go to Washington DC, because the government of California is “too big to fail”. I’m not going to be one of the voices calling for this, but as Megan McArdle points out, there are quite a few who will:

There is a surprisingly sizeable blogger contingent arguing that we have to bail them out because however regrettable the events that lead here, we now have no choice. But actually, we do have a choice: we could let them go bankrupt. And we probably should.

If Uncle Sugar bails out California, California will not fix its problems. Perhaps you want Obama to make it fix the problems, using the same competence, power, and can-do spirit with which he has repaired all the holes in the banking and auto manufacturing sectors. But Obama is not in a good position to do this. California Democrats are a huge part of his governing coalition. All Obama can do is shovel money into the bottomless pit of California’s political system.

If California is bailed out by Washington, it will simply be another way to prop up a system that is fundamentally broken. California has spent decades building up the unsustainable and crushing tax & spending burden we now have. Income taxes are high (9.55% for most people above $40K), sales taxes are high, fees and regulations are high. About the only thing we have that isn’t high is property tax, and Sacramento keeps trying to change that.

Fundamentally, we need to be taught a lesson. We need to finally understand that you simply cannot live in perpetual deficit. Arnold Schwarzeneggar recently explained why:

“This is the harsh reality of the crisis we face. Sacramento is not Washington [DC]… We cannot print money.”

Maybe, just maybe, if we fail it will teach us a lesson. It will teach us that money doesn’t grow on trees, and that there is an economic limit to your ability to act in constant deficit. It will teach us that the abnormal — not the normal — scenario is one of constantly printing your way out of problems. Maybe, just maybe, it will restore some semblance of welcome economic sanity to California.

But I doubt it. Obama will find a way to paper over the problems, we’ll play kick the can because Sacramento is “too big to fail”, and wait until this becomes a problem so large that only a national collapse of our entire monetary system will teach us a lesson.

I need to start taking my piles of spare change to CoinStar — paper money will heat my house a lot better than coinage.

Truth Hurts… Ignorance Hurts Worse

I disagree with Schiff on hyperinflation; but we’re DEFINITELY going to be seeing significant inflation. I’m thinking 1979 levels or so.

Note: Schiff is also a firm believer in the inherent value fallacy; which is just that, a fallacy. There is no such thing as a stable currency, because nothing has inherent value. All value is circumstantial.

Fiat currency is a horrible thing, but the solution is NOT specie currency, which has its own issues (which can be just as bad as those of fiat currency). The solution is a global free currency market, without government value setting by fiat, OR by an arbitrary commodity standard… or any other arbitrary standard for that matter.

Let the market decide what the currency of a nation is worth, and it will seek its natural level AT ANY GIVEN MOMENT. Let the markets set their own confidence level, based on whatever a currency represents, is backed by, what its purchasing power is… whatever the market values.

We are approaching the technology basis that will allow this, though we aren’t there yet. Universal realtime international communications are a pre-requisite for an efficient currency market. Currently, currency markets present significant arbitrage opportunities based on asymmetric information, communications lag, and government distortion.

Unfortunately, now that governments have the power of fiat currency, they will absolutely refuse to give it up.

We’ve got maybe a 24 month window of slight recovery and plateauing of prices; then we doublehump this, with real economic contraction spurred on by the devaluing dollar, rapid inflation; and concomitant high interest rates, and tighter credit (you think credit is tight now? Not even close).

If you want to buy a house, do it 18-24 months from now on a fixed rate mortgage; and plan on living there the rest of your life. Inflation is going to wipe out a significant amount of your debt anyway.

… Presuming the Chinese don’t bail out on us entirely, and kick this off SIX months from now, instead of 24 months from now.

I am a cynically romantic optimistic pessimist. I am neither liberal, nor conservative. I am a (somewhat disgruntled) muscular minarchist… something like a constructive anarchist.

Basically what that means, is that I believe, all things being equal, responsible adults should be able to do whatever the hell they want to do, so long as nobody’s getting hurt, who isn’t paying extra

Barney Frank On Ron Paul’s Federal Reserve Transparancy Act

As Stephen noted last night, Ron Paul has introduced a bill that would require the Federal Reserve to open it’s books to Congress. According to Thomas, that bill now has 79 co-sponsors.

I agree with Stephen that this is an issue that all libertarians, all Americans indeed, need to pay more attention to and, in that spirit, here’s a very interesting clip of House Banking Chairman Barney Frank answering a question about Paul’s bill:

At the very least, Frank’s comments would seem to indicate that the bill will get a fair hearing by the committee, which is more than can be said about previous legislative efforts to crack open the doors of the Fed.

There are no hearing dates set right now, but that doesn’t mean that it isn’t time to contact your Representative and tell them they need to get on board, especially if they’re on the Banking Committee.

It’s time for libertarians to start taking Federal Reserve issues seriously

For years, a lot of libertarians and paleoconservatives have focused a lot of attention on the Federal Reserve.  Some have gone overboard, blaming the Fed on virtually every lost freedom in America.  Others have focused too hard at the wrong time; I remember one person speaking at a gun show looking pretty foolish because he was talking about Fed issues while everyone in the audience was concerned about the upcoming passage of Clinton’s Assault Weapons Ban.

