The Guy Who Would Be King (at the Fed)

Professor R. Glenn Hubbard, Dean of Columbia Graduate School of Business, was a runner-up in the race to become Federal Reserve Chairman. He was also chairman of President Bush's Council of Economic Advisers from 2001 to 2003.



He expresses opinions close to my own about the Fed's responsibility for our present situation. In a Reuter's article, he is quoted at the recent Jackson Hole Kansas City Fed's retreat as saying:

"I do believe policy had been too accommodative for too long. And now the question is, How do we deal with the current situation?"

Then Reuter's paraphrases him thus:

"The U.S. central bank, under Bernanke's leadership since February, 'still has enormous credibility with the public,' which is helping to keep inflation expectations contained, Hubbard said."

I would agree that the Fed still has enormous credibility with the public, and even within the business community. After all, they believe (and so does the Fed itself) that the Fed has the power to control the money supply and influence the American economy.

But whether or not it is this credibility that is keeping inflation expectations contained, I am less sure. Business will increase prices when push comes to shove, and it hasn't yet because (in my humble opinion) prices are being kept in check by shrinking consumer purchasing power.

Here's how this wide-reaching vicious circle works. The arresting of prices (and wages, by the way) is caused by limitation of consumer spending capacity, which in America is dependent on two things: (1) their creditworthiness, some of which is evaluated on their real wealth as measured in real estate holdings -- which measurement has stabilized and most likely will soon be reduced; and (2) investors' diminishing willingness to furnish the money behind the credit. (We've reached the end of the CDO, MBS, etc., market expansion potential.)

It's called stagflation, folks. It's here. And it's all the Fed's fault. They created this credit bubble in the first place, and now they can't get us out of it. As I've said before, the Fed is between a rock and a hard place. If they increase rates in September, they'll throw turmoil into the housing market and the economy will start to demonstrate recession-like symptoms. If they decrease rates, they'll make a stock market bubble and eventually plunge the long-term dollar into the toilet. If they do nothing, one of two things could happen: (1) we'll let ourselves be strung us along for the stagflation ride, which could go on for some time; and/or (2) at some point the various market players involved may decide they've had enough, and we get some hot action -- if they can afford to, which some of them can't (Japan, China, et al.) Option 2 could therefore mean fireworks, or more stagflation.

Is the Fed making things better or worse by carrying on the charade of control? That is the question. I know they were just trying to avoid a deeper recession in 2001, but if you ask me (which you haven't), I think that someday in the relatively near future, the market will force the Fed out of the money supply/credit business.

I think's it's already happening. Gold is already waiting outside the back door, can't you hear it knocking?

PS: If you haven't seen the parody by some of Columbia Business School's students of Hubbard's "disappointment" at not receiving the Big Chair at the Fed, you've gotta see this:

Hubbard Parody

Sock It To The Unions

I do get why unions exist; but their raison-d'etre has evaporated in today's modern economies. Now, they are a thorn in the side of free labor markets, plus they will be the cause of much financial suffering when unreasonable pensions become due.

There's a website called unionFacts.com that concentrates on union abuses, and they've got some nice ads that are worth looking at. Here is one:



Remind you of any personal experience? Did me, although the California DMV's have cleaned up their act somewhat, by putting evaluation forms on every countertop. And yes, I vented to my heart's content.

Don't Think For a Minute That Gold Has Said It's Last Word

Now where was I in my golden rant? Let's see.


[Gold bug created and photographed by Flickr subscriber rustyrabbit. Thanks to him for his artistic endeavors.]

The following excerpts from an article at a new site called metalsplace.com state my position better than I could myself. Here they are:

"The global standard of wealth for over four millennia now gets down to the very serious business of defining support as measured in the world's fiat paper currencies. $614 gold today is equivalent to about $252 in 1980 inflation adjusted dollars. Got gold?"

"Long-Term Outlook: No change. A secular bullish perfect storm trend for precious metals continues. Rapidly escalating global investor demand, easier participation by investors via ETFs, conversion of Middle East petroleum dollars to gold, rising new demand from Asia, possible central bank buying partially offsetting central bank selling, conversion from dollars to gold by large U.S. dollar denominated foreign exchange reserves, declining gold production, increased political and NGO interference to bring new sources on line, rapidly escalating costs to produce, delays and shortages of equipment and manpower, previous two-decade bear-market-induced shortage of intellectual capital for miners, safe-haven buying to hedge strong, reckless, competitive dilution of under-backed fiat paper currencies and continued troubling global political and religious tensions are just some of the factors contributing to the bullish winds now blowing. In real terms gold remains undervalued versus nearly all other commodities and strongly undervalued as measured by the world's fiat paper promises... The Great Gold Bull has a long way to go. It just won't go straight up."

