According to Kitco, Jim Cramer has predicted a 15% increase in the price of gold. I last bought a physical ounce of gold in the fall of 2018, when the price dipped to $1,165. It is currently above $1300. I don't know where the price will go. Jim Rogers believes that it will fall back to $900, where it was in 2008. I'm still a buyer at $1300, but not much above. I had bought some gold investments in the 1300s a year or two ago, and some are still in the red, but the inflection point seems to be approaching.
I once ran into Jim Cramer on the New York City subway. There was this dapper guy standing in front of me while I was half napping, and I kept thinking that he looked familiar. I finally roused myself out of my torpor and asked him, "Do you work at Brooklyn College?" He replied in a whisper, "Television Show."
I like his show, but I don't watch TV often. I see Cramer as a voice of Wall Street. Hence, when Kitco quotes Cramer as follows, there is reason to think that a bull market in gold is near:
Don’t listen to the Fed watchers who claim that Powell caved to the stock market or the president...The only thing Powell caved to is reality … This is about the economy — who doesn’t want a healthy economy? If Powell had stuck to his plan for a series of lockstep rate hikes, it would’ve been a lot more devastation to Main Street than to Wall Street.
It pays to read between the lines when listening to Wall Streeters talk about the Fed. If they ever told the truth, there would be a revolution. What Cramer is saying is that short-term economic contingencies are making long-term dollar declines necessary. That means that gold will rise. The $1500 price target is a short-term prediction based on Cramer's intuition or inside information. The ultimate price of gold in our lifetimes is likely to be much higher. That's because of massive indebtedness.
My late friend Howard S. Katz used to talk about a commodity pendulum, whereby monetary expansion causes low-interest-rate borrowing by miners, who overexpand. That crushes commodity prices in the short run. In the long run the miners go bankrupt because of the competition from the overexpansion, and the declining supply leads to sharp price increases.
My guess is that there will be a short-term bubble, perhaps to $1500 as Cramer says, then a downturn, perhaps as far back as the 1100s, but not necessarily. This will punish short-term buyers, making it easier for insiders to buy at a cheaper price. Eventually, we will be seeing much higher prices in gold. It is debatable whether an ultimate dollar collapse will lead to a new gold standard. If it does, we could see $10,000 gold, so my 2010 prediction of $3,500 may have been too low.
Showing posts with label gold standard. Show all posts
Showing posts with label gold standard. Show all posts
Thursday, January 31, 2019
Sunday, August 24, 2014
I'm Betting on a Rising Stock Market
The belief that the stock market will go up forever is a bubble psychology that goes back to the South Sea Bubble, which fooled even Sir Isaac Newton. Since 2009, and especially since President Obama's reelection in 2012, the stock market has been going at a tear. The tear will continue. The editorial page of the New York Times proves it. The Times wrote this yesterday:
On one side is a small yet vocal minority of Fed officials
who want to head off inflation by raising rates sooner rather than later. On
the other is a majority that thinks a near-term rate hike would stifle growth
and, with it, any chance of restoring health to the labor market. That group
includes Janet Yellen, the Fed’s chairwoman, and most members of the Fed’s
policy committee…The economic evidence indisputably favors Ms. Yellen, who has
indicated that rate increases should not begin until sometime next year, at the
earliest. It will take until then to be able to say with confidence whether
recent improvements in growth and hiring are sustainable.
The reason that the Times's editorial is important is that the nation's hierarchy of decision making with respect to interest rate policy is as follows:
Investment banker cronies--> Ochs Sulzberger family-->The New York Times--> public opinion among Democrats --> President Obama's opinon --> Janet Yellen's opinion --> Federal Open Market Committee decision
If a Republican were in office, the Wall Street Journal would play the equivalent role.
Rates will be lower, or will increase less, than stock market participants expect because the Democrats have a commitment to boosting the stock market. The Times goes on to make the curious claim that keeping interest rates low will improve real wages; that real wages have declined while interest rates have been kept at historically low levels for the past 43 years does not deter them. Recall the old saying about insanity.
Seeking Alpha says that George Soros is currently hedging the S&P 500. I'm sure that there is a logical or statistical basis for his tactic because all evidence says that the stock market is high now. The support of the Fed will continue to keep the market at high levels into next year, though. I'm not buying the S&P short ETF, SH, just yet. However, I have about 1% of my portfolio in the VIXX index and an interest rate short index, both of which have declined and are near all-time lows. The VIXX index measures market volatility, and it goes up when the stock market goes down. It is at all-times low, which is an indicator that the stock market will go down.
From a policy standpoint the New York Sun's Seth Lipsky continues to offer a still, small voice of financial sanity among the Sodom and Gomorrah of the American media. Sadly, Paul Krugman will have to turn into a pillar of salt before any change in America's addiction to print-and-spend economics ends.
For now, I'm buying a little more Chicago Bridge and Iron (CBI). It's gone up a few percent since Buffett bought a second set of shares; according to Seeking Alpha several other hedge funds are piling in. The sharp decline due to rumors about improper accounting and the firm's president's illness seems to have offered Buffett and other hedge funds a buying opportunity; including pension fund holdings, Berkshire may own 25%.
Monday, April 8, 2013
Clive Crook's Groupthink
I stayed in my apartment in Astoria, Queens last night because of a dental appointment this afternoon. Because I keep basic cable there, I watched the mainstream Bloomberg news channel. Luckily, David Stockman was on.
Stockman has written an interesting book, The Great Deformation, in which he predicts a collapse of the dollar and advocates a gold standard. Stockman's prescription is contrary to the preferences of Wall Street, Bloomberg LP, big businessmen, and bankers. However, it is not outlandish. Without Stockman's insider knowledge of the Reagan administration, I advocate the same ideas; I am delighted to see him on mainstream television.
The program involved former Reagan official Stockman debating Bloomberg's Clive Crook, a good-looking journalist with an English accent. Crook says that he likes some of Stockman's analysis, but he longs for "the old David Stockman" who was mainstream and did not advocate outlandish ideas like dissolution of the federal government and a gold standard. Crook was dismissive and insulting; his argument was ad hominem and unsubstantial. Instead of saying why he thinks that a gold standard won't work, Crook claimed that by advocating a gold standard Stockman placed himself outside the mainstream.
Most good ideas are rejected at first. Nikoa Tesla was told that AC electricity was a perpetual motion scheme; talking pictures were thought to be a fad, as was television. Who cares if the US establishment, which has created the current dismal social-and-economic situation, finds Stockman's ideas to be outlandish? Their failed ideas have destroyed America's progress.
Anyone who has studied group dynamics knows that Crook's tactics are characteristic of groupthink. All groups depend on conformity. Although the pro-Fed establishment is not a small group in the same sense as the jury in Twelve Angry Men, it is a group with norms. The historical record of the current financial system has been poor all along. The Fed caused the Great Depression; it caused the 1970s Stagflation, and Stockman is right: It has gotten worse since Alan Greenspan's appointment during the Reagan years.
Because the in-group faces a great loss if it loses the Fed or sees restrictions placed on its ability to print money for itself, it needs to defend the status quo. Rather than defend the indefensible, Crook applies power-and-influence tactics aimed at silencing Stockman.
In a sense, Crook is right: Stockman's ideas are irrelevant to the current group in power. This includes both Democrats and Republicans. When the Fed was established in 1913, the founders did not anticipate abolition of the gold standard. An argument for abolition of the gold standard would have seemed irrelevant to Woodrow Wilson, who had been a gold Democrat (he did not vote for William Jennings Bryan in 1896). Twenty years later FDR abolished the gold standard. The reverse can occur today.
Stockman has written an interesting book, The Great Deformation, in which he predicts a collapse of the dollar and advocates a gold standard. Stockman's prescription is contrary to the preferences of Wall Street, Bloomberg LP, big businessmen, and bankers. However, it is not outlandish. Without Stockman's insider knowledge of the Reagan administration, I advocate the same ideas; I am delighted to see him on mainstream television.
The program involved former Reagan official Stockman debating Bloomberg's Clive Crook, a good-looking journalist with an English accent. Crook says that he likes some of Stockman's analysis, but he longs for "the old David Stockman" who was mainstream and did not advocate outlandish ideas like dissolution of the federal government and a gold standard. Crook was dismissive and insulting; his argument was ad hominem and unsubstantial. Instead of saying why he thinks that a gold standard won't work, Crook claimed that by advocating a gold standard Stockman placed himself outside the mainstream.
Most good ideas are rejected at first. Nikoa Tesla was told that AC electricity was a perpetual motion scheme; talking pictures were thought to be a fad, as was television. Who cares if the US establishment, which has created the current dismal social-and-economic situation, finds Stockman's ideas to be outlandish? Their failed ideas have destroyed America's progress.
Anyone who has studied group dynamics knows that Crook's tactics are characteristic of groupthink. All groups depend on conformity. Although the pro-Fed establishment is not a small group in the same sense as the jury in Twelve Angry Men, it is a group with norms. The historical record of the current financial system has been poor all along. The Fed caused the Great Depression; it caused the 1970s Stagflation, and Stockman is right: It has gotten worse since Alan Greenspan's appointment during the Reagan years.
Because the in-group faces a great loss if it loses the Fed or sees restrictions placed on its ability to print money for itself, it needs to defend the status quo. Rather than defend the indefensible, Crook applies power-and-influence tactics aimed at silencing Stockman.
In a sense, Crook is right: Stockman's ideas are irrelevant to the current group in power. This includes both Democrats and Republicans. When the Fed was established in 1913, the founders did not anticipate abolition of the gold standard. An argument for abolition of the gold standard would have seemed irrelevant to Woodrow Wilson, who had been a gold Democrat (he did not vote for William Jennings Bryan in 1896). Twenty years later FDR abolished the gold standard. The reverse can occur today.
Saturday, June 19, 2010
Gold Hits Record High
The Street.com reports that gold hit a record high (in nominal dollars) at $1258.30 per ounce. I view this as a speculative market driven by fear of global monetary collapse and short term investors. I doubled my gold holding on the hunch that the bubble will continue for at least a few weeks although the market could collapse at any time. Nevertheless, "expert" gold investors on Kitco often quote an old saying "sell in May and go away" until the fall. But here it is mid-June and the gold market is breaking new highs. This seems to be a very strong bull market.
As I noted a few days ago, other commodities are not bubbling like gold. Silver has its advocates and it went up more than two percent today, but it is not moving as fast as gold. Nor is there inflation. According to the Bureau of Labor Statistics there was 0.2% deflation in May although prices increased 2.0 percent year over year. These numbers are likely understated as the CPI statistics are biased against inflation to minimize social security increases.
There is reason to fear monetary collapse. The debt that the US government is issuing will need to be repaid. If interest rates rise, then the repayments will become burdensome. That will put pressure on the Fed to continue inflating. If it does, foreign bond holders may sell, which would stimulate further inflation.
Modest commodity price increases in other areas suggest that other commodities may be better long term holdings than gold. The DBA, DBC and SLV, agricultural, commodity and silver indexes, may be less speculative and require less buying and selling. El Dorado Gold, which I sold at about 17 is now at 18 and going strong.
I don't invest more in gold than I can afford to lose half in the short term. In the long term gold will likely go up. It does not seem that the centralized money supply is a system that will last. Throughout history monetary collapse has been accompanied by inflation. Another alternative would be the bankruptcy of the federal government.
Americans should fear any impetus toward global centralization of the money supply. Much as the Greek economy has dogged Germany do we really want to deal with Venezuela's economic problems, as bad as America's are?
Bill Gates and Depopulation
On a tangentially related front, there is a video circulating that has Bill Gates saying that he would like to depopulate the world. Gates holds that vaccines will cause lower population. "If you reduce childhood deaths population growth goes down." However, the fixation on population control is like marijuana (so they say)--it leads to stronger stuff. When the vaccines are distributed, then restrictions on human reproduction are sure to follow. The video below argues that vaccines are not enough to reduce infant mortality in the Third World. Undrinkable water, for example, causes a large share of deaths. So why use vaccines to reduce population? And if vaccines fail to reduce population, what do Bill Gates and the UN next have up their sleeve?
The depopulation issue seems to be related to the monetary issue. Just as government mismanagement leads the greedy government officials to call for more power, so the mismanagement of public health leads to ever greater calls for repression by health officials. Both lead to increasing centralization.
As I noted a few days ago, other commodities are not bubbling like gold. Silver has its advocates and it went up more than two percent today, but it is not moving as fast as gold. Nor is there inflation. According to the Bureau of Labor Statistics there was 0.2% deflation in May although prices increased 2.0 percent year over year. These numbers are likely understated as the CPI statistics are biased against inflation to minimize social security increases.
There is reason to fear monetary collapse. The debt that the US government is issuing will need to be repaid. If interest rates rise, then the repayments will become burdensome. That will put pressure on the Fed to continue inflating. If it does, foreign bond holders may sell, which would stimulate further inflation.
Modest commodity price increases in other areas suggest that other commodities may be better long term holdings than gold. The DBA, DBC and SLV, agricultural, commodity and silver indexes, may be less speculative and require less buying and selling. El Dorado Gold, which I sold at about 17 is now at 18 and going strong.
I don't invest more in gold than I can afford to lose half in the short term. In the long term gold will likely go up. It does not seem that the centralized money supply is a system that will last. Throughout history monetary collapse has been accompanied by inflation. Another alternative would be the bankruptcy of the federal government.
Americans should fear any impetus toward global centralization of the money supply. Much as the Greek economy has dogged Germany do we really want to deal with Venezuela's economic problems, as bad as America's are?
Bill Gates and Depopulation
On a tangentially related front, there is a video circulating that has Bill Gates saying that he would like to depopulate the world. Gates holds that vaccines will cause lower population. "If you reduce childhood deaths population growth goes down." However, the fixation on population control is like marijuana (so they say)--it leads to stronger stuff. When the vaccines are distributed, then restrictions on human reproduction are sure to follow. The video below argues that vaccines are not enough to reduce infant mortality in the Third World. Undrinkable water, for example, causes a large share of deaths. So why use vaccines to reduce population? And if vaccines fail to reduce population, what do Bill Gates and the UN next have up their sleeve?