On the other side of the coin, our recent economic situation has raised a lot of issues about the role of the Federal Reserve, what alternatives there are to it, and how the system really works in practice.  Ron Paul supporters are particularly well-versed on these issues and the general public is becoming more interested in them, as well.

On February 26, Ron Paul introduced legislation to audit  “the Board of Governors of the Federal Reserve System and the Federal reserve banks” before the end of 2010.  While bills introduced by Paul are often disregarded by the rest of Congress, this one is starting to show some legs. According to Paul’s website, the bill now has 71 co-sponsors.

I’ve taken a lot of heat over the years for trying to protect the movement from being disregarded by mainstream Americans because of our internal kook factors.  When Ron Paul can obtain 71 sponsors for a bill, it’s time for hesitant libertarians to jump on board the Federal Reserve bandwagon.  You might start by contacting your Representative today.

UPDATE: Just received the following on Twitter:

If you don’t think the Federal Reserve issue is too arcane, then I’m up for it! Heard it for a while-can’t pretend I understand it. Freedom!

Keeping What What We Make Away From the Tax-man

The furor over the Tea Party movement has been quite exciting.  While I love watching government officials and their sycophantic propagandists energetically denounce people for daring to suggest that people should be permitted to keep their earnings,  I, like others, think the protests – in and of themselves – are insufficient to meaningfully change the vampire economy that has seized the U.S. in its fangs.

The people protesting are not, however, wrong.   The basis of a free society is the independence of the people: their ability to choose how to conduct their lives, what professions they will pursue, where they will live, how they will order their lives.  The more resources a person has at their disposal, the wider the range of choices available to them. Freedom from taxation is as fundamental a human right as choosing whom we love.

The protesters are, however, seemingly oblivious to the real problem, the control the state has over the institutions of finance, banking and trade.   It is this control that not only allows the state to plunder without any limits, but also encourages people to acquire wealth through dishonest means – through rent seeking, wealth distribution, or other forms of special privilege.

If we wish to be a free people, we must build the institutions and the cultural habits that encourage individuals to amass these resources through peaceful commerce and production. The fundamental act by which people stockpile these resources is called saving. In a simple economy, such as an agrarian one, the importance of having people stockpiling seed-corn, or hay for feeding their herds during winters or periods of famine is obvious to everyone.

In a complex economy, people typically stockpile money, since there is a degree of uncertainty as to how those savings will be put to use in the future, and money is provides them with the most options when looking to consume savings to satisfy some present need. Unfortunately, people have stopped saving, largely because the current monetary regime makes saving a sucker’s game. A dollar stuffed under a mattress exponentially loses its value. A dollar deposited in a bank also steadily loses value, albeit at a lower rate; the bank typically makes up much but not all of the losses do to inflation by paying interest.

The story of the 20th and 21st centuries are, if nothing else, the capture of the banking system by the state. It is becoming increasingly difficult for people to amass wealth that is securely theirs. Bank accounts can be confiscated. Their money can be held hostage via a banking holiday. Regulators can learn intimate details of the private affairs of individuals by reviewing the banks’ records.

Those of us who wish to reverse the trend towards an ever more powerful and intrusive state must take the lead to restoring the ability of people to stockpile savings.

How can we do this? There are several ways:

  • Create new forms of money that are easily stockpiled. This does not have to be gold and silver, but can be things like cell-phone minutes
  • Create new markets to trade without interference
  • Create new systems for storing forms of money safely

Building these institutions will not be easy. They cannot be imposed from outside. They cannot depend on some messianic leader to encourage their adoption. They must attract users who have no interest in the political agenda, but because they satisfy the users’ personal needs. It is important to bear in mind that this regime has existed so long that for most of us who are alive today have no idea that it could ever be otherwise. Furthermore, the public is the target of a pretty comprehensive propaganda campaign that pervades all forms of mass media that distorts history and aggrandizes the growth of the state. At this point, the vast majority of people are absolutely convinced that a free society is at best doomed to economic collapse and in all likelihood a violent, brutish, dog-eat-dog dystopia.

While I don’t have a particular “magic bullet” to restore the vital freedom to amass wealth without having to fear government confiscation or debasement, I do have some suggestions:

  • Accept as wide a variety of currencies and goods as payment as you can.
  • Likewise be prepared to proffer as wide a variety of goods and currencies as possible.
  • Store some of your savings in places that others do not have access to. Limit knowledge about the size of your savings on a strict need to know basis. Loose lips sink ships! (NB. Safety Deposit Boxes don’t count; FDR had his thugs systematically go through people’s safety deposit boxes throughout the country, confiscating the newly illegal gold) .
  • Do not cooperate with the state any more than your conscience, or willingness to engage in civil disobediance permits. Keep in mind, though, that principled non-cooperation with the state can easily lead to being thrown in jail, beaten, or even murdered.
  • Keep your eyes peeled for new ways of doing business, new products, and new marketplaces that increase your independence. When you find something, publicize it as widely as is appropriate.

