I subscribe to two newsletters with opposite predictions about the markets: David Stockman's Stockman Letter and Steve Sjuggerud's True Wealth, published by Stansberry Research. Stockman is predicting declines in a wide range of markets, including tech and energy, while Sjuggerud is predicting bull markets across the board, but especially in tech and China. There will be a "melt up" (Sjuggerud's term) until a correction, which will occur perhaps 18 months from now.
The great investor Howard Marks, in his book The Most Important Thing, says that being right at the wrong time is the same as being wrong, and from a purely financial perspective he is right. While I'm quoting aphorisms, one that is worth considering is "the trend is your friend."
Sjuggerud doesn't appear to dispute Stockman's underlying theory: The Fed and the current monetary regime are a long-term drain on productivity and economic well being, and the bubble economy it has created is little different from other failed bubble economies of the past, such as John Law's Mississippi Bubble in France in the early 18th century. The ending of a long-term bubble of this kind will not be positive. It may mean long-term stagnation and declining job opportunities, as occurred in Japan, and it may mean a massive crash.
If the trend is our friend, I'm thinking that Sjuggerud's hypothesis is right in the short-run while Stockman's is right in the long-run. Tech and similar investments will do well until they don't. The trick is to gain at least something from the short-term bubbles and to get out while the going is good.
The last tech bubble saw the Nasdaq rise to unprecedented heights. According to Wikipedia: "It reached a price-earnings ratio of 200, dwarfing the peak price-earnings ratio of 80 for the Japanese Nikkei 225 during the Japanese asset price bubble of 1991." It's impossible to know just when a bubble will burst, but it seems to me that the current Nasdaq price-earnings ratio of 18.6 allows leeway for a bubble to proceed. It is true that the prices of today's glamour stocks are at nosebleed levels, but the general market has a ways to go.
Showing posts with label the fed. Show all posts
Showing posts with label the fed. Show all posts
Wednesday, April 24, 2019
Tuesday, April 2, 2019
Universal Basic Income
I had assigned five potential readings for extra credit: Atlas Shrugged, Economics in One Lesson, Capitalism and Freedom, The Anticapitalistic Mentality, and "The Use of Knowledge in Society." One of my students sent me a video of an interview about the idea of universal basic income. Many of the points the interviewee makes are fallacies discussed in the readings, especially Economics in One Lesson and Capitalism and Freedom. I hence sent the following email to my three online classes:
One of your classmates showed me a video about universal basic income. This is one of the ideas invented by Milton Friedman in Capitalism and Freedom. However, the proposal made today involves a sharp expansion of welfare benefits, which Friedman would have opposed were he alive today. The issues in the video are among the current issues that overlap with several of the extra credit readings I have made available, so I thought I'd send my response to you. If you're not interested, skip this email as this material is not relevant to the exam.
The student wrote this:
Hi Professor,
I saw this a few weeks ago. What do you think about UBI?
https://youtu.be/cTsEzmFamZ8
My response is as follows:
Andrew Yang's fallacious claim that technology destroys jobs is hundreds of years old. It goes back to 17th century England. Some of the Luddites in the 19th century destroyed textile machinery as a form of protest. Eleanor Roosevelt made similar claims in the 1940s. The claim that technology destroys jobs has always been false. This is something discussed in Economics in One Lesson, which I recommend to you to understand why Yang misunderstands the implications of technology. Market-based technology increases wealth. Hence, there is demand for new kinds of jobs as increased wealth finds new markets and new outlets.
However, this isn't working well today because today's technology and investments are not market based; they are created by government fiat and monetary expansion. That is, the Fed and the banking system expand the money supply; the expanded money supply reduces interest rates to nearly zero; then, the banking system makes the artificially created money available to powerful borrowers at low or zero rates. The low rates create bad investment or malinvestment in projects that would not exist under free market conditions. The bad investment initially stimulates employment, but over time it substitutes capital for labor. The reason is that low interest rates reduce the cost of capital to a greater degree than they reduce the cost of labor.
The manufacturing jobs that have left the country have disappeared neither purely because of technology nor purely because of low overseas wages. When capital leaves a country, its currency falls, and further overseas investment is curtailed because the currency becomes weak. For the past 40 years, plant relocations have been subsidized by low or zero interest rates that the Federal Reserve bank creates artificially coupled with the reserve currency status of the dollar. Because countries around the world hold dollars, the dollar does not decline, so firms borrow at artificially low interest rates to relocate plants, but the dollar does not fall because it is held by firms and central banks around the world.
If capital costs are minimal or zero, then there is minimal or zero cost to substitute capital for labor. Hence, capital investment in plant relocation has cost firms little, and plant relocation has exceeded the market level. The same is true of investment in technology. Because interest rates are low, it is cheaper for firms to borrow to invest in technology and replace labor with technology. Today, technology is nearly costless because interest rates are nearly zero. As a result, the economy has become distorted in favor of capital investment. To correct all this will be hard, but to distort it further by creating more money and inducing men to stop working so that they have free time to create militias is insane. The end result will escalate the decline of the economy because of misallocation of resources --the subject of the novel Atlas Shrugged.