The depopulation issue seems to be related to the monetary issue. Just as government mismanagement leads the greedy government officials to call for more power, so the mismanagement of public health leads to ever greater calls for repression by health officials. Both lead to increasing centralization.
Sunday, May 16, 2010
Tax Increase or Gold Standard?
The Midas Letter (h/t Kitco) predicts that there will a bi-partisan consensus as to a massive tax increase following the midterm election this fall. This will harm the United States economy. Midas writes:
"Washington's elites are quietly preparing a post-election fiscal compromise that will fund much of President Barack Obama's domestic spending agenda with huge tax increases. They aim to create a value-added tax and will argue that there is no alternative even though doing so will leave the United States resembling the stagnant, bureaucratic nations of Western Europe."
This is only a prediction, of course, but would this scenario differ much from the history of the past 40 years? Ever since Richard M. Nixon abolished the gold standard and Ronald Reagan adopted Keynesian monetary expansion, both New-Deal policies, the Republicans have largely adopted a strategy of "Democratic Party light." Under Reagan the GOP held the line on domestic spending as a percentage of real gdp but did not begin to reduce total government spending until the end of the Cold War, following Reagan's departure. Thereafter, there was a small drop in total federal spending, which remained in the 16-18% of real gdp range until the end of the Bush II administration. In 2009, the Democrats once again proved to be the leaders in government bloat and expanded real spending by more than ten percent, to 20% of real gdp. President Obama should be renamed the Emperor of Bloat.
The 20% expansion of government spending as a percentage of real gdp directly followed the largest expansion of monetary reserves in living memory in 2008. Perhaps the expansion of the Continental during the Revolutionary War was comparable to the expansion of the monetary base two years ago. Obama then increased real domestic spending, in part through a painfully nonsensical "stimulus" plan. Although the Democratic Party's media has downplayed this, as of this month the unemployment rate is higher than it was last year on a non-seasonally adjusted basis. In other words, government has expanded, it has failed to reduce unemployment, and now new investment will be crowded out if the spending increases are validated through tax increases next year.
If the GOP goes along with any sort of tax increase now, and does not demand sharp spending reductions, it does not warrant any further support. A third party will be needed. Hopefully, this scenario will not play out. If the GOP stops further increases in government and proves that it aims to reduce government, it can redeem itself. But any sort of bi-partisanship with the pigs in the Democratic Party ought to spell the end of the GOP. A replacement party will be needed just as the GOP replaced the Whigs in the 1850s.
The Midas Letter suggests an alternative to a tax increase:
"The U.S. could return to a gold standard, a system that would not only prevent the government from running chronic budget deficits but would also curb attempts to manipulate the value of the dollar for political reasons... The first step...is an American commitment to a dollar convertible to gold on a date certain. The second step is allowing the market, in the run-up to that date, to find and fix a dollar price of gold that would encourage other nations to replace dollar reserves with gold holdings as their new monetary base, whether or not they choose initially to join the new international gold standard...Legislation restoring dollar-gold convertibility should be accompanied by passage of a constitutional amendment guaranteeing the American people a right to conduct their economic affairs in gold, regardless of the future status of gold as the official money of the United States."
Which would you prefer--a massive tax increase, or a return to the gold standard? Write your Congressman, even if they're as incompetent and corrupt as mine.
"Washington's elites are quietly preparing a post-election fiscal compromise that will fund much of President Barack Obama's domestic spending agenda with huge tax increases. They aim to create a value-added tax and will argue that there is no alternative even though doing so will leave the United States resembling the stagnant, bureaucratic nations of Western Europe."
This is only a prediction, of course, but would this scenario differ much from the history of the past 40 years? Ever since Richard M. Nixon abolished the gold standard and Ronald Reagan adopted Keynesian monetary expansion, both New-Deal policies, the Republicans have largely adopted a strategy of "Democratic Party light." Under Reagan the GOP held the line on domestic spending as a percentage of real gdp but did not begin to reduce total government spending until the end of the Cold War, following Reagan's departure. Thereafter, there was a small drop in total federal spending, which remained in the 16-18% of real gdp range until the end of the Bush II administration. In 2009, the Democrats once again proved to be the leaders in government bloat and expanded real spending by more than ten percent, to 20% of real gdp. President Obama should be renamed the Emperor of Bloat.
The 20% expansion of government spending as a percentage of real gdp directly followed the largest expansion of monetary reserves in living memory in 2008. Perhaps the expansion of the Continental during the Revolutionary War was comparable to the expansion of the monetary base two years ago. Obama then increased real domestic spending, in part through a painfully nonsensical "stimulus" plan. Although the Democratic Party's media has downplayed this, as of this month the unemployment rate is higher than it was last year on a non-seasonally adjusted basis. In other words, government has expanded, it has failed to reduce unemployment, and now new investment will be crowded out if the spending increases are validated through tax increases next year.
If the GOP goes along with any sort of tax increase now, and does not demand sharp spending reductions, it does not warrant any further support. A third party will be needed. Hopefully, this scenario will not play out. If the GOP stops further increases in government and proves that it aims to reduce government, it can redeem itself. But any sort of bi-partisanship with the pigs in the Democratic Party ought to spell the end of the GOP. A replacement party will be needed just as the GOP replaced the Whigs in the 1850s.
The Midas Letter suggests an alternative to a tax increase:
"The U.S. could return to a gold standard, a system that would not only prevent the government from running chronic budget deficits but would also curb attempts to manipulate the value of the dollar for political reasons... The first step...is an American commitment to a dollar convertible to gold on a date certain. The second step is allowing the market, in the run-up to that date, to find and fix a dollar price of gold that would encourage other nations to replace dollar reserves with gold holdings as their new monetary base, whether or not they choose initially to join the new international gold standard...Legislation restoring dollar-gold convertibility should be accompanied by passage of a constitutional amendment guaranteeing the American people a right to conduct their economic affairs in gold, regardless of the future status of gold as the official money of the United States."
Which would you prefer--a massive tax increase, or a return to the gold standard? Write your Congressman, even if they're as incompetent and corrupt as mine.
Thursday, February 12, 2009
An Open Letter to Hu Jintao, General Secretary of the Chinese Communist Party
Dear Mr Hu:
If the Chinese adopt a systematic laissez-faire economic policy and a hard money, gold standard, then they will have the world's leading economy within 150 years. By the year 2250, the Chinese could regain its position as the world's wealthiest nation that it held until the 17th century and also outstrip the western nations with respect to technology.
The Chinese have made two crucial errors in their attempt to westernize their economy. (1) You have assumed that Wall Street and the American financial system is responsible for America's economic success. That is an error. Wall Street has been of at most secondary importance and may have served to reduce economic progress over the past century. (2) As a corollary to (1), you have decided to focus on exports to the US and to adopt a financial system that parallels America's. Although exports are useful and free trade is wise, it is wiser to allow the Chinese people to determine ways to satisfy Chinese markets. In part because of China's size, China cannot duplicate Japan's and Korea's export-led growth strategy. By focusing on exports, China has chosen a less stable and less productive path than would a free market or spontaneous approach.
One fallacy of America's economic policy is the idea that unconstrained flexibility in currency expansion can lead to better outcomes than a hard money (gold-based) system. Businesses are like children. They want ever more candy. But if you give them too much candy, it hurts their teeth. That is why today's American businesses from General Motors to Wall Street lack teeth. They have eaten too much candy.
For the past 110 years, America has lived off the innovation and growth of the 19th century. The reason is that America left the gold standard in 1933. The gold standard has the effect of stimulating innovation. Because of currency deflation, firms scramble to innovate. Workers enjoy rising real wages under deflation, and as a result can save and so do not suffer excessively during depressions. Depressions can be limited by insisting that banks do not lend excessively, by ending fractional reserve banking, and by requiring specie (gold) reserves.
American bankers and corporations have insisted that a "flexible" currency helps them. At the same time, they have engaged in double talk claiming that monetary expansion helps the poor. However, China is now seeing first hand the duplicity inherent in these claims. You are holding more than one trillion dollars in potentially worthless greenbacks and the losses due to America's reckless monetary expansion will cause harm to the Chinese people.
I urge you to familiarize yourself with the history of America's sixth president, Andrew Jackson, who abolished America's second central bank in 1836. The explosive economic growth that followed, despite a short term inflation and recession that followed, state-level paper money and the Civil War inflation, is testimony to the power of monetary responsibility.
America's economic success was due to laissez-faire. Even Marx does not claim that socialism is possible until laissez-faire has run its course. Should China adopt a laissez-faire policy and gold standard, I myself would be interested in living there.
Sincerely,
Mitchell Langbert, Ph.D.
If the Chinese adopt a systematic laissez-faire economic policy and a hard money, gold standard, then they will have the world's leading economy within 150 years. By the year 2250, the Chinese could regain its position as the world's wealthiest nation that it held until the 17th century and also outstrip the western nations with respect to technology.
The Chinese have made two crucial errors in their attempt to westernize their economy. (1) You have assumed that Wall Street and the American financial system is responsible for America's economic success. That is an error. Wall Street has been of at most secondary importance and may have served to reduce economic progress over the past century. (2) As a corollary to (1), you have decided to focus on exports to the US and to adopt a financial system that parallels America's. Although exports are useful and free trade is wise, it is wiser to allow the Chinese people to determine ways to satisfy Chinese markets. In part because of China's size, China cannot duplicate Japan's and Korea's export-led growth strategy. By focusing on exports, China has chosen a less stable and less productive path than would a free market or spontaneous approach.
One fallacy of America's economic policy is the idea that unconstrained flexibility in currency expansion can lead to better outcomes than a hard money (gold-based) system. Businesses are like children. They want ever more candy. But if you give them too much candy, it hurts their teeth. That is why today's American businesses from General Motors to Wall Street lack teeth. They have eaten too much candy.
For the past 110 years, America has lived off the innovation and growth of the 19th century. The reason is that America left the gold standard in 1933. The gold standard has the effect of stimulating innovation. Because of currency deflation, firms scramble to innovate. Workers enjoy rising real wages under deflation, and as a result can save and so do not suffer excessively during depressions. Depressions can be limited by insisting that banks do not lend excessively, by ending fractional reserve banking, and by requiring specie (gold) reserves.
American bankers and corporations have insisted that a "flexible" currency helps them. At the same time, they have engaged in double talk claiming that monetary expansion helps the poor. However, China is now seeing first hand the duplicity inherent in these claims. You are holding more than one trillion dollars in potentially worthless greenbacks and the losses due to America's reckless monetary expansion will cause harm to the Chinese people.
I urge you to familiarize yourself with the history of America's sixth president, Andrew Jackson, who abolished America's second central bank in 1836. The explosive economic growth that followed, despite a short term inflation and recession that followed, state-level paper money and the Civil War inflation, is testimony to the power of monetary responsibility.
America's economic success was due to laissez-faire. Even Marx does not claim that socialism is possible until laissez-faire has run its course. Should China adopt a laissez-faire policy and gold standard, I myself would be interested in living there.
Sincerely,
Mitchell Langbert, Ph.D.
Monday, February 9, 2009
President Andrew Jackson on the Current Economic "Crisis"
President Andrew Jackson vetoed the Congressional bill renewing the charter of the Second Bank of the United States and then moved the federal government's assets out of the bank, fearing that the BUS would have otherwise bribed Congress to override his veto. The following considerations in President Jackson's 1837 farewell address are peculiarly relevant to the incompetent policies of today's Federal Reserve Bank and its responsibility for the current banking problems:
"The paper system being founded on public confidence and having of itself no intrinsic value, it is liable to great and sudden fluctuations, thereby rendering property insecure and the wages of labor unsteady and uncertain...In times of prosperity, when confidence is high...[the banks] extend their issues of paper beyond the bounds of discretion and the reasonable demands of business; and when...public confidence is at length shaken, then a reaction takes place, and they immediately withdraw the credits they have given, suddenly curtail their issues, and produce an unexpected and ruinous contraction of the circulating medium, which is felt by the whole community. The banks by this means save themselves, and the mischievous consequences of their imprudence or cupidity are visited upon the public. Nor does the evil stop here. These ebbs and flows in the currency and these indiscreet extensions of credit naturally engender a spirit of speculation injurious to the habits and character of the people...It is not by encouraging this spirit that we shall best preserve public virtue and promote the true interests of our country; but if your currency continues as exclusively paper as it now is, it will foster this eager desire to amass wealth without labor; it will multiply the number of dependents on bank accommodations and bank favors; the temptation to obtain money at any sacrifice will become stronger and stronger, and inevitably lead to corruption, which will find its way into your public councils and destroy at no distant day the purity of your Government. Some of the evils which arise from this system of paper press with peculiar hardship upon the class of society least able to bear it...It is the duty of every government so to regulate its currency as to protect this numerous class, as far as practicable, from the impositions of avarice and fraud...Yet it is evident that their interests can not be effectually protected unless silver and gold are restored to circulation...
"The distress and sufferings inflicted on the people by the bank are some of the fruits of that system of policy which is continually striving to enlarge the authority of the Federal Government beyond the limits fixed by the Constitution. The powers enumerated in that instrument do not confer on Congress the right to establish such a corporation as the Bank of the United States, and the evil consequences which followed may warn us of the danger of departing from the true rule of construction...Let us abide by the Constitution as it is written, or amend it in the constitutional mode if it is found to be defective."
---President Andrew Jackson, Farewell Address, 1837. Quoted in Harry L. Watson, Andrew Jackson vs. Henry Clay: Democracy and Development in Antebellum America. Boston: Bedford St. Martin, 1998, pp. 246.