In the end, the current system cannot last. The United States Government is consuming resources at a rate that is unsustainable. Using the collapse of other states as a guide, it is quite likely that its officers will wreck a large portion of the U.S. economy in their efforts to delay the inevitable. How destructive the collapse is, how vulnerable people are to the destructive edicts issued by government officials will be a function of how well we do in fostering the growth of alternate institutions. Shielding ourselves from harm is but a first step. If we wish to avoid experiencing that which Germans did 100 years ago - the destruction of an enlightened culture by a voracious predatory state leading to totalitarianism, death and war (see here for the illustrated version)- we must also figure out how to shield our neighbors too.

So I have a homework assignment for you, dear reader, what will you do to build the institutions that make it easier for you and your neighbors to keep what they make away from the tax-man?

I am an anarcho-capitalist living just west of Boston Massachussetts. I am married, have two children, and am trying to start my own computer consulting company.

Debts, Deficits, Taxes, and Tea Parties

In watching the MSM coverage of the Tea Party protests, the following arguments are used to try and debase the factual arguments of the protests:

  1. Obama plans to lower taxes on the majority of Americans while raising them on the rich.
  2. Obama’s budget cuts the deficit in half over the next 10 years.
  3. Right now tax rates are the same as they were when Obama took office.
  4. Most Americans are OK with their taxes.

These are all true, but none invalidate the point of the protests.  The protests are not talking about current taxes, they are talking about future taxes.  Each and every dollar borrowed today is a dollar taxed out of the economy at some point within the next 30 years.  This is a simple, undeniable fact.

When trying to figure out bad our future tax burden is, one number concerns us:  The National Debt.  This number is staggering, standing at $11,176,642,012,673 at the moment I type this.  According to the CBO, Obama’s budget will increase this debt by over $1,800,000,000,000 in just the next year.   So, while Obama is correct that his budget cuts the yearly budget deficit in half by 2019, that means that his spending plan will add a mere $900,000,000,000 to the national debt that year.  If the CBO estimate holds, the debt will top $20,000,000,000,000 in 2019.  This means that between 2009-2019, the amount of money borrowed against the full faith and credit of the US taxpayer will almost have doubled.

Say it to yourself… twenty trillion dollars.  That’s the massive future tax liability for the citizens of the United States being protested today.  The anger about this future tax liability is very real among those who see it.  While the tea party movement might get co-opted by big-spending Republicans and fade away, the sentiment that started it is as genuine, grassroots, and truthful as any protest movement in American history.

Russia Considering Return to Gold Standard

Here’s some irony for you. Perhaps Obama, Reid and Pelosi might consider following Russia’s lead:

Arkady Dvorkevich, the Kremlin’s chief economic adviser, said Russia would favour the inclusion of gold bullion in the basket-weighting of a new world currency based on Special Drawing Rights issued by the International Monetary Fund.[…]

[…]Mr Dvorkevich said it was “logical” that the new currency should include the rouble and the yuan, adding that “we could also think about more effective use of gold in this system”.

The Gold Standard was the anchor of world finance in the 19th Century but began breaking down during the First World War as governments engaged in unprecedented spending. It collapsed in the 1930s when the British Empire, the US, and France all abandoned their parities.

It was revived as part of fixed dollar system until US inflation caused by the Vietnam War and “Great Society” social spending forced President Richard Nixon to close the gold window in 1971.

The world’s fiat paper currencies have lacked any external anchor ever since. It is widely argued that the financial excesses and extreme debt leverage of the last quarter century would have been impossible – or less likely – under the discipline of gold.

Of course, this would make bailouts and excessive federal spending less palatable politically, so it ain’t gonna happen here until it’s forced on our governmental leadership.

Quote Of The Day

So we’re supposed to trust the people who didn’t see it coming to make sure they stop their intervention before they’ve over-intervened?

Fed Pres Lockhart in a speech a few hours ago in Paris is summing up well what is the growing angst in the markets that the Fed is sowing the seeds for big inflation with their aggressive steps by saying, “there’s reasonable concern related to the growth of the balance sheet of the central bank in response to the economic difficulties we’re having, that this could over the long term fuel inflation if the monetary aggregates are not managed well and if the Fed doesn’t react at the right time to remove some of the stimulus.” We are thus relying on a Fed that thought subprime was contained at a loss of maybe $150b in 2007 to somehow reverse their massively aggressive initiatives at the exact right time.

What If You Threw A Borrowing Party And Nobody Lent?

Governments, ready to spend boatloads cruiseliner-loads of money they don’t have, are trying to borrow it — to the extent possible — from the markets. I mentioned yesterday that the US was starting to print our own money to lend to ourselves. Britain is facing a similar problem — they were auctioning off some bonds, and nobody wanted to buy:

There is a limit to what bond investors will put up with. As governments inflate their fiscal deficits to deal with the crisis, they are issuing an awful lot of government bonds. And some of it is going to prove a tough sell.

Today, the UK suffered a failed auction for the first time since 2002. The Debt Management Office received bids for just £1.63 billion of a £1.75 billion offering. As the government has to sell nearly £150 billion of gilts in the coming (2009-10) financial year, this is hardly an encouraging sign.