Right on.

How About A Triple-A-Type Health Society?

Here's an idea that no one's mentioned yet. How about creating a nonprofit club similar to the Auto Club, only for health matters instead of car matters? (Yes, Virginia, your doctor is a member of an industry, just like your garage mechanic.)



The Auto Club, with its 50 million members in North America, has got to be one of the most successful nonprofits operating in the profit sector, another example being the credit unions in the banking industry. Their insurance rates can't be beat by any profit company, the proof of that fact being that competitors never mention AAA rates in comparison ads.

Why can't this same formula be applied in the health care insurance arena?

Why can't a concerned group of citizens band together, form a nonprofit corporation, and begin advising consumers about the conditions on the health care road? Place some "sharp curve" and "steep grade" signs, advise us about tactics and prices? Offer inspections for medical care facilities? Consumer-Report-type investigations of new techniques, their prices, their track record, and consumer-oriented critiques exposing opinions from all sides of the spectrum, not just that of the doctor and the for-profit insurance company? Have Member Doctors, just like they have Member Repair Shops?

Organizers can take inspiration from credit union, AAA, and Consumer Report set-up and procedures.

I'll just throw this little tidbit out there in the hopes that someone can take it and run with it -- or give me a reason why it can't be done. We the consumers have got to take our health care responsibities into our own hands and stop gulping down all that Pablum from the medical industries that profit from our naivete.

The Free Market Includes the Freedom to Fail

Wal-Mart is going through another bashing. This time, it's not the unions, it's the banking regulators. Wal-Mart wants to open a kind of bank. Why? To lower their credit transaction costs. Of course, there is great resistance among other bankers and credit processing companies, for obvious reasons; and they are doing their best to lobby the government to stop Wal-Mart from doing so.


[Thanks to bbv-net.de for the photo.]

Now, I've had my own business, and I know how hard it is to find a good credit card processing company outside the Big Few, whose fees are astronomical. I cannot imagine how many billions Wal-Mart must pay for their service, even though they obviously have a special deal.

In an article at marketwatch.com, Nick Godt and Robert Schroeder explain that "[c]ommunity banks fear Wal-Mart will have the same impact on local banks as it did on many local retailers which, unable to compete with the giant retailer's pricing, have shrunk or been forced out of business."

And thank goodness for that. It's called inefficiency. It also means that, just like Wal-Mart's cheaper manufacturing prices, their credit processing savings will be passed along to customers. If some expensive and inefficient credit card processing company goes out of business, -- hey, dem's the breaks.

People forget one of the principal tenets of a free market. Failure in a real free market arena is part of the game, not something to be avoided. Open competition is the only valid playing field, and anyone who accepts the idea of free competition must accept that there are winners and losers.

In fact, that's the whole point. If we don't let Wal-Mart into the bank boxing ring, that's tantamount to declaring last year's champions as the winners forever. That's not a free market; that's monopoly privilege.

Let Wal-Mart show the others they won't be bullied around. That's the best way to get the competition to lower their prices and clean up their act.

Another Good Thinker and Writer on Economics

Most economists know Arnold Kling, another of my favorites. Although we don't agree on everything, he's always open-minded, always provocative, makes excellent points, expresses himself with ease, and has firm knowledge of his subject.


[Thanks to econlib.org for the photo.]

His latest article is about how people prefer obeying easy albeit incorrect directives, to going to the trouble of acquiring useful knowledge that is difficult to extract from other than readily observable data. In other words, we jump to conclusions rather than carry out blind and random experimentation.

Here's the salient point he makes:

"For the most part, consumers and taxpayers would rather not know whether education, health care, and foreign aid are cost-effective. Instead, people would rather 'trust the experts' and attribute high skill levels to educators, doctors, and aid agencies. And, of course, the experts would like us to continue to pay their salaries without questioning their results. As on many other issues, in seeking cost-benefit analysis [good] economists are fighting an uphill battle." [Others are taking personal advantage of the downhill but very profitable slide towards sensationalism.] [My editing. kd]

He's got it so right.

