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?

Bush Ethanol Program Is Inflationary Chaff

Back on February 8, 2007, Howard S. Katz blogged:

"Hamburger at a price of $5.00 per pound (cheapest grade); starvation in Mexico; food shortages around the world: These are some of the blunders which are just around the corner (next 1-2 years) due to the actions of the U.S. Congress, the Government of Mexico and our paper money system.

"You are undoubtedly aware that every time you buy a gallon of gas these days, 10% of it is ethanol. Ethanol is simply ethyl alcohol. It is the same stuff which is in wine, in beer and in vodka and which makes us take leave of our senses when we drink too much. It is, however, a perfectly adequate substitute for gasoline, and were car engines designed for it they could run on fuel which is 100% ethyl alcohol.

"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.However, 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%. "

Larwyn just e-mailed:

"Inflation directly caused by Ethanol on our Grocery bills is going to make the increases in SSI, Food Stamps and other entitlement more than would be required. Last week when I sent out the information on the nitrates and phosphates growing algae and killing ponds and streams, I noted the RISE IN WHEAT PRICES - And why do you think we are now IMPORTING WHEAT - BECAUSE WE'RE PLANTING TOO MUCH CORN!!!
NOW THERE IS A WHEAT SHORTAGE!!! Guess the REPUBS from the farm states will soon be quoted "LET THEM EAT RICE!!"

Now, Rick Moran of American Thinker blogs that:

"Fallout from the ethanol scam continues to hit the economy. Not only has the rise in the price of corn due to diverting part of the the crop for fuel made much of the food we buy in the grocery store more expensive, now the drive to plant more corn for ethanol production has caused a shortage in wheat."

There is a two prong problem. First, the Greenspan Fed has overly expanded the money supply, with the result that dollars are held around the world, not only by governments like Japan and China, but also by private citizens. A student from Russia told me that the likelihood of small Russian dollar holders selling is going to increase as the dollar depreciates (and it has just hit all time lows). Small holders of dollars around the world have no more incentive to hold dollars than those who watched the Nasdaq plunge in '00-'02 had an incentive to hold on to the devalued tech stocks.

Second, through government intervention the Bush administration has worsened the problem by artificially increasing demand for corn just at the point where commodity demand is exploding around the world.

The underlying problem, though is government intervention, whether you call it Federal Reserve Bank policy or whacky energy subsidies. The Fed's claim to being a competent manager of the money supply deserves increased scrutiny and will likely get it as inflation worsens.

Competency Based Education for the Incompetent

Lee of Tampa Bay and grammargrinch.blogspot.com writes

> Professor: What do you mean by "competency-based education"?
>
> I live in Tampa Bay. The Hillsborough County school
> superintendent can't punctuate and makes almost $300,000 a year in
> tax money. The board is potted plants that rubberstamp her dopey
> decisions and thinks her illiteracy is irrelevant. She appoints
> buddies to all the high-level administrarive jobs in a long-
> standing patronage system. They fall into Kallikack IQ range.
> Their incompetence is such that they administer by subcontracting
> decisions paid for by the taxpayers on top of their bloated
> salaries; they have trouble following the recommendations of these
> pricey studies due to the Kallikack factor.
>
> I infer that all the D students went into administration and have
> turned it into a cash-cow racket fo academic weaklings.
>
> Does this situation fall under your "competency-based education"?
> If so, what's its cure?
>
> lee drury de cesare
> grammargrinch.blogspot.com lee_decesare@yahoo.com

My response:

Hi Lee. I take it that you're responding to a blog I wrote? Competency based education can't begin until the fundamental competencies needed for education are mastered. These include reading, writing, arithmetic and also a fundamental level of ethics needed to function competently. You seem to suggest that your school district is run by individuals who have not been competently educated in the first place, so competency-based education cannot proceed. The solution seems to me to be a voucher system that was proposed by Milton Friedman in his book Capitalism and Freedom 40 years ago. If I may, I'd like to post your inquiry on my blog.