"The paper system being founded on public confidence and having of itself no intrinsic value, it is liable to great and sudden fluctuations, thereby rendering property insecure and the wages of labor unsteady and uncertain...In times of prosperity, when confidence is high...[the banks] extend their issues of paper beyond the bounds of discretion and the reasonable demands of business; and when...public confidence is at length shaken, then a reaction takes place, and they immediately withdraw the credits they have given, suddenly curtail their issues, and produce an unexpected and ruinous contraction of the circulating medium, which is felt by the whole community. The banks by this means save themselves, and the mischievous consequences of their imprudence or cupidity are visited upon the public. Nor does the evil stop here. These ebbs and flows in the currency and these indiscreet extensions of credit naturally engender a spirit of speculation injurious to the habits and character of the people...It is not by encouraging this spirit that we shall best preserve public virtue and promote the true interests of our country; but if your currency continues as exclusively paper as it now is, it will foster this eager desire to amass wealth without labor; it will multiply the number of dependents on bank accommodations and bank favors; the temptation to obtain money at any sacrifice will become stronger and stronger, and inevitably lead to corruption, which will find its way into your public councils and destroy at no distant day the purity of your Government. Some of the evils which arise from this system of paper press with peculiar hardship upon the class of society least able to bear it...It is the duty of every government so to regulate its currency as to protect this numerous class, as far as practicable, from the impositions of avarice and fraud...Yet it is evident that their interests can not be effectually protected unless silver and gold are restored to circulation...
"The distress and sufferings inflicted on the people by the bank are some of the fruits of that system of policy which is continually striving to enlarge the authority of the Federal Government beyond the limits fixed by the Constitution. The powers enumerated in that instrument do not confer on Congress the right to establish such a corporation as the Bank of the United States, and the evil consequences which followed may warn us of the danger of departing from the true rule of construction...Let us abide by the Constitution as it is written, or amend it in the constitutional mode if it is found to be defective."
---President Andrew Jackson, Farewell Address, 1837. Quoted in Harry L. Watson, Andrew Jackson vs. Henry Clay: Democracy and Development in Antebellum America. Boston: Bedford St. Martin, 1998, pp. 246.
Tuesday, October 14, 2008
Dollar Liberation
Llewellyn Rockwell of the Ludwig von Mises Institute has written an excellent blog on monetary reform and the gold standard.
Rockwell notes:
"It is the perfect storm: the big banks loot us through government, while the academic economists approve it as applied science.
"Moreover, there seems to be no test of whether or not what they are doing is a good thing. When the market responds negatively to a new infusion of cash, they say that it isn't enough. When the market responds positively, they take credit for fixing the problem. The state maintains the charade that it is the one infallible institution."
Llewellyn argues that the problem with a gold standard is that:
"the people charged with implementing it will invariably be the very people, advancement of whose interests has caused the current problem and have the least incentive to change the system. We've seen in the last several weeks how these people are willing to blow up the world rather than face liquidation. So the question becomes, how can we take steps toward sound money and banking without depending on the good will of the officials in charge?"
Rockwell recommends several books:
-Hans Sennholz's Money and Freedom
-George Selgin's Good Money
and the writings of Jörg Guido Hülsmann. FA von Hayek also advocated competitive currencies. Under the free market view of money:
"People should be free to use any money they can get each other to accept. More than that, people should be free to introduce new moneys based on gold or silver or any other commodity, and develop payment systems based on this, whether that means paper signifiers or digital goods. The market is capable of policing this system the same way it does retail trade."
View the whole thing here.
Rockwell notes:
"It is the perfect storm: the big banks loot us through government, while the academic economists approve it as applied science.
"Moreover, there seems to be no test of whether or not what they are doing is a good thing. When the market responds negatively to a new infusion of cash, they say that it isn't enough. When the market responds positively, they take credit for fixing the problem. The state maintains the charade that it is the one infallible institution."
Llewellyn argues that the problem with a gold standard is that:
"the people charged with implementing it will invariably be the very people, advancement of whose interests has caused the current problem and have the least incentive to change the system. We've seen in the last several weeks how these people are willing to blow up the world rather than face liquidation. So the question becomes, how can we take steps toward sound money and banking without depending on the good will of the officials in charge?"
Rockwell recommends several books:
-Hans Sennholz's Money and Freedom
-George Selgin's Good Money
and the writings of Jörg Guido Hülsmann. FA von Hayek also advocated competitive currencies. Under the free market view of money:
"People should be free to use any money they can get each other to accept. More than that, people should be free to introduce new moneys based on gold or silver or any other commodity, and develop payment systems based on this, whether that means paper signifiers or digital goods. The market is capable of policing this system the same way it does retail trade."
View the whole thing here.
Tuesday, June 10, 2008
Bernanke Discovers the Dollar
The valiant New York Sun has printed my letter in its June 10th edition and online here:
'Bernanke Discovers the Dollar'
Thank you for your editorial about the Fed's role in creating inflation ["Bernanke Discovers the Dollar," June 5, 2008].
In the late 19th century the Mugwumps, the educated New Yorkers and Bostonians who opposed the spoils system and big government, were concerned about currency depreciation and inflation that Civil War greenbacks had caused.
In particular, the Mugwumps were concerned that inflation led to the re-distribution of wealth from wage earners and those on fixed incomes to financial speculators like Jay Gould.
Ever since President Nixon jettisoned the international gold standard in 1971, Americans' average real hourly wage has declined. There has been no previous 38-year decline in the real hourly wage.
Modern economists, lacking the Mugwumps' courage, have averted their gaze from link between income inequality and monetary expansion.
But the link is obvious, and it is becoming more severe. In 1884 the Mugwumps bolted the Republican Party to vote for a Democrat, Grover Cleveland, a gold standard proponent.
Let us hope that John McCain offers greater integrity than did Cleveland's 1884 opponent, James Blaine.
MITCHELL LANGBERT
Associate Professor of Business and Economics
Brooklyn College
Brooklyn, N.Y.
'Bernanke Discovers the Dollar'
Thank you for your editorial about the Fed's role in creating inflation ["Bernanke Discovers the Dollar," June 5, 2008].
In the late 19th century the Mugwumps, the educated New Yorkers and Bostonians who opposed the spoils system and big government, were concerned about currency depreciation and inflation that Civil War greenbacks had caused.
In particular, the Mugwumps were concerned that inflation led to the re-distribution of wealth from wage earners and those on fixed incomes to financial speculators like Jay Gould.
Ever since President Nixon jettisoned the international gold standard in 1971, Americans' average real hourly wage has declined. There has been no previous 38-year decline in the real hourly wage.
Modern economists, lacking the Mugwumps' courage, have averted their gaze from link between income inequality and monetary expansion.
But the link is obvious, and it is becoming more severe. In 1884 the Mugwumps bolted the Republican Party to vote for a Democrat, Grover Cleveland, a gold standard proponent.
Let us hope that John McCain offers greater integrity than did Cleveland's 1884 opponent, James Blaine.
MITCHELL LANGBERT
Associate Professor of Business and Economics
Brooklyn College
Brooklyn, N.Y.
Wednesday, November 7, 2007
Abolish the Fed and Go on a Diet
The media continue to avoid the biggest story of the coming decade, the decline of the dollar. The economy is important to everyone, even more so than the Iraqi War. Unfortunately, the progressive movement of the early twentieth century, followed by the Roosevelt liberals of the 1930s and the postwar Keynesian consensus, have enfeebled public conversation about the money supply and about the economy. The macroeconomics taught in most universities is nonsensical but the public has been told that an understanding of it is necessary to participate in public conversation about the Federal Reserve Bank. This is not true. Fed policy is a political variable. But the result of all the obfuscation and pretension is enervated public participation and the facilitation of the financial community's excessive influence on monetary policy.
The result of the twentieth century's institutionalization of progressive propaganda is that banking, Wall Street and corporate lobbies have dominant influence over the country's monetary policy. The major news media are largely in synch with the financial lobby and echo the academic Keynesian propaganda which purposes to legitimize the Fed. The result is the absence of debate about a policy that grievously harms the public in the interest of "well ordered" credit markets and stock market price increases. Although comments that the stock market will almost always go up are common, no major observer has asked why (my friend Howard S. Katz is the sole exception, as far as I know). The reason is that monetary expansion or inflation reduces interest rates and so increases the value that investors place on future income streams (accountants and actuaries call this the present value of future earnings). This distortion of valuations of the future is a government subsidy similar to a welfare benefit. Few Americans believe in welfare but most have been duped into believing in this subsidy.
The absence of debate has crippled the nation's ability to formulate a coherent economic policy. Instead, backroom deals have been made with the public's money supply, and we are learning about them now, when it is too late. Sadly, the interests that are represented, such as Wall Street, are not overly ethical and have learned little from their experiences with Worldcom and Enron earlier in the decade. The Fed will hurt many Americans, much as it did in the 1970s. But the difference between a diet and inflation is that in a diet, the person who suffers pays for self-indulgence. In inflation, the investors, debtors and corporate interests who benefited from the monetary expansion are not the ones who will pay.
The policy that the financial lobby has devised is curious. Foreign investors have been convinced to hold dollars, keeping the value of the dollar much higher than it would be in a market that is not politically driven. In turn, there has been more consumption of gasoline, manufactured goods and other imports. No one knows the extent to which consumption has exceeded the nation's true market power, but it might be by a considerable amount. The result is that suburbs have been developed, large cars driven, obesity increased and jobs disappeared. Jobs have disappeared, contrary to the fundamental claim of Keynesian economics about the effects of inflation and monetary expansion, because the dollar is stronger than it should be so costs look higher here than in other countries. Americans, who were once a muscular, dynamic nation, have become a nation of fat slobs who do not work but rather stay at home watching television and weighing 400 pounds. (I include myself and have recently lost twenty pounds and have been working out four times per week. But that's only the beginning.)
A report that Lenny Rann sent me today that was written by a bearish financial analyst suggests that Wall Street and the commercial banks have acted dishonestly toward the foreign investors who have been bankrolling them and the general public. The last 25 years' increases in the stock market are largely due to these subsidies, so when news came out today that the Chinese are fed up with us and are intending to invest elsewhere, the Dow fell 360 points, better than two percent. Much like Americans' waist lines, the stock markets have flourished because of the something-for-nothing mindset that Wall Street capitalism has created.
America is no longer the nation of innovation; of Edison; of manufacturing; of new ideas; of hard work; of entrepreneurship. Rather, it is the country of investment banks; Jim Cramer's whining for lower interest rates; and selfish indifference to the effects of dishonest money.
America is going to have to go on a diet. Americans have been deceived by the Republicans as well as the Democrats. In past economic declines, the tendency has been to resort to interventionism. That is the likely result now. The problem is that the decline has been caused by intervention. The only way out is to become more athletic, to return to the kind of policies that made the US a leader. Those are policies that foster innovation, entrepreneurship and self-reliance. Regulation will kill American leadership, as will the Fed. This day is no longer far off. It is near. The Fed ought to be abolished and ought to be viewed as the source of all the pain that Americans will feel in the coming decades.
The result of the twentieth century's institutionalization of progressive propaganda is that banking, Wall Street and corporate lobbies have dominant influence over the country's monetary policy. The major news media are largely in synch with the financial lobby and echo the academic Keynesian propaganda which purposes to legitimize the Fed. The result is the absence of debate about a policy that grievously harms the public in the interest of "well ordered" credit markets and stock market price increases. Although comments that the stock market will almost always go up are common, no major observer has asked why (my friend Howard S. Katz is the sole exception, as far as I know). The reason is that monetary expansion or inflation reduces interest rates and so increases the value that investors place on future income streams (accountants and actuaries call this the present value of future earnings). This distortion of valuations of the future is a government subsidy similar to a welfare benefit. Few Americans believe in welfare but most have been duped into believing in this subsidy.
The absence of debate has crippled the nation's ability to formulate a coherent economic policy. Instead, backroom deals have been made with the public's money supply, and we are learning about them now, when it is too late. Sadly, the interests that are represented, such as Wall Street, are not overly ethical and have learned little from their experiences with Worldcom and Enron earlier in the decade. The Fed will hurt many Americans, much as it did in the 1970s. But the difference between a diet and inflation is that in a diet, the person who suffers pays for self-indulgence. In inflation, the investors, debtors and corporate interests who benefited from the monetary expansion are not the ones who will pay.
The policy that the financial lobby has devised is curious. Foreign investors have been convinced to hold dollars, keeping the value of the dollar much higher than it would be in a market that is not politically driven. In turn, there has been more consumption of gasoline, manufactured goods and other imports. No one knows the extent to which consumption has exceeded the nation's true market power, but it might be by a considerable amount. The result is that suburbs have been developed, large cars driven, obesity increased and jobs disappeared. Jobs have disappeared, contrary to the fundamental claim of Keynesian economics about the effects of inflation and monetary expansion, because the dollar is stronger than it should be so costs look higher here than in other countries. Americans, who were once a muscular, dynamic nation, have become a nation of fat slobs who do not work but rather stay at home watching television and weighing 400 pounds. (I include myself and have recently lost twenty pounds and have been working out four times per week. But that's only the beginning.)
A report that Lenny Rann sent me today that was written by a bearish financial analyst suggests that Wall Street and the commercial banks have acted dishonestly toward the foreign investors who have been bankrolling them and the general public. The last 25 years' increases in the stock market are largely due to these subsidies, so when news came out today that the Chinese are fed up with us and are intending to invest elsewhere, the Dow fell 360 points, better than two percent. Much like Americans' waist lines, the stock markets have flourished because of the something-for-nothing mindset that Wall Street capitalism has created.
America is no longer the nation of innovation; of Edison; of manufacturing; of new ideas; of hard work; of entrepreneurship. Rather, it is the country of investment banks; Jim Cramer's whining for lower interest rates; and selfish indifference to the effects of dishonest money.
America is going to have to go on a diet. Americans have been deceived by the Republicans as well as the Democrats. In past economic declines, the tendency has been to resort to interventionism. That is the likely result now. The problem is that the decline has been caused by intervention. The only way out is to become more athletic, to return to the kind of policies that made the US a leader. Those are policies that foster innovation, entrepreneurship and self-reliance. Regulation will kill American leadership, as will the Fed. This day is no longer far off. It is near. The Fed ought to be abolished and ought to be viewed as the source of all the pain that Americans will feel in the coming decades.