To the casual observer, it might seem unsurprising that investors turned their nose up. They were being asked to lend money at 4.5% for 40 years to a country that, even in the midst of a recession, has an inflation rate above the government target, has a deficit expected by the IMF to be 11% of GDP next year, and a currency that has fallen by a quarter against the dollar since last summer.

During the Wall Street “flight to quality” seen late last year, yields on short-term Treasuries dropped significantly as 0.1% returns on short-term bonds were better than the worry of losing 30% of your wealth as the stock market tanked nearly uniformly. But the key there is short-term.

Right now, nobody really believes that governments are going to exercise monetary prudence in the face of cratering economies. That’s true in America, and it’s true in Britain. Why would someone lend money for a 4.5% 40-year return if they honestly think inflation over that time period will ensure they lose quite a bit of money?

Governments are going to borrow lots of money, and the market is not enthralled by the lending terms they’re being offered. There are two ways to get around this. You can offer better terms (i.e. higher yield bonds), but that has the downside of letting the world know that you plan to inflate your own currency. Alternatively, you can simply print the money you need to borrow and loan it to yourself at whatever terms you want. It seems that central banks in the US and Britain are already taking that path, and the market sees the writing on the wall.

Is Dollar Hegemony About To End?

Just over two years ago, I offered a worst-case prediction of where this economic crisis could lead.

Wait, though, it gets worse. America isn’t an empire in the conventional sense of the word, but we are an economic empire. The dollar is the currency of the world, from middle eastern oil to the reserve currencies of countless nations. During the Great Depression, or during the stagflation of the 1970’s, other nations were stuck with the dollar, because nothing else was suitable. But if the dollar starts dropping in a major inflation, they now have options. And if they drop the dollar, it’s all over. All of a sudden, America won’t draw on the world for our own stability. Considering the actions of our politicians, that’s a bad, bad thing.

We may be witnessing the end of America as the world’s superpower. It may be the end of our status as the economic empire of the world. Some across the globe, of course, will cheer. After all, they feel like America is the premier force of evil in the world. For all the bad that we’ve done, though, we’ve been a pretty stable force, and worked to prevent the spread of fascism and communism, across the globe. America’s economic system has been the safe-haven for the world. When a position of power is vacated, what typically fills it is rarely positive. The end of the American empire will likely result in more instability worldwide.

There are two reasons that I’m very, very concerned about this.

First, American dollar hegemony has actually been, for all the stupidity we’ve encountered upon over the last few decades, a pretty stabilizing force. To bastardize an old quote, America’s economic system is the worst, except for all the others. There’s no reasonable guarantee that anything that follows dollar hegemony will actually increase stability. Rather I think it will be worse.

Second, I don’t want to pay for our government. While we’ve been pretty well looting the other nations of the world, printing money and sending it to them in exchange for durable goods, only to have them lend it back to our own government to pay for programs we’re unwilling to tax ourselves for. Essentially we’ve been taxing other nations to pay for our own government, with the unspoken understanding that we’d probably slowly print our way out of debt rather than actually pay our debt. I can understand why they don’t want to continue that, especially since we’re dramatically increasing the size of the government that we’ll be expecting them to pay for.

But that doesn’t mean it won’t happen.

Russia, as reported by QandO, made noises last week about putting an end to the dollar as the reserve currency of the world:

The Kremlin published its priorities Monday for an upcoming meeting of the G20, calling for the creation of a supranational reserve currency to be issued by international institutions as part of a reform of the global financial system.

The International Monetary Fund should investigate the possible creation of a new reserve currency, widening the list of reserve currencies or using its already existing Special Drawing Rights, or SDRs, as a “superreserve currency accepted by the whole of the international community,” the Kremlin said in a statement issued on its web site.

The SDR is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries.

Now, QandO again (along with Doug @ BTB) reports that one of our far bigger creditors, China, is making the same suggestion:

China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”.

Analysts said the proposal was an indication of Beijing’s fears that actions being taken to save the domestic US economy would have a negative impact on China.

“This is a clear sign that China, as the largest holder of US dollar financial assets, is concerned about the potential inflationary risk of the US Federal Reserve printing money,” said Qu Hongbin, chief China economist for HSBC

I’d like to believe that this is merely a warning to the Obama administration that destroying our currency won’t be accepted by the international community. It would be a very clear warning that if we proceed down this path, those who are currently tied into our dollar will try to quickly cut our losses and leave us out to dry.

But I really don’t think the Obama administration, the Bernanke Fed, and the Geithner Treasury will heed those warnings. You want a reason to fear Great Depression II? This is it.

In fact, it may already be starting. China is worried about the $1 Trillion they’ve already lent us, but the real key to ending dollar hegemony is to stop lending us more. If other countries stop buying US Treasury Bonds, we must find a way to fund our own deficits internally… And there’s some evidence that’s already happening:

Thanks to Brad Setser for the graph

Thanks to Brad Setser for the graph

Yep, foreigners are getting close to their limit. Will it hold? I don’t know, but in the meantime, the Fed is starting the printing press to make up the shortfall (h/t Calculated Risk):

The first outright Treasury coupon purchase will be conducted on Wednesday, March 25, 2009, and will settle Thursday, March 26, 2009. Results will be posted on the New York Fed’s website following the operation.