That said, Milton Friedman in Capitalism and Freedom, which I also recommend (along with Economics in One Lesson and Atlas Shrugged), is the one who created the idea of the negative income tax, which is what Yang is talking about. Friedman's idea was to simplify the myriad welfare programs by replacing welfare, Social Security, and all other programs and treating welfare as an extension of the income tax in one simple program. That would reduce bureaucracy costs. That is one of the chapters in Capitalism and Freedom. That is probably a good idea. However, an expansion of welfare is not a good idea because it will encourage people who would otherwise attempt to cope with the economy by finding jobs that may not be as good as would exist in a market setting to instead go on welfare. The result will be more disenfranchised Americans who live lives of hopeless welfare dependency--and more monetary expansion at a time when government is heavily in debt. Antfa will go on steroids.
The current federal debt level is 106% of gross domestic product, but that doesn't include unfunded Social Security liabilities, unpaid student loans, unfunded future Medicare and Medicaid liabilities, and unfunded future public sector pension costs . The actual indebtedness may be closer to 200% of GDP. Japan has sustained indebtedness at this level, but an expansion of welfare will push US indebtedness higher still. You will notice that recent graduates in Japan have suffered since the 1990s, and the same will happen to you.
According to a research paper by Kenneth Rogoff, when indebtedness exceeds 90% of the GDP it slows growth. An opposing, recent theory called the Modern Monetary Theory claims that government can expand the money supply indefinitely without consequences. The answer to this is that there is no evidence in history of this working, just as there is no evidence in history of socialism working. Because the dollar is a reserve currency, an aggressive monetary expansion to cover infinite indebtedness will potentially cause withdrawal of foreign central banks from the dollar. This may result in a dollar collapse, and the reverse of what Yang and other advocates hope for.
The economic fallacy that Andrew Yang is making in the video is that it is easy to see the jobs disrupted by technology , but it is difficult to see how demand will evolve because of additional wealth due to the technology. In 1875, if you had asked someone what the effects of the automobile's disruption of the horse-and-carriage market, the person would have said the same thing that Yang is saying. The problem with much of the technology now, such as social media, is that it is interest rate rather than market driven. The result is that many tech jobs are not value producing and should not exist. (The same can be said of professors' jobs, which would not exist without student loans, many of which will not be paid off.)
Hence, to help address Yang's fallacies, I suggest reading both Economics in One Lesson and Capitalism and Freedom as extra credit assignments. Atlas Shrugged paints a dramatic, dystopian picture of the direction in which economic fallacies, including this one, are taking us.
One of your classmates showed me a video about universal basic income. This is one of the ideas invented by Milton Friedman in Capitalism and Freedom. However, the proposal made today involves a sharp expansion of welfare benefits, which Friedman would have opposed were he alive today. The issues in the video are among the current issues that overlap with several of the extra credit readings I have made available, so I thought I'd send my response to you. If you're not interested, skip this email as this material is not relevant to the exam.
The student wrote this:
Hi Professor,
I saw this a few weeks ago. What do you think about UBI?
https://youtu.be/cTsEzmFamZ8
My response is as follows:
Andrew Yang's fallacious claim that technology destroys jobs is hundreds of years old. It goes back to 17th century England. Some of the Luddites in the 19th century destroyed textile machinery as a form of protest. Eleanor Roosevelt made similar claims in the 1940s. The claim that technology destroys jobs has always been false. This is something discussed in Economics in One Lesson, which I recommend to you to understand why Yang misunderstands the implications of technology. Market-based technology increases wealth. Hence, there is demand for new kinds of jobs as increased wealth finds new markets and new outlets.
However, this isn't working well today because today's technology and investments are not market based; they are created by government fiat and monetary expansion. That is, the Fed and the banking system expand the money supply; the expanded money supply reduces interest rates to nearly zero; then, the banking system makes the artificially created money available to powerful borrowers at low or zero rates. The low rates create bad investment or malinvestment in projects that would not exist under free market conditions. The bad investment initially stimulates employment, but over time it substitutes capital for labor. The reason is that low interest rates reduce the cost of capital to a greater degree than they reduce the cost of labor.
The manufacturing jobs that have left the country have disappeared neither purely because of technology nor purely because of low overseas wages. When capital leaves a country, its currency falls, and further overseas investment is curtailed because the currency becomes weak. For the past 40 years, plant relocations have been subsidized by low or zero interest rates that the Federal Reserve bank creates artificially coupled with the reserve currency status of the dollar. Because countries around the world hold dollars, the dollar does not decline, so firms borrow at artificially low interest rates to relocate plants, but the dollar does not fall because it is held by firms and central banks around the world.
If capital costs are minimal or zero, then there is minimal or zero cost to substitute capital for labor. Hence, capital investment in plant relocation has cost firms little, and plant relocation has exceeded the market level. The same is true of investment in technology. Because interest rates are low, it is cheaper for firms to borrow to invest in technology and replace labor with technology. Today, technology is nearly costless because interest rates are nearly zero. As a result, the economy has become distorted in favor of capital investment. To correct all this will be hard, but to distort it further by creating more money and inducing men to stop working so that they have free time to create militias is insane. The end result will escalate the decline of the economy because of misallocation of resources --the subject of the novel Atlas Shrugged.