Most of us humans have the capacity to analyze events and learn, but we only use this ability in a comparatively primitive fashion. In many life situations, this may get us by, but sometimes it leads to tragedy. It's the difference between, "It looks like he's guilty," and "The prosecution has shown us solid evidence and has proven that he is guilty." Or "This looks like the reason for it," when "this" is not the real cause at all.

As he points out, when it comes to economics, education, politics, helping the poor, [I'll add climatology], or health care, this tendency of ours to generalize and hypothesize without performing scientific due diligence has done great damage.

Scientists and researchers, and the politicians who depend on them, must be disciplined in such a way as to find useful results 99.999% of the time, and not allow haphazard judgments to cause serious damage through premature public announcements and laws that are counterproductive.

Arnold writes at econlib.org, and posts often there in his econlog. You can also find him at tcsdaily.com.

The Rebirth of Another Wall Street Wizard

John Dvorak has written a hilarious article for a South African site named 24.com. Here are some excerpts:

"Elvis incorporated hidden investment messages in his song titles."



[Click on the image for a larger version. Thanks to mazaika.com.]

"I don't want to bore you with the details but if you do enough math on the discography you get the following list of songs in the following order: 'Heartbreak Hotel,' 'Love Me Tender,' 'All Shook Up,' 'Don't,' 'Stuck on You,' 'Surrender,' 'It's Now or Never,' 'I Got Stung,' 'Flaming Star' and 'Return to Sender.' These songs clearly define and warn us, years in advance, about the dot-com bubble."

"And within the discography are clear messages not to get suckered into investing in 'Hound Dogs'. Although Hound Dog is not on the list, it instead plays a more specific role. I believe that the song was a warning not to invest in Pets.com. Also note that both 'All Shook Up' and 'Return to Sender' is clear reference to Webvan."

"Now if you dig deep enough into the analysis it gets even more predictive. The songs: 'Love me Tender,' 'Don't Be Cruel,' 'Wear My Ring Around Your Neck,' 'Hard-Headed Woman,' 'You're the Devil in Disguise,' 'I got Stung' (reprise), and 'Jail House Rock' foretell the Martha Stewart fiasco with chilling accuracy."

"But it just isn't the general predictive accuracy that is amazing with what I call the ESI - Elvis Stock Index. I'm hoping some math geniuses will develop an exact formula so the ESI can stand alongside the RSI, the ROC and the MFI. After all we've all made millions using those fine charting tools, no? Then again maybe we can skip the charts because many songs contain, in fact, exact stock picks. These to me are the most interesting.

"I will probably have to finance a research firm to ferret out all the tips, but I have a few here for you to consider. They indeed appear as buy and sell recommendations within song titles in the form of anagrams.

"Hound Dog, for example gives us two tips with two anagrams. The first is 'Odd Hog, NU.' This is a clear reference to Northeastern Utilities (NU) . Will it pig out over energy prices? Maybe.

"The second Hound Dog Tip is: 'Dud? Go HON!' And indeed Honeywell (HON) has skyrocketed since the death of Elvis. Amazing!

"In some instances Elvis was painting with a broad brush. This is the case with the message within the title, 'Stuck on You'. It says: 'Scout Yukon.' OK, I will.

"As you can see, none of this is to be taken lightly. The King lives!"


Go, John! I love a little humor with my RSS feed in the morning.

Dang, He Does It Again

Professor Christopher Lingle has done it again, written a piece in the Tapei Times that hits another of my economic nails on the head.


[Click on image for a larger version. Thanks to Taipei Times for the drawing.]

This time, he analyzes Japanese and Chinese monetary policy, and this guy's an expert (not just a bloggiating gadfly like myself.)

Japan and China have done so well in their leap forward into the 21st century; but they have swallowed the West's fiscal methodology in toto, not stopping to separate the effective policy from the counterproductive waste. Here's how he puts his main point:

"One of the forgotten lessons of the Keynesian-inspired stagflation of the 1970s is that economic growth based on increased government spending is unsustainable. It also introduces distortions and imbalances in the overall production structure of the domestic economy."