Starting on Wednesday, April 1, 2009, and continuing every two weeks, the New York Fed will issue a tentative operation schedule for its purchases of longer-dated Treasury securities, including the maturity sector or sectors to be targeted.

The signs are pointing to a major change in world structure.

  • The world is slowing down their purchases of American debt, fearing it won’t be repaid.
  • The world is threatening to liquidate the US Dollar as the de facto reserve currency, because they fear an impending devaluation.
  • The Obama administration, the Fed, and the Treasury appear to be willing to spend historic sums in the face of these developments in the hopes the world is bluffing.

I don’t want to be a doomsayer, but the outlook sure as hell ain’t rosy. America has been gorging at the buffet for the last 40 years, ever since the collapse of Bretton Woods system. The bill is about to come due, and we’re sure to be surprised when we realize it’s pay-per-item, and not all-you-can-eat.

Open Thread: Stock Market Edition

Two weeks ago, the Dow hit a major low at 6440, closing slightly higher. This made a lot of sense to me, given the fundamentals of the economy. In fact, I nearly posted a rather snide article on CNBC “calling the bottom” that morning.

But then things changed. The Dow has been on a tear ever since, culminating yesterday in a 500-point rise. This is a 20% rise since its lows of merely two weeks ago. And I just don’t understand why.

I see three potential explanations:

  • We’ve hit the bottom of the recession, and the 6440 low was an undershoot on the downswing, which was bound to be quickly reversed.
  • This is a sucker’s rally, and the Dow will soon drop again.
  • We haven’t hit the end of the recession, but the inflationary policies of our government are going to cause a rise in equity and asset prices.

I don’t believe the first. I can be wrong on that, but I think there are structural monetary and economic issues that are still bound to unwind. The government is trying to reinflate the bubble, but I think there’s too much leverage working against them.

I can easily believe the second. I think there’s quite a lot of downside risk, and after such a phenomenal drop, I actually believe there’s plenty of suckers who thought we’d hit bottom.

What really worries me is the third option. If the inflation is starting, this has significant impact on my personal situation. As a renter, I want to purchase real estate before the inflation really hits, locking in a nice low fixed interest rate on a home that’s going to rise in value with the devaluation of the dollar. If the interest rates spike before I can buy, I may be locked out of ownership in any of the neighborhoods I’d actually want to live in.

So what does everyone think? Where will we be in a month, in 6 months, and in 18 months? Is this a sucker’s rally, is this the start of the great inflation, or is this simply the bottom of the recession and things are looking up?

Quote Of The Day

I was talking to a coworker this morning about the stock market and the Fed’s injection of $1.2T newly-printed money into the economy. I made a point that I think bears repeating:

The stock market can lose value, while going up.

This is the insidious nature of inflation. They’ll inject this money and nominal prices will move up (houses, DJIA, S&P500, etc) — at which point they’ll claim that they’re fixing the economy.

Just like Germany did in the early 1920’s.

Quote Of The Day

Chinese Prime Minister Wen Jiabao:

“President Obama and his new government have adopted a series of measures to deal with the financial crisis. We have expectations as to the effects of these measures,” Mr. Wen said. “We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.”

Sorry, Mr. Wen. Much like the mortgage lenders who have imploded have learned, you shouldn’t lend money to people based on their “stated” ability to repay.

Hat Tip: MichaelW @ QandO

Is the White House “Going Galt” on Us?

randselfishIn a 2001 article entitled “The Virtue of Greed,” noted economist Walter Williams wrote: “YOU CAN CALL IT GREED, selfishness or enlightened self-interest, but the bottom line is that it’s these human motivations that get wonderful things done. Unfortunately, many people are naive enough to believe that it’s compassion, concern and ‘feeling another’s pain’ that’s the superior human motivation. As such, we fall easy prey to charlatans, quacks and hustlers.”

In what may become a new executive branch strategery to sell America on President Obama’s economic plan, White House National Economic Council Chair Lawrence Summers did what Glenn Reynolds and Ilya Somin are describing as channeling the fictional Oscar-winning Wall Street character Gordon Gekko (YouTube of speech below).  To be fair, Obama started it by calling on people to act in their own self-interest by making a few stock investments: “What you’re now seeing is, profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long term perspective on it.”

However, Obama’s motivation of selling his economic plan was revealed (emphasis added) in his very next sentence: “I think that consumer confidence — as they see the American Recovery and Reinvestment Act taking root, businesses are starting to see opportunities for investment and potential hiring, we are going to start creating jobs again.”

Here’s how Politico describes the Summers quote:

“In the past few years, we’ve seen too much greed and too little fear; too much spending and not enough saving; too much borrowing and not enough worrying,” Summers said Friday in a speech to the Brookings Institution. “Today, however, our problem is exactly the opposite.”

In remarks to a private dinner at the U.S. Chamber of Commerce on Wednesday, Summers was even blunter, according to an attendee: “Before, we had too much greed and too little fear. Now, we have too much fear and too little greed.”