That said, Milton Friedman in Capitalism and Freedom, which I also recommend (along with Economics in One Lesson and Atlas Shrugged), is the one who created the idea of the negative income tax, which is what Yang is talking about. Friedman's idea was to simplify the myriad welfare programs by replacing welfare, Social Security, and all other programs and treating welfare as an extension of the income tax in one simple program. That would reduce bureaucracy costs. That is one of the chapters in Capitalism and Freedom. That is probably a good idea. However, an expansion of welfare is not a good idea because it will encourage people who would otherwise attempt to cope with the economy by finding jobs that may not be as good as would exist in a market setting to instead go on welfare. The result will be more disenfranchised Americans who live lives of hopeless welfare dependency--and more monetary expansion at a time when government is heavily in debt. Antfa will go on steroids.
The current federal debt level is 106% of gross domestic product, but that doesn't include unfunded Social Security liabilities, unpaid student loans, unfunded future Medicare and Medicaid liabilities, and unfunded future public sector pension costs . The actual indebtedness may be closer to 200% of GDP. Japan has sustained indebtedness at this level, but an expansion of welfare will push US indebtedness higher still. You will notice that recent graduates in Japan have suffered since the 1990s, and the same will happen to you.
According to a research paper by Kenneth Rogoff, when indebtedness exceeds 90% of the GDP it slows growth. An opposing, recent theory called the Modern Monetary Theory claims that government can expand the money supply indefinitely without consequences. The answer to this is that there is no evidence in history of this working, just as there is no evidence in history of socialism working. Because the dollar is a reserve currency, an aggressive monetary expansion to cover infinite indebtedness will potentially cause withdrawal of foreign central banks from the dollar. This may result in a dollar collapse, and the reverse of what Yang and other advocates hope for.
The economic fallacy that Andrew Yang is making in the video is that it is easy to see the jobs disrupted by technology , but it is difficult to see how demand will evolve because of additional wealth due to the technology. In 1875, if you had asked someone what the effects of the automobile's disruption of the horse-and-carriage market, the person would have said the same thing that Yang is saying. The problem with much of the technology now, such as social media, is that it is interest rate rather than market driven. The result is that many tech jobs are not value producing and should not exist. (The same can be said of professors' jobs, which would not exist without student loans, many of which will not be paid off.)
Hence, to help address Yang's fallacies, I suggest reading both Economics in One Lesson and Capitalism and Freedom as extra credit assignments. Atlas Shrugged paints a dramatic, dystopian picture of the direction in which economic fallacies, including this one, are taking us.
Wednesday, November 3, 2010
Americans for Limited Government on QE2
I just received this message from Americans for Limited Government's Robert Romano.
ALG Statement on Fed Purchase of $600 Billion of Treasuries
November 3rd, 2010, Fairfax, VA—Americans for Limited Government (ALG) President Bill Wilson today issued the following statement condemning the Federal Reserve's planned purchase of $600 billion of treasuries over the next eight months:
"The Federal Reserve's reckless program to purchase $600 billion of treasuries over the next eight months is taking the U.S. into uncharted waters, where the nation's central bank will be the largest holder of the national debt in the entire world next year. The Fed already holds $834 billion of treasuries, and was already on pace to have over $1 trillion in treasuries by August, 2011, more than China, Japan, or any other foreign creditor.
"With another $600 billion on top of the Fed's expected trillion-dollar stake in the debt, the signal we are sending to the world is that to pay for our obligations is to print a ton of new money. In the next three years alone, $5.2 trillion of debt will be coming due. In addition, the Obama Administration plans on increasing the debt another $3.6 trillion over that same period. That means that the Treasury has to sell $8.8 trillion of debt over three years, or $2.93 trillion every year.
"$2.93 trillion a year is more than the Treasury has ever had to sell. Approximately $630 billion more than it has ever sold. So it is little surprise that now the Fed is coming out saying it is buying another $600 billion of treasuries. This action by the Fed has nothing to do with 'a stronger pace of economic recovery,' as the central bank claims. It has everything to do with the fact that we are broke, and we're printing money to pay the bills.
"It is up to the newly elected Congress to rein in Washington's unsustainable fiscal trajectory so that the possibility is eliminated of further Fed purchases of the debt. Otherwise, they will be signing up to have the U.S. triple-A credit rating downgraded, and will preside over the decline of the nation as an economic superpower. Spending must be cut, and the Fed has to be reined in and audited. The very solvency of the Treasury is in danger, and only Congress can reverse course and begin to pay down the debt, before it is too late."
ALG Statement on Fed Purchase of $600 Billion of Treasuries
November 3rd, 2010, Fairfax, VA—Americans for Limited Government (ALG) President Bill Wilson today issued the following statement condemning the Federal Reserve's planned purchase of $600 billion of treasuries over the next eight months:
"The Federal Reserve's reckless program to purchase $600 billion of treasuries over the next eight months is taking the U.S. into uncharted waters, where the nation's central bank will be the largest holder of the national debt in the entire world next year. The Fed already holds $834 billion of treasuries, and was already on pace to have over $1 trillion in treasuries by August, 2011, more than China, Japan, or any other foreign creditor.
"With another $600 billion on top of the Fed's expected trillion-dollar stake in the debt, the signal we are sending to the world is that to pay for our obligations is to print a ton of new money. In the next three years alone, $5.2 trillion of debt will be coming due. In addition, the Obama Administration plans on increasing the debt another $3.6 trillion over that same period. That means that the Treasury has to sell $8.8 trillion of debt over three years, or $2.93 trillion every year.
