The American Economy and Premium Dog Food

Scanning the September 10, 2007 New York Sun, New York's best newspaper, I notice several articles about international affairs and several about the economy. Of the articles about the economy, one is reluctantly bearish while the others argue on behalf of "accomodative" Fed policy, i.e., reduction of interest rates, expansion of the money supply and (although the pieces do not mention it) subsequent inflation.

Dan Dorfman's bearish article on the front page notes that Oppenheimer and Company's Michael Metz has forecast a 1,600 point drop in the Dow because there is a "90%" chance of "a long-term recession". Dorfman quotes Metz as citing reasons like declining consumer spending, withdrawals of money from hedge funds, and reduced analyst estimates, all of which result from insufficient market response to Fed Chairman Bernanke's interest rate cuts a couple of weeks ago. The article does not mention whether Mr. Metz would favor additional interest rate cuts.

Of course, inflation already moves full speed ahead. I noticed that a half gallon of organic milk in a Manhttan grocery store was $5.95 the other day, twenty percent more than a couple of years ago. As Howard S. Katz has pointed out, Wall Street's selfish fixation on low interest rates, an important source of income inequality, leads to a reallocation from the poor to the rich. The poor devote most of their income to consumption and so are worst hurt by inflation, while the rich are the largest beneficiaries of the increasing stock markets that result from reduced interest rates. Not surprisingly, the Ivy League economists who claim to oppose income inequality and whose graduates dominate Wall Street mostly oppose increasing interest rates and steadying the money supply. Over a multi-decade period money supply increases lead to inflation, and dog food consumption among the poor and elderly. Like Howard S. Katz, Metz recommends gold stocks.

More openly arguing in favor of the elderly's eating dog food, although not explicitly stating that he favors welfare subsidies for multi-millionaires extracted by government fiat from the poor via the Fed, on page 11 Lawrence Kudlow argues that "you don't have credit blowups, liquidity freezes, dysfunctional commercial paper markets, suspect bank loan quality...when bank policies are easy and accomodative".

Mr. Kudlow is concerned that higher interest rates lead to lack of financial confidence, fewer jobs and less "economic growth". There is naturally a trade-off in the short run (but not the long run) between employment and inflation. That is because the monetary depreciation that Mr. Kudlow, Wall Street and the Keynesian liberals advocate encourage unproductive businesses that would not exist in a market system. For instance, developers sell large, environmentally unfriendly houses in part because low interest rates subsidize their true cost. Expensive Manhattan restaurants flourish when Wall Streeters take home $750,000 salaries and can afford to eat weeknight dinners out at $300 for two. Tighter interest rates mean that the Palm, the 21 Club and the Homestead Steak House will not be as crowded. Mr. Kudlow's Keynesian policies would subsidize inefficient businesses that do not produce value, relying instead on government welfare policies that take wealth from the poor and elderly to subsidize investors. Short-term declines in payrolls are not a bad thing when subsidies to incompetent corporate gamesmen who do not create value are ended, and I feel much less sorry for them than I felt for the those taken off welfare during the 1990s welfare reforms. Kudlow's plan is to stem slight decreases in payroll and potential layoffs by inefficient businesses (inefficient because they do not generate enough profit to cover slight increases in interest rates) by printing more money, causing more inflation, and reducing interest rates from 5.25% to 4%. Mr. Kudlow is the best friend the dog food industry ever had, and I am certain to invest in Nestle, the owner of Purina and Alpo, if Mr. Kudlow's policy prescriptions are adopted, since lots of old people will be eating it while Mr. Kudlow enjoys his favorite Manhattan watering hole.