Monday, November 5, 2007
Gold and Commodity Exposure in Your Portfolio
John Maynard Keynes quoted Lenin as saying that best way to destroy the capitalist system is to debauch the currency. There is debate whether Lenin said it or not. In any case much harm can be done from inflation. Since 1979, the compound inflation rate in the United States has been 3.7%. This has accompanied a lengthy stock market increase and a much larger production of dollars by the Federal Reserve Bank. The US money supply has increased several times, but there is a much larger amount of dollars in circulation around the globe, perhaps as much as 8 or 9 times the number of dollars in circulation in the US. The result of this is that the dollar is at all-time lows against a range of currencies, and has the prospect of depreciating further. The reduction in the buying power of the dollar is beneficial for exporters and may attract some factories back to the US. But it will harm those who hold dollars. In particular, those who hold savings accounts and long term bonds will be harmed as prices increase. Similarly, those on pensions and annuities will be harmed. The days when inflation was merely a domestic affair are over. The depreciating dollar means that many prices are increasing now. If Ben Bernanke continues to inflate the number of dollars (reduce the Fed Funds rate) then there could be a sell-off by foreign governments, who are holding trillions of dollars that are depreciating in value. In turn, this would cause inflation here.
This kind of instability poses as serious a risk to your portfolio as the risk of a stock market decline. A stock market decline is a possibility if the Fed reacts to the sharp dollar declines appropriately, that is, by raising interest rates. If the Fed continues to cater to Wall Street and America's wealthy on food stamps (those who benefit from the stock market increases that unrealistically low interest rates have caused) then the stock market might continue to go up until the inflation gets so bad that nominal interest rates are forced up by inflation. Jim Cramer will literally be forcing senior citizens to eat dog food just so he can see his portfolio increase.
It is conceivable that given the irresponsibility that the Bernanke Fed has demonstrated so far there will be a major inflation. This will exacerbate the income inequality that liberal economists harp on but erroneously attribute to fiscal policy.
Gold stocks have been performing very well this year and I have been quite happy as a result. As well, the metal itself as well as other commodities such as oil and grain have been going up very nicely. If there is a massive dollar depreciation, which is not an unrealistic risk, having a good share of your money in commodities will protect you.
One way to invest in commodity stocks is through the Ivy Natural Resources Fund . The trailing 5 year returns are 34.05% versus 21% for the S&P 500. As well, the Powershares index fund family has a number of commodity and dollar bearish indexes. These include gold, silver, oil, energy, agricultural, commodity index, dollar bearish and a number of others.
The frightening thing about massive inflation is that the investment that you naturally think of as most safe, cash, gets trashed. A dollar held since 1979 is worth about 34 cents today. In a massive inflation, the depreciation would go much further much more quickly.
Friends, I urge you to cover yourselves. The "economic miracle" of the past 25 years has been a three-card-Monty game. The 25-year old bliss in the stock market results from currency depreciation that is inherently unethical (because it is based on stealing from the poor to give to the rich). It will have serious consequences for conservative investors, and possibly end with a major stock market decline. It could be much worse than what I am describing if there is a major sell off of the dollar.
This kind of instability poses as serious a risk to your portfolio as the risk of a stock market decline. A stock market decline is a possibility if the Fed reacts to the sharp dollar declines appropriately, that is, by raising interest rates. If the Fed continues to cater to Wall Street and America's wealthy on food stamps (those who benefit from the stock market increases that unrealistically low interest rates have caused) then the stock market might continue to go up until the inflation gets so bad that nominal interest rates are forced up by inflation. Jim Cramer will literally be forcing senior citizens to eat dog food just so he can see his portfolio increase.
It is conceivable that given the irresponsibility that the Bernanke Fed has demonstrated so far there will be a major inflation. This will exacerbate the income inequality that liberal economists harp on but erroneously attribute to fiscal policy.
Gold stocks have been performing very well this year and I have been quite happy as a result. As well, the metal itself as well as other commodities such as oil and grain have been going up very nicely. If there is a massive dollar depreciation, which is not an unrealistic risk, having a good share of your money in commodities will protect you.
One way to invest in commodity stocks is through the Ivy Natural Resources Fund . The trailing 5 year returns are 34.05% versus 21% for the S&P 500. As well, the Powershares index fund family has a number of commodity and dollar bearish indexes. These include gold, silver, oil, energy, agricultural, commodity index, dollar bearish and a number of others.
The frightening thing about massive inflation is that the investment that you naturally think of as most safe, cash, gets trashed. A dollar held since 1979 is worth about 34 cents today. In a massive inflation, the depreciation would go much further much more quickly.
Friends, I urge you to cover yourselves. The "economic miracle" of the past 25 years has been a three-card-Monty game. The 25-year old bliss in the stock market results from currency depreciation that is inherently unethical (because it is based on stealing from the poor to give to the rich). It will have serious consequences for conservative investors, and possibly end with a major stock market decline. It could be much worse than what I am describing if there is a major sell off of the dollar.
Tuesday, October 2, 2007
How to Make US Business More Competitive?
Q. Dear Professor Langbert,
I really enjoy the feedback you supply at the end of the forums. I have one question for you- what can be done to "save" U.S. economy, and provide decent jobs for everyone?
A. In my opinion there need to be 6-7 reforms:
1. Reform the education system. Make sure that all elementary students have good training in the three r's as well as socialization and interpersonal skills. Use objective testing and tighter management of elementary schools to motivate such outcomes.
2. Stablize the monetary system by adopting a fixed rule whereby money supply grows at the same pace as productivity times population or adopt a metal (i.e., gold) standard
3. Change the something for nothing mentality that has infected all walks of life, from Wall Street to MTV. The idea that manipulation, deception or luck is the chief ingredient that leads to success a problem. The TV show "Entourage" is as bad as the Jim Cramers
who scream for lower interest rates and welfare for the rich
4. Limit government to a smaller, fixed percentage of the economy than currently. This smaller percentage could not be changed except in times of emergency or war
5. As well, the companies need to became more careful about how they hire directors on the board as well as CEOs. Criteria for promotion and advancement need to be clearly articulated and revealed publicly, and the reasons for the promotions need to be publicly revealed. Hiring criteria at all levels need to be objective. The current fixation on college degrees needs to be either proven/rationalized or eliminated.
6. Companies need to do a better job of training, empowering and using incentives to motivate employees.
7. Adoption of HR strategies that motivate innovation and quality. Many manufacturing firms have focused on costs at the expense of quality.
I really enjoy the feedback you supply at the end of the forums. I have one question for you- what can be done to "save" U.S. economy, and provide decent jobs for everyone?
A. In my opinion there need to be 6-7 reforms:
1. Reform the education system. Make sure that all elementary students have good training in the three r's as well as socialization and interpersonal skills. Use objective testing and tighter management of elementary schools to motivate such outcomes.
2. Stablize the monetary system by adopting a fixed rule whereby money supply grows at the same pace as productivity times population or adopt a metal (i.e., gold) standard
3. Change the something for nothing mentality that has infected all walks of life, from Wall Street to MTV. The idea that manipulation, deception or luck is the chief ingredient that leads to success a problem. The TV show "Entourage" is as bad as the Jim Cramers
who scream for lower interest rates and welfare for the rich
4. Limit government to a smaller, fixed percentage of the economy than currently. This smaller percentage could not be changed except in times of emergency or war
5. As well, the companies need to became more careful about how they hire directors on the board as well as CEOs. Criteria for promotion and advancement need to be clearly articulated and revealed publicly, and the reasons for the promotions need to be publicly revealed. Hiring criteria at all levels need to be objective. The current fixation on college degrees needs to be either proven/rationalized or eliminated.
6. Companies need to do a better job of training, empowering and using incentives to motivate employees.
7. Adoption of HR strategies that motivate innovation and quality. Many manufacturing firms have focused on costs at the expense of quality.
Monday, October 1, 2007
Unions and Money: Labor Unions Are Anti-Worker Because They Are Pro-Inflation
Freeman and Medoff have written a famous book, "What Do Unions Do?" in which they distinguish between the voice and monopoly faces of unions. The voice face gives employees an outlet to express dissatisfaction with management and to let management know what the employees want. The voice face includes collective bargaining, grievance procedures, and the elimination of employment at will (in part through progressive discipline rules that limit employers' right to fire employees). Freeman and Medoff argue that employee voice increases employee tenure with the firm, encourages more capable employees who are better trained and raises labor productivity.
In contrast the monopoly face of unionism is where unions raise wages by restricting employment. To concede higher wages to unions firms must restrict employment levels because of the laws of supply and demand. The higher wages cause firms to substitute capital investment and machinery for labor. In turn, the monopoly face causes a two-tier society in which elite workers working for large firms earn high wages, while "secondary sector" workers earn less.
Freeman and Medoff argue that the voice face is stronger than the monopoly face and that union wage gains of 5-30% are mostly due to employee voice, that is, due to lower turnover, more communication and better training.
However, Freeman and Medoff emphasize another piece of evidence: unionized firms are less profitable than non-union firms, and the difference is in the area of 15%. Since their book was written in the 1980s, firms have been increasingly motivated to move plants overseas to avoid the unions' effects on profits.
It is a specific characteristic of twentieth century American unionism that unions reduce efficiency. In Japan, unions are enterprise unions that are sometimes called "company unions" but not quite the same as the term "company union" would mean here. Enterprise unions contribute to firms' efficiency by providing employee voice but also encouraging more efficient production. In contrast, US unions are steadfastly opposed to helping firms, and are often anti-management. Also, they often insist on antiquated work rules that impede flexibility and innovation. This anti-management mentality is a problem that has hurt unions.
Unions have been co opted by left-wing ideology that holds that workers and management are enemies. Until about 40 years ago, American companies were the most dynamic in the world and American workers were the most successful. The two went together. This does not suggest that there is antagonism between labor and management, but rather that both benefit together.
What changed? CEOs, endowed with a rich cornucopia of stock options, have emphasized stock valuation to a greater degree, and so moved plants overseas. However, the situation is somewhat more complicated. Although I am unique in thinking this, I believe that the problem facing unions is due to monetary policy and the Fed.
In the 19th century unions opposed inflation. The Loco Focos in New York, the Workingmen's Parties of the 1830s, the Jacksonian Democrats all favored sound money and the gold standard. They opposed inflation. Inflation is harmful to workers because workers spend most of their wages. In contrast, inflation is helpful to capital because low interest rates, which are caused by the same thing that causes inflation, increasing money supply, boosts the present value of future earnings, hence the stock market, and makes firms more profitable because they can borrow for less.
That is, the Federal Reserve Bank increases the money supply (and has increased it by 68 times since 1913 when it was founded) and the increases in the money supply cause increases in the stock market that are greater than the increases in prices. Since 1913 the stock market has gone up 218 times while prices have increased 16 times.
In the 19th century, the working class was overwhelmingly opposed to inflation, and had the unions favored inflation they would have failed. What the low inflation environment did, though, was cause American firms to grow rapidly not because of financial gimmickry as they do now, but because of improvements in efficiency and innovation. Firms like Standard Oil made repeated breakthroughs in technology such as oil pipelines and were for their time extraordinarily efficient. American firms consolidated markets in areas like steel and meat as well in order to obtain efficiencies. Although there were labor conflicts, the conflicts were occurring in an environment in which hundreds of thousands of Europeans were immigrating here each year in order to work in those same companies. In other words, we had the best paid employees in the world while the labor supply was continually expanding because of immigration. No other economy in the history of the world had come close to expanding the welfare of the poor as did the American economy under laissez faire capitalism.
In the early 1930s, during a depression brought on by Fed policy, the unions switched their position on inflation. This was done at the same time as the National Labor Relations Act was passed and anti-free market legislation under the New Deal became dominant. The unions' new indifference to inflation was justified in terms of the Keynesian economics prevalent at that time (and today). However, this put the union workers at loggerheads with other workers. Relying on pro-union economists such as Freeman and Medoff, unions saw indexing as a way around inflation.
Economists claimed that inflation did not matter because union wages were indexed, but of course few workers' wages were indexed. Inflation exists to help capital at labor's expense, so there had to be two categories of workers, the unionized and the non-unionized. This was facilitated in part by the exclusion of white collar workers from unions. Since the economy was moving away from manufacturing toward services throughout the 20th century, this largely doomed unions by the millenium. Moreover, white collar workers tend to identify with management, which has generally been anti-union.
The result has been that the unions secured a niche for themselves, but were viewed as antagonistic to the needs of the majority of workers, who opposed inflation just as they did in the 19th century. The workers themselves disliked unions. This tension came to a head during the 1980 presidential election, when the union leadership backed the pro-inflation Democrats but the majority of blue collar workers, including most union workers, backed Ronald Reagan who claimed to oppose inflation. In fact, President Reagan did end the inflation of the 1970s, but then recommenced a new cycle of inflation under Alan Greenspan from which we have yet to emerge (and are only beginning to experience the ill effects).
In this cycle there was a surprise effect, namely, because executives were granted stock options and so motivated to cut costs, many union jobs were driven out of the country. Thus, unions backed the wrong horse. They backed the Fed, Keynesianism and inflation because they thought that they were best protected and would gain at the secondary sector workers' expense. But they did not anticipate that the stock market would become more buoyant (because of low interest rates). When combined with executive stock options, the buoyant stock market made executives more eager to combat unions. In other words, the availability of easy credit caused executives to focus less on innovation and efficiency as they did in the 19th century, and more on low-risk cost cutting by moving plants overseas.
The end result is that the American employee has been in bad shape since the 1980s, and unions have done nothing to help. If anything, unions have been an excellent friend to Wall Street at the expense of the poor during the past 70 years.
In contrast the monopoly face of unionism is where unions raise wages by restricting employment. To concede higher wages to unions firms must restrict employment levels because of the laws of supply and demand. The higher wages cause firms to substitute capital investment and machinery for labor. In turn, the monopoly face causes a two-tier society in which elite workers working for large firms earn high wages, while "secondary sector" workers earn less.
Freeman and Medoff argue that the voice face is stronger than the monopoly face and that union wage gains of 5-30% are mostly due to employee voice, that is, due to lower turnover, more communication and better training.