"$2.93 trillion a year is more than the Treasury has ever had to sell. Approximately $630 billion more than it has ever sold. So it is little surprise that now the Fed is coming out saying it is buying another $600 billion of treasuries. This action by the Fed has nothing to do with 'a stronger pace of economic recovery,' as the central bank claims. It has everything to do with the fact that we are broke, and we're printing money to pay the bills.
"It is up to the newly elected Congress to rein in Washington's unsustainable fiscal trajectory so that the possibility is eliminated of further Fed purchases of the debt. Otherwise, they will be signing up to have the U.S. triple-A credit rating downgraded, and will preside over the decline of the nation as an economic superpower. Spending must be cut, and the Fed has to be reined in and audited. The very solvency of the Treasury is in danger, and only Congress can reverse course and begin to pay down the debt, before it is too late."
Saturday, March 13, 2010
Glenn Beck and Conspiracy Theories
Contrairimairi sent me this link on the Grand Delusion blog concerning Glenn Beck. The writer makes several good points. He should have stopped at his discussion of the Fed. Claiming that 9/11 was a US government conspiracy is a path which angels ought fear to tread. The freedom movement fails to serve itself by advocating conspiracy theories. The writer states that a few people resigned from the 9/11 commission but that is insufficient to claim a conspiracy.
There have been true conspiracies in American history, such as the one involving the assassination of Abraham Lincoln. There is still debate whether the Kennedy assassination involved a conspiracy. Such debates are fine but ought not be the basis of a political platform. Any movement or group that makes such a debate part of its fundamental belief system or platform consigns itself to the margin. So Beck is right.
Which does not change the Grand Delusion writer's key point. By making himself seem a "mainstream" leader of the freedom movement Beck can do considerable damage to it.
As I have previously blogged, I do not watch television or listen to radio news. The clips I have seen of Beck do not seem to indicate that he has taken a forthright stand on the Fed. I would also be interested in knowing his position on the United Nations. The video below opens questions, unlike any other media source, but Beck himself does not take a position. There is no one on any major media outlet who questions US involvement with the UN, so Beck's position is unbalanced. Balanced does not mean balancing 100% with 0%. Taking a 50-50 position where coverage is 100-0 means that you are advocating 99.5 To 0.5.
The importance of the Federal Reserve Bank issue cannot be overstated. It is the chief issue of interest to the "military industrial complex" and to anyone who favors socialism. Without the Fed and its wealth redistribution mechanism neither big government nor Wall Street's current form of organization would be possible. There is no need for a conspiracy theory. Bald economic interest and straightforward, mechanical economic relationships are all that are required to identify why George Soros favors the Fed and opposes the Second Amendment. Any advocate of the closed society and for a privileged elite would find considerable virtue in Soros's positions.
There have been true conspiracies in American history, such as the one involving the assassination of Abraham Lincoln. There is still debate whether the Kennedy assassination involved a conspiracy. Such debates are fine but ought not be the basis of a political platform. Any movement or group that makes such a debate part of its fundamental belief system or platform consigns itself to the margin. So Beck is right.
Which does not change the Grand Delusion writer's key point. By making himself seem a "mainstream" leader of the freedom movement Beck can do considerable damage to it.
As I have previously blogged, I do not watch television or listen to radio news. The clips I have seen of Beck do not seem to indicate that he has taken a forthright stand on the Fed. I would also be interested in knowing his position on the United Nations. The video below opens questions, unlike any other media source, but Beck himself does not take a position. There is no one on any major media outlet who questions US involvement with the UN, so Beck's position is unbalanced. Balanced does not mean balancing 100% with 0%. Taking a 50-50 position where coverage is 100-0 means that you are advocating 99.5 To 0.5.
The importance of the Federal Reserve Bank issue cannot be overstated. It is the chief issue of interest to the "military industrial complex" and to anyone who favors socialism. Without the Fed and its wealth redistribution mechanism neither big government nor Wall Street's current form of organization would be possible. There is no need for a conspiracy theory. Bald economic interest and straightforward, mechanical economic relationships are all that are required to identify why George Soros favors the Fed and opposes the Second Amendment. Any advocate of the closed society and for a privileged elite would find considerable virtue in Soros's positions.
Monday, March 8, 2010
Partisanship and the Politics of Failure
Partisanship has replaced patriotism. On the one hand, we have Democrats who are loyal to the collectivist dream, to the vision of Swedish and German national socialism. As well, the Democrats consider it necessary to put the economic needs of Paul Pelosi, George Soros and the Service Employees International Union before American freedom. On the other hand, the Republicans thought up the bailout and have been scrupulously loyal to the needs of the pharmaceutical industry.
Neither party has pursued policies that would maximize America's well being. These are cutting by two thirds the book of regulation, the tax burden and the size of government.
The media, which is on Wall Street's payroll, have painted American politics as a partisan contest instead of a partisan collaboration. On the one side, MSNBC claims that Obama is America's savior. On the other side, Rush Limbaugh claims that the GOP is. The Democrats advocate national socialism while the Republicans advocate national socialism without welfare programs. There is much overlap, especially because the GOP has never seen a Democratic welfare program that they wanted to repeal. That is, the difference in advocacy is not matched by different action. Both parties advocate big government.
The media's emphasis on partisanship is one more in a long line of distraction tactics, a three card Monty trick. It is one more way that Wall Street's lackeys help divert Americans from the current system's failure.
To the extent that Americans have allowed themselves to be bamboozled by the scam, they have suffered. The real hourly wage now is the same as it was in 1971. Forty years of stagnation thanks to the Socialists of Both Parties.