“While greed is no virtue, entrepreneurship and the search for opportunity is what we need today,” Summers concluded. “We need a program that breaks these vicious cycles. We need to instill the trust that allows opportunity to overcome fear and enables families and businesses to again imagine a brighter future. And we need to create this confidence without allowing it to lead to unstable complacency.”

At times, Summers sounds like he could be quoting from Ayn Rand’s The Virtue of Selfishness. In reality, he’s promoting a program which has already caused Rand to rise from her grave.

Ordinarily, making Rand required reading around the White House would be considered a good thing.  However, such reading could turn into what Wikipedia describes as:

The political manipulation of language, by obfuscation, e.g. WAR IS PEACE. Using language to obfuscate meaning or to reduce and eliminate ideas and their meanings that are deemed dangerous to its authority.

and

The encouragement of “doublethink,” whereby the population must learn to embrace inconsistent concepts without dissent, e.g. giving up liberty for freedom. Similar terms used, are “doublespeak“, and “newspeak

America is still falling prey to the “charlatans, quacks and hustlers” Williams described.  Instead of using altruistic devices, the bad guys now seem to be toying with the use of Orwellian tactics.


Related reading:

Michelle Malkin’s take on what she’s describing as Obama’s 180 on fiscal policy messaging.

DailyKos: “Atlas Didn’t Shrug – John Galt 2009 is Staying

QandO: “Hayek, Greenspan And The Designs Of Men

Capitalism Magazine on the left’s reaction to the “Going Galt” theme

Alan Greenspan Says — Not My Fault

Alan Greenspan is one of the most highly respected financial minds in the world. He was Chairman of the Federal Reserve under four consecutive Presidents, and was laughed at when he uttered the words “irrational exuberance” foretelling the eventual collapse of the dot-com bubble.

But even if he was expected to be so by the Presidents he served, he’s not superman. He missed a call, and explained to Congress in Oct 2008 “that we’re not smart enough as people. We just cannot see events that far in advance.”

He’s right, and while I would have suggested some humility about his power while he was in office, I respect that he realized that he doesn’t know everything.

So I was a bit surprised to find out today that he’s got an op-ed in the Wall Street Journal about something he seems very sure of: it wasn’t his fault.

The Mises Guys Don't Believe You

The Mises Guys Don't Believe You

There are at least two broad and competing explanations of the origins of this crisis. The first is that the “easy money” policies of the Federal Reserve produced the U.S. housing bubble that is at the core of today’s financial mess.

The second, and far more credible, explanation agrees that it was indeed lower interest rates that spawned the speculative euphoria. However, the interest rate that mattered was not the federal-funds rate, but the rate on long-term, fixed-rate mortgages. Between 2002 and 2005, home mortgage rates led U.S. home price change by 11 months. This correlation between home prices and mortgage rates was highly significant, and a far better indicator of rising home prices than the fed-funds rate.

The Federal Reserve became acutely aware of the disconnect between monetary policy and mortgage rates when the latter failed to respond as expected to the Fed tightening in mid-2004. Moreover, the data show that home mortgage rates had become gradually decoupled from monetary policy even earlier — in the wake of the emergence, beginning around the turn of this century, of a well arbitraged global market for long-term debt instruments.

To some extent, I think what he is saying is correct. There were factors in the economy holding interest rates down and leading to the liquidity glut that we experienced — and some of those factors were outside of the control of the Federal Reserve. But if there were worries about what was going on as early as the middle of 2004, why wasn’t Greenspan on television talking about “irrational exuberance” again?

There were a lot of factors leading up to this. Easy money policies by the fed were one of them. Fannie and Freddie were another. Government endorsement of corrupt ratings agencies that turned crap into AAA bonds played a big part. And the natural belief of the market to believe that the bottom will never fall and keep levering up was a big part of it. Most of those issues were either direct government intervention into the market or an enabling government factor that gave investors and lenders the confidence to overreach.

The structure of our economy incentivized leverage, and I explained a while ago how dangerous excessive leverage can be. At the scale we’ve reached globally, trying to unwind it will be very, very painful. And if anything, you would be expecting the Fed to be standing athwart the trend yelling “STOP”. It’s not like there weren’t warning signs (and doomsayers predicting this eventual end), but the Fed wasn’t paying attention. The guys responsible for it didn’t see it, and if they can’t see it, you wonder what the purpose of having them is at all. For that, I place the blame at the top, on Greenspan.

The problem, as I see it, is that we expect these supposed supermen to be perfect regulators and perfect forecasters of our economy. It’s just not possible. Hayek said it best:

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

The problem isn’t that they don’t know. The problem is that we entrust them with power as if we expect them to know.

Is Obama a Socialist?

communist-manifestoWriting that “Calling Barack Obama’s plan socialistic lacks any class,” Albor Ruiz argues that “fear mongering over a ‘class war’ and an Obama conspiracy to turn the U.S. into a ‘socialist’ country is reaching a fever pitch.”

He then cites “Tax Hike Mike” Huckabee as an example:

Huckabee, no doubt, takes the cake. “Lenin and Stalin would love this stuff,” he has said with quasi-religious fervor. “The Union of Soviet Socialist Republics may be dead, but a Union of American Socialist Republics is being born.”