However, Freeman and Medoff emphasize another piece of evidence: unionized firms are less profitable than non-union firms, and the difference is in the area of 15%. Since their book was written in the 1980s, firms have been increasingly motivated to move plants overseas to avoid the unions' effects on profits.
It is a specific characteristic of twentieth century American unionism that unions reduce efficiency. In Japan, unions are enterprise unions that are sometimes called "company unions" but not quite the same as the term "company union" would mean here. Enterprise unions contribute to firms' efficiency by providing employee voice but also encouraging more efficient production. In contrast, US unions are steadfastly opposed to helping firms, and are often anti-management. Also, they often insist on antiquated work rules that impede flexibility and innovation. This anti-management mentality is a problem that has hurt unions.
Unions have been co opted by left-wing ideology that holds that workers and management are enemies. Until about 40 years ago, American companies were the most dynamic in the world and American workers were the most successful. The two went together. This does not suggest that there is antagonism between labor and management, but rather that both benefit together.
What changed? CEOs, endowed with a rich cornucopia of stock options, have emphasized stock valuation to a greater degree, and so moved plants overseas. However, the situation is somewhat more complicated. Although I am unique in thinking this, I believe that the problem facing unions is due to monetary policy and the Fed.
In the 19th century unions opposed inflation. The Loco Focos in New York, the Workingmen's Parties of the 1830s, the Jacksonian Democrats all favored sound money and the gold standard. They opposed inflation. Inflation is harmful to workers because workers spend most of their wages. In contrast, inflation is helpful to capital because low interest rates, which are caused by the same thing that causes inflation, increasing money supply, boosts the present value of future earnings, hence the stock market, and makes firms more profitable because they can borrow for less.
That is, the Federal Reserve Bank increases the money supply (and has increased it by 68 times since 1913 when it was founded) and the increases in the money supply cause increases in the stock market that are greater than the increases in prices. Since 1913 the stock market has gone up 218 times while prices have increased 16 times.
In the 19th century, the working class was overwhelmingly opposed to inflation, and had the unions favored inflation they would have failed. What the low inflation environment did, though, was cause American firms to grow rapidly not because of financial gimmickry as they do now, but because of improvements in efficiency and innovation. Firms like Standard Oil made repeated breakthroughs in technology such as oil pipelines and were for their time extraordinarily efficient. American firms consolidated markets in areas like steel and meat as well in order to obtain efficiencies. Although there were labor conflicts, the conflicts were occurring in an environment in which hundreds of thousands of Europeans were immigrating here each year in order to work in those same companies. In other words, we had the best paid employees in the world while the labor supply was continually expanding because of immigration. No other economy in the history of the world had come close to expanding the welfare of the poor as did the American economy under laissez faire capitalism.
In the early 1930s, during a depression brought on by Fed policy, the unions switched their position on inflation. This was done at the same time as the National Labor Relations Act was passed and anti-free market legislation under the New Deal became dominant. The unions' new indifference to inflation was justified in terms of the Keynesian economics prevalent at that time (and today). However, this put the union workers at loggerheads with other workers. Relying on pro-union economists such as Freeman and Medoff, unions saw indexing as a way around inflation.
Economists claimed that inflation did not matter because union wages were indexed, but of course few workers' wages were indexed. Inflation exists to help capital at labor's expense, so there had to be two categories of workers, the unionized and the non-unionized. This was facilitated in part by the exclusion of white collar workers from unions. Since the economy was moving away from manufacturing toward services throughout the 20th century, this largely doomed unions by the millenium. Moreover, white collar workers tend to identify with management, which has generally been anti-union.
The result has been that the unions secured a niche for themselves, but were viewed as antagonistic to the needs of the majority of workers, who opposed inflation just as they did in the 19th century. The workers themselves disliked unions. This tension came to a head during the 1980 presidential election, when the union leadership backed the pro-inflation Democrats but the majority of blue collar workers, including most union workers, backed Ronald Reagan who claimed to oppose inflation. In fact, President Reagan did end the inflation of the 1970s, but then recommenced a new cycle of inflation under Alan Greenspan from which we have yet to emerge (and are only beginning to experience the ill effects).
In this cycle there was a surprise effect, namely, because executives were granted stock options and so motivated to cut costs, many union jobs were driven out of the country. Thus, unions backed the wrong horse. They backed the Fed, Keynesianism and inflation because they thought that they were best protected and would gain at the secondary sector workers' expense. But they did not anticipate that the stock market would become more buoyant (because of low interest rates). When combined with executive stock options, the buoyant stock market made executives more eager to combat unions. In other words, the availability of easy credit caused executives to focus less on innovation and efficiency as they did in the 19th century, and more on low-risk cost cutting by moving plants overseas.
The end result is that the American employee has been in bad shape since the 1980s, and unions have done nothing to help. If anything, unions have been an excellent friend to Wall Street at the expense of the poor during the past 70 years.
Howard S. Katz's "Bad News"
Howard S. Katz has posted a fascinating blog entitled "Bad News" which I reproduce below:
>"I have bad news for all young Americans.
"You were born into what used to be the greatest country in the world. The Founding Fathers of this country fought for our liberty in the 18th century. They won, and they set up a government whose purpose was the protection of everyone’s rights. The first President of this country was known for being unable to tell a lie.
"In 1933, however, the country fell into the hands of a collection of scoundrels. They said, “Rob from the rich and give to the poor.” Then they set up a system which robs from the poor and gives to the rich. In order to win support for this system, they told a bunch of lies.
"Then when these lies had become accepted as commonplace, they made up more lies. Then more lies still. The whole structure resembles an onion. If you are smart enough to discover an important truth and peel off one layer of the onion, you think that you are seeing reality. But then there is another lie to be peeled off and yet another lie beneath that. Let us take the current issue facing America, the “interest rate cut” of Sept. 18, 2007. The phrase is in quotes because, while not literally a lie, it was a half truth, and a half truth with the intent to deceive. (See blog 9-24-07.)
"The argument in favor of the “rate cut” was that the country was on the verge of a recession. Please to define recession? Well, John Maynard Keynes argued that it was not having a lot of goods that made a country rich. Just the opposite, what made a country rich was having a lot of demand. It was necessary to have an intense desire for economic goods, and having this desire would in some way create the goods.
"Let us test this theory against the empirical facts. In North Korea, for example, they have unbelievable poverty. Ditto, ditto, Tibet, Albania and most of black Africa. Is the United States rich and North Korea poor for the simple reason that we have more demand? And anyway, how would you measure demand to prove whether this was true or false?
"In reality, a human being starts to demand economic goods almost from his first breath. He cries for food. Then he cries for a rattle, then a bicycle. Then he asks for a car. Then he gets a job so that he can get a better car. All of his life is spent demanding. The problem in an economy is not to create the demand. There is plenty of demand. What America (and Britain) did starting about 1790 was to figure out a way to increase the quantity of goods to satisfy that demand. That took a number of brilliant men. At that time, all of the world was demanding (and had been demanding since the creation of the human species), but only the Anglo-Saxon countries (and later a number of other countries which imitated them to a degree) figured out how to satisfy much of that demand.
"Now, what about recessions? According to the Keynesian theory it is bad to not have enough demand. But it is equally bad to have too much demand. And since there is no way to measure demand, we must depend on the economic authority figures to tell us whether demand is too high or too low. An economy with demand too low is said to be in recession or depression. An economy with demand too high is said to be overheating and suffering from inflation. And what the Keynesian economists are always searching for is a Goldilocks economy – one where the demand is just right.
"One thing is impossible under this theory,: to have demand too low and too high at the same time. Or to put it in their lingo, it is impossible to have a recession and an overheating (inflationary) economy at the same time.
"But two months ago, Ben Bernanke, the chairman of the Federal Reserve, said that the economy was in danger of inflation. Indeed, for the first 8 months of 2007 the official consumer price index has risen by 3%. If this continues for the remainder of the year, then 2007 will come in at a 4.5% rate. And this would be the highest rate since 1990. But just last week, in the twinkling of an economic eye, Bernanke said that the economy was in danger of a recession. (I should mention that most pieces of economic data are very erratic, and it is necessary to watch a given index for at least 6 or 12 months to even know whether it is going up or down. Indeed, all of the data issued over the most recent two months are labeled preliminary. They are often revised, and sometimes revised sharply. A piece of data which was reported two months ago might be revised away next month and discovered never to have happened.)
"If you want to understand what is really going on, then the U.S. economy did not suddenly go from too much to too little demand. There has been too much demand for every one of the past 52 years because prices have risen every year since 1955. And during this period there have been nine officially declared recessions. In every one of these, there has been too much demand and too little demand. Nobody cares that this is impossible. To be a Keynesian economist, one must, like the Queen of Hearts, “believe 6 impossible things before breakfast.” (To believe the impossible, it is helpful to give different meanings to the same concept. For example, sometimes demand means a willful desire, as when a baby cries; sometimes it means effective demand, i.e., demand backed up by the money to buy.)
"But the sad thing, dear young American, can be seen if we consider a line from Hamlet. “Though this be madness, yet there be method in’t.” Indeed, modern establishment economics is madness. Yet there is a method in it. The method is to rob from the poor and give to the rich. From 1972, real wages in America have been going down. From 1974, the stock market has been going up. (During the age known as the period of the robber barons the real wages of the working man went up, and the stock market went sideways.)
"The Federal Reserve does not have the ability to manage the economy. From 1836 to 1914 there was no central bank in America, and our economy was the greatest in the world. During this time prices remained stable. Today the bankers (government and private) have the privilege to create money, and the classrooms are filled with “economists” teaching that the creation of money out of nothing is the “road to plenty.”
"One of the rich people who made big bucks from the Greenspan issues of money in the 1990s was hurting this year because the creation of money slowed down. This gentleman, Jim Cramer, went on YouTube on August 6 and threw a public tantrum. (You can find it via a Google search on his name and then click YouTube – Market Meltdown.) The reason that the Federal Reserve “lowered interest rates” (meaning agreed to print money) on Sept. 18 was that it was trying to balance the rich people like Jim Cramer with the poor people who do not make any noise. The squeaky wheel got the grease. And all the pseudo-economics is a rationalization.
"This is the world into which you were born. The Government steals from the poor and gives to the rich. How much is to be stolen is decided by the method of the 3-year old who throws a tantrum in the supermarket. Paper money is the money of the bankers. Gold money is honest money. Gold is the money of the people."
>"I have bad news for all young Americans.
"You were born into what used to be the greatest country in the world. The Founding Fathers of this country fought for our liberty in the 18th century. They won, and they set up a government whose purpose was the protection of everyone’s rights. The first President of this country was known for being unable to tell a lie.
"In 1933, however, the country fell into the hands of a collection of scoundrels. They said, “Rob from the rich and give to the poor.” Then they set up a system which robs from the poor and gives to the rich. In order to win support for this system, they told a bunch of lies.
"Then when these lies had become accepted as commonplace, they made up more lies. Then more lies still. The whole structure resembles an onion. If you are smart enough to discover an important truth and peel off one layer of the onion, you think that you are seeing reality. But then there is another lie to be peeled off and yet another lie beneath that. Let us take the current issue facing America, the “interest rate cut” of Sept. 18, 2007. The phrase is in quotes because, while not literally a lie, it was a half truth, and a half truth with the intent to deceive. (See blog 9-24-07.)
"The argument in favor of the “rate cut” was that the country was on the verge of a recession. Please to define recession? Well, John Maynard Keynes argued that it was not having a lot of goods that made a country rich. Just the opposite, what made a country rich was having a lot of demand. It was necessary to have an intense desire for economic goods, and having this desire would in some way create the goods.
"Let us test this theory against the empirical facts. In North Korea, for example, they have unbelievable poverty. Ditto, ditto, Tibet, Albania and most of black Africa. Is the United States rich and North Korea poor for the simple reason that we have more demand? And anyway, how would you measure demand to prove whether this was true or false?
"In reality, a human being starts to demand economic goods almost from his first breath. He cries for food. Then he cries for a rattle, then a bicycle. Then he asks for a car. Then he gets a job so that he can get a better car. All of his life is spent demanding. The problem in an economy is not to create the demand. There is plenty of demand. What America (and Britain) did starting about 1790 was to figure out a way to increase the quantity of goods to satisfy that demand. That took a number of brilliant men. At that time, all of the world was demanding (and had been demanding since the creation of the human species), but only the Anglo-Saxon countries (and later a number of other countries which imitated them to a degree) figured out how to satisfy much of that demand.
"Now, what about recessions? According to the Keynesian theory it is bad to not have enough demand. But it is equally bad to have too much demand. And since there is no way to measure demand, we must depend on the economic authority figures to tell us whether demand is too high or too low. An economy with demand too low is said to be in recession or depression. An economy with demand too high is said to be overheating and suffering from inflation. And what the Keynesian economists are always searching for is a Goldilocks economy – one where the demand is just right.
"One thing is impossible under this theory,: to have demand too low and too high at the same time. Or to put it in their lingo, it is impossible to have a recession and an overheating (inflationary) economy at the same time.
"But two months ago, Ben Bernanke, the chairman of the Federal Reserve, said that the economy was in danger of inflation. Indeed, for the first 8 months of 2007 the official consumer price index has risen by 3%. If this continues for the remainder of the year, then 2007 will come in at a 4.5% rate. And this would be the highest rate since 1990. But just last week, in the twinkling of an economic eye, Bernanke said that the economy was in danger of a recession. (I should mention that most pieces of economic data are very erratic, and it is necessary to watch a given index for at least 6 or 12 months to even know whether it is going up or down. Indeed, all of the data issued over the most recent two months are labeled preliminary. They are often revised, and sometimes revised sharply. A piece of data which was reported two months ago might be revised away next month and discovered never to have happened.)