Somehow, neither Limbaugh nor MSNBC managed to "just say 'No!'" to Federal Reserve monetary policies that transfer large amounts of wealth to Wall Street and the recent trillion dollar bailout of the same Street. Put together, the monetary subsidies to the money center banking system serve no productive economic purpose unless you wish to claim that the money center financial institutions have been adept at choosing innovative investments to spur the American economy. But if you claim that you need to explain why they need multi-trillion dollar bailouts.
No industry has failed more dramatically, has demonstrated less competence, has proven itself less capable of serving any socially redeeming function than the money center banking institutions that have received trillions of dollars in subsidies. This is not an emotional assessment. No industry in history has ever depended on life support to that degree, has more egregiously sucked assets out of the productive sector of any economy than has the money center banking system.
Yet, Mr. Limbaugh, MSNBC, the New York Times, and Fox are all scrupulously loyal to it.
Americans need to reconsider their love affair with the mass media. On the one side, the Republicans love to hate it. On the other, the Democrats have replaced their natural thought processes with the parroting of entire sentences from the mass media's dim wits. Both sides have lost the habit of thinking for themselves.
As well, Americans need to consider whether the two party system continues to work in their interests. Jefferson said that there needs to be a revolution every twenty years. The current two party system has been in place for 150 years. Over time, corrupt relationships have developed. The solution proposed about a century ago was to expand federal power. But that solution has failed. Partisanship has become much of the problem, not the solution. Unless, that is, you believe in "Socialism in One Country."
Neither party has pursued policies that would maximize America's well being. These are cutting by two thirds the book of regulation, the tax burden and the size of government.
The media, which is on Wall Street's payroll, have painted American politics as a partisan contest instead of a partisan collaboration. On the one side, MSNBC claims that Obama is America's savior. On the other side, Rush Limbaugh claims that the GOP is. The Democrats advocate national socialism while the Republicans advocate national socialism without welfare programs. There is much overlap, especially because the GOP has never seen a Democratic welfare program that they wanted to repeal. That is, the difference in advocacy is not matched by different action. Both parties advocate big government.
The media's emphasis on partisanship is one more in a long line of distraction tactics, a three card Monty trick. It is one more way that Wall Street's lackeys help divert Americans from the current system's failure.
To the extent that Americans have allowed themselves to be bamboozled by the scam, they have suffered. The real hourly wage now is the same as it was in 1971. Forty years of stagnation thanks to the Socialists of Both Parties.
Somehow, neither Limbaugh nor MSNBC managed to "just say 'No!'" to Federal Reserve monetary policies that transfer large amounts of wealth to Wall Street and the recent trillion dollar bailout of the same Street. Put together, the monetary subsidies to the money center banking system serve no productive economic purpose unless you wish to claim that the money center financial institutions have been adept at choosing innovative investments to spur the American economy. But if you claim that you need to explain why they need multi-trillion dollar bailouts.
No industry has failed more dramatically, has demonstrated less competence, has proven itself less capable of serving any socially redeeming function than the money center banking institutions that have received trillions of dollars in subsidies. This is not an emotional assessment. No industry in history has ever depended on life support to that degree, has more egregiously sucked assets out of the productive sector of any economy than has the money center banking system.
Yet, Mr. Limbaugh, MSNBC, the New York Times, and Fox are all scrupulously loyal to it.
Americans need to reconsider their love affair with the mass media. On the one side, the Republicans love to hate it. On the other, the Democrats have replaced their natural thought processes with the parroting of entire sentences from the mass media's dim wits. Both sides have lost the habit of thinking for themselves.
As well, Americans need to consider whether the two party system continues to work in their interests. Jefferson said that there needs to be a revolution every twenty years. The current two party system has been in place for 150 years. Over time, corrupt relationships have developed. The solution proposed about a century ago was to expand federal power. But that solution has failed. Partisanship has become much of the problem, not the solution. Unless, that is, you believe in "Socialism in One Country."
Tuesday, July 1, 2008
Stock Prices, the Fed and America's Win-Lose Economy
What is the role of the Fed in generating income inequality because low interest rates boost the stock market while the monetary expansion that causes low rates creates inflation and so reduces real wages? In a web page on stock market returns Jeremy J. Siegel in the Concise Encyclopedia of Economics notes:
"The average compound rate of return on stocks from 1802 through 1991 was 7.7 percent per year: 5.8 percent from 1802 to 1870, 7.2 percent from 1871 to 1925, and 10.0 percent from 1926 to 1991. The increase in the rate of return of stocks over time has fully compensated the equity holder for the increased inflation that has occurred since World War II. "
However, these numbers do not follow the contours of changing American policy concerning the Fed. Before 1913 there was no Fed. From 1913 to 1932 there was a Fed whose inflationary power was limited by a gold standard. From 1932 to 1971 Roosevelt had abolished the gold standard but the Bretton Woods monetary regime required that the US convert foreign dollar holders' dollars into gold. In 1971 Richard M. Nixon abolished the international gold standard.