He fleshes out the details in his article, and here is the punch line:

"The best evidence of the failure of Keynesian cures is found in Japan. After its 'bubble economy' collapsed at the end of the 1980s, Tokyo financed its additional public-sector expenditures with fiscal deficits. Japan's public-sector spending during the 1990s exceeded [Yen]800 trillion (US$7 trillion), an amount five times greater than America's fiscal expenditures during its restructuring in the 1980s.
"Nonetheless, neither massive expenditures nor the expansionary credit policies with a zero-interest rate worked very well. In the end, average economic growth in Japan during the 1990s was only about 1.1 per cent.
"However, Tokyo's outstanding debt rose from 56 percent of GDP at the beginning of the 1990s to about at least 130 percent. Many independent observers and credit-rating agencies put the figure at a much higher level.
"What happened in Japan was that public officials were either unaware or wary of initiating the needed radical restructuring of the domestic economy. If Beijing follows Tokyo down a similar path, the Chinese economy will slow down markedly in the medium to long term."

Darn, he's good.

And by the way, do I need to point out the similarity between Japan's spending voodoo cure and our own, between Japan's mushrooming debt and ours? Ahem. It's not like we've learned from our own mistakes ourselves. And now that we've gotten up this tree, I don't think the "Fed Experts" know how to get us back down. (I'd love to be a gadfly on the wall at the next FOMC meeting.)

Who's That Guy Making All That Economic Sense?

Read an article by Professor Christopher Lingle at Tech Central Station, that really hits the nitty gritty of my own economic monetary philosophy.


[Thanks to Professor Lingle and www.ufm.edu for the photo.]

His main point is that Federal Reserve and other central bank loose monetary policy has created a global credit glut that has and will continue to harm both emerging and leading economies alike at some point in the future. The piper must be paid.

Recent tightening measures taken by the Asian countries are in the right direction, but they are after the fact, and will only be too late, if not too little.

Here are the best points Professor Lingle makes:

"For his part, Alan Greenspan recently pointed to the fact that asset prices have been outstripping GDP and declared this to be an unsustainable phenomenon. Unfortunately, he figured it out too late, since his policy decisions were behind the unprecedented era of unusually cheap credit that contributed to artificial 'booms' in so many economies."

"Much of the pain that awaits the global economies was set into motion by decisions of central bankers to pump air into economies with artificially-low interest rates. As such, it is NOT the fact that interest rates are currently being pushed up that will cause the problems. The problems were actually set into motion when interest rates were pushed down artificially by central banks!
"The blame for impending corrections and recessions must be shouldered by central bankers that often worked in tandem with finance ministries to inflate their money supplies. Irresponsible policy makers seemed to believe that something real and sustainable can be created out of the 'nothing' of cheap credit and more pieces of paper money."

"As it is, global capital inflows and outflows are only a symptom indicat[ing] the response of investors in terms of their approval or disapproval of policies and conditions in a country. In this sense, capital outflows are not the cause of internal economic turmoil but should be seen as the messenger of good or bad tidings.
"It turns out that the observed instability will be the outcome of [past] policy choices relating to monetary and fiscal policy."

"[I]t should be clear that initial inflows of capital were induced by misguided finance ministries and central banks that made capital so cheap in the first place. The irony (and tragedy) is that the very same logic of the very same groups that initiated policies that created the instability will be asked to use the same dubious wisdom to sort things out."

Now there's an economist after my own heart and mind.

The Oceans are Cooling (Sic)

Yes, that's what Roger Pielke Sr. points out in his blog of August 10, referring to a paper by J.M. Lyman, J.K. Willis, and G.C. Johnson that will be published at Geophysical Research Letters.

Maybe that's why we haven't had the spike in hurricanes that weather "experts" were predicting.


[Thanks to the-creativity-company.com for the photo.]

So, on the one hand you have Al Gore warning us that we have only ten years left to straighten out this Global Warming mess, and on the other, you have those who claim that we may not know as much as we thought about the whole subject.

Whom do you believe? A hypocrite like Al, who hasn't even signed up for green energy at his three homes? (From another USA Today article -- I swear, USA Today is becoming interesting.) Or do you trust the quieter scientists who express skepticism about the whole hysteria? I will vote for the guy who has nothing to gain. Follow the money, they say. And for "money," you can substitute "power," if you like.

Economists are interested in this Global Warming debate, because it is a perfect example of their newest credo, "Incentives matter." That applies to everyone, including scientists and former politicians.

Finally, a Sane Voice About Global Warming: Craig Bohren, Ph.D.