PS--Competency based education is where the instruction focuses on a specific skill, just as you focused on the dead man float when you first learned how to swim and then learned the crawl stroke, one step at a time. Rather than emphasize theoretical development, theory is used to support grasp of the skill. For instance, I do not teach about "personality" in an organization class, but rather about "self-awareness" and the importance of understanding yourself. The concept of personality is one of a number of tools that can be used to understand yourself. Obviously, this kind of approach can't be used if the students are unable to understand the (more elementary) concept of personality and also lack ethical foundations that are needed for learning and for grasping why self-awareness is important.

The Wal-Mart Revolution by Richard Vedder and Wendell Cox

Richard Vedder and Wendell Cox.
The Wal-Mart Revolution: How Big-Box Stores Benefit Consumers, Workers and the Economy.
Washington, DC: The AEI Press, 2006.
Softcover. $20.

Richard Vedder's and Wendell Cox'sWal-Mart Revolution: How Big-Box Stores Benefit Consumers, Workers and the Economy is a solid piece of work. I have previously blogged a review of Charles Fishman's Wal-Mart Effect in which I note that Fishman's book lacks balance. I also note that Fishman fails to competently interpret research that he quotes at length, and that several of his criticisms of Wal-Mart are misguided. Despite these drawbacks to Fishman's work, I note that Fishman's Wal-Mart Effect "is likely the best that will be written in the near future about Wal-Mart's supposed ill effects." That statement is probably true. But while Fishman's is still the best book about Wal-Mart's ill effects, Vedder's and Cox's is clearly the only competent book that has been written about Wal-Mart. All the others, including Fishman's, are so much worse.

The reason may in part lie in the authors' credentials. Richard Vedder is a labor economist who is a distinguished professor at Ohio University. Vedder and Cox are able to analyze studies intelligently. In contrast, Fishman is a journalist who lacks Vedder's technical background. Moreover, Vedder does not carry the ideological biases that characterize the popular press and academic discussions about Wal-Mart, much of which (outside the economics literature) involves spilling from emptiness into the ideological void.

Vedder's and Cox's book is well worth reading from cover to cover. The authors explain somewhat technical material in very clear English. The authors present a fascinating overview of the history of retailing, and show that each generation's innovations are subjected to the same reactionary, left-wing criticisms as previous ones. The attacks on Wal-Mart that appear in a variety of websites, films, newspapers and academic conferences echo similar attacks on A&P, Standard Oil and the automobile industry.

Vedder and Cox show that Wal-Mart's contribution to American and global economic progress has been enormous and that the chief beneficiaries are the poor. In the 1970s and 1980s, it was a commonplace that productivity in the manufacturing sector grew at a faster pace than productivity in the services sector, to include retail. As Wal-Mart has grown, because of the brilliant management insights that Sam Walton pioneered, productivity growth in retail has outstripped manufacturing's. In some analyses, the productivity growth due to Wal-Mart and other big box retailers (see chart on p. 134) seems to have been an astonishing three times (300 percent) greater than in other sectors of retail and in other sectors of the economy. This implies enormous welfare gains to the American public.

Using intuitive, clear explanations, Vedder and Cox dispose of the arguments that factories in the third world make workers poorer and that because third world factories are not able to meet first world standards they should be closed. Vedder and Cox use basic economics to prove otherwise.

In recent years, the left has become increasingly indifferent to the plight of the poor, to include the poor both domestically and internationally. Vedder and Cox argue that Wal-Mart's contribution to consumer surplus in America alone is likely around five percent of gross domestic product, which they state is comparable to the contribution of the entire railroad industry during the 19th century. Yet, the left is eager to destroy Wal-Mart. Wal-Mart's raising of prices would have a maleficent effect on the poor, not only in America but throughout the third world. Wal-Mart's opponents might be viewed as advocates of starvation and deprivation.

The Wal-Mart Revolution should be read by all Americans interested in protecting progress and management innovation.