To track the effects of Fed policy on real wages, inflation and stock market returns, I computed Dow Jones Industrial Average returns for four periods: the pre-Fed period from 1896 to 1913; the Fed/gold standard period from 1913 to 1932; the Fed/international gold standard only period from 1932 to 1971; and the gold standard-free period from 1971-2008. I also computed as best as I could with rough and ready Internet data (a) the inflation rate, (b) the Dow returns less inflation, (c) the compounded return on the Dow, (d) the change in real (inflation-adjusted) hourly wage, (e) the compounded real wage change and (f) the compounded inflation change for the four periods.
I was searching for income inequality data (the usual method of measuring income inequality is the "Ginni coefficient") but could not find a measure on the Web that goes back to 1896. I did find a partial measure in an article by Jared Bernstein and Laurence Mishel. To estimate the compound rates I relied on the 1040tools future value calculator here. Data on real hourly wage changes from 1896 to 1913 are available here. The Dow Jones website makes available its Dow Jones Industrial Average index from 1896. There are estimates available of stock returns from 1802, but what is gained in longitude is lost in comparability. Corporations prior to 1890 did not have the same legal attributes as they did after. Moreover, prior to 1880 stocks were limited as to their breadth of circulation, the nature of the firms for which they were traded and the risk involved because of changes in the corporate form of organization. Therefore, the 1896-1913 period will have to do as a pre-Fed measure to compare with subsequent periods.
The chart below (column A--see here for better view) shows that inflation was lower in the pre-Fed period than in any period since the establishment of the Fed in 1913. From 1896-1913 inflation averaged one percent (column H), while from 1913-1932, the Fed/gold standard period it averaged 1.7%. From 1932-1971, the international gold standard period it averaged 2.82% and during the gold standard- free period, thanks to Republican President Richard M. Nixon, it averaged 3.92%, the highest sustained inflation in American history. The media story that the Greenspan Fed achieved low inflation is but puffery by historical standards. The post-1980 era has a poor record with respect to inflation. At the same time, stock market returns have been boosted since the abolition of the gold standard in 1932 but not before. Column C shows that the Dow increased 108.1% from 1896 to 1913; it fell 23.32% from 1913 to 1932 because of the Great Depression and then it rose 1,143.7% from 1932 to 1971 and 1,266% from 1971 to 2008. Adjusting for inflation and compounding, stock market returns were 3.83% during the 1896-1913 period, -2.9% from 1913 to 1932, 5.93% from 1932 to 1971 and then 5.9% from 1971 to 2008. The key change seems to have been in 1932.
The establishment of the Fed and the abolition of the gold standard seem to have coincided with at first a dramatic increase in real wages and then a reduction from 1971 onward (see Columns F and G). From 1896 to 1913 real hourly wages increased 30.2% over 17 years or 1.6% compounded. From 1913 to 1932, the gold standard period of the Fed, real wages increased 45.5% or 2.12% compounded. This is in part due to reduced inflation during the Depression. However, and this contradicts my theory, from 1932 to 1971 real wages increased 171.8%, a compounded real wage change of 2.6%. Then, from 1971 to 2008, the gold standard-free period compounded real wages fell 27% or a compounded rate of -1.1%. This is a unique 37-year period, but it follows a period of very high wage growth from 1932 to 1971.
Despite the extensive discussion of income inequality, I could not find readily historical data available on Ginni coefficients or other income inequality measures going back to 1896. It is clear from the Bernstein and Mishel article that since 1972 income inequality as measured by the 90-10 cutoff has been increasing.
The data support the idea that changing the monetary regime boosted the stock market. The 5.9% real stock market returns post 1932 are 35% greater than the real, pre-Fed stock market returns from 1896-1913. If you factor in the Fed/gold standard period of 1913-1932 the boost is greater still. There seems to have been a correction in wages but not stock market returns from 1971 to 2008.
But there is conflicting evidence for the Fed/real wage connection. From 1932 to 1971 real wages increased by 2.6% per year, faster than in the 1896-1913 period, but then from 1971 to 2008 they fell by 1.1% per year. Arguably, the New Deal institutions such as labor unions sustained real wage growth for roughly forty years. Thereafter, there was a shift in employers' bargaining power. This may be because of the dramatic boost to monetary and credit expansion that the elimination of the gold standard permitted. Price inflation from 1971 to 2008 was 432% compared to 196.5% for the 1932 to 1971 period. The increasing price inflation may have enhanced firms' ability to substitute technology and equipment for labor and to finance overseas expansion sufficiently to counteract the wage gains made during the 1932-1971 period. As well, the effects of monetary expansion on real wages may be cumulative over many decades, and it is possible that 40 years of inflation resulted in a 40-year stimulus of demand for labor followed by adjustments due to even longer term inflationary effects. It may be that 40 years is the time required for inflation to influence real wages. However, it is also possible that labor unions were weakened during this period and so lacked the bargaining power to counteract employers' strategies. It is also possible that globalization has increased wage competition and has forced firms to be more competitive.
Rather than view stock returns as resulting from investor demand, as Professor Siegel does, it might be more logical to view them as ensuing directly from the Federal Reserve Bank's subsidization of the stock market. The Fed subsidizes the stock market by depressing real interest rates, which increases stock valuations and enables firms to borrow cheaply. Lower interest rates enable firms to substitute machinery and technology for workers to a greater degree than they otherwise would and to finance moves overseas. As well, workers may not be completely aware of inflation's effects on pay, and accept wages under illusory price stability. Thus, the Fed may have served as a wealth transferal device from workers to stockholders. The one fly in this story's ointment is the sharp increase in real wages during the 1932 to 1971 period.