First of all, citing Huckabee was a mistake, as he’s part of the problem and clearly not part of the solution.

My favored definition of socialism comes from Merriam-Webster: “ any of various economic and political theories advocating collective or governmental ownership and administration of the means of production and distribution of goods.”

This seems to describe the current administration, but there are other definitions which may or may not apply, as well.

If we are to pick an accurate word to describe Obama’s (to be fair, Bush laid the foundations which hadn’t already been established by previous administrations) designs on our children’s and even their children’s money, what should it be? If we are to better describe Obama’s move towards what Karl Marx called “a heavy progressive or graduated income tax,” how would we do it?

“Abolition of all right of inheritance?”  There is already talk of Obama toying with the Death Tax.

We may have moved from the Agrarian Age to the Information Age, but an “extension of factories and instruments of production owned by the State” seems to apply to AIG fairly well. If seventeen percent of our gross domestic spending is on health care, additional government control of this industry would certainly apply.  Control of the automobile industry clearly involves factories and instruments of production. While Obama has backed off his call for a Car Czar, the fact remains that he certainly made the attempt and likely will again if he gets the opportunity.

“Centralisation of the means of communication and transport in the hands of the State.”  Bush got a good start on transporation with the implementation of various TSA schemes and implementation of the Fairness Doctrine would move us closer to Marxism on the communications front.

While “a national bank with State capital and an exclusive monopoly,” may not precisely describe the Federal Reserve, for many intents and purposes it does.

Fannie Mae and Freddie Mac seem a major starting point for “centralisation of credit in the hands of the State.”  Purchasing shares and attaching federal strings to bank bailouts is certainly a big move in this direction.

Perhaps Mr. Ruiz is correct.  Should we be calling Obama’s attempted takeover of major portions of our economy while further redistributing the wealth socialist or Marxist?  Not that one necessarily excludes the other.

In reality, it all boils down to one simple question: Does it really matter if we call current policy socialism or a crap sandwich? It tastes the same either way.

Four Questions for Barack Obama

From CNN:

“It’s time for this waste and inefficiency to end. It’s time for a government that only invests in what works,” Obama said.

The president said the country must “turn the tide on an era of fiscal irresponsibility so that we can sustain our recovery, enhance accountability and avoid leaving our children a mountain of debt.”

Question Number One: If “it’s time for a government that only invests in what works,” why does it look like AIG may be receiving yet another “investment” of taxpayer dollars because their latest bailouts haven’t worked?

Question Number Two: If we are truly going to “turn the tide on an era of fiscal irresponsibility,” on what did we just spend $11.6 trillion of our children’s and grandchildren’s inheritance?

Question Number Three: If “it’s time for this waste and inefficiency to end,” why wasn’t it time for waste to end as late as yesterday?

Question Number Four: If we are to “avoid leaving our children a mountain of debt,” why aren’t we seeing the “change” we were promised?  The only change I see is an accelerated rate of fiscal irresponsibility which may ultimately lead to financial collapse.

It Matters How The Money Is Spent

Brad Delong wonders why we are against government “stimulus”, when “spending” produces good outcomes:

I simply do not understand their arguments that government spending cannot boost the economy. As far as I can tell, they are simply burying their heads in the sand.

At the start of 1996, the US unemployment rate was 5.6%. Then America’s businesses and investors discovered the Internet. Over the next four years, annual US spending on information technology equipment and software roared upward, from $281 billion to $446 billion, the US unemployment rate dropped from 5.6% to 4%, and the economy grew at a 4.3% real annual rate…

Back at the start of 2004, America’s banks discovered that they could borrow money cheaply from Asia… or so they thought. Over the next two years, annual US spending on residential construction roared upward, from $624 billion to $798 billion, the US unemployment rate dropped from 5.7% to 4.6%, and the economy grew at a 3.1% real annual rate.

…[Y]ou cannot argue that these groups did not increase their spending, and that their increased spending did not pull large numbers of Americans – roughly two million in each case – into productive and valued employment.

The government’s money is as good as anybody else’s. If businesses’ enthusiasm for spending on high-tech gadgetry and new homeowners’ enthusiasm for spending on three-bedroom houses can boost employment and production, then what argument can Harvey, Fama, Barro, Steil, and company make that government spending will not? I simply do not see it.

His logic is pretty simple: spend money and you’ll stimulate the economy.

In response, Bryan Caplan over at Econlog fires back with some Bastiat:

If all we’re trying to do is raise nominal GDP, then I agree that “the government’s money is as good as anybody else’s.” Unfortunately, nobody’s money is very good. To see why, we need to ask a question inspired by Bastiat: If X had not spent money on Y, what would have happened instead? We can pose this question to both the private sector and the government.

Suppose X is the private sector, and Y is the Internet. Brad seems to think that if the private sector hadn’t poured money into the Internet, that spending would simply never have existed. This doesn’t make sense to me. If the Internet boom never happened, I say that the private sector would have spent on something else, or lent it out to someone else to spend on something else.

OK, suppose X is the government, and Y is the bail-out. Again, Brad seems to think that if the government doesn’t spend Y, no one will. This doesn’t make sense to me either, and for the same reasons: The money has to come from somewhere.