"If you want to understand what is really going on, then the U.S. economy did not suddenly go from too much to too little demand. There has been too much demand for every one of the past 52 years because prices have risen every year since 1955. And during this period there have been nine officially declared recessions. In every one of these, there has been too much demand and too little demand. Nobody cares that this is impossible. To be a Keynesian economist, one must, like the Queen of Hearts, “believe 6 impossible things before breakfast.” (To believe the impossible, it is helpful to give different meanings to the same concept. For example, sometimes demand means a willful desire, as when a baby cries; sometimes it means effective demand, i.e., demand backed up by the money to buy.)
"But the sad thing, dear young American, can be seen if we consider a line from Hamlet. “Though this be madness, yet there be method in’t.” Indeed, modern establishment economics is madness. Yet there is a method in it. The method is to rob from the poor and give to the rich. From 1972, real wages in America have been going down. From 1974, the stock market has been going up. (During the age known as the period of the robber barons the real wages of the working man went up, and the stock market went sideways.)
"The Federal Reserve does not have the ability to manage the economy. From 1836 to 1914 there was no central bank in America, and our economy was the greatest in the world. During this time prices remained stable. Today the bankers (government and private) have the privilege to create money, and the classrooms are filled with “economists” teaching that the creation of money out of nothing is the “road to plenty.”
"One of the rich people who made big bucks from the Greenspan issues of money in the 1990s was hurting this year because the creation of money slowed down. This gentleman, Jim Cramer, went on YouTube on August 6 and threw a public tantrum. (You can find it via a Google search on his name and then click YouTube – Market Meltdown.) The reason that the Federal Reserve “lowered interest rates” (meaning agreed to print money) on Sept. 18 was that it was trying to balance the rich people like Jim Cramer with the poor people who do not make any noise. The squeaky wheel got the grease. And all the pseudo-economics is a rationalization.
"This is the world into which you were born. The Government steals from the poor and gives to the rich. How much is to be stolen is decided by the method of the 3-year old who throws a tantrum in the supermarket. Paper money is the money of the bankers. Gold money is honest money. Gold is the money of the people."
Saturday, September 29, 2007
Thirty-six Years Late and Ten Trillion Dollars Short
Goldbug Howard S. Katz blogs that media coverage of the Fed is rife with fraud. There is no difference, notes Katz, between the Fed's reducing interest rates and increasing the money supply, although the Fed wants to claim otherwise:
"You will usually hear that the Federal Reserve is adjusting the Federal funds (not the T-bill) rate. This is another piece of misinformation designed to keep the public’s eye off the ball. The Federal Reserve does not operate in the Federal funds market...."
Katz notes that in order to purchase T-bills, the Fed must increase the money supply, and it does so through printing more monopoly money, i.e., dollars:
"When the Federal Reserve first received this power, the total money supply of the U.S. was twenty billion dollars. This week it was 1363 billion dollars."
Between 1946 and August 1971 countries operated under the Bretton Woods system under which most countries settled their international balances in U.S. dollars but some redeemed dollars for gold. Because of pre-1971 inflation, balance-of-payments deficits reduced gold reserves. Thus, President Nixon announced that the United States would no longer offer gold. According to the Bureau of Labor Statistics, one dollar in 1971 has the same buying power as $5.13 in 2007. In other words, since the ending of the final link to the gold standard 36 years ago, the dollar has declined to 1/5.13 or 19.49% of its value.
Mainstream economists have developed elaborate rationales for this decline, such as "assuming that all wages are indexed, all savings accounts are indexed, the stock market goes up at a constant rate, and loan payments are indexed, then inflation does not matter". If you believe them you lose money.
After 36 years of post-Bretton Woods inflation, The New York Sun notes that the current real estate bubble has burst. Prices have fallen by the most since 1970 and purchases have fallen by 8.3%, the most in seven years. Construction is in its worst slump since 1991. It is true that there is a bright side to the decline of the dollar, namely, we have become to Europe what Europe was to us in the 1960s: a tourist destination. As the Sun also reports, "New York City's travel, real estate, and manufacturing sectors — which profit from the sale of services to foreigners — will likely benefit." Of course, those who need to purchase real estate in the New York area will pay through the nose, as their monopoly dollars need to be brought in wheel barrows and cannot compete with Euros, Yen or Yuan. But who cares, since those of us who are selling now can retire?
To its credit, the Sun ran another front page article about the dollar's decline , "The Dollar's Fall Starts to Worry". The Sun notes that "foreign investors proclaim that a "for sale" sign has been hung on the city". The Sun quotes Axel Merk:
"No country in the world has ever fought itself to prosperity by weakening its currency"
The Sun also quotes chief of the Fed's counterfeiting operations, Ben Bernanke, as saying that there is a "liquidity crisis". With my TIAA CREF money market fund yielding 3.68%, what kind of liquidity crisis is Bernanke describing? Is he insane? I'm having trouble figuring out whether Ben Bernanke is on hallucinogenic drugs; is a crook; or hopes for a high-paying job from schnorrers* like Jim Cramer.
The Sun also notes that Russia, China and the Middle East countries are starting to exchange dollars for the euro. Given the multi-trillion (not billion) extent of foreign holdings, there is a massive potential for further reductions in the dollar.
Given that the Sun is reporting the dollar decline thirty-six years after the end of the gold standard, and after the Fed has circulated ten trillion dollars in monopoly money around the world, it looks like the Sun's front-page article may be thirty-six years late and ten trillion dollars short. Buy gold and commodities, friends.
*To revise Groucho Marx's song "Hooray for Captain Spaulding"in Animal Crackers (the tune was also the theme to Groucho's 1960s TV Show, You Bet Your Life):
My name is Jimmy Cramer
The Economy's Explorer
Did someone call me a schnorrer?
Hooray, hooray, hooray
"You will usually hear that the Federal Reserve is adjusting the Federal funds (not the T-bill) rate. This is another piece of misinformation designed to keep the public’s eye off the ball. The Federal Reserve does not operate in the Federal funds market...."
Katz notes that in order to purchase T-bills, the Fed must increase the money supply, and it does so through printing more monopoly money, i.e., dollars:
"When the Federal Reserve first received this power, the total money supply of the U.S. was twenty billion dollars. This week it was 1363 billion dollars."
Between 1946 and August 1971 countries operated under the Bretton Woods system under which most countries settled their international balances in U.S. dollars but some redeemed dollars for gold. Because of pre-1971 inflation, balance-of-payments deficits reduced gold reserves. Thus, President Nixon announced that the United States would no longer offer gold. According to the Bureau of Labor Statistics, one dollar in 1971 has the same buying power as $5.13 in 2007. In other words, since the ending of the final link to the gold standard 36 years ago, the dollar has declined to 1/5.13 or 19.49% of its value.
Mainstream economists have developed elaborate rationales for this decline, such as "assuming that all wages are indexed, all savings accounts are indexed, the stock market goes up at a constant rate, and loan payments are indexed, then inflation does not matter". If you believe them you lose money.
After 36 years of post-Bretton Woods inflation, The New York Sun notes that the current real estate bubble has burst. Prices have fallen by the most since 1970 and purchases have fallen by 8.3%, the most in seven years. Construction is in its worst slump since 1991. It is true that there is a bright side to the decline of the dollar, namely, we have become to Europe what Europe was to us in the 1960s: a tourist destination. As the Sun also reports, "New York City's travel, real estate, and manufacturing sectors — which profit from the sale of services to foreigners — will likely benefit." Of course, those who need to purchase real estate in the New York area will pay through the nose, as their monopoly dollars need to be brought in wheel barrows and cannot compete with Euros, Yen or Yuan. But who cares, since those of us who are selling now can retire?
To its credit, the Sun ran another front page article about the dollar's decline , "The Dollar's Fall Starts to Worry". The Sun notes that "foreign investors proclaim that a "for sale" sign has been hung on the city". The Sun quotes Axel Merk:
"No country in the world has ever fought itself to prosperity by weakening its currency"
The Sun also quotes chief of the Fed's counterfeiting operations, Ben Bernanke, as saying that there is a "liquidity crisis". With my TIAA CREF money market fund yielding 3.68%, what kind of liquidity crisis is Bernanke describing? Is he insane? I'm having trouble figuring out whether Ben Bernanke is on hallucinogenic drugs; is a crook; or hopes for a high-paying job from schnorrers* like Jim Cramer.
The Sun also notes that Russia, China and the Middle East countries are starting to exchange dollars for the euro. Given the multi-trillion (not billion) extent of foreign holdings, there is a massive potential for further reductions in the dollar.
Given that the Sun is reporting the dollar decline thirty-six years after the end of the gold standard, and after the Fed has circulated ten trillion dollars in monopoly money around the world, it looks like the Sun's front-page article may be thirty-six years late and ten trillion dollars short. Buy gold and commodities, friends.
*To revise Groucho Marx's song "Hooray for Captain Spaulding"in Animal Crackers (the tune was also the theme to Groucho's 1960s TV Show, You Bet Your Life):
My name is Jimmy Cramer
The Economy's Explorer
Did someone call me a schnorrer?
Hooray, hooray, hooray
Hillary Clinton Revives the Major Douglas Social Credit Concept--Republicans Should Advocate Peoples' Equity Plan Instead
The New York Daily News reports that Hillary Clinton has proposed a "baby bond" scheme whereby each newborn baby will receive a $5,000 account from the federal government that they could use for college. Blog impresario Larwyn questions whether the idea can be taken seriously. As with any redistribution scheme, baby bonds would have unforeseen effects. For example, they would raise the federal deficit; and they would raise taxes, making it more difficult for moderate-income families to pay for college. Given the parlous state of the US dollar, excessive federal spending and $150 billion in state and federal subsidies to higher education, not to mention persistent college tuition cost inflation, it is difficult to follow how such an idea can be taken seriously. It does not bode well for our country's future that a potential president was incompetent enough to even float this idea.
Hillary's baby bond plan is a throwback to the nonsensical theory of social credit advocated in the 1920s by Major Douglas and described in Wikipedia. Major Douglas's theory of social credit starts with the fallacious belief that prices ought to be linked to the costs of production. Common sense tells us that value does not relate to production costs. The fact that I spent a lot fixing up a house in New Orleans, Louisiana doesn't necessarily mean that the house is worth a lot. Production theories of value have been discredited by Carl Menger and many others who show that value is derived from the utility that consumers place on merchandise, i.e., supply and demand.
The key social credit recommendation, a guaranteed income for
all regardless of whether they work, was a larger scale idea than Hillary's who limits the guaranteed income to only $5,000 to new-born babies, but the concept is parallel.
The social credit concept is just another version of welfare, income redistribution or social security. A simpler way to do this would be to simply cut everyone's income tax by $5,000. Why limit it to to babies? The Republicans ought to counter with a "peoples'" or "taxpayers'" equity plan--an across-the-board $5,000 tax credit to all taxpayers.
Since you can't keep socialists down, the social credit fallacy soon turned into a rationale for anti-Semitism. As Wikipedia notes:
"Some prominent groups and individuals, most notably the poet Ezra Pound and the leaders of the Australian League of Rights, have subscribed to Social Credit as an economic theory, believing that it demonstrated the guilt of "Jewish bankers," who supposedly control the world's economy[citation needed]. Social Credit lays the blame for many economic woes at the feet of private banks, most especially those that practice fractional-reserve banking."
In case you're interested, Wikipedia describes social credit's implications:
"-a 'National Credit Office' to calculate on a statistical basis the amount of credit that should be circulating in the economy;
-a price adjustment mechanism that reflects the real cost of production (aggregate consumption in the same period of time);
-a 'National Dividend' to give a basic guaranteed income to all regardless of whether or not they have a job"
Obviously, a national divided will not come from any "credit surplus" (and it will not be free, as Hillary seems to believe). Nor would any central office have the ability to calculate the amount of credit that should be circulating. Nor should prices be related to the cost of production. All of these ideas lead to widespread poverty, as would Hillary Clinton's election.
While banking and the paper money system are statist institutions that ought to be abolished, a simple way to do so is a gold or other standard such as a fixed monetary rule.
Hillary's baby bond plan is a throwback to the nonsensical theory of social credit advocated in the 1920s by Major Douglas and described in Wikipedia. Major Douglas's theory of social credit starts with the fallacious belief that prices ought to be linked to the costs of production. Common sense tells us that value does not relate to production costs. The fact that I spent a lot fixing up a house in New Orleans, Louisiana doesn't necessarily mean that the house is worth a lot. Production theories of value have been discredited by Carl Menger and many others who show that value is derived from the utility that consumers place on merchandise, i.e., supply and demand.
The key social credit recommendation, a guaranteed income for
all regardless of whether they work, was a larger scale idea than Hillary's who limits the guaranteed income to only $5,000 to new-born babies, but the concept is parallel.
The social credit concept is just another version of welfare, income redistribution or social security. A simpler way to do this would be to simply cut everyone's income tax by $5,000. Why limit it to to babies? The Republicans ought to counter with a "peoples'" or "taxpayers'" equity plan--an across-the-board $5,000 tax credit to all taxpayers.
Since you can't keep socialists down, the social credit fallacy soon turned into a rationale for anti-Semitism. As Wikipedia notes:
"Some prominent groups and individuals, most notably the poet Ezra Pound and the leaders of the Australian League of Rights, have subscribed to Social Credit as an economic theory, believing that it demonstrated the guilt of "Jewish bankers," who supposedly control the world's economy[citation needed]. Social Credit lays the blame for many economic woes at the feet of private banks, most especially those that practice fractional-reserve banking."
In case you're interested, Wikipedia describes social credit's implications:
"-a 'National Credit Office' to calculate on a statistical basis the amount of credit that should be circulating in the economy;
-a price adjustment mechanism that reflects the real cost of production (aggregate consumption in the same period of time);
-a 'National Dividend' to give a basic guaranteed income to all regardless of whether or not they have a job"
Obviously, a national divided will not come from any "credit surplus" (and it will not be free, as Hillary seems to believe). Nor would any central office have the ability to calculate the amount of credit that should be circulating. Nor should prices be related to the cost of production. All of these ideas lead to widespread poverty, as would Hillary Clinton's election.
While banking and the paper money system are statist institutions that ought to be abolished, a simple way to do so is a gold or other standard such as a fixed monetary rule.
