Economy Talk

Republican talk show pundits like Sean Hannity are wrong to defend George Bush. In pursuing an inflationary, interventionist policy President Bush and Ben Bernanke have behaved like Democrats, not Republicans.

Nancy and Contrairimairi have sent me e-mails recently about the economy. I agree with any and all tax cuts, and I disagree with the idea that the current problems in the economy are due to tax cuts (or taxes at all). Contrairimairi's brother is a Democrat, and I agree with him on a few points, but the ultimate prescription is NOT that a Democrat can solve the mess that George W. Bush's and Ben Bernanke's Federal Reserve Bank has created. From a historical perspective, President Bush has exaggerated policies that the Democrats established. The policies should be abolished.

Nor do I think the current problems in the economy have anything to do with Congress. Moreover, Obama would be worse than McCain. The reason he would be worse is that he is more closely linked to Wall Street than McCain is. The uncertainty and instability that we are facing are all due to manipulation by the Federal Reserve Bank. I've blogged on this alot (also see here, here, here, here, here, and here, here).

The Fed was aggressively increasing the money supply until about five years ago, when it started encouraging foreign governments to purchase Treasury Bonds, boosting the value of the dollar. Long term the dollar is going down, but short term it has been increasing.

The inflation rate has been low because the increased money supply encouraged lower interest rates for many years that made lending easier and this stimulated commodity production. The commodity firms increased production in the 1980s and 1990s and then when prices fell they reduced production. The result was they lost alot of money and they will resist new production. In response to the reduced production, prices started increasing about four or five years ago. What should happen is inflation followed by the Fed's reducing the money supply (raising interest rates) but they have not done that because the Republicans don't want a stock market crash while in office. Reducing interest rates will reduce the stock markets. Thus, the Fed has delayed the usual stock market cycle. Also, the low interest rates stimulated bad investment in real estate and the Fed has also been subsidizing the results. The effects of all the bad investment and subsidies to Wall Street ought to be a combination of rising interest rates and inflation like in the 1970s. But the Fed has performed a trick by getting foreign governments to inflate for us. This will not last forever.

But the pain can continue for a long time as the subsidization of bad investments by increasing the money supply can continue until actual inflation starts. Then the public will deamand action and the Fed will raise rates. This may happen after the election as McCain is envisioning himself as a one term president anyway, although Palin's nomination may change that. It could be delayed for 10 years or more depending on how much strength is in the world economy to keep subsidizing the US economy.

In short, there is a considerable amount of manipulation by central banks right now and the US central bank, the Federal Reserve, has been willing to subsidize incompetent firms. This will ultimately result in inflation. I would tell you to buy hard assets, i.e., platinum, gold and silver, but the trick that the Fed is playing with the foreign central banks is currently causing a steep drop in the gold price along with an increase in the dollar. At some point in the near future, possibly when gold hits around 700 or 670, then it will be a good time to buy gold and Euros.

I disagree that the Democrats can solve these problems. The problem in our economy is due to policies that were adopted in 1932 by Franklin D. Roosevelt and in 1971 by Richard Nixon. In 1932 FDR illegalized gold ownership and took the Fed off the gold standard. An international gold standard was reinstated in 1944, I think, but in 1971 Richard M. Nixon abolished that one. The cause of the Fed's unlmited power to create money was a three step process. Wilson, a Democrat, founded the Fed in 1913. Roosevelt, a Democrat, abolished the gold standard in 1932. Nixon, a Republican, abolished the international gold standard in 1971. The Democrats have never advocated reinstatment of a gold standard or a monetary rule, which was what Milton Friedman advocated. The end result has been the kind of policies we see today. They are the result of:

1. Partnership between government and business, a long standing policy that the Democrats have advocated
2. Abolition of the gold standard, a long standing Democratic Party policy
3. Keynesian economics, a long standing economic theory advocated by the Democratic Party.

The Republicans have copied the Democrats on this. Blaming the imitators in favor of the originators will not solve the problem. Nor is regulation or deregulation of FNMA relevant. The Democrats show that they do not grasp/do not want to solve the underlying problem by blaming speculators for inflation and bringing up irrelevant topics such as regulation and the income tax when the real problem is monetary policy and unlimited Federal Reserve power to create money. This is the Democrats' policy that the Republicans have adopted. It is decidedly pro-Wall Street, and Wall Street has chiefly contributed to Obama, not McCain.

Contraririmairi writes:

>I will assume you received the "just 2 years" e-mail from Nancy. I sent it off to my brother. He and I had just had a VERY lengthy discussion on many of these issues two nights before. He did, however, take the time to pick the e-mail apart, and I thought you would be interested in his response.

Contrairimairi's brother writes:

The "intertia" of the US economy averages about 5 years (despite this, Congress refuses to go onto 5 year budget cycles and corporations are even worse, with quarterly cycles). In other words, major changes take about 5 years before their full impact is felt.
- Regardless of program changes, the short term result is usually positive since the planning that goes into making such changes is usually focused no further than 12 months in advance, due in large part to a very broken Federal budgeting system and ZERO accountability.
- Due to deficit spending - a situation that occurs when taxes are too low to support the programs that greedy people demands (and compounded with graft and kickbacks to crooked politicians and their lobbyist buddies) - the government has been printing money without substantial basis in GDP valuation, resulting in inflation and radical drop in the value of the dollar - which leads to higher prices, greater control over our country by (hostile) foreign interests willing to cash in on our stupidity, and those two factors in turn lead to massive financial pressure on people - many of whom were not financially prepared for home ownership but were funded in the Fannie/Freddie Ponzi scheme.
- These cost pressures and devaluations/inflation are undeniably tied to Republican actions to cut taxes, mainly on the rich, in hopes the proven-broken "trickle" down theory will continue to hold. Corporations, having no conscience, see no advantage in attempting to radically expand in a stagnant market, while others - like oil companies - benefit from the price increases caused by a weak dollar, fabricated shortages and crooked futures dealers. The result? Higher profits - for a while - followed by sharp cutbacks, which increases unemployment and forces even more jobs offshore, leading to an increase in unemployment and a further drop in the value of the dollar. This situation is called "positive feedback" - the exact same mechanism that results in those painful speaker-system squeals during church or public events when somebody doesn't take proper care to make sure inputs and outputs are balanced. Works for money too.
- Privatization of Fannie Mae and Freddie Mac (and other government agencies) could result in one of the largest "dumps" ever on individuals, as we (as taxpayers) have to bail out the greedy, corrupt, and inept "management"...
And just to be clear - if Obama gets elected tomorrow NOTHING will change.
- Ask yourself: if taxes were cut to ZERO, how would the bills get paid? Yet the current path is to reduce taxes to ZERO for the rich (i.e., eliminating the Corporate Gains tax, the Estate Tax, etc.). Guess who gets to make up the difference, shoulder the load, and bail out the crooks?"

Nancy writes:

In just two years ..... Remember the election in 2006?
Thought you might like to read the following ~

A little over one year ago:

1) Consumer confidence stood at a 2 1/2 year high;
2) Regular gasoline sold for $2.19 a gallon;
3) The unemployment rate was 4.5%.

Since voting in a Democratic Congress in 2006 we have seen:

1) Consumer confidence plummet;
2) The cost of regular gasoline soar to over $3.50 a gallon;
3) Unemployment is up to 5% (a 10% increase);
4) American households have seen $2.3 trillion in equity value evaporate (stock and mutual fund losses);
5) Americans have seen their home equity drop by $1.2 trillion dollars;
6) 1% of American homes are in foreclosure.

America voted for change in 2006, and we got it!

Remember it's Congress that makes law not the President. He has to work with what's handed to him.