"The average compound rate of return on stocks from 1802 through 1991 was 7.7 percent per year: 5.8 percent from 1802 to 1870, 7.2 percent from 1871 to 1925, and 10.0 percent from 1926 to 1991. The increase in the rate of return of stocks over time has fully compensated the equity holder for the increased inflation that has occurred since World War II. "
However, these numbers do not follow the contours of changing American policy concerning the Fed. Before 1913 there was no Fed. From 1913 to 1932 there was a Fed whose inflationary power was limited by a gold standard. From 1932 to 1971 Roosevelt had abolished the gold standard but the Bretton Woods monetary regime required that the US convert foreign dollar holders' dollars into gold. In 1971 Richard M. Nixon abolished the international gold standard.
To track the effects of Fed policy on real wages, inflation and stock market returns, I computed Dow Jones Industrial Average returns for four periods: the pre-Fed period from 1896 to 1913; the Fed/gold standard period from 1913 to 1932; the Fed/international gold standard only period from 1932 to 1971; and the gold standard-free period from 1971-2008. I also computed as best as I could with rough and ready Internet data (a) the inflation rate, (b) the Dow returns less inflation, (c) the compounded return on the Dow, (d) the change in real (inflation-adjusted) hourly wage, (e) the compounded real wage change and (f) the compounded inflation change for the four periods.
I was searching for income inequality data (the usual method of measuring income inequality is the "Ginni coefficient") but could not find a measure on the Web that goes back to 1896. I did find a partial measure in an article by Jared Bernstein and Laurence Mishel. To estimate the compound rates I relied on the 1040tools future value calculator here. Data on real hourly wage changes from 1896 to 1913 are available here. The Dow Jones website makes available its Dow Jones Industrial Average index from 1896. There are estimates available of stock returns from 1802, but what is gained in longitude is lost in comparability. Corporations prior to 1890 did not have the same legal attributes as they did after. Moreover, prior to 1880 stocks were limited as to their breadth of circulation, the nature of the firms for which they were traded and the risk involved because of changes in the corporate form of organization. Therefore, the 1896-1913 period will have to do as a pre-Fed measure to compare with subsequent periods.
The chart below (column A--see here for better view) shows that inflation was lower in the pre-Fed period than in any period since the establishment of the Fed in 1913. From 1896-1913 inflation averaged one percent (column H), while from 1913-1932, the Fed/gold standard period it averaged 1.7%. From 1932-1971, the international gold standard period it averaged 2.82% and during the gold standard- free period, thanks to Republican President Richard M. Nixon, it averaged 3.92%, the highest sustained inflation in American history. The media story that the Greenspan Fed achieved low inflation is but puffery by historical standards. The post-1980 era has a poor record with respect to inflation. At the same time, stock market returns have been boosted since the abolition of the gold standard in 1932 but not before. Column C shows that the Dow increased 108.1% from 1896 to 1913; it fell 23.32% from 1913 to 1932 because of the Great Depression and then it rose 1,143.7% from 1932 to 1971 and 1,266% from 1971 to 2008. Adjusting for inflation and compounding, stock market returns were 3.83% during the 1896-1913 period, -2.9% from 1913 to 1932, 5.93% from 1932 to 1971 and then 5.9% from 1971 to 2008. The key change seems to have been in 1932.
The establishment of the Fed and the abolition of the gold standard seem to have coincided with at first a dramatic increase in real wages and then a reduction from 1971 onward (see Columns F and G). From 1896 to 1913 real hourly wages increased 30.2% over 17 years or 1.6% compounded. From 1913 to 1932, the gold standard period of the Fed, real wages increased 45.5% or 2.12% compounded. This is in part due to reduced inflation during the Depression. However, and this contradicts my theory, from 1932 to 1971 real wages increased 171.8%, a compounded real wage change of 2.6%. Then, from 1971 to 2008, the gold standard-free period compounded real wages fell 27% or a compounded rate of -1.1%. This is a unique 37-year period, but it follows a period of very high wage growth from 1932 to 1971.
Despite the extensive discussion of income inequality, I could not find readily historical data available on Ginni coefficients or other income inequality measures going back to 1896. It is clear from the Bernstein and Mishel article that since 1972 income inequality as measured by the 90-10 cutoff has been increasing.
The data support the idea that changing the monetary regime boosted the stock market. The 5.9% real stock market returns post 1932 are 35% greater than the real, pre-Fed stock market returns from 1896-1913. If you factor in the Fed/gold standard period of 1913-1932 the boost is greater still. There seems to have been a correction in wages but not stock market returns from 1971 to 2008.
But there is conflicting evidence for the Fed/real wage connection. From 1932 to 1971 real wages increased by 2.6% per year, faster than in the 1896-1913 period, but then from 1971 to 2008 they fell by 1.1% per year. Arguably, the New Deal institutions such as labor unions sustained real wage growth for roughly forty years. Thereafter, there was a shift in employers' bargaining power. This may be because of the dramatic boost to monetary and credit expansion that the elimination of the gold standard permitted. Price inflation from 1971 to 2008 was 432% compared to 196.5% for the 1932 to 1971 period. The increasing price inflation may have enhanced firms' ability to substitute technology and equipment for labor and to finance overseas expansion sufficiently to counteract the wage gains made during the 1932-1971 period. As well, the effects of monetary expansion on real wages may be cumulative over many decades, and it is possible that 40 years of inflation resulted in a 40-year stimulus of demand for labor followed by adjustments due to even longer term inflationary effects. It may be that 40 years is the time required for inflation to influence real wages. However, it is also possible that labor unions were weakened during this period and so lacked the bargaining power to counteract employers' strategies. It is also possible that globalization has increased wage competition and has forced firms to be more competitive.