Monday, September 17, 2007
The Depreciating Dollar
The New York Sun, New York's best newspaper, has run a front page editorial concerning the dollar, which the Sun argues, should be called the "Greenspan" instead of the "greenback". The reasons are in part that Greenspan's biography the Age of Turbulence came out today; the Fed's Open Market Committee will meet tomorrow to discuss whether to lower interest rates (depreciating the dollar further); and the Sun is increasingly concerned about the depreciating gold value of the dollar. Over the past two years the Sun has editorialized that the dollar declined from 1/265th ounce of gold in 2000, when President George W. Bush took office, to 1/500th of an ounce of gold in December 2005, to 1/637th of an ounce of gold in November 2006 to, well Kitco reports at 3:17 that gold has risen to $717 in light of tomorrow's Fed meeting, so it's 1/717th of an oz. of gold per dollar.
The problem facing the dollar is in some ways like previous inflations, such as the German inflation of the 1920s. In some ways, though, it is unique because never before has a fiat currency both served as a worldwide medium of exchange and been subject to aggressive depreciation in value. There are a number of interesting ramifications of this story that my friend Howard S. Katz has exposed through the years in his book The Paper Aristocracy; through his blog and through his investment advisory services.
First, Katz has brought the effects of monetary expansion on income inequality to the attention of libertarian politicians such as Ron Paul and to the attention of all who will listen. The left's game plan, evidenced during the great depression, has been to use disruption caused by mismanagement of the money supply, such as the 1929 stock market crash, the depression of the 1930s and the concomitant political strains, to agitate for quack nostrums like extension of government regulation that does nothing to cure the monetary problem and instead cripples the economy and interferes with legitimate business. Once again, we see an increase in agitation concerning income inequality just as the past two decades' monetary expansion is peaking.
Second, the effects on income inequality this time, which Katz discusses in his blog, may be more extreme than in the past. Because the monetary expansion has not resulted in the same degree of inflation as it normally would, interest rates have been reduced to very low levels, corporate profits have been energized and stock markets boosted to high levels. This seems to have turned Keynesianism on its head. The traditional Keynesian model is that stimulation of economic activity would create new jobs (hence the Phillips curve's trade off between inflation and unemployment) and workers would not object to the erosion of their real wages, essentially because they are suckers.
Instead, in the late 20th century and early 21st century world, which is far more globalized than Keynes's world of the 1930s, monetary stimulus may have reduced demand for US labor even as real wages have fallen. It may have done so because executives have been granted stock options that motivate them to maximize shareholder value more aggressively than they did in the prior postwar period. Rather than risk a higher degree of innovation, the executives focused on cost cutting, i.e., moving plants and services, to include white collar ones, to lower wage countries. These steps had some effect on stock values, enhancing the income inequality that naturally occurs because of monetary expansion and that is part and parcel of what the Fed does. Thus, traditional Keynesian economics has become not only a kind of deception (relying as it does on monetary illusion) as it has always been, but also has become increasingly outdated because of globalization. Real wages are stagnant; the stock market increases; but high paying jobs flee the country, all due to the Fed's monetary policy combined with aggressive stock option programs.
Third, the Fed now functions like a casino manager. The US dollar does not function just as a traditional money supply that provides a store of value; a medium of exchange; a unit of account and a standard of deferred payment. Rather, the dollar has become a commodity that is held by investors all over the world as a form of speculation. This new function puts the Fed in the role of casino game manager that needs to determine whether enough "chips" have been manufactured---chips that have meaning only so long as there are gamblers to use them.
Although economists have meaningful credentials, there is no reason to believe that they understand how to market casino chips. I am sure that Ben Bernanke, like Alan Greenspan, is a brilliant guy, but he is no better at marketing than a layman. Should Americans have faith in an institution like the Fed, which claims to manage the money supply while quietly extending its role to facilitator of a global crap shoot? Isn't it time to rethink the Fed altogether?
The problem facing the dollar is in some ways like previous inflations, such as the German inflation of the 1920s. In some ways, though, it is unique because never before has a fiat currency both served as a worldwide medium of exchange and been subject to aggressive depreciation in value. There are a number of interesting ramifications of this story that my friend Howard S. Katz has exposed through the years in his book The Paper Aristocracy; through his blog and through his investment advisory services.
First, Katz has brought the effects of monetary expansion on income inequality to the attention of libertarian politicians such as Ron Paul and to the attention of all who will listen. The left's game plan, evidenced during the great depression, has been to use disruption caused by mismanagement of the money supply, such as the 1929 stock market crash, the depression of the 1930s and the concomitant political strains, to agitate for quack nostrums like extension of government regulation that does nothing to cure the monetary problem and instead cripples the economy and interferes with legitimate business. Once again, we see an increase in agitation concerning income inequality just as the past two decades' monetary expansion is peaking.
Second, the effects on income inequality this time, which Katz discusses in his blog, may be more extreme than in the past. Because the monetary expansion has not resulted in the same degree of inflation as it normally would, interest rates have been reduced to very low levels, corporate profits have been energized and stock markets boosted to high levels. This seems to have turned Keynesianism on its head. The traditional Keynesian model is that stimulation of economic activity would create new jobs (hence the Phillips curve's trade off between inflation and unemployment) and workers would not object to the erosion of their real wages, essentially because they are suckers.
Instead, in the late 20th century and early 21st century world, which is far more globalized than Keynes's world of the 1930s, monetary stimulus may have reduced demand for US labor even as real wages have fallen. It may have done so because executives have been granted stock options that motivate them to maximize shareholder value more aggressively than they did in the prior postwar period. Rather than risk a higher degree of innovation, the executives focused on cost cutting, i.e., moving plants and services, to include white collar ones, to lower wage countries. These steps had some effect on stock values, enhancing the income inequality that naturally occurs because of monetary expansion and that is part and parcel of what the Fed does. Thus, traditional Keynesian economics has become not only a kind of deception (relying as it does on monetary illusion) as it has always been, but also has become increasingly outdated because of globalization. Real wages are stagnant; the stock market increases; but high paying jobs flee the country, all due to the Fed's monetary policy combined with aggressive stock option programs.
Third, the Fed now functions like a casino manager. The US dollar does not function just as a traditional money supply that provides a store of value; a medium of exchange; a unit of account and a standard of deferred payment. Rather, the dollar has become a commodity that is held by investors all over the world as a form of speculation. This new function puts the Fed in the role of casino game manager that needs to determine whether enough "chips" have been manufactured---chips that have meaning only so long as there are gamblers to use them.
Although economists have meaningful credentials, there is no reason to believe that they understand how to market casino chips. I am sure that Ben Bernanke, like Alan Greenspan, is a brilliant guy, but he is no better at marketing than a layman. Should Americans have faith in an institution like the Fed, which claims to manage the money supply while quietly extending its role to facilitator of a global crap shoot? Isn't it time to rethink the Fed altogether?
Monday, May 28, 2007
How to Re-Monetize Gold
Lenny Rann responds to my earlier blog as follows:
Rann writes:
>"We have exceeded the ability to regulate our currency along the gold standard, we have produced too much to cover with such a scarce resource. Much that we produce are not commodities that exist in the natural world, i.e. the richest man in the world made it on intellectual property. Today, copper and steel seem to define the relationship between liquidity and commodity prices (inflation?) Please see the five year chart for the following copper producer (PCU) and steel manufacturer (SID) http://finance.yahoo.com/q/bc?t=5y&s=PCU&l=on&z=m&q=l&c=sid. Whether we are in a metal commodity bubble, I don't know. Almost all of my holdings are in metals and mining, but I am reducing my positions and moving back to petroleum."
It doesn't matter what resource is used as a standard. But the problem isn't that gold fluctuates too much; that there is too much productivity; or that the economy is too complicated for the dollar to be backed by gold. The problem is that we have increased productivity too little to merit the increases in the number of dollars.
You could use platinum, iron or silver, as a monetary standard, but historically gold has been used and people feel comfortable with it. You could use other things as well, say oil, it's arbitrary in the sense that people expect coins to be shiny. The government still makes them shiny because people feel comfortable with shiny coins. Coins could be orange, but people would be uncomfortable.
Gold is a good choice because people feel comfortable with it.The issue is whether to have a standard or not. It doesn't matter if commodities fluctuate in price. They don't fluctuate in only one direction, so over the long run there is more stability with a commodity standard than without one. The arguments against a standard are just an excuse because some people want inflation. The people who favor inflation are: commercial bankers, investment bankers, hedge fund managers, corporate executives, left wing academics, Keynesian economists, the American Enterprise Institute and debtors. The people who shouldn't want inflation are wage earners and savers.
There are many people who both benefit and lose from inflation. People who are bad stock market investors lose, because inflation causes unpredictable shifts in the stock market which make many people do irrational things like withdrawing their money when the market bottoms. Also, people are often both real estate owners who hold a fixed-rate mortgage and also are wage earners. Inflation will help them via the fixed rate mortgage but it will hurt them because it reduces the real value of their wages.
The last three decades have seen flat wages (which began in the 1970s, right after the gold standard was abolished) coupled with widespread home ownership. So the effects of inflation are complicated. The poor who can't borrow are hurt the most. The very wealthy are helped the most. Risk-averse savers are hurt. Risk-taking investors with good market timing and people who take large mortgages at fixed rates relative to their incomes are helped. Wage earners are hurt. Stock holders are helped.
The chief thing that changes when you don't have a gold or other standard is that the central bank has the flexibility to increase the money supply faster than the rate of increase in productivity. M3, the now-discontinued measure of global supply of US dollars, has been increasing at 8% per year, three times the rate of US productivity increases. If the Fed could match increases in the money supply to productivity increases in the US economy it would be ideal. But they cannot because of political pressure from the financial community, the business community and Keynesian and left-wing academics. Also, the Fed makes many mistakes.
The effects of money supply increases are felt in the long run and can potentially become catastrophic for the United States and its citizens.The shift from the gold standard to pure paper money was completed in 1972, under President Nixon, and workers' real wages started stagnating almost immediately thereafter.
According to David Wozney, a poster on Howard Katz's Gold Bug blog , "A 'Federal Reserve Note' is not a U.S.A. dollar. In 1973, Public Law 93-110 defined the U.S.A. dollar as consisting of 1/42.2222 fine troy ounces of gold."
I read on the web that there are 368,250 bars of gold in Ft. Knox, with each bar weighing 400 oz. 400 x 368,250 x $750 (approximate price) = $110.5 billion. The government stopped publishing M3, which included foreign deposits, but it is likely in the area of $11.3 trillion. That means that while the government has defined a dollar to be 1/42.2 oz. of gold, according to one observer it has gone ahead and printed 185,000 dollars for every ounce of gold that exists anywhere in the world.
Eventually, dollar holders may realize that the dollar has no validity. It has not been backed up "by the US economy"; it has not been backed up by the good faith of the US government (which has been increasing global money supply at 8 percent per year while US productivity has been increasing at 2.5 percent per year); and it has not been backed up by gold.
I would assume that to re monetize gold you need to redefine the dollar as 1/750th oz. of gold, or the current market value, and use the amount in Ft. Knox as fractional reserves.
Rann writes:
>"We have exceeded the ability to regulate our currency along the gold standard, we have produced too much to cover with such a scarce resource. Much that we produce are not commodities that exist in the natural world, i.e. the richest man in the world made it on intellectual property. Today, copper and steel seem to define the relationship between liquidity and commodity prices (inflation?) Please see the five year chart for the following copper producer (PCU) and steel manufacturer (SID) http://finance.yahoo.com/q/bc?t=5y&s=PCU&l=on&z=m&q=l&c=sid. Whether we are in a metal commodity bubble, I don't know. Almost all of my holdings are in metals and mining, but I am reducing my positions and moving back to petroleum."
It doesn't matter what resource is used as a standard. But the problem isn't that gold fluctuates too much; that there is too much productivity; or that the economy is too complicated for the dollar to be backed by gold. The problem is that we have increased productivity too little to merit the increases in the number of dollars.
You could use platinum, iron or silver, as a monetary standard, but historically gold has been used and people feel comfortable with it. You could use other things as well, say oil, it's arbitrary in the sense that people expect coins to be shiny. The government still makes them shiny because people feel comfortable with shiny coins. Coins could be orange, but people would be uncomfortable.
Gold is a good choice because people feel comfortable with it.The issue is whether to have a standard or not. It doesn't matter if commodities fluctuate in price. They don't fluctuate in only one direction, so over the long run there is more stability with a commodity standard than without one. The arguments against a standard are just an excuse because some people want inflation. The people who favor inflation are: commercial bankers, investment bankers, hedge fund managers, corporate executives, left wing academics, Keynesian economists, the American Enterprise Institute and debtors. The people who shouldn't want inflation are wage earners and savers.
There are many people who both benefit and lose from inflation. People who are bad stock market investors lose, because inflation causes unpredictable shifts in the stock market which make many people do irrational things like withdrawing their money when the market bottoms. Also, people are often both real estate owners who hold a fixed-rate mortgage and also are wage earners. Inflation will help them via the fixed rate mortgage but it will hurt them because it reduces the real value of their wages.
The last three decades have seen flat wages (which began in the 1970s, right after the gold standard was abolished) coupled with widespread home ownership. So the effects of inflation are complicated. The poor who can't borrow are hurt the most. The very wealthy are helped the most. Risk-averse savers are hurt. Risk-taking investors with good market timing and people who take large mortgages at fixed rates relative to their incomes are helped. Wage earners are hurt. Stock holders are helped.
The chief thing that changes when you don't have a gold or other standard is that the central bank has the flexibility to increase the money supply faster than the rate of increase in productivity. M3, the now-discontinued measure of global supply of US dollars, has been increasing at 8% per year, three times the rate of US productivity increases. If the Fed could match increases in the money supply to productivity increases in the US economy it would be ideal. But they cannot because of political pressure from the financial community, the business community and Keynesian and left-wing academics. Also, the Fed makes many mistakes.
The effects of money supply increases are felt in the long run and can potentially become catastrophic for the United States and its citizens.The shift from the gold standard to pure paper money was completed in 1972, under President Nixon, and workers' real wages started stagnating almost immediately thereafter.