This, of course, is a very important point. The money has to come from somewhere, and government spending is not “new” spending into the economy. Even if it’s newly-printed money, it only increases nominal, not real, GDP.

There’s a big question missing from Caplan’s response. I posted the below as a comment @ Econlog, and it’s best to let it speak for itself:

“There’s another question to be answered here…

Is the goal increased GDP & employment or is it a more productive economy?

I’d say that the internet boom was a productivity boom. The improvement in computing and communication technologies will have long-lasting effects in increasing the standard of living globally. Yes, there was certainly overinvestment and a boom, but after the correction the world was a changed (and more productive) place.

The real estate boom? Not so much. Yes, it boosted employment and production, but it was fake (i.e. unsustainably-leveraged) money and the long term productivity of our economy was not improved. We spent the money, and people were employed for a while, but at the end of the day we didn’t really make any big changes. Then the fake money dried up, and all those people were out of work.

So can government money improve the productivity of our economy? Maybe. If the money is spent on make-work programs, not so much. If it’s spent in the hopes of getting temporary spending increases, not so much. In short, if it’s just intended to get people buying “things” so that they put people to work, the actual gains of the spent money will not be long-term improvements to our economy.

Could government spend it on productivity improvements? Yes, but they probably won’t. So it’s better — as Bryan points out — to keep that money in private hands where it at least has SOME hope of being spent wisely.”

The goal is not simply to increase GDP and employment. Any spending can do that. The goal is to increase wealth and standard of living, and as the difference between the internet boom in the late 90’s and the recent housing boom shows, it depends how you spend the money.

Government can, quite easily, throw money at AIG to continue insane lending practices or throw money at GM to continue building gas-guzzling cars of questionable reliability. Throwing that money around will certainly ensure some people remain in their jobs. But it doesn’t actually improve the economy!

I’d rather that money stay in the private sector. That money will be withheld from GM until they demonstrate that they have a plan to learn to build cars more efficiently and satisfy their customers in a profitable way. Unless they can figure out how to do that, they don’t deserve the money and the American consumer is not getting the car they want.

Brad Delong is certainly correct that government spending can put people to work, and can even show an increase in GDP numbers — for a time. But much like GM has not proven that they can build the cars people want to buy, the United States Government has not proven that they can spend money wisely enough to be trusted with it. Government spending, like the easy credit of the housing bubble, might induce temporary employment and production. But it won’t improve our economy over the long term.

$4 Trillion

When leftists start arguing about how much laissez-faire capitalism we experienced under the Bush adminstration, I often point out that he was the first President to preside over a $2T budget, and he was also the first to propose a $3T budget (for FY’09).

I expected Obama to spend more than Bush — but I didn’t think it would be this bad:

Details on president Barack Obama’s first budget are out today, and there is no shortage of eye-popping numbers. Total budgeted spending in fiscal 2009 (which began five months ago) will reach nearly $4 trillion, or nearly 30% of American GDP. The deficit for the year is expected to be about $1.75 trillion. As budgeted, the deficit will decline to just over $1.1 trillion in fiscal 2010, and to about $500 billion by the end of Mr Obama’s first term—close to, but still above, last year’s deficit of $459 billion. The drop is less ambitious than it sounds, however; it is primarily due to a winding down of spending in Iraq and the expiration of Bush era tax cuts. It will take harder choices to move the budget toward balance.

You can play around with the numbers a bit; i.e. the 2010 budget itself is somewhere between $3.5T and $4T, but when you include $750B in “room” for a bank bailout that we “might” need — and it’s not clear whether that’s FY’09 or FY’10 — I think you can see that planned spending is likely to top that $4T mark. Likewise, in Obama’s defense, if he’s actually living up to his promise of taking the “off-budget” spending of the Bush administration and putting it on-budget, that might not be as big of an increase as it looks.

But it’s still big. It’s still a number that should scare the hell out of most Americans. It places federal government spending at roughly a third of GDP — which doesn’t include state and local spending, of course. We’re going to be nearing a point where government, all levels combined, spend half of GDP. If anyone believed we had a true free market before, I’m sure they’ll change their minds.

And his deficit reductions [of the deficits he’s creating]? Well, it’s a combination of tax hikes, reduction in Iraq spending, and an assumption of 4% GDP growth rates. I guess it’s because he’s figuring in the Keynesian multiplier effect of all his wonderful proposals, huh?

Oh, in completely unrelated news, 2008 was the biggest year on record for lobbyists — and 2009 is expected to be bigger:

So the $3.2 billion bonanza for lobbyists in 2008 was just a precursor of the lollapalooza to come. Within three weeks of Obama’s inauguration, the Washington Post reported that more than 90 organizations had hired lobbyists specifically to influence the stimulus bill.

Hmm, a link between ever-increasing budgets and your friendly K-Street fellows trying to influence how that money is being spent? By “most open and transparent administration in history”, is Obama just suggesting that the “Open for Business” sign will be displayed prominently in the window of the White House? I’m sure it doesn’t mean that he’s installing a “No Solicitors” sign.

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