Rather than view stock returns as resulting from investor demand, as Professor Siegel does, it might be more logical to view them as ensuing directly from the Federal Reserve Bank's subsidization of the stock market. The Fed subsidizes the stock market by depressing real interest rates, which increases stock valuations and enables firms to borrow cheaply. Lower interest rates enable firms to substitute machinery and technology for workers to a greater degree than they otherwise would and to finance moves overseas. As well, workers may not be completely aware of inflation's effects on pay, and accept wages under illusory price stability. Thus, the Fed may have served as a wealth transferal device from workers to stockholders. The one fly in this story's ointment is the sharp increase in real wages during the 1932 to 1971 period.
Wednesday, April 30, 2008
Progressive-Liberal Economists Murder Children
Economist Ben Bernanke
Weep and pray for children in nations with food shortages, who have been starved by the progressive-liberal Fed policies of the Greenspan and Bernanke Fed. For the past three decades progressive-liberal economists have advocated creation of money, that is, liquidity or credit, to stimulate real estate investment. This misallocation of resouces inhibited food production by transferring resources away from commodities production to construction.
Keynesian progressive-liberal economists have caused a global food shortage. Too little food being produced and the transfer of land to developers mean that agriculture cannot adjust to increasing demand. The Fed's actions, in response to the claims of Keynesian economists, are starving children. The economists are murderers because they have induced the world's banking community to engage in policies that have starved children. Now, their chief concern is that the starvation not impede Wall Street's profit picture.
Recently economist James Galbraith responded to my blog about his television appearance, claiming that higher interest rates would be a catastrophe. But the policies that the Fed has adopted, i.e., creation of money by lending it to hedge fund managers and commercial banks at public expense, has resulted in starvation around the world. Keynesians don't view the starvation that their policies have caused to be a catastrophe. Only a decline in Wall Street's profit picture is a catastrophe to them. Starving children is a detail of no economic consequence to their models.
Weep and pray for children in nations with food shortages, who have been starved by the progressive-liberal Fed policies of the Greenspan and Bernanke Fed. For the past three decades progressive-liberal economists have advocated creation of money, that is, liquidity or credit, to stimulate real estate investment. This misallocation of resouces inhibited food production by transferring resources away from commodities production to construction.
Keynesian progressive-liberal economists have caused a global food shortage. Too little food being produced and the transfer of land to developers mean that agriculture cannot adjust to increasing demand. The Fed's actions, in response to the claims of Keynesian economists, are starving children. The economists are murderers because they have induced the world's banking community to engage in policies that have starved children. Now, their chief concern is that the starvation not impede Wall Street's profit picture.
Recently economist James Galbraith responded to my blog about his television appearance, claiming that higher interest rates would be a catastrophe. But the policies that the Fed has adopted, i.e., creation of money by lending it to hedge fund managers and commercial banks at public expense, has resulted in starvation around the world. Keynesians don't view the starvation that their policies have caused to be a catastrophe. Only a decline in Wall Street's profit picture is a catastrophe to them. Starving children is a detail of no economic consequence to their models.
Saturday, April 12, 2008
Progressivism and Fear Revisited
The dominant mood of the past century's Progressive era has been fear. The movement that was founded on the claim that self-expression is of paramount importance; that democracy is sacred; and that institutions can be re-shaped to suit public ends has generated neither human fulfillment nor democracy. It has generated fear. It has done so by re-directing economic resources and potential growth toward large, established firms; regulating the economy and so foreclosing entrepreneurship; creating inflation and the income tax and so foreclosing independent wealth and saving. It restricts employment by favoring large firms over small by redirecting capital to the large firms through the governmentally-supported banking system. The re-direction of capital from personal savings into large corporations' treasuries resulted in the reduction in the number of jobs but also changed the character of jobs from those that reflect entrepreneurial initiative and creativity, hence human fuilfillment, to those that depend on conformity to a boss; teamwork; and fear of being fired. The dominant mood of the Progressives was teamwork and group behavior, the sacrifice of the individual to the group. This was paradoxically done in the name of encouraging self-fulfillment and self-expression. But the chief mood has been a century of fear. The Progressives created the Great Depression by first creating the Fed under Woodrow Wilson, with the Fed then mismanaging the money supply. This created a generation whose chief fear was unemployment and lack of "social security". The Roosevelt administration, following through with the Progressive program, intensified the Fed's power by abolishing the gold standard. The result has been mismanagement of the nation's credit supply; inflation; a reduction in the number of good (non-corporate) jobs; and fear. Fear of not conforming to the boss's whims. Fear of not being politically correct; fear of not following the Progressive elite's fashion of the moment; fear of unemployment because of non-conformity to the corporate and state's whimsical definitions of compatibility and interpersonal skills; fear of not laughing at Bill Maher's stale jokes; and fear of not getting a job at all.
Fear is not far removed from hate. Progressivism is not far removed from totalitarian rule and economic decline.
Fear is not far removed from hate. Progressivism is not far removed from totalitarian rule and economic decline.
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