According to David Wozney, a poster on Howard Katz's Gold Bug blog , "A 'Federal Reserve Note' is not a U.S.A. dollar. In 1973, Public Law 93-110 defined the U.S.A. dollar as consisting of 1/42.2222 fine troy ounces of gold."
I read on the web that there are 368,250 bars of gold in Ft. Knox, with each bar weighing 400 oz. 400 x 368,250 x $750 (approximate price) = $110.5 billion. The government stopped publishing M3, which included foreign deposits, but it is likely in the area of $11.3 trillion. That means that while the government has defined a dollar to be 1/42.2 oz. of gold, according to one observer it has gone ahead and printed 185,000 dollars for every ounce of gold that exists anywhere in the world.
Eventually, dollar holders may realize that the dollar has no validity. It has not been backed up "by the US economy"; it has not been backed up by the good faith of the US government (which has been increasing global money supply at 8 percent per year while US productivity has been increasing at 2.5 percent per year); and it has not been backed up by gold.
I would assume that to re monetize gold you need to redefine the dollar as 1/750th oz. of gold, or the current market value, and use the amount in Ft. Knox as fractional reserves.
Sunday, May 27, 2007
Ethanol and Inflation
Don Surber of the Charleston Daily Mail blogs that Heather Stewart of the London Observer has covered the story that Al Gore's fight against global warming is now starving the third world. Heather Stewart notes that America's thirst for environmentally friendly biofuels is driving up food prices around the world as farmers use corn for ethanol rather than food.
In February, Gold Bug Howard S. Katz blogged that
"In 2005, Archer, Daniels, Midland (the world’s largest processors of soybeans, corn, wheat and cocoa) persuaded the U.S. Congress to vote a subsidy of 51¢ per gallon to convert corn to ethanol. This means that, when you put 10 gallons of gas in your car these days at a pump price of $2.25/gallon, you are actually paying $2.76 for the ethanol gallon. You pay $2.25 at the pump, and another $0.51 is taken from you by the Government...the manufacture of ethanol from corn is not a very efficient process. It takes a lot of corn to make a small amount of ethanol. David Pimentel (professor of agriculture at Cornell) estimates that it would take 100 percent of the country’s corn crop to increase the fuel supply by 7%...With this extra demand for corn, the price of corn started to rise, and between August 2006 and January 2007 the price of corn almost doubled (from $2.20/bu to $4.20/bu)."
Katz also pointed out that the increasing corn prices would filter into meat prices since corn is a key foodstuff for cattle. As well, he noted it is pressuring the cost of food Mexico.
Serber reminds us to:
"not blame the United States because Zimbabwe, which once exported food, must import it thanks to Robert Mugabe's racist seizure of farmlands."
Of course, third world governments are corrupt, and naive, left wing idealists play into government interventionists' and inflationists' hands.
Surber adds:
"Last month, food prices rose 4% nationally....Corn product chips, tortillas, enchiladas, will go up 25 to 30% at the restaurant level if things continue as they are now...Analysts blame a combination of drought, freezing weather, and the rising demand for corn due to the popularity of ethanol. With ethanol production expected to double in the next four years, some analysts say today's prices may look like a bargain in comparison."
But the chief cause of rising prices, Fed monetary policy, is excluded from this list. Back in February Katz also predicted that beef prices would rise thanks to Congress's ethanol subsidy. But the policy underlying inflation is the Fed's.
Surber now notes that:
"Another favorite Memorial Day snack that may take a bite out of your wallet is beef.My Pittsburgh bureau chief supplied the reality check by actually buying groceries: I noticed that the chicken on special this week, fryers and split fryers etc, generally priced at $.99 Lb are on special at $1.19. Filet Mignon special last year at $6.99 lb for whole filet is $8.99. Guess you could say ethanol production hurts the poor and the rich!"
Of course that is true. But blaming particular causes for price increases plays into the inflationist establishment's hands. There are two US causes to the problem that Don Surber notes: (1) Government intervention resulting in poorly thought-through policies like ethanol and (2) price inflation due to the Fed's monetary expansion. A third problem is third-world corruption. A fourth problem is European jealousy of and hostility toward America. It difficult for me to talk about the London Observer or Heather Stewart or Europeans' opinions of America with a straight face. I'd prefer to leave them running in place on hamsters' treadmills, swinging from trees and eating bananas, as long as they don't run wild and return to their millenial habit of murdering Jews.
Both of the policies, government intervention and inflation, make corn and beef prices higher, hurting almost everyone except for those who benefit from them, i.e., Archer Daniels Midland, inflationist bankers, big business, hedge fund operators and real estate developers.
In February, Gold Bug Howard S. Katz blogged that
"In 2005, Archer, Daniels, Midland (the world’s largest processors of soybeans, corn, wheat and cocoa) persuaded the U.S. Congress to vote a subsidy of 51¢ per gallon to convert corn to ethanol. This means that, when you put 10 gallons of gas in your car these days at a pump price of $2.25/gallon, you are actually paying $2.76 for the ethanol gallon. You pay $2.25 at the pump, and another $0.51 is taken from you by the Government...the manufacture of ethanol from corn is not a very efficient process. It takes a lot of corn to make a small amount of ethanol. David Pimentel (professor of agriculture at Cornell) estimates that it would take 100 percent of the country’s corn crop to increase the fuel supply by 7%...With this extra demand for corn, the price of corn started to rise, and between August 2006 and January 2007 the price of corn almost doubled (from $2.20/bu to $4.20/bu)."
Katz also pointed out that the increasing corn prices would filter into meat prices since corn is a key foodstuff for cattle. As well, he noted it is pressuring the cost of food Mexico.
Serber reminds us to:
"not blame the United States because Zimbabwe, which once exported food, must import it thanks to Robert Mugabe's racist seizure of farmlands."
Of course, third world governments are corrupt, and naive, left wing idealists play into government interventionists' and inflationists' hands.
Surber adds:
"Last month, food prices rose 4% nationally....Corn product chips, tortillas, enchiladas, will go up 25 to 30% at the restaurant level if things continue as they are now...Analysts blame a combination of drought, freezing weather, and the rising demand for corn due to the popularity of ethanol. With ethanol production expected to double in the next four years, some analysts say today's prices may look like a bargain in comparison."
But the chief cause of rising prices, Fed monetary policy, is excluded from this list. Back in February Katz also predicted that beef prices would rise thanks to Congress's ethanol subsidy. But the policy underlying inflation is the Fed's.
Surber now notes that:
"Another favorite Memorial Day snack that may take a bite out of your wallet is beef.My Pittsburgh bureau chief supplied the reality check by actually buying groceries: I noticed that the chicken on special this week, fryers and split fryers etc, generally priced at $.99 Lb are on special at $1.19. Filet Mignon special last year at $6.99 lb for whole filet is $8.99. Guess you could say ethanol production hurts the poor and the rich!"
Of course that is true. But blaming particular causes for price increases plays into the inflationist establishment's hands. There are two US causes to the problem that Don Surber notes: (1) Government intervention resulting in poorly thought-through policies like ethanol and (2) price inflation due to the Fed's monetary expansion. A third problem is third-world corruption. A fourth problem is European jealousy of and hostility toward America. It difficult for me to talk about the London Observer or Heather Stewart or Europeans' opinions of America with a straight face. I'd prefer to leave them running in place on hamsters' treadmills, swinging from trees and eating bananas, as long as they don't run wild and return to their millenial habit of murdering Jews.
Both of the policies, government intervention and inflation, make corn and beef prices higher, hurting almost everyone except for those who benefit from them, i.e., Archer Daniels Midland, inflationist bankers, big business, hedge fund operators and real estate developers.
Friday, May 25, 2007
Corporate versus Private Welfare: The Case of Inflation
Is it better to advocate welfare for corporations via loose Fed policy and inflationary interest rates, or is it better to advocate welfare for individuals who are otherwise in poverty? The concept of the marginal utility of money suggests that it makes more sense to advocate welfare for the poor than welfare for the rich. The poor value an incremental dollar more than the rich do, therefore society's welfare is increased to a greater degree by assisting the poor than by assisting the rich.
Given just these two points of view, (1) that government ought to act to support the wealthy, or (2) that government ought to act to support the poor, the latter view is preferable. As I have previously blogged, Fed policy tends to support the wealthy. This has been true historically, and it especially has been true today. As the Carlyle Group's chief investment officer William E. Conway has pointed out in a private internal memo:
>"As you all know (I hope), the fabulous profits that we have been able to generate for our limited partners are not solely a function of our investment genius, but have resulted in large part from a great market and the availability of enormous amounts of cheap debt. This cheap debt has been available for almost all maturities, most industries, infrastructure, real estate, and at all levels of the capital structure. Frankly, there is so much liquidity in the world financial system, that lenders (even “our” lenders) are making very risky credit decisions. This debt has enabled us to do transactions that were previously unimaginable (e.g., Hertz, Kinder Morgan, Nielsen, Freescale), and has resulted in (generally) higher exit multiples than entry multiples."
Mr. Conway is not alone in benefiting from cheap debt, which is due to Fed policy and amounts to a form of welfare. Rather, almost the entire board of directors of the American Enterprise Institute benefits from cheap debt. The AEI's board is entirely composed of executives of major corporations who benefit from cheap debt because they enjoy increased compensation from inflated stock values.
Doug French of the Ludwig von Mises Institute has an excellent blog today about Tulipmania in Holland in the 1630s. Much like today's stock market, hedge fund and real estate bubbles, applauded by AEI and Weekly Standard's Irwin Stelzer, French traces the history of the monetary inflation in Holland due to discoveries of silver and gold in the New World and Holland's policy of free coinage of money, which drew bullion from Japan, the New World and elsewhere in Europe. He shows that monetary inflation caused Tulipmania, one of the earliest speculative bubbles.
French points out that:
"Total balances more than doubled from less than four million florins in 1634 to just over eight million in 1640. More specifically from January 31st 1636 to January 31st 1637 — the height of the tulipmania — Bank of Amsterdam's deposits increased 42 percent...free coinage, the Bank of Amsterdam, and the heightened trade and commerce in Holland served to attract coin and bullion from throughout the world...In 1648, when the Peace of Westphalia acknowledged the independence of the Dutch republic, the latter stopped the "free" coinage of silver florins and only permitted it for gold ducats, which in Holland had no legal value. This legislation discouraged the imports of silver bullion, checked the rise of prices, and put an end to the tulip mania."
Unlike the Bank of Amsterdam, it is unlikely that the Fed will signficantly reduce its counterfeiting any time soon. The AEI need need not fear.
I opened with the wrong question: "Which is preferable, welfare for the rich, i.e., cheap debt, or welfare for the poor?" I would suggest neither. It is difficult to arrive at a political position in today's world, which is driven by two species of ideologues: Republicans who favor monetary expansion, low marginal taxes, crony capitalism and welfare for the rich; and Democrats who favor monetary expansion, crony capitalism higher marginal taxes, and welfare for the very, very rich in the name of the poor. I suppose the Republicans are somewhat better and somewhat more honest, but only barely so.
Given just these two points of view, (1) that government ought to act to support the wealthy, or (2) that government ought to act to support the poor, the latter view is preferable. As I have previously blogged, Fed policy tends to support the wealthy. This has been true historically, and it especially has been true today. As the Carlyle Group's chief investment officer William E. Conway has pointed out in a private internal memo:
>"As you all know (I hope), the fabulous profits that we have been able to generate for our limited partners are not solely a function of our investment genius, but have resulted in large part from a great market and the availability of enormous amounts of cheap debt. This cheap debt has been available for almost all maturities, most industries, infrastructure, real estate, and at all levels of the capital structure. Frankly, there is so much liquidity in the world financial system, that lenders (even “our” lenders) are making very risky credit decisions. This debt has enabled us to do transactions that were previously unimaginable (e.g., Hertz, Kinder Morgan, Nielsen, Freescale), and has resulted in (generally) higher exit multiples than entry multiples."
Mr. Conway is not alone in benefiting from cheap debt, which is due to Fed policy and amounts to a form of welfare. Rather, almost the entire board of directors of the American Enterprise Institute benefits from cheap debt. The AEI's board is entirely composed of executives of major corporations who benefit from cheap debt because they enjoy increased compensation from inflated stock values.
Doug French of the Ludwig von Mises Institute has an excellent blog today about Tulipmania in Holland in the 1630s. Much like today's stock market, hedge fund and real estate bubbles, applauded by AEI and Weekly Standard's Irwin Stelzer, French traces the history of the monetary inflation in Holland due to discoveries of silver and gold in the New World and Holland's policy of free coinage of money, which drew bullion from Japan, the New World and elsewhere in Europe. He shows that monetary inflation caused Tulipmania, one of the earliest speculative bubbles.
French points out that:
"Total balances more than doubled from less than four million florins in 1634 to just over eight million in 1640. More specifically from January 31st 1636 to January 31st 1637 — the height of the tulipmania — Bank of Amsterdam's deposits increased 42 percent...free coinage, the Bank of Amsterdam, and the heightened trade and commerce in Holland served to attract coin and bullion from throughout the world...In 1648, when the Peace of Westphalia acknowledged the independence of the Dutch republic, the latter stopped the "free" coinage of silver florins and only permitted it for gold ducats, which in Holland had no legal value. This legislation discouraged the imports of silver bullion, checked the rise of prices, and put an end to the tulip mania."
Unlike the Bank of Amsterdam, it is unlikely that the Fed will signficantly reduce its counterfeiting any time soon. The AEI need need not fear.
I opened with the wrong question: "Which is preferable, welfare for the rich, i.e., cheap debt, or welfare for the poor?" I would suggest neither. It is difficult to arrive at a political position in today's world, which is driven by two species of ideologues: Republicans who favor monetary expansion, low marginal taxes, crony capitalism and welfare for the rich; and Democrats who favor monetary expansion, crony capitalism higher marginal taxes, and welfare for the very, very rich in the name of the poor. I suppose the Republicans are somewhat better and somewhat more honest, but only barely so.
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