USA Today has been surprising me recently. Yesterday, they published an article by April Holladay called "How to get to the bottom of the global warming debate" that is just about the most well-rounded discussion of the issue I've seen for a while.


[Thanks to psu.edu for the photo.]

Professor Bohren has some interesting comments about the economics of science. As contrasted to the GW worry warts, he has no axe to grind and "is not worried about losing or gaining funding based on his opinions." Important qualities for non-bias. Here's a nice quote:

"Skeptics about global warming are often painted as hirelings of the oil and automotive industries. Such claims irritate me. I have never earned a nickel as a consequence of my skepticism. Indeed, I have lost hundreds of thousands of dollars by it. "

Another:

"In the atmospheric sciences it is difficult to get grants unless you can somehow tie your work to global warming, that is to say, to scare science."

And another:

"Perhaps some critics of global warming are in the pay of the oil and automotive companies. If so, they should be forthright about this. But so should folks on the other side of the debate. What fraction of their salaries comes from research on global warming?"

Call him a liar if you will, but I think he's credible. Read the article for a nitty-gritty look at what it means to be a professor in today's world. Here is his profile.

Mortgage Defaults Rising, According to the LA Times

Foreclosures have risen 215% in California, according to DataQuick Information Systems, La Jolla (cited in David Streitfield's article at the LA times, 8/3/06, "Mortgage Default Notices Soar 67%.") The figure is a bit misleading, because although there have been 1,901 foreclosures in the state during the second quarter, this is historically and statistically quite low.


[Thanks to pplv.com for the image.]

Default notices, the first stage of a foreclosure, have come in at about 20,000 during the second quarter of 2006. The quarterly average is 30,000. High is 60,000 in 1996, low is 12,000 during the 3rd quarter of 2004.

On the one hand, you have Scott Simon of Pimco, Newport Beach, saying, "by every historical standard, this [level of defaults and foreclosures] is still insanely low." He rates the current level at 1 out of 10.

On the other, you have Angelo Mozilo of Countrywide Financial Corp., saying, "I've never seen a soft landing in 53 years."

I tend to believe Mozilo, although it may take longer than we expect, and will depend on what the Fed, the mortgage rates, commodity prices and political unrest do in August and thereafter.

Do We Have to Put Up with Even More Minimum Wage Nonsense?

The left end of Congress, and some in the middle, think that all American employers should consult government on the amount of wages to pay their employees. They must be assuming one or more of the following:

- Employers are too stupid to figure it out for themselves.

- Employers will wring every last penny out of their personnel for their own personal profit.

- Employers do not have to compete with other employers when bidding for laborers.

- On the other side, employees will take whatever the first employer will offer them, and have no alternative choices.

- Many employees are earning the minimum wage.

I can reassure them from personal experience that none of the above is true; but of course no one asks those of us who are actually involved in the fray.

Jane Harman puts it this way:

"Indeed, as most Americans believe, exploitation is contrary to democratic principles - and hard work should be rewarded with a decent and dignified standard of living." Jane Harman, e-mail circular, 08/03/06

Now, I have no quarrel with that statement. But to make the leap from there to the above ridiculous presumptions is quite a stretch. What she doesn't realize is that any small business owner paying bottom wage (and I'm assuming that's who most of them are) has not single-handedly forced anyone to join the company, and couldn't if he/she wanted to. Slavery went out of fashion a few years ago. And to block the next reactive idiocy, they don't collude with all the other small companies in a community, agreeing behind everyone's back to pay below a "decent and dignified standard of living."

Next, very few people are actually earning the minimum wage; and some of those may be newcomers, apprentices, and people who will move up the ladder if they mind their Ps and Qs for a month or two. Why shouldn't a beginner receive an apprentice's wage, if that's where salaries are, marketwise? (Oh-oh, there's that boogyman word "market" again!)

And here's an interesting thought: Small companies make up a good portion of the job providers in the market, and to force many of them to pay more than they can afford for unskilled beginners will put them out of business.

Ms. Harman quotes Franklin Roosevelt: "No business which depends for existence on paying less than living wages to its workers has any right to exist in this country." I guess she believes it's much nicer for the worst-paying businesses to shut down, so they can send their minimum-wage employees back to the unemployment office where they belong.

But maybe that is Congress's goal. It's called S&M Politics. Get'em down on their knees, begging for food. Then give them a crumb. Make them think they need you. They'll thank you by giving you their vote.


[Thanks to singact.com for the image.]